<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 31, 1998
REGISTRATION NO. 333-57913
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
NEW AMERICAN HEALTHCARE CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
TENNESSEE 8062 62-1612155
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
109 WESTPARK DRIVE, SUITE 440
BRENTWOOD, TENNESSEE 37027
TELEPHONE: (615) 221-5070
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------------
ROBERT M. MARTIN
109 WESTPARK DRIVE, SUITE 440
BRENTWOOD, TENNESSEE 37027
TELEPHONE: (615) 221-5070
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
COPIES TO:
<TABLE>
<S> <C>
ERNEST E. HYNE, II J. VAUGHAN CURTIS
HARWELL HOWARD HYNE GABBERT & MANNER, P.C. ALSTON & BIRD LLP
1800 FIRST AMERICAN CENTER ONE ATLANTIC CENTER
NASHVILLE, TENNESSEE 37238 1201 WEST PEACHTREE STREET
(615) 256-0500 ATLANTA, GEORGIA 30309-3424
(404) 881-7000
</TABLE>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon
as practicable after this Registration Statement becomes effective.
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, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, please check the
following box and list the Securities Act registration statement number of the
earlier registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, please check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, please check the following box. [ ]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED MAXIMUM
TITLE OF EACH CLASS OF SECURITIES AMOUNT BEING AGGREGATE AMOUNT OF
TO BE REGISTERED REGISTERED(1) OFFERING PRICE(2) REGISTRATION FEE(3)
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Common stock, $0.01 par value 6,900,000 shares $124,200,000 $36,639
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</TABLE>
(1) Includes 900,000 shares of Common Stock which the Underwriters have an
option to purchase from the Company to cover over-allotments, if any.
(2) Estimated in accordance with Rule 457(o) solely for the purpose of
calculating the registration fee.
(3) Of which $33,925 was previously paid.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT 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 THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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<PAGE> 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, DATED JULY 31, 1998
PROSPECTUS
, 1998
6,000,000 SHARES
(NEW AMERICAN HEALTHCARE LOGO)
COMMON STOCK
All of the 6,000,000 shares of common stock, $0.01 par value per share (the
"Common Stock"), offered hereby are being sold by New American Healthcare
Corporation ("New American" or the "Company"). Up to 900,000 additional shares
will be offered by a stockholder of the Company (the "Selling Stockholder") if
the Underwriters exercise their over-allotment option. The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholder.
See "Principal and Selling Stockholders" and "Underwriting."
Prior to this offering (the "Offering") there has been no public market for
the Common Stock. It is presently estimated that the initial public offering
price will be between $16.00 and $18.00 per share. See "Underwriting" for a
discussion of the factors to be considered in determining the initial public
offering price. Application has been made to list the Common Stock for trading
on the New York Stock Exchange ("NYSE") under the symbol "NAH."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS IN THE COMMON STOCK.
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.
<TABLE>
<CAPTION>
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PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
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<S> <C> <C> <C>
Per Share................................ $ $ $
Total(3)................................. $ $ $
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</TABLE>
(1) The Company and the Selling Stockholder have agreed to indemnify the several
Underwriters against certain liabilities, including liabilities under the
Securities Act of 1933. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2,100,000.
(3) The Selling Stockholder has granted the Underwriters an option, exercisable
within 30 days hereof, to purchase up to an aggregate 900,000 additional
shares of Common Stock at the price to the public less underwriting
discounts and commissions for the purpose of covering over-allotments, if
any. If the Underwriters exercise such option in full, the total Price to
the Public, Underwriting Discounts and Commissions, Proceeds to the Company
and proceeds to the Selling Stockholder will be $ , $ , $ and
$ , respectively. See "Principal and Selling Stockholders" and
"Underwriting."
------------------------
The shares of Common Stock are being offered by the several Underwriters
named herein, subject to prior sale, when, as and if accepted by them and
subject to certain prior conditions including the right of the Underwriters to
reject orders in whole or in part. It is expected that delivery of such shares
will be made in New York, New York on or about , 1998.
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
SUNTRUST EQUITABLE SECURITIES
<PAGE> 3
<TABLE>
<S> <C>
Photograph of Hospital Photograph of Hospital
Dolly Vinsant Memorial Hospital - San Benito, Texas Davenport Medical Center - Davenport Iowa
</TABLE>
<TABLE>
<S> <C> <C>
Photograph of Hospital Photograph of Hospital
Lander Valley Medical Center Company Logo Woodland Park Hospital
Lander, Wyoming Portland, Oregon
</TABLE>
Photograph of Hospital Photograph of Hospital
Eastmoreland Hospital Puget Sound Hospital
Portland, Oregon Tacoma, Washington
(acquisition pending)
<PAGE> 4
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE OFFERING AND
MAY BID FOR AND PURCHASE SHARES OF COMMON STOCK IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and the Consolidated
Financial Statements and the related Notes thereto appearing elsewhere in this
Prospectus. References in this Prospectus to New American or the Company shall,
unless the context otherwise requires, refer to the Company together with its
wholly owned subsidiaries. Except where otherwise indicated, the information in
this Prospectus (i) assumes that the over-allotment option granted to the
Underwriters is not exercised and (ii) has been adjusted to give effect to the
Reincorporation (as hereinafter defined) that will occur immediately prior to
the consummation of the Offering. All references to years, unless otherwise
noted, refer to the Company's fiscal year, which ends on March 31 of each year.
Unless the context otherwise requires, "Common Stock" includes the Non-Voting
Common Stock issued in the Reincorporation. See "The Reincorporation."
THE COMPANY
New American acquires and operates acute care hospitals throughout the
United States. The Company was formed to capitalize on opportunities to be the
principal provider of health care services in the communities in which it
operates, with a focus on non-urban communities. Since acquiring its first
hospital in August 1996, a non-urban facility in Wentzville, Missouri, the
Company has acquired seven additional hospitals, including four that were
purchased from a single party in January 1998. The Company's eight acute care
hospitals are located in six states and have a total of 1,032 licensed beds. In
addition, the Company has entered into a definitive agreement to purchase a
160-bed acute care hospital in Tacoma, Washington. Pro forma net operating
revenues and pro forma net income for the fiscal year ended March 31, 1998 were
$173.3 million and $3.6 million, respectively and for the three months ended
June 30, 1998 were $43.1 million and $1.4 million, respectively.
The Company's hospitals offer a wide range of inpatient and outpatient
medical and surgical services and also provide other health care services,
including general and geriatric psychiatry, rehabilitation and occupational
medicine. As part of developing a community health care delivery system, the
Company's hospitals also operate satellite clinics. All of the Company's
hospitals are accredited by either the Joint Commission on Accreditation of
Healthcare Organizations ("JCAHO"), the American Osteopathic Association ("AOA")
or both.
The Company believes non-urban hospitals are attractive acquisition
candidates for several reasons. Non-urban service areas have smaller populations
and are generally served by only one or two hospitals, resulting in less
competition. The relative dominance of the acute care hospitals in these smaller
markets may also limit the entry of competitive alternate site providers such as
outpatient surgery, rehabilitation or diagnostic imaging. The Company believes,
in general, the demographic characteristics and the relative negotiating
leverage of the local hospital also make such markets less attractive to health
maintenance organizations ("HMOs") and other managed care payors. In addition,
the Company believes non-urban communities are often characterized by high
levels of patient, physician and community loyalty that fosters cooperative
relationships among the local hospital, physicians, patients and employers.
Although the Company focuses primarily on non-urban communities, the Company has
acquired and may in the future acquire hospitals that are not located in
non-urban communities, but which nevertheless provide purchase opportunities
that are attractive to the Company.
The Company's business strategy is to acquire in a selective manner those
hospitals that meet the Company's investment criteria and to enhance revenues,
improve operating efficiencies and increase profitability at its hospitals. In
selecting its acquisition candidates, the Company targets non-urban hospitals
that are or can be positioned to be the focal point of a community's health care
delivery system. The Company believes more than 1,000 hospitals meet its
acquisition criteria. During the acquisition due diligence process, the Company
develops an action plan that provides a framework for identifying opportunities
to enhance the hospital's operating and financial performance, while improving
the quality of care. In developing the action plan, the Company leverages the
extensive experience of its senior management team.
3
<PAGE> 6
Once a hospital is acquired, the Company implements the action plan
developed during the acquisition due diligence process. Key elements of the
Company's action plan include: (i) improving operating efficiencies; (ii)
recruiting additional physicians; (iii) expanding the number of services
offered; (iv) developing health care networks, where appropriate; and (v)
installing a standardized management information system. For the three hospitals
owned for at least twelve months as of June 30, 1998, and comparing the twelve
months ended June 30, 1997 to the comparable period in 1998, EBITDA margin
increased from 8.3% to 13.0%; net income margin (which includes the effect of
corporate overhead allocations and interest on inter-company loans) increased
from (6.9%) to (2.6%); adjusted admissions increased by 6.8%; and emergency room
visits increased by 4.1%. Additionally, since acquiring the three hospitals, the
Company has recruited eleven physicians at these three hospitals.
The Company's senior management team has extensive experience in hospital
operations, financial management and business development. This experience
enables management to analyze a hospital's business and identify opportunities
to improve its clinical and financial performance. The Company's senior
management team has an average of approximately 20 years of experience in the
health care sector. Robert M. Martin, Chairman, President and Chief Executive
Officer, and Dana C. McLendon, Jr., Senior Vice President of Finance and
Administration, are among several of the Company's senior executives who were
formerly senior executives of HealthTrust, Inc. -- The Hospital Company
("HealthTrust"), a nationwide operator of non-urban hospitals. During the
majority of his seven-year tenure at HealthTrust, Mr. Martin was responsible for
managing its largest region, that included 17 primarily non-urban hospitals. Mr.
McLendon spent over five years at HealthTrust and was responsible for developing
and implementing its integrated delivery systems linking hospitals, physicians
and payors. Other members of senior management have significant health care
experience and were formerly with Hospital Affiliates International ("HAI"),
Hospital Corporation of America ("HCA"), Quorum Health Group, Inc. ("Quorum")
and HealthTrust. Moreover, through their experience of operating hospitals,
management has developed an extensive network of contacts for identifying both
potential acquisition targets and potential management talent for both its
hospitals and corporate office. Currently, each local hospital management team
(consisting of a chief executive officer, a chief financial officer and a chief
nursing officer) has, on average, 39 years of collective hospital experience.
The Company's principal executive offices are located at 109 Westpark
Drive, Suite 440, Brentwood, Tennessee 37027, and its telephone number is (615)
221-5070. The Company was incorporated in August 1995.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered hereby............................. 6,000,000 shares
Common Stock to be outstanding after the Offering....... 18,595,370 shares(1)
Use of proceeds......................................... To repay certain indebtedness, to make
cash payments in exchange for the Series A
Preferred Stock in the Reincorporation and
for general corporate purposes. See "Use
of Proceeds."
Proposed NYSE symbol.................................... "NAH"
</TABLE>
- ------------------------------
(1) Includes 423,475 shares of Non-Voting Common Stock to be issued in
connection with the Reincorporation, but does not include 591,725 shares of
Common Stock issuable upon the exercise of outstanding warrants at an
exercise price of $4.13 or 573,431 shares of Common Stock issuable upon the
exercise of outstanding options as of July 27, 1998 at a weighted average
exercise price of $6.00.
4
<PAGE> 7
SUMMARY CONSOLIDATED FINANCIAL AND STATISTICAL DATA
<TABLE>
<CAPTION>
PERIOD YEARS ENDED MARCH 31,
AUGUST 16, -----------------------------------------------
1995 PRO FORMA 1998
(INCEPTION) ---------------------------
THROUGH BEFORE PUGET INCLUDING
MARCH 31, SOUND PUGET SOUND
1996 1997 1998 HOSPITAL(1) HOSPITAL(1)(2)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Net patient service
revenue............... $ -- $10,737 $73,725 $139,374 $168,542
Other revenue........... 17 350 1,924 4,181 4,804
------ ------- ------- -------- --------
Net operating
revenues............ 17 11,087 75,649 143,555 173,346
Expenses:
Other operating
expenses.............. 385 10,958 68,805 132,766 158,380
Depreciation and
amortization.......... 5 783 2,836 5,322 6,510
Interest................ 2 363 2,637 382 2,482
------ ------- ------- -------- --------
392 12,104 74,278 138,470 167,372
------ ------- ------- -------- --------
Income (loss) before
income taxes........ (375) (1,017) 1,371 5,085 5,974
Income taxes.............. -- 66 579 2,033 2,389
------ ------- ------- -------- --------
Net income (loss)..... (375) (1,083) 792 3,052 3,585
Cumulative preferred
dividend................ -- -- 617 -- --
------ ------- ------- -------- --------
Net income (loss)
attributable to
common
stockholders........ $ (375) $(1,083) $ 175 $ 3,052 $ 3,585
====== ======= ======= ======== ========
Net income (loss) per
share-diluted....... $(0.08) $ (0.14) $ 0.01 $ 0.17 $ 0.20
====== ======= ======= ======== ========
Weighted average
number of shares and
dilutive
equivalents-
diluted............. 4,759 8,027 12,144 18,210 18,210
====== ======= ======= ======== ========
STATISTICAL DATA:
Hospitals owned or leased
(at end of period)...... 1 8
Licensed beds (at end of
period)................. 94 1,032
Adjusted admissions(4).... 2,335 13,594
Emergency visits.......... 4,965 36,566
Adjusted patient
days(5)................. 9,951 75,852
EBITDA(6)................. $ 129 $ 6,844
Cash flow from operating
activities.............. (749) 3,754
<CAPTION>
THREE MONTHS ENDED JUNE 30,
-----------------------------------------------
PRO FORMA 1998
---------------------------
BEFORE PUGET INCLUDING
SOUND PUGET SOUND
1997 1998 HOSPITAL(3) HOSPITAL(2)(3)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues:
Net patient service
revenue............... $ 9,638 $34,856 $34,856 $41,862
Other revenue........... 224 1,042 1,042 1,211
------- ------- ------- -------
Net operating
revenues............ 9,862 35,898 35,898 43,073
Expenses:
Other operating
expenses.............. 9,252 32,362 32,362 38,463
Depreciation and
amortization.......... 626 1,359 1,359 1,656
Interest................ 205 1,557 96 621
------- ------- ------- -------
10,083 35,278 33,817 40,740
------- ------- ------- -------
Income (loss) before
income taxes........ (221) 620 2,081 2,333
Income taxes.............. -- 248 832 933
------- ------- ------- -------
Net income (loss)..... (221) 372 1,249 1,400
Cumulative preferred
dividend................ -- 437 -- --
------- ------- ------- -------
Net income (loss)
attributable to
common
stockholders........ $ (221) $ (65) $ 1,249 $ 1,400
======= ======= ======= =======
Net income (loss) per
share-diluted....... $ (0.03) $ (0.01) $ 0.07 $ 0.07
======= ======= ======= =======
Weighted average
number of shares and
dilutive
equivalents-
diluted............. 8,027 8,027 18,766 18,766
======= ======= ======= =======
STATISTICAL DATA:
Hospitals owned or leased
(at end of period)...... 3 8
Licensed beds (at end of
period)................. 391 1,032
Adjusted admissions(4).... 1,768 6,450
Emergency visits.......... 5,124 19,019
Adjusted patient
days(5)................. 10,940 34,709
EBITDA(6)................. $ 610 $ 3,536
Cash flow from operating
activities.............. 412 1,066
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
-------------------------------------------
PRO FORMA PRO FORMA
ACTUAL AFTER OFFERING(7) COMBINED(8)
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........................................... $ 9,940 $ 19,804 $ 20,486
Total assets.............................................. 127,716 136,390 163,004
Long-term obligations, excluding current portion.......... 60,814 4,489 28,489
Redeemable preferred stock................................ 26,054 -- --
Total stockholders' equity................................ 23,850 116,093 116,093
</TABLE>
- ------------------------------
(1) Gives effect to (i) the Reincorporation, (ii) the sale by the Company of
6,000,000 shares of Common Stock in the Offering at an assumed initial
public offering price of $17.00 per share and the application of the net
proceeds therefrom and (iii) the acquisition of Memorial Hospital of Center,
Delta Medical Center -- Memphis, Dolly Vinsant Memorial Hospital, Davenport
Medical Center, Lander Valley Medical Center, Woodland Park Hospital and
Eastmoreland Hospital (the "Fiscal 1998 Hospital Acquisitions"), as if they
had occurred on April 1, 1997. See "Pro Forma Condensed Combined Financial
Information" and "Use of Proceeds."
5
<PAGE> 8
(2) Gives effect to the pending acquisition of Puget Sound Hospital (the "Puget
Sound Acquisition"), as if it had occurred on April 1, 1997. See "Pro Forma
Condensed Combined Financial Information."
(3) Gives effect to (i) the Reincorporation and (ii) the sale by the Company of
6,000,000 shares of Common Stock in the Offering at an assumed initial
public offering price of $17.00 per share and the application of the net
proceeds therefrom, as if they had occurred on April 1, 1998. See "Pro Forma
Condensed Combined Financial Information."
(4) Adjusted admissions are calculated as admissions for the period multiplied
by the ratio obtained by dividing gross patient service revenue by gross
inpatient service revenue.
(5) Adjusted patient days have been calculated based on a revenue-based formula
(multiplying actual patient days by the sum of gross inpatient revenue and
gross outpatient revenue and dividing the result by gross inpatient revenue
for each hospital) to reflect an approximation of the volume of service
provided to inpatients and outpatients by converting total patient revenues
to equivalent patient days.
(6) As presented in this Prospectus, EBITDA represents the sum of income (loss)
from operations before provision for income taxes, interest expense,
depreciation and amortization, and EBITDA margin represents EBITDA as a
percentage of net operating revenue. Management understands that industry
analysts generally consider EBITDA to be one measure of the financial
performance of a company and EBITDA margin to be one measure of operating
performance of a company that are presented to assist investors in analyzing
the operating performance of the Company and its ability to service debt.
Management believes an increase in EBITDA indicates an improved ability to
service existing debt, to sustain potential future increases in debt and to
satisfy capital requirements and an increase in EBITDA margin indicates an
improvement in operating efficiency. However, EBITDA is not a measure of
financial performance under generally accepted accounting principles and
should not be considered an alternative to (i) net income as a measure of
operating performance, or (ii) cash flows from operating, investing, or
financing activities as a measure of liquidity. EBITDA margin is not an
operational measure under generally accepted accounting principles and
should not be considered an alternative to net income or net operating
margin as a measure of operating performance. Given that EBITDA and EBITDA
margin are not measurements determined in accordance with generally accepted
accounting principles and are thus susceptible to varying calculations,
EBITDA and EBITDA margin as presented in this Prospectus may not be
comparable to other similarly titled measures of other companies.
(7) Gives effect to the sale by the Company of 6,000,000 shares of Common Stock
in the Offering at an assumed initial public offering price of $17.00 per
share and the application of the net proceeds therefrom, as if such
transactions had occurred on March 31, 1998. See "Use of Proceeds."
(8) Gives effect to the Puget Sound Acquisition and the sale by the Company of
6,000,000 shares of Common Stock in the Offering at an assumed initial
public offering price of $17.00 per share and the application of the net
proceeds therefrom, as if such transactions had occurred on March 31, 1998.
See "Use of Proceeds" and "Pro Forma Combined Financial Information."
6
<PAGE> 9
FORWARD-LOOKING STATEMENTS
Certain statements in this Prospectus Summary and under the captions "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," "Business," and elsewhere in this Prospectus, constitute
forward-looking statements. Such forward-looking statements (which may be
identified by words such as "anticipate," "believe," "estimate," "expect,"
"intend" and similar expressions) involve known and unknown risks, uncertainties
and other factors that may cause the actual results, performance or achievements
of the Company or industry results to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others: general economic
and business conditions, both nationally and in regions where the Company
operates; demographic changes; the effect of existing or future governmental
regulation and federal and state legislative and enforcement initiatives
affecting the Company's business, including the recently enacted Balanced Budget
Act of 1997; changes in Medicare and Medicaid reimbursement levels; the
Company's ability to implement successfully its acquisition and development
strategy and changes in such strategy; the availability and terms of financing
to fund the expansion of the Company's business, including the acquisition of
additional hospitals; the Company's ability to attract and retain qualified
management personnel and to recruit and retain physicians and other health care
personnel to the non-urban markets it serves; the effect of managed care
initiatives on the non-urban markets served by the Company's hospitals and the
Company's ability to enter into managed care provider arrangements on acceptable
terms; the effect of liability and other claims asserted against the Company;
the effect of competition in the markets served by the Company's hospitals; and
other factors referenced in this Prospectus. Certain of these factors are
discussed in more detail elsewhere in this Prospectus. There can be no assurance
that the forward-looking statements included in this Prospectus will prove to be
accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved. The Company
disclaims any obligation to update any such factors or to announce any revisions
to any of the forward-looking statements contained herein as a result of future
events or developments. See "Risk Factors."
As presented in this Prospectus, EBITDA represents the sum of income (loss)
from operations before provision for income taxes, interest expense,
depreciation and amortization, and EBITDA margin represents EBITDA as a
percentage of net operating revenue. Management understands that industry
analysts generally consider EBITDA to be one measure of the financial
performance of a company and EBITDA margin to be one measure of operating
performance of a company that are presented to assist investors in analyzing the
operating performance of the Company and its ability to service debt. Management
believes an increase in EBITDA indicates an improved ability to service existing
debt, to sustain potential future increases in debt and to satisfy capital
requirements and an increase in EBITDA margin indicates an improvement in
operating efficiency. However, EBITDA is not a measure of financial performance
under generally accepted accounting principles and should not be considered an
alternative to (i) net income as a measure of operating performance, or (ii)
cash flows from operating, investing, or financing activities as a measure of
liquidity. EBITDA margin is not an operational measure under generally accepted
accounting principles and should not be considered an alternative to net income
or net operating margin as a measure of operating performance. Given that EBITDA
and EBITDA margin are not measurements determined in accordance with generally
accepted accounting principles and are thus susceptible to varying calculations,
EBITDA and EBITDA margin as presented in this Prospectus may not be comparable
to other similarly titled measures of other companies.
7
<PAGE> 10
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully the following information before
making an investment in the Common Stock offered hereby.
RISKS OF ACQUISITION STRATEGY
Timely Completion of Acquisitions. A key element of the Company's growth
strategy is the acquisition of acute care hospitals primarily in non-urban
markets. The Company faces competition for acquisition candidates primarily from
other for-profit health care companies, both private and public, that have also
targeted non-urban markets as well as not-for-profit entities. Some of the
Company's competitors have greater financial and other resources than the
Company and larger development staffs focused on identifying and completing
acquisitions. Increased competition for the acquisition of non-urban acute care
hospitals could have an adverse impact on the Company's ability to acquire such
hospitals on favorable terms and to acquire the planned number of such hospitals
during a period of time. The process of identifying suitable acquisition
candidates and proposing, negotiating and consummating a transaction on
favorable terms is lengthy and complex and often subject to various federal and
state governmental approvals. There can be no assurance that the Company will be
able to acquire hospitals that meet its target criteria on satisfactory terms,
or at a pace consistent with its objectives. The failure to complete
acquisitions in a timely manner could have a material adverse effect on the
Company's business, financial conditions and results of operations.
Pending Acquisition. On December 22, 1997, New American entered into a
definitive purchase agreement to acquire substantially all of the assets of
Puget Sound Hospital, a 160-bed acute care hospital located in Tacoma,
Washington for $25.0 million subject to certain working capital adjustments. The
Company does not intend to close the purchase until the remediation of certain
environmental contamination at the facility is completed by the current owner or
until the Company and the current owner have made other arrangements
satisfactory to the Company that provide for the current owner to fund all costs
of such remediation. There can be no assurance that the Puget Sound Acquisition
will be consummated. See "-- Environmental Regulations."
Integration of Acquisitions. The Company acquired seven of its eight
hospitals during the fiscal year ended March 31, 1998. In addition, the Company
intends to continue to acquire additional hospitals as part of its growth
strategy. These acquisitions have substantially increased the number of persons
employed by the Company, the number of facilities operated by the Company and
the geographic markets served by the Company. Although the Company believes it
can successfully integrate and operate acquired hospitals, there can be no
assurance that any completed acquisition or future acquisitions will be
integrated successfully into the Company's operations, that cost savings or
operating synergies will be realized to the extent anticipated by the Company or
that the acquired operations will achieve levels of profitability necessary to
justify the Company's investments therein. Moreover, there can be no assurance
that the results of the acquired operations will not be dilutive to the
Company's per share earnings. Acquisitions may result in adverse effects on the
Company's reported operating results (such as incurrence of non-recurring
acquisition expenses, accumulation of intangible assets that must be amortized
over future periods, and contingent purchase price payments), divert
management's attention, create difficulties in attracting, retaining and
training key personnel, and introduce risks associated with unanticipated
problems or legal liabilities, some or all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.
Assumption of Liabilities of Acquired Hospitals. The Company has acquired
and will continue to acquire hospitals with prior operating histories. The
Company has from time to time identified certain past practices of acquired
hospitals that do not conform to the Company's standards. Although the Company
institutes certain policies and procedures designed to conform such practices to
its standards following closing of acquisitions, there can be no assurance that
the Company will not become liable for the past operations, including billing
and reimbursement practices which may be later asserted to be improper, of such
acquired hospitals. Although the Company performs certain due diligence
investigations with respect to potential liabilities of acquired hospitals and
obtains indemnification with respect to certain liabilities from the sellers of
such hospitals, there can be no assurance that any liabilities for which the
Company becomes responsible will not be material or will not exceed either the
limitations of any applicable indemnification provisions or the financial
resources of the indemnifying parties.
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Governmental Review of Certain Acquisitions. In recent years, several
states have expressed greater interest in transactions involving the sale of
hospitals by not-for-profit or governmental entities. Although the level of
interest varies from state to state, the trend is to provide for increased
governmental review, and in some cases approval, of transactions in which
not-for-profit entities sell a health care facility. Attorneys general in
certain states have been especially active in evaluating these transactions. In
some states these evaluations and reviews also apply to acquisitions from
for-profit entities. Although the Company has not yet been adversely affected as
a result of these trends, such increased scrutiny may increase the difficulty in
completing or prevent the completion of certain transactions in certain states
in the future.
LIMITED OPERATING HISTORY
The Company was organized in 1995, and seven of the Company's eight
hospitals were acquired during the fiscal year ended March 31, 1998. The largest
single purchase, representing four of the Company's eight hospitals, was
completed in January 1998. The Company has operated only one hospital for a full
fiscal year and there is a very limited history of operation of the hospitals by
the Company. There can be no assurance that the Company will be able to achieve
satisfactory operating results.
HEALTH CARE INDUSTRY INVESTIGATIONS
Significant media and public attention has recently focused on the hospital
industry due to ongoing federal and state investigations reportedly related to
certain referral, cost reporting and billing practices, laboratory and home
health care services, physician recruitment practices, and physician ownership
of health care providers and joint ventures involving, skilled nursing,
rehabilitation and psychiatric hospitals. As part of its hospital operations,
the Company operates laboratories, provides home health, skilled nursing,
rehabilitation and psychiatric services and engages in a variety of physician
recruitment activities. The Company also has significant Medicare, Medicaid and
other governmental billings. The Company monitors these aspects of its business
and believes its business practices are consistent with current industry
standards. However, applicable laws are complex and constantly evolving, and
there can be no assurance that government investigations will not result in
interpretations that are inconsistent with industry practices, including the
Company's practices. In public statements surrounding current investigations,
governmental authorities have taken positions on a number of issues, including
some for which little official interpretation has previously been available.
Certain of these positions appear to be inconsistent with practices that have
been common within the industry and which have not previously been challenged in
this manner. Moreover, in certain instances, government investigations that have
in the past been conducted under the civil provisions of federal law are now
being conducted as criminal investigations.
The Office of Inspector General ("OIG") of the United States Department of
Health and Human Services ("DHHS"), the United States Department of Justice
("DOJ") and other federal agencies have initiated hospital billing review
projects in certain states and are expected to extend such projects to
additional states, including states in which the Company does business. Many
state enforcement agencies have followed suit. These enforcement actions and the
increased enforcement activity of state and local authorities increase the
likelihood of governmental investigations of all health care facilities.
In April 1997, the DOJ, Eastern District of Texas, sent a demand letter to
the Company's hospital in Center, Texas, alleging improper laboratory billing
practices during periods prior to the Company's ownership of the hospital. The
Company settled this claim for approximately $18,000, and recovered its
settlement costs for this claim from the prior owner of the hospital pursuant to
an indemnification agreement.
In September 1997, the DOJ, Southern District of Texas, sent a demand
letter to the Company's hospital in San Benito, Texas alleging improper
laboratory billing for periods prior to the Company's ownership. The DOJ has
offered to settle the claim for approximately $20,000. The Company will seek
indemnification from prior owners for any liabilities with respect to this
matter and such prior owners have acknowledged their responsibility.
In November 1997, the DOJ, Eastern District of Missouri, sent a demand
letter to the Company's hospital in Wentzville, Missouri alleging improper
laboratory billing practices from approximately 1991 to 1997. No lawsuit has
been filed and the Company is engaged in discussions with representatives of the
DOJ. If the Company incurs any liability with respect to this matter
attributable to improper billing during periods
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prior to the Company's acquisition of the hospital, the Company will attempt to
recover such losses pursuant to an indemnification agreement entered into as
part of its purchase of the hospital. There can be no assurance that such
indemnification arrangement will be adequate or that indemnification claims will
be satisfied.
There can be no assurances that governmental entities will not initiate
similar investigations in the future at hospitals operated by the Company and
that such investigations will not result in significant fines and/or other
penalties to the Company. In addition, in certain instances, indemnity insurers
and other non-governmental payors have sought repayment from providers for
alleged overpayments. Any investigation of the Company or persons or entities
with whom the Company does business could result in adverse publicity concerning
the Company and could limit the Company's ability to make acquisitions. The
positions taken by authorities in the current investigations or any future
investigations of the Company or other providers and the liabilities or
penalties that may be imposed could have a material adverse effect on the
Company's business, financial condition or results of operations. See "-- Health
Care Regulation" and "Business -- Hospitals -- Regulatory Compliance Program"
and "-- Health Care Reform, Regulation and Licensing."
EFFECT OF REIMBURSEMENT AND PAYMENT POLICIES; HEALTH CARE REFORM LEGISLATION
The Company's hospitals derive a substantial portion of their revenue from
governmental programs. Such programs are highly regulated and are subject to
frequent and substantial changes. In recent years, changes in Medicare and
Medicaid programs have resulted in limitations on, and reduced levels of,
payment and reimbursement for a substantial portion of hospital procedures and
costs. Congress recently enacted the Balanced Budget Act of 1997, which
establishes a plan to balance the federal budget by fiscal year 2002, and
includes significant additional reductions in spending levels for the Medicare
and Medicaid programs. These include, among others, payment reductions directly
affecting hospitals, establishment of prospective payment systems for skilled
nursing facilities and home health agencies under Medicare. This legislation
also repealed the federal payment standard (the "Boren Amendment") for hospitals
and nursing facilities under Medicaid, increasing states' discretion over the
administration of Medicaid programs.
Federal and state proposals are pending that would impose further
limitations on governmental payments to health care providers such as the
Company and increase patient co-payments and deductibles. In addition, a number
of states are considering legislation designed to reduce their Medicaid
expenditures and to provide universal coverage and additional care for certain
populations and/or to impose additional taxes on hospitals to help finance or
expand the states' Medicaid programs. Significant additional reductions in
payment levels could have a material adverse effect on the business, financial
condition and results of operations of the Company.
An increasing number of related legislative proposals have been introduced
or proposed in Congress and in some state legislatures that would effect major
structural reforms in the health care system, either nationally or at the state
level. Among the proposals under consideration or already enacted are price
controls on hospitals, insurance market reforms to increase the availability of
group health insurance coverage to small businesses and requirements that all
businesses offer health insurance coverage to their employees. While the Company
anticipates that payments to hospitals will be reduced as a result of future
federal and state legislation, it is uncertain at this time what health care
reform legislation may ultimately be enacted, if any, or whether other changes
in the administration or interpretation of governmental health care programs
will occur. There can be no assurance that future health care legislation or
other changes in the administration or interpretation of governmental health
care programs will not have a material adverse effect on the Company's business,
financial condition and results of operations. See "Business -- Health Care
Reform, Regulation and Licensing."
DEPENDENCE ON MANAGEMENT
The Company's success is largely dependent on the skills, experience and
efforts of its senior management team. The Company's operations are also
dependent on the efforts, ability and experience of key members of its hospital
management staffs. The loss of services of one or more members of the Company's
senior management team or of a significant portion of its hospital management
staff at one or more of its hospitals could have a material adverse effect on
the Company's business, financial condition and results of
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operations. The Company does not maintain key man life insurance policies on any
of its officers. See "Management."
DEPENDENCE ON PHYSICIANS AND OTHER HEALTH CARE PROFESSIONALS
The success of the Company's hospitals is largely dependent upon the number
and quality of the physicians representing various specialties on the hospitals'
medical staffs. The Company is also largely dependent on the maintenance of good
relations between the Company and such physicians. Hospital physicians are
generally not employees of the Company and most staff physicians have admitting
privileges at hospitals other than those of the Company. Only a limited number
of physicians are interested in practicing in the non-urban communities in which
some of the Company's hospitals are located, and the loss of physicians in these
communities, or the inability of the Company to recruit physicians to these
communities, could have a material adverse effect on the Company's business,
financial condition and results of operations. The operations of the Company's
hospitals may also be affected by difficulties in attracting and retaining
nurses and certain other health care professionals in these communities. See
"Business -- Employees and Medical Staff."
YEAR 2000 COMPLIANT INFORMATION SYSTEMS
Many currently installed computer systems and software products are coded
to accept only two-digit entries in the date code field. By the year 2000, these
date code fields will need to accept four-digit entries to distinguish 21st
century dates from 20th century dates. Computer systems that do not accept
four-digit entries could fail or produce erroneous results and cause disruptions
of operations. As a result, many software and computer systems may need to be
upgraded or replaced in order to comply with such "Year 2000" requirements. The
Company is in the process of converting all of its hospitals to a new management
information system that the Company believes will be Year 2000 compliant. The
failure of the Company's management information system to be Year 2000 compliant
could have a material adverse effect on the Company's business, financial
conditions and results of operations. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
Various clinical and non-clinical equipment currently in use at the
Company's hospitals are also subject to Year 2000 issues. The Company is
examining such equipment in conjunction with its suppliers. The failure of such
equipment to be Year 2000 compliant could have a material adverse effect on the
Company's business, financial condition and results of operations.
In addition, the Company has ongoing relationships with third-party payors,
suppliers, vendors, and others that may have computer systems with Year 2000
problems that the Company does not control. There can be no assurance that the
fiscal intermediaries and governmental agencies with which the Company transacts
business and which are responsible for payment to the Company under the Medicare
and Medicaid programs, as well as other payors, will not experience significant
problems with Year 2000 compliance. According to testimony before a U.S. House
of Representatives subcommittee, the DHHS is far behind in remedying Year 2000
problems, which could delay payment of claims to providers. The failure of third
parties to remedy Year 2000 problems could have a material adverse effect on the
Company's business, financial condition and results of operations.
MIS CONVERSION
The Company relies on the accuracy, reliability and proper use of its
management information system. Each of the Company's hospitals has historically
operated under its own stand-alone system. On certain occasions, the Company has
experienced difficulties with such systems. For example, in November 1997, the
information system at Delta Medical Center -- Memphis failed, which prevented
the Company from accessing certain data and required the Company to maintain
manual records for approximately six weeks until the system and such data could
be restored. The Company is in the process of converting all of its hospitals to
a new management information system that integrates financial, clinical and
administrative functions. Although the Company believes the new management
information system will improve the efficiency of the Company, there can be no
assurance that the new system will work as expected or that the conversion will
be accomplished without interrupting the Company's business. In addition, while
the
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Company anticipates timely completion of the conversion of all of its hospitals
to the new management information system, there can be no assurance that such
conversion will be completed on schedule, that the cost of such conversion will
not exceed budgeted amounts or that the existing systems will not experience
additional problems prior to the completion of the conversion. Failure to
complete the conversion in a timely manner or within budgeted amounts could have
a material adverse effect on the Company's business, financial condition and
results of operations. See "-- Year 2000 Compliant Information Systems" and
"Business -- Management Information System."
HEALTH CARE REGULATION
The health care industry is subject to extensive federal, state and local
laws and regulations relating to issues such as licensure, conduct of
operations, ownership of facilities, additional facilities and services, and
prices for services. These laws and regulations provide for periodic inspections
or other reviews by state and federal agencies to determine compliance with such
laws sufficient for continued licensing or participation in Medicare, Medicaid
or other governmental payor programs. Such laws and regulations are extremely
complex, and in many instances the industry has the benefit of little or no
regulatory or judicial interpretation. The Company is also subject to the
federal anti-kickback law and the Stark law, which covers financial and other
arrangements between and among health care providers. The anti-kickback law and
similar state laws have been broadly interpreted to make remuneration of any
kind, (including many types of business and financial arrangements such as
certain joint ventures, space and equipment rentals, management and personal
services contracts, and certain investment arrangements between and among
providers, suppliers and referral sources), potentially illegal if any purpose
of the remuneration or financial arrangement is to induce a referral. Sanctions
for violating the anti-kickback law include criminal penalties and civil
sanctions, including fines and possible exclusion from government programs such
as Medicare and Medicaid. Pursuant to the Medicare and Medicaid Patient and
Program Protection Act of 1987, the DHHS has issued regulations that describe
some of the conduct and business relationships that are not a basis for
exclusion from the Medicare program or criminal prosecution under the
Anti-kickback Amendments ("Safe Harbors"). The fact that a given business
arrangement does not fall within a Safe Harbor does not render the arrangement
per se illegal. However, business arrangements of health care service providers
that fail to satisfy the applicable Safe Harbor criteria risk increased scrutiny
by enforcement authorities. The Health Insurance Portability and Accountability
Act of 1996 broadened the scope of certain fraud and abuse laws and certain
related enforcement activities. See " -- Health Care Industry Investigations."
In addition, the Stark law restricts referrals by physicians and other
practitioners of Medicare and other government program patients to providers
when such practitioners have ownership or certain other financial arrangements
with such provider. Many states have adopted or are considering similar
legislative proposals, some of which prohibit the payment or receipt of
remuneration for the referral of patients regardless of the source of the
payment for the care. The Company's participation in and development of
financial relationships with physicians and others could be adversely affected
by the Stark law and similar state enactments.
The Company provides financial incentives to recruit physicians into the
communities served by its hospitals, including loans and minimum revenue
guarantees. The Company also enters into certain leases with physicians and is a
party to certain joint ventures with physicians. There can be no assurance that
regulatory authorities who enforce the anti-kickback law, the Stark law and
similar state and federal laws will not determine that the Company's physician
recruiting activities, other physician arrangements or group purchasing
activities violate the anti-kickback law or other federal laws. Such a
determination could subject the Company to liability. DHHS has the authority to
exclude from participation in the Medicare and Medicaid programs those
individuals and entities that engage in defined prohibited activities,
including, but not limited to, violations of state or federal law. DHHS also has
the authority to impose substantial civil monetary penalties for certain
prohibited activities, including those activities prohibited by the
anti-kickback law and the Stark law. See "Business -- Health Care Reform,
Regulation and Licensing."
Both federal and state government agencies have announced heightened and
coordinated civil and criminal enforcement efforts against health care providers
and other health care businesses. One federal initiative, Operation Restore
Trust, focused on investigating health care providers in the home health and
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nursing home industries as well as medical suppliers to these providers in 17
states, including four states (Texas, Tennessee, Missouri and Washington) in
which the Company operates and a form of this initiative is still in place. The
OIG and DOJ from time to time establish enforcement initiatives that focus on
specific billing practices or other suspected areas of abuse. Current
initiatives include a focus on hospital billing for outpatient charges
associated with inpatient services, as well as hospital laboratory billing
practices. Three of the Company's hospitals have been the subject of enforcement
efforts. See "-- Health Care Industry Investigations."
Some states require state approval under certificate of need laws for the
purchase, construction, renovation and expansion of health care facilities and
services. A finding of need may be required prior to capital expenditures
exceeding a prescribed amount, changes in bed capacity or services and certain
other matters as well as a requirement a provider provide a certain amount of
uncompensated care. There can be no assurances that the Company will be able to
obtain required certificates of need.
The laws, rules and regulations described above are subject to considerable
interpretation and considerable discretion on the part of regulators and courts.
If a determination is made that the Company is in violation of such laws, rules
or regulations, or if further changes in the regulatory framework occur, any
such determination or changes could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business -- Health Care Reform, Regulation and Licensing."
COMPETITION
Competition among hospitals and other health care providers in the United
States has intensified in recent years due to cost containment pressures,
changing technology, changes in government regulation and reimbursement, changes
in practice patterns (such as shifting from inpatient to outpatient treatments),
the impact of managed care organizations and other factors. The Company's
hospitals face competition for patients from larger tertiary care centers,
outpatient service providers and other local non-urban hospitals that provide
similar services to those offered by the Company's hospitals. Some of the
hospitals that compete with the Company have greater financial resources and/or
are owned by governmental agencies or not-for-profit corporations supported by
endowments and charitable contributions, and can finance capital expenditures on
a tax-exempt basis. The Company faces competition for acquisitions primarily
from for-profit hospital companies that have also targeted non-urban markets as
well as not-for-profit entities. Some of the Company's competitors have greater
financial and other resources than the Company and larger, more experienced
development staffs focused on identifying and completing acquisitions. See
"-- Risks of Acquisition Strategy -- Timely Completion of Acquisitions" and
"Business -- Competition."
ENVIRONMENTAL REGULATION
Under various federal, state and local environmental laws, ordinances and
regulations, a current or previous owner or operator of real property may be
liable for the costs of removal or remediation of hazardous or toxic substances
on, under, or in such property. Such laws typically impose liability without
regard to whether the owner or operator knew of, or was responsible for, the
presence of such hazardous or toxic substances. In connection with the ownership
or operation of hospitals, the Company may be potentially liable for such costs.
The Company is party to a pending agreement to purchase Puget Sound
Hospital in Tacoma, Washington. During its due diligence process, the Company
discovered certain environmental contamination involving underground storage
tanks no longer in use. Environmental consultants have developed a work plan to
remediate such existing contamination which must be approved by the Washington
State Department of Ecology. Once the work plan is approved, remediation may
begin. The Company does not intend to close the purchase of Puget Sound Hospital
until remediation efforts are successfully completed or until the Company and
the current owner have made other arrangements satisfactory to the Company that
provide for the current owner to fund all costs of such remediation. Although
the Company is not currently aware of any other material environmental claims
pending or threatened against it or any of its hospitals, no assurances can be
given that a material environmental claim will not be asserted against the
Company or against any of its hospitals. The costs of defending against claims
of liability, or of remediating a contaminated property, could
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have a material adverse effect on the Company's business, financial condition
and results of operations. See "-- Risks of Acquisition Strategy -- Pending
Acquisition."
NEED FOR ADDITIONAL CAPITAL
The Company's acquisition program requires substantial capital resources.
In addition, the operations of its existing hospitals require ongoing capital
expenditures for renovation, expansion and addition of costly medical equipment
and technology. The Company may incur indebtedness and may issue, from time to
time, debt or equity securities to fund any such expenditures. There can be no
assurance that sufficient financing will be available on terms satisfactory to
the Company, if at all. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Liquidity and Capital Resources" and
"Business -- Business Strategy."
RISKS RELATED TO INTANGIBLE ASSETS
The Company's acquisitions have resulted in the recording of a significant
amount of goodwill. As of June 30, 1998, the Company had goodwill of
approximately $15.4 million, which is being amortized over 40 years. The
Company's acquisition plan will likely cause the Company to record additional
goodwill. There can be no assurance that the value of goodwill or other
intangible assets will ever be realized by the Company. The Company periodically
reviews the recoverability of its intangible assets. Recoverability of
intangibles is determined based on the undiscounted future operating cash flows
from the related hospital. The amount of impairment, if any, that may require an
additional change to earnings, is measured based on discounted future operating
cash flows using a discount rate reflecting the Company's average cost of funds
or based on the fair value of the related hospital. The write-off of a
significant portion of unamortized intangible assets could have a material
adverse effect on the Company's business, financial condition and results of
operations. See Note 1 of Notes to Consolidated Financial Statements.
PROFESSIONAL LIABILITY
In recent years, physicians, hospitals and other health care providers have
become subject to an increasing number of lawsuits alleging malpractice, product
liability or related legal theories, many of which involve large claims and
significant defense costs. To cover certain claims arising out of the operations
of its hospitals, the Company maintains professional malpractice liability
insurance and general liability insurance in amounts that management believes to
be sufficient for its operations. However, some claims may exceed, or may not be
covered by the policy in effect. The cost of malpractice and other liability
insurance has risen significantly during the past few years. While the Company's
professional and other liability insurance has been adequate in the past to
provide for liability claims, there can be no assurance that adequate levels of
such insurance will continue to be available at reasonable cost to the Company.
EFFECTIVE CONTROL BY CERTAIN STOCKHOLDERS
Upon completion of the Offering, the Company's officers and directors and
their affiliates as a group, including shares held by Welsh, Carson, Anderson
and Stowe VII, L.P. ("WCAS") and its affiliates, will beneficially own
approximately 65.4% of the outstanding shares of voting Common Stock,
(approximately 60.6% if the over-allotment option is exercised in full). As a
result of such ownership, these stockholders, if acting together, will
effectively have the ability to elect the Board of Directors and thereby control
the affairs and management of the Company. This may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Management" and
"Principal and Selling Stockholders."
BENEFITS OF OFFERING TO CERTAIN STOCKHOLDERS
The Company will receive net proceeds of approximately $92.8 million from
the Offering (at an assumed initial public offering price of $17.00 per share)
after deduction of the underwriting discounts and commissions and estimated
expenses of the Offering. Of this amount, approximately $26.2 million will be
paid in the Reincorporation in exchange for the Series A Preferred Stock,
including all accrued and unpaid dividends thereon, and $25.0 million plus
accrued interest will be used to repay Subordinated Debt. The Subordinated Debt
is held by an affiliate of WCAS and the Series A Preferred Stock is held by
WCAS, its affiliates and certain members of management. In addition, in the
event the Underwriters exercise their over-allotment
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option in full, WCAS, as the Selling Stockholder, will receive net proceeds of
approximately $14.2 million. Additionally, the net tangible book value of Common
Stock per share will increase substantially for stockholders owning shares prior
to this Offering. See "Use of Proceeds," "Dilution," "Principal and Selling
Stockholders" and "Certain Relationships and Related Transactions."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE
Prior to the Offering, there has been no public market for the Common
Stock. The initial public offering price of the Common Stock will be determined
by negotiations between the Company and the Representatives of the Underwriters
and may not be indicative of the market price for shares of the Common Stock
after the Offering. There can be no assurance that an active trading market will
develop or be maintained or as to the price at which the Common Stock will trade
if and when such a market develops. The Company has applied to list the Common
Stock for trading on the NYSE. The market price of the Common Stock may be
subject to significant fluctuations in response to variations in the Company's
operating results and other factors, including future acquisitions, market rates
of interest, changes in recommendations or earnings estimates of securities
analysts, developments affecting the health care industry generally, the
enactment of health care reform, reductions in payment rates and changes in
governmental regulation. In addition, the stock market in recent years has
experienced price and volume fluctuations that often have been unrelated or
disproportionate to the operating performance of companies, and the price of the
Common Stock could be affected by such fluctuations. See "Underwriting."
ABSENCE OF DIVIDENDS
The Company does not anticipate paying cash dividends in the foreseeable
future. In addition, the terms of the Company's bank credit agreement prohibit
the payment of cash dividends. Any future indebtedness incurred to refinance the
Company's existing indebtedness or to fund future growth may prohibit or limit
the Company's ability to pay dividends. See "Dividend Policy."
IMMEDIATE AND SUBSTANTIAL DILUTION
The existing stockholders of the Company acquired their shares of Common
Stock at an average cost substantially below the assumed initial public offering
price set forth on the cover page of this Prospectus. Therefore, purchasers of
Common Stock in the Offering will experience immediate and substantial dilution
in net tangible book value per share of approximately $11.59. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE; REGISTRATION RIGHTS
Sales of substantial amounts of the Common Stock in the public market, or
the perception that such sales could occur, could adversely affect the
prevailing market price for the Common Stock and could impair the Company's
ability to raise additional capital through the sale of equity securities. There
will be 18,595,370 shares of Common Stock outstanding upon completion of the
Offering. All of the 6,000,000 shares offered in the Offering (6,900,000 shares
if the Underwriters' over-allotment option is exercised in full) will be
eligible for resale in the public market without restriction by persons other
than affiliates of the Company upon completion of the Offering. The remaining
12,595,370 shares of Common Stock (11,695,370 shares if the Underwriters'
over-allotment option is exercised in full) are "restricted securities" as that
term is defined in Rule 144 under the Securities Act of 1933, as amended (the
"Securities Act"). Commencing 90 days after the completion of the Offering,
12,595,370 shares of Common Stock will be eligible for sale in the public market
pursuant to Rule 144. The remaining restricted shares of Common Stock will
become eligible for sale pursuant to Rule 144 thereafter. In addition, the
Company expects to register up to 2,199,330 shares of Common Stock covered by
its Stock Option Plan following the Offering. The Company, its executive
officers and directors and substantially all of the other current stockholders
have agreed not to sell or otherwise dispose of any of the shares of Common
Stock owned by them in the public market for a period of 180 days after the date
of this Prospectus without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. See "Management -- Stock Option Plan" and
"Description of Capital Stock" and "Shares Eligible for Future Sale."
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The Company is a party to a registration agreement that provides certain
demand and piggyback registration rights to the holders of 12,200,243 shares of
Common Stock. All but 430,781 of such shares are subject to the 180-day
restrictions described above. See "Shares Eligible for Future
Sale -- Registration Rights Agreement."
ANTITAKEOVER PROVISIONS; POSSIBLE ISSUANCE OF PREFERRED STOCK
Certain provisions of the Company's Certificate of Incorporation (the
"Certificate of Incorporation") and Bylaws (the "Bylaws") may be deemed to have
antitakeover effects and may delay, defer or prevent a takeover attempt that a
stockholder might consider in its best interest. Such provisions of the
Certificate of Incorporation and Bylaws: (i) divide the Company's Board of
Directors into three classes, each of which will serve for different three-year
periods; (ii) provide that the stockholders may not take action by written
consent, but only at duly called annual or special meetings of stockholders;
(iii) provide that special meetings of the stockholders may be called only by
the Chairman of the Board of Directors, a majority of the entire Board of
Directors or the Chief Executive Officer; and (iv) establish certain advance
notice procedures for nomination of candidates for election as directors and for
stockholder proposals to be considered at annual stockholders' meetings. Such
provisions cannot be amended without the affirmative vote of at least 70% of the
combined voting power of the outstanding shares of capital stock. The
Certificate of Incorporation also authorizes the Board of Directors to determine
the rights, preferences, privileges and restrictions of unissued series of the
Company's authorized preferred stock and to fix the number of shares and the
designation of any such series, without any vote or action by stockholders.
Thus, the Board of Directors can authorize and issue shares of preferred stock
with voting or conversion rights that could adversely affect the voting or other
rights of holders of the Common Stock. Further, certain provisions of the
Delaware General Corporation Law ("DGCL") may have the effect of delaying,
deferring or preventing a change in control of the Company. See "Description of
Capital Stock -- Antitakeover Effects of provisions of the Company's Certificate
of Incorporation and Bylaws."
LABOR UNIONS; POTENTIAL WORK STOPPAGE
Approximately 150 employees at the Company's hospital located at Davenport,
Iowa are represented by a labor union. In addition, approximately 180 employees
at Puget Sound Hospital, a pending acquisition, are represented by labor unions.
A union contract covering approximately 80 Puget Sound Hospital employees
expires in September 1998. There can be no assurance that the Company will be
able to renew existing labor union contracts on acceptable terms. In addition,
employees could exercise their rights under labor union contracts, which could
include a strike or walk-out. In such cases, there are no assurances that the
Company would be able to staff sufficient employees for its short-term needs.
Any such labor strike or the inability of the Company to negotiate a
satisfactory contract upon expiration of the current agreements could have a
material adverse effect on the Company's business, financial condition or
results of operations.
THE REINCORPORATION
Immediately prior to the consummation of the Offering, the Company will
reincorporate as a Delaware corporation pursuant to a merger of New American
Healthcare Corporation, a Tennessee corporation, with and into a newly created
Delaware corporation. The name of the surviving Delaware corporation will be New
American Healthcare Corporation. The merger will not change the management of
the Company. However, as a result of the merger, the Company will: (i) increase
the authorized number of shares of Common Stock from 20,000,000 to 50,000,000
and create a class of Non-Voting Common Stock with 1,000,000 authorized shares;
(ii) cause all outstanding Series B Preferred Stock held by WCAS to be exchanged
for an aggregate of 3,520,287 shares of Common Stock and 423,475 shares of
Non-Voting Common Stock and cause all outstanding Series B Preferred Stock held
by persons other than WCAS to be exchanged for an aggregate of 245,438 shares of
Common Stock; (iii) cause all outstanding shares of Series A Preferred Stock to
be exchanged for the right to receive an amount of cash equal to the aggregate
redemption price (including accrued dividends) that would be required to be paid
in order to redeem such shares as of the date of merger, which is estimated to
be approximately $26.2 million in the aggregate; and (iv) cause all outstanding
shares of
16
<PAGE> 19
common stock to be exchanged for an aggregate of 8,406,170 shares of Common
Stock (collectively, the "Reincorporation"). As a result of the Reincorporation,
the holders of common stock of the nonsurviving Tennessee corporation will
receive 1.0473 shares of common stock of the Delaware corporation for each share
of common stock of the Tennessee corporation owned. In addition, each share of
Series B Preferred Stock will be exchanged for approximately 17.8264 shares of
Non-Voting common stock or common stock of the Delaware corporation.
USE OF PROCEEDS
The net proceeds to the Company from the Offering, after deducting
estimated underwriting discounts and commissions and offering expenses and
assuming an initial public offering price of $17.00 per share, are estimated to
be approximately $92.8 million. Of this amount, approximately $32.6 million will
be used to reduce the outstanding revolving loan balance at July 27, 1998 under
the Credit Agreement dated as of January 30, 1998, among the Company and the
lenders named therein (the "Credit Agreement"); approximately $26.2 million as
of July 27, 1998 will be used to repay WCAS Capital Partners, III, L.P. ("WCAS
CP III") under the terms of a subordinated note (the "Subordinated Debt") in the
original principal amount of $25.0 million, plus accrued and unpaid interest;
and approximately $26.2 million as of July 27, 1998 will be paid in the
Reincorporation in exchange for the outstanding Series A Preferred Stock and all
accrued and unpaid dividends thereon.
Borrowings under the Credit Agreement bear interest at the prime rate, the
federal funds rate or London Interbank Offered Rate ("LIBOR"), plus, in each
case, a margin depending upon the Company's ratio of funded debt to EBITDA. As
of July 27, 1998, the effective interest rate on outstanding balances was 8.2%.
The Subordinated Debt bears interest at 10.0% per annum. The Subordinated
Debt was used to finance a portion of the acquisitions of Davenport Medical
Center, Woodland Park Hospital, Eastmoreland Hospital, and Lander Valley Medical
Center. See "Certain Relationships and Related Transactions -- Subordinated
Debt."
The Series A Preferred Stock accrues dividends at 7.0% per annum on the sum
of the liquidation value plus accumulated and unpaid dividends, which was
approximately $26.2 million as of July 27, 1998. See "Certain Relationships and
Related Transactions -- Series A Preferred Stock."
The Company intends to use the balance of the proceeds for working capital
and other general corporate purposes, including the possible acquisition of
other hospitals. Pending such uses, the Company intends to invest the net
proceeds of the Offerings in short-term, interest-bearing investment grade debt
securities, certificates of deposit, commercial paper, time deposits or direct
or guaranteed obligations of the United States.
Although the Company has had preliminary discussions from time to time
regarding possible acquisition opportunities, the Company has no agreements,
understandings or commitments with respect to any such opportunities, other than
as described elsewhere in this Prospectus, nor has the Company allocated any
portion of the net proceeds hereunder for any specific acquisition. There can be
no assurance that any future acquisition will be consummated.
DIVIDEND POLICY
The Company currently intends to retain its earnings for use in its
business and therefore does not anticipate declaring or paying any cash
dividends in the foreseeable future. In addition, the Credit Agreement prohibits
the payment of dividends by the Company. Any future determination to declare or
pay cash dividends will be made by the Board of Directors based on the Company's
earnings, financial position, capital requirements, credit agreements and such
other factors as the Board of Directors deems relevant at such time. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
17
<PAGE> 20
CAPITALIZATION
The following table sets forth as of June 30, 1998: (i) the actual
capitalization of the Company; (ii) the pro forma capitalization of the Company
giving effect to the Reincorporation and the Puget Sound Acquisition and (iii)
the pro forma capitalization of the Company as adjusted to reflect the receipt
and application of the estimated net proceeds from the Offering (assuming an
initial public offering price of $17.00 per share and after deducting
underwriting discounts and commissions and offering expenses). The table should
be read in conjunction with the Consolidated Financial Statements and the
related Notes thereto contained elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
---------------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
(IN THOUSANDS)
<S> <C> <C> <C>
Cash and cash equivalents................................. $ 170 $ (828) $ 7,846
======== ======== ========
Capital lease obligations, excluding current portion...... $ 4,489 $ 4,489 $ 4,489
Long-term debt, excluding current portion................. 31,550 55,550 24,000
Subordinated notes payable to affiliates.................. 24,775 24,775 --
Redeemable preferred stock -- Series A, $.01 par value,
authorized: 250,000 shares; issued and outstanding:
250,000 shares actual and pro forma, no shares pro forma
as adjusted............................................. 26,054 26,054 --
Stockholders' equity:
Preferred stock -- Series B, $.01 par value, authorized:
235,000 shares; issued and outstanding: 235,000
shares actual, no shares pro forma and pro forma as
adjusted............................................. 2 -- --
Non-voting common stock, $0.01 par value, authorized:
1,000,000 shares; issued and outstanding: no shares
actual, 423,475 shares pro forma and pro forma as
adjusted............................................. -- 4 4
Common stock, $0.01 par value, authorized: 20,000,000
shares actual, 50,000,000 shares pro forma and
50,000,000 shares pro forma as adjusted; issued and
outstanding: 8,026,500 shares actual, 12,171,895
shares pro forma and 18,171,895 shares pro forma as
adjusted(1).......................................... 80 122 182
Additional paid-in capital.............................. 23,827 23,783 116,191
Common stock warrants................................... 235 235 235
Accumulated deficit..................................... (294) (294) (519)
-------- -------- --------
Total stockholders' equity......................... 23,850 23,850 116,093
-------- -------- --------
Total capitalization............................ $110,718 $134,718 $144,582
======== ======== ========
</TABLE>
- ------------------------------
(1) Does not include 591,725 shares of Common Stock issuable upon the exercise
of outstanding warrants of the Company at an exercise price of $4.13 or
552,485 shares of Common Stock issuable upon the exercise of outstanding
options as of June 30, 1998 at a weighted average exercise price of $5.71.
18
<PAGE> 21
DILUTION
The net tangible book value of the Company as of June 30, 1998 was
approximately $8.1 million, or $0.64 per share of Common Stock. Net tangible
book value per share of Common Stock represents the amount of total assets less
total liabilities, mandatory redeemable preferred stock, and intangible assets,
divided by the number of shares of Common Stock outstanding as of June 30, 1998.
After giving effect to: (i) the Puget Sound Acquisition and (ii) the sale by the
Company of the 6,000,000 shares of Common Stock offered hereby (at an assumed
initial public offering price of $17.00 per share) and the application of the
net proceeds as set forth under "Use of Proceeds," the pro forma net tangible
book value of the Company as of June 30, 1998 would have been $100.4 million, or
$5.41 per share of Common Stock. This represents an immediate increase in pro
forma net tangible book value of $4.77 per share of Common Stock to existing
stockholders and an immediate dilution of $11.59 per share to purchasers in the
Offering, as illustrated by the following table:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share........... $17.00
Net tangible book value per share before the
Offering(1).......................................... $1.00
Decrease attributable to the Reincorporation and Puget
Sound Acquisition.................................... 0.36
-----
Pro forma net tangible book value prior to the
Offering............................................. 0.64
Increase resulting from the Offering.................... 4.77
Pro forma net tangible book value per share after the
Offering(1)............................................. 5.41
------
Dilution per share to new investors(2).................... $11.59
======
</TABLE>
The following table summarizes certain differences between the existing
stockholders and the new investors with respect to the number of shares of
Common Stock purchased from the Company, the total consideration paid and the
average price per share paid (based upon an assumed initial public offering
price of $17.00 per share):
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE PRICE
--------------------- ----------------------- -------------
NUMBER PERCENT AMOUNT PERCENT PER SHARE
<S> <C> <C> <C> <C> <C>
Existing stockholders(1).......... 12,595,370 67.7% $ 23,909,000 19.0% $ 1.90
New investors..................... 6,000,000 32.3 102,000,000 81.0 17.00
---------- ----- ------------ -----
Total........................ 18,595,370 100.0% $125,909,000 100.0%
========== ===== ============ =====
</TABLE>
- ------------------------------
(1) Includes 423,475 shares of Non-Voting Common Stock issued in the
Reincorporation, but excludes (i) 591,725 shares of Common Stock issuable
upon the exercise of outstanding warrants of the Company at an exercise
price of $4.13 per share; and (ii) 552,485 shares of Common Stock issuable
upon the exercise of outstanding options pursuant to the Company's Stock
Option Plan at June 30, 1998 at a weighted average exercise price of $5.71
per share. To the extent the warrants and options are exercised, there could
be additional dilution to the new investors. See "Management -- Stock Option
Plan" and "Description of Capital Stock."
(2) Dilution is determined by subtracting pro forma net tangible book value per
share after the Offering from the initial public offering price per share.
19
<PAGE> 22
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
(UNAUDITED)
The "New American After Offering" column set forth in the unaudited pro
forma condensed combined balance sheet of the Company as of June 30, 1998
assumes the Reincorporation and the application of the estimated net proceeds of
the Offering to be received by the Company had occurred on June 30, 1998. The
"New American Combined" column set forth in the unaudited pro forma condensed
combined balance sheet of the Company as of June 30, 1998 assumes that the Puget
Sound Acquisition, the Reincorporation and the application of the estimated net
proceeds of the offering to be received by the Company had occurred on June 30,
1998.
The "New American as Adjusted" column set forth in the unaudited pro forma
condensed combined statement of operations for the three months ended June 30,
1998 assumes that the application of the estimated net proceeds of the Offering
to be received by the Company had occurred on April 1, 1998. The "New American
as Adjusted" column for the year ended March 31, 1998 assumes that the Fiscal
1998 Hospital Acquisitions and the application of the estimated net proceeds of
the Offering to be received by the Company had occurred on April 1, 1997. The
"New American Combined" column set forth in the unaudited pro forma condensed
combined statement of operations for the three months ended June 30, 1998
assumes that the Puget Sound Acquisition and the application of the estimated
net proceeds of the Offering to be received by the Company had occurred on April
1, 1998. The "New American Combined" column for the year ended March 31, 1998
assumes that the Puget Sound Acquisition, the Fiscal 1998 Hospital Acquisitions
and the application of the estimated net proceeds of the Offering to be received
by the Company had occurred on April 1, 1997.
The unaudited pro forma condensed combined financial information presented
herein are not necessarily indicative of the Company's combined financial
position or the results of operations that actually would have occurred if the
transactions had been consummated on such dates. In addition, they are not
intended to be a projection of results of operations that may be obtained in the
Company's future. The pro forma results of operations, which do not take into
account certain operational changes instituted by the Company upon acquisition
of its hospitals, are not necessarily indicative of the results that may be
expected from such hospitals. The unaudited pro forma condensed combined
financial information should be read in conjunction with the audited financial
statements, including the notes thereto, included elsewhere in this Prospectus.
20
<PAGE> 23
NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
--------------------------------------------------------------------------
NEW
AMERICAN PUGET NEW
NEW AFTER SOUND PRO FORMA AMERICAN
AMERICAN(1) OFFERING OFFERING HOSPITAL ADJUSTMENTS COMBINED
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets:
Cash............................. $ 170 $ 8,674(2) $ 8,844 $ 2 $(1,000)(6) $ 7,846
Patient accounts receivable...... 19,697 -- 19,697 5,113 (1,610)(7) 23,200
Prepaid expenses and other
current assets................. 5,732 -- 5,732 1,697 (704)(7) 6,523
(202)(7)
-------- -------- -------- ------- ------- --------
Total current assets........... 25,599 8,674 34,273 6,812 (3,516) 37,569
Property and equipment, net........ 83,808 -- 83,808 12,697 10,213(6) 106,718
Goodwill, net...................... 15,357 -- 15,357 -- -- 15,357
Other assets, net.................. 2,952 -- 2,952 408 -- 3,360
-------- -------- -------- ------- ------- --------
Total assets................... $127,716 $ 8,674 $136,390 $19,917 $ 6,697 $163,004
======== ======== ======== ======= ======= ========
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses....................... $ 14,331 $ (1,190)(2) $ 13,141 $ 3,064 $ (450)(7) $ 15,755
Estimated third-party payor
settlements.................... 723 -- 723 1,840 (1,840)(7) 723
Current portion of capital lease
obligations.................... 605 -- 605 -- -- 605
-------- -------- -------- ------- ------- --------
Total current liabilities...... 15,659 (1,190) 14,469 4,904 (2,290) 17,083
-------- -------- -------- ------- ------- --------
Capital lease obligations, less
current portion.................. 4,489 -- 4,489 -- -- 4,489
Long-term debt..................... 31,550 (31,550)(2) -- -- 24,000(6) 24,000
Subordinated notes payable to
affiliates....................... 24,775 (24,775)(2) -- -- -- --
Deferred income taxes.............. 1,339 -- 1,339 2,217 (2,217)(7) 1,339
Other.............................. -- -- -- 3,588 (3,588)(7) --
Redeemable preferred stock......... 26,054 292(3) -- -- -- --
(26,346)(2)
Stockholders' equity:
Preferred stock.................. 2 (2)(4) -- -- -- --
Non-voting common stock.......... -- 4 4 -- -- 4
Common stock..................... 80 60(2) 182 1 (1)(6) 182
38(4)
4(5)
Additional paid-in capital....... 23,827 (292)(3) 116,191 7,551 (7,551)(6) 116,191
92,700(2)
(40)(4)
(4)(5)
Common stock warrants............ 235 -- 235 -- -- 235
Accumulated earnings (deficit)... (294) (225)(2) (519) 1,656 (1,656)(6) (519)
-------- -------- -------- ------- ------- --------
Total stockholders' equity..... 23,850 92,243 116,093 9,208 (9,208) 116,093
-------- -------- -------- ------- ------- --------
Total liabilities and
stockholders' equity......... $127,716 $ 8,674 $136,390 $19,917 $ 6,697 $163,004
======== ======== ======== ======= ======= ========
</TABLE>
21
<PAGE> 24
NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(IN THOUSANDS)
(1) The Company made the Doctors Hospital acquisition and the Fiscal 1998
Hospital Acquisitions primarily in exchange for cash and assumption of
associated liabilities as follows:
<TABLE>
<S> <C>
Purchase price.............................................. $104,000
Add liabilities assumed..................................... 16,679
Less assets acquired........................................ 104,927
--------
Costs in excess of net assets acquired............. $ 15,752
========
</TABLE>
The acquisitions were accounted for as purchases. The cost in excess of net
assets acquired is a preliminary allocation that may be adjusted within one
year of the purchase date. Accumulated amortization of cost in excess of net
assets acquired is $395 at June 30, 1998.
(2) To record the issuance of 6,000,000 shares of Common Stock in the offering
for net proceeds of $92,760 based on an assumed initial public offering
price of $17.00 per share and estimated underwriting discounts and
commissions and offering expenses of $9,240. Proceeds from the sale in the
amount of $25,000, $31,550, $26,346 and $1,190 will be used to pay down
subordinated notes payable, long-term debt, redeemable preferred stock and
accrued interest on long-term debt, respectively, with the associated
discount on subordinated notes payable in the amounts of $225 being written
off. Such write-off has not been reflected as a nonrecurring charge in the
pro forma condensed combined statement of operations. The balance of $8,674
will be retained to fund general corporate purposes, including working
capital and the Company's acquisition program.
(3) To record the accrual of cumulative preferred dividends in the amount of
$292 on Series A Preferred Stock at 7% per annum for the period from April
1, 1998 to the expected closing date of the Offering.
(4) To record the Series B Preferred Stock exchange in connection with the
Reincorporation in the amount of $2 to preferred stock, $4 to Non-Voting
Common Stock, $38 to Common Stock and $40 to additional paid-in capital.
(5) To record reclassification of additional paid-in capital to common stock in
the amount of $4 to reflect the stock split effected in the Reincorporation.
(6) To record the Puget Sound Acquisition for approximately $25,000 financed by
$24,000 of long-term debt and $1,000 of cash. The total purchase cost was
allocated as follows: property and equipment of $10,213; common stock of $1;
additional paid-in capital of $7,551; and accumulated earnings of $1,656.
(7) To exclude certain assets and liabilities that will not be acquired or
assumed by New American primarily related to government program patient
accounts receivable of $1,610, deferred tax assets of $704 intercompany
accounts receivable of $202, accrued expenses of $450, estimated third-party
payor settlements of $1,840, deferred income taxes of $2,217 and other
liabilities of $3,588.
22
<PAGE> 25
NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 1998
------------------------------------------------------------------------
NEW NEW
NEW PRO FORMA AMERICAN PUGET PRO FORMA AMERICAN
AMERICAN ADJUSTMENTS AS ADJUSTED SOUND ADJUSTMENTS COMBINED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue......... $34,856 $ -- $34,856 $7,006 $ $41,862
Other revenue....................... 1,042 -- 1,042 169 -- 1,211
------- -------- ------- ------ ----- -------
Net operating revenues............ 35,898 -- 35,898 7,175 -- 43,073
------- -------- ------- ------ ----- -------
Expenses:
Salaries and benefits............... 16,179 -- 16,179 3,334 -- 19,513
Professional fees................... 4,715 -- 4,715 547 -- 5,262
Supplies............................ 3,968 -- 3,968 1,318 -- 5,286
Provision for doubtful accounts..... 3,012 -- 3,012 (13) -- 2,999
Other............................... 3,889 -- 3,889 1,184 (269)(4) 4,804
General and administrative.......... 599 -- 599 -- 599
Depreciation and amortization....... 1,359 -- 1,359 243 (243)(5) 1,656
297(5)
Interest expense.................... 1,557 (1,461)(1) 96 -- 525(6) 621
------- -------- ------- ------ ----- -------
Total operating expenses.......... 35,278 (1,461) 33,817 6,613 310 40,740
------- -------- ------- ------ ----- -------
Income (loss) before income
taxes........................... 620 1,461 2,081 562 (310) 2,333
Income taxes.......................... 248 584(2) 832 191 (90)(2) 933
------- -------- ------- ------ ----- -------
Net income (loss)................... 372 877 1,249 371 (220) 1,400
Cumulative preferred dividends........ 437 (437)(3) -- -- -- --
------- -------- ------- ------ ----- -------
Net income (loss) available to
common stockholders............... $ (65) $ 1,314 $ 1,249 $ 371 $(220) 1,400
======= ======== ======= ====== ===== =======
Pro forma net income per common share:
Basic............................... $ 0.07 $ 0.08
Diluted............................. 0.07 0.07
======= =======
Weighted average shares outstanding:
Basic............................... 18,085(7) 18,085(7)
Diluted............................. 18,766(7) 18,766(7)
======= =======
</TABLE>
- ---------------
(1) To record the elimination of interest expense in the amount of $1,461 on
average acquisition debt during the period of approximately $60,875 at a
weighted average rate of 9.6% that will be paid off with a portion of the
net proceeds of the Offering, as if the Offering had occurred on April 1,
1998.
(2) To record tax expense at the expected combined income tax rate of 40%.
(3) To record the elimination of cumulative preferred dividends in the amount
of $437 on Series A Preferred Stock that will be converted into the right
to receive cash in the Reincorporation.
(4) To eliminate management fees in the amount of $269 that would not have been
incurred had Puget Sound Hospital been acquired on April 1, 1998.
(5) To record depreciation and amortization for the Puget Sound Acquisition in
the amount of $297 as if it had been acquired on April 1, 1998 and
elimination of historical depreciation and amortization in the amount of
$243 recorded prior to the date of acquisition.
(6) To record interest expense for the Puget Sound Acquisition in the amount of
$525 relating to $24,000 of acquisition debt at a rate of 8.75% as if it
had been incurred on April 1, 1998.
(7) The weighted average shares outstanding does not include 510,235 shares of
Common Stock to be issued in connection with the Offering, the net proceeds
from issuance and sale of which have been designated for general corporate
purposes. See Note 1 of Notes to Consolidated Financial Statements for a
discussion of the calculation of Basic and Diluted earnings per share.
23
<PAGE> 26
NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, 1998
-----------------------------------------------------------------------------------------
NEW NEW
NEW ACQUIRED PRO FORMA AMERICAN PUGET PRO FORMA AMERICAN
AMERICAN HOSPITALS(1) ADJUSTMENTS AS ADJUSTED SOUND ADJUSTMENTS COMBINED
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues:
Net patient service
revenue............ $73,725 $65,649 $ -- $139,374 $29,168 $ -- $168,542
Other revenue........ 1,924 2,257 -- 4,181 623 -- 4,804
------- ------- -------- -------- ------- ------- --------
Net operating
revenues......... 75,649 67,906 -- 143,555 29,791 -- 173,346
------- ------- -------- -------- ------- ------- --------
Expenses:
Salaries and
benefits........... 31,276 33,732 -- 65,008 13,362 -- 78,370
Professional fees.... 8,608 8,065 -- 16,673 3,876 -- 20,549
Supplies............. 8,314 7,077 -- 15,391 2,176 -- 17,567
Provision for
doubtful
accounts........... 7,837 4,513 -- 12,350 2,455 -- 14,805
Other................ 9,286 10,239 (570)(2) 18,955 5,306 (1,561)(9) 22,700
General and
administrative..... 3,484 -- 905(3) 4,389 -- -- 4,389
Depreciation and
amortization....... 2,836 3,634 (3,634)(4) 5,322 980 (980)(10) 6,510
2,486(4) 1,188(10)
Interest expense..... 2,637 2,983 (2,623)(5) 382 28 (28)(11) 2,482
3,389(5) 2,100(11)
(6,004)(6)
------- ------- -------- -------- ------- ------- --------
74,278 70,243 (6,051) 138,470 28,183 719 167,372
------- ------- -------- -------- ------- ------- --------
Income (loss)
before income
taxes............ 1,371 (2,337) 6,051 5,085 1,608 (719) 5,974
Income taxes........... 579 (458) 1,912(7) 2,033 547 (191)(7) 2,389
------- ------- -------- -------- ------- ------- --------
Net income (loss).... 792 (1,879) 4,139 3,052 1,061 (528) 3,585
Cumulative preferred
dividends............ 617 -- (617)(8) -- -- -- --
------- ------- -------- -------- ------- ------- --------
Net income (loss)
attributable to
common
stockholders....... $ 175 $(1,879) $ 4,756 $ 3,052 $ 1,061 $ (528) $ 3,585
======= ======= ======== ======== ======= ======= ========
Pro forma net income
per common share:
Basic................ $ 0.17 $ 0.20
Diluted.............. 0.17 0.20
======== ========
Weighted average shares
outstanding:
Basic................ 18,085(12) 18,085(12)
Diluted.............. 18,210(12) 18,210(12)
======== ========
</TABLE>
24
<PAGE> 27
NEW AMERICAN HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED MARCH 31, 1998
(IN THOUSANDS)
(1) To record the historical operations of the Fiscal 1998 Hospital
Acquisitions for the period April 1, 1997 through the date of acquisition
by the Company.
(2) To eliminate management fees in the amount of $570 that would not have been
incurred had the Fiscal 1998 Hospital Acquisitions been consummated on
April 1, 1997.
(3) To record estimated additional administrative salaries in the amount of
$905, representing the total additional incremental costs to manage
acquired and to be acquired hospitals, that would have been incurred had
the Fiscal 1998 Hospital Acquisitions been consummated on April 1, 1997.
(4) To record depreciation and amortization for the Fiscal 1998 Hospital
Acquisitions in the amount of $2,486 as if they had been acquired on April
1, 1997 and elimination of historical depreciation and amortization in the
amount of $3,634 recorded prior to the date of acquisition which had been
recorded on a higher cost basis.
(5) To record interest expense for the Fiscal 1998 Hospital Acquisitions in the
amount of $3,389 relating to acquisition debt of approximately $62,550 at a
weighted average interest rate of 9.6% (less previous interest recognized
on acquisition debt of $2,615) as if it had been incurred on April 1, 1997
and elimination of historical interest expense in the amount of $2,623
recorded prior to the date of acquisition for debt not assumed.
(6) To record the elimination of interest expense in the amount of $6,004 on
acquisition debt of approximately $62,550 at a weighted average interest
rate of 9.6% that will be paid off with a portion of the net proceeds of
the Offering, as if the Offering had occurred on April 1, 1997.
(7) To record tax expense at the expected combined income tax rate of 40%.
(8) To record the elimination of cumulative preferred dividends in the amount
of $617 on Series A Preferred Stock that will be converted into the right
to receive cash in the Reincorporation.
(9) To eliminate management fees in the amount of $217 that would not have been
incurred had Puget Sound Hospital been acquired on April 1, 1997.
(10) To record depreciation and amortization for the Puget Sound Acquisition in
the amount of $1,188 as if it had been acquired on April 1, 1997 and
elimination of historical depreciation and amortization in the amount of
$980 recorded prior to the date of acquisition.
(11) To record interest expense for the Puget Sound Acquisition in the amount of
$2,100 relating to acquisition debt of approximately $24,000 at 8.75% as if
it had been incurred on April 1, 1997 and elimination of historical
interest expense in the amount of $28 recorded prior to the date of
acquisition for debt not assumed.
(12) The weighted average shares outstanding does not include 510,235 shares,
the net proceeds from issuance and sale of which have been designated for
general corporate purposes. See Note 1 of Notes to Consolidated Financial
Statements for a discussion of the calculation of Basic and Diluted
earnings per share.
25
<PAGE> 28
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The following selected consolidated financial data have been derived from
the audited consolidated financial statements of the Company and its
subsidiaries as of March 31, 1996 and for the period from August 16, 1995
(inception) through March 31, 1996 and as of and for the years ended March 31,
1997 and 1998 and the unaudited consolidated financial statements of the Company
and its subsidiaries as of and for the three months ended June 30, 1998 and
1997. The data set forth below should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus and "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
<TABLE>
<CAPTION>
PERIOD
AUGUST 16, YEARS ENDED THREE MONTHS ENDED
1995 (INCEPTION) MARCH 31, JUNE 30,
TO MARCH 31, ------------------ ------------------
1996 1997 1998 1997 1998
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Net patient service revenue............ $ -- $10,737 $ 73,725 $ 9,638 $ 34,856
Other revenue.......................... 17 350 1,924 224 1,042
------ ------- -------- ------- --------
Net operating revenues............... 17 11,087 75,649 9,862 35,898
Expenses:
Salaries and benefits.................. -- 4,117 31,276 4,084 16,179
Professional fees...................... -- 620 8,608 1,079 4,715
Supplies............................... -- 1,439 8,314 1,185 3,968
Provision for doubtful accounts........ -- 534 7,837 787 3,012
Other.................................. -- 2,377 9,286 1,295 3,889
General and administrative............. 385 1,871 3,484 822 599
Depreciation and amortization.......... 5 783 2,836 626 1,359
Interest............................... 2 363 2,637 205 1,557
------ ------- -------- ------- --------
392 12,104 74,278 10,083 35,278
------ ------- -------- ------- --------
Income (loss) before income taxes.... (375) (1,017) 1,371 (221) 620
Income taxes.............................. -- 66 579 -- 248
------ ------- -------- ------- --------
Net income (loss)...................... (375) (1,083) 792 (221) 372
Cumulative preferred dividend............. -- -- 617 -- 437
------ ------- -------- ------- --------
Net income (loss) attributable to
common stockholders.................. $ (375) $(1,083) $ 175 $ (221) $ (65)
====== ======= ======== ======= ========
Net income (loss) per share:
Basic.................................. $(0.08) $ (0.14) $ 0.02 $ (0.03) $ (0.01)
Diluted................................ $(0.08) $ (0.14) $ 0.01 $ (0.03) $ (0.01)
====== ======= ======== ======= ========
Weighted average number of shares
outstanding:
Basic.................................. 4,759 8,027 8,027 8,027 8,027
Diluted................................ 4,759 8,027 12,144 8,027 8,027
====== ======= ======== ======= ========
AS OF MARCH 31, AS OF
----------------------------------- JUNE 30,
1996 1997 1998 1998
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital........................... $1,043 $ 522 $ 15,306 $ 9,940
Total assets.............................. 1,164 19,220 134,193 127,716
Long-term obligations, excluding current
portion................................ 24 975 67,184 60,814
Redeemable preferred stock................ -- -- 25,617 26,054
Total stockholders' equity................ 1,088 15,005 23,915 23,850
</TABLE>
26
<PAGE> 29
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related Notes thereto included elsewhere
in this Prospectus.
OVERVIEW
New American acquires and operates acute care hospitals throughout the
United States. The Company was formed to capitalize on opportunities to be the
principal provider of health care services in those non-urban communities in
which it operates.
The Company acquired its first hospital in August 1996 and since May 1997
has acquired seven additional hospitals. These eight acute care hospitals are
located in six states and have a total of 1,032 licensed beds.
GENERAL
An integral part of the Company's strategy is to acquire non-urban acute
care hospitals. See "Business -- Business Strategy." Because of the financial
impact of the Company's recent acquisitions, it is difficult to make meaningful
comparisons between the Company's financial statements for the fiscal periods
presented. In addition, due to the relatively small number of hospitals
currently operated, each hospital acquisition can materially effect the overall
operating margins of the Company. Upon the acquisition of a hospital, the
Company typically takes a number of steps intended to lower operating costs. See
"Business -- Hospital Operations." The impact of such actions may be offset by
the cost of revenue enhancing initiatives such as expanding services,
strengthening medical staff, and improving market position. The benefits of
these investments and of other activities to improve operating margins generally
do not occur immediately. Consequently, the financial performance of a newly
acquired hospital may initially have an adverse effect on the Company's overall
operating margins. The Company believes that the short-term negative impact on
overall margins will decrease with subsequent acquisitions as the Company
expands its financial base.
In August 1996, the Company acquired Doctors Hospital in Wentzville,
Missouri in an asset purchase transaction for $14.0 million. In May 1997 the
Company acquired Memorial Hospital of Center, Center, Texas in a stock purchase
transaction for $11.5 million. Also in May 1997, the Company purchased Eastwood
Hospital, Memphis, Tennessee (later renamed Delta Medical Center -- Memphis) in
an asset purchase transaction for $13.3 million. In August 1997, the Company
acquired Dolly Vinsant Memorial Hospital, San Benito, Texas in an asset purchase
for $8.1 million. In January 1998, the Company acquired in a single transaction
the assets of Lander Valley Medical Center, Lander, Wyoming; Davenport Medical
Center, Davenport, Iowa; Woodland Park Hospital, Portland, Oregon; and
Eastmoreland Hospital, Portland, Oregon for an aggregate purchase price of
approximately $57.0 million. Lander Valley Medical Center is built on property
subject to a 75-year ground lease from the City of Lander, which expires
December 31, 2073. Woodland Park Hospital is leased pursuant to a 31-year lease,
which expires December 31, 2029. The Company has entered into an agreement to
purchase Puget Sound Hospital in Tacoma, Washington in an asset purchase
transaction for $25.0 million subject to certain working capital adjustments.
See "Risk Factors -- Risks of Acquisition Strategy" and
"Business -- Hospitals -- Pending Acquisition."
Hospital revenues are received primarily from Medicare, Medicaid and
commercial insurance. The Company's percentage of revenues received from the
Medicare program is expected to increase due to the general aging of the
population. The payment rates under the Medicare program for inpatients are
based on a prospective payment system ("PPS"), that is tied to the diagnosis of
the patient. While these payment rates historically have been annually adjusted
for inflation, the adjustments have lagged actual inflation rates. In addition,
numerous states, insurance companies and employers are actively negotiating
discounts to the Company's standard rates. The trend towards increased managed
care, including a shift in payor mix toward HMOs, preferred provider
organizations ("PPOs") and other managed care payors, may also adversely effect
payment rates for the Company's services and the Company's ability to achieve
targeted growth rates in net patient service revenue.
27
<PAGE> 30
Net operating revenues are comprised of net patient service revenue and
other revenue. Net patient service revenue is reported net of contractual
adjustments and policy discounts. The adjustments principally result from
differences between the hospitals' customary charges and payment rates under the
Medicare and Medicaid programs. Customary charges have generally increased at a
faster rate than the rate of increase for Medicare and Medicaid payments. Other
revenue includes cafeteria sales, medical office building rental income and
other miscellaneous revenue. Operating expenses primarily consist of hospital
related costs of operation and include salaries and benefits, professional fees
(includes medical professionals and consulting services), supplies, provision
for doubtful accounts, and other operating expenses (principally consisting of
utilities, insurance, property taxes, travel, freight, postage, telephone,
advertising, repairs and maintenance). General and administrative expenses
relate to corporate overhead.
RESULTS OF OPERATIONS
YEAR ENDED MARCH 31, 1997 COMPARED TO PERIOD AUGUST 16, 1995 (INCEPTION)
THROUGH MARCH 31, 1996
The results of operations for the period ended March 31, 1996 do not
include any hospital related revenues, given that the Company was formed on
August 16, 1995 and did not acquire its first hospital until August 1996.
Results for the period reflect start-up operations. As a consequence of owning
no hospitals in the period ended March 31, 1996, a detailed comparison of the
results of operations for such period to the year ended March 31, 1997 is not
meaningful.
YEAR ENDED MARCH 31, 1998 COMPARED TO YEAR ENDED MARCH 31, 1997
The results of operations for the year ended March 31, 1997 include the
results of operation for Doctors Hospital which was owned for eight months. The
results for the year ended March 31, 1998 include the full year results for
Doctors Hospital plus the partial results for seven hospitals acquired during
the year.
The seven hospitals acquired during fiscal 1998 include:
<TABLE>
<CAPTION>
MONTHS OPERATED
HOSPITAL DATE OF ACQUISITION IN FISCAL 1998
<S> <C> <C>
Memorial Hospital of Center (TX)...................... 5/1/97 11 months
Delta Medical Center-Memphis (TN)..................... 5/16/97 10 months
(formerly Eastwood Hospital)
Dolly Vinsant Memorial Hospital (TX).................. 8/1/97 8 months
Davenport Medical Center (IA)......................... 2/1/98 2 months
Lander Valley Medical Center (WY)..................... 2/1/98 2 months
Woodland Park Hospital (OR)........................... 2/1/98 2 months
Eastmoreland Hospital (OR)............................ 2/1/98 2 months
</TABLE>
Net operating revenues were $75.6 million for the year ended March 31,
1998, compared to $11.1 million for the year ended March 31, 1997, an increase
of $64.5 million. The majority of the increase was due to an increase in net
patient service revenue to $73.7 million for the year ended March 31, 1998,
compared to $10.7 million for the year ended March 31, 1997, an increase of
$63.0 million. Other revenue was $1.9 million for the year ended March 31, 1998,
compared to $0.3 million for the year ended March 31, 1997, an increase of $1.6
million. The increases primarily reflect the acquisition of the seven hospitals
mentioned above and the fact that Doctors Hospital was owned for the entire year
ended March 31, 1998 versus eight months for the year ended March 31, 1997.
Salaries and benefits were $31.3 million for the year ended March 31, 1998,
compared to $4.1 million for the year ended March 31, 1997, an increase of $27.2
million.
Professional fees were $8.6 million for the year ended March 31, 1998,
compared to $0.6 million for the year ended March 31, 1997, an increase of $8.0
million.
Supplies were $8.3 million for the year ended March 31, 1998, compared to
$1.4 million for the year ended March 31, 1997, an increase of $6.9 million.
Provision for doubtful accounts was $7.8 million for the year ended March
31, 1998, compared to $0.5 million for the year ended March 31, 1997, an
increase of $7.3 million.
28
<PAGE> 31
Other expenses were $9.3 million for the year ended March 31, 1998,
compared to $2.4 million for the year ended March 31, 1997, an increase of $6.9
million.
The increases in salaries and benefits, professional fees, supplies,
provision for doubtful accounts and other expenses primarily reflect the
acquisition of the seven hospitals mentioned above and the fact that Doctors
Hospital was owned for the entire year ended March 31, 1998 versus eight months
for the year ended March 31, 1997.
General and administrative expenses were $3.5 million for the year ended
March 31, 1998, compared to $1.9 million for the year ended March 31, 1997, an
increase of $1.6 million. The increase in general and administrative expenses
reflect primarily the increase in corporate staff in association with the seven
hospitals acquired during the year ended March 31, 1998.
Depreciation and amortization expense was $2.8 million for the year ended
March 31, 1998, compared to $0.8 million for the year ended March 31, 1997, an
increase of $2.0 million. The increase is due to the additional depreciation and
amortization expense associated with the seven hospitals acquired during the
year ended March 31, 1998.
Interest expense was $2.6 million for the year ended March 31, 1998,
compared to $0.4 million for the year ended March 31, 1997, an increase of $2.2
million. The increase was due to the increase in average outstanding
indebtedness associated with the seven hospitals acquired during the year ended
March 31, 1998.
Income taxes were $0.6 million for the year ended March 31, 1998, compared
to $66,500 for the year ended March 31, 1997, an increase of $0.5 million.
Income tax expense in 1997 related to state taxes for the one owned hospital.
For 1998, taxes relate to both federal and state taxes at a combined rate of
42%.
During the year ended March 31, 1998, the Company issued the Series A
Preferred Stock and accrued a cumulative preferred dividend of $0.6 million. See
"Certain Relationships and Related Transactions -- Series A Preferred Stock."
THREE MONTHS ENDED JUNE 30, 1998 COMPARED TO THREE MONTHS ENDED JUNE 30, 1997
Net operating revenues were $35.9 million for the three months ended June
30, 1998, compared to $9.9 million for the three months ended June 30, 1997, an
increase of $26.0 million. The majority of the increase was due to an increase
in net patient service revenue to $34.9 million for the three months ended June
30, 1998, compared to $9.6 million for the three months ended June 30, 1997, an
increase of $25.3 million. Other revenue was $1.0 million for the three months
ended June 30, 1998, compared to $0.2 million for the three months ended June
30, 1997, an increase of $0.8 million. The increases primarily reflect the
acquisition of the seven hospitals mentioned above and the fact that all eight
of the Company's hospitals were owned for the entire three months ended June 30,
1998 versus only one of the Company's hospitals having been owned for the entire
three months ended June 30, 1997.
Salaries and benefits were $16.2 million for the three months ended June
30, 1998, compared to $4.1 million for the three months ended June 30, 1997, an
increase of $12.1 million.
Professional fees were $4.7 million for the three months ended June 30,
1998, compared to $1.1 million for the three months ended June 30, 1997, an
increase of $3.6 million.
Supplies were $4.0 million for the three months ended June 30, 1998,
compared to $1.2 million for the three months ended June 30, 1997, an increase
of $2.8 million.
Provision for doubtful accounts was $3.0 million for the three months ended
June 30, 1998, compared to $0.8 million for the three months ended June 30,
1997, an increase of $2.2 million.
Other expenses were $3.9 million for the three months ended June 30, 1998,
compared to $1.3 million for the three months ended June 30, 1997, an increase
of $2.6 million.
The increases in salaries and benefits, professional fees, supplies,
provision for doubtful accounts and other expenses primarily reflect to the
acquisition of the seven hospitals mentioned above and the fact that all
29
<PAGE> 32
eight of the Company's hospitals were owned for the entire three months ended
June 30, 1998 versus only one of the Company's hospitals having been owned for
the entire three months ended June 30, 1997.
General and administrative expenses were $0.6 million for the three months
ended June 30, 1998, compared to $0.8 million for the three months ended June
30, 1997, a decrease of $0.2 million. The decrease in general and administrative
expenses primarily reflects decreases in costs written off due to abandoned
acquisitions and lower levels of accrued bonuses.
Depreciation and amortization expense was $1.4 million for the three months
ended June 30, 1998, compared to $0.6 million for the three months ended June
30, 1997, an increase of $0.8 million. The increase is due to the additional
depreciation and amortization expense associated with the fact that all eight of
the Company's hospitals were owned for the entire three months ended June 30,
1998 versus only one of the Company's hospitals having been owned for the entire
three months ended June 30, 1997.
Interest expense was $1.6 million for the three months ended June 30, 1998,
compared to $0.2 million for the three months ended June 30, 1997, an increase
of $1.4 million. The increase was due to the increase in average outstanding
indebtedness associated with the eight hospitals owned during the three months
ended June 30, 1998 versus only one of the Company's hospitals having been owned
for the entire three months ended June 30, 1997.
Income taxes were $0.2 million for the three months ended June 30, 1998
compared to no income taxes for the three months ended June 30, 1997, an
increase of $0.2 million. For the three months ended June 30, 1998, taxes relate
to both federal and state taxes at a combined rate of 40%.
During the three months ended June 30, 1998, the Company accrued a
cumulative preferred dividend on the Series A Preferred Stock of $0.2 million.
See "Certain Relationships and Related Transactions -- Series A Preferred
Stock."
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of $9.9 million,
including cash and cash equivalents of $0.1 million. Consistent with the
hospital industry, a major component of the Company's working capital is patient
accounts receivable. Payments on patient accounts receivable are made by
third-party payors (principally Medicare, Medicaid, and insurance plans) and
directly by patients.
The Company's cash requirements, excluding acquisitions, have historically
been funded by cash generated from operations. Cash provided by operations was
$3.8 million and $1.1 million for the year ended March 31, 1998 and the three
months ended June 30, 1998, respectively, compared to cash used in operations of
$0.7 million and cash provided by operations of $0.4 million for the year ended
March 31, 1997 and the three months ended June 30, 1997, an increase of $4.5
million and $0.7 million, respectively.
Cash used in investing activities for the year ended March 31, 1998 and the
three months ended June 30, 1998 was $92.5 million and $0.7 million,
respectively, compared with cash used in investing activities of $14.5 million
and $25.1 million for the year ended March 31, 1997 and the three months ended
June 30, 1997, an increase of $78.0 million and a decrease of $24.4 million,
respectively. These amounts principally relate to acquisitions of hospitals and,
to a lesser extent, purchases of property and equipment. Capital expenditures
for hospitals may vary from year to year. The Company expects to make capital
expenditures for the year ended March 31, 1999 of approximately $9.0 million
which includes (i) approximately $4.0 million for management information systems
software and hardware which based on representations made to the Company by
Health Management Systems, Inc. ("HMS") will be Year 2000 compliant by March 31,
1999, and (ii) certain non-MIS costs associated with Year 2000 compliance. The
Company does not expect to incur any additional material Year 2000 compliance
costs. The Company has completed an itemized inventory of all of its hospitals
for the purpose of identifying all equipment with potential Year 2000 problems.
The Company intends to contact all vendors of such equipment as well as its
group purchasing agent prior to February 28, 1999 to assess Year 2000
compliance. In addition, the Company expects to spend approximately $0.4 million
on Year 2000 compliant management information systems for each hospital acquired
in the future.
30
<PAGE> 33
Cash provided by financing activities totaled $94.2 million for the year
ended March 31, 1998, compared to cash provided by financing activities of $14.9
million for the year ended March 31, 1997, an increase of $79.3 million. Cash
used by financing activities totaled $6.4 million for the three months ended
June 30, 1998, compared to cash provided by financing activities of $26.1
million for the three months ended June 30, 1997, an increase of $32.5 million.
These amounts resulted from the proceeds of senior debt, Subordinated Debt and
warrants and the issuance of Series A and B Preferred Stock.
The Company has entered into a definitive purchase agreement to acquire
Puget Sound Hospital in Tacoma, Washington. The cash purchase price will be
$25.0 million, plus the book value of certain working capital accounts. The
Company plans to finance approximately $24.0 million of the purchase price
through the Credit Agreement, with the remainder paid from the Company's cash.
See "Risk Factors -- Risks of Acquisition Strategy -- Pending Acquisition."
The Company's Credit Agreement provides for revolving credit facility in
the amount of $132.5 million. Borrowings under the facility bear interest of (i)
a base rate equal to the greater of the Prime Rate or the Federal Funds rate,
plus in either case, a margin of up to 1% or (ii) LIBOR as of the date of the
borrowing plus a margin of up to 2.5%. The applicable margin is determined by a
ratio of indebtedness to EBITDA calculated on a monthly basis. As of June 30,
1998, the Company had outstanding $31.6 million, bearing interest at a rate of
8.2%. The Credit Agreement is interest only payments until December 31, 2000, at
which time one-sixteenth of the aggregate outstanding balance will be due in
quarterly payments on the last day of each third month thereafter to and
including September 30, 2003, with a final lump sum payment due December 31,
2003. The revolving credit facility is secured by substantially all the
Company's assets. The Credit Agreement contains limitations on the Company's
ability to incur additional indebtedness, sell material assets, retire, redeem
or otherwise reacquire its capital stock, and pay dividends. The Credit
Agreement also requires the Company to maintain specified levels of net worth
and meet certain covenants and ratios.
The Company believes its future cash flow from operations, together with
borrowings available under the Credit Agreement and the proceeds of the Offering
will be sufficient to fund the Company's anticipated acquisition activities,
capital expenditures, debt service requirements and operating expenses for the
next twelve months. The Company may incur additional indebtedness in order to
finance certain large strategic acquisition opportunities. There can be no
assurance that such additional financing, if required, will be available on
terms acceptable to the Company.
ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
133, Accounting for Derivative Instruments and Hedging Activities, which is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
This statement establishes accounting and reporting standards for derivative
instruments, including derivative instruments imbedded in other contracts and
for hedging activities. It requires that an entity recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. The Company does not presently have any
derivative financial instruments and does not believe that this statement will
have a material impact on its financial position or results of operations.
INFLATION
The health care industry is labor intensive. Wages and other expenses
increase, especially during periods of inflation and labor shortages. In
addition, suppliers pass along rising costs to the Company in the form of higher
prices. The Company has implemented cost control measures to curb increases in
operating costs and expenses. In light of cost containment measures imposed by
government agencies and private insurance companies, the Company is unable to
predict its ability to offset or control future cost increases, or its ability
to pass on the increased costs associated with providing health care services to
patients insured by government or managed care payors.
31
<PAGE> 34
BUSINESS
OVERVIEW
New American acquires, and operates acute care hospitals throughout the
United States. The Company was formed to capitalize on opportunities to be the
principal provider of health care services in the communities in which it
operates with a focus on non-urban communities. Since acquiring its first
hospital in August 1996, a non-urban facility in Wentzville, Missouri, the
Company has acquired seven additional hospitals, including four that were
purchased from a single party in January 1998. The Company's eight acute care
hospitals are located in six states and have a total of 1,032 licensed beds. In
addition, the Company has entered into a definitive agreement to purchase a
160-bed acute care hospital in Tacoma, Washington. Pro forma net revenues and
pro forma net income for the fiscal year ended March 31, 1998 were $173.3
million and $3.6 million, respectively and for the three months ended June 30,
1998 were $43.1 million and $1.4 million, respectively.
The Company's hospitals offer a wide range of inpatient and outpatient
medical and surgical services and also provide other health care services,
including general and geriatric psychiatry, rehabilitation and occupational
medicine. As part of developing a community health care delivery system, the
Company's hospitals also operate satellite clinics. All of the Company's
hospitals are accredited by either JCAHO, AOA, or both.
The Company's business strategy is to acquire in a selective manner
hospitals that meet the Company's investment criteria and to enhance revenues,
improve operating efficiencies and increase profitability at its hospitals. In
selecting its acquisition candidates, the Company targets non-urban hospitals
that are or can be positioned to be the focal point of a community's health care
delivery system. The Company believes more than 1,000 hospitals meet its
acquisition criteria. During the acquisition due diligence process, the Company
develops an action plan that provides a framework for identifying opportunities
to enhance the hospital's operating and financial performance, while improving
the quality of care. In developing the action plan, the Company leverages the
extensive experience of its senior management team.
Once a hospital is acquired, the Company implements the action plan
developed during the acquisition due diligence process. Key elements of the
Company's action plan include: (i) improving operating efficiencies; (ii)
recruiting additional physicians; (iii) expanding the number of services
offered; (iv) developing health care networks, where appropriate; and (v)
installing a standardized management information system. For the three hospitals
owned for at least twelve months as of June 30, 1998, and comparing the twelve
months ended June 30, 1997 to the comparable period in 1998, EBITDA margin
increased from 8.1% to 13.0%; net operating margin increased from (6.9%) to
(2.6%); adjusted admissions increased by 8.3%; and emergency room visits
increased by 4.1%. Additionally, since acquiring the three hospitals, the
Company has recruited eleven physicians at these three hospitals.
The Company's senior management team has extensive experience in hospital
operations, financial management and business development. This experience
enables management to analyze a hospital's business and identify opportunities
to improve its clinical and financial performance. The Company's senior
management team has an average of approximately 20 years of experience in the
health care sector. Robert M. Martin, Chairman, President and Chief Executive
Officer, and Dana C. McLendon, Jr., Senior Vice President of Finance and
Administration are among several of the Company's senior executives who were
formerly senior executives of HealthTrust, a nationwide operator of non-urban
hospitals. During the majority of his seven-year tenure at HealthTrust, Mr.
Martin was responsible for managing its largest region, that included 17
primarily non-urban hospitals. Mr. McLendon spent over five years at HealthTrust
and was responsible for developing and implementing its integrated delivery
systems linking hospitals, physicians and payors. Other members of senior
management have significant health care experience and were formerly with
organizations including HAI, HCA, Quorum and HealthTrust. Moreover, through
their experience of operating hospitals, management has developed an extensive
network of contacts for identifying both potential acquisition targets and
potential management talent for both its hospitals and corporate offices.
Currently, each local hospital management team (consisting of a chief executive
officer, a chief financial officer and a chief nursing officer) has, on average,
39 years of collective hospital experience.
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<PAGE> 35
INDUSTRY BACKGROUND
Hospital Management Industry. According to the Health Care Financing
Administration ("HCFA"), in 1996 health care expenditures comprised
approximately 13.6% of the United States Gross Domestic Product, or in excess of
$1 trillion. During 1996, health care expenditures at hospitals accounted for
approximately 34.6% or $358.5 billion, of total health care spending. In recent
years, the hospital industry has experienced (i) advances in medical treatments
and technologies that permit shorter inpatient stays, and (ii) cost containment
pressures by Medicare, Medicaid, HMOs, PPOs and insurers to reduce hospital
stays and provide services, where possible, on a less expensive outpatient
basis. As a result, the average length of stay in the acute care hospital has
dropped from approximately 7.6 days in 1981 to approximately 6.5 days in 1995.
At the same time, occupancy has decreased from 77.9% in 1981 to 65.7% in 1995.
In addition, cost containment pressures have led to the development of
alternative delivery sites, including skilled nursing facilities, home health
programs, outpatient surgery and emergency and diagnostic centers. To remain
competitive, many hospitals have become more vertically integrated through the
introduction of various ancillary and outpatient services. As a result, average
hospital outpatient visits have grown at an increasing rate. In 1981, hospital
outpatient visits increased over the prior year by 0.9% and in 1995 increased
over the prior year by 6.5%.
Non-Urban Health Care Market. According to the American Hospital
Association, in 1996 there were approximately 2,226 non-urban hospitals in the
United States, over 2,035 of which were controlled by not-for-profit or
governmental entities. The Company believes non-urban hospitals are attractive
acquisition candidates for several reasons. Non-urban service areas have smaller
populations and are generally served by only one or two hospitals, resulting in
less competition. The relative dominance of acute care hospitals in these
smaller markets may also limit the entry of competitive alternate site providers
such as outpatient surgery, rehabilitation or diagnostic imaging. The Company
believes, in general, the demographic characteristics and the relative
negotiating leverage of the local hospital also make such markets less
attractive to HMOs and other managed care payors. In addition, the Company
believes non-urban communities are often characterized by high levels of
patient, physician and community loyalty that fosters cooperative relationships
among the local hospital, physicians, patients and employers. Although the
Company focuses primarily on non-urban hospitals, the Company has acquired and
may in the future acquire hospitals that are not located in non-urban
communities, but which nevertheless provide purchase opportunities that are
attractive to the Company.
Although the characteristics of the non-urban health care market present a
number of opportunities, hospitals in such markets have been under considerable
pressure. In recent years, hospitals have been required to operate within the
reimbursement limitations imposed by the Medicare and Medicaid programs and
private insurance companies, while the cost of health care has increased
significantly. Non-urban hospitals have often experienced this pressure more
intensely. Frequently, non-urban hospitals are owned and operated by not-for-
profit and governmental entities that may have limited access to the capital
required to keep pace with advances in medical technology and to make needed
capital improvements. Such hospitals also may lack certain specialized
management resources to enable the hospital to control its operating expenses,
recruit and retain physicians and expand health care services. Collectively,
these factors frequently lead to poor operating performance, a decline in the
number of services offered, dissatisfaction by the community and physicians and
concerns about quality of care. As a result, patients migrate to, or are
referred by local physicians to, hospitals in larger urban markets. Patient
out-migration further increases the financial pressure on physicians and
hospitals within these markets, thereby limiting their ability to address the
issues which have led to these pressures.
BUSINESS STRATEGY
The Company's objective is to grow its business and to be a leading
provider of quality, cost-effective health care in the communities it serves
through the following strategies:
Acquire Hospitals in Select Markets. The Company intends to acquire
non-urban hospitals that are or can be positioned as the focal point of a
community's health care delivery system and that present the opportunity to
improve financial performance and local market share. The ideal market has
a stable or
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<PAGE> 36
growing population base and favorable demographics that support or require
additional health care services. The Company intends to acquire two to
three hospitals per year and estimates that over 1,000 hospitals meet its
acquisition criteria. See "-- Acquisition Program."
Improve Operating Efficiencies. Following the acquisition of a
hospital, the Company implements an operating plan tailored to the facility
and its community. The local management team, with support from the
corporate office, seeks to improve financial performance by: (i)
implementing expense controls; (ii) proactively managing staffing levels
based on patient volume and acuity; (iii) reducing supply costs by
leveraging the Company's supply arrangements and renegotiating or
terminating vendor contracts; and (iv) improving admissions, billing and
collection procedures.
Recruit Additional Physicians. The Company believes recruiting
physicians is a key to expanding services offered and improving quality of
care. As the primary decision maker in the delivery of health care, the
physician is an important resource in directing patients to the Company's
hospitals, providing high quality health care and building relationships
between the community and the Company's hospitals. Prior to the acquisition
of a hospital, the Company evaluates the needs of the community for
additional primary care and specialty physicians. The Company then works
with the local hospital board, management and medical staff to define
further the physicians needed and assists the local management team in
identifying and recruiting specific physicians to meet those needs.
Expand Services Offered. By expanding its service capabilities, the
Company seeks to limit out-migration, increase local market share and
generally capture a greater proportion of health care expenditures made by
the communities. In addition, by providing a broader range of services, the
Company believes it can treat higher acuity patients, thereby further
increasing hospital revenues and profitability. These services may include
specialty inpatient services, outpatient services, occupational medicine
and rehabilitation. As part of developing a community health care delivery
system, the Company's hospitals also operate satellite clinics. The Company
also utilizes various mobile technologies to provide, on a cost-effective
basis, services otherwise available only at larger, urban facilities.
Develop or Join Health Care Networks. In markets where appropriate,
the Company seeks to develop or join networks of providers with an emphasis
on primary care physicians. Such networks are increasingly important for
directing patients to particular health care providers. Further, these
networks help to position the Company's hospitals as the focal points of
their respective community's health care delivery system. Additionally, the
Company seeks affiliations with regional tertiary care providers in order
to access services not provided by the Company's hospitals.
Implement Standardized Information System. The delivery of high
quality and cost-effective health care depends to an increasing extent on
an effective clinical, financial and administrative information system. The
Company is presently installing an integrated management information system
designed for small and mid-size hospitals. The conversion of each hospital
will provide the Company's corporate office and hospital management teams
with standardized and integrated clinical, financial and administrative
information. Management believes this new system will allow the Company to
manage better all aspects of its business. The Company plans to have
converted all of its existing hospitals to this system by March 1999 and
will continue to convert the systems of new hospitals as acquired.
ACQUISITION PROGRAM
In evaluating acquisition candidates, the Company develops an action plan
that provides a framework for identifying opportunities to enhance the
hospital's operating and financial performance while improving the quality of
care. The Company also evaluates the market to determine competitive dynamics
and the potential for revenue growth, including demographic characteristics and
opportunities to capture additional health care expenditures. Acquisition
candidates targeted by the Company: (i) are typically located in non-urban
markets that exhibit favorable demographic trends and a population base
sufficient to support such a facility; (ii) provide opportunities to increase
revenue, profitability, market share and improve quality of service; (iii) are
or can be positioned as the focal point of a community's health delivery system;
and (iv) can be
34
<PAGE> 37
acquired at acceptable multiples of net revenue and EBITDA which are consistent
with the Company's investment criteria.
In addition to responding to requests for proposals from entities that are
seeking to sell or lease hospitals, the Company proactively identifies potential
acquisition targets. The Company's senior management and development officers
utilize their extensive contacts within the industry to develop attractive
acquisition opportunities. The Company also screens acquisition candidates
utilizing databases which provide details regarding hospital operating
statistics, market demographics and the competitive environment. The Company
further evaluates the potential to recruit physicians to target markets and
state certificate of need requirements. Once it is determined that a specific
hospital meets the Company's investment criteria, management contacts hospital
owners, community boards and administrators to introduce the Company and to
discuss the benefits to the community of a possible acquisition by the Company.
The Company believes it typically takes six to nine months to consummate an
acquisition after a hospital owner accepts an offer in principle. Prior to
entering into a definitive purchase agreement, the Company undertakes a thorough
due diligence process to review the target's operations and management. During
this process, the Company reviews operating trends, opportunities for
improvements, Medicare/Medicaid reimbursement, purchasing, fraud and abuse
compliance, litigation, capital requirements, environmental issues, and
interviews the local management teams. Based on its findings during the due
diligence review, the Company develops the action plan for improving the
hospital's operating and financial performance. The Company works closely with
community decision-makers in order to enhance both the community's understanding
of the Company's operating capabilities as well as the Company's understanding
of the Community's needs.
During the acquisition process, the Company has negotiated and attempts to
negotiate specific indemnification provisions with the sellers of each of its
acquired hospitals on a case-by-case basis. Typically the Company seeks
indemnification from the prior owners for all liabilities arising from action or
inaction prior to the closing of the acquisition. The Company believes this
case-by-case negotiation is the standard practice in the industry, and as the
industry continues to compete for acquisitions, such competition could lower the
amount of indemnification the Company may be able to negotiate in the future.
HOSPITAL OPERATIONS
Following the acquisition of a hospital, the Company implements a 30-, 60-,
90-day action plan that it began developing during its due diligence review.
Additionally, during the first 90 days, a more comprehensive analysis is
completed to identify longer-term opportunities. The Company works in concert
with hospital management to formulate a "strategic blueprint" designed to
capitalize on these opportunities. Hospital management is responsible for the
implementation of the blueprint. The Company's senior management meets with
local managers monthly to review the hospital's performance versus a new
operating budget. Management meets annually to reassess opportunities and
reformulate strategic blueprints.
Each hospital management team is comprised of a chief executive officer,
chief financial officer and chief nursing officer. The quality of the local
hospital management team is critical to the hospital's success. During the due
diligence process, the Company reviews the performance and abilities of existing
members of the hospital's management teams and replaces or supplements members
as necessary. The Company believes that its network of contacts assists it in
locating and hiring qualified hospital managerial talent. The Company has
implemented a hospital management compensation program based upon the
achievement of the financial and clinical goals set forth in the operating plan.
The Company also generally grants members of each local management team stock
options as an additional incentive. Currently, the three-person hospital
management teams have, on average, approximately 39 years of collective hospital
operating experience. See "Risk Factors -- Dependence on Management."
While the hospital management team is responsible for the day-to-day
operations of the hospitals, the Company's corporate staff provides support
services to each hospital, including purchasing, corporate compliance,
reimbursement advice, standardized information systems, human resources,
accounting, cash management, tax and insurance support. Financial controls are
maintained through utilization of standardized
35
<PAGE> 38
policies and procedures which will be supported by a company-wide management
information system. The Company promotes communication among its hospitals and
with the corporate office through a wide area network and video conferencing so
that local expertise and improvements can be readily shared, additional training
can be performed, and new policies and procedures can be implemented.
As part of the Company's efforts to improve access to quality health care,
the Company evaluates the needs of the community and adds appropriate services
at its hospitals. Services added may include specialty inpatient services, such
as cardiology, geriatric psychiatry, rehabilitation and subacute care, and
outpatient services such as same-day surgery, imaging, occupational medicine and
physical therapy. Management believes quality emergency services and OB/GYN
services are particularly important because they are typically the most visible
services provided to the community. The Company also makes capital investments
in technology and facilities, where appropriate, in order to increase the
quality and breadth of services available to the community. These capital
investments are undertaken on a project-by-project basis and must meet financial
benchmarks. The Company believes these added services improve access to health
care and the hospitals' reputation in each community and will in turn increase
patient volume and revenue.
In order to add new services which meet the needs of the community, the
Company's corporate staff assists the hospital management team in identifying
and recruiting physicians to the hospital's medical staff. The majority of
physicians who relocate their practices to the communities served by the
Company's hospitals are identified by local management and the medical staff.
The Company supplements these efforts with independent recruiting firms. When
recruiting a physician who is new to the community, the Company generally enters
into a contract to guarantee the physician a minimum level of income during a
limited initial period and assists the physician with his or her transition to
the community. The Company generally requires the physician to repay some or all
of the amounts expended for such assistance in the event the physician leaves
the community prior to the expiration of the contract. The Company generally
does not employ physicians. See "Risk Factors -- Dependence on Physicians and
Other Health Care Professionals" and "-- Health Care Regulation."
In markets where appropriate, the Company seeks to develop or join networks
of providers with an emphasis on primary care physicians in order to be
attractive to managed care payors, self insured employers and various government
sponsored programs. Further, these networks help to position the Company's
hospitals as the focal point of their respective community's health care
delivery system. Regardless of other network development activity, the Company
seeks affiliations with regional tertiary care providers to access services not
offered by the Company's hospitals. Further, these alliances help enhance the
image of the Company's hospitals. The Company currently has two affiliation
agreements with tertiary provider hospitals for the purposes of accessing
tertiary services, managed care, departmental consultants, physician
specialists, and continuing medical education and enhancing physician
recruitment. One agreement is with East Texas Medical Center Regional Healthcare
System in Tyler, Texas and has a term of five years from January 1998, but
either party can terminate upon ninety days written notice. The second agreement
is with BJC Health System in St. Louis, Missouri and has a term of three years
from July 1998 but either party can terminate at any time upon ninety days
written notice.
HOSPITALS
GENERAL
The Company currently operates eight acute care hospitals with 1,032
licensed beds located in Iowa, Missouri, Oregon, Tennessee, Texas and Wyoming
and has entered into a definitive agreement to purchase another hospital in
Washington State with 160 licensed beds. See "Risk Factors -- Risks of
Acquisition Strategy -- Pending Acquisition."
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<PAGE> 39
The Company's hospitals offer a wide range of inpatient medical services,
such as surgical procedures, intensive care, laboratory, imaging and emergency
services, as well as outpatient services, such as same-day surgery, laboratory,
imaging, occupational medicine and physical therapy. Some of the Company's
hospitals provide, where cost effective, certain other services, including
adolescent and geriatric psychiatry, rehabilitation, OB/GYN, orthopedics,
chemical dependency, skilled nursing and home health services. The Company's
hospitals do not provide highly specialized surgical services, such as organ
transplants and open heart surgery, and are not engaged in extensive medical
research or educational programs, although two of the hospitals have family
practice residency programs. The Company's hospitals are generally involved in
the local community through various activities such as participation in health
fairs and sponsorship of educational programs.
The following table sets forth certain information with respect to each of
the Company's hospitals:
<TABLE>
<CAPTION>
DATE OF LICENSED
HOSPITAL ACQUISITION BEDS OWNED/LEASED
<S> <C> <C> <C>
Doctors Hospital
Wentzville, MO............................................ 8/1/96 94 owned
Memorial Hospital of Center
Center, TX................................................ 5/1/97 54 owned
Delta Medical Center -- Memphis
Memphis, TN............................................... 5/16/97 243 owned
Dolly Vinsant Memorial Hospital
San Benito, TX............................................ 8/1/97 81 owned
Davenport Medical Center
Davenport, IA............................................. 1/31/98 149 owned
Lander Valley Medical Center(1)
Lander, WY................................................ 1/31/98 102 leased
Woodland Park Hospital(2)
Portland, OR.............................................. 1/31/98 209 leased
Eastmoreland Hospital
Portland, OR.............................................. 1/31/98 100 owned
Puget Sound Hospital(3)
Tacoma, WA................................................ pending 160 to be owned
</TABLE>
- ------------------------------
(1) The Lander Valley Medical Center is subject to a ground lease from the City
of Lander, Wyoming which expires December 31, 2073, with no option to renew.
The current annual rent is $8,415. The Company is responsible for paying
real estate taxes assessed against the buildings, personal property taxes
and license taxes.
(2) Woodland Park Hospital is leased pursuant to a lease which expires December
31, 2029 with no option to renew. The current rental is $27,295 per month
with a 3% annual increase each January 1. The Company is responsible for
paying all operating expenses including all real and personal property taxes
and assessments, insurance utilities and repair costs.
(3) The Company has entered into a definitive agreement to purchase the assets
of Puget Sound Hospital for $25.0 million. There can be no assurance that
the acquisition will be consummated.
HOSPITAL DESCRIPTIONS
Doctors Hospital is a 94-bed acute care hospital located in Wentzville,
Missouri, approximately 40 miles west of St. Louis, which serves a population
base of approximately 150,000. The hospital's 43-acre campus includes a medical
office building and is located approximately five miles from the nearest
hospital. The hospital offers a range of services that includes acute inpatient
and outpatient care, surgery, intensive care, emergency, OB/GYN, imaging,
laboratory, geriatric psychiatry, skilled nursing, occupational medicine and
home health services. The medical staff of over 140 physicians provides primary
care services and specialty services such as cardiology, neurology, urology and
orthopedics.
Since being purchased by the Company, the hospital has opened an eight-bed
geriatric psychiatric unit, and has recruited to the hospital five physicians
and a local, established emergency physician group. In
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<PAGE> 40
response to the significant residential development that has attracted
first-time home buyers to the surrounding area, the hospital has also recruited
two obstetricians who will begin practice in August 1998.
Memorial Hospital of Center is a 54-bed acute care hospital located in
eastern Texas, 50 miles southwest of Shreveport, Louisiana, is the only hospital
located in Shelby County and serves a population base of approximately 23,000.
The hospital is situated on a 17-acre campus, approximately 20 miles from the
nearest hospital. Memorial Hospital offers a range of services, that includes
acute inpatient and outpatient care, surgery, emergency, OB/GYN, imaging,
laboratory, skilled nursing and home health services. The medical staff of over
30 physicians provides primary care services and consulting services for
audiology, urology, orthopedics, and ophthalmology. The hospital has the only
trauma designated emergency services department in an eight county area.
Since being purchased by the Company, the hospital has recruited one
primary care physician, expanded physical therapy services and added
occupational and speech therapies. Emergency department coverage has been
improved through a new physician staffing company agreement. In addition, the
hospital is adding a new radiology and fluoroscopy suite that is scheduled for
completion in August 1998. As part of its ongoing efforts to reduce
out-migration, the hospital is redecorating and updating the patient rooms and
improving the hospital's appearance in general.
Delta Medical Center -- Memphis is a 243-bed acute care hospital located in
southeast Memphis, serves a population base of approximately 300,000, and draws
patients from rural Mississippi and Arkansas. The hospital is on a 20-acre
campus that includes a 110,000 square foot medical office building and is
located approximately five miles from the nearest hospital. The hospital offers
a range of services that includes acute inpatient and outpatient care, surgery,
intensive care, emergency, imaging, laboratory, geriatric and adolescent
psychiatry, chemical dependency and occupational medicine services. The medical
staff of over 350 physicians provides primary care services and specialty
services such as cardiology, neurology, urology and orthopedics. Delta Medical
Center -- Memphis operates Total Care, a hospital-based PPO, that enhances the
ability of the hospital to access managed care patients.
Since being purchased by the Company, the hospital has been granted
separate certificates of need for an 18-bed skilled nursing unit and a ten-bed
physical rehabilitation unit. Both are expected to be in operation by April
1999. In addition, the hospital has recruited an orthopedic surgeon, an
oncologist and a neurologist during the past year.
Dolly Vinsant Memorial Hospital is an 81-bed acute care hospital in San
Benito, Texas serving a population base of approximately 50,000. The hospital is
located in the southernmost county of Texas on a seven-acre campus and is six
miles from the nearest hospital. Dolly Vinsant offers a range of services that
includes acute inpatient and outpatient care, surgery, emergency, imaging,
laboratory and home health services. The medical staff of over 160 physicians
provides primary care services and specialty services such as urology,
orthopedics, ophthalmology, and general surgery.
Since being purchased by the Company, the hospital has recruited an
orthopedic surgeon and has begun providing arthroscopic surgery services. The
hospital plans to add a three-bed special care unit, one additional operating
room (bringing the total to three), and OB/GYN services to meet the needs of the
community.
Davenport Medical Center is an 149-bed acute care facility located in
Davenport, Iowa, one of the Quad cities and serves a population base of
approximately 150,000. The hospital and its medical office building are located
on an 18-acre campus and is approximately two miles from the nearest hospital.
The hospital offers a range of services that includes acute inpatient and
outpatient care, surgery, intensive care, emergency, OB/GYN, imaging,
laboratory, and skilled nursing services. The medical staff of approximately 220
physicians provides primary care services and specialty services such as
urology, orthopedics and pulmonology. The hospital participates in a residency
program for osteopathic physicians and opened an eleven-bed skilled nursing unit
in January 1998.
Since being purchased by the Company, the hospital has successfully
recruited a primary care physician and a cardiologist who will begin practice in
August 1998.
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<PAGE> 41
Lander Valley Medical Center is an 102-bed acute care hospital located in
Lander, Wyoming, approximately 120 miles west of Casper and approximately 180
miles southeast of Jackson. The hospital serves a population base of
approximately 17,000 and is located on a 25-acre campus approximately 27 miles
from the nearest hospital. The hospital offers a range of services that includes
acute inpatient and outpatient care, surgery, intensive care, emergency, OB/GYN,
imaging, laboratory, geriatric and adolescent psychiatry, skilled nursing and
home health services. The medical staff of over 40 physicians provides primary
care services as well as specialty services such as orthopedics, urology,
ophthalmology, and general surgery.
The hospital has recruited a child psychiatrist and is actively recruiting
an OB/GYN, a urologist and an ophthalmologist.
Woodland Park Hospital is a 209-bed acute care neighborhood hospital
located in the northeastern Portland, Oregon area, serving a population base of
approximately 150,000. The hospital and its attached medical office building are
located on a six-acre campus approximately three miles from the nearest
hospital. The hospital offers a range of services that includes acute inpatient
and outpatient care, surgery, intensive care, emergency services, OB/GYN,
imaging, laboratory, geriatric and adolescent psychiatry and occupational
medicine services. Home health services are provided in partnership with
Eastmoreland Hospital. The medical staff of over 190 physicians provides primary
care services and specialty services such as orthopedics, plastic surgery,
ophthalmology, and general surgery.
Since being purchased by the Company, the hospital opened its adolescent
psychiatric unit. Two physicians will also be joining the medical staff by
September 1998, including an OB/GYN and an orthopedic surgeon. The hospital also
intends to expand its geriatric psychiatric services.
Eastmoreland Hospital is an 100-bed acute care neighborhood hospital
located in the southeast Portland, Oregon area, serving a population base of
approximately 175,000. The hospital is located on a six-acre campus with five
medical office buildings on or adjacent to the campus and is approximately four
miles from the nearest hospital. The hospital offers a range of services that
includes acute inpatient and outpatient care, surgery, intensive care,
emergency, imaging, laboratory, rehabilitation, geriatric psychiatry and
occupational medicine services. The hospital also has a residency program for
osteopathic physicians. Home health services are provided in partnership with
Woodland Park Hospital. The medical staff of over 30 physicians provides primary
care services and specialty services such as orthopedic surgery, plastic
surgery, ophthalmology, otolaryngology, gynecology, and general surgery.
Since being purchased by the Company, the hospital has recruited a
gynecologist who will be joining the medical staff by September 1998.
PENDING ACQUISITION
Puget Sound Hospital is an 160-bed acute care hospital located in Tacoma,
Washington that serves a population base of approximately 360,000. On December
22, 1997, the Company entered into a definitive purchase agreement to acquire
substantially all of the assets of Puget Sound Hospital, which is pending
closing. The hospital is located on a five-acre campus approximately twelve
miles from the nearest hospital. The hospital provides a range of services that
includes acute inpatient and outpatient care, surgery, intensive care,
emergency, imaging, laboratory, geriatric and adolescent psychiatry and chemical
dependency treatment. The medical staff of over 85 physicians provides primary
care services and specialty services such as orthopedics, ophthalmology,
urology, podiatry and general surgery. See "Risk Factors -- Risks of Acquisition
Strategy -- Pending Acquisition" and "-- Environmental Regulation."
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<PAGE> 42
OPERATING STATISTICS
The following table sets forth certain operating statistics for the
Company's hospitals for each of the periods presented. The data for the periods
presented are not strictly comparable due to the significant effect that
acquisitions have had on the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS
MARCH 31, ENDED JUNE 30,
------------------ ------------------
1997 1998 1997 1998
<S> <C> <C> <C> <C>
Hospitals owned or leased (at end of period)....... 1 8 3 8
Licensed beds (at end of period)................... 94 1,032 391 1,032
Beds in service (at end of period)................. 94 697 303 697
Occupancy rate (% of licensed beds)(1)............. 14.1% 12.2% 18.4% 21.0%
Occupancy rate (% of beds in service)(2)........... 14.1% 18.0% 23.7% 31.1%
Admissions......................................... 1,086 7,790 1,056 3,664
Adjusted admissions(3)............................. 2,335 13,594 1,768 6,450
Emergency visits................................... 4,965 36,566 5,124 19,019
Surgeries.......................................... 1,078 4,630 609 2,324
Average length of stay (days)(4)................... 4.5 5.9 6.19 5.38
Patient days....................................... 4,854 45,782 6,533 19,716
Adjusted patient days(5)........................... 9,951 75,852 10,940 34,709
Net patient service revenue (in thousands)......... $10,737 $73,725 $ 9,638 $34,856
Gross outpatient service revenue (in thousands).... $ 8,857 $42,658 $17,816 $56,559
</TABLE>
- ------------------------------
(1) Percentages are calculated by dividing average daily census by average
licensed beds.
(2) Percentages are calculated by dividing average daily census by average beds
in service.
(3) Adjusted admissions are calculated as admissions for the period multiplied
by the ratio obtained by dividing gross patient service revenue by gross
inpatient service revenue.
(4) Average length of stay is calculated as the number of patient days divided
by the number of admissions.
(5) Adjusted patient days have been calculated based on a revenue-based formula
(multiplying actual patient days by the sum of gross inpatient revenue and
gross outpatient revenue and dividing the result by gross inpatient revenue
for each hospital) to reflect an approximation of the volume of service
provided to inpatients and outpatients by converting total patient revenues
to equivalent patient days.
SOURCES OF REVENUE
The Company receives payments for patient care from private insurance
carriers, federal Medicare programs for elderly and disabled patients, state
Medicaid programs, Indian Health Services ("INS"), HMOs, the Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS"), employers and patients
directly.
The following table sets forth the percentage of gross patient revenue of
the Company's hospitals from various payors for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED THREE MONTHS ENDED
MARCH 31, JUNE 30,
------------------ ------------------
1997(1) 1998(1) 1997(1) 1998(1)
<S> <C> <C> <C> <C>
Medicare....................................... 49.0% 51.5% 41.7% 40.2%
Medicaid....................................... 20.0 18.4 17.0 16.2
Private and other sources...................... 31.0 30.1 41.3 43.6
</TABLE>
- ------------------------------
(1) The data for the periods presented are not strictly comparable due to the
significant effect that acquisitions have had on the Company. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
40
<PAGE> 43
QUALITY ASSURANCE
The Company's hospitals implement quality assurance procedures to help
ensure quality care. Each hospital has clinical department review committees
comprised of medical staff members that supervise individuals and are
responsible for the quality of medical care provided in their respective
department. In addition, each hospital has a medical advisory committee
comprised of physicians which review the professional credentials of physicians
applying for medical staff privileges at the hospital. Medical advisory
committees also review and monitor surgical outcomes along with procedures
performed and the quality of the logistical, medical and technological support
provided to physicians. Further, the board of trustees of the hospital reviews
the actions and patient outcomes of the medical staff. The Company periodically
surveys patients either during their stay at the hospital or subsequently by
mail or telephone to identify potential areas for improvement. All of the
Company's hospitals are accredited by either JCAHO or AOA or both.
REGULATORY COMPLIANCE PROGRAM
With the help of a consulting firm, the Company has developed and
implemented a corporate-wide compliance program. The Company's compliance
program focuses on various areas of regulatory compliance, including physician
recruitment, reimbursement and cost reporting practices and laboratory and home
health care operations. Mr. McLendon currently serves as the Corporate
Compliance Officer and, together with an executive compliance committee,
monitors adherence to the compliance program. This consulting firm has conducted
training programs on the Company's corporate compliance program at all of the
Company's hospitals and has been retained to provide ongoing training. The
compliance program includes a 24-hour reporting hotline to encourage employees
and others to report any potential compliance issues. The Company also conducts
substantial due diligence on each hospital prior to its acquisition regarding
such hospital's regulatory compliance. See "Risk Factors -- Health Care Industry
Investigations" and "-- Health Care Regulation."
MANAGEMENT INFORMATION SYSTEM
The Company relies on the functionality, accuracy, reliability and proper
use of its management information system. Historically, each of the Company's
hospitals has operated under its own stand-alone systems. On certain occasions,
the Company has experienced difficulties with such systems. For example, in
November 1997, the information system at Delta Medical Center -- Memphis failed,
which prevented the Company from accessing certain data and required the Company
to maintain manual records for approximately six weeks until the system and such
data could be restored. In addition, having different systems throughout its
hospitals has made the collection and standardization of financial and clinical
data more difficult. The Company has recently entered into an agreement with HMS
to license its HMS Monitor System, which the Company believes, based on
representations and warranties made by HMS in the agreement, will be a Year 2000
compliant, fully-integrated financial, clinical and administrative management
information system. The Company believes this system will enable it to monitor,
on a cost-effective basis, the operations of its hospitals and allow it to
generate consistent data at each of its hospitals. See "Risk Factors -- MIS
Conversion."
The new system provides a full platform of software, including patient
accounting, billing and collection, materials management, payroll/personnel
system, accounts payable, fixed assets, general ledger, DRG/case mix management
and medical records. The Company is in the process of converting all of its
current hospitals to this management information system and plans to have all
hospitals converted by March 1999. The license agreement allows for additional
hospitals to be added onto the network and provides that in the event HMS
discontinues the maintenance and support of the software (and certain other
events), the Company will be entitled to a perpetual license to the source code
for the software including all updates and modifications.
In addition, the Company has linked all of its hospitals to each other and
to corporate headquarters through a wide area network and video conferencing
equipment. These tools promote communication among its hospitals so that local
expertise and improvements can be readily shared, additional training can be
performed and new policies and procedures can be implemented.
41
<PAGE> 44
COMPETITION
MEDICAL SERVICES
The primary bases of competition among hospitals are the quality and scope
of medical services, location, strength of referral network, appearance of the
facility and, to a lesser extent, price. The Company's hospitals compete with
other hospitals, some of which may be more established, better equipped, offer a
wider range of services or have financial resources greater than those of the
Company. In addition, certain of these competing hospitals are owned by
tax-supported government agencies or by tax-exempt, not-for-profit corporations
that may be supported by endowments and charitable contributions and can finance
capital expenditures on a tax-exempt basis. Those hospitals located in non-urban
areas generally face less competition in their immediate patient service areas
for the delivery of general acute care services than would be expected in larger
communities. However, even in areas where the Company's hospitals are the only
provider of health care services, such hospitals continue to face competition
from larger tertiary care centers that attract patients for certain services
either not offered or perceived to be inferior at the local hospital, thereby
contributing to out-migration.
ACQUISITIONS
The Company believes that recently, there has been increased competition
for hospital acquisitions among for-profit hospital companies as well as
not-for-profit entities. Some of the Company's competitors have greater
financial and other resources than the Company and larger development staffs
focused on identifying and completing acquisitions. Increased competition for
the acquisition of acute care hospitals targeted by the Company could have an
adverse impact on the Company's ability to acquire such hospitals on favorable
terms or at a pace consistent with its objectives.
EMPLOYEES AND MEDICAL STAFF
As of June 22, 1998, the Company had 1,723 "full-time equivalent"
employees, 19 of whom were corporate headquarters personnel. The remaining
employees, most of whom are nurses, other clinical, dietary, housekeeping and
office personnel, work at the Company's hospitals. A total of 329 of the
employees of Davenport Medical Center and Puget Sound Hospital (a pending
acquisition) are covered by collective bargaining agreements. The Company
considers relations with its employees to be good.
The Company typically does not employ physicians and, as of June 30, 1998,
the Company employed only ten practicing physicians. Of these ten physicians,
nine were inherited pursuant to the Company's acquisitions and the remaining
employed physician was recruited to join an outpatient clinic. All ten employed
physicians work at outpatient clinics operated by the Company. Certain of the
Company's hospital services, including emergency room coverage, radiology,
pathology and anesthesiology services, may be provided through independent
contractor arrangements with physicians or contracts with companies specializing
in providing such services.
GOVERNMENT REIMBURSEMENT
Medicare payments for general hospital inpatient care are based on a
prospective payment system ("PPS"). Under the PPS, a hospital receives a fixed
amount for operating costs based on the established fixed payment amount per
discharge for categories of hospital treatment, commonly known as a diagnosis
related group ("DRG"), for each Medicare inpatient. DRG payments do not consider
a specific hospital's costs, but are adjusted for area wage differentials.
Psychiatric services, long-term care, rehabilitation, pediatric services and
certain designated research hospitals, and distinct parts of rehabilitation and
psychiatric units within hospitals, are currently exempt from PPS and are
reimbursed on a cost-based system, subject to specific reimbursement caps. While
skilled nursing facilities and units are currently exempt from PPS, beginning,
with cost report periods beginning on or after July 1, 1998, a new system of PPS
will be implemented for such facilities and units. For the year ended March 31,
1998, the Company had only 10 units, 4 of which are skilled nursing units, that
were exempt from PPS.
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<PAGE> 45
For several years, the percentage increases to the DRG rates have been
lower than the percentage increases in the cost of goods and services purchased
by general hospitals. The index used to adjust the DRG rates is based on the
cost of goods and services purchased by hospitals as well as those purchased by
non-hospitals (the "Market Basket"). The historical Market Basket rates of
increase were 1.5% and 2.0% for federal fiscal years 1996 and 1997,
respectively, and the Market Basket may be subject to further adjustment from
year to year. The Company anticipates that future legislation may decrease the
future rate of increase for DRG payments, but is unable to predict the amount of
the final reduction.
The Company anticipates that future legislation may reduce the aggregate
reimbursement received, but is unable to predict the amount of the final
reduction.
Each state has its own Medicaid program that is funded jointly by the state
and federal government. Federal law governs how each state manages its Medicaid
program, but there is wide latitude for states to customize Medicaid programs to
fit the needs and resources of their citizens. As a result, each state Medicaid
plan has its own payment formula and recipient eligibility criteria.
In recent years, changes in Medicare and Medicaid programs have resulted in
limitations on, and reduced levels of, payment and reimbursement for a
substantial portion of hospital procedures and costs. Congress recently enacted
the Balanced Budget Act of 1997, which establishes a plan to balance the federal
budget by fiscal year 2002, and includes significant additional reductions in
spending levels for the Medicare and Medicaid programs.
The Medicare, Medicaid, CHAMPUS and other governmental programs are subject
to statutory and regulatory changes, administrative rulings, interpretations and
determinations, requirements for utilization review and new governmental funding
restrictions, all of which may materially increase or decrease program payments
as well as affect the cost of providing services and the timing of payment to
facilities. The final determination of amounts earned under the programs often
requires many years, because of audits by the program representatives,
providers' rights of appeal and the application of numerous technical
reimbursement provisions. Management believes adequate provision has been made
for such adjustments. Until final adjustment, however, significant issues remain
unresolved and previously determined allowances could become either inadequate
or more than ultimately required.
HEALTH CARE REFORM, REGULATION AND LICENSING
CERTAIN BACKGROUND INFORMATION
Health care, as one of the largest industries in the United States,
continues to attract much legislative interest and public attention. Medicare,
Medicaid, and other public and private hospital cost-containment programs,
proposals to limit health care spending, proposals to limit prices and industry
competitive factors are among the many factors which are highly significant to
the health care industry. In addition, the health care industry is governed by a
framework of federal and state laws, rules and regulations that are extremely
complex and for which the industry has the benefit of only limited regulatory or
judicial interpretation. Although the Company believes it is in compliance in
all material respects with such laws, rules and regulations, if a determination
is made that the Company was in violation of such laws, rules or regulations,
its business, financial condition and results of operations could be materially
adversely affected.
There continue to be federal and state proposals that would, and actions
that do, impose more limitations on government and private payments to providers
such as the Company and proposals to increase co-payments and deductibles
required to be paid by patients. The Company's facilities also are affected by
controls imposed by government and private payors designed to reduce admissions
and lengths of stay. Such controls, including what is commonly referred to as
"utilization review," have resulted in fewer of certain treatments and
procedures being performed. Utilization review entails the review of the
admission and course of treatment of a patient by a third party. Utilization
review by third-party peer review organizations ("PROs") is required in
connection with the provision of care paid for by Medicare and Medicaid.
Utilization review by third parties is also required under many managed care
arrangements.
Many states have enacted, or are considering enacting, measures that are
designed to reduce their Medicaid expenditures and to make certain changes to
private health care insurance. Various states have
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<PAGE> 46
applied, or are considering applying, for a federal waiver from current Medicaid
regulations to allow them to serve some of their Medicaid participants through
managed care providers. These proposals also may attempt to include coverage for
some people who presently are uninsured, and generally could have the effect of
reducing payments to hospitals, physicians and other providers for the same
level of service provided under Medicaid.
CERTIFICATE OF NEED REQUIREMENTS
Some states require approval under certificate of need laws for the
purchase, construction, renovation and expansion of health care facilities and
services. Certificates of need ("CON"), which are issued by governmental
agencies with jurisdiction over health care facilities, are at times required
for capital expenditures exceeding a prescribed amount, changes in bed capacity
for services and certain other matters. A CON may also require a provider to
commit to provide a certain level of uncompensated care. However, in Texas,
where the Company operates two of its eight hospitals, and in Wyoming where the
Company operates one hospital do not currently require certificates of need for
hospital construction or changes in the mix of services. Tennessee requires a
CON before the construction, development or establishment of any type of health
care institution or where modifications require capital expenditure greater than
$2.0 million, except in the case of a hospital. Tennessee also requires a CON
when redistributing or increasing the number of licensed beds. Missouri requires
a CON before offering or developing a new institutional health service within
the state. Oregon requires CONs for new hospital, skilled nursing facility, or
intermediate care service and substance abuse programs only. Iowa requires CON
when offering a new institutional health service. Although to date the Company
has been successful in obtaining CON's for needed projects, the Company is
unable to predict whether it will be able to obtain any CON that may be
necessary to accomplish its business objectives in any jurisdiction where such
CONs are required.
ANTI-KICKBACK AND SELF-REFERRAL REGULATIONS
Sections of the Anti-Fraud and Abuse Amendments to the Social Security Act,
commonly known as the "anti-kickback" statute (the "Anti-kickback Amendments"),
prohibit certain business practices and relationships that might affect the
provision and cost of health care services reimbursable under Medicare and
Medicaid, including the payment or receipt of remuneration for the referral of
patients whose care will be paid for by Medicare or other government programs.
Sanctions for violating the Anti-kickback Amendments include criminal penalties
and civil sanctions, including fines and possible exclusion from government
programs such as the Medicare and Medicaid programs. Pursuant to the Medicare
and Medicaid Patient and Program Protection Act of 1987, the U.S. Department of
Health and Human Services has issued regulations that create Safe Harbors under
the Anti-kickback Amendments. A given business arrangement which does not fall
within a Safe Harbor is not per se illegal; however, business arrangements of
health care service providers that fail to satisfy the applicable Safe Harbor
criteria risk increased scrutiny by enforcement authorities. The "Health
Insurance Portability and Accountability Act of 1996," which became effective
January 1, 1997 broadened the scope of certain fraud and abuse laws, such as the
Anti-kickback Amendments and certain related enforcement activities.
The Company provides financial incentives to recruit physicians into the
communities served by its hospitals, including loans and minimum revenue
guarantees. No Safe Harbor for physician recruitment is currently in force.
Although the Company is not subject to the Internal Revenue Service Revenue
Rulings and related authority addressing recruitment activities by tax-exempt
facilities, management believes such IRS authority tends to set the industry
standard for acceptable recruitment activities. The Company believes its
recruitment policies are being conducted in accordance with the IRS authority
and industry practice. The Company also enters into certain leases with
physicians and is a party to certain joint ventures with physicians. The Company
also participates in a group purchasing joint venture. The Company believes
these arrangements do not violate the Anti-kickback Amendments. There can be no
assurance that regulatory authorities who enforce the Anti-kickback Amendments
will not determine that the Company's physician recruiting activities, other
physician arrangements, or group purchasing activities violate the Anti-kickback
Amendments or other federal laws. Such a determination could subject the Company
to liabilities under the Social Security
44
<PAGE> 47
Act, including exclusion of the Company from participation in Medicare and
Medicaid. See "Business -- Health Care Reform, Regulation and Licensing."
The Company's operations necessarily involve financial relationships with
physicians on the medical staff. Such arrangements include professional services
agreements for services at its hospitals and physician recruitment incentives to
encourage physicians to establish private practices in markets served by the
Company's owned or leased hospitals. Although the Company believes these
arrangements are lawful, no safe harbor provisions apply to physician
recruitment arrangements not involving physician employment. Evolving
interpretations of current, or the adoption of new, federal or state laws or
regulations could affect these arrangements.
There is increasing scrutiny by law enforcement authorities, the Office of
Inspector General ("OIG") of the Department of Health and Human Services
("HHS"), the courts, and Congress of arrangements between health care providers
and potential referral sources to ensure that the arrangements are not designed
as a mechanism to exchange remuneration for patient care referrals and
opportunities. Investigators have also demonstrated a willingness to look behind
the formalities of a business transaction to determine the underlying purpose of
payments between health care providers and potential referral sources.
Enforcement actions have increased, as evidenced by recent highly publicized
enforcement investigations of certain hospital activities. Although, to its
knowledge, the Company is not currently the subject of any investigation which
is likely to have a material adverse effect on its business, financial condition
or results of operations, there can be no assurance that the Company and its
hospitals will not be the subject of investigations or inquiries in the future.
See "Risk Factors -- Health Care Industry Investigations."
In addition to investigations and enforcement actions initiated by
governmental agencies, health care companies may also be the subject of qui tam
actions brought under the False Claims Act by private individuals on behalf of
the government. Furthermore, actions under the False Claims Act, commonly known
as "whistleblower" lawsuits are generally filed under seal to allow the
government adequate time to investigate and determine whether it will intervene
in the action, and defendant health care providers are often without knowledge
of such actions until the government has completed its investigation and the
seal is lifted. Whistleblowers receive a portion of any amounts collected by the
government in such actions as a reward for bringing the action to the
government's attention.
In addition, provisions of the Social Security Act restrict referrals by
physicians of Medicare and other government-program patients to providers of a
broad range of designated health services with which they have ownership or
certain other financial arrangements (the "Stark Laws"). A person making a
referral, or seeking payment for services referred, in violation of Stark would
be subject to the following sanctions: (i) civil money penalties of up to
$15,000 for each service; (ii) assessments equal to twice the dollar value for
each service; and/or (iii) exclusion from participation in the Medicare Program
and any other governmental reimbursement program. Further, if any physician or
entity enters into an arrangement or scheme that the physician or entity knows
or should know has the principal purpose of assuring referrals by the physician
to a particular entity, and the physician directly made referrals to such
entity, then such physician or entity could be subject to a civil money penalty
of up to $100,000. Many states have adopted or are considering similar
legislative proposals, some of which extend beyond the Medicaid program to
prohibit the payment or receipt of remuneration for the referral of patients and
physician self-referrals regardless of the source of the payment for the care.
The Company's contracts with physicians on the medical staff of its hospitals
and its participation in and development of joint ventures and other financial
relationships with physicians could be adversely affected by these amendments
and similar state enactments.
The Company is unable to predict the future course of federal, state and
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework or in the
interpretation of these laws, rules and regulations could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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<PAGE> 48
RECENT INVESTIGATIONS
In April 1997, the DOJ, Eastern District of Texas, sent a demand letter to
the Company's hospital in Center, Texas, alleging improper laboratory billing
practices during periods prior to the Company's ownership of the hospital. The
Company settled this claim for approximately $18,000, and recovered its
settlement costs for this claim from the prior owner of the hospital pursuant to
an indemnification agreement.
In September 1997, the DOJ, Southern District of Texas, sent a demand
letter to the Company's hospital in San Benito, Texas alleging improper
laboratory billing for periods prior to the Company's ownership. The DOJ has
offered to settle the claim for approximately $20,000. The Company will seek
indemnification from prior owners for any liabilities with respect to this
matter and such prior owners have acknowledged their responsibility.
In November 1997, DOJ, Eastern District of Missouri, sent a demand letter
to the Company's hospital in Wentzville, Missouri alleging improper laboratory
billing practices from approximately 1991 to 1997. No lawsuit has been filed and
the Company is engaged in discussions with representatives of the DOJ. If the
Company incurs any liability with respect to this matter attributable to
improper billing during periods prior to the Company's acquisition of the
hospital, the Company will attempt to recover such losses pursuant to an
indemnification agreement entered into as part of its purchase of the hospital.
There can be no assurance that such indemnification will be adequate or that
indemnification claims will be satisfied.
ENVIRONMENTAL REGULATIONS
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations, as well as the Company's
purchases and sales of facilities, are also subject to various other
environmental laws, rules and regulations.
Although the Company is not aware of any material environmental claims
pending or threatened against its currently owned or operated hospitals, it is
aware that certain environmental problems are present at Puget Sound Hospital, a
hospital for which the Company has entered into a definitive purchase agreement.
The seller is legally and financially responsible for the cleanup, its external
environmental consultants completed a work plan for the removal of the
contamination. New American does not intend to complete the acquisition until
the seller has completed the removal of the contamination in accordance with a
plan approved by the Washington State Department of Ecology.
HEALTH CARE FACILITY LICENSING AND CERTIFICATION REQUIREMENTS
The Company's health care facilities are subject to extensive federal,
state and local legislation and regulation. In order to maintain their operating
licenses and continue to be eligible for participation in the Medicare, Medicaid
and other governmental programs, health care facilities must comply with strict
standards concerning a variety of areas, including, but not limited to, medical
care, written policies and procedures, record-keeping, equipment and hygiene.
Various licenses and permits also are required in order to dispense narcotics,
operate pharmacies, handle radioactive materials and operate certain equipment.
The Company believes its health care facilities hold all material governmental
approvals, licenses and permits. All licenses, provider numbers and other
permits, certifications or approvals required to perform the Company's business
operations are held by subsidiaries of the Company. Each of the Company's
facilities is fully accredited by the Joint Commission on Accreditation of
Health Care Organizations and/or the American Osteopathic Association.
UTILIZATION REVIEW COMPLIANCE AND HOSPITAL GOVERNANCE
The Company's health care facilities are subject to and comply with various
forms of utilization review. In addition, under the Medicare prospective payment
system, each state must have a PRO to carry out a federally mandated system of
review of Medicare patient admissions, treatments and discharges in general
hospital. Medical and surgical services and practices are extensively supervised
by committees of staff doctors at each health care facility, are overseen by
each health care facility's local governing board, the primary
46
<PAGE> 49
voting members of which are physicians and community members, and are reviewed
by the Company's quality assurance personnel. The local governing boards also
help maintain standards for quality care, develop long-range plans, establish,
review and enforce practices and procedures and approve the credentials and
disciplining of medical staff members.
GOVERNMENTAL DEVELOPMENTS REGARDING SALES OF NOT-FOR-PROFIT HOSPITALS
In recent years, the legislatures and attorneys general of several states
have shown a heightened level of interest in transactions involving the sale of
non-profit hospitals. Although the level of interest varies from state to state,
the trend is to provide for increased governmental review, and in some cases
approval, of transactions in which not-for-profit corporations sell a health
care facility. Attorneys general in certain states have been especially active
in evaluating these transactions. Although the Company has not yet been
adversely affected as a result of these trends, such increased scrutiny may
increase the difficulty or prevent the completion of transactions with
not-for-profit organizations in certain states in the future.
PROFESSIONAL LIABILITY
As part of its business, the Company is subject to claims of liability for
events occurring in the ordinary course of hospital operations. To cover these
claims, the Company maintains professional malpractice liability insurance and
general liability insurance in amounts which management believes to be
sufficient for its operations, although some claims may exceed the scope of the
coverage in effect. The Company also maintains umbrella coverage. At various
times in the past, the cost of malpractice and other liability insurance has
risen significantly. Therefore, there can be no assurance that adequate levels
of such insurance will continue to be available at a reasonable price.
LEGAL PROCEEDINGS
The Company is, from time to time, subject to claims and suits arising in
the ordinary course of business, including claims for damages for personal
injuries, breach of contracts or for wrongful restriction of or interference
with physician's staff privileges. In certain of these actions, plaintiffs
request punitive or other damages that may not be covered by insurance. The
Company is currently not a party to any proceeding which, in management's
opinion, would have a material adverse effect on the Company's business,
financial condition or results of operations.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
Robert M. Martin......................... 49 President, Chief Executive Officer and
Chairman of the Board of Directors
Dana C. McLendon, Jr..................... 55 Senior Vice President of Finance and
Administration, Secretary, Treasurer and
Director
Craig B. Watson.......................... 51 Senior Vice President of Operations
Timothy S. Hill.......................... 36 Vice President and Controller
Neil G. McLean........................... 49 Vice President of Acquisitions and
Development
Christopher W. Dux....................... 47 Regional Vice President
Richard H. Stowe (1)(2).................. 54 Director
James B. Hoover (2)...................... 43 Director
David A. Jensen (1)...................... 53 Director
Jeptha W. Dalston, Ph.D.(2).............. 67 Director
Paul B. Queally (1)(2)................... 34 Director
</TABLE>
- ------------------------------
(1) Member of Compensation Committee.
(2) Member of Audit, Ethics and Quality Assurance Committee.
Mr. Martin has served as the President, Chief Executive Officer and
Chairman of the Board of Directors of the Company since its formation in 1995.
From 1991 to 1995, Mr. Martin was Regional Vice President of the Eastern Region
of HealthTrust, a region which included 17 hospitals in six states. From 1990 to
1991, Mr. Martin was Regional Vice President of HealthTrust Central Region,
which included nine hospitals in two states. Mr. Martin holds a BA in business
administration from Drury College, Springfield, Missouri and an MBA from Temple
University, Philadelphia, Pennsylvania.
Mr. McLendon has served as the Senior Vice President of Finance and
Administration, Secretary, Treasurer and as a Director of the Company since its
formation in 1995. From 1991 to 1995 he served as Director, and then Vice
President -- Delivery System Integration at HealthTrust. Mr. McLendon was
President and Chief Executive Officer of First American Bank from 1988 to 1990.
Prior to 1988, Mr. McLendon held various positions with First Union National
Bank, including Regional Executive Vice President. Mr. McLendon holds a BS in
business administration and an MBA from the University of South Carolina.
Mr. Watson has served as the Senior Vice President of Operations of the
Company since its formation in 1995. From 1991 to 1995, he served as Chief
Executive Officer of Gulf Coast Medical Center formerly a HealthTrust hospital.
Mr. Watson served as Chief Executive Officer of a non-profit home health company
from 1985 to 1991. Mr. Watson has an MBA in finance from the University of
Houston and is a certified public accountant ("CPA").
Mr. Hill has served as the Vice President and Controller of the Company
since its formation in 1995. From 1987 to 1995, Mr. Hill was with HealthTrust,
Inc., where he served in a variety of accounting, audit, reimbursement and
financial positions. Mr. Hill served as Director of Financial Reporting for
Columbia/HCA in 1995. Mr. Hill holds a BS in accounting from Tennessee
Technological University and is a CPA.
Mr. McLean has served as Vice President of Acquisitions and Development of
the Company since January 1996. From November 1989 to January 1996, he served as
Group Vice President for Quorum and was responsible for 13 managed hospitals in
the states of Georgia and North Carolina. Mr. McLean has an MBA from Mercer
University and is a CPA.
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<PAGE> 51
Mr. Dux has served as Regional Vice President of the Company since May
1998. From June 1997 to May 1998 he served as Chief Executive Officer of
Parkridge Medical Center, Chattanooga, Tennessee. From March 1992 until June
1997 he was the Chief Executive Officer of Pulaski Community Hospital, Pulaski,
Virginia. Mr. Dux is a graduate of Belmont Abbey College and of the Duke
Endowment Program for Hospital Administrators.
Mr. Stowe has served as a director of the Company since January 1996. Since
May 1979, he has been a general partner of WCAS and its predecessors. Mr. Stowe
has served as a director of Health Management Systems, Inc. as well as several
private companies since April 1979 and The Cerplex Group, Inc. since 1996.
Mr. Hoover has served as a director of the Company since January 1996.
Since June 1998, Mr. Hoover has been a managing member of Dauphin Capital
Partners, a healthcare venture capital firm. Mr. Hoover was a general partner of
WCAS from November 1992 to May 1998. Mr. Hoover has served as a director of
Housecall Medical Resources, Inc. since June 1994, of Centennial Healthcare
Corporation since January 1996 and U.S. Physical Therapy, Inc. since February
1993.
Mr. Jensen has served as a director of the Company since September 1996.
Since December 1996, Mr. Jensen has been President and Chief Executive Officer
of Blue Cross and Blue Shield of New Hampshire. Mr. Jensen served as Acting
Chief Executive Officer of the Foundation for Informed Medical Decision Making
from August 1994 to November 1996; and President of Healthsource Management,
Inc., a subsidiary of an HMO company, from January 1991 to May 1994. Mr. Jensen
is also a director of the Business and Industry Association of New Hampshire.
Mr. Dalston has served as a director of the Company since September 1996.
From 1993 to 1996 he served as a director of the University of Houston Graduate
Program in Health Administration. Mr. Dalston has been a professor and member of
the faculty since 1993. Since 1993, Mr. Dalston has served as President and
Chief Executive Officer of Health Exec, Inc.
Mr. Queally has served as a director of the Company since January 1998.
Since February 1996 he has been a general partner of WCAS. Mr. Queally joined
the Sprout Group in September 1986 holding various positions, most recently a
general partner until February 1996. Since 1995, Mr. Queally has served as a
director for Concentra Managed Care, Inc., a managed workers compensation
company.
STAGGERED BOARD
After the Reincorporation, the Board of Directors will be divided into
three classes. The Class 1 directors' initial term will expire at the 1999
annual meeting of stockholders, the Class 2 directors' initial term will expire
at the 2000 annual meeting of stockholders and the Class 3 directors' initial
term will expire at the 2001 annual meeting of stockholders. After the initial
term, each class will serve for a three-year term. The initial Class 1 directors
will be: Mr. Dalston, Mr. Hoover and Mr. Jensen. The initial Class 2 directors
will be: Mr. Queally and Mr. Stowe. The initial Class 3 directors will be: Mr.
McLendon and Mr. Martin.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors currently has two committees: the Audit, Ethics and
Quality Assurance Committee and the Compensation Committee. The Compensation
Committee makes recommendations concerning salaries and incentive compensation
for executives of the Company. Mr. Stowe is the chairman of the Compensation
Committee, which also includes Mr. Jensen and Mr. Queally. The Audit, Ethics and
Quality Assurance Committee reviews and approves the annual report of the
Company's independent auditors and monitors adherence to the Company's
compliance program. Mr. Queally is the chairman of the Compliance, Audit and
Ethics Committee, which also includes Mr. Dalston, Mr. Hoover and Mr. Stowe.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The Company's Compensation Committee is currently composed of Mr. Stowe,
Mr. Jensen and Mr. Queally. No executive officer of the Company serves as a
member of the compensation committee or as a director of any other entity whose
executive officer(s) serves as a director of the Company.
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<PAGE> 52
DIRECTOR COMPENSATION
Directors of the Company who are employees of the Company or its
subsidiaries are not entitled to receive any fees for serving as directors;
however, such directors are reimbursed for out-of-pocket expenses incurred with
respect to the Company's business. In addition, non-employee directors of the
Company will be eligible to participate in the Company's Stock Option Plan. For
the year ended March 31, 1998, non-employee directors did not receive any
compensation other than reimbursement for out-of-pocket expenses.
EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company for the
periods described to the Company's chief executive officer and the Company's
four other most highly compensated executive officers at March 31, 1998
(collectively, the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
---------------------------------------------------------------------
OTHER ANNUAL ALL OTHER
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION(1) COMPENSATION(2)
<S> <C> <C> <C> <C>
Robert M. Martin
President, Chief Executive Officer
and Chairman of the Board of
Directors....................... 263,750 127,500 12,756 3,571
Dana C. McLendon, Jr.
Senior Vice President of Finance
and Administration, Secretary,
Treasurer and Director.......... 179,167 67,988 11,330 3,712
Craig B. Watson
Senior Vice President of
Operations...................... 162,917 59,920 8,125 18,613
Timothy S. Hill
Vice President and Controller...... 123,750 40,188 8,125 2,618
Neil G. McLean
Vice President of Acquisitions and
Development..................... 148,747 41,064 8,125 3,161
</TABLE>
- ------------------------------
(1) Represents automobile allowance of $8,125. Also includes insurance premiums
of $4,631 and $3,205 for Mr. Martin and Mr. McLendon, respectively.
(2) Represents Company 401(k) contributions, life insurance premiums paid by the
Company and reimbursed moving expenses, as follows:
<TABLE>
<CAPTION>
401(K) INSURANCE MOVING
OFFICER CONTRIBUTIONS PREMIUMS EXPENSES
<S> <C> <C> <C>
Robert M. Martin.................................... 3,200 371 --
Dana C. McLendon, Jr................................ 3,200 512 --
Craig B. Watson..................................... 3,200 413 15,000
Timothy S. Hill..................................... 2,377 241 --
Neil G. McLean...................................... 2,822 339 --
</TABLE>
STOCK OPTION PLAN
Under the Company's Stock Option Plan, as amended (the "Stock Option
Plan"), options to purchase shares of Common Stock are available for grant to
consultants, advisors, directors and employees of the Company, providing an
equity interest in the Company and additional compensation to such grantees
based on appreciation of the value of such stock.
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<PAGE> 53
The Stock Option Plan allows for options to purchase in the aggregate up to
2,199,330 shares of Company Common Stock to be granted by the Board of
Directors. The Board of Directors may, in its discretion, grant incentive stock
options ("ISO's") or non-qualified stock options.
The Stock Option Plan provides that the exercise price of an ISO option
must not be less than the fair market value of the Common Stock on the trading
day next preceding the date of the grant. The exercise price of a non-qualified
stock option shall be determined by the Board of Directors. Payment for shares
of Common Stock to be issued upon exercise of an option may be made either in
cash, Common Stock or any combination thereof, at the discretion of the Board of
Directors. Options are nontransferable, other than by will, the laws of descent
and distribution or pursuant to certain domestic relations orders. Shares
subject to options granted under the Stock Option Plan that expire, terminate or
are canceled without having been exercised in full become available again for
option grants. Shares acquired pursuant to the exercise of an option, if
repurchased by the Company, will again become available for option grants.
The Stock Option Plan is administered by the Board of Directors, or, at the
discretion of the Board of Directors, a committee of directors. Subject to
certain limitations, the Board and its committee have the authority to determine
the recipients, as well as the exercise prices, exercise periods, length and
other terms of stock options granted pursuant to the Stock Option Plan. In
making such determinations, the Board may take into account the nature of the
services rendered or to be rendered by option recipients, and their past,
present or potential contributions to the Company.
The number of shares of Common Stock that may be granted under the Stock
Option Plan or under any outstanding options granted thereunder will be
proportionately adjusted, to the nearest whole share, in the event of any stock
dividend, stock split, share combination or similar recapitalization involving
the Common Stock or any spin-off, spin-out or other significant distribution of
the Company's assets to its stockholders for which the Company receives no
consideration.
Generally, in the event an ISO holder is terminated as an employee by
reason of disability or death, the holder or his or her representative may
exercise the option for a period of twelve months following such termination. In
the event the ISO holder is terminated as an employee for any reason other than
disability, death or cause, the holder may exercise his or her option for a
period of three months following termination. The Board of Directors may, but
need not, cause ISOs to provide that if the employment of an ISO holder is
terminated for "cause," as defined in the Stock Option Plan, the unexercised
options expire.
Unless stated otherwise in a non-qualified stock option agreement, for a
period of 60 days following the date the employment of a non-qualified stock
option holder terminates, the Company has the right to purchase such
participant's vested options at a price equal to the difference between the
exercise price of such options and the fair market value of the underlying
shares of Common Stock.
No federal income tax consequences occur to either the Company or the
optionee upon the Company's grant or issuance of a non-qualified stock option.
Upon an optionee's exercise of a non-qualified stock option, the optionee will
recognize ordinary income in an amount equal to the difference between the fair
market value of the Common Stock purchased pursuant to the exercise of the
option and the exercise price of the option. However, if the Common Stock
purchased upon exercise of the option is not transferable or is subject to a
substantial risk of forfeiture, then the optionee will not recognize income
until the stock becomes transferable or is no longer subject to such a risk of
forfeiture (unless the optionee makes an election under Internal Revenue Code
Section 83(b) to recognize the income in the year of exercise, which election
must be made within 30 days of the option exercise). The Company will be
entitled to a deduction in an amount equal to the ordinary income recognized by
the optionee in the year in which such income is recognized by the optionee.
Upon a subsequent disposition of the shares of Common Stock, the optionee will
recognize a capital gain to the extent the sales proceeds exceed the optionee's
cost of the shares plus the previously recognized ordinary income.
Options granted under the Stock Option Plan are intended to qualify for
favorable tax treatment under Internal Revenue Code Section 422. No individual
may be granted incentive stock options under the Stock Option Plan exercisable
for the first time during any calendar year and having an aggregate fair market
value
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<PAGE> 54
in excess of $100,000. If the recipient of an incentive stock option disposes of
the underlying shares before the end of certain holding periods (essentially the
later of one year after the exercise date or two years after the grant date), he
or she will generally recognize ordinary income in the year of disposition in an
amount equal to the difference between his or her purchase price and the fair
market value of the Common Stock on the exercise date. If a disposition does not
occur until after the expiration of the holding periods, the recipient will
generally recognize a capital gain equal to the excess of the disposition price
over the price paid by tax deduction for compensation expense on account of the
original sales to employees, but may be entitled to deduction if a participant
disposes of stock received upon exercise of an incentive stock option under the
Stock Option Plan prior to the expiration of the holding periods.
As of July 27, 1998, the Board of Directors has granted options to purchase
573,431 shares under the Stock Option Plan; 78,548 of which were granted to Mr.
Martin, 39,274 each to Mr. McLendon and Mr. Watson and 26,183 each to Mr. Hill
and Mr. McLean.
EMPLOYEE STOCK PURCHASE PLAN
The Company has established an Employee Stock Purchase Plan ("Employee
Stock Purchase Plan") for employees and reserved an aggregate of 2,000,000
shares of Common Stock for issuance thereunder. Pursuant to the Employee Stock
Purchase Plan, eligible employees may use payroll deductions to purchase shares
of Common Stock at a price equal to 85% of the closing price of the stock as
reported in The Wall Street Journal on either the first trading day or the last
trading day of each plan year, whichever is lower. At the end of each plan year,
funds accumulated in the employee's account will be used to purchase the maximum
number of shares of the Common Stock at the above price. The Company makes no
contribution to the purchase price.
All employees (including officers and directors) may elect to participate
in the Employee Stock Purchase Plan if they meet minimum employment
requirements. The maximum payroll deduction is 10% of an employee's normal pay.
Participating employees' rights under the Employee Stock Purchase Plan are
nontransferable. Prior to the end of a plan year, a participant may elect to
withdraw from the Employee Stock Purchase Plan and the amount accumulated as a
result of such employee's payroll deductions shall be returned to the
withdrawing employee without interest. Any employee whose employment with the
Company is terminated for any reason other than death, retirement or long-term
disability immediately ceases to be a participant and also receives the balance
of his or her prior contributions. In the event an employee dies, retires or
becomes long-term disabled during a plan year, such employee or their legal
representative may withdraw such employee's contribution account balance. In the
event such withdrawal election is not timely made, such employee's account
balance will be used to purchase Common Stock in accordance with the employee
stock purchase plan.
In no event may a participant in the Employee Stock Purchase Plan purchase
thereunder during a calendar year, Common Stock having a fair market value more
than $25,000. The Company intends to register the shares issued under the
Employee Stock Purchase Plan so that the shares purchased pursuant to the
Employee Stock Purchase Plan are freely tradeable, except for any shares held by
an "affiliate" of the Corporation, which would be subject to the limitations of
Rule 144 under the Securities Act.
401(K) PLAN
The Company and its affiliates offer a 401(k) Plan for all eligible
employees who are over 20 1/2 years of age and have six months service with the
Company. The Company may make matching discretionary contributions and the Board
of Directors has authorized a matching contribution for 1997 of 100% of each
participant's contributions up to a maximum two percent of each participant's
annual gross wages. No employee may contribute more than 20% of wages to the
401(k) Plan, and for 1997 are limited to a contribution of no more than $9,500.
Pursuant to certain tax requirements certain "highly compensated" employees may
be further limited in the amount of contribution. Matching funds vest in the
participant's account over a period of five years of vesting service. A total of
$115,482 was contributed to the Plan as matching contributions for 1998.
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<PAGE> 55
NONCOMPETE AND SEVERANCE AGREEMENTS
In 1995, the Company entered into Employment Agreements with each of Mr.
Martin, Mr. McLendon, Mr. Watson, Mr. Hill and Mr. McLean that included
non-compete and severance provisions. As of August , 1998, the Company and
each of the above executives replaced the Employment Agreements with Non-
Compete and Severance Agreements. The Noncompete and Severance Agreements
prohibit the executive from (i) competing with the Company in any venture
involving the ownership or management of for-profit general acute care
hospitals, (ii) soliciting the Company's employees, or (iii) interfering with
the Company's business, in each case for a period of time following termination
of employment equal to the period during which the executive is entitled to
severance; provided that the severance provisions do not apply in the case of
termination due to death, disability, or for cause (as defined in the Noncompete
and Severance Agreement). The noncompete and severance period for each of Mr.
Martin and Mr. McLendon is 24 months and for each of Mr. Watson, Mr. Hill, and
Mr. McLean is 12 months. The noncompete agreements are governed by Tennessee
law. Tennessee law generally supports an employer's right to enforce noncompete
agreements against former employees as long as the restrictions are reasonably
calculated to protect legitimate business interests of the employer. The
employees covered by noncompete agreements are vital to the Company, and
management believes the agreements protect legitimate business interests of the
Company. In the event the noncompete agreements are found to be too broad as to
time or geographic scope, Tennessee law generally provides that the noncompete
agreements should be modified and enforced to the extent reasonable under the
circumstances.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INITIAL FORMATION AND CAPITALIZATION
The Company was incorporated in August 1995. In August and October of 1995,
the Company sold an aggregate of 2,800,000 shares of common stock to certain
members of management at prices ranging from $0.01 to $0.05 per share. In
December 1995, in connection with its original investment in the Company, WCAS,
its affiliates and certain executive officers of the Company (the "Investors")
purchased an aggregate of 5,026,500 shares of common stock at $0.30 per share
and entered into an agreement regarding the possible future purchase of Series A
Preferred Stock and Series B Preferred Stock as discussed more fully below.
The securities purchase agreement, which was entered into in December 1995,
anticipated future purchases of securities in connection with acquisitions and
set the price for shares of preferred stock that the Investors would be
committed to purchase under certain conditions. The actual sale of Series A
Preferred Stock and Series B Preferred Stock occurred in connection with
hospital acquisitions occurring subsequent to the date of the securities
purchase agreement. The actual sales are as follows: On July 31, 1996, in
connection with the acquisition of Doctors Hospital, the Company sold an
aggregate of 150,000 shares of Series B Preferred Stock to the Investors and
certain other investors for $15,000,000. On April 2, 1997, the Company sold an
aggregate of 11,185.5 shares of Series B Preferred Stock to the Investors and
certain other investors for $1,118,550, and sold an aggregate of 1,575 shares of
Series A Preferred Stock to certain members of management for $157,500. On April
30, 1997, in connection with the acquisition of Memorial Hospital of Center, and
May 16 of 1997, in connection with the acquisition of Delta Medical Center, the
Company sold to the Investors an aggregate of 73,814.5 shares of Series B
Preferred Stock for $7,381,450 and 51,185.5 shares of Series A Preferred Stock
for $5,118,550. On July 31, 1997, in connection with the acquisition of Dolly
Vinsant Memorial Hospital, the Company sold an aggregate of 20,000 shares of
Series A Preferred Stock to the Investors for $2,000,000. On January 30, 1998,
in connection with the purchase of the four hospitals from Tenet Healthcare
Corporation, the Company sold an aggregate of 177,239.5 shares of Series A
Preferred Stock to the Investors for $17,723,950.
SERIES A PREFERRED STOCK
The Company has 250,000 shares of Series A Preferred Stock issued and
outstanding which will be exchanged for the right to receive approximately $26.1
million in cash (as of June 30, 1998) in the Reincorporation from the net
proceeds of the Offering. WCAS and its affiliates and certain executive officers
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<PAGE> 56
of the Company own all 250,000 shares of Series A Preferred Stock. Holders of
Series A Preferred Stock are entitled to receive dividends at the rate of $7.00
per share per annum. The dividends are cumulative and accrue from date of issue
and equaled $1.1 million as of June 30, 1998. Pursuant to the Reincorporation,
WCAS will receive $24.3 million; WCAS Healthcare Partners, L.P. will receive
approximately $382,000; Mr. Martin will receive approximately $51,200; Mr.
McLendon will receive approximately $51,200; Mr. Watson will receive
approximately $25,600; Mr. Hill will receive approximately $7,700; Mr. McLean
will receive approximately $25,600; Mr. Hoover will receive approximately
$25,400; and Mr. Stowe will receive approximately $76,400. Mr. Martin and Mr.
McLendon are limited partners of WCAS Healthcare Partners, L.P. See "Use of
Proceeds."
SERIES B PREFERRED STOCK
The Company has 235,000 shares of Series B Preferred Stock issued and
outstanding. The Series B Preferred Stock held by WCAS will be exchanged for an
aggregate of 3,520,487 shares of Common Stock and 423,475 shares of Non-Voting
Common Stock and Series B Preferred Stock held by persons other than WCAS will
be exchanged for an aggregate shares of Common Stock. WCAS and its affiliates
and certain executive officers of New American own 233,000 shares of Series B
Preferred Stock.
REGISTRATION RIGHTS AGREEMENT
In connection with the original investment in the Company by WCAS in
December 1995, WCAS and certain of its affiliates (the "Purchasers") and certain
executive officers of the Company (the "Stockholders") entered into a
Registration Rights Agreement. The Registration Rights Agreement provides for
demand registration rights for the Purchasers and the Stockholders. These demand
registration rights can be exercised (subject to certain restrictions) by either
(i) a majority of the Purchasers on up to two occasions, or (ii) a majority of
the Stockholders on only one occasion. Notwithstanding the foregoing, the
Registration Rights Agreement provides for unlimited demand registration rights
for the Purchasers and the Stockholders with respect to registrations on Form
S-3 (if the Company is entitled to use Form S-3), so long as the reasonably
anticipated aggregate price to the public of such offering is at least $1.5
million. Demand registrations under this agreement on Form S-3 are limited to
once every 180 days. Certain other conditions also must be met before the
Company may be required to honor a demand registration request by the
Stockholders or Purchasers. The Company is required to pay all expenses of any
registration pursuant to the Registration Rights Agreement, subject to certain
limitations provided in the agreement.
The Registration Rights Agreement also provides that, subject to certain
limitations including the discretion of the managing underwriter in an
underwritten offering, the Purchasers and Stockholders may request inclusion of
their shares in a registration of securities by the Company. If a Purchaser or
Stockholder does not elect to participate in such an underwritten offering, such
a holder may sell his stock on or after the 90th day following the effective
date of the registration statement or, if later, on or after the expiration of
any contractual "lockup" provisions imposed by the underwriters. Such "lockup"
provisions cannot exceed 180 days. All of the parties to the Registration Rights
Agreement have waived any right to participate in this Offering except that WCAS
will sell up to 900,000 shares in the event the underwriters exercise their
over-allotment option.
STOCKHOLDERS' AGREEMENT
In connection with the original investment in the Company by WCAS in
December 1995, WCAS and certain of its affiliates ("WCAS Stockholders") as well
as the executive officers that were stockholders at that time ("Founder
Stockholders") entered into a Stockholders' Agreement (the "Stockholders'
Agreement"). During the term of the Stockholders' Agreement, the WCAS
Stockholders and the Founder Stockholders agree to vote their shares of Common
Stock and to use their best efforts to elect up to seven Directors; (i) two of
whom shall be designated by a majority in interest of the Founder Stockholders
(so long as the Founder Stockholders in the aggregate own a designated amount of
Stock), (ii) two of whom shall be designated by a majority in interest of the
WCAS Stockholders (so long as the WCAS Stockholders in the aggregate own a
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<PAGE> 57
designated amount of Stock), and (iii) up to three of whom shall be individuals
mutually agreed on and nominated for Stockholder approval by the Founder
Stockholders' and the WCAS Stockholders' designees described above. None of the
mutually agreed on Directors described in (iii) above may be nominated unless
there are an equal number of Founder Stockholder designees and WCAS designees
present. Once elected, no Founder Stockholder Designee or WCAS Stockholder
Designee shall be removed without the approval of a majority in interest of the
Founder Stockholders or the WCAS Stockholders, as the case may be.
WCAS reserves the right to sell any or all of its Stock to any person at
any time, but it agrees to endeavor, when practicable, in its sole discretion,
to notify the Founder Stockholders in advance if WCAS decides to make such a
sale in order to allow the Founder Stockholders to consider acquiring the Shares
to be sold. The Stockholders' Agreement also provides for Co-Sale Rights
pursuant to which if WCAS proposes to reduce its Common Stock and Series B
Preferred Stock holdings below a certain amount, WCAS shall give New American a
written notice describing the proposed terms of the disposition.
The Stockholders' Agreement shall terminate in its entirety upon the
consummation of the Offering.
RESTRICTED STOCK AGREEMENT
In connection with the initial capitalization of the Company, certain
executive officers of the Company entered into a Restricted Stock Agreement in
December 1995 with respect to the shares of the Company's common stock held by
such officers. Under the Restricted Stock Agreement, the officers' common stock
vests over a period of four years beginning in September 1995. Unvested shares
are subject to repurchase by the Company if the officers' employment with the
Company terminates for any reason. The Restricted Stock Agreement provides that
upon a "change of control" (as defined in the Restricted Stock Agreement) all
unvested shares become vested and no longer subject to the Company's repurchase
rights. As of August 1, 1998, 906,128 shares of Common Stock remain subject to
restrictions.
In June 1998, the Restricted Stock Agreement was amended to, among other
things, provide for accelerated vesting upon an officers' death or disability.
SUBORDINATED DEBT
On January 30, 1998, WCAS CP III loaned the Company $25.0 million pursuant
to a subordinated note. The Subordinated Debt bears interest at 10% and is due
January 30, 2008 with interest payable semiannually in arrears on June 30 and
December 31 of each year commencing June 30, 1998. Upon New American's written
notice to WCAS CP III at least 10 days, and no more than 60 days, in advance,
New American may prepay all or any portion of the Subordinated Debt. The Company
intends to pay off the Subordinated Debt and accrued interest in full with the
proceeds of this Offering. See "Use of Proceeds."
The Company is required to make certain mandatory prepayments of the
Subordinated Debt in the event that certain prepayments of senior debt are
required under the Credit Agreement. In addition, a prepayment is required if at
any time while the Subordinated Debt is outstanding, (i) the Company merges or
consolidates with or into another entity (subject to certain exceptions), or
(ii) the Company sells or otherwise disposes of substantially all of its assets
to a third-party, or (iii) a third-party purchaser acquires a majority of the
Company's outstanding capital stock. In such event, as a condition to
consummating such sale of the Company, New American must prepay the Subordinated
Debt in full.
WARRANT
In connection with the Subordinated Debt, the Company issued a warrant to
purchase Common Stock of the Company (the "Warrant"). The Warrant entitles WCAS
CP III to purchase up to 591,725 shares of the Common Stock at $4.13 per share
(subject to customary anti-dilution adjustments). The Warrant expires January
30, 2008 and is not exercisable as to fractional shares of Common Stock. The
provisions of the Registration Rights Agreement described above are applicable
to the registration of the shares issuable upon exercise of the Warrant.
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<PAGE> 58
WCAS CP III may make payment in respect of the Warrant's exercise by (i)
cash or check, (ii) surrender to the Company of any of the Subordinated Debt (or
any other obligations issued by the Company), (iii) delivery to the Company of
any other securities issued by New American, (iv) an election to receive shares
having an aggregate fair market value equal to the Warrant's fair market value,
upon which election the Company will issue shares of Common Stock to the holder
("Net Issue Exercise"), or (v) any combination of the other four payment
methods.
In the event the Company issues or sells any shares of Common Stock or
securities convertible into Common Stock or grants options or other rights at a
price per share or with an exercise or conversion price per share less than the
Warrant's exercise price, the Warrant's exercise price shall be reduced
according to a formula set forth in the Warrant. In addition, the Warrant
includes provisions for the following events: change in option price or
conversion rate; stock dividend declaration; issuance or sale of common stock,
options or convertible securities for cash; record date determination;
disposition of Treasury Shares; subdivision or combination of stock; and
adjustment of Warrant provisions by New American's Board of Directors. The
Warrant's exercise price shall not be adjusted in the case of (i) issuance of
shares of Common Stock upon conversion of the Series B Convertible Preferred
Stock or (ii) issuance of Common Stock reserved for issuance to New American's
employees.
If (i) any capital reorganization or reclassification of New American's
capital stock, (ii) any consolidation or merger of New American, or (iii) a sale
of substantially all of New American's assets is effected in such a way as to
entitle holders of Common Stock to receive stock, securities or assets with
respect to or in exchange for Common Stock, then each Warrant holder shall have
the right to receive in lieu of such shares of Common Stock such shares of
stock, securities, or assets (including cash) as would have been issued or
payable in exchange for the stock had the reorganization, reclassification,
consolidation, merger or sale not taken place.
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<PAGE> 59
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Common Stock as of August 1, 1998 and immediately following the
Offering by: (i) each person who is known by the Company to own beneficially
more than five percent of the Common Stock; (ii) each director and Named
Executive Officer of the Company; and (iii) all directors and executive officers
of the Company as a group. To the knowledge of the Company, each of the persons
named in the table has sole voting and investment power as to the shares shown
unless otherwise noted. Unless otherwise noted, the address of each holder of
five percent or more of the Common Stock is the Company's corporate address.
Footnote 3 also sets forth certain information with respect to the beneficial
ownership of the Selling Stockholder, assuming the Underwriters exercise their
over-allotment option in full.
<TABLE>
<CAPTION>
PERCENTAGE OF
BENEFICIAL OWNERSHIP
SHARES -------------------------
BENEFICIALLY BEFORE AFTER
NAME OWNED OFFERING(1) OFFERING(1)
<S> <C> <C> <C>
Welsh, Carson, Anderson & Stowe VII, L.P.(2)(3)............. 9,680,990 73.41 50.46
Robert M. Martin(4)......................................... 1,406,628 11.17 7.56
Dana C. McLendon, Jr.(5).................................... 586,488 4.66 3.15
Craig B. Watson(6).......................................... 330,947 2.63 1.78
Timothy S. Hill(7).......................................... 266,748 2.12 1.43
Neil G. McLean(8)........................................... 210,120 1.67 1.13
Richard H. Stowe(9)......................................... 9,709,072 73.63 50.60
James B. Hoover............................................. 9,381 * *
David A. Jensen(10)......................................... 4,189 * *
Jeptha W. Dalston(11)....................................... 4,189 * *
Paul B. Queally(9).......................................... 9,680,990 73.41 50.46
All directors and officers as a group (11 persons)(12)...... 12,527,762 94.94 65.26
</TABLE>
- ------------------------------
* Indicates less than one percent
(1) The percentages shown are based on 12,595,370 shares of Common Stock
outstanding prior to the Offering and 18,595,370 shares of Common Stock
(including Non-Voting Common Stock) outstanding after the Offering.
Pursuant to Rule 13d-3 under the Securities Exchange Act of 1934 (the
"Exchange Act"), shares of Common Stock which a person has the right to
acquire pursuant to the exercise of stock options and warrants held by such
holder that are exercisable within sixty (60) days of such date are deemed
outstanding for the purpose of computing the percentage ownership of such
person, but are not deemed outstanding for computing the percentage
ownership of any other person.
(2) Includes 140,780 shares of Common Stock by WCAS Healthcare Partners, L.P.,
a warrant to purchase shares of Common Stock held by WCAS CP III and
423,475 shares of Non-Voting Common Stock held by WCAS. WCAS Healthcare
Partners, L.P. is a limited partnership with two general partners: Russell
L. Carson and Patrick J. Welsh. Welsh, Carson, Anderson & Stowe VII, L.P.
is a limited partnership with twelve general partners which include both
Mr. Carson and Mr. Welsh. WCAS CP III is a limited partnership with ten
general partners which also include both Mr. Carson and Mr. Welsh.
(3) If the Underwriters exercise their over-allotment option in full, Welsh,
Carson, Anderson & Stowe VII, L.P. would sell 900,000 shares of Common
Stock and would beneficially own 8,780,990 shares (45.77%) of the Common
Stock outstanding.
(4) Includes 430,001 restricted shares pursuant to a restricted stock
agreement.
(5) Includes 202,506 restricted shares pursuant to a restricted stock
agreement.
(6) Includes 116,413 restricted shares pursuant to a restricted stock
agreement.
(7) Includes 74,307 restricted shares pursuant to a restricted stock agreement.
(8) Includes 82,901 restricted shares pursuant to a restricted stock agreement.
(9) Includes those shares held directly and indirectly by WCAS. See footnote 2.
Mr. Stowe and Mr. Queally are each a director of the Company. Mr. Stowe and
Mr. Queally are both general partners of WCAS. Mr. Stowe and Mr. Queally
each disclaim beneficial ownership of the shares owned by WCAS.
(10) Includes 4,189 shares issuable upon exercise of options at $4.13 per share.
(11) Includes 4,189 shares issuable upon exercise of options at $4.13 per share.
(12) Includes 8,378 shares issuable upon exercise of options and 906,128 shares
restricted pursuant to the restricted stock agreement and 591,725 shares
issuable upon exercise of the warrant.
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<PAGE> 60
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 50,000,000 shares of
Common Stock, par value $0.01 per share, 1,000,000 shares of non-voting Common
Stock, par value $0.01 per share ("Non-Voting Common Stock") and 10,000,000
shares of Preferred Stock, par value $0.01 per share. Upon the completion of the
Reincorporation, there will be 12,171,895 shares of Common Stock, 423,475 shares
of Non-Voting Common Stock and no shares of Preferred Stock outstanding. Upon
completion of the Offering and after giving effect to the use of proceeds
therefrom, 18,171,895 shares of Common Stock will be issued and outstanding,
423,475 shares of Non-Voting Common Stock will be issued and outstanding and no
shares of Preferred Stock will be outstanding. The following summary of certain
provisions of the Company's capital stock describes all material provisions of,
but does not purport to be complete, and is subject to, and qualified in its
entirety by, the Certificate of Incorporation and the Bylaws of the Company that
are included as exhibits to the Registration Statement of which this Prospectus
forms a part and by the provisions of applicable law.
COMMON STOCK
The issued and outstanding shares of Common Stock are, and the shares of
Common Stock being offered will be upon payment therefor, validly issued, fully
paid and nonassessable. Subject to the prior rights of the holders of any
Preferred Stock, the holders of outstanding shares of Common Stock are entitled
to receive dividends out of assets legally available therefor at such time and
in such amounts as the Board of Directors may from time to time determine. See
"Dividend Policy." The shares of Common Stock are not redeemable or convertible,
and the holders thereof have no preemptive or subscription rights to purchase
any securities of the Company. Upon liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to receive pro rata the
assets of the Company that are legally available for distribution after payment
of all debts and other liabilities and subject to the prior rights of any
holders of Preferred Stock then outstanding. Each outstanding share of Common
Stock is entitled to vote on all matters submitted to a vote of stockholders.
Application has been made to list the Common Stock for trading on the NYSE
under the symbol "NAH."
NON-VOTING COMMON STOCK
The issued and outstanding shares of Non-Voting Common Stock are held by
WCAS and its affiliates and are validly issued, fully paid and nonassessable.
Subject to the prior rights of the holders of any Preferred Stock, and on a pro
rata basis with the holders of Common Stock, the holders of outstanding shares
of Non-Voting Common Stock are entitled to receive dividends out of assets
legally available therefor at such time and in such amounts as the Board of
Directors may from time to time determine. See "Dividend Policy." The shares of
Non-Voting Common Stock are convertible into Common Stock at any time provided
that WCAS and its affiliates will not own 50% or more of the Common Stock after
such conversion. In the event WCAS or its affiliates sell any Non-Voting Common
Stock to third parties, such shares shall automatically convert to Common Stock.
The holders of Non-Voting Common Stock have no preemptive or subscription rights
to purchase any securities of the Company. Upon liquidation, dissolution or
winding up of the Company, and on a pro rata basis with the holders of Common
Stock, the holders of Non-Voting Common Stock are entitled to receive pro rata
the assets of the Company that are legally available for distribution after
payment of all debts and other liabilities and subject to the prior rights of
any holders of Preferred Stock then outstanding. Holders of outstanding shares
of Non-Voting Common Stock will not be entitled to vote such shares on any
matter submitted to a vote of stockholders.
PREFERRED STOCK
The Board may, without any further vote or action by the Company's
stockholders, from time to time, direct the issuance of shares of Preferred
Stock in one or more series with such designations, rights, preferences and
limitations as the Board may determine, including the consideration received
therefor. The Board also has the authority to determine the number of shares
comprising each series, dividend rates,
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redemption provisions, liquidation preferences, sinking fund provisions,
conversion rights and voting rights without the approval by the holders of
Common Stock. Although it is not possible to state the effect that any issuance
of Preferred Stock will have on the rights of holders of Common Stock, the
issuance of Preferred Stock may have one or more of the following effects: (i)
to restrict Common Stock dividends if Preferred Stock dividends have not been
paid; (ii) to dilute the voting power and equity interest of holders of Common
Stock to the extent that any series of Preferred Stock has voting rights or is
convertible into Common Stock; or (iii) to prevent current holders of Common
Stock from participating in the distribution of the Company's assets upon
liquidation until any liquidation preferences granted to holders of Preferred
Stock are satisfied. In addition, the issuance of Preferred Stock may, under
certain circumstances, have the effect of discouraging a change in control of
the Company by, for example, granting voting rights to holders of Preferred
Stock that require approval by the separate vote of the holders of Preferred
Stock for any amendment to the Company's Certificate of Incorporation or any
reorganization, consolidation, merger or other similar transaction involving the
Company. As a result, the issuance of the Preferred Stock may discourage bids
for the Common Stock at a premium over the market price therefor, and could have
a materially adverse effect on the market value of the Common Stock. Upon
consummation of the Offering and the redemption in full of the Senior Preferred
Stock and conversion of the Junior Preferred Stock, there will be no shares of
Preferred Stock outstanding. The Board of Directors does not presently intend to
issue any shares of Preferred Stock.
ANTITAKEOVER EFFECTS OF PROVISIONS OF THE CERTIFICATE OF INCORPORATION AND
BYLAWS
General. Certain provisions of the Certificate of Incorporation and Bylaws
could discourage potential acquisition proposals and could delay or prevent a
change in control of the Company. These provisions are intended to enhance the
likelihood of continuity and stability in the composition of the Board of
Directors and in the policies formulated by the Board of Directors and to
discourage certain types of transactions that may involve an actual or
threatened change of control of the Company. These provisions are designed to
reduce the vulnerability of the Company to an unsolicited acquisition proposal
and to discourage certain tactics that may be used in proxy fights. However,
such provisions may discourage third parties from making tender offers for the
Company's shares. As a result, the market price of the Common Stock may not
benefit from any premium which might occur in anticipation of a threatened or
actual change in control. Such provisions also may have the effect of preventing
changes in the management of the Company. See "Risk Factors -- Antitakeover
Provisions; Possible Issuance of Preferred Stock." For purposes of the following
discussion, the term "Company" refers only to New American.
Board of Directors. The Certificate of Incorporation and Bylaws provide
for the Board of Directors of the Company to be divided into three classes, as
nearly equal in number as possible. The term of the Class I directors will
expire at the 1999 annual meeting of stockholders; the term of the Class 2
directors will expire at the 2000 annual meeting of stockholders; and the term
of the Class 3 directors will expire at the 2001 annual meeting of stockholders
(and in all cases when their respective successors are duly elected and
qualified). At each annual meeting of stockholders, successors to the class of
directors whose term expires at such meeting will be elected to serve for
three-year terms or until their successors are duly elected and qualified.
Directors may be removed by the stockholders only for cause. See
"Management -- Executive Officers and Directors."
The Certificate of Incorporation and Bylaws provide that the Board of
Directors shall consist of no less than six nor more than fifteen members
(except that such maximum number may be increased from time to time to reflect
the rights of holders of Preferred Stock) with the actual number set from time
to time by resolution adopted by a majority of the Board of Directors. Upon the
closing of the Offering, the Board of Directors will consist of seven members.
The Certificate of Incorporation and the Bylaws provide that the Board of
Directors is authorized to create additional directorships (up to the maximum
number permitted) and to elect additional directors thereto to serve for the
full term of the class of directors in which such directorship was created. The
provisions of the DGCL, the Certificate of Incorporation and the Bylaws relating
to the removal of directors and the filling of vacancies on the Board of
Directors will preclude a third party from removing incumbent directors without
cause and simultaneously gaining control of the Board of Directors by filling,
with its own nominees, the vacancies created by removal. These provisions also
reduce the
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power of stockholders generally, even those with a majority voting power in the
Company, to remove incumbent directors without cause and to fill vacancies on
the Board of Directors.
Stockholder Action and Special Meetings. The Certificate of Incorporation
and Bylaws provide that any action of the Common stockholders must he effected
at a duly called meeting and not by a consent in writing.
The Bylaws do not permit stockholders of the Company to call special
meetings of stockholders. A special meeting of stockholders may only be called
by the President or the Board of Directors.
Advance Notice Requirements for Stockholder Proposals and Director
Nominations. The Bylaws establish an advance notice procedure for the
nomination, other than by or at the direction of the Board of Directors or a
committee thereof, of candidates for election as directors (the "Nomination
Procedure") as well as for other stockholder proposals to be considered at
stockholders' meetings. Notice to the Company from a stockholder who proposes to
nominate a person at a meeting for election as a director must contain: (i) the
name and residence address of the stockholder who intends to make the nomination
and the name, age and address of the nominee; (ii) the principal occupation and
business address of the nominee; (iii) the class and number of shares held of
record, beneficially and by proxy, by the stockholder and the nominee as of the
record date of such meeting (if such record date is publicly available) and as
of the date of such notice; and (iv) such other information regarding each
nominee proposed by such stockholder as would be required to be included in a
proxy statement or otherwise required pursuant to Regulation 14A under the
Exchange Act, including the consent of each nominee to serve as a director of
the Company if so elected. The presiding officer of the meeting may refuse to
acknowledge the nomination of any person not made in compliance with the
Nomination Procedure. The purpose of requiring advance notice is to afford the
Board of Directors an opportunity to consider the qualifications of the proposed
nominees or the merits of other stockholder proposals and, to the extent deemed
necessary or desirable by the Board of Directors, to inform stockholders about
those matters. Although the advance notice provisions do not give the Board of
Directors any power to approve or disapprove of stockholder nominations or
proposals for action by the Company, they may have the effect of precluding a
contest for the election of directors or the consideration of stockholder
proposals if the procedures established by the Bylaws are not followed and of
discouraging or deterring a third party from conducting a solicitation of
proxies to elect its own slate of directors or to approve its own proposals,
without regard to whether consideration of such nominees or proposals might be
harmful or beneficial to the Company and its stockholders.
Amendment of the Certificate of Incorporation. The Certificate of
Incorporation requires the affirmative vote of the holders of at least 70% of
the outstanding shares of the Company's capital stock entitled to vote thereon
and 70% of the members of the Board of Directors in order to amend certain of
its provisions. These voting requirements will make it more difficult for
stockholders to make changes in the Certificate of Incorporation which would be
designed to facilitate the exercise of control over the Company. In addition,
the requirement for approval by at least a 70% stockholder vote will enable the
holders of a minority of the voting securities of the Company to prevent the
holders of a majority or more of such securities from amending these provisions
of the Certificate of Incorporation.
DELAWARE TAKEOVER STATUTE
The Company is subject to Section 203 of the DGCL ("Section 203") which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any business combination with an interested stockholder for a period of three
years following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the board of directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(x) by persons who are directors and also officers, and (y) by employee stock
plans in which employee participants do not have the right to determine
confidentially whether shares held subject to the plan will be tendered in a
tender or exchange offer; or (iii) on or subsequent to such date the
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business combination is approved by the board of directors and authorized at an
annual or special meeting of stockholders, and not by written consent, by the
affirmative vote of at least 70% of the outstanding voting stock which is not
owned by the interested stockholder.
In general, Section 203 defines an interested stockholder as any entity or
person beneficially owning 15% or more of the outstanding voting stock of the
corporation and any entity or person affiliated with or controlling or
controlled by such an entity or person. Section 203 defines business combination
to include: (i) any merger or consolidation involving the corporation and the
interested stockholder; (ii) any sale, transfer, pledge or other disposition
involving the interested stockholder of 10% or more of the assets of the
corporation; (iii) subject to certain exceptions, any transaction which results
in the issuance or transfer by the corporation of any stock of the corporation
to the interested stockholder; (iv) any transaction involving the corporation
which has the effect of increasing the proportionate share of the stock of any
class or series of the corporation beneficially owned by the interested
stockholder; or (v) the receipt by the interested stockholder of the benefit of
any loans, advances, guarantees, pledges or other financial benefits provided by
or through the corporation.
LIMITATION ON DIRECTORS' LIABILITY
The DGCL permits corporations to limit or terminate the personal liability
of directors to corporations and their stockholders for monetary damages for
breach of the directors' fiduciary duties of care. The duty of care requires
that, when acting on behalf of the corporation, directors must exercise informed
business judgment based on all material information reasonably available to
them. Absent the limitations now authorized by such legislation, directors are
accountable to corporations and their stockholders for monetary damages for
conduct constituting gross negligence in the exercise of their fiduciary duties
of care. Although the DGCL does not change the directors' duties of care, it
enables corporations to limit available relief to equitable remedies such as
injunction or rescission.
The Certificate of Incorporation limits the liability of directors (in
their capacity as directors but not in their capacity as officers) to the
Company or its stockholders to the fullest extent permitted by the DGCL, as so
amended. Specifically, no director of the Company will be personally liable for
monetary damages for breach of the director's fiduciary duty as a director,
except for liability: (i) for any breach of the director's duty of loyalty to
the Company 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 DGCL, which relates to unlawful payments of dividends or
unlawful stock repurchases or redemptions; or (iv) for any transaction from
which the director derived an improper personal benefit. The inclusion of this
provision in the Certificate of Incorporation may have the effect of reducing
the likelihood of derivative litigation against directors, and may discourage or
deter stockholders or management from bringing a lawsuit against directors for
breach of their duty of care, even though such an action, if successful, might
otherwise have benefitted the Company and its stockholders. See "Management."
INDEMNIFICATION AND INSURANCE
Under the Certificate of Incorporation, and in accordance with Section 145
of the DGCL, the Company will indemnify any person who was or is a party, or is
threatened to be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than a "derivative" action by or in the right of the Company) by reason
of the fact that such person is or was a director or officer of the Company,
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement in connection with such action, suit or proceeding if such person
acted in good faith and in a manner such person reasonably believed to be in or
not opposed to the best interests of the Company, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe was unlawful.
A similar standard of care is applicable in the case of derivative actions,
except that indemnification only extends to expenses (including attorneys' fees)
incurred in connection with the defense or settlement of such an action and
then, where the person is adjudged lobe liable to the Company, only if and to
the extent that the Court of Chancery of the Slate of Delaware or the court in
which such action was brought determines that such person is fairly and
reasonably entitled to such indemnity and then only for such expenses as the
court deems proper.
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The Certificate of Incorporation provides that the Company will pay for the
expenses incurred by an indemnified director or officer in defending the
proceedings specified above in advance of their final disposition, provided
that, if the DGCL so requires, such person agrees to reimburse the Company if it
is ultimately determined that such person is not entitled to indemnification.
The Certificate of Incorporation so provides that the Company may, in its sole
discretion, indemnify any person who is or was one of its employees and agents
or any person who is or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership, joint venture,
trust or other enterprise to the same degree as the foregoing indemnification of
directors and officers. In addition, the Company may purchase and maintain
insurance on behalf of any person who is or was a director, officer, employee or
agent of the Company or another corporation, partnership, joint venture, trust
or other enterprise against any liability asserted against and incurred by such
person in such capacity, or arising out of the person's status as such whether
or not the Company would have the power or obligation to indemnify such person
against such liability under the provisions of the DGCL. The Company maintains
insurance for the benefit of the Company's officers and directors insuring such
persons against certain liabilities, including liabilities under the securities
laws. See "Management."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is First Union
National Bank of North Carolina.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 18,595,370 shares of
Common Stock outstanding. Of these shares, the 6,000,000 shares of Common Stock
sold in the Offering (6,900,000 shares if the Underwriters' over-allotment
option is exercised in full) will be tradeable without restriction under the
Securities Act, except for any such shares which may be acquired by an
"affiliate" of the Company (an "Affiliate"), as that term is defined in Rule 144
under the Securities Act, which shares will be subject to the resale limitations
of Rule 144.
In general, under Rule 144 as currently in effect, beginning 90 days after
the date of this Prospectus, if a period of at least one year has elapsed since
the later of the date the "restricted securities" (as that phrase is defined in
Rule 144) were acquired from the Company and the date they were acquired from an
Affiliate, then the holder of such restricted securities (including an
Affiliate) is entitled to sell a number of shares within any three-month period
that does not exceed the greater of 1% of the then outstanding shares of the
Common Stock (approximately 185,954 shares immediately after this Offering) or
the average weekly reported volume of trading of the Common Stock on the NYSE
during the four calendar weeks preceding such sale. The holder may only sell
such shares through unsolicited brokers' transactions. Sales under Rule 144 are
also subject to certain requirements pertaining to the manner of such sales,
notices of such sales and the availability of current public information
concerning the Company. Affiliates may sell shares not constituting restricted
shares in accordance with the foregoing volume limitations and other
requirements but without regard to the one-year period. Commencing 90 days after
the completion of the Offering, 12,595,370 shares of Common Stock will be
eligible for sale in the public market under Rule 144, subject to the volume
limitations and other requirements described above, without consideration of the
contractual restrictions described below.
Under Rule 144(k), if a period of at least two years has elapsed between
the later of the date restricted shares were acquired from the Company or the
date they were acquired from an Affiliate, as applicable, a holder of such
restricted shares who is not an Affiliate at the time of the sale and has not
been an Affiliate for at least three months prior to the sale would be entitled
to sell the shares immediately without regard to the volume limitations and
other conditions described above. Ninety days after the date of this Prospectus,
approximately 421,867 shares of Common Stock will be eligible for sale without
restriction under Rule 144(k).
Notwithstanding the foregoing, the Company, its executive officers and
directors, and the holders of 12,164,589 shares of Common Stock outstanding
immediately have agreed that for a period of 180 days after
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the date of the Offering they will not, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock except pursuant
to the Underwriting Agreement. Of the approximately 12,595,370 shares of Common
Stock otherwise eligible for sale as discussed above, 12,164,589 shares are
subject to such agreements.
Prior to the offering there has been no market for the Common Stock. The
Company can make no predictions as to the effect, if any, that sales of shares
or the availability of shares for sale will have on the market price prevailing
from time to time. Nevertheless, sales of significant amounts of the Common
Stock in the public market, or the perception that such sales may occur, could
adversely affect prevailing market prices. See "Risk Factors -- Shares Eligible
for Future Sale; Registration Rights."
STOCK OPTIONS
At July 27, 1998, options to purchase a total of 578,144 shares of Common
Stock pursuant to the Company's Stock Option Plan were outstanding. Of the
shares subject to options, 345,611 are subject to lock-up agreements. Upon
completion of this Offering, an additional 1,621,186 shares of Common Stock will
be available for future option grants under the Company's Stock Option Plan. The
Company intends to file a registration statement on Form S-8 under the
Securities Act to register shares of Common Stock subject to outstanding stock
options and Common Stock issuable pursuant to the Option Plan, with respect to
options that were granted, or are to be granted, to employees of the Company.
The Company expects to file these registration statements promptly following the
consummation of this Offering, and such registration statements are expected to
become effective upon filing. Shares covered by these registration statements
will thereupon be eligible for sale in the public markets, subject to the
lock-up agreements, to the extent applicable.
REGISTRATION RIGHTS AGREEMENT
Following the consummation of this Offering and subject to the lock-up
agreements, certain stockholders will be entitled to require the Company to
register under the Securities Act a total of 12,200,243 shares of outstanding
Common Stock (the "Registrable Shares"). In addition, in the event the Company
proposes to register any of its securities under the Securities Act, either for
its own account or for the account of a security holder, such stockholders may
be entitled to include the Registrable Shares in such registration, subject to
certain limitations on the number of shares to be included in the registration
by the underwriter of such Offering. See "Certain Relationships and Related
Transactions -- Registration Rights Agreement."
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UNDERWRITING
Subject to the terms and certain conditions contained in the Underwriting
Agreement dated , 1998 (the "Underwriting Agreement"), the
underwriters named below, who are represented by Donaldson, Lufkin & Jenrette
Securities Corporation, Bear, Stearns & Co. Inc., Credit Suisse First Boston and
SunTrust Equitable Securities Corporation (the "Representatives"), have
severally agreed to purchase from the Company the respective number of shares of
Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation.........
Bear, Stearns & Co. Inc.....................................
Credit Suisse First Boston Corporation......................
SunTrust Equitable Securities Corporation...................
---------
Total............................................. 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to purchase and accept delivery of the shares of Common Stock
offered hereby are subject to approval by their counsel of certain legal matters
and to certain other conditions. The Underwriters are obligated to purchase and
accept delivery of all the shares of Common Stock offered hereby (other than
those shares covered by the over-allotment option described below) if any are
purchased.
The Underwriters initially propose to offer the shares of Common Stock in
part directly to the public at the initial public offering price set forth on
the cover page of this Prospectus and in part to certain dealers (including the
Underwriters) at such price less a concession not in excess of $ per
share. The Underwriters may allow, and such dealers may reallow, to certain
other dealers a concession not in excess of $ per share. After the initial
offering of the Common Stock, the public offering price and other selling terms
may be changed by the Representatives at any time without notice. The
Underwriters do not intend to confirm sales to any accounts over which they
exercise discretionary authority.
The Selling Stockholder has granted to the Underwriters an option,
exercisable within 30 days after the date of this Prospectus, to purchase, from
time to time, in whole or in part, up to an aggregate of 900,000 additional
shares of Common Stock at the initial public offering price less underwriting
discounts and commissions. The Underwriters may exercise such option solely to
cover overallotments, if any, made in connection with the Offering. To the
extent that the Underwriters exercise such option, each Underwriter will become
obligated, subject to certain conditions, to purchase its pro rata portion of
such additional shares based on such Underwriter's percentage underwriting
commitment as indicated in the preceding table.
The Company and the Selling Stockholder have agreed to indemnify the
Underwriters against certain liabilities, including liabilities under the
Securities Act, or to contribute to payments that the Underwriters may be
required to make in respect thereof.
Each of the Company, its executive officers and directors, the Selling
Stockholder and certain stockholders of the Company has agreed, subject to
certain exceptions, not to (i) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase or otherwise transfer or dispose of,
directly or indirectly, any shares of Common Stock or any securities convertible
into or exercisable or exchangeable for Common Stock or (ii) enter into any swap
or other arrangement that transfers all or a portion of the economic
consequences associated with the ownership of any Common Stock (regardless of
whether any of the transactions described in clause (i) or (ii) is to be settled
by the delivery of Common Stock, or such other securities, in cash or otherwise)
for a period of 180 days after the date of this Prospectus without the prior
written consent of Donaldson, Lufkin & Jenrette Securities Corporation. In
addition, during such period, the Company has also agreed not to file any
registration statement with respect to, and each of its executive officers,
directors and certain stockholders of the Company has agreed not to make any
demand for, or exercise any right with respect to, the registration of any
shares of Common Stock or any securities convertible into or exercisable or
exchangeable for Common Stock without the prior written consent of Donaldson,
Lufkin & Jenrette Securities Corporation.
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Prior to the Offering, there has been no established trading market for the
Common Stock. The initial public offering price for the shares of Common Stock
offered hereby will be determined by negotiation among the Company and the
Representatives. The factors to be considered in determining the initial public
offering price include the history of and the prospects for the industry in
which the Company competes, the past and present operations of the Company, the
historical results of operations of the Company, the prospects for future
earnings of the Company, the recent market prices of securities of generally
comparable companies and the general condition of the securities markets at the
time of the Offering.
Application has been made to list the Common Stock on the NYSE. In order to
meet the requirements for listing the Common Stock on the NYSE, the Underwriters
have undertaken to sell lots of 100 or more shares to a minimum of 2,000
beneficial owners.
Other than in the United States, no action has been taken by the Company,
or the Underwriters that would permit a public offering of the shares of Common
Stock offered hereby in any jurisdiction where action for that purpose is
required. The shares of Common Stock offered hereby may not be offered or sold,
directly or indirectly, nor may this Prospectus or any other offering material
or advertisements in connection with the offer and sale of any such shares of
Common Stock be distributed or published in any jurisdiction, except under
circumstances that will result in compliance with the applicable rules and
regulations of such jurisdiction. Persons into whose possession this Prospectus
comes are advised to inform themselves about and to observe any restrictions
relating to the Offering and the distribution of this Prospectus. This
Prospectus does not constitute an offer to sell or a solicitation of an offer to
buy any shares of Common Stock offered hereby in any jurisdiction in which such
an offer or a solicitation is unlawful.
In connection with the Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Offering,
creating a syndicate short position. The Underwriters may bid for and purchase
shares of Common Stock in the open market to cover such syndicate short position
or to stabilize the price of the Common Stock. In addition, the underwriting
syndicate may reclaim selling concessions from syndicate members and selected
dealers if they repurchase previously distributed Common Stock in syndicate
covering transactions, in stabilizing transactions or otherwise. These
activities may stabilize or maintain the market price of the Common Stock above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Harwell Howard Hyne Gabbert & Manner, P.C., Nashville,
Tennessee. Certain legal matters will be passed upon for the Underwriters by
Alston & Bird LLP, Atlanta, Georgia.
EXPERTS
The consolidated financial statements and schedule of New American
Healthcare Corporation as of March 31, 1998 and 1997, and for the years ended
March 31, 1998 and 1997 and period August 16, 1995 (inception) through March 31,
1996, have been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Doctors Hospital for the period January 1, 1996
through July 31, 1996 and year ended December 31, 1995, have been included
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, appearing elsewhere
herein, and upon the authority of said firm as experts in accounting and
auditing.
The financial statements of Center Hospital, Inc. for the year ended April
30, 1997, and period June 28, 1995 through April 30, 1996, have been included
herein and in the registration statement in reliance upon the
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report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The financial statements of Eastwood Hospital, Inc. for the period January
1, 1997 through May 15, 1997 and years ended December 31, 1996 and 1995, have
been included herein and in the registration statement in reliance upon the
report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing.
The combined financial statements of Woodland Park Hospital, Eastmoreland
Hospital, Lander Valley Medical Center and Davenport Medical Center for the
periods June 1, 1997 through January 31, 1998, and September 1, 1996 through May
31, 1997, year ended August 31, 1996 and period July 1, 1995 through August 31,
1995, have been included herein and in the registration statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
The financial statements of Puget Sound Hospital as of March 31, 1998 and
May 31, 1997, and for the ten months ended March 31, 1998, the nine months ended
May 31, 1997, the twelve months ended August 31, 1996 and the three months ended
August 31, 1995, have been included herein and in the registration statement in
reliance upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein, and upon the authority of said firm as
experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-l pursuant to the Securities
Act with respect to the Common Stock offered hereby. This Prospectus does not
contain all the information set forth in the Registration Statement, certain
items of which are omitted as permitted by the rules and regulations of the
Commission. Statements contained in this Prospectus as to the contents of any
contract, agreement or other document filed with the Registration Statement as
exhibits are necessarily summaries of such documents, and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed as an exhibit to the Registration Statement. For further information about
the Company and the securities offered hereby, reference is made to the
Registration Statement and to the consolidated financial statements, schedules
and exhibits filed as a part thereof.
Upon completion of the Offering, the Company will be subject to the
information requirements of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and, in accordance therewith, will file reports and other
information with the Commission. The Registration Statement, the exhibits and
schedules forming a part thereof and the reports and other information filed by
the Company with the Commission in accordance with the Exchange Act may be
inspected without charge at the public reference facilities maintained by the
Commission at 450 Fifth Street, N.W., Washington, D.C. 20549 and at the
following regional offices of the Commission: 7 World Trade Center, Suite 1300,
New York, New York 10048; and Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois, 60661-2511. Copies of such materials or
any part thereof may also be obtained from the Public Reference Section of the
Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Commission also maintains an Internet web site at http://www.sec.gov that
contains reports, proxy statements and other information.
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<PAGE> 69
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
NEW AMERICAN HEALTHCARE CORPORATION
Independent Auditors' Report................................ F-3
Consolidated Balance Sheets as of June 30, 1998 (unaudited)
and March 31, 1998 and 1997............................... F-4
Consolidated Statements of Operations for the three months
ended June 30, 1998 and 1997, years ended March 31, 1998
and 1997, and period August 16, 1995 (inception) through
March 31, 1996............................................ F-5
Consolidated Statements of Stockholders' Equity for the
three months ended June 30, 1998 and 1997, years ended
March 31, 1998 and 1997, and period August 16, 1995
(inception) through March 31, 1996........................ F-6
Consolidated Statements of Cash Flows for the three months
ended June 30, 1998 and 1997, years ended March 31, 1998
and 1997, and period August 16, 1995 (inception) through
March 31, 1996............................................ F-7
Notes to Consolidated Financial Statements.................. F-8
DOCTORS HOSPITAL
Independent Auditors' Report................................ F-19
Statements of Operations for the period January 1, 1996
through July 31, 1996 and the year ended December 31,
1995...................................................... F-20
Statements of Cash flows for the period January 1, 1996
through July 31, 1996 and the year ended December 31,
1995...................................................... F-21
Notes to Financial Statements............................... F-22
CENTER HOSPITAL, INC. (MEMORIAL HOSPITAL OF CENTER)
Independent Auditors' Report................................ F-25
Statements of Operations for the year ended April 30, 1997,
and period June 28, 1995 through April 30, 1996........... F-26
Statements of Cash Flows for the year ended April 30, 1997,
and period June 28, 1995 through April 30, 1996........... F-27
Notes to Financial Statements............................... F-28
EASTWOOD HOSPITAL, INC. (NOW DELTA MEDICAL CENTER --MEMPHIS)
Independent Auditors' Report................................ F-31
Statements of Operation for the period January 1, 1997
through May 15, 1997 and years ended December 31, 1996 and
1995...................................................... F-32
Statements of Cash Flows for the period January 1, 1997
through May 15, 1997 and years ended December 31, 1996 and
1995...................................................... F-33
Notes to Financial Statements............................... F-34
THE HOSPITALS (WOODLAND PARK HOSPITAL, EASTMORELAND
HOSPITAL, LANDER VALLEY MEDICAL CENTER AND DAVENPORT
MEDICAL CENTER)
Independent Auditors' Report................................ F-37
Combined Statements of Operations for the periods June 1,
1997 through January 31, 1998 and September 1, 1996
through May 31, 1997, year ended August 31, 1996 and
period July 1, 1995 through August 31, 1995............... F-38
Combined Statements of Cash Flows for the periods June 1,
1997 through January 31, 1998 and September 1, 1996
through May 31, 1997, year ended August 31, 1996 and
period July 1, 1995 through August 31, 1995............... F-39
Notes to Combined Financial Statements...................... F-40
PSH, INC. (PUGET SOUND HOSPITAL)
Independent Auditors' Report................................ F-45
Balance Sheets as of March 31, 1998 and May 31, 1997........ F-46
</TABLE>
F-1
<PAGE> 70
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Statements of Income for the ten months ended March 31,
1998, nine months ended May 31, 1997 year ended August 31,
1996 and three months ended August 31, 1995............... F-47
Statements of Stockholder's Equity for the ten months ended
March 31, 1998, the nine months ended May 31, 1997, the
twelve months ended August 31, 1996, and the three months
ended August 31, 1995..................................... F-48
Statements of Cash Flows for the ten months ended March 31,
1998, the nine months ended May 31, 1997, the twelve
months ended August 31, 1996, and the three months ended
August 31, 1995........................................... F-49
Notes to Financial Statements............................... F-50
</TABLE>
F-2
<PAGE> 71
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New American Healthcare Corporation:
We have audited the accompanying consolidated balance sheets of New
American Healthcare Corporation and subsidiaries (the Company), as of March 31,
1998 and 1997, and the related consolidated statements of operations,
stockholders' equity and cash flows for the years ended March 31, 1998 and 1997,
and period August 16, 1995 (inception) through March 31, 1996. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
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 audits 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 financial statements referred to above
present fairly, in all material respects, the financial position of New American
Healthcare Corporation and subsidiaries as of March 31, 1998 and 1997, and the
results of their operations and their cash flows for the years ended March 31,
1998 and 1997 and period August 16, 1995 (inception) through March 31, 1996 in
conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Nashville, Tennessee
June 25, 1998
F-3
<PAGE> 72
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
JUNE 30, AS OF MARCH 31,
----------- ------------------
1998 1998 1997
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 170 $ 6,119 $ 697
Patient accounts receivable, net of allowance for doubtful
accounts of $10,270, $9,172 and $582 at June 30, 1998
and March 31, 1998 and 1997, respectively............... 19,697 19,906 2,260
Other receivables......................................... 1,428 1,290 234
Inventory................................................. 2,792 2,720 349
Prepaid expenses and other current assets................. 1,512 1,409 222
-------- -------- -------
Total current assets............................... 25,599 31,444 3,762
Property and equipment, net................................. 83,808 84,404 13,074
Goodwill, net of accumulated amortization of $395, $299 and
$69 at June 30, 1998 and March 31, 1998 and 1997,
respectively.............................................. 15,357 16,672 1,476
Other assets................................................ 2,952 1,673 908
-------- -------- -------
Total assets....................................... 127,716 $134,193 $19,220
======== ======== =======
LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses..................... 14,331 $ 14,522 $ 1,593
Estimated third-party payor settlements................... 723 1,091 1,351
Current portion of capital lease obligations.............. 605 525 295
-------- -------- -------
Total current liabilities.......................... 15,659 16,138 3,239
Capital lease obligations, excluding current portion........ 4,489 4,865 226
Long-term debt.............................................. 31,550 37,550 750
Subordinated notes payable to affiliates.................... 24,775 24,769 --
Deferred income taxes....................................... 1,339 1,339 --
Redeemable preferred stock -- Series A, $.01 par value, 250
shares authorized, 250 shares issued and outstanding at
June 30, 1998 and March 31, 1998, respectively............ 26,054 25,617 --
Stockholders' equity:
Preferred stock, Series B, $.01 par value, 235 shares
authorized, 235 shares issued and outstanding at June
30, 1998 and March 31, 1998, respectively, and 150
shares at March 31, 1997. Convertible into 4,000 shares
of common stock......................................... 2 2 1
Common stock, $.01 par value, 20,000 shares authorized;
8,027 shares issued and outstanding..................... 80 80 80
Additional paid-in capital................................ 23,827 24,264 16,382
Common stock warrants..................................... 235 235 --
Accumulated deficit....................................... (294) (666) (1,458)
-------- -------- -------
Total stockholders' equity......................... 23,850 23,915 15,005
-------- -------- -------
Commitments, contingencies and subsequent events
Total liabilities and stockholders' equity......... $127,716 $134,193 $19,220
======== ======== =======
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 73
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
PERIOD
AUGUST 16, 1995
(INCEPTION)
THREE MONTHS ENDED JUNE 30, YEARS ENDED MARCH 31, THROUGH
---------------------------- -------------------------- MARCH 31,
1998 1997 1998 1997 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Net patient service revenue.... $ 34,856 $ 9,638 $ 73,725 $ 10,737 $ --
Other revenue.................. 1,042 224 1,924 350 17
----------- ----------- ----------- ----------- ---------
Net operating
revenues.............. 35,898 9,862 75,649 11,087 17
----------- ----------- ----------- ----------- ---------
Expenses:
Salaries and benefits.......... 16,179 4,084 31,276 4,117 --
Professional fees.............. 4,715 1,079 8,608 620 --
Supplies....................... 3,968 1,185 8,314 1,439 --
Provision for doubtful
accounts..................... 3,012 787 7,837 534 --
Other.......................... 3,889 1,295 9,286 2,377 --
General and administrative..... 599 822 3,484 1,871 385
Depreciation and
amortization................. 1,359 626 2,836 783 5
Interest....................... 1,557 205 2,637 363 1
----------- ----------- ----------- ----------- ---------
35,278 10,083 74,278 12,104 391
----------- ----------- ----------- ----------- ---------
Income (loss) before
income taxes.......... 620 (221) 1,371 (1,017) (374)
Income taxes..................... 248 -- 579 67 --
----------- ----------- ----------- ----------- ---------
Net income (loss)....... 372 (221) 792 (1,084) (374)
Cumulative preferred dividend.... 437 -- 617 -- --
----------- ----------- ----------- ----------- ---------
Net income (loss)
attributable to common
stockholders.......... (65) (221) $ 175 $ (1,084) $ (374)
=========== =========== =========== =========== =========
Net income (loss) per share:
Basic.......................... (0.01) (0.03) 0.02 (0.14) (0.08)
Diluted........................ (0.01) (0.03) 0.01 (0.14) (0.08)
Weighted average number of shares
and dilutive share equivalents
outstanding:
Basic.......................... 8,027 8,027 8,027 8,027 4,759
Diluted........................ 8,027 8,027 12,144 8,027 4,759
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 74
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREFERRED ADDITIONAL COMMON TOTAL
STOCK COMMON PAID-IN STOCK ACCUMULATED STOCKHOLDERS'
SERIES B STOCK CAPITAL WARRANT DEFICIT EQUITY
<S> <C> <C> <C> <C> <C> <C>
Balances as of August 16,
1995 (inception)........... $ -- $ -- $ -- $ -- $ -- $ --
Issuance of 8,027 shares of
common stock............ -- 80 1,383 -- -- 1,463
Net loss................... -- -- -- -- (374) (374)
------ ------- ----------- -------- ----------- -----------
Balances as of March 31,
1996....................... -- 80 1,383 -- (374) 1,089
Issuance of 150 shares of
preferred stock, Series
B....................... 1 -- 14,999 -- -- 15,000
Net loss................... -- -- -- -- (1,084) (1,084)
------ ------- ----------- -------- ----------- -----------
Balance as of March 31,
1997....................... 1 80 16,382 -- (1,458) 15,005
Issuance of 85 shares of
preferred stock, Series
B....................... 1 -- 8,499 -- -- 8,500
Cumulative dividends on
Series A preferred
stock................... -- -- (617) -- -- (617)
Issuance of common stock
warrants................ -- -- -- 235 -- 235
Net income................. -- -- -- -- 792 792
------ ------- ----------- -------- ----------- -----------
Balances as of March 31,
1998....................... $ 2 $ 80 $ 24,264 $ 235 $ (666) $ 23,915
Cumulative dividends on
Series A preferred stock
(unaudited)............. -- -- (437) -- -- (437)
Net income (unaudited)..... -- -- -- -- 372 372
------ ------- ----------- -------- ----------- -----------
Balances as of June 30, 1998
(unaudited)................ $ 2 $ 80 $ 23,827 $ 235 $ (294) $ 23,850
====== ======= =========== ======== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 75
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS PERIOD
ENDED AUGUST 16, 1995
JUNE 30, YEARS ENDED MARCH 31, (INCEPTION) THROUGH
------------------- ------------------------ MARCH 31,
1998 1997 1998 1997 1996
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)........................... $ 372 $ (221) $ 792 $ (1,084) $ (374)
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization............. 1,359 626 2,836 783 5
Amortization of deferred financing
costs................................... 46 38 164 75 --
Provision for doubtful accounts........... 3,012 787 7,836 534 --
Deferred tax expense...................... -- (299) 241 -- --
Changes in operating assets and
liabilities, net of acquisitions:
Patient accounts receivable............. (2,802) (1,616) (12,125) (1,593) --
Other receivables....................... 121 (583) (626) (234) --
Inventory............................... (72) (27) (185) 96 (2)
Prepaid expenses and other current
assets................................ (103) (283) 2 (102) (6)
Other assets............................ (766) 481 (294) (62) (1)
Accounts payable and accrued expenses... (191) 37 5,159 (513) 26
Estimated third-party payor
settlements........................... 90 1,472 (46) 1,351 --
------- -------- ---------- ---------- ------
Net cash provided by (used in)
operating activities................ 1,066 412 3,754 (749) (352)
------- -------- ---------- ---------- ------
Cash flows from investing activities:
Purchase of property and equipment.......... (650) (433) (2,945) (261) (17)
Sale of property............................ -- 42 167 -- --
Cash paid for acquisitions.................. -- (24,667) (89,744) (14,004) --
Deferred acquisition costs.................. -- -- -- (242) --
Organization costs incurred................. -- -- -- -- (5)
------- -------- ---------- ---------- ------
Net cash used in investing
activities.......................... (650) (25,058) (92,522) (14,507) (22)
------- -------- ---------- ---------- ------
Cash flows from financing activities:
Proceeds from the issuance of long-term
debt...................................... -- 12,500 64,065 750 --
Repayment of long-term debt................. (6,000) -- (2,500) -- --
Repayment of capital lease obligations...... (296) (213) (680) (197) (3)
Issuance of common stock.................... -- -- -- -- 1,463
Issuance of common stock warrant............ -- -- 235 -- --
Issuance of redeemable preferred stock...... -- 5,276 25,000 -- --
Issuance of preferred stock................. -- 8,500 8,500 15,000 --
Deferred financing costs.................... (69) -- (430) (686) --
------- -------- ---------- ---------- ------
Net cash (used in) provided by
financing activities................ (6,365) 26,063 94,190 14,867 1,460
------- -------- ---------- ---------- ------
Net increase (decrease) in cash....... (5,949) 1,417 5,422 (389) 1,086
Cash and cash equivalents at beginning of
period...................................... 6,119 697 697 1,086 --
------- -------- ---------- ---------- ------
Cash and cash equivalents at end of period.... $ 170 $ 2,114 $ 6,119 $ 697 $1,086
======= ======== ========== ========== ======
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest.... $ 939 $ 167 $ 1,891 $ 79 $ 1
Cash paid during the period for income
taxes..................................... $ 310 $ -- $ 204 $ -- $ --
======= ======== ========== ========== ======
Noncash investing and financing activities:
Assets and liabilities assumed in hospital
acquisitions:
Receivables............................... $ -- $ 5,467 $ 13,788 $ 1,200 $ --
Inventory................................. -- 631 2,186 443 --
Prepaid expense and other assets.......... -- 1,485 1,137 114 --
Accounts payable and accrued expenses..... -- (3,064) (8,067) (2,080) --
Estimated third-party payor settlements... -- 213 213 -- --
Capital lease obligations................. -- (602) (5,275) (669) --
Capital lease obligations incurred to
acquire equipment......................... -- 69 275 -- 53
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE> 76
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED MARCH 31, 1998 AND 1997, AND
PERIOD AUGUST 16, 1995 (INCEPTION) THROUGH MARCH 31, 1996
(IN THOUSANDS EXCEPT PER SHARE INFORMATION)
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
New American Healthcare Corporation (the Company) acquires and operates
acute care hospitals throughout the United States. The Company was formed to
capitalize on opportunities to be the principal provider of health care services
in the non-urban communities in which it operates. The Company operates eight
acute care hospitals located in six states. The Company's hospitals offer a wide
range of inpatient and outpatient medical and surgical services and also provide
other health care services, including general and geriatric psychiatry,
rehabilitation, and occupational medicine. As part of developing a community
health care delivery system, the Company's hospitals also operate satellite
clinics. All of the Company's hospitals are accredited by either the Joint
Commission on Accreditation of Healthcare Organizations (JCAHO), the American
Osteopathic Association (AOA) or both.
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial statements of
New American Healthcare Corporation and all wholly owned subsidiaries. All
significant intercompany transactions and balances have been eliminated in the
consolidation.
C. USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities and the reported amounts of revenues and
expenses to prepare these consolidated financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
D. CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with maturities of
three months or less when purchased to be cash equivalents. The Company
generally invests its excess cash in U.S. Government securities and U.S.
Government agency instruments.
E. PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consist of amounts owed by various governmental
agencies, insurance companies and private patients. The Company regularly
reviews its accounts receivable to provide an appropriate allowance for
uncollectible accounts. See note 2.
F. INVENTORY
Inventory is composed primarily of drugs and medical supplies and is stated
at the lower of cost, determined on a first-in, first-out basis, or market.
G. PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Routine maintenance and
repairs are charged to expense as incurred. Expenditures for major improvements
that extend useful lives or increase values are capitalized. Equipment under
capital leases is stated at the present value of the minimum lease payments.
Depreciation is
F-8
<PAGE> 77
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
computed on straight-line basis over the estimated useful life of each class of
depreciable assets as follows: land improvements -- 10 years; buildings and
improvements -- 20 to 40 years; equipment and fixtures -- 4 to 20 years.
Equipment under capital leases is amortized using the straight line method over
the shorter of the lease term or the estimated useful life of the equipment.
Such amortization is included in depreciation and amortization in the
accompanying consolidated financial statements.
H. GOODWILL AND OTHER ASSETS
Goodwill represents the excess of purchase price over net assets acquired.
Amortization is provided on a straight-line basis over the estimated useful life
of 40 years. Other assets consist of deferred financing costs, a non-compete
agreement, and deferred acquisition costs. Deferred financing costs incurred in
conjunction with the revolving credit agreement are being amortized on a
straight-line basis over the life of the agreement. The non-compete agreement is
amortized over the two year life of the related contract. Deferred acquisition
costs consist of direct costs incurred in the process of acquiring hospitals.
Such costs are included in the cost of the acquisition of hospitals, if the
acquisition is completed, or written off as a charge to earnings if a proposed
acquisition is abandoned.
The Company periodically reviews the recoverability of its intangible
assets. Recoverability of intangibles is determined based on the undiscounted
future operating cash flows from the related hospital. The amount of impairment,
if any, is measured based on discounted future operating cash flows using a
discount rate reflecting the Company's average cost of funds or based on the
fair value of the related hospital.
I. IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceed the fair value of the assets.
J. 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.
K. INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date.
L. STOCK OPTION PLAN
The Company accounts for its compensation and stock option plan in
accordance with the provisions of Statement of Financial Accounting Standards
("SFAS") No. 123, Accounting for Stock-Based Compensation. For options issued to
employees, SFAS 123 allows entities to apply the provision of Accounting
F-9
<PAGE> 78
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to
Employees. As such, compensation expense would be recorded on the date of grant
only if the fair value of the underlying stock exceeded the exercise price. The
Company provides pro forma net income (loss) and pro forma earnings (loss) per
share disclosures for employee stock option grants made in 1996 and future years
as if the fair-value-based method defined in SFAS 123 had been applied.
M. EARNINGS PER SHARE
Basic earnings per share is computed based on the weighted average shares
outstanding and excludes any potential dilution. Diluted earnings per share
reflects the potential dilution from the exercise or conversion of all dilutive
securities into common stock based on the assumed initial public offering price
of $17.
N. FINANCIAL INSTRUMENTS
The Company has financial instruments consisting of cash and cash
equivalents, patient accounts receivable, accounts payable, and long-term debt.
The fair value of the Company's financial instruments based on current market
indicators approximates their carrying amount.
O. INTERIM FINANCIAL INFORMATION
The unaudited consolidated financial statements as of June 30, 1998 and for
the three months ended June 30, 1998 and 1997 have been prepared in accordance
with generally accepted accounting principles and in the opinion of management,
contain all adjustments considered necessary for a fair presentation.
2. NET PATIENT SERVICE REVENUE
The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
Medicare
Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per discharge.
These rates vary according to a patient classification system that is based
on clinical, diagnostic, and other factors. Inpatient nonacute services and
certain outpatient services related to Medicare beneficiaries are paid
based on a cost reimbursement methodology. The Company is reimbursed for
cost reimbursable items at a tentative rate with final settlement
determined after submission of an annual cost report by the Company and
audit thereof by the Medicare fiscal intermediary. The Company's
classification of patients under the Medicare program and the
appropriateness of their admission are subject to an independent review by
a peer review organization under contract with the Company. The Company did
not assume the liability for the Medicare cost reports of all the hospitals
it acquired with the exception of Doctors Hospital, Memorial Hospital of
Center and Delta Medical Center -- Memphis for which the majority of
Medicare cost reports have been audited by the Medicare fiscal intermediary
through 1995.
Medicaid
The Company operates under Medicaid programs in six states which
generally provide that inpatient services rendered to Medicaid
beneficiaries are paid at prospectively determined rates per day for a
covered period of days. Certain outpatient services are reimbursed based
upon a cost reimbursement methodology. Final reimbursement rates and
amounts for these services will be determined after
F-10
<PAGE> 79
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
submission of annual cost reports by the Company and audits by third-party
intermediaries. Other outpatient services are reimbursed based on a fee
schedule. The Company did not assume the liability for the Medicaid cost
reports of all the hospitals acquired with the exception of Doctors
Hospital, Memorial Hospital of Center and Delta Medical Center -- Memphis
for which the majority of Medicaid cost reports have been audited by the
third-party intermediaries through 1995.
Other
The Company has also entered into payment agreements with certain
insurance carriers, health maintenance organizations, and preferred
provider organizations. The basis for payment to the Corporation under
these agreements includes prospectively determined rates per discharge,
discounts from established charges, and prospectively determined daily
rates.
Final determination of amounts earned under the Medicare and Medicaid
programs often occur in subsequent years because of audits by the programs,
rights of appeal and the application of numerous technical provisions.
Business and Credit Concentrations
In the course of providing health care services through its inpatient
and outpatient care facilities, the Company grants credit to patients and
generally does not require collateral or other security in extending
credit; however, it routinely obtains assignment of (or is otherwise
entitled to receive) patients' benefits payable under their health
insurance programs, plans or policies (e.g., Medicare, Medicaid, Blue
Cross, health maintenance organizations, preferred provider organizations
and commercial insurance policies).
As of March 31, 1998, the Company had net receivables from Medicare
and Medicaid of $8,641 and $6,563, respectively. Approximately 63% and 47%
of net patient service revenues are from participation in the Medicare and
state sponsored Medicaid programs for the years ended March 31, 1998 and
1997, respectively.
3. ACQUISITIONS
During the years ended March 31, 1998 and 1997, the Company acquired the
following hospitals:
<TABLE>
<CAPTION>
HOSPITAL EFFECTIVE DATE LOCATION
<S> <C> <C>
1998:
Memorial Hospital of Center............... May 1, 1997 Center, Texas
Delta Medical Center -- Memphis........... May 16, 1997 Memphis, Tennessee
Dolly Vinsant Hospital.................... August 1, 1997 San Benito, Texas
Woodland Park Hospital(a)................. February 1, 1998 Portland, Oregon
Eastmoreland Hospital(a).................. February 1, 1998 Portland, Oregon
Lander Valley Medical Center(a)........... February 1, 1998 Lander, Wyoming
Davenport Medical Center(a)............... February 1, 1998 Davenport, Iowa
1997:
Wentzville,
Doctors Hospital.......................... August 1, 1996 Missouri
</TABLE>
- ---------------
(a) Hospitals were acquired in a single transaction for an aggregate purchase
price of $57,000.
F-11
<PAGE> 80
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has acquired hospitals primarily in exchange for cash and
assumption of associated liabilities for the years ended March 31 as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Purchase price.............................................. $90,000 $14,000
Add liabilities assumed..................................... 13,342 2,748
Less assets acquired........................................ 87,916 15,203
------- -------
Costs in excess of net assets acquired............ $15,426 $ 1,545
======= =======
</TABLE>
The acquisitions were accounted for as purchases and the accompanying
consolidated financial statements include the results of their operations from
the respective dates of the acquisitions.
The following unaudited pro forma results of operations for the years ended
March 31, 1998 and 1997 give effect to the acquisitions as if the respective
transactions had occurred as of April 1, 1996. The unaudited pro forma results
are not necessarily indicative of what actually might have occurred if the
acquisitions had been completed as of April 1, 1996. In addition, they are not
intended to be a projection of future results of operations and do not reflect
any of the synergies that might be achieved in hospital operations.
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net revenues................................................ $143,555 $140,414
Net loss.................................................... (395) (556)
Net loss attributable to common stockholders................ (2,145) (2,306)
Pro forma net loss per share -- basic and diluted........... $ (0.18) $ --
======== ========
</TABLE>
Additionally, in December 1997, the Company entered into a definitive
agreement to purchase a hospital in Tacoma, Washington for a purchase price of
approximately $25,000, subject to certain working capital adjustments, to be
funded primarily through borrowings.
4. PROPERTY AND EQUIPMENT
A summary of property and equipment as of March 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Land........................................................ $ 7,249 $ 700
Land improvements........................................... 545 107
Buildings and improvements.................................. 60,919 8,953
Equipment and fixtures...................................... 18,314 3,946
Leasehold improvements...................................... 144 75
----------- -----------
87,171 13,781
Less accumulated depreciation and amortization.............. 2,767 707
----------- -----------
$ 84,404 $ 13,074
=========== ===========
</TABLE>
Included in buildings and improvements and equipment and fixtures are
buildings and equipment held under capital leases of $5,698 and $768 as of March
31, 1998 and 1997, respectively. Related accumulated amortization was $630 and
$120 as of March 31, 1998 and 1997, respectively.
F-12
<PAGE> 81
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LEASE OBLIGATIONS
The Company leases various equipment under lease agreements that have been
capitalized and office space under a noncancellable operating lease. In
addition, one hospital has been leased under an agreement that has been
capitalized. A summary of future minimum lease payments and the present value of
future minimum lease payments for the capitalized leases and payments due under
the operating leases as of March 31, 1998, is as follows:
<TABLE>
<CAPTION>
YEAR ENDING MARCH 31, CAPITAL OPERATING
<S> <C> <C>
1999................................................... $ 908 $ 391
2000................................................... 555 217
2001................................................... 443 174
2002................................................... 362 103
2003................................................... 371 39
Thereafter............................................. 15,377 221
------- ------
18,016 $1,145
======
Less: interest at rates ranging from 4.4% to 15.0%........ 12,626
-------
Capital lease obligations................................. 5,390
Less: current portion..................................... 525
-------
Capital lease obligations, excluding current portion...... $ 4,865
=======
</TABLE>
Rent expense was approximately $1,202, $161 and $24 for the years ended
March 31, 1998 and 1997 and period August 16, 1995 through March 31, 1996,
respectively.
Capital lease obligations consist primarily of a lease on Woodland Park
Hospital at March 31, 1998 for $4,884 at 7.1%.
6. LONG-TERM DEBT
On September 30, 1996, the Company entered into a revolving credit
agreement with a consortium of banks to provide funding for acquisitions of
health care facilities and related businesses, and for general corporate
purposes including working capital. The revolving credit limit was set at
$85,000. As of March 31, 1997, the Company had borrowings under this facility of
$750, bearing interest at prime plus 0.5% (9.0% as of March 31, 1997), payable
in quarterly installments of $63 plus accrued interest beginning December 31,
1999, with the remaining unpaid principal due in September 2001.
On January 30, 1998, the Company amended and restated its credit agreement,
increasing its revolving credit limit to $132,500. Borrowings under the facility
bear interest of (i) a base rate equal to the greater of the Prime Rate or the
Federal Funds rate, plus in either case, a margin of up to 1% or (ii) London
InterBank Offered Rate as of the date of the borrowing plus a margin of up to
2.5%. The applicable margin is determined by a ratio of indebtedness to EBITDA
calculated on a monthly basis. As of March 31, 1998, the Company had outstanding
$37,550, bearing interest at a rate of 6.9%. The Credit Agreement is interest
only payments until December 31, 2000, at which time one-sixteenth of the
aggregate outstanding balance will be due in quarterly payments on the last day
of each third month thereafter to and including September 30, 2003, with a final
lump sum payment due December 31, 2003. The revolving credit facility is secured
by substantially all the Company's assets. The Credit Agreement contains
limitations on the Company's ability to incur additional indebtedness, sell
material assets, retire, redeem or otherwise reacquire its capital stock, and
pay dividends. The Credit Agreement also requires the Company to maintain
specified levels of net worth and meet certain covenants and ratios.
F-13
<PAGE> 82
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Commitment fees between 0.25% and 0.38% are charged on the unused portion
of the revolving credit facility. Total commitment fees during the years ended
March 31, 1998 and 1997 was $349 and $209, respectively, and is included in
interest expense in the accompanying statements of operations.
On January 30, 1998, WCAS Capital Partners III, L.P., an affiliate of a
principal shareholder of the Company, issued subordinated debt to the Company in
the amount of $25,000. The subordinated debt bears interest at a rate of 10.0%
and is due January 30, 2008 with interest payable semiannually on June 30 and
December 31 of each year. The debt was issued at a discount of $235 related to
the fair value of the associated common stock warrant. The discount is being
amortized through charges to interest expense using the straight line method
over the life of the subordinated debt. As of March 31, 1998, the discount was
$231. The Company is required to make certain mandatory prepayments of the
subordinated debt in the event that certain prepayments of senior debt are
required under the credit agreement. In addition, a prepayment is required if at
any time while the subordinated debt is outstanding, (i) the Company merges or
consolidates with or into another entity (subject to certain exceptions), or
(ii) the Company sells or otherwise disposes of substantially all of its assets
to a third party, or (iii) a third party purchaser acquires a majority of the
Company's outstanding capital stock.
The aggregate maturities of long-term debt as of March 31, 1998 are as
follows:
<TABLE>
<S> <C>
1999........................................................ $ --
2000........................................................ --
2001........................................................ 4,693
2002........................................................ 9,388
2003........................................................ 9,388
Thereafter.................................................. 39,081
-------
$62,550
=======
</TABLE>
7. REDEEMABLE PREFERRED STOCK
Redeemable preferred stock consists of 250 authorized shares of Series A
non-convertible cumulative preferred, $.01 par value (Series A preferred stock).
The Series A preferred stock is entitled to dividends equaling $7.00 per share
per annum. The Company is required to redeem all Series A preferred stock on
April 1, 2006 for $100 per share plus any unpaid dividends. The Series A
preferred stock is required to be redeemed at face value in the event of any
qualified initial public offering of the Company's common stock to the public.
The Company issued 250 shares of Series A preferred stock in 1998 for
$25,000. The proceeds were used to finance hospital acquisitions.
8. STOCKHOLDERS' EQUITY
PREFERRED STOCK
Preferred stock consists of Series B convertible preferred (Series B
preferred stock). The Series B preferred stock is not entitled to a dividend
unless a dividend is declared for the common stock. Series B preferred stock
requires 7.0% cumulative dividends beginning on April 1, 2008. The Series B
preferred stock is convertible to common stock at the holder's discretion by
multiplying the number of shares of Series B preferred stock by $100 and
dividing by the conversion price of $5.875 per share. The Series B preferred
stock automatically converts in the event of a public offering of the Company's
common stock at a price of at least $10 per share and net proceeds in excess of
$20,000.
F-14
<PAGE> 83
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company issued 85 and 150 shares of Series B preferred stock for $8,500
and $15,000 in 1998 and 1997, respectively. The proceeds were used to finance
hospital acquisitions. As of March 31, 1998, 4,000 shares of common stock have
been reserved for issuance upon conversion of the Series B preferred stock.
STOCK OPTIONS
In 1996, the Company adopted a stock option plan (the Plan) pursuant to
which the Company has reserved 1,500 shares of common stock for stock option
grants to directors, key employees and shareholders with exercise prices equal
to the estimated fair market value of the Company's common stock on the date of
grant. Stock options generally vest ratably over a period of five years and are
exercisable for ten years from grant date. As of March 31, 1998, there were
approximately 1,330 shares available for grant under the Plan. In May 1998, the
Company increased reserved shares by 600 shares to 2,100 shares.
The per share weighted-average fair value of stock options granted during
the years ended March 31, 1998 and 1997 was $0.82 and $0.86, respectively, on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: an expected dividend yield and volatility of 0.0% for
both years, risk-free interest rate ranging from 5.5% to 6.0% in 1998 and 5.5%
in 1997, and an expected life of 4 years for both years.
The Company applies the intrinsic value method as defined by APB Opinion
No. 25 in accounting for its Plan and, accordingly, no compensation cost has
been recognized for its stock options in the accompanying consolidated financial
statements. Had the Company determined compensation cost based on the fair value
at the grant date for its stock options under SFAS No. 123, the Company's per
share amounts would not have changed and net income would have been reduced by
$23 and net loss would have increased by $28 for the years ended March 31, 1998
and 1997, respectively.
Stock option activity during the period is as follows:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
<S> <C> <C>
Balance as of March 31, 1996................................ -- $ --
Granted................................................... 50 4.33
--- -----
Balance as of March 31, 1997................................ 50 4.33
Granted................................................... 132 4.33
Forfeited................................................. (11) 4.33
--- -----
Balance as of March 31, 1998................................ 171 $4.33
=== =====
</TABLE>
As of March 31, 1998, the number of options exercisable was 10 and the
weighted average exercise price was $4.33. No options were exercisable at March
31, 1997.
As of March 31, 1998, the exercise price and weighted-average remaining
contractual life of outstanding options was $4.33 and 9.7 years, respectively.
F-15
<PAGE> 84
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RECONCILIATION OF EARNINGS PER SHARE CALCULATION
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computations for net earnings:
<TABLE>
<CAPTION>
INCOME SHARES PER SHARE
FOR THE YEAR ENDED MARCH 31, 1998 (NUMERATOR) (DENOMINATOR) AMOUNT
- --------------------------------- ----------- ------------- ---------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE:
Net income......................................... $792
Cumulative preferred dividend...................... 617
----
Net income attributable to common stockholders 175 8,027 $0.02
---- ------ -----
EFFECT OF DILUTIVE SECURITIES:
Options............................................ -- 48
Warrants........................................... -- 69
Convertible preferred stock........................ -- 4,000
---- ------
DILUTED EARNINGS PER SHARE:
Net income attributable to common stockholders $175 12,144 $0.01
==== ====== =====
</TABLE>
WARRANT
In connection with the subordinated debt discussed in note 6, the Company
issued a warrant to purchase up to 565 shares of common stock at $4.33 per
share. The warrant expires January 30, 2008. The holder may exercise the
warrants in one or a combination of the following methods including cash or
check, surrender of any obligation or security of the Company or an election to
receive common stock equal to the fair value of the warrant. The exercise price
of the warrants is subject to adjustment in the event that common stock or
equities convertible to common stock are issued with an exercise or conversion
price less than that of the warrant.
9. RETIREMENT PLAN
The Company sponsors a 401(k) plan for its employees. All employees who
have been employed at least six months and are at least 20 1/2 years of age are
eligible for the plan. The Company may match employee contributions at the
discretion of the Board of Directors. Total pension expense for the years ended
March 31, 1998 and 1997 was $115 and $30, respectively.
10. INCOME TAXES
There was no income tax expense for the period ended March 31, 1996. The
components of income tax expense for the years ended March 31, 1998 and 1997 are
as follows:
<TABLE>
<CAPTION>
1998
--------------------------
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Federal..................................................... $248 $239 $486
State....................................................... 90 2 93
---- ---- ----
$338 $241 $579
==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
1997
--------------------------
CURRENT DEFERRED TOTAL
------- -------- -----
<S> <C> <C> <C>
Federal..................................................... $ -- $ -- $ --
State....................................................... 67 -- 67
---- ---- ----
$ 67 $ -- $ 67
==== ==== ====
</TABLE>
F-16
<PAGE> 85
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The actual income tax expense differs from the "expected" tax expense
(computed by applying the U.S. federal corporate income tax rate of 34% to
earnings before income taxes) as a result of the following:
<TABLE>
<CAPTION>
PERIOD
AUGUST 16,
1995
YEARS ENDED (INCEPTION)
MARCH 31, THROUGH
------------ MARCH 31,
1998 1997 1996
<S> <C> <C> <C>
Computed "expected" tax expense............................. $466 $(346) $(127)
Increase (reduction) in income taxes resulting from:
State income taxes, net of federal income tax benefit..... 61 4 (15)
Nondeductible goodwill amortization....................... 47 -- --
Change in valuation allowance............................. -- 436 142
Other..................................................... 5 (27) --
---- ----- -----
$579 $ 67 $ --
==== ===== =====
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax asset as of March 31, 1998 and 1997, are presented
below:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 390 $ 202
Accrued vacation.......................................... 275 56
AMT credit carryforward................................... 248 --
Operating loss carryforward............................... 123 252
Deferred costs due to differences in amortization and
write-off for tax purposes............................. 74 22
Property and equipment, principally due to differences in
depreciation........................................... -- 46
Other..................................................... 163 --
------ -----
Total gross deferred tax asset.................... 1,273 578
Less: Valuation allowance......................... -- (578)
------ -----
Net deferred tax asset............................ 1,273 --
Deferred tax liability:
Property and equipment, principally due to differences in
depreciation........................................... 1,813 --
------ -----
Net deferred tax liability........................ $ 540 $ --
====== =====
</TABLE>
The valuation allowance as of March 31, 1997 was charged to goodwill in
connection with the stock acquisition of one of the Company's hospitals. As of
March 31, 1998, the Company had approximately $360 of net operating loss
carryforwards which begin to expire in 2011. Included in prepaid expenses and
other current assets is $799 of current deferred tax assets.
11. CONTINGENCIES
LIABILITY INSURANCE
The Company is insured for professional liability based on a claims-made
policy. The provision for professional liability and comprehensive general
liability claims includes estimates of the ultimate costs for claims incurred
but not reported, in accordance with actuarial projections based on past
experience. Management is aware of no professional liability claims whose
settlement would have a material adverse effect on the Company's financial
position, results of operations or liquidity.
F-17
<PAGE> 86
NEW AMERICAN HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
LITIGATION
The Company is subject to various claims, legal actions and regulatory
investigations which arise in the ordinary course of business, certain of which
could be material. In the opinion of management, the ultimate resolution of such
matters will be adequately covered by insurance and will not have a material
adverse effect on the Company's financial position, results of operations or
liquidity.
12. SUBSEQUENT EVENTS (UNAUDITED)
PUBLIC OFFERING OF COMMON STOCK AND REINCORPORATION
The Company is currently in the process of an initial public offering of
its common stock (the "Offering"). The net proceeds from the Offering are
planned to be used primarily to reduce outstanding indebtedness and redeem
Series A preferred stock.
The Company intends to reincorporate as a Delaware corporation from a
Tennessee corporation immediately prior to the consummation of the anticipated
Offering. The reincorporation will result in an increase in the authorized
shares of common stock to 50,000 shares, exchange of Series B preferred stock
for 3,766 shares of the Company's common stock and 423 shares of the Company's
non-voting common stock and a forward exchange of the Company's existing common
stock at a ratio of 1.0473:1.
F-18
<PAGE> 87
INDEPENDENT AUDITORS' REPORT
The Board of Trustees
Doctors Hospital:
We have audited the accompanying statements of operations and cash flows of
Doctors Hospital (the Hospital) for the period January 1, 1996 through July 31,
1996 and year ended December 31, 1995. These financial statements are the
responsibility of the Hospital'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 audits 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 financial statements referred to above present fairly,
in all material respects, the results of operations and cash flows of the
Hospital for the period January 1, 1996 through July 31, 1996 and year ended
December 31, 1995 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Nashville, Tennessee
May 22, 1998
F-19
<PAGE> 88
DOCTORS HOSPITAL
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996 YEAR
THROUGH ENDED
JULY 31, DECEMBER 31,
1996 1995
<S> <C> <C>
Revenues:
Net patient service revenue............................... $ 8,744 $14,550
Other revenue............................................. 194 277
------- -------
Net operating revenues............................ 8,938 14,827
------- -------
Expenses:
Salaries and benefits..................................... 3,469 6,276
Professional fees......................................... 1,013 1,535
Supplies.................................................. 1,371 2,079
Provision for doubtful accounts........................... 1,054 1,231
Other..................................................... 1,963 2,926
Depreciation and amortization............................. 545 908
Interest.................................................. 608 1,116
------- -------
10,023 16,071
------- -------
Net loss.......................................... $(1,085) $(1,244)
======= =======
</TABLE>
See accompanying notes to financial statements.
F-20
<PAGE> 89
DOCTORS HOSPITAL
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1996 YEAR
THROUGH ENDED
JULY 31, DECEMBER 31,
1996 1995
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,085) $ (1,244)
Adjustments to reconcile net loss to net cash provided by
operating activities:
Depreciation and amortization.......................... 545 908
Provision for doubtful accounts........................ 1,054 1,231
Loss on disposal of property and equipment............. -- 6
Increase (decrease) in cash due to changes in:
Patient accounts receivable.......................... (1,031) (805)
Other receivables.................................... (401) (300)
Inventory............................................ (36) (21)
Prepaid expenses and other assets.................... 29 90
Accounts payable and accrued expenses................ 3,226 774
Estimated third party payor settlements.............. 624 585
------- --------
Net cash provided by operating activities......... 2,925 1,224
------- --------
Cash flows from investing activities -- acquisition of
property and equipment.................................... (90) (218)
------- --------
Cash flows from financing activities:
Proceeds from issuance of long-term debt.................. 8,327 14,115
Payments on long-term debt................................ (8,820) (15,231)
Capital distribution...................................... (1,800) --
Cash overdrafts........................................... (494) 110
------- --------
Net cash used by financing activities............. (2,787) (1,006)
------- --------
Net increase in cash.............................. 48 --
Cash at beginning of period................................. -- --
------- --------
Cash at end of period....................................... $ 48 $ --
======= ========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 623 $ 1,161
======= ========
</TABLE>
See accompanying notes to financial statements.
F-21
<PAGE> 90
DOCTORS HOSPITAL
NOTES TO FINANCIAL STATEMENTS
PERIOD JANUARY 1, 1996 THROUGH JULY 31, 1996
AND YEAR ENDED DECEMBER 31, 1995
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
Doctors Hospital (the Hospital) is a 94-bed general acute care hospital
which provides inpatient, outpatient, home health, skilled nursing, psychiatric
and occupational health services.
On August 1, 1996, New American Healthcare Corporation (New American)
purchased the Hospital from Doctors Hospital-Wentzville, L.P. for approximately
$14,000.
B. USE OF ESTIMATES
Management of the Hospital has made a number of estimates and assumptions
relating to the reported amounts of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
C. DEPRECIATION
Depreciation is provided over the estimated useful life of each class of
depreciable asset and is computed using the straight-line method. The estimated
useful lives of property and equipment are as follows: land improvements -- 20
to 30 years; buildings and improvements -- 20 to 40 years; equipment and
furniture -- 10 to 20 years. Equipment under capital lease obligations is
amortized on the straight-line method over the shorter period of the lease term
or the estimated useful life of the equipment. Such amortization is included in
depreciation and amortization in the financial statements.
D. AMORTIZATION
Other assets consist of organization costs and loan costs. Organization
costs are amortized over 5 years using the straight-line method. Loan costs are
amortized over the term of the loan agreement.
E. LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
F. 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.
G. INCOME TAXES
The Hospital operates as a partnership as provided by the Internal Revenue
Code. The effect of this election resulted in all of the Hospital's taxable
income or losses being passed through to the partners in the partnership. Had
the Hospital accounted for income taxes under the asset and liability method
required under Statement of Financial Accounting Standards No. 109, Accounting
for Income Taxes, no tax expense or
F-22
<PAGE> 91
DOCTORS HOSPITAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
benefit would have been recognized because it is not more likely than not that
deferred tax assets would be recognized.
2. NET PATIENT SERVICE REVENUE
The Hospital has agreements with third-party payors that provide for
payments to the Hospital at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
Medicare
Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per discharge.
These rates vary according to a patient classification system that is based
on clinical, diagnostic, and other factors. Inpatient nonacute services and
certain outpatient services related to Medicare beneficiaries are paid
based on a cost reimbursement methodology. The Hospital is reimbursed for
cost reimbursable items at a tentative rate with final settlement
determined after submission of an annual cost report by the Hospital and
audit thereof by the Medicare fiscal intermediary. The Hospital's
classification of patients under the Medicare program and the
appropriateness of their admission are subject to an independent review by
a peer review organization under contract with the Hospital. The Hospital's
Medicare cost reports have been audited by the Medicare fiscal intermediary
through 1996.
Medicaid
Inpatient acute care services rendered to Medicaid program
beneficiaries are paid based on a prospectively determined rate per day.
Outpatient services rendered to beneficiaries are reimbursed under a cost
reimbursement methodology. The Hospital is reimbursed for outpatient
services at a tentative rate with final settlement determined after
submission of annual cost reports by the Hospital and audits by the
Medicaid fiscal intermediary. The Hospital's Medicaid cost reports have
been audited by the Medicaid fiscal intermediary through 1996.
Other
The Hospital has also entered into payment agreements with certain
insurance carriers, health maintenance organizations, and preferred
provider organizations. The basis for payment to the Hospital under these
agreements includes prospectively determined rates per discharge, discounts
from established charges, and prospectively determined daily rates.
Business and Credit Concentrations
In the course of providing health care services, the Hospital grants
credit to patients and generally does not require collateral or other
security in extending credit; however, the Hospital routinely obtains
assignment of (or are otherwise entitled to receive) patients' benefits
payable under their health insurance programs, plans or policies (e.g.,
Medicare, Medicaid, Blue Cross, health maintenance organizations, preferred
provider organizations and commercial insurance policies).
Approximately 52% and 54% of net patient service revenue are from
participation in the Medicare and Medicaid programs for the period January
1, 1996 through July 31, 1996 and the year ended December 31, 1995,
respectively.
F-23
<PAGE> 92
DOCTORS HOSPITAL
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. LEASES
The Hospital leases various equipment under lease agreements that have been
capitalized and under noncancellable operating leases.
As of the date of sale to New American, all capital and operating leases
were either assumed by New American or paid off shortly thereafter.
Rent expense was approximately $120 and $183 for the period January 1, 1996
through July 31, 1996 and year ended December 31, 1995, respectively.
4. CONTINGENCIES
LIABILITY INSURANCE
The Hospital is insured for professional liability based on a claims-made
policy. The provision for professional liability and comprehensive general
liability claims includes estimates of the ultimate costs for claims incurred
but not reported, in accordance with actuarial projections based on past
experience. Management is aware of no professional liability claims whose
settlement would have a material adverse effect on the Hospital's financial
position, results of operations or liquidity.
LITIGATION
The Hospital is subject to various claims, legal actions and regulatory
investigations which arise in the ordinary course of business, certain of which
could be material. In the opinion of management, the ultimate resolution of such
matters will be adequately covered by insurance and will not have a material
adverse effect on the Hospital's financial position, results of operations or
liquidity.
5. RETIREMENT PLAN
The Hospital sponsors a 401(k) plan for Hospital employees. All employees
who have six months of experience and are at least 20 1/2 years of age are
eligible for the plan. The Hospital may match employee contributions at the
discretion of the Board of Trustees. The Hospital incurred no pension expense
for the period January 1, 1996 through July 31, 1996 and year ended December 31,
1995.
F-24
<PAGE> 93
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Center Hospital, Inc.:
We have audited the accompanying statements of operations and cash flows of
Center Hospital, Inc. d/b/a Memorial Hospital of Center (the Hospital) (a wholly
owned subsidiary of Southeastern Hospital Corporation) for the year ended April
30, 1997, and period June 28, 1995 through April 30, 1996. These financial
statements are the responsibility of the Hospital'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 financial statements referred to above present fairly,
in all material respects, the results of the operations and cash flows of the
Hospital for the year ended April 30, 1997, and period June 28, 1995 through
April 30, 1996, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Nashville, Tennessee
June 12, 1998
F-25
<PAGE> 94
CENTER HOSPITAL, INC.
D/B/A MEMORIAL HOSPITAL OF CENTER
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JUNE 28, 1995
YEAR ENDED THROUGH
APRIL 30, APRIL 30,
1997 1996
<S> <C> <C>
Revenues:
Net patient service revenue............................... $ 9,306 $ 6,948
Other revenue............................................. 170 160
------- -------
Net operating revenues............................ 9,476 7,108
------- -------
Expenses:
Salaries and benefits..................................... 4,164 3,295
Professional fees......................................... 1,083 649
Supplies.................................................. 886 862
Provision for doubtful accounts........................... 983 811
Other..................................................... 840 649
Depreciation and amortization............................. 459 385
Interest.................................................. 246 222
Management fees........................................... 1,899 1,639
------- -------
10,560 8,512
------- -------
Net loss.......................................... $(1,084) $(1,404)
======= =======
</TABLE>
See accompanying notes to financial statements.
F-26
<PAGE> 95
CENTER HOSPITAL, INC.
D/B/A MEMORIAL HOSPITAL OF CENTER
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JUNE 28, 1995
YEAR ENDED THROUGH
APRIL 30, APRIL 30,
1997 1996
<S> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,084) $(1,404)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization.......................... 459 385
Provision for doubtful accounts........................ 982 811
Increase (decrease) in cash due to changes in:
Patient accounts receivable.......................... (821) (672)
Other receivables.................................... 137 (132)
Inventory............................................ 23 25
Prepaid expenses and other assets.................... 9 18
Accounts payable and accrued expenses................ 249 400
Estimated third-party payor settlements.............. (789) (106)
------- -------
Net cash used in operating activities............. (835) (675)
------- -------
Cash flows from investing activities -- purchase of property
and equipment............................................. (459) (102)
------- -------
Cash flows from financing activities:
Changes in intercompany account........................... 1,483 904
Repayment of long-term debt............................... (6) (5)
Repayment of capital lease obligations.................... (125) (108)
------- -------
Net cash provided by financing activities......... 1,352 791
------- -------
Net increase in cash.............................. 58 14
Cash at beginning of period................................. 70 56
------- -------
Cash at end of period....................................... $ 128 $ 70
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 104 $ 49
======= =======
</TABLE>
See accompanying notes to financial statements.
F-27
<PAGE> 96
CENTER HOSPITAL, INC.
D/B/A MEMORIAL HOSPITAL OF CENTER
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED APRIL 30, 1997, AND
PERIOD JUNE 28, 1995 THROUGH APRIL 30, 1996
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
Center Hospital, Inc. d/b/a Memorial Hospital of Center (Hospital), a
wholly owned subsidiary of Southeastern Hospital Corporation (Southeastern) is a
54-bed general acute care hospital providing a full compliment of acute care
services including emergency services to the residents of Center, Texas and
adjoining counties in Louisiana and Texas. The Hospital also has a 10-bed
transitional care unit.
On May 1, 1997, New American Healthcare Corporation (New American)
purchased the Hospital from Southeastern for approximately $11,500.
B. USE OF ESTIMATES
Management of the Hospital has made a number of estimates and assumptions
relating to the reported amounts of revenues and expenses to prepare these
financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
C. DEPRECIATION
Depreciation is provided over the estimated useful life of each class of
depreciable asset and is computed using the straight-line method. The estimated
useful lives of property and equipment are as follows: land improvements -- 40
years; buildings and improvements -- 40 years; equipment and furniture -- 3 to
10 years. Equipment under capital lease obligations is amortized using the
straight-line method over the shorter of the lease term or the estimated useful
life of the equipment. Such amortization is included in depreciation and
amortization in the accompanying financial statements.
D. LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
E. 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.
F. INCOME TAXES
The Hospital is not a separate taxable entity but has been included in the
consolidated return of its parent for all periods presented. However, Statement
of Financial Accounting Standards No. 109, Accounting for Income Taxes, requires
that the consolidated current and deferred tax expense be allocated among
members of a consolidated group which issue separate financial statements. The
allocation of consolidated tax expense is
F-28
<PAGE> 97
CENTER HOSPITAL, INC.
D/B/A MEMORIAL HOSPITAL OF CENTER
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
based on what the Hospital's current and deferred tax expense would have been
had the Hospital filed a separate tax return.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date. No income tax expense or benefit has
been recorded in the accompanying financial statements as a valuation allowance
has been recorded for deferred tax assets as it is not more likely than not that
such deferred tax assets will be realized.
2. NET PATIENT SERVICE REVENUE
The Hospital has agreements with third-party payors that provide for
payments to the Hospital at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
Medicare
Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per discharge.
These rates vary according to a patient classification system that is based
on clinical, diagnostic, and other factors. Inpatient nonacute services and
certain outpatient services related to Medicare beneficiaries are paid
based on cost reimbursement methodologies. The Hospital is reimbursed for
cost reimbursable items at tentative rates, with final settlement
determined after submission of an annual cost report by the Hospital and
audit thereof by the Medicare fiscal intermediary. The Hospital's
classification of patients under the Medicare program and the
appropriateness of their admission are subject to an independent review by
a peer review organization under contract with the Hospital. The Hospital's
cost reports have been audited and final-settled for all filing years
through 1995.
Medicaid
Inpatient services rendered to Medicaid beneficiaries are generally
paid at prospectively determined rates per day for a covered period of
days. Certain outpatient services are reimbursed based upon a cost
reimbursement methodology. Final reimbursement rates and amounts for these
services will be determined after submission of annual cost reports by the
Hospital and audits by the state. Other outpatient services are reimbursed
based on a fee schedule.
Other
The Hospital has also entered into payment agreements with certain
insurance carriers, health maintenance organizations, and preferred
provider organizations. Payment methodologies under these agreements
include prospectively determined rates per discharge, discounts from
established charges, and prospectively determined daily rates.
Business and Credit Concentrations
In the course of providing health care services, the Hospital grants
credit to patients and generally does not require collateral or other
security in extending credit; however, the Hospital routinely obtains
F-29
<PAGE> 98
CENTER HOSPITAL, INC.
D/B/A MEMORIAL HOSPITAL OF CENTER
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
assignment of (or are otherwise entitled to receive) patients' benefits
payable under their health insurance programs, plans or policies (e.g.,
Medicare, Medicaid, Blue Cross, health maintenance organizations, preferred
provider organizations and commercial insurance policies).
Approximately 43% of net patient service revenue are from
participation in the Medicare and Medicaid programs for the year ended
April 30, 1997 and period June 28, 1995 through April 30, 1996.
3. LEASES
The Hospital leases various equipment under lease agreements that have been
capitalized and under noncancellable operating leases.
As of the date of sale to New American, substantially all capital and
operating leases were either assumed by New American or paid off shortly
thereafter.
Rent expense was approximately $82 and $91 for the year ended April 30,
1997 and period June 28, 1995 through April 30, 1996, respectively.
4. MANAGEMENT FEES
The Hospital operates under a management agreement with Southeastern.
According to the management agreement, monthly management fees were calculated
at 8% of gross revenues earned by the Hospital. During 1997, Southeastern
retroactively increased the management fee to 12% of gross revenues plus
interest on the entire calculated balance at a rate of 11% for the year ended
April 30, 1997 and period June 28, 1995 through April 30, 1996.
5. CONTINGENCIES
LIABILITY INSURANCE
The Hospital is insured for professional and general liability based on a
claims-made policy. The provision for professional liability and comprehensive
general liability claims includes estimates of the ultimate costs for claims
incurred but not reported, in accordance with actuarial projections based on
past experience. Management is aware of no professional liability claims whose
settlement would have a material adverse effect on the Hospital's financial
position, results of operations or liquidity.
LITIGATION
The Hospital is subject to various claims, legal actions, and regulatory
investigations which arise in the ordinary course of business, certain of which
could be material. In the opinion of management, the ultimate resolution of such
matters will be adequately covered by insurance and will not have a material
adverse effect on the Hospital's financial position, results of operations or
liquidity.
F-30
<PAGE> 99
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Eastwood Hospital, Inc.
We have audited the accompanying statements of operations and cash flows of
Eastwood Hospital, Inc. (the Hospital) for the period January 1, 1997 through
May 15, 1997 and years ended December 31, 1996 and 1995. These financial
statements are the responsibility of the Hospital'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 financial statements referred to above present fairly,
in all material respects, the results of the operations and cash flows of the
Hospital for the period January 1, 1997 through May 15, 1997 and years ended
December 31, 1996 and 1995, in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Jackson, Mississippi
May 29, 1998
F-31
<PAGE> 100
EASTWOOD HOSPITAL, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1997 YEARS ENDED
THROUGH DECEMBER 31,
MAY 15, ------------------
1997 1996 1995
<S> <C> <C> <C>
Revenues:
Net patient service revenue............................. $10,579 $30,349 $30,215
Other revenue........................................... 349 879 1,388
------- ------- -------
Net operating revenues.......................... 10,928 31,228 31,603
------- ------- -------
Expenses:
Salaries and benefits................................... 5,003 12,845 12,874
Professional fees....................................... 720 2,818 1,080
Supplies................................................ 1,096 3,153 2,550
Provision for doubtful accounts......................... 1,214 3,648 3,033
Other................................................... 3,882 10,131 12,245
Depreciation and amortization........................... 285 780 544
------- ------- -------
12,200 33,375 32,326
------- ------- -------
Net loss........................................ $(1,272) $(2,147) $ (723)
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-32
<PAGE> 101
EASTWOOD HOSPITAL, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
JANUARY 1, 1997 YEARS ENDED
THROUGH DECEMBER 31,
MAY 15, -----------------
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss.................................................. $(1,272) $(2,147) $ (723)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization.......................... 285 781 545
Provision for doubtful accounts........................ 1,214 3,648 3,033
Increase (decrease) in cash due to changes in:
Patient accounts receivable.......................... (1,184) (1,070) (4,296)
Other receivables.................................... (59) (981) (1,229)
Inventory............................................ 101 (118) 56
Prepaid expenses and other assets.................... (70) (44) (57)
Accounts payable and accrued expenses................ (336) (28) 1,131
------- ------- -------
Net cash provided by (used in) operating
activities...................................... (1,321) 41 (1,540)
------- ------- -------
Cash flows from investing activities -- purchase of property
and equipment............................................. (128) (400) (808)
------- ------- -------
Cash flows from financing activities:
Changes in intercompany account........................... 817 695 3,067
Cash overdrafts........................................... 1,045 (143) (26)
Repayment of capital lease obligations.................... (82) (207) (96)
------- ------- -------
Net cash provided by financing activities......... 1,780 345 2,945
------- ------- -------
Net increase (decrease) in cash................... 331 (14) 597
Cash at beginning of period................................. 642 656 59
------- ------- -------
Cash at end of period....................................... $ 973 $ 642 $ 656
======= ======= =======
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.................. $ 26 $ 93 $ 74
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-33
<PAGE> 102
EASTWOOD HOSPITAL, INC.
NOTES TO FINANCIAL STATEMENTS
PERIOD JANUARY 1, 1997 THROUGH MAY 15, 1997
AND YEARS ENDED DECEMBER 31, 1996 AND 1995
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS
Eastwood Hospital, Inc. (Eastwood) is a provider of psychiatric and acute
health care, licensed for approximately 240 beds, located in Memphis, Tennessee.
Through May 15, 1997, the Hospital was a wholly owned subsidiary of
HealthCare America, Inc. On May 16, 1997, New American Healthcare Corporation
(New American) purchased the Hospital for approximately $13,300. Subsequent to
the purchase, the Hospital began doing business as Delta Medical
Center -- Memphis.
B. USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires that management make estimates and
assumptions affecting the reported amounts of assets, liabilities, revenues and
expenses, as well as disclosure of contingent assets and liabilities. Actual
results could differ from those estimates.
C. DEPRECIATION
Depreciation is provided over the estimated useful life of each class of
depreciable asset and is computed using the straight-line method. Estimated
useful lives approximate the following: land improvements -- 10 years; buildings
and improvements -- 20 to 30 years; equipment and furniture -- 4 to 20 years.
Equipment under capital lease obligations is amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
equipment. Such amortization is included in depreciation and amortization in the
accompanying financial statements.
D. LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
E. 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.
F. INCOME TAXES
While the Hospital was included in the consolidated income tax returns of
its parent, it accounts for income taxes in these financial statements as if it
filed stand-alone income tax returns. Income taxes are accounted for under the
asset and liability method. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit carryforwards.
F-34
<PAGE> 103
EASTWOOD HOSPITAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date.
The Hospital has experienced operating losses since inception of its
ownership by HealthCare America, Inc. Because of uncertainties regarding the
ultimate realization of related tax operating loss carryforwards, the Hospital
has not recognized any net deferred tax asset in the accompanying financial
statements.
2. NET PATIENT SERVICE REVENUE
The Hospital has agreements with third-party payors that provide for
payments to the Hospital at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
Medicare
Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per discharge.
These rates vary according to a patient classification system that is based
on clinical, diagnostic, and other factors. Inpatient nonacute services and
certain outpatient services related to Medicare beneficiaries are paid
based on cost reimbursement methodologies. The Hospital is reimbursed for
cost reimbursable items at tentative rates, with final settlement
determined after submission of an annual cost report by the Hospital and
audit thereof by the Medicare fiscal intermediary. The Hospital's
classification of patients under the Medicare program and the
appropriateness of their admission are subject to an independent review by
a peer review organization under contract with the Hospital. The Hospital's
cost reports have been audited and final-settled for all filing years
through 1995.
Tenncare
Inpatient and outpatient services rendered to Tenncare program
(Tennessee's Medicaid program) beneficiaries are reimbursed based upon
prospective reimbursement methodologies established by the participating
third-party payors.
Other
The Hospital has also entered into payment agreements with certain
insurance carriers, health maintenance organizations, and preferred
provider organizations. Payment methodologies under these agreements
include prospectively determined rates per discharge, discounts from
established charges, and prospectively determined daily rates.
Business and Credit Concentrations
The Hospital grants credit without collateral to its patients, most of
whom are local residents and are insured under third-party payor
agreements. Revenues related to the Medicare program, the Hospital's most
significant third-party payor, comprised approximately 42%, 50% and 45% of
the Hospital's net patient service revenue for the period January 1, 1997
through May 15, 1997 and years ended December 31, 1996 and 1995,
respectively.
3. LEASES
The Hospital leases various equipment under lease agreements that have been
capitalized and under noncancellable operating leases.
F-35
<PAGE> 104
EASTWOOD HOSPITAL, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
As of the date of sale to New American, all capital and operating leases
were either assumed by New American or paid off shortly thereafter.
Rent expense was approximately $664, $2,483 and $3,562 for the period
January 1, 1997 through May 15, 1997 and years ended December 31, 1996 and 1995,
respectively. Included in such rentals is the cost of a year-to-year operating
lease with Healthcare America, Inc. for real estate related to the Hospital's
principal operating facilities, totaling approximately $450, $1,950 and $3,000
for the period January 1, 1997 through May 15, 1997 and years ended December 31,
1996 and 1995, respectively.
4. MANAGEMENT FEES
Through May 15, 1997, the Hospital operated under management arrangements
with its parent, HealthCare America, Inc. Management services provided by the
parent included auditing, accounting, personnel and other related services. The
cost of these management services is included in other expenses in the
accompanying statements of operations, and approximated $585, $1,563 and $1,560
for the period January 1, 1997 through May 15, 1997 and years ended December 31,
1996 and 1995, respectively.
5. CONTINGENCIES
LIABILITY INSURANCE
The Hospital is insured for professional liability based on a claims-made
policy. The provision for professional liability and comprehensive general
liability claims includes estimates of the ultimate costs for claims incurred
but not reported, in accordance with actuarial projections based on past
experience. Management is aware of no professional liability claims whose
settlement would have a material adverse effect on the Hospital's financial
position, results of operations or liquidity.
LITIGATION
The Hospital is subject to various claims, legal actions and regulatory
investigations which arise in the ordinary course of business, certain of which
could be material. In the opinion of management, the ultimate resolution of such
matters will be adequately covered by insurance and will not have a material
adverse effect on the Hospital's financial position, results of operations or
liquidity.
6. RETIREMENT PLAN
Through May 15, 1997, the Hospital participated in a 401(k) plan sponsored
by Healthcare America, Inc. for participating Hospital employees. Employees
meeting related age and tenure requirements were generally eligible for
participation in the plan. The Hospital's direct cost of participation in this
multi-employer plan cannot be determined as they are not separately allocated
from corporate.
F-36
<PAGE> 105
INDEPENDENT AUDITORS' REPORT
The Board of Directors
New American Healthcare Corporation:
We have audited the accompanying combined statements of operations and cash
flows of Woodland Park Hospital, Eastmoreland Hospital, Lander Valley Medical
Center and Davenport Medical Center ("The Hospitals") for the periods June 1,
1997 through January 31, 1998 and September 1, 1996 through May 31, 1997, year
ended August 31, 1996 and period July 1, 1995 through August 31, 1995. These
combined financial statements are the responsibility of The Hospitals'
management. Our responsibility is to express an opinion on these combined
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 audits 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 combined financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
The Hospitals for the periods June 1, 1997 through January 31, 1998 and
September 1, 1996 through May 31, 1997, year ended August 31, 1996 and period
July 1, 1995 through August 31, 1995 in conformity with generally accepted
accounting principles.
KPMG Peat Marwick LLP
Nashville, Tennessee
June 23, 1998
F-37
<PAGE> 106
THE HOSPITALS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
PERIOD SEPTEMBER 1, PERIOD
JUNE 1, 1997 1996 YEAR JULY 1, 1995
THROUGH THROUGH ENDED THROUGH
JANUARY 31, MAY 31, AUGUST 31, AUGUST 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenue..................... $46,646 $ 54,309 $74,087 $11,907
Other revenue................................... 1,696 2,122 2,243 448
------- -------- ------- -------
Net operating revenues 48,342 56,431 76,330 12,355
------- -------- ------- -------
Expenses:
Salaries and benefits........................... 24,342 26,582 34,554 5,418
Professional fees............................... 5,388 5,067 7,064 1,383
Supplies........................................ 4,793 6,079 8,081 1,263
Provision for doubtful accounts................. 3,182 2,690 3,843 539
Other........................................... 7,333 9,153 11,225 1,845
Depreciation and amortization................... 2,328 3,253 4,143 668
Interest........................................ 2,295 2,845 3,886 671
Management fees................................. -- 1,610 1,567 261
Merger and other corporate expenses............. -- 633 -- --
Provision for loss on impairment................ -- 9,943 -- --
------- -------- ------- -------
49,661 67,855 74,363 12,048
------- -------- ------- -------
Income (loss) before income taxes....... (1,319) (11,424) 1,967 307
Income tax benefit (expense)...................... 467 1,690 (801) (145)
------- -------- ------- -------
Net income (loss)....................... $ (852) $ (9,734) $ 1,166 $ 162
======= ======== ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-38
<PAGE> 107
THE HOSPITALS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD
PERIOD SEPTEMBER 1, PERIOD
JUNE 1, 1997 1996 YEAR JULY 1, 1995
THROUGH THROUGH ENDED THROUGH
JANUARY 31, MAY 31, AUGUST 31, AUGUST 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)............................... $ (852) $(9,734) $ 1,166 $ 162
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization................ 2,328 3,253 4,143 669
Provision for doubtful accounts.............. 3,182 2,690 3,843 538
Provision for loss on impairment............. -- 9,943 -- --
Deferred income taxes........................ (292) (2,016) 109 (67)
Changes in operating assets and liabilities:
Patient accounts receivable................ (4,368) (3,569) (4,874) (101)
Other receivables.......................... 56 253 252 (127)
Inventory.................................. (37) 11 10 89
Prepaid expenses and other assets.......... (151) 24 (144) 61
Accounts payable and accrued expenses...... (2,165) 2,872 1,359 838
Estimated third-party payor settlements.... 4,318 (613) (216) 42
------- ------- ------- -------
Net cash provided by operating
activities............................ 2,019 3,114 5,648 2,104
------- ------- ------- -------
Cash flows from investing activities:
Purchase of property and equipment.............. (2,955) (2,243) (3,249) (410)
Acquisition of minority interests............... (2,740) -- (462) --
------- ------- ------- -------
Net cash used in investing activities... (5,695) (2,243) (3,711) (410)
------- ------- ------- -------
Cash flows from financing activities:
Changes in intercompany account................. 4,557 (1,295) (1,264) (1,092)
Repayment of long-term debt..................... (586) (190) (213) (18)
Repayment of capital lease obligations.......... (100) (169) (336) (59)
------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ 3,871 (1,654) (1,813) (1,169)
------- ------- ------- -------
Net increase (decrease) in cash......... 195 (783) 124 525
Cash at beginning of period....................... 160 942 818 293
------- ------- ------- -------
Cash at end of period............................. $ 355 $ 159 $ 942 $ 818
======= ======= ======= =======
</TABLE>
See accompanying notes to combined financial statements.
F-39
<PAGE> 108
THE HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS
PERIODS JUNE 1, 1997 THROUGH JANUARY 31, 1998 AND SEPTEMBER 1, 1996
THROUGH MAY 31, 1997, YEAR ENDED AUGUST 31, 1996 AND
PERIOD JULY 1, 1995 THROUGH AUGUST 31, 1995
(IN THOUSANDS)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
On January 31, 1998, New American Healthcare Corporation (New American)
entered into an Asset Purchase Agreement with Tenet Healthcare Corporation
(Tenet), whereby New American acquired four hospitals (The Hospitals) from Tenet
for a purchase price of approximately $57,000. The four Tenet hospitals are
Woodland Park Hospital and Eastmoreland Hospital, located in Portland, Oregon,
Lander Valley Medical Center, located in Lander, Wyoming, and Davenport Medical
Center, located in Davenport, Iowa.
The accompanying financial statements are presented on a combined basis as
The Hospitals were all under common control and were acquired in a single
acquisition. The combined financial statements reflect the historical accounts
of The Hospitals for the periods presented which represent the fiscal year ends
of The Hospitals' various parent companies through the date of acquisition. The
Hospitals were owned by Ornda Healthcare Corporation (Ornda), which had an
August 31 fiscal year end, until February 1997 at which time Tenet completed a
pooling-of-interest with Ornda and the fiscal year end changed to May 31. The
combined financial statements include allocations for certain periods of general
and administrative and other expenses from the corporate office. Such corporate
office expense allocations are based on determinations that management believes
to be reasonable. However, as Ornda and Tenet operated certain other businesses
and provided certain services, including financial, legal and other professional
services, human resources and information system services, to the Tenet
Hospitals and others; such expense allocations to The Hospitals may not be
representative of the costs of such services to be incurred in the future.
B. USE OF ESTIMATES
Management of The Hospitals has made a number of estimates and assumptions
relating to the reported amounts of revenues and expenses to prepare these
combined financial statements in conformity with generally accepted accounting
principles. Actual results could differ from those estimates.
C. DEPRECIATION
Depreciation is computed on straight-line basis over the estimated useful
life of each class of depreciable assets as follows: land improvements -- 10
years; buildings and improvements -- 20 to 40 years; equipment and fixtures -- 4
to 20 years. Equipment under capital leases is amortized using the straight-line
method over the shorter of the lease term or the estimated useful life of the
equipment. Such amortization is included in depreciation and amortization in the
accompanying combined financial statements.
D. GOODWILL
Goodwill represents the excess of purchase price over net assets acquired.
Amortization is provided on a straight-line basis over the estimated useful life
of 40 years.
Recoverability of intangible assets is periodically reviewed.
Recoverability of intangibles is determined based on the undiscounted future
operating cash flows from the related hospital. The amount of impairment, if
any, is measured based on discounted future operating cash flows using a
discount rate reflecting Tenet's average cost of funds or based on the fair
value of the related hospital.
F-40
<PAGE> 109
THE HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
E. IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparison of the carrying amount of an asset to future net cash flows expected
to be generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
amount of the assets exceeds the fair value of the assets.
F. 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.
G. INCOME TAXES
The Hospitals are not separate taxable entities but have been included in
the consolidated return of their parent for all periods presented. However,
Statement of Financial Accounting Standards No. 109, Accounting for Income
Taxes, requires that the current and deferred tax expense be allocated among
members of a company which issue separate financial statements.
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized as income in the
period that includes the enactment date. Valuation allowances are recorded for
deferred tax assets when it is more likely than not that such deferred tax
assets will not be realized.
2. NET PATIENT SERVICE REVENUE
The Hospitals have agreements with third-party payors that provide for
payments to The Hospitals at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
Medicare
Inpatient acute care services rendered to Medicare program
beneficiaries are paid at prospectively determined rates per discharge.
These rates vary according to a patient classification system that is based
on clinical, diagnostic, and other factors. Inpatient nonacute services and
certain outpatient services related to Medicare beneficiaries are paid
based on a cost reimbursement methodology. The Hospitals are reimbursed for
cost reimbursable items at a tentative rate with final settlement
determined after submission of an annual cost report by The Hospitals and
audit thereof by the Medicare fiscal intermediary. The Hospitals'
classification of patients under the Medicare program and the
appropriateness of their admission are subject to an independent review by
a peer review organization under contract with The Hospitals.
Medicaid
Inpatient services rendered to Medicaid beneficiaries are generally
paid at prospectively determined rates per day for a covered period of
days. Certain outpatient services are reimbursed based upon a cost
F-41
<PAGE> 110
THE HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
reimbursement methodology. Final reimbursement rates and amounts for these
services will be determined after submission of annual cost reports by The
Hospitals and audits by third-party intermediaries. Other outpatient
services are reimbursed based on a fee schedule.
Other
The Hospitals have also entered into payment agreements with certain
insurance carriers, health maintenance organizations, and preferred
provider organizations. The basis for payment to The Hospitals under these
agreements includes prospectively determined rates per discharge, discounts
from established charges, and prospectively determined daily rates.
Business and Credit Concentrations
In the course of providing health care services through their
inpatient and outpatient care facilities, The Hospitals grant credit to
patients and generally do not require collateral or other security in
extending credit; however, they routinely obtain assignment of (or are
otherwise entitled to receive) patients' benefits payable under their
health insurance programs, plans or policies (e.g., Medicare, Medicaid,
Blue Cross, health maintenance organizations, preferred provider
organizations and commercial insurance policies).
Approximately 47%, 49%, 48% and 43% of net patient service revenue are
from participation in the Medicare and state sponsored Medicaid programs
for the periods June 1, 1997 through January 31, 1998, and September 1,
1996 through May 31, 1997, year ended August 31, 1996 and period July 1,
1995 through August 31, 1995, respectively.
3. LEASE OBLIGATIONS
The Hospitals lease various equipment under lease agreements that have been
capitalized and have other noncancellable operating leases primarily for
equipment. Additionally, Woodland Park Hospital is leased under a lease
agreement that has been capitalized.
As of the date of sale to New American, all capital and operating leases
were either assumed by New American or paid off shortly thereafter.
Rent expense was approximately $824, $958, $1,292 and $216 for the periods
June 1, 1997 through January 31, 1998, and September 1, 1996 through May 31,
1997, year ended August 31, 1996 and period July 1, 1995 through August 31,
1995, respectively.
4. MANAGEMENT FEES
Through February 1997, The Hospitals operated under management arrangements
with their parent, Ornda. Services provided by Ornda included auditing,
accounting, personnel and other related services. Tenet did not charge
management fees. However, Tenet provided a similar level of administrative
support services.
5. IMPAIRMENT OF LONG-LIVED ASSETS
In the period September 1, 1996 through May 31, 1997, it was determined
that an impairment of $9,943 had occurred with respect to certain long-lived
assets of Davenport Medical Center based on its position in the market, overall
loss of its market share and expected undiscounted net cash flows from hospital
operations. All intangible assets totaling $6,584 were written-off and the
building was written down $3,359 from $10,950. Fair value was determined based
on the expected selling price of the hospital determined by comparable earnings
before income taxes, depreciation and amortization multiples.
F-42
<PAGE> 111
THE HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
6. MERGER EXPENSES
Certain expenses relating primarily to conforming accounting policies and
other corporate charges associated with the merger of Ornda and Tenet were
allocated to The Hospitals. These costs totaled $633 and are included in merger
and other corporate expenses in the accompanying combined statements of
operations for the period September 1, 1996 through May 31, 1997.
7. RETIREMENT PLAN
Through January 31, 1998, The Hospitals participated in a 401(k) plan
sponsored by Tenet for participating employees. Employees meeting related age
and tenure requirements were generally eligible for participation in the plan.
The Hospitals' direct cost of participation in this multi-employer plan cannot
be determined as they are included in management fees or not allocated from
Tenet.
8. INCOME TAXES
Income tax benefit (expense) consists of the following:
<TABLE>
<CAPTION>
PERIOD JUNE 1, 1997 THROUGH JANUARY 31, 1998
--------------------------------------------
CURRENT DEFERRED TOTAL
-------- --------- -------
<S> <C> <C> <C>
Federal...................................... $ 175 $ 250 $ 425
State........................................ -- 42 42
----- ------ ------
$ 175 $ 292 $ 467
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PERIOD SEPTEMBER 1, 1996 THROUGH MAY 31, 1997
-----------------------------------------------
CURRENT DEFERRED TOTAL
--------- ---------- --------
<S> <C> <C> <C>
Federal...................................... $(306) $1,702 $1,396
State........................................ (20) 314 294
----- ------ ------
$(326) $2,016 $1,690
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED AUGUST 31, 1996
-----------------------------------------
CURRENT DEFERRED TOTAL
------- -------- ------
<S> <C> <C> <C>
Federal...................................... $(627) $ (121) $ (748)
State........................................ (65) 12 (53)
----- ------ ------
$(692) $ (109) $ (801)
===== ====== ======
</TABLE>
<TABLE>
<CAPTION>
PERIOD JULY 1, 1995 THROUGH AUGUST 31, 1995
--------------------------------------------
CURRENT DEFERRED TOTAL
-------- --------- -------
<S> <C> <C> <C>
Federal...................................... $(162) $ 53 $ (109)
State........................................ (50) 14 (36)
----- ------ ------
$(212) $ 67 $ (145)
===== ====== ======
</TABLE>
F-43
<PAGE> 112
THE HOSPITALS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The actual income tax expense differs from the "expected" tax benefit
(expense) (computed by applying the U.S. federal corporate income tax rate of
34% to earnings before income taxes) as a result of the following:
<TABLE>
<CAPTION>
PERIOD PERIOD PERIOD
JUNE 1, 1997 SEPTEMBER 1, YEAR JULY 1, 1995
THROUGH 1996 THROUGH ENDED THROUGH
JANUARY 31, MAY 31, AUGUST 31, AUGUST 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Computed "expected" tax expense........ $448 $ 3,884 $(669) $(104)
Increase (reduction) in income taxes
resulting from:
State income taxes, net of federal
income tax benefit................ 28 194 (35) (24)
Write off of goodwill................ -- (2,312) -- --
Other................................ (9) (76) (97) (17)
---- ------- ----- -----
$467 $ 1,690 $(801) $(145)
==== ======= ===== =====
</TABLE>
9. CONTINGENCIES
LIABILITY INSURANCE
The Hospitals are insured for professional and general liability based on a
claims-made policy. The provision for professional liability and comprehensive
general liability claims includes estimates of the ultimate costs for claims
incurred but not reported, in accordance with actuarial projections based on
past experience. Management is aware of no professional liability claims whose
settlement would have a material adverse effect on The Hospitals' financial
position, results of operations or liquidity.
LITIGATION
The Hospitals are subject to various claims, legal actions and regulatory
investigations which arise in the ordinary course of business, certain of which
could be material. In the opinion of management, the ultimate resolution of such
matters will be adequately covered by insurance and will not have a material
adverse effect on The Hospitals' financial position, results of operations or
liquidity.
F-44
<PAGE> 113
INDEPENDENT AUDITORS' REPORT
The Board of Directors
PSH, Inc.:
We have audited the accompanying balance sheets of PSH, Inc., as of March
31, 1998 and May 31, 1997, and the related statements of income, stockholder's
equity and cash flows for the ten months ended March 31, 1998, the nine months
ended May 31, 1997, the year ended August 31, 1996 and the three months ended
August 31, 1995. 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 audits 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 financial statements referred to above present fairly,
in all material respects, the financial position of PSH, Inc. at March 31, 1998
and May 31, 1997, and the results of its operations and its cash flows for the
ten months ended March 31, 1998, the nine months ended May 31, 1997, the year
ended August 31, 1996 and the three months ended August 31, 1995 in conformity
with generally accepted accounting principles.
KPMG Peat Marwick LLP
Seattle, Washington
July 27, 1998
F-45
<PAGE> 114
PSH, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, MAY 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 2 $ 2
Patient accounts receivable, net of allowance for doubtful
accounts of $646 in 1998 and $1,156 in 1997............ 4,277 4,897
Other receivables, net.................................... 809 626
Inventories............................................... 282 285
Deferred income taxes..................................... 704 870
Prepaid expenses.......................................... 74 49
------- -------
Total current assets.............................. 6,148 6,729
Property and equipment, net................................. 12,863 12,777
Intangible assets, net of accumulated amortization of $213
in 1998 and $100 in 1997.................................. 359 445
Other assets................................................ -- 5
------- -------
Total assets...................................... $19,370 $19,956
======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Bank overdraft............................................ $ 111 $ 302
Accounts payable and other accrued expenses............... 1,506 1,633
Accrued salaries and benefits............................. 1,251 1,270
Due to parent............................................. 336 2,398
Estimated third-party payor settlements................... 1,716 1,002
------- -------
Total current liabilities......................... 4,920 6,605
Deferred income taxes....................................... 2,217 2,253
Payable to parent for income taxes.......................... 3,161 2,861
Stockholder's equity:
Common stock, par value $100; authorized 2,500 shares,
issued and outstanding 10 shares....................... 1 1
Additional paid-in capital................................ 7,551 7,551
Retained earnings......................................... 1,520 685
------- -------
Total stockholder's equity........................ 9,072 8,237
Commitments and contingencies...............................
------- -------
Total liabilities and stockholder's equity........ $19,370 $19,956
======= =======
</TABLE>
See accompanying notes to financial statements.
F-46
<PAGE> 115
PSH, INC.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
TEN MONTHS NINE MONTHS THREE MONTHS
ENDED ENDED YEAR ENDED ENDED
MARCH 31, MAY 31, AUGUST 31, AUGUST 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Revenues:
Net patient service revenue................ $24,334 $22,085 $28,870 $8,359
Other revenue.............................. 537 504 528 163
------- ------- ------- ------
Net operating revenues............. 24,871 22,589 29,398 8,522
------- ------- ------- ------
Expenses:
Salaries and benefits...................... 11,121 10,182 12,416 2,867
Professional fees.......................... 3,251 2,892 3,390 859
Supplies................................... 1,821 1,744 2,720 599
Provision for doubtful accounts............ 2,130 1,609 1,353 632
Other...................................... 4,508 3,660 4,673 1,051
Depreciation and amortization.............. 773 785 995 289
Interest................................... 1 3 104 110
------- ------- ------- ------
23,605 20,875 25,651 6,407
------- ------- ------- ------
Income before income tax expense........ 1,266 1,714 3,747 2,115
Provision for income taxes................... 431 582 1,276 719
------- ------- ------- ------
Net income.............................. $ 835 $ 1,132 $ 2,471 $1,396
======= ======= ======= ======
</TABLE>
See accompanying notes to financial statements.
F-47
<PAGE> 116
PSH, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL RETAINED TOTAL
COMMON PAID-IN EARNINGS STOCKHOLDER'S
STOCK CAPITAL (DEFICIT) EQUITY
<S> <C> <C> <C> <C>
Balances as of May 31, 1995........................... $1 $7,551 $(4,314) $3,238
Net income............................................ -- -- 1,396 1,396
-- ------ ------- ------
Balances as of August 31, 1995........................ 1 7,551 (2,918) 4,634
Net income............................................ -- -- 2,471 2,471
-- ------ ------- ------
Balances as of August 31, 1996........................ 1 7,551 (447) 7,105
Net income............................................ -- -- 1,132 1,132
-- ------ ------- ------
Balances as of May 31, 1997........................... 1 7,551 685 8,237
Net income............................................ -- -- 835 835
-- ------ ------- ------
Balances as of March 31, 1998......................... $1 $7,551 $ 1,520 $9,072
== ====== ======= ======
</TABLE>
See accompanying notes to financial statements.
F-48
<PAGE> 117
PSH, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR
TEN MONTHS NINE MONTHS ENDED THREE MONTHS
ENDED ENDED AUGUST ENDED
MARCH 31, MAY 31, 31, AUGUST 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net income...................................... $ 835 $1,132 $2,471 $1,396
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.............. 773 785 995 289
Provision for doubtful accounts............ 2,130 1,609 1,353 632
Provision for income taxes................. 431 582 1,276 719
Changes in operating assets and
liabilities:
Patient accounts receivable............. (1,510) (2,006) (1,197) (722)
Other receivables....................... (183) (201) 91 (48)
Inventories............................. 3 (36) 28 (36)
Prepaid expenses........................ (25) 147 (175) 56
Accounts payable and other accrued
expenses.............................. (118) 185 215 (219)
Accrued salaries and benefits........... (19) 202 61 (105)
Estimated third-party payor
settlements........................... 714 (178) (93) (516)
Due to parent........................... (2,062) (1,381) (3,873) (1,331)
Other................................... 5 -- (5) 3
------ ------ ------ ------
Net cash provided by operating
activities............................ 974 840 1,147 118
------ ------ ------ ------
Cash flows from investing activities:
Purchase of property and equipment.............. (746) (892) (575) (232)
Purchase of intangible assets................... (27) -- (545) --
------ ------ ------ ------
Net cash used in investing activities... (773) (892) (1,120) (232)
------ ------ ------ ------
Cash flows from financing activities:
Repayments of notes payable..................... -- (10) (40) (11)
Bank overdraft.................................. (191) 55 30 102
Other........................................... (10) (11) (18) --
------ ------ ------ ------
Net cash provided by (used in) financing
activities............................ (201) 34 (28) 91
------ ------ ------ ------
Net increase (decrease) in cash......... -- (18) (1) (23)
Cash at beginning of period....................... 2 20 21 44
------ ------ ------ ------
Cash at end of period............................. $ 2 $ 2 $ 20 $ 21
====== ====== ====== ======
</TABLE>
See accompanying notes to financial statements.
F-49
<PAGE> 118
PSH, INC.
NOTES TO FINANCIAL STATEMENTS
TEN MONTHS ENDED MARCH 31, 1998, THE NINE
MONTHS ENDED MAY 31, 1997, THE YEAR ENDED
AUGUST 31, 1996 AND THE THREE MONTHS ENDED AUGUST 31, 1995
(IN THOUSANDS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) DESCRIPTION OF BUSINESS
PSH Inc. (the Company), a wholly owned subsidiary of Tenet Healthcare
Corporation (the Parent), owns and operates a general hospital serving the
Tacoma and surrounding Pierce County, Washington community. The hospital,
licensed for 160 beds, including 49 medical/surgical, 49 psychiatric, 54
chemical dependency and 8 intensive care beds, offers a wide range of
inpatient and outpatient medical services and also provides specialty
services including psychiatry, chemical dependency treatment, beriatric
surgery, home health and hospice care.
(B) PATIENT ACCOUNTS RECEIVABLE
Patient accounts receivable consists of amounts owed by various
governmental agencies, insurance companies and private patients. The
Company regularly reviews its accounts receivable to provide an appropriate
allowance for uncollectible accounts.
(C) INVENTORIES
Inventories are comprised primarily of drugs and medical supplies and are
stated at the lower of cost, determined on a first-in, first-out basis, or
market.
(D) PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Routine maintenance and
repairs are charged to expense as incurred. Expenditures for major
improvements that extend useful lives or increase values are capitalized.
Depreciation and amortization are provided on the straight-line method over
the estimated useful lives of the assets as follows: land
improvements -- 15 years; buildings -- 20 to 30 years; building
improvements -- 5 to 20 years; equipment and fixtures -- 3 to 15 years.
(E) INTANGIBLE ASSETS
Intangible assets consist primarily of goodwill resulting from the purchase
of a home health practice. Amortization is provided on the straight-line
method over an estimated useful life of 5 years.
(F) IMPAIRMENT OF LONG-LIVED ASSETS
Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable. Recoverability of assets to be
held and used is measured by comparison of the carrying amount of an asset
to future net cash flows expected to be generated by the asset. If such
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceed
the fair value of the assets.
(G) 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
F-50
<PAGE> 119
PSH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
the period the related services are rendered and adjusted in future periods
as final settlements are determined.
The Company provides care to patients who meet certain criteria under its
charity care policy without charge or at amounts less than its established
rates. Because the Company does not pursue collection of amounts determined
to qualify as charity care, they are not reported as patient service
revenue.
(H) INCOME TAXES
The Company and its Parent file a consolidated federal income tax return.
Income taxes are provided as if the Company was a separate taxpaying entity
and these income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled.
The effect on deferred tax assets and liabilities of a change in tax rates
is recognized as income in the period that includes the enactment date.
(I) FINANCIAL INSTRUMENTS
The Company has financial instruments consisting of cash, patient accounts
receivable, accounts payable, and amounts due from and to parent. The fair
value of these financial instruments approximates their carrying amount
based upon their short term nature.
(J) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of expenses during the
reporting periods. Actual results could differ from those estimates.
(2) NET PATIENT SERVICE REVENUE
The Company has agreements with third-party payors that provide for
payments to the Company at amounts different from its established rates. A
summary of the payment arrangements with major third-party payors follows:
MEDICARE
Inpatient acute care services rendered to Medicare program beneficiaries
are paid at prospectively determined rates per discharge. These rates vary
according to a patient classification system that is based on clinical,
diagnostic, and other factors. Inpatient nonacute services and certain
outpatient services related to Medicare beneficiaries are paid based on a
cost reimbursement methodology. The Company is reimbursed for cost
reimbursable items at a tentative rate with final settlement determined
after submission of an annual cost report by the Company and audit thereof
by the Medicare fiscal intermediary. The Company's classification of
patients under the Medicare program and the appropriateness of their
admission are subject to an independent review by a peer review
organization under contract with the Company.
F-51
<PAGE> 120
PSH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
MEDICAID
Inpatient services rendered to Medicaid beneficiaries are paid at
prospectively determined rates per day for a covered period of days.
Certain outpatient services are reimbursed based upon a cost reimbursement
methodology. Final reimbursement rates and amounts for these services are
determined after submission of annual cost reports by the Company and
audits by third-party intermediaries. Other outpatient services are
reimbursed based on a fee schedule.
OTHER
The Company has payment agreements with certain commercial insurance
carriers, health maintenance organizations, and preferred provider
organizations. The basis for payment to the Company under these agreements
includes prospectively determined rates per discharge, discounts from
established charges, and prospectively determined daily rates.
BUSINESS AND CREDIT CONCENTRATIONS
In the course of providing health care services through its inpatient and
outpatient care facilities, the Company grants credit to patients and
generally does not require collateral or other security in extending
credit; however, it routinely obtains assignment of (or is otherwise
entitled to receive) patients' benefits payable under their health
insurance programs, plans or policies (e.g., Medicare, Medicaid, Blue
Cross, health maintenance organizations, preferred provider organizations
and commercial insurance policies).
Net receivables from Medicare, Medicaid and managed care organizations
amounted to $1,057, $745 and $1,499 as of March 31, 1998 and $1,325, $1,252
and $1,552 as of May 31, 1997, respectively. Approximately 52%, 58%, 58%
and 56% of net patient service revenue are from participation in the
Medicare and state sponsored Medicaid programs for the ten months ended
March 31, 1998, the nine months ended May 31, 1997, the year ended August
31, 1996 and the three months ended August 31, 1995, respectively.
(3) PROPERTY AND EQUIPMENT
A summary of property and equipment follows:
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, MAY 31,
1998 1997
<S> <C> <C>
Land and improvements..................................... $ 1,108 $ 1,108
Buildings and improvements................................ 14,801 14,846
Equipment and fixtures.................................... 11,327 10,537
------- -------
27,236 26,491
Less accumulated depreciation and amortization............ 14,373 13,714
------- -------
$12,863 $12,777
======= =======
</TABLE>
(4) LEASE OBLIGATIONS
The Company leases office space and various equipment under noncancelable
operating lease agreements expiring at various dates through August 31, 2001.
Rent expense, including short-term rentals and expenditures in lieu of rent, was
$654, $646, $810 and $203 for the ten months ended March 31, 1998, the nine
months ended May 31, 1997, the year ended August 31, 1996 and the three months
ended August 31, 1995,
F-52
<PAGE> 121
PSH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
respectively. A summary of future minimum lease payments due under the operating
leases as of March 31, 1998, is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
MARCH 31,
<S> <C>
1999...................................................... $350
2000...................................................... 211
2001...................................................... 64
2002...................................................... 21
----
$646
====
</TABLE>
The Company leases a portion of the facility and office space under
operating leases expiring at various dates through October 14, 2001. Approximate
minimum future rental receipts due under the operating leases as of March 31,
1998, is as follows:
<TABLE>
<CAPTION>
YEARS ENDING
MARCH 31,
<S> <C>
1999...................................................... $221
2000...................................................... 88
2001...................................................... 88
2002...................................................... 47
----
$444
====
</TABLE>
(5) RETIREMENT PLAN
The Company has a 401(k) plan available for employees through the
sponsorship of the Parent. All employees who have completed one year of service
are eligible for the plan. Company contributions under the plan are provided at
specified rates according to the rate of employee contributions. Total expense
under the plan was $69, $132, $112, and $3 for the ten months ended March 31,
1998, the nine months ended May 31, 1997, the year ended August 31, 1996 and the
three months ended August 31, 1995, respectively.
(6) INCOME TAXES
The components of income tax expense are as follows:
<TABLE>
<CAPTION>
TEN NINE YEAR THREE
MONTHS MONTHS ENDED MONTHS
ENDED ENDED AUGUST ENDED
MARCH 31, MAY 31, 31, AUGUST 31,
1998 1997 1996 1995
<S> <C> <C> <C> <C>
Current................................. $301 $899 $1,126 $709
Deferred................................ 130 (317) 150 10
---- ---- ------ ----
$431 $582 $1,276 $719
==== ==== ====== ====
</TABLE>
F-53
<PAGE> 122
PSH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities are presented below:
<TABLE>
<CAPTION>
AS OF AS OF
MARCH 31, MAY 31,
1998 1997
<S> <C> <C>
Deferred tax assets:
Allowance for doubtful accounts........................... $ 220 $ 393
Net intangibles........................................... 52 23
Accrued vacation.......................................... 262 255
Other accrued expenses.................................... 221 221
Other..................................................... 1 1
------- -------
Total deferred tax assets......................... 756 893
Deferred tax liabilities:
Property and equipment.................................... (2,269) (2,276)
------- -------
Net deferred tax liability........................ $(1,513) $(1,383)
======= =======
</TABLE>
(7) RELATED PARTY TRANSACTIONS
As a wholly owned subsidiary of the Parent, expenses such as employee
benefits, insurance coverage, information systems, legal fees, interest and
other costs are allocated to the Company by the Parent. Total expenses paid by
the Parent and allocated to the Company were $2,747, $2,368, $3,111 and $699 for
the ten months ended March 31, 1998, the nine months ended May 31, 1997, the
year ended August 31, 1996 and the three months ended August 31, 1995,
respectively. During the periods ended March 31, 1998, May 31, 1997, August 31,
1996 and August 31, 1995, the Company was also charged a management fee by the
Parent. The management fees charged to the Company were $1,344, $972, $1,204 and
$345 for the ten months ended March 31, 1998, the nine months ended May 31,
1997, the year ended August 31, 1996 and the three months ended August 31, 1995,
respectively.
The Company maintains cash accounts for depository and cash disbursement
purposes. The Parent sweeps daily deposits from the Company's cash accounts and
funds the daily disbursement requirements. The due from and due to parent
balances result from the cash sweep, cash funding and expense allocation
activity.
(8) CONTINGENCIES
The Company has environmental soil contamination resulting from leakage of
oil storage tanks located on the Company's property. Environmental consultants
have developed a workplan to remediate existing contamination which must be
approved by the Washington State Department of Ecology. Once the workplan is
approved, remediation may begin. Full remediation of the contamination cannot
take place as the oil storage tanks are located under one of the Company's main
buildings. Based on discussions with the State of Washington, the Company will
be required to complete a partial remediation of the affected area with a full
clean up upon demolition of the building or conversion of the property for a
purpose other than hospital operations.
Management believes that the Company's probable, non discounted net
liability for partial remediation ranges from $450 to $700 of which $450 has
been accrued in the accompanying financial statements. The total estimated cost
of full remediation is currently not estimable due to the location of the
contaminated area.
The Company is subject to various other claims and legal actions which
arise in the ordinary course of business, certain of which could be material. In
the opinion of management, the ultimate resolution of such matters will be
adequately covered by the insurance and will not have a material adverse effect
on the Company's financial position, results of operations or liquidity.
F-54
<PAGE> 123
PSH, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(9) SALE OF ASSETS
In December 1997, the Company entered into a definitive agreement to sell
substantially all of its assets to New American Healthcare Corporation for
$25,000, plus an amount equal to the book value of selected working capital
accounts. This sale is contingent upon the resolution of the environmental
remediation discussed in note 8.
F-55
<PAGE> 124
HOSPITAL LOCATIONS
Map of United States marked to show locations
of the Company's Hospitals
1. Doctors Hospital Wenteville, Missouri 94 beds
2. Memorial Hospital of Center Center, Texas 54 beds
3. Delta Medical Center Memphis, Tennessee 243 beds
4. Dolly Vinsant Memorial Hospital San Benito, Texas 81 beds
5. Davenport Medical Center Davenport, Iowa 149 beds
6. Lander Valley Medical Center Lander, Wyoming 102 beds
7. Woodland Park Hospital Portland, Oregon 209 beds
8. Eastmoreland Hospital Portland, Oregon 100 beds
9. Puget Sound Hospital Tacoma, Washington 160 beds
(acquisition pending)
* Corporate Headquarters Nashville, Tennessee
<PAGE> 125
- ------------------------------------------------------
- ------------------------------------------------------
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS,
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY OF THE UNDERWRITERS. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO
BUY, TO ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD
BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 8
The Reincorporation................... 16
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Pro Forma Condensed Combined Financial
Information......................... 20
Selected Historical Financial and
Operating Data...................... 26
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 27
Business.............................. 32
Management............................ 48
Certain Relationships and Related
Transactions........................ 53
Principal and Selling Stockholders.... 57
Description of Capital Stock.......... 58
Shares Eligible for Future Sale....... 62
Underwriting.......................... 64
Legal Matters......................... 65
Experts............................... 65
Additional Information................ 66
Index to Financial Statements......... F-1
</TABLE>
------------------
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK OFFERED HEREBY, WHETHER OR
NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
6,000,000 SHARES
(NEW AMERICAN HEALTHCARE LOGO)
COMMON STOCK
------------------
PROSPECTUS
------------------
DONALDSON, LUFKIN & JENRETTE
BEAR, STEARNS & CO. INC.
CREDIT SUISSE FIRST BOSTON
SUNTRUST EQUITABLE SECURITIES
, 1998
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 126
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the estimated costs and expenses (all of
which will be paid by the Registrant) in connection with the Offering described
in the Registration Statement.
<TABLE>
<S> <C>
Commission Registration Fee................................. $ 36,639
NASD Filing Fee............................................. 12,000
New York Stock Exchange Listing Fee......................... 91,600
Blue Sky Fees and Expenses.................................. 10,000
Printing and Engraving Expenses............................. 205,000
Legal Fees and Expenses..................................... 500,000
Auditors' Fees and Expenses................................. 1,200,000
Transfer Agent and Registrar Fees and Expenses.............. 11,500
Miscellaneous............................................... 33,261
----------
Total....................................................... $2,100,000
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
(a) The Delaware General Corporation Law (the "DGCL") provides that a
corporation may indemnify any of its directors against liability incurred in
connection with a proceeding if (i) the director acted in good faith, (ii) the
director reasonably believed that his or her conduct was not opposed to the best
interest of the corporation, and (iii) in connection with any criminal
proceeding, the director had no reasonable cause to believe that his or her
conduct was unlawful. In actions brought by or in the right of the corporation,
however, the DGCL provides that if the director was adjudged to be liable to the
corporation, only the Court of Chancery of the State of Delaware or the court in
which such action was brought may approve such indemnity.
(b) Article Ten of the Certificate of Incorporation of the Registrant sets
forth the extent to which officers or directors of the Registrant may be insured
or indemnified against any liabilities which they may incur. The general effect
of such provision is that any person made a party to any action, suit or
proceeding by reason of the fact that he or she is or was a director or officer
of the Registrant will be indemnified by the Registrant against expenses
(including attorney's fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by him or her in connection with such action,
suit or proceeding, to the fullest extent permitted under the laws of the State
of Delaware. In addition, such provision provides that, in the Registrant's sole
discretion, the Registrant may indemnify employees or agents against such
expenses, judgments, fines and amounts paid in settlement. The Company intends
to purchase a policy of directors' and officers' insurance that would in certain
instances provide the funds necessary for the Registrant to meet its obligations
under its Certificate of Incorporation.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
In connection with the original capitalization of the Company, on August
28, 1995 and October 9, 1995, the Company sold an aggregate of 2,500,000 and
300,000, respectively, shares of its Common Stock to certain members of
management. In order to obtain working and acquisition capital, on December 27,
1995, the Company sold an aggregate of 5,026,500 shares of its Common Stock to
Welsh, Carson, Anderson & Stowe VII, L.P., WCAS Healthcare Partners, L.P.,
certain members of management and certain other investors. In order to obtain
working capital and induce management ownership, on February 8, 1996, the
Company sold 200,000 shares of its Common Stock to Neil G. McLean. The aggregate
purchase price for all such purchases was approximately $1,607,950.
In order to obtain working and acquisition capital, on July 31, 1996, the
Company sold an aggregate of 150,000 shares of its Series B Convertible
Preferred Stock ("Series B Preferred Stock") to Welsh, Carson,
II-1
<PAGE> 127
Anderson & Stowe VII, L.P., certain members of management and certain other
investors. In order to obtain working and acquisition capital, on April 2, 1997,
the Company sold 11,185.5 shares of its Series B Preferred Stock to Welsh,
Carson, Anderson & Stowe VII, L.P., certain members of management and certain
other investors. In order to obtain acquisition capital, on April 30, 1997 and
May 16, 1997, the Company sold an aggregate of 57,500 and 16,314.5 shares,
respectively, of its Series B Preferred Stock to Welsh, Carson, Anderson & Stowe
VII, L.P. and certain other investors. The aggregate purchase price for all such
purchases was approximately $23,500,000.
In order to obtain working capital, on April 2, 1997, the Company sold an
aggregate of 1,575 shares of Series A Non-convertible Cumulative Preferred Stock
(Series A Preferred Stock) to certain members of management. In order to obtain
acquisition capital, on May 16, 1997, July 31, 1997 and January 30, 1998, the
Company sold an aggregate of 51,185.5, 20,000, and 177,239.5 shares,
respectively of Series A Preferred Stock to Welsh, Carson, Anderson & Stowe VII,
L.P. and certain other investors. The aggregate purchase price for all such
purchases was approximately $25,000,000.
In connection with the issuance of the $25,000,000 of Subordinated Debt, on
January 30, 1998, the Company issued a Warrant to purchase 565,000 shares of
Common Stock to WCAS Capital Partners III, L.P.
All of the sales described above were deemed to be exempt from registration
under the Securities Act by virtue of Section 4(2) thereof, as transactions not
involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
*1 -- Form of Underwriting Agreement.
3.1 -- Form of Certificate of Incorporation of the Registrant to be
filed with the Secretary of State of the State of Delaware
prior to completion of this Offering.
3.2 -- Form of Bylaws of the Registrant.
**3.3 -- Form of Agreement and Plan of Merger of New American
Healthcare Corporation with and into NAHC Merger Sub, Inc.
dated , 1998.
4.1 -- Provisions of Articles of Incorporation defining the rights
of security holders. See Exhibit 3.1.
4.2 -- Form of Common Stock certificate.
**5 -- Opinion of Harwell Howard Hyne Gabbert & Manner, P.C.
10.1 -- Form of Executive Non-Compete and Severance Agreements.
*10.2 -- Lease Agreement dated May 22, 1996 between New American
Healthcare Corporation, as Tenant, and James W. Ayers, as
Landlord, as amended by First Amendment to Lease dated
October 10, 1996 between Highwoods/Forsyth Ltd. Partnership
(as successor to James W. Ayers) and New American Healthcare
Corporation and further amended by Second Amendment to Lease
dated June 10, 1998 between Highwoods/Forsyth Ltd.
Partnership (as successor to James W. Ayers) and New
American Healthcare Corporation for the office space located
in Brentwood, Tennessee.
*10.3 -- Securities Purchase Agreement dated as of January 30, 1998
among the Registrant and WCAS Capital Partners III, L.P.
*10.4 -- 10% Senior Subordinated Note due January 30, 2008 made by
the Registrant in favor of WCAS Capital Partners III, L.P.
in the principal amount of $25 million.
*10.6 -- Stock Subscription Warrant dated January 30, 1998 from the
Registrant to WCAS Capital Partners III, L.P.
*10.7 -- Securities Purchase Agreement dated as of December 19, 1995
among the Registrant, Welsh, Carson, Anderson & Stowe VII,
L.P. and the several other purchasers named in Annex I, as
amended.
</TABLE>
II-2
<PAGE> 128
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
*10.8 -- Registration Rights Agreement dated December 19, 1995 by and
among the Registrant, Welsh, Carson, Anderson & Stowe VII,
L.P. and the several purchasers named in Annex I, as
amended.
*10.9 -- Stockholders Agreement dated December 19, 1995 by and among
the Registrant, Welsh, Carson, Anderson & Stowe VII, L.P.
and several parties named in Schedule I, as amended.
*10.10 -- Restricted Stock Agreement dated December 19, 1995 by and
among the Registrant, Welsh, Carson, Anderson & Stowe VII,
L.P. the several other investors named in Annex I and the
several individuals named in Annex II.
*10.11 -- Asset Purchase Agreement effective August 1, 1996, between
Doctors Hospital - Wentzville, L.P., as Seller, and NAHC of
Missouri, Inc., as Buyer.
*10.12 -- Consulting Agreement dated August 1, 1996 between Jack B.
Bailey and New American Healthcare Corporation.
*10.13 -- Amended and Restated Credit Agreement dated as of January
30, 1998 between New American Healthcare Corporation,
Toronto Dominion (Texas), Inc. for itself and as Agent on
behalf of the Banks and the Issuing Bank.
*10.14 -- Promissory Note dated January 30, 1998 in the amount of
$30,000,000 made by the Company in favor of Toronto Dominion
(Texas), Inc.
*10.15 -- Promissory Note dated January 30, 1998 in the amount of
$25,000,000 made by the Company in favor of NationsBank,
N.A.
*10.16 -- Promissory Note dated January 30, 1998 in the amount of
$10,000,000 made by the Company in favor of AmSouth Bank of
Tennessee.
*10.17 -- Promissory Note dated January 30, 1998 in the amount of
$15,000,000 made by the Company in favor of Corestates Bank,
N.A.
*10.18 -- Promissory Note dated January 30, 1998 in the amount of
$10,000,000 made by the Company in favor of Banque Paribas.
*10.19 -- Promissory Note dated January 30, 1998 in the amount of
$12,500,000 made by the Company in favor of First American
National Bank.
*10.20 -- Promissory Note dated January 30, 1998 in the amount of
$15,000,000 made by the Company in favor of National City
Bank, Kentucky.
*10.21 -- Promissory Note dated January 30, 1998 in the amount of
$15,000,000 made by the Company in favor of BankOne, N.A.
*10.22 -- Amended and Restated Security Agreement dated January 30,
1998 by and between the Company and Toronto Dominion
(Texas), Inc. as Agent.
*10.23 -- Amended and Restated Stock Pledge Agreement dated as of
January 30, 1998 between New American Healthcare Corporation
and Toronto Dominion (Texas), Inc. for itself and as Agent
on behalf of the Banks and the Issuing Bank.
*10.24 -- Form of Subsidiary Security Agreement dated as of January
30, 1998 between each of the Company's subsidiaries and
Toronto Dominion (Texas), Inc. for itself and as Agent on
behalf of the Banks and the Issuing Bank.
*10.25 -- Form of Subsidiary Guaranty dated as of January 30, 1998
between each of the Company's subsidiaries and Toronto
Dominion (Texas), Inc. for itself and as Agent on behalf of
the Banks and the Issuing Bank.
*10.26 -- Stock Purchase Agreement effective May 1, 1997 among Larry
F. McFall, Phil Sanderson, D.L. Patterson, Charles F.
Daniel, Sam C. Yeager, Mack R. Choplin, David R. Carver and
Timothy L. Yeager, as Shareholders, Southeastern Hospital
Corporation, Park Healthcare Company (Southeastern and Park,
as Sellers) and New American Healthcare Corporation with
respect to the stock of Center Hospital, Inc. d/b/a Memorial
Hospital of Center.
*10.27 -- Asset Purchase Agreement dated May 1, 1997 among Eastwood
Hospital, Inc., as Seller, the Shareholder of Seller, and
NAHC of Tennessee, Inc., as Buyer, and New American
Healthcare Corporation, as Parent.
</TABLE>
II-3
<PAGE> 129
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
*10.28 -- Interim Management Agreement dated May 16, 1997 between
Eastwood Hospital, Inc. and NAHC of Tennessee, Inc. with
respect to the mental health outpatient facility located at
3960 Knight Arnold Road, Suite 303, Memphis, Tennessee
38118.
*10.29 -- Asset Purchase Agreement effective August 1, 1997 by and
among The Dolly V L.C., as Seller, the Members of Seller,
and NAHC II of Texas, Inc., as Buyer (Dolly Vinsant Memorial
Hospital).
*10.30 -- Asset Sale Agreement dated as of December 22, 1997 among New
American Healthcare Corporation, as Buyer, and Davenport
Medical Center, Inc., EGH, Inc., Qualicare of Wyoming, Inc.
and Woodland Park Hospital, Inc. (collectively, Seller), as
assigned to the respective subsidiaries of NAHC by that
certain Assignment of Asset Sale Agreement dated January 30,
1998.
*10.31 -- Assignment and Assumption of Lease (Lander Valley Medical
Center) effective February 1, 1998 between Qualicare of
Wyoming, Inc. and NAHC of Wyoming, Inc. with respect to that
certain Lease dated July 10, 1982 between the City of
Lander, as lessor, and Lander Valley Regional Medical
Center, as lessee, as modified by Amendment No. One to Lease
dated April 24, 1985 and the First Amendment to Lease dated
July 1, 1991.
*10.32 -- Assignment and Assumption of Lease (Woodland Park Hospital)
effective February 1, 1998 between Woodland Park Hospital,
Inc. (Assignor) and NAHC of Oregon, Inc. (Assignee) with
respect to that certain Lease dated December 27, 1968
between Woodland Park Corporation (predecessor-in-interest
to The Les Ashbar Trust; Ernest B. Martin, The Connie L.
McNight Trust dated April 6, 1993; David L. Harris as
Successor Trustee FBO Joan K. Bailey (nka Joan K. Ayala),
Marti Ridout and Jan L. Schilded; A.E. Brim; Milton Zusman,
Melvin Weinstein; Melvin Weinstein and Anne Weinstein,
Trustees U/T/A dated April 7, 1992, Michael Zusman, Steven
Zusman, Bruce Weinstein and Lisa Marie Weinstein) and
W.P.H., Inc. (Assignor's predecessor-in-interest), as
amended by Amendment to Lease dated March 4, 1971, as
assigned by Notice of Assignment of Lease and Authorization
for Payment of Lease Rentals dated April 1, 1972 and as
further amended by Second Amendment to Lease dated January
30, 1998.
*10.33 -- License Agreement (Pulse Health Services) dated as of
January 31, 1998 among Tenet HealthSystem HealthCorp, NAHC
of Oregon, Inc. and New American Healthcare Corporation.
*10.34 -- License Agreement (Pulse Home Health) dated as of January
31, 1998 among Tenet HealthSystem HealthCorp, NAHC of Iowa,
Inc. and New American Healthcare Corporation.
*10.35 -- Asset Sale Agreement dated as of December 22, 1997 between
New American Healthcare Corporation, as Buyer, and PSH,
Inc., as Seller.
*10.36 -- Agreement dated March 23, 1998 between Healthcare Management
Systems, Inc. and New American Healthcare Corporation
(management information systems).
10.37 -- New American Healthcare Corporation Stock Option Plan.
10.38 -- New American Healthcare Corporation Employee Stock Purchase
Plan.
**11 -- Statement re Computation of Common Stock Pro Forma Income
Per Share.
*21 -- Subsidiaries of the Registrant.
23.1 -- Consent of KPMG Peat Marwick LLP.
23.2 -- Consent of Harwell Howard Hyne Gabbert & Manner, P.C.
(included in Exhibit 5)
*24.1 -- Power of Attorney (included on page II-6).
*27.1 -- Financial Data Schedule (for SEC use only).
</TABLE>
- ------------------------------
* Filed with initial Registration Statement
** To be filed by amendment
(b) Financial Statement Schedules and Reports
Schedule II -- Valuation and Qualifying Accounts
II-4
<PAGE> 130
ITEM 17. UNDERTAKINGS.
The undersigned Registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the Registrant of expenses incurred or paid by a director, officer or
controlling person of the Registrant in the successful defense of any action,
suit or proceeding) is asserted against the Registrant by such director, officer
or controlling person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
The undersigned Registrant hereby undertakes 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 a form
of prospectus filed by the Registrant 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, 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-5
<PAGE> 131
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Brentwood,
State of Tennessee, on July 29, 1998.
NEW AMERICAN HEALTHCARE CORPORATION
By: /s/ ROBERT M. MARTIN
--------------------------------------
Robert M. Martin
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed by the following persons in the
capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT M. MARTIN Chief Executive Officer, July 29, 1998
- ----------------------------------------------------- President, Chairman of the
Robert M. Martin Board (Principal Executive
Officer).
/s/ DANA C. MCLENDON, JR. Senior Vice President of July 29, 1998
- ----------------------------------------------------- Finance and Administration,
Dana C. McLendon, Jr. Director (Principal Financial
Officer)
/s/ TIMOTHY S. HILL Vice President and Controller July 29, 1998
- ----------------------------------------------------- (Principal Accounting
Timothy S. Hill Officer)
* Director July , 1998
- -----------------------------------------------------
Richard H. Stowe
* Director July , 1998
- -----------------------------------------------------
James B. Hoover
* Director July , 1998
- -----------------------------------------------------
David A. Jensen
* Director July , 1998
- -----------------------------------------------------
Jeptha W. Dalston
* Director July , 1998
- -----------------------------------------------------
Paul B. Queally
By: /s/ DANA C. MCLENDON, JR. July 29, 1998
-----------------------------------------------
Dana C. McLendon, Jr.
Attorney-in-fact
</TABLE>
II-6
<PAGE> 132
NEW AMERICAN HEALTHCARE CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
ADDITIONS
---------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE AT
BEGINNING COSTS AND OTHER ACCOUNTS DEDUCTIONS END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE(1) DESCRIBE(2) PERIOD
----------- ---------- ---------- -------------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Year Ended March 31, 1997:
Allowance for doubtful accounts... -- 534,292 3,031,918 (2,984,210) 582,000
Year Ended March 31, 1998:
Allowance for doubtful accounts... 582,000 7,836,565 4,761,368 (4,007,933) 9,172,000
</TABLE>
- ------------------------------
(1) Represents allowance for doubtful accounts acquired in acquisitions.
(2) Accounts written off, net of recoveries.
<PAGE> 1
CERTIFICATE OF INCORPORATION
OF
NEW AMERICAN HEALTHCARE CORPORATION
The undersigned, a natural person, for the purpose of organizing a
corporation for conducting the business and promoting the purposes hereinafter
stated, under the provisions and subject to the requirements of the laws of the
State of Delaware (particularly Title 8, Chapter 1 of the Delaware Code and the
acts amendatory thereof and supplemental thereto, and known, identified, and
referred to as the "Delaware General Corporation Law"), hereby certifies that:
FIRST: The name of the Corporation (hereinafter called the
"Corporation") is NEW AMERICAN HEALTHCARE CORPORATION.
SECOND: The address, including street, number, city, and county, of the
registered office of the Corporation in the State of Delaware is 9 East
Loockerman Street, Dover, Delaware 19901, County of Kent; and the name of the
registered agent of the Corporation in the State of Delaware at such address is
National Registered Agents, Inc.
THIRD: The nature of the business or purposes of the Corporation is to
engage in any lawful act or activity for which corporations may be organized
under the Delaware General Corporation Law.
FOURTH:
1. The maximum number of shares of stock which the Corporation shall
have the authority to issue is fifty million (50,000,000) shares of Common
Stock, having a par value of $.01 per share, which shares shall not be subject
to any preemptive rights, one million (1,000,000) shares of Non-Voting Common
Stock having a par value of $.01 per share, which shares shall not be subject to
any preemptive rights and ten million (10,000,000) shares of undesignated
preferred stock having a par value of $.01 per share.
2. Pursuant to Section 151 of the Delaware General Corporation Law, a
statement of the designations, powers, preferences and rights, and the
qualifications, limitations and restrictions thereof, in respect of each class
of capital stock is as follows:
A. PREFERRED STOCK
The Board of Directors is hereby expressly authorized at any time, and
from time to time, to provide for the issuance of shares of preferred stock in
one or more series, with
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such voting powers, full or limited, or no voting powers, and with such
designations, preferences and relative, participating, optional or other rights,
and qualifications or restrictions thereof, as shall be stated and expressed in
the resolution or resolutions providing for the issue thereof adopted by a
majority of the Board of Directors then in office and the certificate of
designations filed under the Delaware General Corporation Law setting forth such
resolution or resolutions, including (without limiting the generality thereof)
the following as to each such series:
(i) the designation of such series;
(ii) the dividends, if any, payable with respect to such series,
the rates or basis for determining such dividends, any
conditions and dates upon which such dividends shall be
payable, the preferences, if any, of such dividends over, or
the relation of such dividends to, the dividends payable on
the Common Stock or any other series of preferred stock,
whether such dividends shall be noncumulative or cumulative,
and, if cumulative, the date or dates from which such
dividends shall be cumulative;
(iii) whether shares of such series shall be redeemable at the
option of the Board of Directors or the holder, or both, upon
the happening of a specified event and, if redeemable, whether
for cash, property or rights, including securities of the
Corporation, the time, prices or rates and any adjustment and
other terms and conditions of such redemption;
(iv) the terms and amount of any sinking, retirement or purchase
fund provided for the purchase or redemption of shares of such
series;
(v) whether shares of such series shall be convertible into or
exchangeable for shares of Common Stock or any other series of
preferred stock, at the option of the Corporation or of the
holder, or both, or upon the happening of a specified event
and, if provision be made for such conversion or exchange, the
terms, prices, rates, adjustments and any other terms and
conditions thereof;
(vi) the extent, if any, to which the holders of shares of such
series shall be entitled to vote with respect to the election
of directors or otherwise, including, without limitation, the
extent, if any, to which such holders shall be entitled,
voting as a series or as a part of a class, to elect one or
more directors upon the happening of a specified event or
otherwise;
(vii) the restrictions, if any, on the issue or reissue of shares of
such series or any other series;
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(viii) the extent, if any, to which the holders of shares of such
series shall be entitled to preemptive rights; and
(ix) the rights of the holders of shares of such series upon the
liquidation of the Corporation or any distribution of its
assets.
B. COMMON STOCK
(i) Voting Rights. All holders of Common Stock shall be entitled
to notice of any stockholders' meeting. Subject to the
provisions of any applicable law and except as otherwise
provided in this Certificate of Incorporation or by the
resolution or resolutions providing for the issue of shares
of preferred stock, all voting rights shall be vested solely
in the Common Stock. The holders of shares of Common Stock
shall be entitled to vote upon the election of directors and
upon any other matter submitted to the stockholders for a
vote. Each share of Common Stock issued and outstanding shall
be entitled to one noncumulative vote. A fraction of a share
of Common Stock shall not be entitled to any voting rights
whatsoever.
(ii) Dividends and Distributions. No payment of dividends or
distributions shall be made to the holders of shares of
Common Stock unless and until the holders of shares of
preferred stock receive any preferential amounts to which
they are entitled under this Article or in the resolution or
resolutions providing for the issue of shares of preferred
stock. Subject to the limitation set forth in the preceding
sentence of this Paragraph (i) and except as otherwise
provided by this Certificate of Incorporation or in the
resolution or resolutions providing for the issue of shares
of preferred stock, the holders of shares of Common Stock
shall be entitled to receive such dividends and distributions
as may be declared upon such shares of Common Stock, from
time to time by a resolution or resolutions adopted by the
Board of Directors.
(iii) Liquidation, Dissolution or Winding Up. Except as otherwise
provided in this Certificate of Incorporation and subject to
the rights of holders, if any, of preferred stock to receive
preferential liquidation distributions to which they are
entitled under this Article or under the resolution or
resolutions providing for the issue of shares of preferred
stock, in the event of any liquidation, dissolution or winding
up of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the debts and
liabilities of the Corporation, all assets of the Corporation
shall be shared pro rata among the holders of the Common
Stock.
C. NON-VOTING COMMON STOCK
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<PAGE> 4
(i) Voting Rights. The holders of shares of Class B Common
Stock shall not be entitled to vote on any matter to be voted on by the
stockholders of the Corporation.
(ii) Dividends. No payment of dividends or distributions shall
be made to the holders of shares of Non-Voting Common Stock unless and until the
holders of shares of preferred stock receive any preferential amounts to which
they are entitled under this Article or in the resolution or resolutions
providing for the issue of shares of preferred stock. Subject to the limitation
set forth in the preceding sentence of this Paragraph (ii) and except as
otherwise provided by this Certificate of Incorporation or in the resolution or
resolutions providing for the issue of shares of preferred stock, the holders of
shares of Non-Voting Common Stock shall be entitled to receive such dividends
and distributions as may be declared upon such shares of Non Voting Common
Stock, from time to time by a resolution or resolutions adopted by the Board of
Directors. Such dividends shall be equal in amount per share to dividends
declared on Common Stock; provided, however, that in the event that the holders
of Common Stock receive a dividend payable in shares of Common Stock or other
securities convertible into or exchangeable for shares of Common Stock, then
holders of Non-Voting Common Stock shall receive a number of shares of
Non-Voting Common Stock or of such other securities which is equal to the number
of shares of Non-Voting Common Stock or such other securities which they would,
but for this proviso, have received pursuant to this paragraph (ii).
(iii) Liquidation. Except as otherwise provided in this
Certificate of Incorporation and subject to the rights of holders, if any, of
preferred stock to receive preferential liquidation distributions to which they
are entitled under this Article or under the resolution or resolutions providing
for the issue of shares of preferred stock, in the event of any liquidation,
dissolution or winding up of the Corporation, whether voluntary or involuntary,
after payment or provision for payment of the debts and liabilities of the
Corporation, all assets of the Corporation shall be shared pro rata among the
holders of the Common Stock and the Non-Voting Common Stock based upon the
number of shares held by them, in all remaining assets of the Corporation
available for distribution to its stockholders.
(iv) Conversion.
(a) Right to Convert. Subject to the terms and conditions of
this paragraph iv, the holder of any share or shares of Non-Voting Common Stock
shall have the right, at its option, at any time, to convert any such shares of
Non-Voting Common Stock (except that upon any liquidation, dissolution or
winding up of the Corporation the right of conversion shall terminate at the
close of business on the last full business day next preceding the date fixed
for payment of the amount distributable on Non-Voting Common Stock) into an
equal number of fully paid and nonassessable whole shares of Common Stock;
provided, however, that such conversion will not be permitted hereunder, and the
Corporation shall not be required to convert any shares of Non-Voting Common
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Stock into Common Stock, to the extent that, at the date upon which such
conversion is deemed to take place as provided in subparagraph (iv)(b) below,
the WCAS Group (as hereinafter defined) would, but for the limitation contained
in this proviso, hold, or otherwise have voting control over, in aggregate, more
than 49% of the voting securities of the Corporation outstanding at such time,
after taking into account the shares of Common Stock issuable upon such
conversion. Such rights of conversion shall be exercised by the holder thereof
by giving written notice that the holder elects to convert a stated number of
shares of Non-Voting Common Stock into Common Stock and by surrender of a
certificate or certificates for the shares so to be converted to the Corporation
at its principal office (or such other office or agency of the Corporation as
the Corporation may designate by notice in writing to the holder or holders of
Non-Voting Common Stock) at any time during its usual business hours on the date
set forth in such notice, together with a statement of the name or names (with
address) in which the certificate or certificates for shares of Common Stock
shall be issued.
(b) Issuance of Certificates; Time Conversion Effected.
Promptly after the receipt of the written notice referred to in subparagraph
(iv)(a) and surrender of the certificate or certificates for the share or shares
of Non-Voting Common Stock to be converted, the Corporation shall issue and
deliver, or cause to be issued and delivered, to the holder, registered in such
name or names as such holder may direct, a certificate or certificates for the
number of whole shares of Common Stock issuable upon the conversion of such
share or shares of Non-Voting Common Stock. To the extent permitted by law, such
conversion shall be deemed to have been effected immediately prior to the close
of business on the date on which such written notice shall have been received by
the Corporation and the certificate or certificates for such share or shares
shall have been surrendered as aforesaid, and at such time the rights of the
holder of such share or shares of Non-Voting Common Stock shall cease, and the
person or persons in whose name or names any certificate or certificates for
shares of Common Stock shall be issuable upon such conversion shall be deemed to
have become the holder or holders of record of the shares represented thereby.
(c) Fractional Share; Dividends; Partial Conversion.
Fractional shares may be issued upon conversion of Non-Voting Common Stock into
Common Stock. No payment or adjustment shall be made upon any conversion on
account of any cash dividends or the Common Stock issued upon such conversion.
At the time of each conversion, the Corporation shall pay in cash an amount
equal to all dividends accrued and unpaid on the shares surrendered for
conversion to the date upon which such conversion is deemed to take place as
provided in subparagraph (iv)(b) above. In case the number of shares of
Non-Voting Common Stock represented by the certificate or certificates
surrendered pursuant to subparagraph (iv)(a) exceeds the number of shares
converted, the Corporation shall, upon such conversion, execute and deliver to
the holder thereof, at the expense of the Corporation, a new certificate or
certificates for the number
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<PAGE> 6
of shares of Non-Voting Common Stock represented by the certificate or
certificates surrendered which are not to be converted.
(d) Subdivision or Combination of Stock. In case the
Corporation shall at any time subdivide its outstanding shares of Common Stock
into a greater number of shares, then the Non-Voting Common Stock shall be
proportionately subdivided, and conversely, in case the outstanding shares of
Common Stock shall be combined into a smaller number of shares, then the number
of shares of Non-Voting Common Stock immediately prior to such combination shall
be proportionately reduced. Upon any such event, the Corporation shall give
written notice thereof, by first class mail, postage prepaid, addressed to each
holder of shares of Common Stock at the address of such holder as shown on the
books of the Corporation.
(e) Reorganization or Reclassification. If any capital
reorganization or reclassification of the capital stock of the Corporation or
any consolidation or merger of the Corporation with another corporation, or the
sale of all or substantially all its assets to another corporation, shall be
effected in such a way that holders of Common Stock shall be entitled to receive
stock, securities or assets with respect or in exchange for Common Stock, then,
as a condition of such reorganization, reclassification, consolidation, merger
or sale, lawful and adequate provisions shall be made whereby each holder of a
share or shares of Non-Voting Common Stock shall thereafter have the right to
receive, upon the basis and upon the terms and conditions specified herein and
in lieu of the shares of Common Stock immediately theretofore receivable upon
the conversion of such share or shares of Non-Voting Common Stock, such shares
of stock, securities or assets as may be issued or payable with respect to or in
exchange for a number of outstanding shares of Common Stock equal to the number
of shares of such stock immediately theretofore so receivable had such
reorganization, reclassification, consolidation, merger or sale not taken place,
and in any such case appropriate provision shall be made with respect to the
rights and interests of such holder to the end that the provisions hereof
(including, without limitation, provisions for adjustments of the number of
shares of Common Stock issuable upon conversion of Non-Voting Common Stock)
shall thereafter be applicable, as nearly as may be, in relation to any shares
of stock, securities or assets thereafter deliverable upon such conversion. In
the event of a merger or consolidation of the Corporation as a result of which a
greater or lesser number of shares of common stock of the surviving corporation
are issuable to holders of Common Stock outstanding immediately prior to such
merger or consolidation, the number of shares of Common Stock issuable upon
conversion of Non-Voting Common Stock in effect immediately prior to such merger
or consolidation shall be adjusted in the same manner as though there were a
subdivision or combination of all outstanding shares of Common Stock. The
Corporation will not effect any such consolidation, merger or sale, unless prior
to the consummation thereof the success or corporation (if other than the
corporation) resulting from such consolidation or merger or the corporation
purchasing such assets shall assume, by written instrument executed and mailed
or delivered to each holder of Non-Voting Common Stock at the last
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<PAGE> 7
address of such holder appearing on the books of the Corporation, the obligation
to deliver to such holder such shares of stock, securities or assets as, in
accordance with the foregoing provisions, such holder may be entitled to
receive.
(f) Notice of Adjustment. Upon any adjustment made pursuant to
subparagraph (iv)(e), then and in each such case the Corporation shall give
written notice thereof, by first class mail, postage prepaid, addressed to each
holder of shares of NonVoting Common Stock at the address of such holder as
shown on the books of the Corporation, which notice shall state the stock,
securities or assets issuable upon conversion of the Non-Voting Common Stock
resulting from such adjustment, setting forth in reasonable detail the method of
calculation and the facts upon which such calculation is based.
(g) Other Notices. In case at any time:
(1) the Corporation shall declare any dividend upon its
Common Stock payable in cash or stock or make any other
distribution to the holders of its Common Stock;
(2) the Corporation shall offer for subscription pro rata
to the holders of its Common Stock any additional shares
of stock of any class or other rights;
(3) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation,
or a consolidation or merger of the Corporation with, or
a sale of all or substantially all its assets to, another
corporation; or
(4) there shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Corporation,
then, in any one or more of said cases, the Corporation shall give, by first
class mail, postage prepaid, addressed to each holder of any shares of
Non-Voting Common Stock at the address of such holder as shown on the books of
the Corporation, (A) at least 20 days' prior written notice of the date on which
the books of the Corporation shall close or a record shall be taken for such
dividend, distribution or subscription rights or for determining rights to vote
in respect of any such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding up, and (B) in the case of any such
reorganization, reclassification, consolidation, merger, sale, dissolution,
liquidation or winding up, at least 20 days' prior written notice of the date
when the same shall take place. Such notice in accordance with the foregoing
clause (A) shall also specify, in the case of any such dividend, distribution or
subscription rights, the date on which the holders of Common Stock shall be
entitled thereto, and such notice in
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<PAGE> 8
accordance with the foregoing clause (B) shall also specify the date on which
the holders of Common Stock shall be entitled to exchange their Common Stock for
securities or other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution, liquidation or
winding up, as the case may be.
(h) Stock to be Reserved. The Corporation will at all times
reserve and keep available out of its authorized Common Stock or its treasury
shares, solely for the purpose of issue upon the conversion of the Non-Voting
Common Stock as herein provided such number of shares of Common Stock as shall
then be issuable upon the conversion of all outstanding shares of Non-Voting
Common Stock. The Corporation covenants that all shares of Common Stock which
shall be so issued shall be duly and validly issued and fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof. The Corporation will take all such action as may be necessary to
assure that all such shares of Common Stock may be so issued without violation
of any applicable law or regulation, or of any requirements of any national
securities exchange upon which the Common Stock of the Corporation may be
listed. The Corporation will not take any action which results in any adjustment
of the number of shares of Common Stock issuable upon conversion of the
Non-Voting Common Stock if the total number of shares of Common Stock and
issuable after such action upon conversion of the Non-Voting Common Stock would
exceed the total number of shares of Common Stock then authorized by the
Corporation's Certificate of Incorporation.
(i) No Reissuance of Common Stock. Shares of Non-Voting Common
Stock which are converted into shares of Class A Common Stock as provided herein
shall not be reissued.
(j) Issue Tax. The issuance of certificates for shares of
Class A Common Stock upon conversion of the Non-Voting Common Stock shall be
made without charge to the holders thereof for any issuance tax in respect
thereof, provided that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the issuance and
delivery of any certificate in a name other than that of the holder of the
Non-Voting Common Stock which is being converted.
(k) Closing of Books. The Corporation will at no time close
its transfer books against the transfer of any Non-Voting Common Stock or of any
shares of Common Stock issued or issuable upon the conversion of any shares of
Non-Voting Common Stock in any manner which interferes with the timely
conversion of such Non-Voting Common Stock.
(l) Transfer of Non-Voting Common Stock. Any shares of
Non-Voting Common Stock that are transferred to any non-affiliate of WCAS Group
shall immediately and automatically convert to Common Stock, and all conditions
of such conversion shall be in accordance with this paragraph (iv)
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(m) Definitions. Capitalized terms not otherwise defined but
used in this Article Fourth have the meanings set forth below:
"AFFILIATE" means with respect to any Person, any other
Person, directly or indirectly controlling, controlled by or under common
control with such Person. For the purpose of the above definition, the term
"control" (including with correlative meaning, the terms "controlling",
"controlled by" and "under common control with"), as used with respect to any
Person, shall mean the possession, directly or indirectly, of the owner to
direct or cause the direction of the management and policies of such Person,
whether through the ownership of voting securities or by contract or otherwise.
"PERSON" means an individual, a partnership, a corporation, an
association, a joint stock company, a limited liability company, a trust, a
joint venture, an unincorporated organization and a governmental entity or any
department, agency or political subdivision thereof.
"WCAS GROUP" means Welsh, Carson, Anderson & Stowe VII, L.P.,
WCAS Capital Partners, L.P., WCAS Healthcare Capital Partners, L.P. and
affiliates of each of the foregoing.
3. Except as otherwise provided in this Certificate of Incorporation or
by applicable law, the Corporation's capital stock, regardless of class, may be
issued for such consideration and for such corporate purposes as the Board of
Directors may from time to time determine by a resolution or resolutions adopted
by a majority of the Board of Directors then in office.
FIFTH: The name and the mailing address of the incorporator are as
follows:
NAME MAILING ADDRESS
---- ---------------
[ERNEST E. HYNE, II 1800 FIRST AMERICAN CENTER
315 DEADERICK STREET
NASHVILLE, TENNESSEE 37238]
SIXTH: The Corporation shall have perpetual existence.
SEVENTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors, or any class of them, and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
ss.291 of Title 8 of the Delaware Code, or on the application of trustees in
dissolution or of any receiver or receivers appointed for this Corporation under
ss.279 of
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Title 8 of the Delaware Code, order a meeting of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, to be summoned in such manner as the said court
directs. If a majority in number representing three-fourths (3/4) in value of
the creditors or class of creditors, and/or of the stockholders or class of
stockholders of this Corporation, as the case may be, agree to any compromise or
arrangement and to any reorganization of this Corporation as consequence of such
compromise or arrangement, the said compromise or arrangement and the said
reorganization shall, if sanctioned by the court to which the said application
has been made, be binding on all the creditors or class of creditors, and/or on
all the stockholders or class of stockholders, of this Corporation, as the case
may be, and also on this Corporation.
EIGHTH:
1. The management of the business and the conduct of the affairs of the
Corporation shall be vested in its Board of Directors.
2. The Board of Directors shall be comprised of not less than six (6)
or more than twelve (12) members, the exact numbers to be fixed from time to
time by the Board of Directors pursuant to a resolution adopted by a majority of
directors then in office. The number of directors of the Corporation may be
increased or decreased outside of this range only in the following manner:
A. By a majority of the shareholders of the Corporation entitled to
vote if the then existing Board of Directors of the Corporation
unanimously approve the proposed increase or decrease in members; or
B. By a vote of the holders of 70% or more of the combined voting power
of the then outstanding shares of stock entitled to vote generally
in the election of directors voting together as a single class.
Notwithstanding anything contained in the Bylaws or this Certificate of
Incorporation of the Corporation to the contrary, the affirmative vote of the
holders of at least 70% of the voting power of all of the shares of stock of the
Corporation entitled to vote generally in the election of directors voting
together as a single class shall be required to alter, amend or repeal this
Section 2 or adopt any provision inconsistent therewith.
3. The Board of Directors shall be divided into three classes,
designated Class 1, Class 2 and Class 3. Each class shall consist, as nearly as
may be possible, of one-third of the number of directors constituting the Board
of Directors. The term of office for Class 1 directors will first expire at the
annual meeting of stockholders for 1999; the term of office of Class 2 directors
will first expire at the annual meeting of stockholders for 2000; and the term
of office of Class 3 directors will first expire at the annual meeting of
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stockholders for 2001, and in each case until their successors are duly elected
and qualified. At each annual meeting of stockholders commencing with the first
annual meeting of stockholders, successors to the class of directors whose terms
expire at the annual meeting of stockholders shall be elected by stockholders
for a three-year term and until their successors are duly elected and qualified.
Except as otherwise provided herein or in the Bylaws, increases in the size of
the Board of Directors shall be distributed among the classes so as to render
the class as nearly equal in size as possible. Whenever the holders of preferred
stock issued pursuant to this Certificate of Incorporation or the resolution or
resolutions adopted by a majority of the Board of Directors then in office
providing for the issue of shares of preferred stock shall have the right,
voting as a separate class, to elect directors, the election, term of office,
filling of vacancies and other terms of such directorships shall be governed by
the terms of this Certificate of Incorporation or such resolution or
resolutions, as the case may be, and such directorships shall not be divided
into serial classes or otherwise subject to this Section 3 unless expressly so
provided therein.
4. One or more directors or the entire Board of Directors of the
Corporation may be removed at any time for "cause" by the affirmative vote of
the holders of a majority of the outstanding shares of capital stock of the
Corporation entitled to vote generally in the election of directors (considered
for this purpose as one class). "Cause," for purposes of this section shall be
(i) any fraudulent or dishonest act or activity by the director; or (ii)
behavior materially detrimental to the business of the Corporation.
5. Whenever the Corporation shall be authorized to issue only one class
of stock, each outstanding share shall entitle the holder thereof to notice of,
and the right to vote at, any meeting of stockholders. Whenever the Corporation
shall be authorized to issue more than one class of stock, no outstanding share
of any class of stock which is denied voting power under the provisions of this
Certificate of Incorporation shall entitle the holder thereof to the right to
vote at any meeting of stockholders except as otherwise provided by applicable
law; provided, that no share of any such class which is otherwise denied voting
power shall entitle the holder thereof to vote upon the increase or decrease in
the number of authorized shares of said class.
NINTH: The personal liability of the directors of the Corporation is
hereby eliminated to the fullest extent permitted by paragraph (7) of clause (b)
of ss.102 of the Delaware General Corporation Law, as the same may be amended or
supplemented. The provisions of this Article Ninth are not intended to, and
shall not, limit, supersede or modify any other defense available to a director
under applicable law. Any repeal or modification of this Article Ninth by the
stockholders of the Corporation shall not adversely affect any right or
protection of a director of the Corporation existing at the time of such repeal
or modification.
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TENTH:
1. The Corporation shall, to the fullest extent permitted by ss.145 of
the Delaware General Corporation Law, as the same may be amended or supplemented
(but in the case of any such amendment or supplement, only to the extent that
such amendment or supplement permits the Corporation to provide broader
indemnification rights than said law permitted the Corporation to provide prior
to such amendment or supplement), indemnify any and all directors and officers
whom it shall have power to indemnify under said section from and against any
and all of the expenses, liabilities or other matters referred to in or covered
by said section, and the indemnification provided for herein shall continue as
to a person who has ceased to be a director or officer and shall inure to the
benefit of the heirs, executors and administrators of such person. The
Corporation may, in its sole discretion and to the fullest extent permitted by
ss.145 of the Delaware General Corporation Law, as the same may be amended or
supplemented, indemnify any and all employees and agents whom it shall have
power to indemnify under said section from and against any and all of the
expenses, liabilities, or other matters referred to in or covered by said
section, and the indemnification provided for herein shall continue as to a
person who has ceased to be an employee or agent and shall inure to the benefit
of the heirs, executors, and administrators of such person.
2. The Corporation shall pay the expenses incurred in defending any
proceeding against a director or officer which is or may be subject to
indemnification pursuant to this Article in advance of final disposition of such
proceeding; provided, however, if the Delaware General Corporation Law so
requires, that the payment of such expenses incurred by a director or officer
shall be made only upon receipt of an undertaking by the director or officer to
repay all amounts advanced if it should be ultimately determined that the
director or officer is not entitled to be indemnified under this Article or
otherwise. The Corporation may, in its sole discretion, advance expenses
incurred by its employees or agents to the same extent as expenses may be
advanced to its directors and officers hereunder.
3. The rights conferred on any person by this Article shall be deemed
contract rights and shall not be exclusive of any other rights which such person
may have or hereafter acquire under any statute, provision of this Certificate
of Incorporation or the Corporation's Bylaws, agreement, or vote of stockholders
or disinterested directors or otherwise.
4. The Corporation may purchase and maintain insurance to protect
itself and any other director, officer, employee or agent of the Corporation or
any corporation, partnership, joint venture, trust or other enterprise against
any liability, whether or not the Corporation would have the power to indemnify
such person under the Delaware General Corporation Law.
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ELEVENTH:
1. From time to time any of the provisions of this Certificate of
Incorporation may be amended, altered or repealed in accordance with the laws of
the State of Delaware at the time in force; provided, however, that the
affirmative vote of the holders of at least a majority of the outstanding shares
of the Corporation's capital stock entitled to vote thereon and a majority of
the members of the Board of Directors then holding office is required to amend
those provisions of this Certificate of Incorporation set forth in Articles
Eighth, Ninth, Tenth, Eleventh or Twelfth.
2. Except where a higher percentage affirmateive vote is required by
this Certificate of Incorporation or the Corporation's Bylaws, the Corporation's
Bylaws may be amended, added to or repealed by an affirmative vote of at least a
majority of either (i) the shares of the Corporation's capital stock entitled to
vote thereon, or (ii) the Board of Directors.
TWELFTH: The President or a majority of the Board of Directors of the
Corporation may call special meetings of stockholders.
THIRTEENTH: The vote of stockholders of the Corporation required to
approve any Business Combination shall be as set forth in this Article
Thirteenth. The term "Business Combination" as used in this Article Thirteenth
shall mean any transaction that is referred to in any one or more clauses A - E
of Section 1 of this Article; each other capitalized term used in this Article
shall have the meaning ascribed to it in Section 3 of this Article.
1. In addition to any affirmative vote required by law or this
Certificate of Incorporation, and except as otherwise expressly provided in
Section 2 of this Article Thirteenth, the following Business Combinations shall
not be consummated without the affirmative vote of the holders of at least 70
percent of the combined voting power of the then outstanding shares of stock of
all classes and series of the Corporation entitled to vote generally in the
election of directors ("Voting Stock"), in each case voting together as a single
class (such affirmative vote shall be required notwithstanding the fact that no
vote may be required, or that a lesser percentage may be specified, by law or by
this Certificate of Incorporation):
A. any merger or consolidation of the Corporation or any subsidiary
with (i) any Interested Stockholder or (ii) any other Corporation
or entity (whether or not itself an Interested Stockholder) which
is or after each merger or consolidation would be, an Affiliate of
an Interested Stockholder; or
B. any sale, lease, exchange, mortgage, pledge, transfer or other
disposition (in one transaction or a series of transactions) to or
with any Interested Stockholder or any Affiliate of any Interested
Stockholder of assets of the
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Corporation or any Subsidiary having an aggregate fair market value
of $10,000,000 or more; or
C. the issuance or transfer by the Corporation or any Subsidiary (in
one transaction or a series or transactions) of any securities of
the Corporation or any Subsidiary to any Interested Stockholder or
any Affiliate of any Interested Stockholder in exchange for cash,
securities or other property (or a combination thereof) having an
aggregate fair market value of $10,000,000 or more, other than the
issuance of securities upon the conversion of convertible securities
of the Corporation or any Subsidiary which were not acquired by
such Interested Stockholder (or such Affiliate) from the Corporation
or a Subsidiary; or
D. the adoption of any plan or proposal for the liquidation or
dissolution of the Corporation proposed by or on behalf of an
Interested Stockholder or any Affiliate of any Interested
Stockholder; or
E. any reclassification of securities (including any reverse stock
split), or recapitalization of the Corporation, or any merger or
consolidation of the Corporation with any of its Subsidiaries or
any other transaction (whether or not with or into or otherwise
involving an Interested Stockholder) which in any such case has the
effect, directly or indirectly, of increasing the proportionate
outstanding shares of any class or series of stock or securities
convertible into stock of the Corporation or any Subsidiary which
is directly or indirectly beneficially owned by any Interested
Stockholder or any Affiliate of any Interested Stockholder.
2. The provisions of Section 1 of this Article Thirteenth shall not be
applicable to any Business Combination which shall have been approved by a
majority of the Disinterested Directors, and such Business Combination shall
require only such affirmative vote as is required by law and any other provision
of this Certificate of Incorporation.
3. For purposes of this Article Thirteenth:
A. A "person" shall mean any individual, firm, company or other entity.
B. "Interested Stockholder" shall mean any person (other than the
Corporation or any Subsidiary) who or which:
(i) is the beneficial owner, directly or indirectly, of more
than 20 percent of the combined voting power of the then
outstanding shares of Voting Stock; or
(ii) is an Affiliate of the Corporation and at any time within
the two-year period immediately prior to the date in
question was the beneficial
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<PAGE> 15
owner, directly or indirectly, of 20 percent or more
of the combined voting power of the then outstanding
shares of Voting Stock; or
(iii) is an assignee of or has otherwise succeeded to the
beneficial ownership of any shares of Voting Stock
that were at any time within the two-year period
immediately prior to the date in question
beneficially owned by any Interested Stockholder, if
such assignment or succession shall have occurred in
the course of a transaction or series of transactions
not involving a public offering within the meaning of
the Securities Act of 1933.
C. A person shall be a "beneficial owner" of any Voting Stock:
(i) which such person or any of its Affiliates or
Associates beneficially owns directly or indirectly;
or
(ii) which such person or any of its Affiliates or
Associates has (a) the right to acquire (whether such
right is exercisable immediately or only after the
passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of
conversion rights, exchange rights, warrants or
options, or otherwise, or (b) the right to vote or
direct the vote pursuant to any agreement,
arrangement or understanding; or
(iii) which are beneficially owned, directly or indirectly,
by any other person with which such person or any of
its Affiliates or Associates has any agreement,
arrangement or understanding for the purpose of
acquiring, holding, or disposing of any shares of
Voting Stock.
D. For the purposes of determining whether a person is an
Interested Stockholder pursuant to Section 3.B of this Article
Thirteenth, the number of shares of Voting Stock deemed to be
outstanding shall include shares deemed owned through
application of Section 3.C of this Article but shall not
include any other shares of Voting Stock that may be issuable
pursuant to any agreement, arrangement or understanding, or
upon exercise of conversion rights, warrants or options, or
otherwise.
E. "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and
Regulations under the Securities Exchange Act of 1934, as
amended.
F. "Subsidiary" means any company more than 50 percent of whose
outstanding stock having ordinary voting power in the election
of directors is owned, directly or indirectly, by the
Corporation or by a Subsidiary or by the
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<PAGE> 16
Corporation and one or more Subsidiaries; provided, however,
that for the purposes of the definition of Interested
Stockholder set forth in Section 3.B of this Article
Thirteenth, the term "Subsidiary" shall mean only a company of
which a majority of each class of equity security is owned,
directly or indirectly, by the Corporation.
G. "Disinterested Directors" means any member of the Board of
Directors of the Corporation who is unaffiliated with, and
not a nominee of, the Interested Stockholder and was a
member of the Board prior to the time that the Interested
Stockholder became an Interested Stockholder, and any
successor of a Disinterested Director who is unaffiliated
with, and not a nominee of, the Interested Stockholder and
who is recommended to succeed a Disinterested Director by a
majority of Disinterested Directors then on the Board of
Directors.
4. A majority of the Disinterested Directors of the Corporation shall
have the power and duty to determine, on the basis of information known to them
after reasonable inquiry, all facts necessary to determine compliance with this
Article Thirteenth, including, without limitation,
A. whether a person is an Interested Stockholder,
B. the number of shares of Voting Stock beneficially owned by any
person,
C. whether a person is an Affiliate or Associate of another
person,
D. whether the requirements of Section 2 of this Article
Thirteenth have been met with respect to any Business
Combination, and
E. whether the assets which are the subject of any Business
Combination have, or the consideration to be received for the
issuance or transfer of securities by the Corporation or any
Subsidiary in any Business Combination has an aggregate fair
market value of $10,000,000 or more. The good faith
determination of a majority of the Disinterested Directors on
such matters shall be conclusive and binding for all purposes
of this Article Thirteenth.
5. Nothing contained in this Article Thirteenth shall be construed to
relieve any Interested Stockholder from any fiduciary obligation imposed by law.
6. Notwithstanding anything contained in this Certificate of
Incorporation to the contrary, the affirmative vote of the holders of at least
70 percent of the voting power of the Voting Stock, voting together as a single
class, shall be required to alter, amend, or repeal this Article Thirteenth or
to adopt any provision inconsistent therewith.
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The undersigned, being the incorporator, for the purpose of forming a
Corporation under the laws of the State of Delaware does make, file and record
this Certificate of Incorporation, does certify that the facts herein stated are
true, and, accordingly, has hereto set his hand and seal this _______ day of
August, 1998.
----------------------------------
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Incorporator
17
<PAGE> 1
BYLAWS
OF
NEW AMERICAN HEALTHCARE CORPORATION
ARTICLE I
MEETINGS OF STOCKHOLDERS
1.1 Annual Meeting. The annual meeting of the stockholders shall be
held, at such place within or without the state of incorporation as may be
designated by the Board of Directors, on such date and at such time as shall be
designated each year by the Board of Directors and stated in the notice of the
meeting. At the annual meeting the stockholders shall elect directors by a
plurality vote and transact such other business as may properly be brought
before the meeting.
1.2 Special Meetings. Special meetings of the stockholders may be
called by the President or a majority of the Board of Directors. The place of
said meetings shall be designated by the directors. The business transacted at
special meetings of the stockholders of the corporation shall be confined to the
business stated in the notice given to the stockholders.
1.3 Notice of Stockholder Meetings. Written or printed notice of
stockholders meetings shall state the place, day, and hour of the meeting, and,
in the case of a special meeting, the purpose or purposes for which the meeting
is called and the person or persons calling the meeting; notice may be
communicated in person, by mail or private carrier or by other means of written
communication by or at the direction of the President, Secretary, officer, or
person calling the meeting to each stockholder entitled to vote at the meeting.
Such notice shall be delivered not less than ten (l0) nor more than sixty (60)
days before the date of the meeting; provided, however, that any such notice may
be waived in writing, either prior to or subsequent to such meeting.
1.4 Advance Notice Requirements. The provisions of this Section 1.4 are
in addition to, and do not waive, any standards in effect under
applicable federal or state law regarding stockholder proposals.
(a) At an annual or special meeting of stockholders, only such business
shall be conducted as shall have been properly brought before the meeting. To be
properly brought before a meeting, business must be (i) specified in the notice
of meeting (or any supplement thereto) given by or at the direction of the Board
of Directors or the President, (ii) otherwise properly brought before the
meeting by or at the direction of the Board of Directors or President, or (iii)
brought before the meeting by a stockholder in accordance with these Bylaws. For
business to be properly brought before an annual meeting by a stockholder, the
stockholder must have given timely notice thereof in writing to the Secretary of
the corporation. To be timely, a stockholder's notice must be delivered
<PAGE> 2
to or mailed and received at the principal executive offices of the corporation
not less than sixty (60) nor more than ninety (90) days prior to the meeting;
provided, however, that in the event that less than seventy (70) days notice or
prior public disclosure of the date of the meeting is given or made to
stockholders, notice by the stockholder to be timely must be so received not
later than the close of business on the tenth (10th) day following the day on
which such notice of the date of the meeting was mailed or such public
disclosure was made. A stockholder's notice shall set forth as to each matter
the stockholder proposes to bring before the meeting (i) a brief description of
the business desired to be brought before the meeting and the reasons for
conducting such business at the meeting, (ii) the name and address, as they
appear on the corporation's books, of the stockholder proposing such business,
(iii) the class and number of shares which are beneficially owned by the
stockholder as of the record date of the meeting (if such record date is
publicly available) and as of the date of the notice, and (iv) any material
interest of the stockholder in such business. Notwithstanding anything in these
Bylaws to the contrary, no business shall be conducted at any annual or special
meeting except in accordance with the procedures set forth in this Section
1.4(a). The chairman of the meeting shall, if the facts warrant, determine that
the business was not properly brought before the meeting and in accordance with
the provisions of this Section 1.4(a), and if he shall so determine, he shall so
declare to the meeting and any such business not properly brought before the
meeting shall not be transacted.
(b) Notwithstanding anything to the contrary set forth in these Bylaws,
including the provisions of Section 1.4(a), only persons who are nominated in
accordance with the procedures set forth in this Section 1.4(b) shall be
eligible for election as directors. Nominations of persons for election to the
Board of Directors of the corporation may be made at a meeting of stockholders
by or at the direction of a majority of the Board of Directors or a duly
authorized committee thereof (which committee in the case of any nomination of a
director who is to be an Independent Director (as such term is defined in
Section 2.2 below) shall have a majority of Independent Directors) or by any
stockholder of the corporation entitled to vote for the election of directors at
the meeting who complies with the notice procedures set forth in this Section
1.4(b). Such nominations, other than those made by or at the direction of the
Board of Directors or a duly authorized committee thereof, shall be made
pursuant to written notice timely made in writing to the Secretary of the
corporation. To be timely, a stockholder's notice shall be delivered to or
mailed and received at the principal executive offices of the corporation within
the time periods specified in Section 1.4(a). Such notice shall set forth (i) as
to each person whom the stockholder proposes to nominate for election or
re-election as a director (w) the name, age, business address and residence
address of such person, (x) the principal occupation or employment of such
person (y) the class and number of shares of the corporation which are
beneficially owned by such person as of the record date of such meeting (if such
record date is publicly available) and as of the date of such notice, and (z)
any other information relating to such person that is required to be disclosed
in solicitations of proxies for election of directors or is otherwise required
pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended
(including, without limitation, such person's written consent to being named in
the proxy statement as a nominee and to serve as a director if elected); and
(ii) as to the stockholder giving notice (y) the name and address, as they
appear on the corporation's books, of such stockholder, and (z) the class and
number of shares of the corporation's capital stock which are beneficially owned
by such stockholder as of the record date of the meeting (if such record date is
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<PAGE> 3
publicly available) and as of the date of such notice. At the request of the
Board of Directors or a committee appointed by it, any person nominated by the
board or such committee for election as a director shall furnish to the
Secretary of the corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director unless nominated in accordance with
the procedure set forth in this Section 1.4(b). The chairman of the meeting
shall, if the facts warrant, determine that a nomination was not made in
accordance with the procedures prescribed by these Bylaws, and if he should so
determine, he shall so declare to the meeting and the defective nomination shall
be disregarded.
1.5 Quorum Requirements. A majority of the shares entitled to vote,
present in person or represented by proxy, shall constitute a quorum for the
transaction of business. A meeting may be adjourned despite the absence of a
quorum, and notice of an adjourned meeting need not be given if the time and
place to which the meeting is adjourned are announced at the meeting at which
the adjournment is taken. When a quorum is present at any meeting, a majority in
interest of the stock there represented shall decide any question brought before
such meeting, unless the question is one upon which, by express provision of the
Certificate of Incorporation or Bylaws, or by the laws of Delaware, a larger or
different vote is required, in which case such express provision shall govern
the decision of such question.
1.6 Voting and Proxies. Every stockholder entitled to vote at a meeting
may do so either in person or by proxy appointment made by an instrument in
writing subscribed by such stockholder which proxy shall be filed with the
secretary of the meeting before being voted. Such proxy shall entitle the
holders thereof to vote adjournment of such meeting, but shall not be valid
after the final adjournment thereof. No proxy shall be valid after the
expiration of three (3) years from the date of its execution, unless the said
instrument expressly provides for a longer period.
ARTICLE II
BOARD OF DIRECTORS
2.1 Qualification and Election. Directors need not be stockholders or
residents of this State, but must be of legal age. They shall be elected by a
plurality of the votes cast at the annual meetings of the stockholders or at a
special meeting of the stockholders called for that purpose. Each director shall
hold office until the expiration of the term for which he is elected, and
thereafter until his successor has been elected and qualified.
2.2 Number. The Board of Directors shall be comprised of not less than
six (6) or more than twelve (12) members, the exact numbers to be fixed from
time to time by the Board of Directors pursuant to a resolution adopted by a
majority of directors then in office. The number of directors of the Corporation
may be increased or decreased outside of this range only in the following
manner:
(a) By a majority of the shareholders of the Corporation entitled to
vote if the then existing Board of Directors of the Corporation unanimously
approve the proposed increase or decrease in members; or
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<PAGE> 4
(b) By a vote of the holders of 70% or more of the combined voting
power of the then outstanding shares of stock entitled to vote generally in the
election of directors voting together as a single class.
Notwithstanding anything contained in these Bylaws or the Certificate
of Incorporation of the Corporation to the contrary, the affirmative vote of the
holders of at least 70% of the voting power of all of the shares of stock of the
Corporation entitled to vote generally in the election of directors voting
together as a single class shall be required to alter, amend or repeal this
Section 2.2 or adopt any provision inconsistent therewith.
At least a majority of the Directors shall at all times (except
temporarily pending the filling of a vacancy as hereinafter provided) be persons
("Independent Directors") who are not officers, employees or owners (except for
less than 1% of any public company) of any corporation, partnership or other
person (including themselves) (a) which is a landlord of this corporation, or
(b) which has any other relationship with this corporation that would prevent
such person from serving on the Audit Committee of the Board of Directors of a
corporation having stock listed on the American Stock Exchange or the New York
Stock Exchange.
2.3 Classes. The Board of Directors shall be divided into three
classes, designated Class 1, Class 2 and Class 3. Each class shall consist, as
nearly as may be possible, of one-third of the number of directors constituting
the Board of Directors. The term of office for Class 1 directors will first
expire at the annual meeting of stockholders for 1999; the term of office of
Class 2 directors will first expire at the annual meeting of stockholders for
2000; and the term of office of Class 3 directors will first expire at the
annual meeting of stockholders for 2001, and in each case until their successors
are duly elected and qualified. At each annual meeting of stockholders
commencing with the first annual meeting of stockholders, successors to the
class of directors whose terms expire at the annual meeting of stockholders
shall be elected by stockholders for a three-year term and until their
successors are duly elected and qualified. Except as otherwise provided herein
or in the Certificate of Incorporation, increases in the size of the Board of
Directors shall be distributed among the classes so as to render the class as
nearly equal in size as possible. Whenever the holders of preferred stock issued
pursuant to the Certificate of Incorporation or the resolution or resolutions
adopted by a majority of the Board of Directors then in office providing for the
issue of shares of preferred stock shall have the right, voting as a separate
class, to elect directors, the election, term of office, filling of vacancies
and other terms of such directorships shall be governed by the terms of the
Certificate of Incorporation or such resolution or resolutions, as the case may
be, and such directorships shall not be divided into serial classes or otherwise
subject to this Section 2.3 unless expressly so provided therein.
2.4 Meetings. The annual meeting of the Board of Directors shall be
held immediately after the adjournment of the annual meeting of the
stockholders, at which time the officers of the corporation shall be elected.
The board may also designate more frequent intervals for regular meetings.
Special meetings may be called at any time by the chairman of the board,
President, or any two directors. Members of the Board of Directors may
participate in a meeting of the Board of Directors by means of conference
telephone or similar communications equipment by means of
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<PAGE> 5
which all persons participating in the meeting can hear each other, and
participation in a meeting in such manner shall constitute presence in person at
such a meeting.
2.5 Notice of Directors' Meetings. The annual and all regular board
meetings may be held without notice of the date, time, place or purpose of the
meeting. Special meetings shall be held upon notice sent by any usual means of
communication not less than twenty-four (24) hours before the meeting noting the
date, time and place of the meeting. The notice need not describe the purposes
of the special meeting. Attendance by a director at a meeting or subsequent
execution or approval by a director of the minutes of a meeting or a consent
action shall constitute a waiver of any defects in notice of such meeting and/or
consent action.
2.6 Quorum and Vote. A majority of the Directors then in office shall
constitute a quorum for transaction of business at any meeting of the Board of
Directors; provided, however, that a quorum for transaction of business with
respect to any matter in which any director (or affiliate of such director) who
is not an Independent Director has any interest shall consist of a majority of
the directors including a majority of the Independent Directors, then in office.
Except as otherwise required by law or by the Certificate of Incorporation, the
act of a majority of directors present at a meeting at which a quorum is present
shall constitute the act of the Board of Directors, except that no act relating
to any matter in which any director (or affiliate of such director) who is not
an Independent Director has any interest shall be the act of the Board unless a
majority of the Independent Directors on the Board vote for such act.
2.7 Executive, Audit, Ethics and Quality Assurance Committee,
Compensation Committee, and Other Committees. The Board of Directors, by a
resolution adopted by a majority of its members, may designate an executive
committee, consisting of two or more directors, an audit, ethics and quality
assurance committee, a majority of the members of which shall be Independent
Directors, a compensation committee and other committees, consisting of two or
more directors. If any committee may take or authorize any act as to any matter
in which any director (or affiliate of such director) who is not an Independent
Director has or may have any interest, a majority of the members of such
committee shall be Independent Directors , except that any such committee
consisting of only two directors may have one Independent Director and one
director who is not an Independent Director. The Board may delegate to such
committee or committees any and all such authority as it deems desirable,
including the right to delegate to an executive committee the power to exercise
all the authority of the Board of Directors in the management of the affairs and
property of the corporation, except those powers which the Board of Directors is
specifically prohibited from delegating pursuant to Section 141(c)(2) of the
General Corporation Law of the State of Delaware. The Board of Directors may
designate one or more directors as alternate members of any committee, who may
replace any absent or disqualified member at any meeting of the committee. In
the absence or disqualification of a member of a committee, the member or
members present at any meeting and not disqualified from voting, whether or not
such member or members constitute a quorum, may unanimously appoint another
member of the Board of Directors at act at the meeting in the place of any such
absent or disqualified member.
ARTICLE III
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<PAGE> 6
OFFICERS
3.1 Number. The corporation shall have a President, a Secretary, and
such other officers as the Board of Directors shall from time to time deem
necessary. Any two or more offices may be held by the same person, except the
offices of President and Secretary.
3.2 Election and Term. The officers shall be elected by, and shall hold
office at the pleasure of, the Board of Directors.
3.3 Duties. All officers shall have such authority and perform such
duties in the management of the corporation as are normally incident to their
offices and as the Board of Directors may from time to time provide.
ARTICLE IV
RESIGNATIONS, REMOVALS AND VACANCIES
4.1 Resignations. Any officer or director may resign at any time by
giving written notice to the Chairman of the Board, the President or the
Secretary. Any such resignation shall take effect at the time specified therein,
or, if no time is specified, then upon its acceptance by the Board of Directors.
4.2 Removal of Officers. Any officer or agent may be removed at any
time with or without cause by the Board of Directors.
4.3 Removal of Directors. Any or all of the directors may be removed at
any time for "cause" by the affirmative vote of the holders of a majority of the
outstanding shares of capital stock of the corporation entitled to vote
generally in the election of directors (considered for this purpose as one
class). "Cause" for purposes of these Bylaws shall be: (i) any fraudulent or
dishonest act or activity by the director; or (ii) behavior materially
detrimental to the business of the Corporation.
4.4 Vacancies. Newly created directorships resulting from an increase
in the number of directors, and vacancies occurring in any office or
directorship for any reason, including removal of an officer or director, may be
filled by the vote of a majority of the directors remaining in office, even if
less than a quorum exists; provided, however, that any vacancy created by
removal of a director pursuant to Section 4.3 may be filled by action of the
stockholders taken at the same meeting at which the vacancy was created, such
action to be taken upon the affirmative vote of the holders of not less than a
majority of the voting power of the outstanding capital stock of the corporation
entitled to vote in the election of directors, voting as a single class.
ARTICLE V
CAPITAL STOCK
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<PAGE> 7
5.1 Stock Certificates. Every stockholder shall be entitled to a
certificate or certificates of capital stock of the corporation in such form as
may be prescribed by the Board of Directors. Unless otherwise decided by the
board, such certificates shall be signed by the President and the Secretary of
the corporation, however, any or all of the signatures may be a facsimile. The
corporation shall be entitled to treat the holder of record of any share or
shares of stock of the corporation as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it has actual or other notice thereof, except as provided by law.
5.2 Transfer of Shares. Shares of stock may be transferred on the books
of the corporation by delivery and surrender of the properly assigned
certificate, but subject to any restrictions on transfer imposed by either the
applicable securities laws or any stockholder agreement.
5.3 Loss, Theft or Destruction of Certificates. In the case of the
loss, theft, mutilation, or destruction of a certificate of stock, a duplicate
certificate may be issued upon such terms as the Board of Directors shall
prescribe.
ARTICLE VI
ACTION BY CONSENT
6.1 Directors. Whenever the directors are required or permitted to take
any action by vote, such action may be taken without a meeting on written
consent, setting forth the action so taken, signed by all the persons or
entities entitled to vote thereon, and such action shall be as valid and
effective as any action taken at a regular or special meeting of the directors.
6.2 Stockholders. Any action required or permitted to be taken by the
holders of the issued and outstanding stock of the Corporation may be effected
solely at an annual or special meeting of stockholders duly called and held in
accordance with law, the Certificate of Incorporation and these Bylaws, and not
by the consent in writing of such stockholders or any of them, provided,
however, that holders of shares of any series of the Corporation's preferred
stock may exercise the special voting rights, if any, of such series to elect
directors upon the occurrence of certain events specified in the Certificate of
Incorporation or in the resolution or resolutions adopted by a majority of the
Board of Directors then in office providing for the issue of any series of
preferred stock pursuant to the Certificate of Incorporation, in any manner now
or hereafter permitted by the Certificate of Incorporation or the General
Corporation Law of the State of Delaware.
ARTICLE VII
AMENDMENT OF BYLAWS
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<PAGE> 8
Except where specifically stated otherwise, these Bylaws may be
amended, added to or repealed by an affirmative vote of a majority of either (1)
the shares of the corporation's capital stock entitled to vote thereon
represented at any duly constituted stockholders' meeting, or (2) the Board of
Directors.
ARTICLE VIII
FISCAL YEAR
The fiscal year for the corporation shall be fixed from time to time by
the Board of Directors.
CERTIFICATION
I certify that these Bylaws were adopted by written consent of the
Board of Directors of the corporation and became effective on August _____,
1998.
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Secretary
8
<PAGE> 1
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NEW YORK
OR CHARLOTTE, NORTH CAROLINA
NEW AMERICAN HEALTHCARE CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
NUMBER SHARES
NAHC
COMMON STOCK CUSIP 641881 10 7
SEE REVERSE FOR
CERTAIN DEFINITIONS
THIS IS TO CERTIFY that
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE
COMMON STOCK, $.01 PAR VALUE EACH, OF
New American Healthcare Corporation, transferable on the books of the
Corporation by the holder hereof ______________________________________
properly endorsed. This certificate is not valid unless countersigned by the
Transfer Agent and registered by the Registrar.
Witness the facsimile signatures of its duly authorized officers.
Dated:
Countersigned and Registered /s/ ROBERT M. MARTIN
FIRST UNION NATIONAL BANK CHAIRMAN, PRESIDENT & CEO
[CHARLOTTE, NC]
By Transfer Agent and Registrar
/s/ DANA C. MCLENDON JR.
Authorized Signature SR. VICE PRESIDENT,
FINANCE & ADMINISTRATION
<PAGE> 2
NEW AMERICAN HEALTHCARE CORPORATION
THE CORPORATION IS AUTHORIZED TO ISSUE MORE THAN ONE CLASS OF STOCK AND
MORE THAN ONE SERIES OF ANY CLASS OF STOCK. THE CORPORATION WILL FURNISH WITHOUT
CHARGE TO EACH STOCKHOLDER WHO SO REQUESTS, THE POWERS, DESIGNATIONS,
PREFERENCES AND RELATIVE, PARTICIPATING, OPTIONAL OR OTHER SPECIAL RIGHTS OF
EACH CLASS OF STOCK OR SERIES THEREOF AND THE QUALIFICATIONS, LIMITATIONS OR
RESTRICTIONS OF SUCH PREFERENCES AND/OR RIGHTS.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT-_________ Custodian _________
TEN ENT - as tenants by the entireties (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as Act ______________________
tenants in common (State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For value received, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- -------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of assignee
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
________________________________________________________________________ Shares
of the Common Stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint _____________________________________________
- --------------------------------------------------------------------------------
Attorney to transfer the said stock on the books of the within-named
Corporation with full power of substitution in the premises.
Dated,
---------------------
-------------------------------------
NOTICE: THE SIGNATURE TO THIS ASSIGNMENT MUST
CORRESPOND WITH THE NAME AS WRITTEN
UPON THE FACE OF THE CERTIFICATE IN
EVERY PARTICULAR WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
--------------------------------------
SIGNATURE(S) GUARANTEED: THE SIGNATURE(S) SHOULD BE GUARANTEED
BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCK, BROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS
WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-16.
<TABLE>
<S> <C>
- --------------------------------------------------------- ---------------------------------------------------------
AMERICAN BANK NOTE COMPANY PRODUCTION COORDINATOR: TRICIA O'CONNOR: 215-830-2154
680 BLAIR MILL ROAD PROOF OF JUNE 8 1998
HORSHAM, PA 19044 NEW AMERICAN HEALTHCARE CORPORATION
(215) 657-3480 H 57080Bk
- --------------------------------------------------------- ---------------------------------------------------------
SALES: A. HOBBS: 404-525-1455 OPERATOR: hj
- --------------------------------------------------------- ---------------------------------------------------------
NET/BANKNOTE/HOME42/NewAmer67080 NEW
- --------------------------------------------------------- ---------------------------------------------------------
</TABLE>
<PAGE> 1
SEVERANCE AND NONCOMPETE AGREEMENT
This SEVERANCE AND NONCOMPETE AGREEMENT is dated as of June ____,
1998, by and between NEW AMERICAN HEALTHCARE CORPORATION, a Delaware
corporation (the "Company"), and DANA C. MCLENDON, JR. (the "Executive").
W I T N E S S E T H:
WHEREAS, Executive and Company previously have entered into an
Executive Employment Agreement dated December 19, 1995 (the "Employment
Agreement"); and
WHEREAS, Executive and Company have agreed to terminate the Employment
Agreement and to replace it with this Severance and Noncompete Agreement;
NOW, THEREFORE, for and in consideration of the premises hereof and the
mutual covenants contained herein, the parties hereto hereby covenant and agree
as follows:
1. Confidential Information. The Executive hereby covenants,
agrees and acknowledges as follows:
(a) The Executive has and will have access to and will
participate in the development of or be acquainted with confidential or
proprietary information and trade secrets related to the business of
the Company, and any present or future subsidiaries or affiliates
thereof (collectively with the Company, the "Companies"), including but
not limited to (i) customer lists; claims histories and related records
and compilations of information; the identity, lists or descriptions of
any new patients, referral sources or organizations; financial
statements; cost reports or other financial information; contract
proposals or bidding information; business plans; training and
operations methods and manuals; personnel records; software programs;
reports and correspondence; fee structures; and management systems,
policies or procedures, including related forms and manuals; (ii)
information pertaining to future developments such as future marketing
or acquisition plans or ideas, and potential new business locations and
(iii) all other tangible and intangible property, which are used in the
business and operations of the Companies but not made public. The
information and trade secrets relating to the business of the Companies
described hereinabove in this paragraph (a) are hereinafter referred to
collectively as the "Confidential Information", provided that the term
Confidential Information shall not include any information (x) that is
or becomes generally publicly available (other than as a result of
violation of this Agreement by the Executive) or (y) that the Executive
receives on a nonconfidential basis from a source (other than the
Companies or their representatives) that is not known by him to be
bound by an obligation of secrecy or confidentiality to any of the
Companies.
<PAGE> 2
(b) The Executive shall not disclose, use or make known for
his or another's benefit any Confidential Information or use such
Confidential Information in any way except as is in the best interests
of the Companies in the performance of the Executive's duties under
this Agreement. The Executive may disclose Confidential Information
when required by a third party and applicable law or judicial process,
but only after providing (i) immediate notice to the Company at any
third party's request for such information, which notice shall include
the Executive's intent with respect to such request, and (ii)
sufficient opportunity for the Company to challenge or limit the scope
of the disclosure on behalf of the Companies, the Executive or both.
(c) The Executive acknowledges and agrees that a remedy at law
for any breach or threatened breach of the provisions of this Section 1
would be inadequate and, therefore, agrees that the Companies shall be
entitled to injunctive relief in addition to any other available rights
and remedies in case of any such breach or threatened breach; provided,
however, that nothing contained herein shall be construed as
prohibiting the Companies from pursuing any other rights and remedies
available for any such breach or threatened breach.
(d) The Executive agrees that upon termination of his
employment with the Company for any reason, the Executive shall
forthwith return to the Company all Confidential Information in
whatever form maintained (including without limitation, computer discs
and other electronic media).
(e) The obligations of the Executive under this Section 1
shall, except as otherwise provided herein, survive the termination of
the Executive's employment with the Company and the expiration or
termination of this Agreement and shall terminate eighteen months after
the termination of Executive's employment with the Company.
(f) Without limiting the generality of Section 5 hereof, the
Executive hereby expressly agrees that the foregoing provisions of this
Section 1 shall be binding upon the Executive's heirs, successors and
legal representatives.
2. Restrictive Covenants.
(a) Competition. During Executive's employment with the
Company and during the eighteen (18) month period following termination
of Executive's employment with the Company for any reason whatsoever,
provided that payments, if any, required pursuant to Section 3(b)
hereof are made in full and in a timely fashion, the Executive will not
directly or indirectly (as a director, officer, executive employee,
manager, consultant, independent contractor, advisor or otherwise)
engage in competition with, or own any interest in, perform any
services for, participate in or be connected with any business or
organization which engages in competition with any of the Companies in
any state of the United States of America,
2
<PAGE> 3
provided, however, that the provisions of this Section 2(a) shall not
be deemed to prohibit the Executive's ownership of not more than two
percent (2%) of the total shares of all classes of stock outstanding of
any publicly held company, or ownership, whether through direct or
indirect stock holdings or otherwise, of one percent (1%) or more of
any other business.
(b) Non-Solicitation. During Executive's employment with the
Company and during the eighteen (18) month period following termination
of the Executive's employment with the Company for any reason
whatsoever, provided that payments, if any, required pursuant to
Section 3(b) hereof are made in full and in a timely fashion, the
Executive will not directly or indirectly induce or attempt to induce
any employee of any of the Companies to leave the employ of the Company
of such subsidiary or affiliate, or in any way interfere with the
relationship between any of the Companies and any employee thereof.
This Section 2(b) shall not prohibit the Executive from employing any
employee of the Company if such employee initially contacts Executive
seeking such employment, and such employee has stated his or her
intention to terminate his or her employment with the Company.
(c) Non-Interference. During the Employment Term and during
the eighteen (18) month period following the end of the Employment Term
for any reason whatsoever (or, if later, the eighteen (18) month period
following termination of the Executive's employment with the Company),
provided that payments, if any, required pursuant to Section 3(b)
hereof are made in full and in a timely fashion, the Executive will not
directly or indirectly hire, engage, send any work to, place orders
with, or in any manner be associated with any supplier, contractor,
subcontractor or other business relation of any of the Companies if
such action by him would have a material adverse effect on the
business, assets or financial condition of any of the Companies, or
materially interfere with the relationship between any such person or
entity and any of the Companies.
(d) Certain Definitions.
(i) For purposes of this Section 2, a person or entity
(including, without limitation, the Executive) shall be deemed to be a
competitor of one or more of the Companies, or a person or entity
(including, without limitation, the Executive) shall be deemed to be
engaging in competition with one or more of the Companies, if such
person or entity (A) subject to the proviso set forth below, is a
for-profit general acute care hospital company, or (B) in any way
conducts, operates, carries out or engages in the business of managing
for-profit general acute care hospitals, in either case in any state of
the United States of America, provided, however, nothing in this
Agreement shall prohibit the Executive from becoming associated in any
capacity at a single for-profit general acute care hospital, as long as
such hospital is not owned, operated or managed by a for-profit
multi-facility hospital company or management company.
3
<PAGE> 4
(ii) For purposes of this Section 2, no corporation or entity
that may be deemed to be an affiliate of the Company solely by reason
of its being controlled by, or under common control with, Welsh,
Carson, Anderson & Stowe VII, L.P. or any of its affiliates other than
the Company, will be deemed to be an affiliate of the Company.
(e) Certain Representations of the Executive. In connection
with the foregoing provisions of this Section 2, the Executive
represents that his experience, capabilities and circumstances are such
that such provisions will not prevent him from earning a livelihood.
The Executive further agrees that the limitations set forth in this
Section 2 (including, without limitation, time and territorial
limitations) are reasonable and properly required for the adequate
protection of the current and future businesses of the Companies. It is
understood and agreed that the covenants made by the Executive in this
Section 2 (and in Section 1 hereof) shall survive the expiration or
termination of this Agreement.
(f) Injunctive Relief. The Executive acknowledges and agrees
that a remedy at law for any breach or threatened breach of the
provisions of Section 2 hereof would be inadequate and, therefore,
agrees that the Company and any of its subsidiaries or affiliates shall
be entitled to injunctive relief in addition to any other available
rights and remedies in cases of any such breach or threatened breach;
provided, however, that nothing contained herein shall be construed as
prohibiting the Company or any of its affiliates from pursuing any
other rights and remedies available for any such breach or threatened
breach.
(g) Change of Control. Notwithstanding the foregoing, the
restrictive covenants contained in Section 2 shall not apply to
Executive in the event there is a Change in Control at the Company. For
purposes of this Agreement, A "Change in Control" shall have occurred
if at any time during the term of this Agreement any of the following
events shall occur:
(i) Any person (as the term "person" is used in Section
13(d)(3) or Section 14(d)(2) of the Securities Exchange Act of 1934
(the "Exchange Act")) who is not on the date hereof the beneficial
owner (as the term "beneficial owner" is defined under Rule 13d-3 or
any successor rule or regulation promulgated under the Exchange Act) of
5% or more of any class of the outstanding equity securities of the
Company become the beneficial owner of securities which when added to
any securities already owned by such person would represent 25% or more
of the combined voting power of the then-outstanding voting securities
of the Company;
(ii) The Company is merged, consolidated or reorganized into
or with another corporation or other person and as a result of such
merger, consolidation or reorganization less then 80% of the combined
voting power of the then-outstanding securities of such corporation or
person immediately after such transaction are held in the aggregate by
the holders of voting securities of the Company immediately prior to
such transaction;
4
<PAGE> 5
(iii) The Company sells all or substantially all of its assets
to any other corporation;
(iv) During the period of two consecutive years, individuals
who, at the beginning of any such period, constitute the directors of
the Company cease for any reason to constitute at least a majority
thereof unless the election or the nomination for election by the
Company stockholders of such director of the Company first elected
during such period was approved by a vote of at lease two-thirds of the
directors of the Company at the beginning of any such period; or
(v) The Company is no longer engaged, directly or indirectly,
in the business of owning, managing or operating for-profit general
acute care hospitals in the United States of America.
3. Termination.
(a) The Executive's employment hereunder shall be terminated
upon the occurrence of any of the following:
(i) death of the Executive;
(ii) termination of the Executive's employment hereunder by
the Company because of the Executive's inability to perform his duties
on account of disability or incapacity for a period of six (6)
consecutive months;
(iii) termination of the Executive's employment hereunder by
the Company at any time "for cause" (as defined below), such
termination to take effect immediately upon written notice from the
Company to the Executive to such effect; and
(iv) termination of the Executive's employment hereunder (A)
by the Company at any time, other than (x) termination by reason of
death, disability or incapacity as contemplated by clause (i) or (ii)
above or (y) termination by the Company "for cause" as contemplated by
clause (iii) above or (B) by the Executive for the breach of any
provision of this Agreement by the Company.
The following actions, failures and events by or affecting the
Executive shall constitute "cause" for termination within the meaning of clause
(iii) above: (A) conviction of the Executive of, or the entering of a plea of
nolo contendere by the Executive with respect to, having committed a felony, (B)
acts of dishonesty or moral turpitude by the Executive that are materially
detrimental to one or more of the Companies, (C) acts or omissions by the
Executive that the Executive knew were likely to materially damage the business
of one or more of the Companies, (D) gross negligence by the Executive in the
performance of, or willful disregard by the Executive of, his obligations
hereunder or otherwise relating to his employment, or (E) failure by the
Executive to obey the reasonable and lawful orders of the Board of Directors
that are consistent with the provisions of this
5
<PAGE> 6
Agreement (provided that, in the event such failure does not also constitute
"cause" under any of clauses (A) through (D) above, the Executive shall have
received written notice of such failure and a reasonable opportunity to discuss
the matter with the Board of Directors, followed by a notice that the Board of
Directors adheres to its position and a reasonable opportunity to comply with
such orders).
(b) In the event that the Executive's employment is terminated
pursuant to clause (iv) of Section 3(a) above, the Company shall pay to
the Executive, as severance pay or liquidated damages or both, monthly
payments at the rate per annum of his salary at the time of such
termination and shall provide the Executive with the benefits and the
disability benefits being provided to Executive prior to termination,
for a period from the date of such termination to eighteen months after
such termination.
(c) Notwithstanding anything to the contrary expressed or
implied herein, except as required by applicable law and except as set
forth in Section 3(b) above, the Company (and its affiliates) shall not
be obligated to make any payments to the Executive or on his behalf of
whatever kind or nature by reason of the Executive's cessation of
employment (including, without limitation, by reason of termination of
the Executive's employment by the Company for "cause"), other than (i)
such amounts, if any, of his salary and bonus as shall have accrued and
remained unpaid as of the date of said cessation and (ii) such other
amounts, if any, which may be then otherwise payable to the Executive
from the Company's benefits plans or reimbursement policies.
(d) No interest shall accrue on or be paid with respect to any
portion of any payments hereunder.
(e) Except as required by law, no right to receive payments
under this Agreement shall be subject to anticipation, commutation,
alienation, sale, assignment, encumbrance, charge, pledge, or
hypothecation or to exclusion, attachment, levy or similar process or
to assignment by operation of law, and any attempt, voluntary or
involuntary, to effect any such action shall be null, void and of no
effect.
4. Non-Assignability. Neither this Agreement nor any right or
interest hereunder shall be assignable by the Executive or his beneficiaries or
legal representatives without the Company's prior written consent; provided,
however, that nothing in this Section 4 shall preclude the Executive from
designating a beneficiary to receive any benefit payable hereunder upon his
death or incapacity.
5. Binding Effect. Without limiting or diminishing the effect
of Section 4 hereof, this Agreement shall inure to the benefit of and be binding
upon the parties hereto and their respective heirs, successors, legal
representatives and assigns.
6. Notices. All notices which are required or may be given
pursuant to the terms of this Agreement shall be in writing and shall be
sufficient in all respects if given
6
<PAGE> 7
in writing and: (i) delivered personally, (ii) mailed by certified or registered
mail, return receipt requested and postage prepaid, (iii) sent via a nationally
recognized overnight courier or (iv) sent via facsimile confirmed in writing to
the recipient, if to the Company, at the Company's principal place of business,
and if to the Executive, at his home address most recently filed with the
Company, or to such other address or addresses as either party shall have
designated in writing to the other party hereto.
7. Law Governing. This Agreement shall be governed by and
construed in accordance with the laws of the State of Tennessee.
8. Severability. The Executive agrees that in the event that
any court of competent jurisdiction shall finally hold that any provision of
Section 1 or 2 hereof is void or constitutes an unreasonable restriction against
the Executive, the provisions of such Section 1 or 2 shall not be rendered void
but shall apply with respect to such extent as such court may judicially
determine constitutes a reasonable restriction under the circumstances. If any
part of this Agreement other than Section 1 or 2 is held by a court of competent
jurisdiction to be invalid, illegible or incapable of being enforced in whole or
in part by reason of any rule of law or public policy, such part shall be deemed
to be severed from the remainder of this Agreement for the purpose only of the
particular legal proceedings in question and all other covenants and provisions
of this Agreement shall in every other respect continue in full force and effect
and no covenant or provision shall be deemed dependent upon any other covenant
or provision.
9. Waiver. Failure to insist upon strict compliance with any
of the terms, covenants or conditions hereof shall not be deemed a waiver of
such term, covenant or condition, nor shall any waiver or relinquishment of any
right or power hereunder at any one or more times be deemed a waiver or
relinquishment of such right or power at any other time or times.
10. Entire Agreement; Modifications. This Agreement
constitutes the entire and final expression of the agreement of the parties with
respect to the subject matter hereof and supersedes all prior agreements, oral
and written, between the parties hereto with respect to the subject matter
hereof, including, without limitation, the Employment Agreement, which is hereby
terminated and rendered of no further force and effect. This Agreement may be
modified or amended only by an instrument in writing signed by both parties
hereto.
11. Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
7
<PAGE> 8
IN WITNESS WHEREOF, the Company and the Executive have duly
executed and delivered this Agreement as of the day and year first above
written.
COMPANY:
NEW AMERICAN HEALTHCARE CORPORATION
By:
------------------------------------
Title:
---------------------------------
EXECUTIVE:
-----------------------------------------
Dana C. McLendon, Jr.
8
<PAGE> 1
================================================================================
NEW AMERICAN HEALTHCARE CORPORATION
Amended and Restated Stock Option Plan
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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Page
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<S> <C> <C>
Section 1. Purpose.........................................................................................i
Section 2. Definitions....................................................................................i
2.1 "Board of Directors"............................................................................i
2.2 "Code"..........................................................................................i
2.3 "Committee".....................................................................................i
2.4 "Common Stock"..................................................................................i
2.5 "Employee"......................................................................................i
2.6 "ISO"...........................................................................................i
2.7 "Non-Qualified Option"..........................................................................i
2.8 "Option".......................................................................................ii
2.9 "Participant"..................................................................................ii
2.10 "Parent of the Company"........................................................................ii
2.11 "Subsidiary of the Company"....................................................................ii
Section 3. Eligibility....................................................................................ii
Section 4. Common Stock Subject to the Plan...............................................................ii
4.1 Number.........................................................................................ii
4.2 Terminated/Reacquired Options..................................................................ii
4.3 Special ISO Limitations........................................................................ii
4.4 Nonqualified Provisions.......................................................................iii
Section 5. Administration of the Plan....................................................................iii
5.1 Committee.....................................................................................iii
5.2 Options.......................................................................................iii
5.3 Interpretations...............................................................................iii
5.4 Committee Interpretations Conclusive...........................................................iv
5.5 Committee Voting...............................................................................iv
5.6 Committee Exculpation..........................................................................iv
5.7 Granting of Options to Directors and Officers..................................................iv
Section 6. Terms and Conditions of Options................................................................iv
6.1 ISO's..........................................................................................iv
6.2 Non-Qualified Options.........................................................................vii
6.3 Payment of Exercise Price with Previously Issued Stock.......................................viii
6.4 Modification, Extension and Renewal of Options...............................................viii
Section 7. Adjustments..................................................................................viii
Section 8. Effect of the Plan on Employment Relationship..................................................ix
Section 9. Amendment of the Plan..........................................................................ix
</TABLE>
i
<PAGE> 3
<TABLE>
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Page
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<S> <C> <C>
Section 10. Non-Compete Provisions.........................................................................ix
Section 11. Termination of the Plan........................................................................ix
Section 12. Effective Date of the Plan.....................................................................ix
Section 13. Indemnification of Board or Committee..........................................................ix
</TABLE>
ii
<PAGE> 4
NEW AMERICAN HEALTHCARE CORPORATION
AMENDED AND RESTATED STOCK OPTION PLAN
Section 1. Purpose. The purpose of the New American Healthcare
Corporation Amended and Restated Stock Option Plan (the "Plan") is to promote
the interests of New American Healthcare Corporation, a Delaware corporation
(the "Company"), and its stockholders by providing an opportunity to selected
employees, officers, directors, consultants, and advisors of the Company or any
Subsidiary thereof to purchase Common Stock of the Company. By encouraging such
stock ownership, the Company seeks to attract, retain and motivate such
employees and persons and to encourage such employees and persons to devote
their best efforts to the business and financial success of the Company. It is
intended that this purpose will be effected by the granting of "non-qualified
stock options" and/or "incentive stock options" to acquire the Common Stock of
the Company. Under the Plan, the Board of Directors (or the Committee) shall
have the authority (in its sole discretion) to grant "incentive stock options"
within the meaning of Section 422(b) of the Code or "non-qualified stock
options" to which Code Section 421 does not apply. The Plan is not subject to
the provisions of the Employee Retirement Income Security Act of 1974 ("ERISA").
Section 2. Definitions. For purposes of this Plan, the following terms
used herein shall have the following meanings, unless a different meaning is
clearly required by the context.
2.1 "Board of Directors" shall mean the Board of Directors of
the Company.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as
amended.
2.3 "Committee" shall mean the committee of the Board of
Directors referred to in Section 5.1 hereof.
2.4 "Common Stock" shall mean the Common Stock, $.01 par
value, of the Company.
2.5 "Employee" shall mean (i) with respect to an ISO, any
person, including an officer or director of the Company, who, at the time an ISO
is granted to such person hereunder, is employed, as defined by Code Section 422
and the Treasury Regulations promulgated thereunder, on a full-time basis by the
Company or any Subsidiary of the Company, and (ii) with respect to a
Non-Qualified Option shall mean any person employed by or performing services
for the Company or any Subsidiary of the Company, including, without limitation,
directors and officers.
2.6 "ISO" shall mean an Option to purchase Common Stock
granted under the Plan that constitutes and shall be treated as an "incentive
stock option", as defined in Section 422(b) of the Code.
2.7 "Non-Qualified Option" shall mean an Option to purchase
Common Stock granted to a Participant pursuant to the Plan that is intended to
be, and qualifies as,
<PAGE> 5
a "non-qualified stock option", with respect to which Code Section 421 does not
apply, and that shall not constitute or be treated as an ISO.
2.8 "Option" shall mean any ISO or Non-Qualified Option
granted to an Employee pursuant to this Plan.
2.9 "Participant" shall mean any Employee to whom an Option is
granted under this Plan.
2.10 "Parent of the Company" shall have the meaning set forth
in Section 424(e) of the Code.
2.11 "Subsidiary of the Company" shall have the meaning set
forth in Section 424(f) of the Code.
Section 3. Eligibility. Options may be granted to any Employee. The
Board of Directors (or the Committee) shall have the sole authority to select
the persons to whom Options are to be granted hereunder, and to determine
whether a person is to be granted a Non-Qualified Option or an ISO or any
combination thereof. No person shall have any right to participate in the Plan.
Any person selected by the Board of Directors for participation during any one
period will not by virtue of such participation have the right to be selected as
a Participant for any other period.
Section 4. Common Stock Subject to the Plan.
4.1 Number. The total number of shares of Common Stock for
which Options may be granted under this Plan shall not exceed in the aggregate
2,100,000 shares of Common Stock.
4.2 Terminated/Reacquired Options. The shares of Common Stock
that may be subject to Options granted under this Plan may be either authorized
and unissued shares or shares reacquired at any time and now or hereafter held
as treasury stock as the Board of Directors may determine. In the event that any
outstanding Option expires or is terminated for any reason, the shares allocable
to the unexercised portion of such Option shall again become available for
issuance pursuant to this Plan. If any shares of Common Stock acquired pursuant
to the exercise of an Option shall have been repurchased or reacquired by the
Company, then such shares shall again become available for issuance pursuant to
the Plan. In the event that there is an insufficient number of authorized shares
of Common Stock available to allow exercise of Options on the date of any grant
hereunder, such Options will not be exercisable until there are sufficient
shares of Common Stock authorized for issuance.
4.3 Special ISO Limitations. An ISO shall not be granted to an
Employee who, at the time the ISO is granted, owns (actually or constructively
under the provisions of Section 424(d) of the Code) stock possessing more than
10% of the total combined voting power of all classes of stock of the Company or
any Parent or Subsidiary of the Company, unless the option price is at least
110% of the fair market value (determined as
2
<PAGE> 6
of the time the ISO is granted) of the shares of Common Stock subject to the ISO
and the ISO by its terms is not exercisable more than five years from the date
it is granted.
4.4 Non-qualified Provisions. Notwithstanding any other
provision of the Plan, the provisions of Section 4.3 shall not apply, or be
construed to apply, to any Non-Qualified Option granted under the Plan.
Section 5. Administration of the Plan.
5.1 Committee. The Plan shall be administered by the Board of
Directors or, if established at any time by the Board of Directors, by a
committee thereof (the "Committee"). The Committee may be appointed from time to
time by, and shall serve at the pleasure of, the Board of Directors and will be
so constituted to comply with Rule 16b-3 as promulgated under the Securities
Exchange Act of 1934, as amended, as the rule may be amended from time to time
or in any successor rule or comparable regulatory requirement ("Rule 16b-3").
Notwithstanding any other provision of the Plan, Options may only be granted
under this Plan in compliance with Section 5.7 hereof.
5.2 Options. The Board of Directors (or the Committee) shall
have the sole authority and discretion under the Plan (i) to select the
Participants who are to be granted Options hereunder; (ii) to designate whether
any Option to be granted hereunder is to be an ISO or a Non-Qualified Option;
(iii) to establish the number of shares of Common Stock that may be issued under
each Option; (iv) to determine the time and the conditions subject to which
Options may be exercised in whole or in part; (v) to determine the form of the
consideration that may be used to purchase shares of Common Stock upon exercise
of any Option (including the circumstances under which the Company's issued and
outstanding shares of Common Stock may be used by a Participant to exercise an
Option); (vi) to impose restrictions and/or conditions with respect to shares of
Common Stock acquired upon exercise of an Option; (vii) to determine the
circumstances under which shares of Common Stock acquired upon exercise of any
Option may be subject to repurchase by the Company; (viii) to determine the
circumstances and conditions subject to which shares acquired upon exercise of
an Option may be sold or otherwise transferred, including, without limitation,
the circumstances and conditions subject to which a proposed sale of shares of
Common Stock acquired upon exercise of an Option may be subject to the Company's
right of first refusal (as well as the terms and conditions of any such right of
first refusal); (ix) to establish a vesting provision for any Option relating to
the time (or the circumstance) when the Option may be exercised by a
Participant, including vesting provisions which may be contingent upon the
Company meeting specified financial goals; (x) to accelerate the time when
outstanding Options may be exercised, provided, however, that any ISO's shall be
"accelerated" only within the meaning of Section 424(h) of the Code, and (xi) to
establish any other terms, restrictions and/or conditions applicable to any
Option not inconsistent with the provisions of this Plan, and, with respect to
ISO's, not inconsistent with the provisions of Code Section 422.
5.3 Interpretations. The Board of Directors (or the Committee)
shall be authorized to interpret the Plan and may, from time to time, adopt such
rules and
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regulations, not inconsistent with the provisions of the Plan, as it may deem
advisable to carry out the purpose of the Plan.
5.4 Committee Interpretations Conclusive. The interpretation
and construction by the Board of Directors (or the Committee) of any provision
of the Plan, any Option granted hereunder or any agreement evidencing any such
Option shall be final and conclusive upon all parties.
5.5 Committee Voting. Subject to Section 5.7 hereof, directors
of the Company (or members of the Committee, if established) who are either
eligible for Options hereunder, or to whom Options have been granted hereunder,
may vote on any matter affecting the administration of the Plan or the granting
of Options under the Plan; provided, however, that no director (or member of the
Committee) shall vote upon the granting of an Option to himself, but any such
director may be counted in determining the existence of a quorum at any meeting
of the Board of Directors (or the Committee) at which the Plan is administered
or action is taken with respect to the granting of an Option.
5.6 Committee Exculpation. All expenses and liabilities
incurred by the Board of Directors (or the Committee) in the administration of
the Plan shall be borne by the Company. The Board of Directors (or the
Committee) may employ attorneys, consultants, accountants or other persons in
connection with the administration of the Plan. The Company, and its officers
and directors, shall be entitled to rely upon the advice, opinions or valuations
of any such persons. No member of the Board of Directors (or the Committee)
shall be liable for any action, determination or interpretation taken or made in
good faith with respect to the Plan or any Option granted hereunder.
5.7 Granting of Options to Directors and Officers.
Administrative discretion regarding the selection of any director of the Company
to whom Options may be granted pursuant to this Plan, or the determination of
the number of shares of Common Stock which may be allocated under such Options
and the terms thereof, shall be administered by a committee of two or more
directors having full authority to act in the matter, all of whom are
Disinterested as such term is defined in Rule 16b-3. Administrative discretion
regarding the selection of any officer of the Corporation (who is not a
director) to whom Options may be granted pursuant to this Plan, or the
determination of the number of shares of Common Stock which may be allocated
under such Options, will be exercised by (i) the Board, if each of its members
is Disinterested, or (ii) a Committee of two or more directors, all of whom are
Disinterested.
Section 6. Terms and Conditions of Options.
6.1 ISO's. The terms and conditions of each ISO granted under
the Plan shall be specified by the Board of Directors (or the Committee), shall
be set forth in an ISO agreement between the Company and the Participant in such
form as the Board of Directors (or the Committee) shall approve, and shall be
clearly identified therein as an ISO. The terms and conditions of each ISO shall
be such that each ISO issued hereunder shall constitute and shall be treated as
an "incentive stock option" as defined in Section
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<PAGE> 8
422 of the Code. The terms and conditions of any ISO granted hereunder need not
be identical to those of any other ISO granted hereunder.
The terms and conditions of each ISO shall include the following:
(a) The option price shall be 100% (or 110% in the case of an
Employee referred to in Section 4.3 hereof) of the fair market value, as
determined in accordance with Code Section 422(c)(7) and as determined in good
faith by the Board of Directors, of the shares of Common Stock subject to the
ISO on the trading day next preceding the date the ISO is granted, but in no
event shall the option price be less than the par value of such shares.
(b) ISO's, by their terms, shall not be transferable otherwise
than by will or the laws of descent and distribution, and, during an Employee's
lifetime, an ISO shall be exercisable only by the Employee.
(c) Except as otherwise provided pursuant to Section 6.1(f),
in the event a Participant shall cease to be employed by the Company or any
Parent or Subsidiary of the Company on a full-time basis for any reason other
than as a result of his death or "permanent and total disability" (within the
meaning of Section 22(e)(3) of the Code) and other than for "cause" as defined
in Section 6.1(h)(i), the unexercised portion of any ISO held by such
Participant at that time may only be exercised within three months after the
date on which the Participant ceased to be so employed, and only to the extent
that the Participant could have otherwise exercised such ISO as of the date on
which he ceased to be so employed; provided, however, if the Participant shall
die within said three month period, then the period during which ISO may be
exercised shall be extended to the date that is one year after the Participant
ceased to be employed by the Company; provided, further, that in no event may
such option be exercised beyond the expiration of the term of the Option.
(d) In the event a Participant shall cease to be employed by
the Company or any Parent or Subsidiary of the Company on a full-time basis by
reason of his "permanent and total disability" (within the meaning of Section
22(e)(3) of the Code), the unexercised portion of any ISO held by such
Participant at that time may only be exercised within one year after the date on
which the Participant ceased to be so employed, and only to the extent that the
Optionee could have otherwise exercised such ISO as of the date on which he
ceased to be so employed; provided that in no event may such Option be exercised
beyond the expiration of the term of the Option.
(e) In the event a Participant shall die while in the
full-time employ of the Company or a Parent or Subsidiary of the Company, the
unexercised portion of any ISO held by such Participant at the time of his death
may only be exercised within one year after the date of such Participant's
death, and only to the extent that the Participant could have otherwise
exercised such ISO at the time of his death. In such event, such ISO may be
exercised by the executor or administrator of the Participant's estate or by any
person or persons who shall have acquired the ISO directly from the Participant
by bequest or inheritance.
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<PAGE> 9
(f) The Board of Directors (or the Committee) shall fix the
term of all ISOs granted pursuant to the Plan, including the date on which such
ISO shall expire and terminate, provided, however, that such term shall in no
event exceed ten years from the date on which such ISO is granted (or, in the
case of an ISO granted to an Employee referred to in Section 4.3 hereof, such
term shall in no event exceed five years from the date on which such ISO is
granted). Each ISO shall be exercisable in such amount or amounts, under such
conditions and at such times or intervals or in such installments as shall be
determined by the Board of Directors (or the Committee) in its sole discretion.
(g) In the event that the Company or any Parent or Subsidiary
of the Company is required to withhold any Federal, state or local taxes in
respect of any compensation income realized by the Participant as a result of
any "disqualifying disposition" of any shares of Common Stock acquired upon
exercise of an ISO granted hereunder, the Company shall deduct from any payments
of any kind otherwise due to such Participant the aggregate amount of such
Federal, state or local taxes required to be so withheld or, if such payments
are insufficient to satisfy such Federal, state or local taxes, or if no such
payments are due or to become due to such Participant, then such Participant
will be required to pay to the Company, or make other arrangements satisfactory
to the Company regarding payment to the Company of, the aggregate amount of any
such taxes. All matters with respect to the total amount of taxes to be withheld
in respect of any such compensation income shall be determined by the Board of
Directors in its sole discretion.
(h) In the sole discretion of the Board of Directors (or the
Committee) the terms and conditions of any ISO may (but need not) include the
following provision:
(x) In the event a Participant is terminated from
employment with the Company for cause, such Participant's right to
exercise any option granted hereunder, whether vested or non-vested,
shall terminate upon notice of discharge. For purposes of this
paragraph, "cause" shall mean final conviction of a felony,
adjudication of bankruptcy, conduct prejudicial to the interest of the
Company, or any other reason specified as "cause" in any employment
agreement or similar agreement between a Participant and the Company.
(i) If upon the exercise of one or more ISOs issued pursuant
to this or any other plan of the Company or any Parent or Subsidiary of the
Company, a portion of such exercised Options are not treated as ISOs pursuant to
Code Section 422(d), then the Company shall issue one or more certificates
evidencing the Common Stock acquired pursuant to the exercise of ISOs and one or
more certificates evidencing the Common Stock acquired pursuant to the exercise
of Options not treated as ISOs in accordance with Code Section 422 and shall so
identify such certificates in the Company's stock transfer records.
(j) Following a transfer of stock to any person pursuant to
such person's exercise of an ISO, the Company or any Parent or Subsidiary of the
Company shall (on or before January 31 of the calendar year following the year
of such transfer) furnish to such
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<PAGE> 10
person the written statement prescribed by Code Section 6039 and the Treasury
Regulations promulgated thereunder.
6.2 Non-Qualified Options. The terms and conditions of each
Non-Qualified Option granted under the Plan shall be specified by the Board of
Directors (or the Committee), in its sole discretion, shall be set forth in a
written option agreement between the Company and the Participant in such form as
the Board of Directors (or the Committee) shall approve, and shall be clearly
identified therein as a Non-Qualified Stock Option. The terms and conditions of
each Option will be such that each Option issued hereunder shall not constitute
or be treated as an "incentive stock option", as defined in Section 422 of the
Code, and will be a "non-qualified stock option" for Federal income tax
purposes. The terms and conditions of any Non-Qualified Option granted hereunder
need not be identical to those of any other Option granted hereunder.
The terms and conditions of each Non-Qualified Option
Agreement shall include the following:
(a) The option price shall be as determined by the Board of
Directors, but in no event shall the option Price be less than the par value of
such shares.
(b) The Board of Directors (or the Committee) shall fix the
term of all Non-Qualified Options granted pursuant to the Plan (including the
date on which such Non-Qualified Option shall expire and terminate). Such term
may not be more than ten years from the date on which such Non-Qualified Option
is granted. Each Non-Qualified Option shall be exercisable in such amount or
amounts, under such conditions, and at such times or intervals or in such
installments as shall be determined by the Board of Directors (or the Committee)
in its sole discretion. Unless stated otherwise in a Non-Qualified Option
Agreement, for a period of sixty (60) days following the date a Participant's
employment or directorship with the Company terminates, the Company shall have
the right to purchase such Participant's vested options by paying Participant
the difference between the exercise price of such options and the fair market
value (as of the date of Participant's termination) of the underlying shares of
Common Stock.
(c) Non-Qualified Options shall not be transferable otherwise
than by will or the laws of descent and distribution, and during a Participant's
lifetime a Non-Qualified Option shall be exercisable only by the Participant.
(d) In the event that the Company is required to withhold any
Federal, state or local taxes in respect of any compensation income realized by
the Participant in respect of a Non-Qualified Option granted hereunder or in
respect of any shares of Common Stock acquired upon exercise of a Non-Qualified
Option, the Company shall deduct from any payments of any kind otherwise due to
such Participant the aggregate amount of such Federal, state or local taxes
required to be so withheld or, if such payments are insufficient to satisfy such
Federal, state or local taxes, or if no such payments are due or to become due
to such Participant, then, such Participant will be required to pay to the
Company, or make other arrangements satisfactory to the Company regarding
payment to the Company of, the aggregate amount of any such taxes, prior to the
Company's being
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<PAGE> 11
obligated to deliver shares to the Participant. All matters with respect to the
total amount of taxes to be withheld in respect of any such compensation income
shall be determined by the Board of Directors in its sole discretion.
6.3 Payment of Exercise Price with Previously Issued Stock.
Except as otherwise provided in an Option agreement between the Company and a
Participant granting an ISO or a Non-Qualified Option to such Participant, the
Board of Directors may permit the option price for any Option granted under the
Plan to be paid, in whole or in part, with previously issued Common Stock of the
Company (valued as of the date of exercise of such Option).
6.4 Modification, Extension and Renewal of Options. Subject to
the terms and conditions and within the limitations of the Plan and with respect
to ISOs as permitted by the Code, the Board of Directors (or the Committee) may
modify, extend or renew outstanding Options granted under the Plan, or accept
the surrender of outstanding Options (to the extent not theretofore exercised)
and authorize the granting of new Options and substitutions therefor (to the
extent not theretofore exercised), provided, however, that no modification,
revision or cancellation of an Option shall, without the consent of the optionee
thereof, cause an ISO to become a Non-Qualified Option or, except as otherwise
set forth herein, alter or impair any rights or obligations under any Option
theretofore granted under the Plan.
Section 7. Adjustments.
(a) In the event that, after the adoption of the Plan by the
Board of Directors, the outstanding shares of the Company's Common Stock shall
be increased or decreased or changed into or exchanged for a different number or
kind of shares of stock or other securities of the Company or of another
corporation through reorganization, merger or consolidation, recapitalization,
reclassification, stock split, split-up, combination or exchange of shares or
declaration of any dividends payable in Common Stock or in any other manner
effected without the receipt of consideration by the Company, the Board of
Directors shall appropriately adjust (i) the number of shares of Common Stock
(and the option price per share) subject to the unexercised portion of any
outstanding Option (to the nearest possible full share), provided, however, that
the limitations of Sections 422 and 424 of the Code shall apply with respect to
adjustments made to ISOs, and (ii) the number of shares of Common Stock for
which Options may be granted under this Plan, as set forth in Section 4.1
hereof, and such adjustments shall be effective and binding for all purposes of
this Plan.
(b) Notwithstanding the foregoing, upon the closing of any
offer to holders of not less than 50% of the Company's Common Stock relating to
the acquisition of their shares in a single transaction or related series of
transactions, including, without limitation, through purchase, merger or
otherwise, or any transaction relating to the acquisition of substantially all
of the assets or business of the Company, the Board of Directors of the Company
may make such adjustment as it deems equitable in respect of outstanding Options
including, without limitation, the revision or cancellation of any outstanding
Options; provided, that, to the extent any such Options shall be vested, such
cancellation
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<PAGE> 12
or revision shall be based upon the difference between the acquisition value for
the Company's Common Stock and the exercise price of such Options. Any such
equitable determination by the Board of Directors shall be effective and binding
for all purposes of this Plan and any Stock Option Agreement thereunder.
Section 8. Effect of the Plan on Employment Relationship. Neither this
Plan nor any Option granted hereunder to a Participant shall be construed as
conferring upon such Participant any right to continue in the employ of the
Company or the service of the Company or any Subsidiary, as the case may be, or
limit in any respect the right of the Company or any Subsidiary to terminate
such Participant's employment or other relationship with the Company or any
Subsidiary, as the case may be, at any time.
Section 9. Amendment of the Plan. The Board of Directors may amend the
Plan from time to time as it deems desirable, unless any federal or state law
requires the approval of the Company's stockholders. Notwithstanding any other
provisions of the Plan, the Board of Directors may modify outstanding Options in
any manner in its reasonable discretion if the Board determines that intended
benefits are not obtainable because of accounting treatment.
Section 10. Non-Compete Provisions. The terms of any Participant's
Option Agreement may, at the discretion of the Board, contain non-compete
provisions.
Section 11. Termination of the Plan. The Board of Directors may
terminate the Plan at any time. Unless the Plan shall theretofore have been
terminated by the Board of Directors, the Plan shall terminate ten years after
the date of its initial adoption by the Board of Directors. No Option may be
granted hereunder after termination of the Plan. The termination or amendment of
the Plan shall not alter or impair any rights or obligations under any Option
theretofore granted under the Plan.
Section 12. Effective Date of the Plan. This Plan shall be effective as
of July 31, 1996, the date on which the Plan was adopted by the Board of
Directors of the Company and approved by the unanimous written consent of the
holders of all outstanding stock of the Company.
Section 13. Indemnification of Board or Committee. In addition to other
rights of indemnification as they may have as members of the Board, each member
of the Board or Committee will be indemnified by the Corporation against all
costs and expenses reasonably incurred by him in connection with any action,
suit or proceeding to which he may be party by reason of any action taken or
failure to act under or in connection with the Plan, or any Option granted
thereunder, and against all amounts paid by him in settlement thereof (provided
the settlement is approved by legal counsel selected by the Corporation) or paid
by him in satisfaction of a judgment in any such action, suit or proceeding,
except a judgment based upon a finding of a breach of the duty of loyalty or
acts or omissions either not in good faith or which involve intentional
misconduct or a knowing violation of law. Upon the institution of any such
action, suit or proceeding, each Board or Committee member affected will notify
the Corporation in writing of the same, giving the Corporation
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<PAGE> 13
an opportunity, at its own expense, to defend the same before the member
undertakes to defend it on his own behalf."
This Plan was adopted and approved by the Board of Directors and its
Stockholders on the _____ day of ___________________, 1998.
--------------------------------------
Secretary
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<PAGE> 1
NEW AMERICAN HEALTHCARE CORPORATION
EMPLOYEE STOCK PURCHASE PLAN
ARTICLE I.
TITLE, PURPOSE AND TERM
Section 1.01 This Plan shall be known as the New American Healthcare
Corporation Employee Stock Purchase Plan (hereinafter referred to as the
"Plan").
Section 1.02 The purpose of the Plan is to provide the Employees of New
American Healthcare Corporation and designated subsidiaries with a convenient
way to become stockholders of the Company. It is believed that employee
participation in the ownership of the Company will help to achieve the unity of
purpose essential to the continued growth of the Company and benefit its
employees and stockholders. This Plan is intended to be effective as an employee
stock purchase plan, as defined in Section 423 of the Internal Revenue Code of
1986, as amended, and shall be interpreted and construed in accordance with such
purpose.
Section 1.03 The Plan will be effective on the Effective Date. The Plan
will be continued from year to year but, subject to Section 5.03, may be
modified or discontinued by the Company at any time.
ARTICLE II.
DEFINITIONS
As used herein, the following words and phrases shall have the meanings
specified below, unless a different meaning is plainly required by the context:
Section 2.01 The term "Anniversary Date" shall mean each January 1 on
and after the Effective Date.
Section 2.02 The term "Board of Directors" shall mean the Board of
Directors of New American Healthcare Corporation.
Section 2.03 The term "Closing Market Price" shall mean the closing
price of the Sponsoring Employer Stock as reported in The Wall Street Journal
for the date of determination; provided, however, if the Sponsoring Employer
Stock is not listed on a national securities exchange, then the term "Closing
Market Price" shall mean the market value of the Sponsoring Employer Stock as
determined by the Board of Directors.
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Section 2.04 The term "Code" shall mean the Internal Revenue Code of
1986, as amended from time to time.
Section 2.05 The term "Committee" shall mean the committee, if any,
designated by the Board of Directors in accordance with Section 5.01 to
administer the Plan.
Section 2.06 The term "Company" shall mean New American Healthcare
Corporation (sometimes referred to as the "Sponsoring Employer") and its
successors by merger or consolidation and all of its subsidiary corporations,
except those subsidiary corporations expressly excluded from participation in
the Plan by action of the Board of Directors. The Company's principal offices
are located at 109 Westpark Drive, Suite 440, Brentwood, Tennessee 37027.
Section 2.07 The term "Continuous Service" shall mean the number of
days of continuous employment with the Company from the Employee's last hiring
date to the Employee's date of severance of employment for any reason.
Continuous Service shall not be broken and shall be credited for absences due to
vacation, temporary sickness or injury or military leave.
Section 2.08 The term "Contribution Account" shall mean the account
established on behalf of a Participant to which shall be credited the amount of
the Participant's contribution, pursuant to Article IV.
Section 2.09 The term "Effective Date" shall mean January 1, 1998.
Section 2.10 The term "Employee" shall mean each current and future
employee of the Company whose customary employment is at least twenty (20) hours
a week and more than five months in a calendar year.
Section 2.11 The term "Exercise Date" shall mean the last day of the
Plan Year on which the Sponsoring Employer Stock publicly trades.
Section 2.12 The term "Grant Date" shall mean the first day of the Plan
Year on which the Sponsoring Employer Stock publicly trades.
Section 2.13 The term "Issue Price" shall mean the per share price of
the Sponsoring Employer Stock to be charged to Participants at the "Exercise
Date". The "Issue Price" shall be determined as outlined in Article IV.
Section 2.14 The term "Participant" shall mean any Employee of the
Company who has met the conditions and provisions for becoming a Participant as
provided in Article III hereof.
Section 2.15 The term "Participant's Contribution Rate" shall be an
exact number of dollars determined by the Participant to contribute each pay
period by regular payroll
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deductions to his Contribution Account as outlined in Section 4.02 and the term
"Participant's Contribution" shall be the aggregate dollars actually so
contributed.
Section 2.16 The term "Normal Pay" shall be computed, with respect to
Employees who are paid on an hourly basis, by annualizing each such Employee's
hourly base pay and his regular scheduled hours of work as of the January 1
immediately preceding a Plan Year and dividing by twelve. For a salaried
employee the "Normal Pay" shall be the greater of such employee's compensation
for the calendar year for which the determination is being made or the
immediately preceding calendar year.
Section 2.17 The term "Plan Year" shall mean a consecutive twelve (12)
month period beginning on the first day of January and ending on the last day of
December.
Section 2.18 The term "Sponsoring Employer Stock" shall mean those
shares of the Company's common stock, par value $0.01 per share, which pursuant
to Section 4.01 are reserved for issuance to Participants upon the exercise of
options granted under this Plan.
Section 2.19 Any words herein used in the masculine shall be read and
construed in the feminine where they would so apply. Words in the singular shall
be read and construed as though in the plural in all cases where they would so
apply.
ARTICLE III.
PARTICIPATION IN PLAN
Section 3.01 Each Employee shall become eligible to be a Participant of
the Plan and may participate therein upon his date of employment.
Section 3.02 Except as otherwise provided in Sections 4.02 and 4.06,
all eligible Employees who become Participants of the Plan shall have the same
rights and privileges. Upon becoming a Participant, said Participant shall be
bound by the terms of this Plan, including any amendments hereto.
Section 3.03 Each Employee who becomes eligible to be a Participant in
the Plan shall be furnished a summary of the Plan and enrollment forms. If such
Employee elects to participate hereunder, he must complete such form and file it
with the Company. The completed enrollment form shall indicate the Participant's
Contribution Rate authorized by the Participant. The Employee's election to
participate shall remain in effect for the current and all future Plan Years
unless otherwise revoked or modified by the Employee. If any Employee does not
elect to participate in any given Plan Year, he may elect to participate in a
future Plan Year so long as he continues to meet the eligibility requirements
and timely elects to participate in such year.
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ARTICLE IV.
ISSUANCE OF STOCK OPTIONS
Section 4.01 The aggregate number of shares of the Sponsoring Employer
Stock that may be issued to Participants under the Plan upon the exercise of
options granted hereunder shall be, and the Company shall reserve, 2,000,000
shares of Company Stock. These shares may be authorized and unissued shares, or
issued shares held in or acquired for the treasury of the Company, or shares of
common stock reacquired by the Company upon purchase in the open market or
otherwise.
Section 4.02 In order to participate in this Plan and be granted
options hereunder, an Employee must authorize the Company or its affiliate to
deduct the Participant's Contribution Rate from each paycheck. Such Contribution
Rate must be an exact number of dollars per month, but not less than $10.00 per
pay period, and not more than 100% of such Employee's Normal Pay. Such
authorization shall be in writing and on such forms as provided by the Company.
Such deductions shall begin on the first pay period after the Company's receipt
of the Employee's enrollment forms. For all purposes of this Plan, such
deductions shall be deemed a part of the Participant's Contribution. No interest
shall accrue to any Participant on any amounts deducted from his paychecks
pursuant to this Plan.
The Participant's Contribution Rate, once established, shall remain in
effect for all Plan Years unless changed by the Participant in writing on such
forms as provided by the Company and filed with the Company.
At any time during the Plan Year, a Participant may notify the Company
that he wishes to withdraw from the Plan and discontinue his payroll deductions.
This notice shall be in writing and on such forms as provided by the Company.
Payroll deductions will be stopped as soon as practical, but not more than
thirty (30) days following the Company's receipt of the withdrawal notice.
A Participant may elect to withdraw some or all of his Contribution
Account once at any time during the Plan Year without being terminated from the
Plan for such year. If a Participant withdraws contributions a second time
during the Plan Year, no further contributions will be permitted during that
Plan year by such withdrawing Participant. Where notice is received during the
last thirty (30) days of any Plan Year, the Company shall have no liability for
refunds not processed before shares are purchased on behalf of the Participant.
Section 4.03 If in a Plan Year the total number of shares of Company
Stock then subject to options granted to Participants exceeds the number of
shares of Company Stock authorized and then available under this Plan, a
pro-rata allocation of the available shares will be made among all Participants
authorizing payroll deductions based on the relative amounts of their respective
payroll deductions up to the Exercise Date.
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Section 4.04 The Issue Price of the Sponsoring Employer Stock under
this Plan will be the lesser of (i) 85% of the Closing Market Price on the Grant
Date, or (ii) 85% of the Closing Market Price on the Exercise Date.
Section 4.05 On each Exercise Date the Participant's Contribution
Account shall be used to purchase the maximum number of whole shares of Company
Stock determined by dividing the Issue Price into the Participant's Contribution
Account. Any money remaining in a Participant's Contribution Account shall be
returned to the Employee if requested. If such return is not requested, the
balance will remain in the Participant's Contribution Account to be used in the
next Plan Year along with new contributions in the new Plan Year. Options
granted under this Plan shall be subject to such amendment or modifications as
the Company shall deem necessary to comply with any applicable laws and
regulations, and shall contain such other provisions as the Company shall from
time to time approve and deem necessary.
Section 4.06 In no event may a Participant (i) be granted an option or
options under this Plan (and any other employee stock purchase plan of the
Company) during a calendar year to purchase Company Stock having an aggregate
fair market value (determined on the Grant Date) in excess of the largest amount
for which rights to purchase stock can accrue in a calendar year under the Code,
(ii) be granted an option if such Participant beneficially owns, immediately
after the option is granted, five percent (5%) or more of the total combined
voting power or value of all classes of stock of the Company or of its
subsidiary corporations, as determined under the Code, or (iii) transfer or
otherwise alienate any option granted to him under this Plan; provided, however,
a Participant may transfer same to members of his immediate family (or to one or
more trusts for the benefit of such family members or to partnerships or limited
liability companies in which such family members or trusts are the only partners
or members) provided the Participant does not receive any consideration for the
transfer. Any option held by any such transferees would continue to be subject
to the same terms and conditions that are applicable to such options immediately
prior to their transfer.
Section 4.07 Company stock certificates evidencing Company Stock
purchased upon the exercise of options granted under the Plan shall be issued as
soon as practical after the date of such exercise.
Section 4.08 Any Employee whose employment is terminated for any reason
(except death, retirement or long-term disability in accordance with the
Employer's long-term disability plan) during the Plan Year shall cease to be a
Participant immediately. The balance of the Participant's Contribution Account
shall be paid to such Participant, or his legal representative, as soon as
practical after his termination. Any unexercised options granted to such
Participant shall be deemed null and void.
Section 4.09 If a Participant dies during a Plan Year, no further
contributions on behalf of the deceased Participant may be made. The legal
representative of the deceased Participant may elect to withdraw the balance in
said Participant's Contribution
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Account by notifying the Company in writing at least thirty (30) days prior to
the last day of the Plan Year. In the event no timely election to withdraw is
made, the balance accumulated in the deceased Participant's Contribution Account
shall be used to purchase shares of the Sponsoring Employer Stock in accordance
with Section 4.05 hereof. The balance, if any, shall be distributed to such
legal representative as soon as practical after the Exercise Date.
Section 4.10 If a Participant shall retire or become long-term disabled
and terminate employment (in accordance with the Company's long-term disability
plan) during a Plan Year, no further contributions on behalf of the retired or
disabled Participant may be made. The Participant may elect to withdraw the
balance in his or her Contribution Account by notifying the Company in writing
at least thirty (30) days prior to the last day of the Plan Year. In the event
no timely election to withdraw is made, the balance accumulated in the retired
or disabled Participant's Contribution Account shall be used to purchase shares
of the Sponsoring Employer Stock in accordance with Section 4.05 hereof. The
balance, if any, shall be distributed to such Participant as soon as practical
after the Exercise Date.
ARTICLE V.
MISCELLANEOUS
Section 5.01 The Board of Directors or a committee established by such
Board to which is delegated such authority, shall administer the Plan and keep
records of individual Participant benefits. The Board or such committee shall
interpret the Plan and shall determine all questions arising in the
administration, interpretation and application of the Plan, and all such
determinations shall be conclusive and binding on all persons. Furthermore, the
Board of Directors may adopt such rules and regulations, not inconsistent with
this Plan, as the Board of Directors may deem advisable to carry out the purpose
of the Plan.
Section 5.02 Each Participant, former Participant, or any other person
who shall claim a right or benefit under this Plan, shall be entitled only to
look to the Company for such benefit.
Section 5.03 Except as otherwise required by the Code or, with respect
to persons required to file reports under Section 16 of the Securities Exchange
Act of 1934, as amended, Rule 16b-3 under such Act, the Board of Directors may
at any time or from time to time amend the Plan in any respect or terminate the
Plan without stockholder approval. Notwithstanding anything to the contrary set
forth herein, if any provision herein shall be determined at any time to be in
violation of:
(a) Rule 16b-3 (or any successor regulation), as to a person who is a
reporting person under Section 16 of such Act, or
(b) to create any unintended tax result,
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then, such provision shall, upon such determination, automatically be deemed
inoperative, void and of no force and effect as if never set forth herein and
may be deleted from this Plan or amended by the Board of Directors at any time
with prospective or retroactive effect. The Plan shall be suspended in the event
a "tender offer" is made to the Company's stockholders. The Board's
determination that such an offer has been made shall be conclusive. No
contributions shall thereafter be accepted and all Contribution Accounts shall
be refunded to Participants. The Plan may thereafter be reactivated by Board
action at any time.
Section 5.04 The Company will pay all expenses of administering this
Plan that may arise in connection with the Plan.
Section 5.05 Any rules, regulations, or procedures that may be
necessary for the proper administration or functioning of this Plan that are not
covered in this Plan shall be promulgated and adopted by the Board of Directors
or the Committee.
Section 5.06 Headings and subheadings in this Plan are inserted for
convenience of reference only and are to be ignored in the construction of any
provisions hereof.
Section 5.07 This Plan shall be construed in accordance with the laws
of the State of Delaware.
Section 5.08 Any misstatement in an Employee's age, length of
Continuous Service, date of employment or any other such matter, shall be
corrected when it becomes known that any such misstatement of fact has occurred.
Section 5.09 The options granted hereunder may not be assigned or
transferable by Participants other than upon the death of a Participant by will
or the laws of descent and distribution. If a Participant attempts any
prohibited assignment, transfer or alienation, the Company shall disregard such
action. During the lifetime of each Participant, the options granted hereunder
are only exercisable by such Participant.
Section 5.10 This Plan is not and shall not be deemed to constitute a
contract between an Employer and any Employee or to be a consideration of an
inducement for the employment of any Employee. Nothing contained in this Plan
shall be deemed to give any Employee the right to be retained in the service of
Employer or to interfere with the right of Employer to discharge any Employee at
any time regardless of the effect that such discharge shall have upon him as a
Participant in the Plan.
Section 5.11 No liability whatever shall attach to or be incurred by
any past, present or future stockholders, officers, or directors, as such, of
the Company, under or by reason of any of the terms, conditions or agreements
contained in this Plan or implied therefrom, and any and all liabilities of and
any and all rights and claims against the Company, or any stockholder, officer
or director as such whether arising at common law or in equity or created by
statute or constitution or otherwise, pertaining to this Plan, are hereby
expressly
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waived and released by every Participant, as a part of the consideration for any
benefits under this Plan. No member of the Board of Directors or the Committee
and no employee of the Company involved in the administration of this Plan shall
be personally liable for any mistake of judgment made in good faith, and the
Company shall indemnify and hold harmless such person against any cost or
expense (including counsel fees) or liability (including any sum paid in
settlement of a claim) with the consent of the Company arising out of any act or
omission to act in connection with this Plan unless arising out of such person's
own fraud or bad faith.
Section 5.12 The aggregate number of shares of the Sponsoring Employer
Stock reserved for purchase under the Plan as provided in Section 4.01 hereof
and the calculation of the Issue Price shall be appropriately adjusted to
reflect any increases or decreases in the number of issued shares of the
Sponsoring Employer Stock resulting from a subdivision, consolidation or
combination of shares or other capital adjustments, payment of a stock dividend,
stock split, stock rights offering, special dividend, or other change or
exchange for other securities by reclassification or otherwise, or other such
increase or decrease in such shares of the Sponsoring Employer Stock.
Section 5.13 The Sponsoring Employer's obligation to sell and deliver
the Sponsoring Employer Stock under the Plan is at all times subject to all
approvals of, or filings with, any governmental authorities required in
connection with the authorization, issuance, sale or delivery of such stock.
Section 5.14 A Participant who is a person subject to Section 16 of the
Securities Exchange Act of 1934, as amended, (i) is not allowed to sell any
shares of Company Stock purchased hereunder until six (6) months after the
Exercise Date relating to such shares, and (ii) if such Participant ceases
participation in the Plan, such Participant may not enroll in the Plan again for
at least six (6) months.
8
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
New American Healthcare Corporation:
The audits referred to in our report dated June 25, 1998, included the related
financial statement schedule for the years ended March 31, 1998 and 1997,
included in the registration statement. This financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement schedule based on our audits. In our
opinion, such financial statement schedule, when considered in relation to the
basic consolidated financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Nashville, Tennessee
July 30, 1998
<PAGE> 2
The Board of Trustees
Doctors Hospital:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Nashville, Tennessee
July 30, 1998
<PAGE> 3
The Board of Directors
Center Hospital, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Nashville, Tennessee
July 30, 1998
<PAGE> 4
The Board of Directors
Eastwood Hospital, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/KPMG PEAT MARWICK LLP
- ------------------------
Jackson, Mississippi
July 30, 1998
<PAGE> 5
The Board of Directors
New American Healthcare Corporation:
We consent to the use of our report included herein on The Hospitals and to the
reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Nashville, Tennessee
July 30, 1998
<PAGE> 6
The Board of Directors
PSH, Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
/s/ KPMG PEAT MARWICK LLP
- -------------------------
Seattle, Washington
July 30, 1998
