<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1994
REGISTRATION NO. 33-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
----------------
NATIONAL MEDICAL ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
----------------
NEVADA 95-2557091
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2700 Colorado Avenue
Santa Monica, California 90404
(310) 998-8000
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
----------------
SCOTT M. BROWN, ESQ.
Senior Vice President,
Secretary and General Counsel
National Medical Enterprises, Inc.
2700 Colorado Avenue
Santa Monica, California 90404
(310) 998-8000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
----------------
Copies of all communications to:
THOMAS C. JANSON, JR. KIRK A. DAVENPORT, ESQ
SKADDEN, ARPS, SLATE, MEAGHER & FLOM LATHAM & WATKINS
300 SOUTH GRAND AVENUE, SUITE 3400 855 THIRD AVENUE, SUITE 1000
LOS ANGELES, CALIFORNIA 90071 NEW YORK, NEW YORK 10022
(213) 687-5000 (212) 906-1200
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [_]
If any of the securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or
interest reinvestment plans, please check the following box. [_]
----------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
AMOUNT MAXIMUM AGGREGATE AMOUNT OF
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT(1) PRICE(1) FEE
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
% Senior Notes due 2002....... $400,000,000 100% $400,000,000 $137,932
% Senior Subordinated Notes
due 2005....................... $600,000,000 100% $600,000,000 $206,898
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Estimated solely for purposes of calculating the registration fee pursuant
to Rule 457 under the Securities Act of 1933.
----------------
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 THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 JURISDICTION IN WHICH SUCH OFFER, SOLICITATION OR SALE +
+WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES +
+LAWS OF ANY SUCH JURISDICTION. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 23, 1994
PROSPECTUS
, 1995
$1,000,000,000
NATIONAL MEDICAL ENTERPRISES, INC. [LOGO]
$400,000,000 % SENIOR NOTES DUE 2002
$600,000,000 % SENIOR SUBORDINATED NOTES DUE 2005
----------
The Senior Notes and Senior Subordinated Notes are being offered by National
Medical Enterprises, Inc. ("NME" or the "Company"). The Notes are being issued
to finance a portion of the cash purchase price to be paid in connection with
the acquisition by the Company of American Medical Holdings, Inc. ("AMH"). This
Offering is contingent upon the consummation of such acquisition and upon the
establishment of the New Credit Facility (as defined herein). Interest on the
Notes will be payable semi-annually on and of each year, commencing
, 1995. The Senior Notes will not be redeemable by the Company prior to
maturity. The Senior Subordinated Notes will be redeemable at the option of the
Company, in whole or from time to time in part, at any time on or after ,
2000 at the redemption prices set forth herein, plus accrued and unpaid
interest to the date of redemption. In addition, upon the occurrence of a
Change of Control Triggering Event, each holder of Notes may require the
Company to repurchase such Notes at 101% of the principal amount thereof, plus
accrued and unpaid interest to the date of repurchase. The Company has applied
to list the Senior Notes and Senior Subordinated Notes on the New York Stock
Exchange under the symbols " " and " ", respectively.
The Senior Notes will be general unsecured obligations of the Company ranking
senior to all subordinated indebtedness of the Company, including the Senior
Subordinated Notes, and pari passu in right of payment with all other
indebtedness of the Company, including borrowings under the New Credit
Facility. Borrowings under the New Credit Facility will be secured by a first
priority lien on certain collateral. The Senior Subordinated Notes will be
general unsecured obligations of the Company, subordinated in right of payment
to all existing and future Senior Debt (as defined herein) of the Company,
including the Senior Notes and borrowings under the New Credit Facility. On a
pro forma basis, as of August 31, 1994, after giving effect to the Merger (as
defined herein) and certain refinancing transactions, Senior Debt of the
Company would have been approximately $ billion, of which $ billion would
have been secured indebtedness of NME. In addition, the Notes will be
effectively subordinated to all indebtedness and other obligations of the
Company's subsidiaries which, on a pro forma basis, after giving effect to the
Merger and certain refinancing transactions, would have been approximately
$ million at August 31, 1994 (excluding trade payables of $ million at
August 31, 1994).
SEE "RISK FACTORS" FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE
CONSIDERED BY PROSPECTIVE PURCHASERS IN CONNECTION WITH AN INVESTMENT IN THE
NOTES OFFERED HEREBY.
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>
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC(1) COMMISSIONS(2) COMPANY (3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Senior Note............................ % % %
Total...................................... $ $ $
Per Senior Subordinated Note............... % % %
Total...................................... $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company, estimated at $ .
The Notes are offered by the Underwriters, subject to prior sale, when, as
and if issued to and accepted by the Underwriters, and subject to various prior
conditions. The Underwriters reserve the right to withdraw, cancel or modify
any such offer and to reject orders in whole or in part. It is expected that
delivery of the Notes will be made in New York, New York on or about February
, 1995.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO. MORGAN STANLEY & CO. SALOMON BROTHERS INC
INCORPORATED
J. P. MORGAN SECURITIES INC.
BT SECURITIES CORPORATION
SMITH BARNEY INC.
BA SECURITIES, INC.
<PAGE>
AVAILABLE INFORMATION
National Medical Enterprises, Inc., a Nevada corporation ("NME" or the
"Company"), has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement (the "Registration Statement") on Form
S-3 under the Securities Act of 1933, as amended (the "Securities Act"), for
the registration of the Notes (as defined herein) offered hereby. This
Prospectus, which constitutes a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement, certain
items of which are contained in exhibits and schedules to the Registration
Statement as permitted by the rules and regulations of the Commission. For
further information with respect to the Company and the Notes, reference is
made to the Registration Statement, including the exhibits thereto, and the
financial statements and notes filed as a part thereof. Statements made in this
Prospectus concerning the contents of any contract, agreement or other document
referred to herein are not necessarily complete. With respect to each such
contract, agreement or other document filed with the Commission as an exhibit,
reference is made to the exhibit for a more complete description of the matter
involved, and each such statement shall be deemed qualified in its entirety by
such reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. The reports, proxy statements and other information filed by the
Company with the Commission may be inspected and copied at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Room 3190, Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and 7 World Trade Center, 13th Floor, New York, New
York 10048. Copies of such material may be obtained from the Public Reference
Section of the Commission at Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The Company's Common Stock is
listed on the New York Stock Exchange (the "NYSE") and the Pacific Stock
Exchange (the "PSE") under the symbol "NME." Reports, proxy statements and
other information filed by the Company may be inspected at the offices of the
NYSE at 20 Broad Street, New York, New York 10005 and at the offices of the PSE
at 301 Pine Street, San Francisco, CA 94104.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission pursuant to
the Exchange Act (File No. 0-11290) are incorporated in this Prospectus by
reference and are made a part hereof:
1. Annual Report on Form 10-K for the fiscal year ended May 31, 1994, as
amended (the "NME 10-K");
2. Quarterly Report on Form 10-Q for the quarterly period ended August 31,
1994;
3. The portions of NME's Proxy Statement for the Annual Meeting of
Shareholders held on September 28, 1994 that have been incorporated by
reference into the NME 10-K; and
4. The portions of NME's 1994 Annual Report to Shareholders for the fiscal
year ended May 31, 1994 that have been incorporated by reference into the NME
10-K.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act subsequent to the date of this
Prospectus and prior to the termination of the offering of the securities made
hereby shall be deemed to be incorporated by reference in this Prospectus and
to be a part hereof from the date of the filing of such documents. Any
statement contained in a document incorporated or deemed to be incorporated
herein by reference shall be deemed to be modified or superseded for purposes
of this Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is incorporated or deemed to be
incorporated by reference herein modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, upon oral or written
request, a copy of any or all of the documents incorporated herein by reference
(other than exhibits to such documents, unless such exhibits are specifically
incorporated by reference in such documents). Written or telephone requests
should be directed to National Medical Enterprises, Inc., 2700 Colorado Avenue,
Santa Monica, California 90404, Attention: Scott M. Brown, Esq., Senior Vice
President, Secretary and General Counsel (telephone (310) 998-8000).
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE NOTES AT
LEVELS ABOVE THOSE WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information appearing elsewhere in this
Prospectus or incorporated herein by reference.
THE COMPANY
National Medical Enterprises, Inc. ("NME" or the "Company") is a leading
investor-owned healthcare company that operates general hospitals and related
healthcare facilities serving primarily urban and regional areas in the United
States and abroad and that holds investments in other healthcare companies. At
November 30, 1994, NME operated 33 domestic general hospitals, with a total of
6,622 licensed beds, located in California, Florida, Louisiana, Missouri,
Tennessee and Texas. NME operates six rehabilitation hospitals, seven long-term
care facilities and four psychiatric facilities located on the same campus as,
or nearby, the Company's general hospitals. In addition, NME operates ancillary
facilities, including outpatient surgery centers, home healthcare programs and
ambulatory, occupational and rural healthcare clinics. Through its
international hospital division, NME also operated 13 general hospitals in
Australia, Singapore, Spain and Malaysia, with a total of 1,845 licensed beds
at November 30, 1994. For the 12 months ended August 31, 1994, NME had adjusted
net operating revenues and adjusted EBITDA (as defined herein) of $2.6 billion
and $508.3 million, respectively. See "Supplemental Discussion of Adjusted
Results of Operations of NME."
NME's investments in other healthcare companies include: (i) an approximately
31% interest in The Hillhaven Corporation ("Hillhaven"), a publicly traded
company that operated 287 long-term care facilities, 57 pharmacies and 19
retirement housing communities in the United States at November 30, 1994; (ii)
an approximately 42% interest in Westminster Health Care Holdings PLC
("Westminster"), a publicly traded company listed on the London Stock Exchange
that operated 65 long-term care facilities in the United Kingdom at November
30, 1994; and (iii) an approximately 21% interest in Total Renal Care, Inc.
("TRC"), which operated 41 freestanding and mobile kidney dialysis units in
eight states at November 30, 1994.
On October 10, 1994, the Company entered into an Agreement and Plan of Merger
(the "Merger Agreement") with American Medical Holdings, Inc. ("AMH") pursuant
to which AMH will become a wholly owned subsidiary of the Company (the
"Merger"). AMH is a leading investor-owned healthcare company that operates
general hospitals and related healthcare facilities serving primarily urban and
regional areas in 13 states. At November 30, 1994, AMH operated 37 general
hospitals with a total of 8,831 licensed beds and one psychiatric hospital with
171 licensed beds. The AMH hospitals are located in Texas, Florida, California,
Louisiana, Missouri, Tennessee, Arkansas, North Carolina, South Carolina,
Georgia, Alabama, Indiana and Nebraska. AMH also operates ancillary facilities
located on the same campus as, or nearby, many of its hospitals, including
outpatient surgery centers, rehabilitation units, long-term care facilities,
home healthcare programs and ambulatory, occupational and rural healthcare
clinics. For the fiscal year ended August 31, 1994, AMH had net operating
revenues and EBITDA of $2.4 billion and $482.9 million, respectively. See
"Selected Historical Financial Information of AMH."
Following the Merger, the Company will operate 70 domestic general hospitals,
with a total of 15,453 licensed beds, serving primarily urban and regional
areas in 13 states. On a pro forma combined basis, the Company's net operating
revenues, EBITDA and income from continuing operations for the 12 months ended
August 31, 1994, would have been approximately $5.0 billion, $991.2 million and
$227.5 million, respectively. See "Pro Forma Financial Information." These pro
forma combined results do not give effect to certain cost savings that
management believes may be realized following the Merger, currently estimated
to be approximately $60.0 million annually beginning in fiscal 1996 (before any
severance or other costs of
3
<PAGE>
implementing certain efficiences), equivalent to approximately 1.2% of the pro
forma combined net operating revenues for the 12 months ended August 31, 1994.
These savings are expected to be realized primarily through the elimination of
duplicative corporate overhead, reduced supplies expense through the
incorporation of AMH into the Company's group purchasing program, and from
improved collection of AMH accounts receivable by the Company's wholly owned
debt collection business, Syndicated Office Systems, Inc. ("SOS"). No
assurances can be made as to the amount of cost savings, if any, that actually
will be realized.
The Company's principal executive offices are located at 2700 Colorado
Avenue, Santa Monica, California 90404, and its telephone number is (310) 998-
8000.
BUSINESS STRATEGY
The Company's strategic objective is to provide quality, cost-effective
healthcare services in selected geographic areas. NME believes that competition
among healthcare providers occurs primarily at the local level. Accordingly,
the Company tailors its local strategies to address the specific competitive
characteristics of each geographic area in which it operates, including the
number of facilities operated by NME, the nature and structure of physician
practices and physician groups, the extent of managed care penetration, the
number and size of competitors and the demographic characteristics of the area.
Key elements of the Company's strategy are:
. to develop integrated healthcare delivery systems by coordinating the
operations and services of the Company's facilities with other
hospitals and ancillary care providers and through alliances with
physicians and physician groups;
. to reduce costs through enhanced operating efficiencies while
improving the quality of care provided;
. to develop and maintain its strong relationships with physicians and
generally to foster a physician-friendly culture;
. to enter into discounted fee for service arrangements, capitated
contracts and other managed care contracts with third party payors;
and
. to acquire hospitals, groups of hospitals, other healthcare
businesses, ancillary healthcare providers, physician practices and
physician practice assets where appropriate to accelerate the
development of quality, cost-effective integrated healthcare delivery
systems.
NME believes that the Merger represents an opportunity to acquire a
substantial portfolio of hospitals providing quality, cost-effective care.
AMH's general hospitals operate primarily in urban and regional areas and are
comparable in size to those operated by the Company, with an average size at
November 30, 1994 of 239 licensed beds as compared to 201 licensed beds for
NME. In addition, a number of these hospitals are located in geographic areas
where NME currently operates hospitals, including southern California,
southeastern Florida, the greater New Orleans area and the central coast of
California. The Merger will provide an opportunity for the Company to
coordinate the services it provides in these geographic areas with those
services provided by AMH, which the Company believes will accelerate its
development of integrated healthcare delivery systems in these areas. The
Merger also expands the Company's operations into several new geographic areas,
including Arkansas, North Carolina, South Carolina, Georgia, Alabama, Indiana
and Nebraska.
4
<PAGE>
FINANCING FOR THE MERGER
In connection with the consummation of the Merger, the Company anticipates
issuing approximately 33.2 million shares of its common stock and paying
approximately $1.48 billion in cash to AMH stockholders. In addition, the
Company anticipates repaying approximately $365.2 million of indebtedness of
NME under its existing credit facility, repaying approximately $92.9 million of
indebtedness of NME that matures prior to or shortly after the consummation of
the Merger and repurchasing pursuant to tender offers up to $169.1 million
aggregate face amount of medium term notes of NME with maturities through 1997.
In addition, American Medical International, Inc. ("AMI"), a wholly owned
subsidiary of AMH, anticipates repaying approximately $266.0 million of
indebtedness under its existing credit facility, repaying approximately $151.4
million of indebtedness of AMI that matures prior to the consummation of the
Merger and repurchasing pursuant to tender offers up to $623.2 million
aggregate face amount of indebtedness of AMI and redeeming approximately $100.2
million aggregate face amount of indebtedness of AMI. In connection with the
tender offers for certain of the AMI debt securities, NME anticipates
soliciting consents from the holders thereof to eliminate certain of the
restrictive covenants in the indentures relating to such securities (the
"Consent Solicitations").
The cash paid in connection with the Merger, the tender offers and the
redemption and repayment of certain other indebtedness, together with the fees
and expenses incurred in connection therewith will be financed through: (i) the
proceeds from this offering of Notes (this "Offering"); (ii) borrowings under
NME's new bank credit facility (the "New Credit Facility") providing for
aggregate commitments of up to $2.5 billion, including a $500.0 million
revolving credit facility; and (iii) the available cash balances of NME and
AMH. This Offering is conditioned upon the consummation of the Merger and the
Consent Solicitations and the establishment of the New Credit Facility. See
"The Merger and Financing."
THE OFFERING
Notes Offered................. $400,000,000 principal amount of % Senior
Notes due 2002 (the "Senior Notes") and
$600,000,000 principal amount of % Senior
Subordinated Notes due 2005 (the "Senior
Subordinated Notes and, together with the
Senior Notes, the "Notes").
Maturity Dates................ , 2002 with respect to the Senior Notes
and , 2005 with respect to the Senior
Subordinated Notes.
Interest Payment Dates........ and , commencing ,
1995.
Mandatory Redemption.......... None.
Optional Redemption........... The Senior Notes will not be redeemable by NME
prior to maturity. The Senior Subordinated
Notes will be redeemable at the option of NME,
in whole or from time to time in part, at any
time on or after , 2000 at the
redemption prices set forth herein, plus
accrued and unpaid interest to the date of
redemption. See "Description of Notes--Optional
Redemption."
Change of Control............. Upon a Change of Control Triggering Event (as
defined), each holder of Notes will have the
right to require NME to repurchase such
holder's Notes at 101% of the principal amount
thereof, plus accrued and unpaid interest to
the date of repurchase. The terms of the New
Credit Facility will prohibit the Company from
purchasing Notes upon the occurrence of a
Change of Control Triggering Event. The terms
of the indenture governing the Senior Notes
will not restrict the Company's ability to
purchase Senior Subordinated Notes upon the
occurrence of a Change of Control Triggering
Event. See "Description of Notes--Repurchase at
the Option of Holders--Change of Control," and
"Description of the New Credit Facility."
5
<PAGE>
Ranking.................... The Senior Notes will be general unsecured
obligations of the Company ranking senior to all
subordinated indebtedness of the Company,
including the Senior Subordinated Notes, and will
rank pari passu in right of payment with the
Company's other existing and future indebtedness,
including borrowings under the New Credit
Facility. Borrowings under the New Credit Facility
will be secured by a first priority lien on the
capital stock of the Company's direct
subsidiaries, certain indebtedness owed to the
Company by certain of its subsidiaries and certain
of the Company's equity investments and will have
priority as to such collateral over the Senior
Notes. The Senior Subordinated Notes will be
general unsecured obligations of the Company
subordinated in right of payment to all existing
and future Senior Debt (as defined herein) of the
Company, including the Senior Notes and borrowings
under the New Credit Facility. On a pro forma
basis, as of August 31, 1994, after giving effect
to the Merger and certain refinancing
transactions, Senior Debt of the Company would
have been approximately $ billion, of which $
billion would have been secured indebtedness of
NME. See "Historical and Pro Forma
Capitalization," "The Merger and Financing,"
"Description of the New Credit Facility,"
"Description of Notes--General" and "--
Subordination of Senior Subordinated Notes." In
addition, both the Senior Notes and the Senior
Subordinated Notes will be effectively
subordinated to all of the outstanding
indebtedness and other obligations of the
Company's subsidiaries which, on a pro forma basis
at August 31, 1994, after giving effect to the
Merger and certain refinancing transactions, would
have been approximately $ million (based upon
certain assumptions as to the amounts of
indebtedness of AMI to be redeemed or repurchased
and excluding trade payables of $ million at
August 31, 1994). See "Pro Forma Financial
Information." The Indentures (as defined below)
will limit the ability of subsidiaries of NME to
incur additional indebtedness.
Certain Covenants.......... The Indenture governing the Senior Notes (the
"Senior Note Indenture") and the Indenture
governing the Senior Subordinated Notes (the
"Senior Subordinated Note Indenture" and, together
with the Senior Note Indenture, the "Indentures")
will contain certain covenants, including, but not
limited to, covenants limiting: (i) the incurrence
by the Company and its subsidiaries of additional
indebtedness; (ii) the payment of dividends on and
the redemption of capital stock by the Company;
(iii) the creation of liens securing indebtedness;
(iv) restrictions on the ability of subsidiaries
to pay dividends; (v) transactions with
affiliates; (vi) the sale of assets; and (vii) the
Company's ability to consolidate or merge with or
into, or to transfer all or substantially all of
its assets to, another person. See "Description of
Notes--Certain Covenants."
Use of Proceeds............ The net proceeds to the Company from the sale of
the Notes are estimated to be approximately $
million (after deducting estimated expenses and
underwriting discounts and commissions). The
Company intends to use all of such net proceeds to
pay a portion of the cash consideration payable to
holders of the common stock, par value $0.01 per
share, of AMH pursuant to the Merger. See "The
Merger and Financing" and "Use of Proceeds."
6
<PAGE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by prospective purchasers in connection with an investment in the
Notes offered hereby.
SUMMARY PRO FORMA FINANCIAL INFORMATION
The following table presents summary pro forma financial information derived
from the Unaudited Pro Forma Condensed Combined Financial Statements included
elsewhere in this Prospectus. The summary pro forma financial information gives
effect to the following transactions and events as if they had occurred at the
beginning of each period presented for purposes of the pro forma statements of
operations and other operating information and on August 31, 1994 for purposes
of the pro forma balance sheet data: (i) the August 1994 sale of approximately
75% of NME's common stock interest in TRC; (ii) the March 1994 sale of one
inpatient rehabilitation hospital and the January 1994 sale of 28 inpatient
rehabilitation hospitals and 45 related satellite outpatient clinics; (iii) the
February 1994 sale of four long-term care facilities and the September 1993
sale of 19 long-term care facilities to Hillhaven (all of which properties
previously had been leased to Hillhaven); (iv) the elimination of restructuring
charges recorded by NME of $77.0 million in fiscal 1994; (v) the elimination of
certain non-recurring gains recorded by NME and AMH; (vi) the Merger, applying
the purchase method of accounting; and (vii) the consummation of this Offering
and the refinancing of certain indebtedness of NME and AMI.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to present the financial position or results of operations of NME had
the transactions and events assumed therein occurred on the dates specified,
nor are they necessarily indicative of the results of operations that may be
achieved in the future. The following Summary Pro Forma Financial Information
does not reflect certain cost savings that management believes may be realized
following the Merger, currently estimated to be approximately $60.0 million
annually beginning in fiscal 1996 (before any severance or other costs of
implementing certain efficiencies). No assurances can be made as to the amount
of cost savings, if any, that actually will be realized. The Unaudited Pro
Forma Condensed Combined Financial Statements are based on certain assumptions
and adjustments described in the Notes to Unaudited Pro Forma Condensed
Combined Financial Statements and should be read in conjunction therewith and
with "The Merger and Financing," "Supplemental Discussion of Adjusted Results
of Operations of NME," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of NME," "Management's Discussion and
Analysis of Financial Condition and Results of Operations of AMH" and the
Consolidated Financial Statements of NME and AMH and the related Notes thereto
included elsewhere in this Prospectus.
NME reports its financial information on the basis of a May 31 fiscal year.
AMH reports its financial information on the basis of an August 31 fiscal year.
The Unaudited Pro Forma Condensed Combined Statement of Operations for the year
ended May 31, 1994 combines NME's Consolidated Statement of Operations for the
fiscal year ended May 31, 1994 with AMH's Consolidated Statement of Operations
for the fiscal year ended August 31, 1994. The Unaudited Pro Forma Combined
Statements of Operations for the three months ended August 31, 1993 and 1994
combine the Consolidated Statements of Operations of NME and AMH for the same
three-month periods.
7
<PAGE>
SUMMARY PRO FORMA FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED AUGUST 31,
MAY 31, ------------------
1994 1993 1994
---------- -------- --------
<S> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net operating revenues......................... $4,965.7 $1,194.9 $1,284.4
Operating expenses:
Salaries and benefits........................ 1,986.4 481.7 511.3
Supplies..................................... 664.6 154.5 172.7
Provision for doubtful accounts.............. 267.3 68.5 73.1
Other operating expenses..................... 1,077.0 279.4 281.1
Depreciation................................. 238.3 59.2 62.0
Amortization................................. 72.0 17.7 17.4
-------- -------- --------
Operating income............................... 660.1 133.9 166.8
Interest expense, net of capitalized portion... (323.6) (85.4) (83.1)
Investment earnings............................ 28.0 18.3 5.7
Equity in earnings of unconsolidated
affiliates.................................... 24.3 3.5 6.2
Minority interest expense...................... (11.1) (3.4) (2.5)
-------- -------- --------
Income from continuing operations before income
taxes......................................... 377.7 66.9 93.1
Taxes on income................................ (163.3) (37.7) (40.3)
-------- -------- --------
Income from continuing operations.............. $ 214.4 $ 29.2 $ 52.8
======== ======== ========
Earnings per common share from continuing
operations, fully-diluted..................... $ 1.03 $ 0.14 $ 0.26
Weighted average number of shares outstanding
(in 000s)..................................... 214,277 213,276 213,343
Ratio of earnings to fixed charges (1)......... 1.9x 1.7x 1.9x
OTHER OPERATING INFORMATION:
EBITDA (2)..................................... $ 970.4 $ 210.8 $ 246.2
EBITDA margin.................................. 19.5% 17.6% 19.2%
Ratio of EBITDA to net interest expense (3).... 3.2x 3.0x 3.1x
Ratio of total debt to EBITDA (4).............. -- -- 3.8x
Capital expenditures........................... $ 286.2 $ 42.8 $ 56.8
</TABLE>
<TABLE>
<CAPTION>
AS OF
AUGUST 31,
1994
----------
<S> <C>
BALANCE SHEET DATA:
Working capital..................................................... $ 226.2
Total assets........................................................ 7,694.1
Long-term debt, net of current portion.............................. 3,590.5
Shareholders' equity................................................ 1,877.6
</TABLE>
- --------------------
(1) The ratio of earnings to fixed charges is calculated by dividing income
from continuing operations before income taxes plus fixed charges by fixed
charges. Fixed charges consist of interest expense, including amortization
of financing costs, and that portion of rental expense deemed to be
representative of the interest component of rental expense.
(2) EBITDA represents operating income before depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of the Company to meet its future
debt service, capital expenditure and working capital requirements.
(3) Net of capitalized portion and net of pro forma interest income of $19.3
million for the year ended May 31, 1994 and $15.6 million and $4.5 million
for the three months ended August 31, 1993 and 1994, respectively.
(4) Represents pro forma combined total debt outstanding at August 31, 1994 of
$3,744.5 million divided by pro forma combined EBITDA of $991.2 million for
the 12 months ended August 31, 1994. Pro forma combined EBITDA for the 12
months ended August 31, 1994 is equal to the sum of the adjusted EBITDA of
NME for the 12 months ended August 31, 1994 and EBITDA of AMH for the
fiscal year ended August 31, 1994 of $508.3 million and $482.9 million,
respectively. Pro forma combined EBITDA does not reflect certain cost
savings that management believes may be realized following the Merger.
8
<PAGE>
RISK FACTORS
Prospective investors should consider carefully, in addition to the other
information contained or incorporated by reference in this Prospectus, the
following factors before purchasing the Notes offered hereby.
CERTAIN FINANCING CONSIDERATIONS; LEVERAGE
In addition to the offering of the Notes hereby, NME intends to enter into
the "New Credit Facility" with Morgan Guaranty Trust Company of New York, as
administrative agent, and certain other lenders, that will provide for
borrowings of up to $2.5 billion, of which approximately $2.0 billion will be
term loans and approximately $500.0 million will be available as revolving
credit loans and letters of credit. See "Description of the New Credit
Facility." The Notes and a portion of the New Credit Facility will be used to
pay the cash portion of the Merger consideration. The remainder of the New
Credit Facility will be used to refinance certain existing indebtedness of NME
and AMH and for working capital purposes.
As of August 31, 1994, NME's total indebtedness was 38.0% of its total
capitalization, includingshort-term debt. As adjusted on a pro forma basis to
give effect to the Merger and certain related transactions, NME's total
indebtedness would have been 66.6% of its total capitalization, including
short-term debt. See "Historical and Pro Forma Capitalization."
The New Credit Facility will include covenants prohibiting or limiting, among
other things, the sale of assets, the making of acquisitions and other
investments, capital expenditures, the incurrence of additional debt and liens
and the payment of dividends, in addition to a minimum consolidated net worth
requirement and certain ratio coverage tests and financial covenants. See
"Description of the New Credit Facility." In addition, the Indentures will
include, among other things, covenants limiting the incurrence of additional
debt and liens and the payment of dividends. NME's failure to comply with any
of these covenants could result in an event of default under its indebtedness,
including the Notes, which in turn could have a material adverse effect on NME.
See "Description of Notes--Certain Covenants."
The degree to which NME is leveraged and the covenants described above may
adversely affect NME's ability to finance its future operations and could limit
its ability to pursue business opportunities that may be in the interests of
NME and its securityholders. In particular, changes in medical technology,
existing, proposed and future legislation, regulations and the interpretation
thereof, and the increasing importance of managed care contracts and integrated
healthcare delivery systems may require significant investment in facilities,
equipment, personnel or services. Although the Company believes that cash
generated by operations and amounts available under the revolving credit
portion of the New Credit Facility will be sufficient to allow it to make such
investments, there can be no assurance that NME will be able to obtain the
funds necessary to make such investments. Furthermore, tax-exempt or
government-owned competitors have certain financial advantages such as
endowments, charitable contributions, tax-exempt financing and exemption from
sales, property and income taxes not available to NME, providing them with a
potential competitive advantage in making such investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
NME--Impact of the Merger" and "--Liquidity and Capital Resources."
COMPETITION
The healthcare industry has been characterized in recent years by increased
competition for patients and staff physicians, excess capacity at general
hospitals, a shift from inpatient to outpatient settings and increased
consolidation. The principal factors contributing to these trends are advances
in medical technology, cost-containment efforts by managed care payors,
employers and traditional health insurers, changes in regulations and
reimbursement policies, increases in the number and type of competing
healthcare providers and changes in physician practice patterns. NME's future
success will depend, in part, on the ability of the Company's hospitals to
continue to attract staff physicians, to enter into managed care contracts and
to organize and structure integrated healthcare delivery systems with other
healthcare providers and physician practice groups. There can be no assurance
that NME's hospitals will continue to be able, on terms favorable to the
Company, to attract physicians to their staffs, to enter into managed care
contracts or to organize and structure integrated healthcare delivery systems,
for which other healthcare companies with greater financial resources or a
wider range of services may be competing. See "Business--Competition."
9
<PAGE>
NME's ability to continue to compete successfully for such contracts or to
form or participate in such systems also may depend upon, among other things,
NME's ability to increase the number of its facilities and services offered
through the acquisition of hospitals, groups of hospitals, other healthcare
businesses, ancillary healthcare providers, physician practices and physician
practice assets and NME's ability to finance such acquisitions. There can be no
assurance that suitable acquisitions, for which other healthcare companies with
greater financial resources than NME may be competing, can be accomplished on
terms favorable to NME or that financing, if necessary, can be obtained for
such acquisitions. See "--Certain Financing Considerations; Leverage." There
can be no assurance that NME will be able to operate profitably any hospitals,
facilities, businesses or other assets it may acquire, effectively integrate
the operations of such acquisitions or otherwise achieve the intended benefits
of such acquisitions.
LIMITS ON REIMBURSEMENT
Both NME and AMH derive a substantial portion of their net operating revenues
from third-party payors, including the Medicare and Medicaid programs. See
"Business--Medicare, Medicaid and Other Revenues." Changes in government
reimbursement programs have resulted in limitations on increases in, and in
some cases in reduced levels of, reimbursement for healthcare services, and
additional changes are anticipated. Such changes are likely to result in
further limitations on reimbursement levels. In addition, private payors,
including managed care payors, increasingly are demanding discounted fee
structures or the assumption by healthcare providers of all or a portion of the
financial risk through prepaid capitation arrangements. Inpatient utilization,
average lengths of stay and occupancy rates continue to be negatively affected
by payor-required pre-admission authorization and utilization review and by
payor pressure to maximize outpatient and alternative healthcare delivery
services for less acutely ill patients. In addition, efforts to impose reduced
allowances, greater discounts and more stringent cost controls by government
and other payors are expected to continue. Although NME is unable to predict
the effect these changes will have on its operations, as the number of patients
covered by managed care payors increases, significant limits on the scope of
services reimbursed and on reimbursement rates and fees could have a material
adverse effect on the financial results of such operations.
EXTENSIVE REGULATION
The healthcare industry is subject to extensive Federal, state and local
regulation relating to licensure, conduct of operations, ownership of
facilities, addition of facilities and services and prices for services. See
"Business--Healthcare Regulation and Licensing." In particular, Medicare and
Medicaid antifraud and abuse amendments codified under Section 1128B(b) of the
Social Security Act (the "Antifraud Amendments") prohibit certain business
practices and relationships that might affect the provision and cost of
healthcare services reimbursable under Medicare and Medicaid. Sanctions for
violating the Antifraud Amendments include criminal penalties and civil
sanctions, including fines and possible exclusion from the Medicare and
Medicaid programs. Pursuant to the Medicare and Medicaid Patient and Program
Protection Act of 1987, the Department of Health and Human Services ("HHS") has
issued regulations that describe some of the conduct and business relationships
permissible under the Antifraud Amendments ("Safe Harbors"). NME believes its
business arrangements comply in all material respects with applicable law and
satisfy the Safe Harbors. The fact that a given business arrangement does not
fall within a Safe Harbor does not render the arrangement per se illegal.
Business arrangements of healthcare service providers that fail to satisfy the
applicable Safe Harbor criteria, however, risk increased scrutiny by
enforcement authorities. Because NME may be less willing than some of its
competitors to enter into business arrangements that do not clearly satisfy the
Safe Harbors, it could be at a competitive disadvantage in entering into
certain transactions and arrangements with physicians and other healthcare
providers.
In addition, Section 1877 of the Social Security Act recently has been
amended, effective January 1, 1995, to significantly broaden the scope of
prohibited physician referrals under the Medicare and Medicaid programs to
providers with which they have financial arrangements. Many states have adopted
or are considering similar legislative proposals, some of which extend beyond
the Medicaid program to all
10
<PAGE>
healthcare services. NME's participation in and development of joint ventures
and other financial arrangements with physicians could be adversely affected by
these amendments and similar state enactments.
Certificates of Need, which are issued by certain state governmental agencies
with jurisdiction over healthcare facilities, are at times required for capital
expenditures exceeding a prescribed amount, changes in bed capacity or services
and certain other matters. After consummation of the Merger, NME will operate
hospitals in nine states that require state approval under Certificate of Need
programs. NME is unable to predict whether it will be able to obtain any
Certificates of Need in any jurisdiction where such Certificates of Need are
required.
NME 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 could have a material
adverse effect on the financial results of NME's operations.
HEALTHCARE REFORM LEGISLATION
In recent years, an increasing number of legislative initiatives have been
introduced or proposed in Congress and in state legislatures that would effect
major changes in the healthcare system, either nationally or at the state
level. Among the proposals under consideration are price controls on hospitals,
insurance market reforms to increase the availability of group health insurance
to small businesses, requirements that all businesses offer health insurance
coverage to their employees and the creation of a government health insurance
plan or plans that would cover all citizens. In 1993, President Clinton
introduced a healthcare reform bill that included a number of measures that
were broadly viewed as increasing the scope of government regulation of the
healthcare industry. Key elements in the President's proposal and other
healthcare reform proposals included various insurance market reforms, the
requirement that businesses provide health insurance coverage for their
employees, reductions or lesser increases in future Medicare and Medicaid
reimbursement to providers and more stringent government cost controls. None of
these proposals has been adopted. There continue to be efforts at the Federal
level to introduce various insurance market reforms, expanded fraud and abuse
and anti-referral legislation and further reductions in Medicare and Medicaid
reimbursement. A broad range of both similar and more comprehensive healthcare
reform initiatives is likely to be considered at the state level. NME cannot
predict whether any of the above proposals or any other proposals will be
adopted, and if adopted, no assurance can be given that the implementation of
such reforms will not have a material adverse effect on NME's business.
CERTAIN LEGAL PROCEEDINGS
NME has been involved in certain significant legal proceedings and
investigations related principally to its discontinued psychiatric business.
These proceedings and investigations include class-action and derivative
lawsuits by certain stockholders, psychiatric patient litigation alleging fraud
and conspiracy, certain lawsuits filed by third-party private-payor insurance
companies and investigations by various state and Federal agencies. NME has (i)
reached agreements with the United States Department of Justice (the "DOJ"),
and HHS and the Commission resolving all Federal healthcare and related
disclosure investigations of the Company (but various government agencies are
continuing to pursue investigations against certain individuals), (ii) reached
an agreement with all states where NME's psychiatric facilities received
Medicaid payments, settling all potential state claims related to the matters
that were the subject of the Federal investigations, (iii) resolved the
litigation between NME and the insurers, (iv) reached agreements in principle
to resolve the shareholder derivative lawsuit and one of the class action
lawsuits, and (v) continues to resolve the cases brought by individual
psychiatric patients. NME has disposed of substantially all of its psychiatric
facilities, but continues to operate the remainder as a discontinued operation,
pending their planned closure, sale or conversion to another use. NME has
received inquiries from various other insurance companies and health benefit
providers regarding the possible filing of claims, and NME expects that
additional lawsuits alleging malpractice at its psychiatric facilities and the
existence of a corporate-wide conspiracy to commit wrongful acts may be filed
from time to time against NME, its officers or directors. NME's reserves for
11
<PAGE>
unusual litigation costs represent management's estimate, based on the
information currently available to it, of the net costs (including legal
expenses) of the ultimate disposition of these matters. NME believes that its
remaining reserves established for these matters are adequate to cover its
ultimate liability. In the event such reserves are not adequate, however, the
adverse determination of these matters could have a material adverse effect on
NME's financial condition and results of operation. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations of
NME--Liquidity and Capital Resources," "Business--Certain Legal Proceedings"
and Note 7 of Notes to the Consolidated Financial Statements of NME.
In its agreements with the DOJ and HHS, NME agreed to maintain its previously
established ethics program and ethics hotline and also agreed to implement
certain additional compliance-related oversight procedures. Should the hotline
or oversight procedures reveal, after investigation by NME, credible evidence
of violations of criminal, or material violations of civil, laws, rules or
regulations governing Federally funded programs, NME is required to report any
such violation to the DOJ and HHS. As a result of the existing agreements with
the DOJ and HHS and the recent legal proceedings and investigations in which
NME has been involved, NME is subject to increased Federal and state regulatory
scrutiny and, in the event that NME violates such decrees or engages in conduct
that violates Federal or state laws, rules or regulations, NME may be subject
to a risk of increased sanctions or penalties, including, but not limited to,
partial or complete disqualification as a provider of Medicare or Medicaid
services.
INCOME TAX EXAMINATIONS
The Internal Revenue Service (the "IRS") is currently examining NME's Federal
income tax returns for fiscal years 1986 through 1990 and has not yet begun
examining any returns for subsequent years (collectively, the "Open Years").
Although the IRS has not challenged any of NME's positions in the Open Years,
there can be no assurance that significant issues will not be raised. While NME
has no reason to believe that the tax reserves it has established will be
inadequate, if audits of the Open Years or fiscal 1994, for which NME has not
yet filed a tax return, result in determinations significantly in excess of
such reserves, NME's financial condition could be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL AND PHYSICIANS
NME's operations are dependent on the efforts, ability and experience of its
key executive officers. NME's continued growth depends on its ability to
attract and retain skilled employees, on the ability of its officers and key
employees to manage growth successfully and on NME's ability to attract and
retain physicians at its hospitals. In addition, the success of NME is, in
part, dependent upon the number, specialties and quality of physicians on its
hospitals' medical staffs, most of whom have no long-term contractual
relationship with NME and may terminate their association with NME's hospitals
at any time. The loss of some or all of these key executive officers or an
inability to attract or retain sufficient numbers of qualified physicians could
have a material adverse impact on NME's future results of operations.
PROFESSIONAL LIABILITY INSURANCE
As is typical in the healthcare industry, each of NME and AMH is subject to
claims and legal actions by patients and others in the ordinary course of
business. Prior to the consummation of the Merger, NME and AMH have been
partially self-insured for professional and general liability risks. NME and
AMH each own a minority interest in HUG Services Inc. ("HUG"), which, through a
wholly owned subsidiary, insures the excess professional and general liability
risks for all NME hospitals and 35 AMH hospitals above the self-insured
amounts, up to $25 million per occurrence and $30 million in the aggregate. HUG
reinsures a substantial portion of the foregoing amounts. Both NME and AMH
currently account for their interests in HUG using the equity method. Following
the Merger, NME will own an approximately 81% equity interest in HUG, and the
assets, liabilities and results of operations of HUG will be consolidated with
those of NME. See "Pro Forma Financial Information."
12
<PAGE>
NME, AMH and HUG maintain unfunded reserves for their professional liability
risks which are based on actuarial estimates calculated and evaluated by
independent actuaries. See Note 7 of the Notes to the Consolidated Financial
Statements of NME. While cash from operations has been adequate to provide for
unforeseen liability claims in the past, there can be no assurance that NME's
cash flow will continue to be adequate to cover such claims following
consummation of the Merger. If actual payments of claims with respect to NME's
self-insured liabilities exceed projected payments of claims, the financial
results of NME's operations could be materially adversely affected.
POSSIBLE INABILITY TO REPURCHASE NOTES UPON A CHANGE OF CONTROL
The terms of the New Credit Facility will prohibit NME from repurchasing
Notes upon the occurrence of a Change of Control Triggering Event. In addition,
since the Company's obligations to repurchase the Senior Subordinated Notes
upon a Change of Control Triggering Event are subordinated to the Company's
obligations to repurchase the Senior Notes and to repay or repurchase other
Senior Debt, in the event of a Change of Control Triggering Event, no payments
may be made with respect to the Senior Subordinated Notes until all of the
Company's obligations with respect to the Senior Notes and such other Senior
Debt have been satisfied in full. Accordingly, NME may not be able to satisfy
its obligations to repurchase the Notes unless NME is able to refinance or
obtain waivers with respect to the New Credit Facility and certain other
indebtedness, including, in the case of the Senior Subordinated Notes, the
Senior Notes. There can be no assurance that NME will have the financial
resources to repurchase the Notes in the event of a Change of Control
Triggering Event, particularly if such Change of Control Triggering Event
requires NME to refinance, or results in the acceleration of, other
indebtedness. See "Description of Notes."
The change of control provisions of the Indentures, may not, in all
instances, obligate the Company to repurchase Notes at the option of the holder
thereof in the event NME incurs additional leverage through certain types of
recapitalizations, leveraged buy-outs or similar transactions that could
increase the indebtedness of the Company or decrease the value of the Notes.
SUBSIDIARY OPERATIONS; SUBORDINATION
Since, both before and after consummation of the Merger, substantially all of
the Company's operations are conducted, and substantially all of the assets of
NME are owned, by its subsidiaries, the Notes effectively will be subordinated
to all existing and future obligations and other liabilities (including trade
payables) of NME's subsidiaries. Any right of NME to the assets of any of its
subsidiaries upon the liquidation, reorganization or insolvency of such
subsidiary (and the consequent right of the holders of the Notes to participate
in those assets) will be subject to the claims of the creditors (including
trade creditors) and preferred stockholders, if any, of such subsidiary, except
to the extent NME has a claim against such subsidiary as a creditor of such
subsidiary. In addition, in the event that claims of NME as a creditor of a
subsidiary are recognized, such claims would be subordinate to any security
interest in the assets of such subsidiary and any indebtedness of such
subsidiary senior to that held by NME. The ability of NME and its subsidiaries
to incur certain obligations is limited by certain of the restrictive covenants
contained in the New Credit Facility and in the Indentures governing the Notes.
Additionally, borrowings under the New Credit Facility will be secured by a
first priority lien on the capital stock of the Company's direct subsidiaries,
certain indebtedness owed to the Company by certain of its subsidiaries and
certain of the Company's equity investments, and will have priority as to such
collateral over the Notes. The Indentures will limit the ability of
subsidiaries of NME to incur additional indebtedness.
In addition, NME's ability to make required principal and interest payments
with respect to NME's indebtedness, including the Notes, depends on the
earnings of its subsidiaries and on its ability to receive
13
<PAGE>
funds from such subsidiaries through dividends or other payments. Since the
Notes are obligations of NME only, NME's subsidiaries are not obligated or
required to pay any amounts due pursuant to the Notes or to make funds
available therefor in the form of dividends or advances to NME.
Further, the subordination provisions of the Senior Subordinated Note
Indenture will provide that the Company may not pay any principal of, premium,
if any, or interest on the Senior Subordinated Notes, or defease, repurchase,
redeem or otherwise acquire or retire Senior Subordinated Notes during the
continuance of a payment default with respect to any Designated Senior Debt
(which will include all borrowings under the New Credit Facility and, after the
repayment of the New Credit Facility, the Senior Notes), other than certain
payments in the form of subordinated securities or from a defeasance trust. In
addition, if any non-payment default occurs that would permit acceleration of
any Designated Senior Debt, the holders of such Designated Senior Debt may
prohibit the Company from making any such payment in respect of the Senior
Subordinated Notes for a period of up to 179 days. Upon any liquidation or
dissolution of the Company or in a bankruptcy, insolvency, receivership or
similar proceeding relating to the Company, holders of Senior Debt will be
entitled to receive payment in full prior to any payment to the holders of the
Senior Subordinated Notes (other than certain payments in the form of
subordinated securities or from a defeasance trust). See "Description of
Notes--Subordination of Senior Subordinated Notes."
NO PRIOR PUBLIC MARKET
Although the Company has applied for listing of the Notes on the NYSE, the
Notes are a new issue of securities with no established trading market. There
can be no assurance as to the liquidity of the market that may develop for the
Notes, the ability of holders of the Notes to sell their Notes or the prices at
which holders would be able to sell their Notes. The Notes could trade at
prices that may be higher or lower than the initial offering price thereof
depending on many factors, including prevailing interest rates, the Company's
operating results and the markets for similar securities.
14
<PAGE>
THE MERGER AND FINANCING
THE MERGER
On October 10, 1994, NME, AMH Acquisition Co., a Delaware corporation and a
newly formed, wholly owned subsidiary of NME ("Merger Sub"), and AMH entered
into the Agreement and Plan of Merger (the "Merger Agreement") pursuant to
which Merger Sub will be merged with and into AMH and AMH will become a wholly
owned subsidiary of NME. At the time the Merger becomes effective (the
"Effective Time"), each outstanding share of common stock, par value $0.01 per
share, of AMH (the "AMH Common Stock"), other than shares held by AMH
stockholders who have elected appraisal rights, treasury shares and shares held
by subsidiaries of AMH and shares held by NME and its subsidiaries, will be
converted into the right to receive (i) 0.42 of a share of common stock, par
value $0.075 per share, of NME (the "NME Common Stock") and (ii) $19.00 in cash
($19.25 in cash if the Merger is consummated after March 31, 1995)
(collectively, the "Merger Consideration"). The aggregate Merger Consideration
will be approximately $1.48 billion in cash and approximately 32.7 million
shares of NME Common Stock. Under certain limited circumstances, AMH
stockholders will, at the option of AMH, be entitled to receive $6.88 in cash
per share in lieu of the NME Common Stock constituting part of the Merger
Consideration. As of November 9, 1994, AMH had an aggregate of 77,804,287
shares of common stock outstanding, including 209,638 shares issuable upon the
expected conversion of AMI's 9 1/2% Convertible Subordinated Debentures due
2001 (the "AMI 9 1/2% Convertible Debentures"). AMH has received written
consents executed by the holders of record of approximately 61.4% of the
outstanding shares of AMH Common Stock approving and adopting the Merger and
the Merger Agreement.
As of October 31, 1994, options to purchase 3,290,567 shares of AMH Common
Stock (the "AMH Options") had been granted and remained outstanding and
unexercised. The exercise price of each of the foregoing grants was equal to
the fair market value of AMH Common Stock on the date that the grant or the
date on which commitment to make the grant was made and range from $7.03 to
$24.54 per share. Upon consummation of the Merger, except as described below,
each AMH Option that is outstanding and unexercised (other than certain AMH
Options held by members of AMH's management), whether vested or unvested, will
be cancelled (together with the cancellation of the selected executive
employees' options described below, the "AMH Option Cancellation") in
consideration for payment by AMH promptly after consummation of the Merger to
holders of AMH Options of cash in an amount equal to (i) the product of (A) the
sum of (x) $19.00 ($19.25 if the Merger is consummated after March 31, 1995),
plus (y) 0.42 times the average closing sales price of a share of NME Common
Stock on the NYSE over the ten consecutive trading days immediately preceding
the consummation of the Merger, and (B) the number of shares of AMH Common
Stock subject to AMH Options, less (ii) the exercise price of such AMH Options.
The foregoing notwithstanding, selected executive employees of AMH who hold in
the aggregate approximately 1,220,200 AMH Options, including Robert W. O'Leary,
John T. Casey and [ ], who are nominees to the Board of Directors of NME,
have agreed with AMH to cancel their AMH Options in exchange for an amount of
cash and NME Common Stock equal to the Merger Consideration less an amount
equal to the exercise price per share that such employees would have paid to
AMH had they exercised their AMH Options prior to the consummation of the
Merger. Payment of the AMH Option Cancellation will be funded from AMH's
available cash balances or from borrowings under AMI's revolving credit
facility and using shares of NME Common Stock issued to AMI in exchange for a
note.
Pursuant to the terms of the Merger Agreement, AMH is permitted and intends
to declare a special dividend (the "AMH Special Dividend") of $.10 per share
payable on , 1995 to stockholders of record on , 1995. Payment of the
AMH Special Dividend will be funded from AMH's available cash balances or from
borrowings under AMI's revolving credit facility.
15
<PAGE>
RELATED TRANSACTIONS
The AMI Tender Offers. NME intends to commence tender offers (the "AMI Tender
Offers") to purchase for cash any and all of AMI's outstanding 11% Senior Notes
due 2000, 9 1/2% Senior Subordinated Notes due 2006, 13 1/2% Senior
Subordinated Notes due 2001 and 15% Junior Subordinated Discount Debentures due
2005 (collectively, the "AMI Post 1991 Debt Securities") and 6 1/2% Dual
Currency Notes due 1997 (the "AMI Dual Currency Notes"). The AMI Post 1991 Debt
Securities and the AMI Dual Currency Notes had an aggregate principal amount
(in the case of the 15% Junior Subordinated Discount Debentures, an aggregate
accreted value) of approximately $623.2 million at August 31, 1994.
In connection with the AMI Tender Offers for the AMI Post 1991 Debt
Securities, NME is soliciting consents (the "Consent Solicitations") from the
holders of the AMI Post 1991 Debt Securities to eliminate certain of the
restrictive covenants in the indentures relating to such securities, including
restricted payment covenants that would limit NME's access to the cash flow of
AMI following the Merger. Each of such indentures requires the affirmative
consent of holders of record of not less than 66 2/3% of the outstanding
securities issued thereunder in order to effect the proposed amendments. The
obligation pursuant to the AMI Tender Offers to purchase securities of each
issue properly tendered and not withdrawn is conditioned upon the receipt of
sufficient consents to amend the indenture relating to such issue of AMI Post
1991 Debt Securities and the execution of supplemental indentures amending such
indenture. The AMI Tender Offers are subject to a number of additional
conditions. The AMI Tender Offers are expected to expire approximately five
business days prior to the Effective Time. Immediately after the Effective
Time, NME intends to assign its right and obligation to purchase the AMI Post
1991 Debt Securities and the AMI Dual Currency Notes under the AMI Tender
Offers to AMI and transfer to AMI, from borrowings under the New Credit
Facility, the amount of funds necessary to consummate such tender offers. It is
currently anticipated that AMI will consummate the AMI Tender Offers
immediately thereafter. NME currently estimates that substantially all of the
AMI Post 1991 Debt Securities and the AMI Dual Currency Notes will be tendered
and repurchased pursuant to the AMI Tender Offers. If a lesser aggregate
principal amount of AMI Post 1991 Debt Securities are tendered pursuant to the
AMI Tender Offers, NME currently intends to permit the untendered securities to
remain outstanding and reduce borrowings under the New Credit Facility
accordingly. Changes in the assumptions regarding the aggregate amount of AMI
Post 1991 Debt Securities or AMI Dual Currency Notes purchased pursuant to the
AMI Tender Offers are not expected to have a significant impact on NME's pro
forma interest expense or indebtedness following the Merger. This Offering is
conditioned upon consummation of the Consent Solicitations.
The AMI Redemptions. AMI intends to call for redemption (the "AMI
Redemptions") all of its outstanding 11 1/4% Sinking Fund Debentures due 2015
(the "AMI 11 1/4% Senior Notes"), the AMI 9 1/2% Convertible Debentures and 5%
Swiss Franc Bonds due 1996 (the "AMI Swiss Bonds" and, together with the AMI
Post 1991 Debt Securities, the AMI Dual Currency Notes, the AMI 11 1/4% Senior
Notes and the AMI 9 1/2% Convertible Debentures, the "AMI Debt Securities"). As
of August 31, 1994 there were outstanding approximately $47.8 million in
aggregate principal amount of AMI 11 1/4% Senior Notes, which are redeemable at
a redemption price of 106.195% of the principal amount thereof for redemptions
occurring prior to June 1, 1995, and 105.632% of the principal amount for a 12-
month period thereafter, plus accrued interest to the redemption date. As of
August 31, 1994, there were outstanding approximately $5.1 million in aggregate
principal amount of the AMI 9 1/2% Convertible Debentures, which are redeemable
at a redemption price of 100% of the principal amount thereof, plus accrued
interest through the redemption date. The AMI 9 1/2% Convertible Debentures
currently are convertible into an aggregate of 209,638 shares of AMH Common
Stock at a conversion price of $24.38 per share. Because the conversion price
is below the per share value of the Merger Consideration, based on the closing
market price of NME Common Stock at December 22, 1994, NME currently expects
that all of the outstanding AMI 9 1/2% Convertible Debentures will be converted
by the holders thereof into shares of AMH Common Stock prior to the Effective
Time. As of August 31, 1994, there were outstanding approximately $52.4 million
in aggregate principal amount of AMI Swiss Bonds, which are redeemable on March
18, 1995 at a redemption price of 100.50% of the principal amount thereof,
together with accrued interest through the redemption date.
16
<PAGE>
NME currently expects that the redemption date for the AMI 9 1/2% Convertible
Debentures will be on or about the Effective Time, that the redemption date for
the AMI Swiss Bonds will be on March 18, 1995 and that notices of redemption
will be given with respect to the AMI 11 1/4% Notes as soon as practicable
following the Effective Time. Amounts required for the redemption of the AMI 9
1/2% Convertible Debentures, if any, the AMI Swiss Bonds and the AMI 11 1/4%
Notes will be transferred to AMI by NME. This Offering is conditioned upon the
concurrent redemption or call for redemption of the AMI 11 1/4% Notes, AMI 9
1/2% Convertible Debentures and the AMI Swiss Bonds pursuant to the AMI
Redemptions.
The NME Tender Offers. NME intends to commence tender offers (the "NME Tender
Offers") to purchase for cash any and all of an aggregate of approximately
$169.1 million principal amount of NME's outstanding unsecured medium-term
notes with maturities through 1997 and the 7 3/8% unsecured Notes due 1997
(collectively, the "NME Medium Term Notes"). The NME Tender Offers are subject
to a number of conditions but are not conditioned on any minimum principal
amount of NME Medium Term Notes of any series being properly tendered and not
withdrawn prior to the expiration of the NME Tender Offers. The NME Tender
Offers are expected to expire approximately five business days prior to the
Effective Time, and payments for any NME Medium Term Notes accepted for payment
are expected to be made immediately after the Effective Time. If less than all
of the currently outstanding Medium Term Notes are tendered pursuant to the NME
Tender Offers, NME currently intends to permit the untendered Medium Term Notes
to remain outstanding and reduce borrowings under the New Credit Facility
accordingly. Any change in the assumptions regarding the aggregate amount of
NME Medium Term Notes purchased pursuant to the NME Tender Offers will not have
a significant impact on NME's pro forma interest expense or indebtedness
following the Merger. This Offering is not conditioned upon the purchase of any
NME Medium Term Notes pursuant to the NME Tender Offers.
The Refinancing of the NME and AMI Credit Facilities and Other Indebtedness.
NME intends to refinance the outstanding credit facilities of NME and AMI with
a portion of the New Credit Facility (together with the AMI Tender Offers, the
AMI Redemptions and the NME Tender Offers, the "Refinancing"). At August 31,
1994, the balance outstanding under each of the NME facility and the AMI
facility was $365.2 and $266.0, respectively. See "Description of the New
Credit Facility." In addition, NME and AMH anticipate repaying approximately
$92.9 million and $151.4 million principal amount, respectively, of
indebtedness that matures prior to or shortly after the consummation of the
Merger.
17
<PAGE>
SOURCES AND USES OF FUNDS
NME intends to finance the cash paid in connection with the Merger and the
related transactions, together with the fees and expenses incurred in
connection therewith with the proceeds from this Offering, borrowings under
the New Credit Facility and the available cash balances of NME and AMH. See
"Description of the New Credit Facility" for a description of the anticipated
terms of the New Credit Facility.
The following table sets forth the sources and uses of funds to be used to
consummate the Merger and the Refinancing assuming (i) that the Merger is
consummated on or prior to March 31, 1995, (ii) that the Notes are sold at a
price to the public equal to 100% of the principal amount thereof, (iii) that
substantially all of the NME Medium Term Notes and the AMI Post 1991 Debt
Securities and the AMI Dual Currency Notes are properly tendered and not
withdrawn pursuant to the NME Tender Offers and the AMI Tender Offers,
respectively, and (iv) that all of the AMI Debt Securities subject to the AMI
Redemptions (other than the AMI 9 1/2% Convertible Debentures) are redeemed
pursuant thereto. The sources and uses of funds set forth below are based upon
the Company's best estimate of the results of the NME Tender Offers and the
AMI Tender Offers and the other assumptions described above, which estimates
and assumptions are subject to change.
<TABLE>
<CAPTION>
(DOLLARS
IN MILLIONS)
<S> <C>
SOURCES:
New Credit Facility:
Term loan...................................................... $2,000.0
Revolver....................................................... 272.1
Senior Notes..................................................... 400.0
Senior Subordinated Notes........................................ 600.0
Cash of NME and AMH.............................................. 121.7
--------
$3,393.8
========
USES:
Cash portion of the Merger Consideration......................... $1,478.3
Repayment of certain AMI debt (1)................................ 1,091.3
Cash portion of the AMH Option Cancellation (2).................. 41.3
AMH Special Dividend............................................. 7.8
Repayment of certain NME debt (3)................................ 611.9
Estimated fees and expenses (4).................................. 163.2
--------
$3,393.8
========
</TABLE>
- ---------------------
(1) Includes repayment of the balance of $266.0 million outstanding under the
existing AMI credit facility as of August 31, 1994, the balance of the AMI
Debt Securities that are being called for redemption (other than the AMI 9
1/2% Convertible Debentures that are assumed to be converted prior to the
Effective Time), the balance (or the accreted value, as applicable) of the
AMI Debt Securities that are expected to be repurchased and cancelled
pursuant to the AMI Tender Offers, and the balance of the 11 3/8% Notes
due 1995 and the 11 1/4% Pound Notes due 1995.
(2) Assumes a per share price for the NME Common Stock of $14.75 per share
(representing the average closing price per share of NME Common Stock as
reported on the NYSE over the ten consecutive trading days immediately
following the announcement of the Merger).
(3) Includes repayment of the balance of $365.2 million outstanding under the
existing NME credit facility as of August 31, 1994, the principal amount
of the 12 1/8% unsecured notes due April 1, 1995 and the principal amount
of the NME Medium Term Notes that are expected to be repurchased and
cancelled pursuant to the NME Tender Offers.
(4) To reflect estimated fees and expenses of NME and AMH in the aggregate
amount of approximately $163.2 million, including transaction costs in
connection with the Merger; financing fees and expenses in connection with
the New Credit Facility and this Offering; and premiums in connection with
the Refinancing relative to the carrying value at August 31, 1994 of the
indebtedness refinanced, which amounts are based on actual agreements,
estimates provided by outside advisors and vendors and estimated premiums
in connection with the Refinancing as determined by the Company's
financial advisors.
18
<PAGE>
USE OF PROCEEDS
The net proceeds to NME from the sale of the Notes in this Offering (after
deducting estimated expenses and underwriting discounts and commissions) are
estimated to be approximately $970.0 million. NME intends to use all of such
proceeds to pay a portion of the Merger consideration. See "The Merger and
Financing."
HISTORICAL AND PRO FORMA CAPITALIZATION
The following table sets forth the capitalization of NME and AMH at August
31, 1994 and of the Company as adjusted to give pro forma effect to the
consummation of this Offering and the application of the net proceeds
therefrom, and the consummation of the Merger and the Refinancing. See "The
Merger and Financing" and "Pro Forma Financial Information."
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1994
-----------------------------------
HISTORICAL HISTORICAL PRO FORMA
NME AMH COMBINED
---------- ---------- ---------
<S> <C> <C> <C>
Short-term borrowings and notes............ $ 110.6 $ -- $ 110.6
Current portion of long-term debt.......... 495.5 156.0 43.4
-------- -------- --------
Total current debt....................... $ 606.1 $ 156.0 $ 154.0
======== ======== ========
Long-term debt, net of current portion:
Existing credit facilities............... $ -- $ 266.0 $ --
New Credit Facility...................... -- -- 2,272.1
Senior Notes............................. -- -- 400.0
Other debt............................... 243.9(1) 875.7(2) 318.4
Senior Subordinated Notes................ -- -- 600.0
-------- -------- --------
Total long-term debt................... 243.9 1,141.7 3,590.5
-------- -------- --------
Shareholders' equity:
NME common stock, par value $0.075,
authorized 450,000,000 shares; issued
185,587,666 shares, 218,689,902 shares
pro forma(3)............................ 13.9 -- 16.3
AMH common stock, par value $0.01,
authorized 200,000,000
shares; issued 77,491,000 shares, no
shares pro forma ....................... -- 0.8 --
Other shareholders' equity............... 1,653.6 847.9 2,139.4
Less treasury stock, at cost, 19,311,722
shares, 19,223,674 shares
pro forma............................... (279.4) -- (278.1)
-------- -------- --------
Total shareholders' equity............. 1,388.1 848.7 1,877.6
-------- -------- --------
Total capitalization................... $1,632.0 $1,990.4 $5,468.1
======== ======== ========
</TABLE>
- ---------------------
(1) Includes the NME Medium Term Notes, other unsecured notes payable,
mortgage notes and capitalized lease obligations. SeeNote 5 of the Notes
to the Consolidated Financial Statements of NME.
(2) Includes the AMI Debt Securities,certain other secured and unsecured notes
payable and capitalized lease obligations. See Note 5 of the Notes to the
Consolidated Financial Statements of AMH.
(3) Does not include 22,270,779 shares of NME Common Stock reserved for
issuance upon exchange of NME options and conversion of outstanding
securities of NME.
19
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Financial Statements give effect
to the following transactions and events as if they had occurred at the
beginning of each period presented for purposes of the pro forma statements of
operations and other operating information and on August 31, 1994 for purposes
of the pro forma balance sheet data: (i) the August 1994 sale of approximately
75% of NME's common stock interest in TRC; (ii) the March 1994 sale of one
inpatient rehabilitation hospital and the January 1994 sale of 28 inpatient
rehabilitation hospitals and 45 related satellite outpatient clinics; (iii) the
February 1994 sale of four long-term care facilities and the September 1993
sale of 19 long-term care facilities to Hillhaven; (all of which properties
previously had been leased to Hillhaven); (iv) the elimination of restructuring
charges recorded by NME of $77.0 million in fiscal 1994; (v) the elimination of
certain non-recurring gains recorded by NME and AMH; (vi) the Merger, applying
the purchase method of accounting; and (vii) consummation of this Offering and
the Refinancing.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to present the financial position or results of operations of NME had
the transactions and events assumed therein occurred on the dates specified,
nor are they necessarily indicative of the results of operations that may be
achieved in the future. The following Unaudited Pro Forma Condensed Combined
Financial Statements do not reflect certain cost savings that management
believes may be realized following the Merger, currently estimated to be
approximately $60.0 million annually beginning in fiscal 1996 (before any
severance or other costs of implementing certain efficiencies). These savings
are expected to be realized primarily through the elimination of duplicative
corporate overhead, reduced supplies expense through the incorporation of AMH
into the Company's group purchasing program and improved collection of AMH
accounts receivable by SOS, the Company's wholly owned debt collection
business. No assurances can be made as to the amount of cost savings, if any,
that actually will be realized. The Unaudited Pro Forma Condensed Combined
Financial Statements are based on certain assumptions and adjustments described
in the Notes to Unaudited Pro Forma Condensed Combined Financial Statements and
should be read in conjunction therewith and with "The Merger and Financing,"
"Supplemental Discussion of Adjusted Results of Operations of NME,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations of NME," "Management's Discussion and Analysis of Financial
Condition and Results of Operations of AMH" and the Consolidated Financial
Statements of NME and AMH and the related Notes thereto included in this
Prospectus.
NME reports its financial information on the basis of a May 31 fiscal year.
AMH reports its financial information on the basis of an August 31 fiscal year.
The Unaudited Pro Forma Condensed Combined Statement of Operations combines
NME's Consolidated Statement of Operations for the fiscal year ended May 31,
1994 with AMH's Consolidated Statement of Operations for the fiscal year ended
August 31, 1994. The Unaudited Pro Forma Combined Statements of Operations for
the three months ended August 31, 1993 and 1994 combine the Consolidated
Statements of Operations of NME and AMH for these same three-month periods.
20
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
AS OF AUGUST 31, 1994
----------------------------------------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
NME AMH ADJUSTMENTS COMBINED
---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents...... $ 112.3 $ 31.9 $(1,527.4)(a) $ 37.4
1,568.9 (b)
(163.2) (c)
14.9 (d)
Short-term investments, at cost
which approximates market..... 52.5 -- 52.5
Accounts and notes receivable,
less allowance for doubtful
accounts...................... 372.9 147.4 19.5 (d) 539.8
Inventories of supplies, at
cost.......................... 53.9 63.5 117.4
Deferred income taxes.......... 329.0 30.9 359.9
Assets held for sale........... 79.9 -- 79.9
Prepaid expenses and other
current assets................ 54.1 15.1 69.2
-------- -------- --------- --------
Total current assets........ 1,054.6 288.8 (87.3 ) 1,256.1
Long-term receivables........... 72.1 15.6 87.7
Investments and other assets.... 303.4 24.5 60.2 (d) 388.1
Property, plant and equipment,
net............................ 1,794.5 1,463.7 275.0 (e) 3,533.2
Intangible assets, at cost less
accumulated amortization....... 111.7 1,183.9 1,133.4 (i) 2,429.0
-------- -------- --------- --------
$3,336.3 $2,976.5 $ 1,381.3 $7,694.1
======== ======== ========= ========
LIABILITIES AND SHAREHOLDERS'
EQUITY
Current liabilities:
Short-term borrowings and
notes......................... $ 110.6 $ -- $ 110.6
Accounts payable............... 144.3 86.9 $ 1.8 (d) 233.0
Employee compensation and
benefits...................... 72.3 117.0 189.3
Reserve related to discontinued
operations.................... 101.6 -- 101.6
Income taxes payable........... 23.9 26.3 1.6 (d) 5.8
(46.0)(f)
Other current liabilities...... 230.1 90.3 25.8 (d) 346.2
Current portion of long-term
debt.......................... 495.5 156.0 (608.1)(b) 43.4
-------- -------- --------- --------
Total current liabilities... 1,178.3 476.5 (624.9) 1,029.9
Long-term debt, net of current
portion........................ 243.9 1,141.6 2,177.0 (b) 3,590.5
(3.4)(g)
31.4 (e)
Other long-term liabilities and
minority interests............. 400.0 291.0 65.4 (d) 756.4
Deferred income taxes........... 126.0 218.7 95.0 (f) 439.7
Shareholders' equity:
Common stock.................. 13.9 0.8 2.4 (k) 16.3
(0.8)(j)
Other shareholders' equity.... 1,653.6 847.9 478.3 (k) 2,139.4
(41.3)(h)
(7.8)(h)
3.4 (g)
(794.7)(j)
Less: Common stock in
treasury, at cost............ (279.4) -- 1.3 (k) (278.1)
-------- -------- --------- --------
Total shareholders' equity.. 1,388.1 848.7 (359.2) 1,877.6
-------- -------- --------- --------
$3,336.3 $2,976.5 $ 1,381.3 7,694.1
======== ======== ========= ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
21
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
HISTORICAL HISTORICAL
NME AMH
YEAR ENDED NME YEAR ENDED AMH PRO
MAY 31, ADJUSTMENTS NME AUGUST 31, ADJUSTMENTS AMH PRO FORMA FORMA
1994 (L) AS ADJUSTED 1994 (M) AS ADJUSTED ADJUSTMENTS COMBINED
---------- ------------ ----------- ---------- ----------- ------------ ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues. $2,943.2 $(359.2) $2,584.0 $2,381.7 $ $2,381.7 $ $4,965.7
Operating expenses:
Salaries and benefits. 1,293.4 (176.0) 1,117.4 869.0 869.0 1,986.4
Supplies.............. 339.4 (14.8) 324.6 340.0 340.0 664.6
Provision for doubtful
accounts............. 107.0 (5.2) 101.8 165.5 165.5 267.3
Other operating
expenses............. 666.5 (113.8) 552.7 524.3 524.3 1,077.0
Depreciation.......... 142.7 (11.9) 130.8 118.1 118.1 (10.6)(n) 238.3
Amortization.......... 18.1 (2.3) 15.8 38.6 38.6 17.6 (o) 72.0
Restructuring charges. 77.0 (77.0) -- -- -- --
-------- ------- -------- -------- ------ -------- ------ --------
Operating income....... 299.1 41.8 340.9 326.2 326.2 (7.0) 660.1
Interest expense, net
of capitalized por-
tion.................. (70.0) 5.0 (65.0) (157.2) (157.2) (101.4)(p) (323.6)
Investment earnings.... 27.7 1.9 29.6 2.7 2.7 (4.3)(q) 28.0
Equity in earnings of
unconsolidated
affiliates............ 23.8 0.5 24.3 -- -- 24.3
Minority interest ex-
pense................. (8.2) 3.0 (5.2) (5.9) (5.9) (11.1)
Net gain on disposals
of facilities and
long-term investments. 87.5 (87.5) -- 69.3 (69.3) -- --
-------- ------- -------- -------- ------ -------- ------ --------
Income from continuing
operations before
income taxes.......... 359.9 (35.3) 324.6 235.1 (69.3) 165.8 (112.7) 377.7
Taxes on income........ (144.0) 13.8 (130.2) (96.1) 25.9 (70.2) 37.1 (r) (163.3)
-------- ------- -------- -------- ------ -------- ------ --------
Income from continuing
operations............ $ 215.9 (t) $ (21.5) $ 194.4 $ 139.0 (s) $(43.4) $ 95.6 $(75.6) $ 214.4
======== ======= ======== ======== ====== ======== ====== ========
Earnings per common
share, from continuing
operations, fully-
diluted............... $ 1.23 $ 1.11 $ 1.75 $ 1.21 $ 1.03
======== ======== ======== ======== ========
Weighted average number
of shares outstanding,
fully-diluted
(in 000's)............ 181,087 181,087 33,190 (u) 214,277
======== ======== ====== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
22
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1994
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NME NME PRO
HISTORICAL ADJUSTMENTS AS HISTORICAL PRO FORMA FORMA
NME (V) ADJUSTED AMH ADJUSTMENTS COMBINED
---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $ 662.8 $(16.6) $ 646.2 $638.2 $ $1,284.4
Operating expenses:
Salaries and benefits.. 283.2 (5.9) 277.3 234.0 511.3
Supplies............... 80.6 -- 80.6 92.1 172.7
Provision for doubtful
accounts.............. 26.1 (0.4) 25.7 47.4 73.1
Other operating
expenses.............. 150.1 (6.8) 143.3 137.8 281.1
Depreciation........... 34.3 (0.6) 33.7 30.9 (2.6)(n) 62.0
Amortization........... 3.6 (0.2) 3.4 10.0 4.0 (o) 17.4
------- ------ ------- ------ ------ --------
Operating income........ 84.9 (2.7) 82.2 86.0 (1.4) 166.8
Interest expense, net of
capitalized portion.... (17.7) -- (17.7) (40.0) (25.4)(p) (83.1)
Investment earnings..... 6.0 -- 6.0 0.8 (1.1)(q) 5.7
Equity in earnings of
unconsolidated
affiliates............. 6.3 (0.1) 6.2 6.2
Minority interest
expense................ (2.0) 0.4 (1.6) (0.9) (2.5)
Net gain on disposals of
facilities and long-
term investments....... 29.5 (29.5) -- -- --
------- ------ ------- ------ ------ --------
Income from continuing
operations before
income taxes........... 107.0 (31.9) 75.1 45.9 (27.9) 93.1
Taxes on income......... (43.0) 12.4 (30.6) (19.0) 9.3 (r) (40.3)
------- ------ ------- ------ ------ --------
Income from continuing
operations............. $ 64.0 $(19.5) $ 44.5 $ 26.9(s) $(18.6) $ 52.8
======= ====== ======= ====== ====== ========
Earnings per common
share from continuing
operations, fully-
diluted................ $ 0.36 $ 0.26 $ 0.35 $ 0.26
======= ======= ====== ========
Weighted average number
of shares outstanding,
fully-diluted (in
000's)................. 180,153 180,153 33,190 (u) 213,343
======= ======= ====== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
23
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED AUGUST 31, 1993
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
NME NME PRO
HISTORICAL ADJUSTMENTS AS HISTORICAL PRO FORMA FORMA
NME (L) ADJUSTED AMH ADJUSTMENTS COMBINED
---------- ----------- -------- ---------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $ 771.6 $(141.7) $ 629.9 $565.0 $ $1,194.9
Operating expenses:
Salaries and benefits.. 351.9 (70.3) 281.6 200.1 481.7
Supplies............... 84.5 (6.2) 78.3 76.2 154.5
Provision for doubtful
accounts.............. 35.0 (3.6) 31.4 37.1 68.5
Other operating
expenses.............. 172.8 (32.7) 140.1 139.3 279.4
Depreciation........... 38.1 (5.0) 33.1 28.7 (2.6)(n) 59.2
Amortization........... 4.7 (1.0) 3.7 9.3 4.7 (o) 17.7
------- ------- ------- ------ ------ --------
Operating income........ 84.6 (22.9) 61.7 74.3 (2.1) 133.9
Interest, net of
capitalized
portion ............... (18.4) 1.9 (16.5) (43.5) (25.4)(p) (85.4)
Investment earnings..... 7.8 1.9 9.7 9.7 (1.1)(q) 18.3
Equity in earnings of
unconsolidated
affiliates............. 3.5 -- 3.5 -- 3.5
Minority interest
expense................ (2.2) 0.8 (1.4) (2.0) (3.4)
Net gain on disposals of
facilities and long-
term investments....... 15.4 (15.4) -- -- --
------- ------- ------- ------ ------ --------
Income from continuing
operations before
income taxes........... 90.7 (33.7) 57.0 38.5 (28.6) 66.9
Taxes on income......... (38.0) 13.1 (24.9) (22.1) 9.3 (r) (37.7)
------- ------- ------- ------ ------ --------
Income from continuing
operations............. $ 52.7(t) $ (20.6) $ 32.1 $ 16.4(s) $(19.3) $ 29.2
======= ======= ======= ====== ====== ========
Earnings per common
share from continuing
operations, fully-
diluted................ $ 0.30 $ 0.18 $ 0.21 $ 0.14
======= ======= ====== ========
Weighted average number
of shares outstanding,
fully-diluted
(in 000's)............. 180,086 180,086 33,190 (u) 213,276
======= ======= ====== ========
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
24
<PAGE>
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Combined Statements of Operations do not
give effect to any cost savings that may be realized after the consummation of
the Merger, estimated by NME management to be approximately $60 million
annually beginning in fiscal 1996 (before any severance or other costs of
implementing such efficiencies). The anticipated savings are based on estimates
and assumptions made by the Company that are inherently uncertain, though
considered reasonable by the Company, and are subject to significant business,
economic and competitive uncertainties and contingencies, all of which are
difficult to predict and many of which are beyond the control of management.
There can be no assurance that such savings, if any, will be achieved.
The adjustments to arrive at the Unaudited Pro Forma Condensed Combined
Financial Statements are as follows:
(a) To record cash paid in connection with the Merger (in millions):
<TABLE>
<CAPTION>
<S> <C>
Cash portion of the Merger Consideration......................... $1,478.3
Cash portion of the AMH Option Cancellation...................... 41.3
AMH Special Dividend............................................. 7.8
--------
Total cash paid in connection with the Merger.................. $1,527.4
========
</TABLE>
(b) To reflect borrowings under the New Credit Facility and the proceeds
from the sale of the Notes and the application of such amounts as follows
(in millions):
<TABLE>
<S> <C>
New Credit Facility
Term loan.................................................... $2,000.0
Revolver..................................................... 272.1
Senior Notes................................................... 400.0
Senior Subordinated Notes...................................... 600.0
--------
Total sources................................................ 3,272.1
Repayment of certain AMI debt (including current portion of
$150.0)....................................................... (1,091.3)
Repayment of certain NME debt (including current portion of
$458.1)....................................................... (611.9)
--------
Net increase in cash......................................... $1,568.9
========
</TABLE>
(c) To reflect estimated fees and expenses of NME and AMH in the
aggregate amount of approximately $163.2 million, including transaction
costs in connection with the Merger; financing fees and expenses in
connection with the New Credit Facility and this Offering; and premiums in
connection with the Refinancing relative to the carrying value at August
31, 1994 of the indebtedness refinanced, which amounts are based on actual
agreements, estimates provided by outside advisors and vendors and
estimated premiums in connection with the Refinancing as determined by the
Company's financial advisors.
(d) To consolidate the assets, liabilities and stockholders' equity of
HUG, currently accounted for as investments by both NME and AMH under the
equity method. Upon completion of the Merger, NME will own approximately
81% of HUG. Both NME and AMH account for the results of operations of HUG
using the equity method of accounting.
(e) To increase by $275.0 million the carrying value of AMH's buildings
and equipment to the estimated fair values thereof and to increase by $31.4
million the carrying value of the balance of AMH's indebtedness not
expected to be refinanced to the preliminary estimate of the fair value
thereof; both as required by the purchase accounting treatment of the
Merger. NME expects to obtain and record final
25
<PAGE>
valuations based upon independent appraisals following the consummation of
the Merger. It is not expected that the final valuations will result in any
significant reclassification between goodwill and buildings and equipment
or long-term debt. For purposes of these Unaudited Pro Forma Condensed
Combined Financial Statements, NME has assumed that the fair value of the
remaining net assets of AMH approximates the existing net book value of
such assets.
(f) To record deferred income taxes in connection with the increase in
the carrying values of AMH buildings and equipment and the balance of AMH
indebtedness not expected to be refinanced in connection with the Merger
and to reduce income taxes payable related to the redemption of certain
indebtedness of AMI and the AMH Option Cancellation.
(g) To give effect to the conversion of the AMI 9 1/2% Convertible
Debentures.
(h) To give effect to the AMH Option Cancellation and to the AMH Special
Dividend. See "The Merger and Financing."
(i) To record the increase in intangible assets representing deferred
financing costs and the excess of the purchase price of the AMH Common
Stock over the fair value of the net assets acquired (in millions):
<TABLE>
<S> <C> <C>
Cash portion of the Merger Consideration.............. $1,478.3
Value of stock portion of the Merger Consideration.... 482.0
Shareholders' equity of AMH at August 31, 1994........ (848.7)
Conversion of AMI 9 1/2% Convertible Debentures....... (3.4)
Cash portion of AMH Option Cancellation............... 41.3
Value of stock portion of AMH Option Cancellation..... 7.5
AMH Special Dividend.................................. 7.8
------
Adjusted AMH shareholders' equity.................. (795.5)
Adjustment to fair value of AMH buildings and
equipment............................................ (275.0)
Adjustment to fair value of AMH indebtedness not
refinanced........................................... 31.4
Estimated fees and expenses ($64.7 million of which
represent deferred financing costs).................. 163.2
Net adjustment to income taxes payable and deferred
income taxes......................................... 49.0
--------
Net increase in intangible assets.................. $1,133.4
========
</TABLE>
(j) To give effect to the elimination of the AMH Common Stock and other
shareholders' equity, as adjusted in note (i) above.
(k) To record the issuance of (i) 32,589,752 shares of NME Common Stock
(which reflects 0.42 shares of NME Common Stock to be exchanged per share
of AMH Common Stock) to be issued in connection with the Merger for all of
the outstanding AMH Common Stock; (ii) 88,048 shares of NME Common Stock
held in treasury in exchange for AMH Common Stock issuable upon conversion
of the AMI 9 1/2% Convertible Debentures; and (iii) 512,484 shares of NME
Common Stock issuable to AMH in exchange for a note, with an estimated
principal amount of $7.5 million, which shares will constitute the stock
portion of the AMH Option Cancellation, assuming in each case a value of
$14.75 per share of NME Common Stock (representing the average closing
price as reported on the NYSE on the 10 trading days immediately following
the announcement of the Merger). AMH will transfer the shares of NME Common
Stock received from NME in exchange for the note to cancel 1,220,200 stock
options held by certain executives of AMH. See "The Merger and Financing."
26
<PAGE>
(l) To adjust the results of operations of NME to reflect (i) the August
1994 sale of approximately 75% of NME's common stock interest in TRC; (ii)
the March 1994 sale of one inpatient rehabilitation hospital; (iii) the
February 1994 sale of four long-term care facilities and the September 1993
sale of 19 long-term care facilities to Hillhaven (all of which properties
previously had been leased to Hillhaven); (iv) the January 1994 sale of 28
inpatient rehabilitation hospitals and 45 related satellite outpatient
clinics; (v) the elimination of restructuring charges recorded by NME of
$77.0 million in fiscal 1994; and (vi) the elimination of certain non-
recurring gains on disposals of facilities and long-term investments
recorded by NME. See "Supplemental Discussion of Adjusted Results of
Operations of NME."
(m) To eliminate non-recurring gains on disposals of facilities and long-
term investments relating to the sale of AMH's interest in EPIC Healthcare
Group, Inc. and to reflect the effect on income taxes of these adjustments.
(n) To adjust depreciation expense for the year ended May 31, 1994 as
follows (in millions):
<TABLE>
<S> <C>
To reflect additional depreciation on the stepped-up values
of AMH's buildings and equipment.......................... $ 9.0
To conform the estimated useful lives of the acquired
buildings and equipment to those used by NME.............. (19.6)
-------
Net decrease in depreciation expense..................... $ (10.6)
=======
The adjustments made for the three months ended August 31, 1993 and 1994 are
equal to one quarter of the amount above. See Note 1 of the Notes to the
Consolidated Financial Statements of NME and AMH.
(o) To reflect amortization of the excess of the purchase price of AMH
over the preliminary estimate of the fair value of the net assets acquired
using the straight-line method over 40 years.
(p) To adjust interest expense, including the amortization of deferred
financing costs over the term of the related indebtedness, for the year
ended May 31, 1994 as follows (in millions):
To reflect pro forma interest expense related to the New
Credit Facility and the Notes............................. $ 270.3
To reduce interest expense to give effect to the
Refinancing and the repayment of certain indebtedness..... (166.1)
To reduce interest expense to reflect the amortization of
the adjustment to fair value of AMH indebtedness not
refinanced................................................ (2.8)
-------
Net increase in interest expense......................... $ 101.4
=======
</TABLE>
The adjustments made for the three months ended August 31, 1993 and 1994
are equal to one quarter of the amount above.
(q) To reflect an estimated reduction of interest income related to a
lower balance of cash and cash equivalents available for investment.
(r) To reflect income taxes at an assumed marginal rate of 39% on the pro
forma adjustments described in (n), (p) and (q) above. Amortization of
goodwill is not deductible for tax purposes.
(s) Does not reflect the extraordinary loss on early extinguishment of
AMH debt.
(t) Does not reflect the cumulative effect of NME's change in the method
of accounting for income taxes.
(u) Represents the additional weighted average common shares that would
have been outstanding upon consummation of the Merger.
(v) To reflect the August 1994 sale of approximately 75% of NME's common
stock interest in TRC; to eliminate non-recurring gains on disposals of
facilities and long-term investments; and to reflect income taxes on these
adjustments.
27
<PAGE>
SUPPLEMENTAL DISCUSSION OF ADJUSTED RESULTS OF OPERATIONS OF NME
GENERAL
During and subsequent to the last three fiscal years, NME completed a number
of dispositions. These dispositions included: (i) the August 1994 sale of
approximately 75% of NME's common stock interest in TRC; (ii) the March 1994
sale of one inpatient rehabilitation hospital and the January 1994 sale of 28
inpatient rehabilitation hospitals and 45 related satellite outpatient clinics;
(iii) the February 1994 sale of four long-term care facilities, the September
1993 sale of 19 long-term care facilities, the fiscal 1993 sales of 62 long-
term care facilities and the fiscal 1992 sales of 20 long-term care facilities
to Hillhaven (all of which properties previously had been leased to Hillhaven);
and (iv) the April 1993 public offering of common stock by Westminster, which
reduced NME's interest in Westminster from approximately 90% to approximately
42% (collectively, the "Divestitures").
To provide prospective purchasers of Notes with certain supplemental
information about NME after giving effect to the Divestitures, set forth below
is certain unaudited adjusted operating information of NME for each of the last
three fiscal years and for the three months ended August 31, 1993 and 1994,
together with a summary discussion of such adjusted operating results for each
of such periods. NME is including this information to supplement the historical
financial information included elsewhere herein because it believes that
prospective purchasers of Notes may find such information useful in evaluating
NME's historical results of operations. The adjusted results of operations of
NME have been derived from the historical financial information of NME as
adjusted to give effect to each of the Divestitures as if they had occurred at
the beginning of each of the periods presented, and to the elimination of
restructuring charges recorded by NME of $77.0 million, $51.6 million and $17.9
million in fiscal 1994, fiscal 1993 and fiscal 1992, respectively. The adjusted
results of operations do not purport to present the results of operations of
NME had the Divestitures occurred on the dates specified, nor are they
necessarily indicative of the results of operations that may be achieved in the
future. All of the following information is qualified in its entirety by, and
should be read in conjunction with, "Management's Discussion and Analysis of
Financial Condition and Results of Operations of NME," "Pro Forma Financial
Information" and the Consolidated Financial Statements of NME included
elsewhere herein.
For purposes of the presentation set forth below, the Company's adjusted net
operating revenues have been divided into three components. Adjusted net
operating revenues from the Company's domestic general hospitals include only
the revenues of the Company's domestic general hospitals. Net operating
revenues from other domestic operations include the revenues principally of the
following: (i) six rehabilitation hospitals and seven long-term care facilities
located on the same campus as, or nearby, the Company's general hospitals; (ii)
certain healthcare joint ventures operated by the Company; (iii) various
subsidiaries of the Company (together "National Health Plans") that offer
health maintenance organizations ("HMOs"), preferred provider organizations
("PPOs") and indemnity products in California; and (iv) revenues earned by the
Company in consideration of the guarantee of certain indebtedness and leases of
Hillhaven and of other third parties. Net operating revenues from the Company's
international operations include the revenues of the Company's operations in
Singapore, Australia and Spain but exclude the results of Westminster and NME's
interests in Malaysia, which are accounted for using the equity method. The
operating expenses attributable to the assets and businesses disposed of
include an allocation of corporate overhead, and such allocated expenses have
been excluded from the adjusted presentation set forth below.
28
<PAGE>
UNAUDITED ADJUSTED RESULTS OF OPERATIONS OF NME
<TABLE>
<CAPTION>
THREE
MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
---------------------------- --------------
1992 1993 1994 1993 1994
-------- -------- -------- ------ ------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net operating revenues:
Domestic general
hospitals.............. $1,963.2 $2,112.9 $2,133.3 $519.7 $527.0
Other domestic
operations............. 228.1 271.9 275.3 67.1 68.1
International
operations............. 91.6 162.4 175.4 43.1 51.1
-------- -------- -------- ------ ------
Net operating revenues... $2,282.9 $2,547.2 $2,584.0 $629.9 $646.2
Operating expenses:
Salaries and benefits... 998.4 1,116.0 1,117.4 281.6 277.3
Supplies................ 290.8 321.8 324.6 78.3 80.6
Provision for doubtful
accounts............... 107.0 105.4 101.8 31.4 25.7
Other operating
expenses............... 500.9 565.4 552.7 140.1 143.3
Depreciation............ 97.5 117.1 130.8 33.1 33.7
Amortization............ 12.6 14.0 15.8 3.7 3.4
-------- -------- -------- ------ ------
Operating income......... $ 275.7 $ 307.5 $ 340.9 $ 61.7 $ 82.2
======== ======== ======== ====== ======
OTHER OPERATING
INFORMATION:
EBITDA (a)............... $ 385.8 $ 438.6 $ 487.5 $ 98.5 $119.3
Capital expenditures..... 320.5 238.4 172.2 17.8 28.1
<CAPTION>
THREE
MONTHS ENDED
YEARS ENDED MAY 31, AUGUST 31,
---------------------------- --------------
1992 1993 1994 1993 1994
-------- -------- -------- ------ ------
(PERCENTAGE OF NET OPERATING REVENUES)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net operating revenues:
Domestic general
hospitals.............. 86.0% 82.9% 82.6% 82.5% 81.6%
Other domestic
operations............. 10.0 10.7 10.6 10.7 10.5
International
operations............. 4.0 6.4 6.8 6.8 7.9
-------- -------- -------- ------ ------
Net operating revenues .. 100.0 100.0 100.0 100.0 100.0
-------- -------- -------- ------ ------
Operating expenses:
Salaries and benefits... 43.7 43.8 43.2 44.7 42.9
Supplies................ 12.7 12.6 12.6 12.4 12.5
Provision for doubtful
accounts............... 4.7 4.1 3.9 5.0 4.0
Other operating
expenses............... 21.9 22.2 21.4 22.2 22.2
Depreciation............ 4.3 4.6 5.1 5.3 5.2
Amortization............ 0.6 0.6 0.6 0.6 0.5
-------- -------- -------- ------ ------
Operating income......... 12.1% 12.1% 13.2% 9.8% 12.7%
======== ======== ======== ====== ======
OTHER OPERATING
INFORMATION:
EBITDA margin............ 16.9% 17.2% 18.9% 15.6% 18.5%
</TABLE>
- -------------------
(a) EBITDA represents operating income before depreciation and amortization.
While EBITDA should not be construed as a substitute for operating income
or a better indicator of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles, it is included herein to provide additional
information with respect to the ability of NME to meet its future debt
service, capital expenditure and working capital requirements.
29
<PAGE>
The patient volumes and adjusted net operating revenues of the Company's
domestic general hospitals are subject to seasonal variations caused by a
number of factors, including but not necessarily limited to, seasonal cycles
of illness, climate and weather conditions, vacation patterns of both hospital
patients and admitting physicians and other factors relating to the timing of
elective hospital procedures. Generally, the patient volumes and adjusted net
operating revenues experienced by the Company's domestic general hospitals are
lowest in the first fiscal quarter ended August 31, and increase through the
fourth fiscal quarter ended May 31.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals. Included in these statistics are the
operations of one hospital that was sold in June 1993 and two hospitals that
were sold in July 1994. The operations of Doctors Hospital of Jefferson, which
was acquired in March 31, 1994, have been excluded from the fiscal 1994
adjusted results presented below.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED MAY 31, AUGUST 31,
------------------------------- ----------------
1992 1993 1994 1993 1994
--------- --------- --------- ------- -------
(DOLLARS IN MILLIONS, EXCEPT PER PATIENT DAY)
<S> <C> <C> <C> <C> <C>
DOMESTIC GENERAL HOSPITAL
OPERATING DATA:
Number of hospitals (at end
of period)................ 35 35 34 34 33
Licensed beds (at end of
period) (1)............... 6,559 6,818 6,735 6,691 6,622
Net inpatient revenues..... $ 1,445.3 $ 1,529.5 $ 1,564.3 $ 374.2 $ 373.4
Net outpatient revenues.... $ 464.6 $ 534.7 $ 555.0 $ 137.1 $ 144.1
Admissions................. 208,307 210,669 207,351 50,605 49,078
Equivalent admissions (2).. 267,083 274,216 270,332 66,687 65,166
Average length of stay (3). 5.82 5.64 5.55 5.47 5.48
Patient days............... 1,211,857 1,187,181 1,151,188 276,876 268,939
Equivalent patient days
(4)....................... 1,545,799 1,537,913 1,489,621 361,500 353,812
Net inpatient revenues per
patient day............... $ 1,193 $ 1,288 $ 1,359 $1,352 $1,388
Utilization of licensed
beds (5).................. 50.5% 47.8% 46.8% 44.7% 43.2%
Outpatient visits.......... 1,376,118 1,473,234 1,468,972 365,731 377,539
</TABLE>
- ---------------------
(1) Aggregate number of beds at the end of the period operated under approval
from the appropriate state licensing agency.
(2) Equivalent admissions represents actual admissions adjusted to include
outpatient and emergency room services by multiplying actual admissions by
the sum of gross inpatient revenues and gross outpatient revenues and
dividing the result by gross inpatient revenues.
(3) Represents total patient days divided by total admissions.
(4) Equivalent patient days represents actual patient days adjusted to include
outpatient and emergency room services by multiplying actual patient days
by the sum of gross inpatient revenues and gross outpatient revenues and
dividing the result by gross inpatient revenues.
(5) Represents average daily census for the period divided by the average
number of licensed beds during the period.
30
<PAGE>
THREE MONTHS ENDED AUGUST 31, 1993 AND 1994
Adjusted net operating revenues increased 2.6% to $646.2 million for the
three months ended August 31, 1994, compared to $629.9 million for the prior
year quarter, representing an increase of $16.3 million. Domestic general
hospitals, other domestic operations and international operations all recorded
increases in adjusted net operating revenues compared to the prior year
quarter, as described below.
Domestic General Hospitals
Adjusted net operating revenues from the Company's domestic general hospital
operations increased 1.4% to $527.0 million for the three months ended August
31, 1994, compared to $519.7 million for the prior year quarter, representing
an increase of $7.3 million. On a same store basis, adjusted net operating
revenues for the Company's domestic general hospitals increased 1.2% to $510.4
million for the three months ended August 31, 1994, compared to $504.2 million
in the prior year quarter. Same store operating results represent the combined
results of the 32 general hospitals operated by the Company throughout both the
three months ended August 31, 1994 and the prior year quarter.
Adjusted net operating revenues for the Company's domestic general hospitals
have remained relatively unchanged as less intensive services continue to shift
from an inpatient to an outpatient basis or to alternative healthcare delivery
services because of technological improvements and continued increases in cost
containment pressures by payors. In addition, management believes that patient
volumes, cash flows and operating results at the Company's domestic general
hospitals have been adversely affected by certain legal proceedings and
investigations. See "Business--Certain Legal Proceedings." Management believes
that these legal proceedings adversely affected the Company's ability to pursue
its business strategy, particularly during fiscal 1994. The most significant of
these legal proceedings and investigations now have been resolved.
On a same store basis, admissions and net inpatient revenues decreased 2.3%
and 0.4%, respectively, for the three months ended August 31, 1994, compared to
the prior year quarter. The shift from less intensive inpatient services to
outpatient and other treatment has reduced inpatient admissions, but has
resulted in increases in inpatient acuity and intensity of services and
consequently higher inpatient revenues per patient day. The increase in
revenues per patient day was mitigated by increases in allowances and discounts
as payors have increased cost controls and managed care utilization has
increased. On a same store basis, outpatient visits and net outpatient revenues
increased 4.0% and 4.3%, respectively, for the three months ended August 31,
1994, compared to the prior year quarter. This increase in outpatient visits
and net outpatient revenues primarily is due to the shift from an inpatient to
an outpatient basis for the delivery of healthcare services.
Other Domestic Operations
Adjusted net operating revenues from the Company's other domestic operations
increased 1.5% to $68.1 million for the three months ended August 31, 1994,
compared to $67.1 million for the prior year quarter, representing an increase
of $1.0 million. This increase primarily reflects continued growth of National
Health Plans, to approximately 42,000 members at August 31, 1994, compared to
approximately 37,000 members at the end of the prior year quarter.
International Operations
Adjusted net operating revenues from the Company's international operations
increased 18.6% to $51.1 million for the three months ended August 31, 1994,
compared to $43.1 million for the prior year quarter, representing an increase
of $8.0 million. This increase is principally attributable to an 18.4% increase
in net operating revenues of Australian Medical Enterprises, Ltd. ("AME"), and
an 11.4% increase in the net operating revenues of the Company's two hospitals
in Singapore. In addition, Centro Medico Teknon in Barcelona, Spain was opened
in February 1994 and became a wholly owned subsidiary in June 1994, when NME
acquired its partner's 50% interest.
31
<PAGE>
Operating Expenses
Adjusted salaries and benefits expense decreased $4.3 million to 42.9% of
adjusted net operating revenues in the three months ended August 31, 1994,
compared to 44.7% for the prior year quarter. This improvement is primarily
attributable to a reduction in corporate and division staffing levels. Adjusted
supplies expense increased slightly to 12.5% of adjusted net operating revenues
in the three months ended August 31, 1994, compared to 12.4% for the prior year
quarter. The adjusted provision for doubtful accounts decreased $5.7 million to
4.0% of adjusted net operating revenues for the three months ended August 31,
1994, compared to 5.0% for the prior year quarter. Adjusted other operating
expenses increased $3.2 million, but remained constant at 22.2% of adjusted net
operating revenues in each period. This increase principally was due to
increased rent and lease expense resulting from the March 31, 1994 acquisition
of Doctors Hospital of Jefferson.
Adjusted EBITDA and Operating Income
Adjusted EBITDA increased 21.1% to $119.3 million for the three months ended
August 31, 1994, compared to $98.5 million for the prior year quarter,
representing an increase of $20.8 million. As a percentage of adjusted net
operating revenues, adjusted EBITDA increased 2.9% to 18.5% for the three
months ended August 31, 1994, compared to 15.6% for the prior year quarter.
Adjusted depreciation and amortization expense increased 0.8% to $37.1
million for the three months ended August 31, 1994, compared to $36.8 million
for the prior year quarter.
Adjusted operating income increased 33.2% to $82.2 million for the three
months ended August 31, 1994, compared to $61.7 million for the prior year
quarter, representing an increase of $20.5 million. The adjusted operating
profit margin increased to 12.7% for the three months ended August 31, 1994,
compared to 9.8% for the prior year quarter.
FISCAL YEARS ENDED MAY 31, 1992, 1993 AND 1994
Adjusted net operating revenues increased 1.4% to $2,584.0 million in fiscal
1994, from $2,547.2 million in fiscal 1993. In fiscal 1993, adjusted net
operating revenues increased 11.6%, compared to $2,282.9 million in fiscal
1992. Domestic general hospitals, other domestic operations and international
operations all recorded increases in adjusted net operating revenues in each of
such fiscal years.
Domestic General Hospitals
Adjusted net operating revenues for the Company's domestic general hospitals
increased 1.0% to $2,133.3 million in fiscal 1994 compared to $2,112.9 million
in fiscal 1993. In fiscal 1993, adjusted net operating revenues for the
Company's domestic general hospitals increased 7.6%, from $1,963.2 million in
fiscal 1992. Adjusted net operating revenues for the Company's domestic general
hospitals were impacted in both fiscal periods by the general trends discussed
above. In addition, management believes that the fiscal 1994 results were
adversely affected by certain legal proceedings and investigations. See
"Business--Certain Legal Proceedings." On a same store basis, adjusted net
operating revenues for the Company's general hospitals increased 1.7% to
$2,123.6 million in fiscal 1994, compared to $2,087.9 million in fiscal 1993.
Same store adjusted net operating revenues represent the combined results of
the 34 general hospitals operated by the Company throughout the last three
fiscal years. Adjusted net operating revenues for the Company's general
hospitals increased 7.6% on a same store basis in fiscal 1993, compared to
$1,940.3 million in fiscal 1992. Same store adjusted net operating revenues
represent the combined results of the 34 domestic general hospitals operated by
the Company throughout the last three fiscal years.
On a same store basis, admissions and net inpatient revenues for the
Company's general hospitals decreased 0.6% and increased 3.2%, respectively, in
fiscal 1994 compared to fiscal 1993. Admissions and net inpatient revenues for
the Company's general hospitals decreased 1.3% and increased 6.0%,
respectively, on a same store basis in fiscal 1993, compared to fiscal 1992. On
a same store basis, outpatient visits and net
32
<PAGE>
outpatient revenues for the Company's general hospitals increased 1.1% and
5.6%, respectively, in fiscal 1994 compared to fiscal 1993. Outpatient visits
and net outpatient revenues for the Company's general hospitals increased 7.1%
and 15.0%, respectively, on a same store basis in fiscal 1993 compared to
fiscal 1992. This increase was due principally to the addition by one hospital
of an off-campus specialty outpatient facility in fiscal 1993.
Other Domestic Operations
Adjusted net operating revenues from other domestic operations increased 1.3%
to $275.3 million in fiscal 1994, compared to $271.9 million in fiscal 1993,
representing an increase of $3.4 million. In fiscal 1993, adjusted net
operating revenue from other domestic operations increased 19.2%, compared to
$228.1 million in fiscal 1992. This increase primarily reflects continued
growth of National Health Plans, partially offset by a decline in joint venture
revenues. At the end of fiscal 1994, National Health Plans' HMO managed the
care needs of over 40,000 members, compared to approximately 35,000 members at
the end of fiscal 1993 and approximately 32,000 members at the end of fiscal
1992. The Company has been analyzing the ownership structure of its joint
ventures in light of the changing regulatory environment applicable to its
joint ventures. As a result, the Company has determined to redeem or repurchase
certain of the limited partnership interests of its physician partners.
International Operations
Adjusted net operating revenues from the Company's international operations
increased 8.0% to $175.4 million in fiscal 1994, compared to $162.4 million in
fiscal 1993, representing an increase of $13.0 million. This increase in fiscal
1994 was attributable principally to a 13.1% increase in net operating revenues
at the Company's two hospitals in Singapore. In fiscal 1993, adjusted net
operating revenues from the international operations increased 77.3% to $162.4
million, compared to $91.6 million in fiscal 1992, representing an increase of
$70.8 million. The increase in fiscal 1993 was attributable principally to the
acquisition of a majority interest in AME in March 1992, which accounted for
$57.4 million of the increase, and a 19.7% increase in net operating revenues
at the Company's two hospitals in Singapore.
Operating Expenses
Adjusted salaries and benefits expense, adjusted supplies expense, and
adjusted other operating expenses remained relatively stable as a percentage of
adjusted net operating revenues in fiscal 1994 as compared to fiscal 1993 and
to fiscal 1992. As a percentage of adjusted net operating revenues, the
adjusted provision for doubtful accounts decreased to 3.9% in fiscal 1994 from
4.1% and 4.7% in fiscal 1993 and fiscal 1992, respectively. The reduction in
the provision for doubtful accounts over this period resulted principally from
the reduced percentage of patient revenues from private payors, continued
improvement of follow-up collection systems by SOS, investment in an electronic
claims processing network and from the continued consolidation of hospital
business office functions.
Adjusted EBITDA and Operating Income
Adjusted EBITDA increased 11.1% to $487.5 million in fiscal 1994 compared to
$438.6 million in fiscal 1993. In fiscal 1993, adjusted EBITDA increased 13.7%
compared to $385.8 million in fiscal 1992. As a percentage of adjusted net
operating revenue, adjusted EBITDA increased to 18.9% in fiscal 1994, compared
to 17.2% and 16.9% in fiscal 1993 and fiscal 1992, respectively.
Adjusted depreciation expense increased to 5.1% of adjusted net operating
revenues in fiscal 1994 from 4.6% and 4.3% in fiscal 1993 and 1992,
respectively, principally as a result of the substantial continuing investment
in the general hospitals operated by the Company.
Adjusted operating income increased 10.9% to $340.9 million in fiscal 1994
compared to $307.5 million in fiscal 1993. In fiscal 1993, adjusted operating
income increased 11.5% from $275.7 million in fiscal 1992. As a percentage of
adjusted net operating revenue, adjusted operating income increased to 13.2% in
fiscal 1994, compared to 12.1% in each of fiscal 1993 and fiscal 1992.
33
<PAGE>
SELECTED OPERATING STATISTICS
The following tables set forth certain operating statistics for the domestic
general hospitals operated by the Company and by AMH for each of the periods
indicated.
NATIONAL MEDICAL ENTERPRISES, INC.
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEARS ENDED MAY 31, AUGUST 31,
------------------------------------------------- ------------------
1992 1993 1994 1993 1994
--------------- --------------- --------------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER PATIENT DAY)
<S> <C> <C> <C> <C> <C>
HISTORICAL OPERATING
DATA:
Number of hospitals (at
end of period)........ 35 35 35 34 33
Licensed beds (at end
of period) (1)........ 6,559 6,818 6,873 6,691 6,622
Net inpatient revenues. $1,445.3 $1,529.5 $1,568.4 $ 374.2 $ 373.4
Net outpatient
revenues.............. $ 464.6 $ 534.7 $ 557.2 $ 137.1 $ 144.1
Admissions............. 208,307 210,669 207,868 50,605 49,078
Equivalent
admissions (2)........ 267,083 274,216 263,609 66,687 65,166
Average length of
stay (3).............. 5.82 5.64 5.55 5.47 5.48
Patient days........... 1,211,857 1,187,181 1,154,030 276,876 268,939
Equivalent patient
days (4).............. 1,545,799 1,537,913 1,493,314 361,500 353,812
Net inpatient revenue
per patient day....... $ 1,193 $ 1,288 $ 1,359 $ 1,352 $ 1,388
Utilization of licensed
beds (5).............. 50.5% 47.8% 46.8% 44.7% 43.2%
Outpatient visits...... 1,376,118 1,473,294 1,472,258 365,731 377,539
AMERICAN MEDICAL HOLDINGS, INC.
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------------------------
1992 1993 1994
--------------- --------------- ---------------
(DOLLARS IN MILLIONS, EXCEPT PER PATIENT DAY)
<S> <C> <C> <C>
HISTORICAL OPERATING
DATA:
Number of hospitals (at
end of period)........ 35 36 37
Licensed beds (at end
of period) (1)........ 7,822 8,003 9,002
Net inpatient revenues. $1,598.6 $1,557.0 $1,644.6
Net outpatient
revenues.............. $ 609.4 $ 648.0 $ 692.1
Admissions............. 233,090 229,596 242,219
Equivalent
admissions (2)........ 308,722 309,972 333,071
Average length of
stay (3).............. 6.25 5.98 5.93
Patient days........... 1,456,542 1,372,232 1,435,487
Equivalent patient
days (4).............. 1,906,304 1,830,169 1,943,842
Net inpatient revenue
per patient day....... $ 1,098 $ 1,135 $ 1,146
Utilization of licensed
beds (5).............. 47.9% 46.8% 46.6%
Outpatient visits...... 1,618,068 1,660,015 2,255,498
</TABLE>
- ---------------------
(1) Aggregate number of beds at the end of the period that a facility has been
granted approval to operate from the appropriate state licensing agency.
(2) Equivalent admissions represents actual admissions adjusted to include
outpatient and emergency room services by multiplying actual admissions by
the sum of inpatient revenue and outpatient revenue and dividing the
result by inpatient revenue.
(3) Represents patient days divided by admissions.
(4) Equivalent patient days represents actual patient days adjusted to include
outpatient and emergency room services by multiplying actual patient days
by the sum of inpatient revenue and outpatient revenue and dividing the
result by inpatient revenue.
(5) Represents average daily census for the period divided by the average
number of licensed beds during the period.
34
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF NME
The following tables set forth selected historical financial data and other
operating information for NME for each of the fiscal years in the five-year
period ended May 31, 1994 and for the three months ended August 31, 1993 and
1994. The selected financial information for each of the five annual periods
has been derived from the Consolidated Financial Statements of NME, which have
been audited by KPMG Peat Marwick LLP, independent auditors for NME, and from
the underlying accounting records of NME. The selected financial information
for the three-month periods has been derived from unaudited condensed
consolidated financial statements of NME and reflects all adjustments
(consisting of normal recurring adjustments) that, in the opinion of the
management of NME, are necessary for a fair presentation of such information.
Operating results for the three months ended August 31, 1994 are not
necessarily indicative of the results that may be expected for fiscal 1995.
All information contained in the following tables should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of NME" and with the Consolidated Financial
Statements and related notes of NME included herein. Certain amounts derived
from the consolidated statements of operations have been reclassified to
conform with the presentation below.
<TABLE>
<CAPTION>
THREE MONTHS
YEARS ENDED MAY 31, ENDED AUGUST 31,
------------------------------------------------ -----------------
1990 (2) 1991 1992 1993 (3) 1994 (4) 1993 (4) 1994 (4)
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA (1):
Net operating revenues. $2,914.0 $2,604.6 $2,934.3 $3,178.2 $2,943.2 $771.6 $662.8
Operating expenses:
Salaries and benefits.. 1,373.0 1,157.7 1,328.1 1,464.8 1,293.4 351.9 283.2
Supplies............... 211.6 252.8 318.9 349.2 339.4 84.5 80.6
Provision for doubtful
accounts.............. 114.7 133.7 123.1 114.6 107.0 35.0 26.1
Other operating
expenses.............. 785.1 596.2 616.5 689.1 666.5 172.8 150.1
Depreciation........... 113.6 108.9 122.4 141.8 142.7 38.1 34.3
Amortization........... 16.5 16.2 18.4 18.6 18.1 4.7 3.6
Restructuring charges
(5)................... -- -- 17.9 51.6 77.0 -- --
-------- -------- -------- -------- -------- ------ ------
Operating income....... 299.5 339.1 389.0 348.5 299.1 84.6 84.9
Interest, net of
capitalized portion... (130.9) (123.9) (89.4) (75.3) (70.0) (18.4) (17.7)
Investment earnings.... 29.5 29.1 28.7 21.1 27.7 7.8 6.0
Equity in earnings of
unconsolidated
affiliates............ 2.9 5.3 6.7 12.5 23.8 3.5 6.3
Minority interest
expense............... (0.2) (4.4) (6.8) (10.0) (8.2) (2.2) (2.0)
Net gain/(loss) on
disposals of
facilities and long-
term investments...... (0.3) (0.1) 31.0 121.8 87.5 15.4 29.5
-------- -------- -------- -------- -------- ------ ------
Income from continuing
operations before
income taxes.......... 200.5 245.1 359.2 418.6 359.9 90.7 107.0
Taxes on income........ (77.0) (100.0) (141.0) (155.0) (144.0) (38.0) (43.0)
-------- -------- -------- -------- -------- ------ ------
Income from continuing
operations............ $ 123.5 $ 145.1 $ 218.2 $ 263.6 $ 215.9 $ 52.7 $ 64.0
======== ======== ======== ======== ======== ====== ======
Earnings per common
share from continuing
operations, fully-
diluted............... $ 0.76 $ 0.87 $ 1.19 $ 1.49 $ 1.23 $ 0.30 $ 0.36
Cash dividends per
common share.......... $ 0.36 $ 0.40 $ 0.46 $ 0.48 $ 0.12 $ 0.12 --
Ratio of earnings to
fixed charges (6)..... 2.0x 2.3x 3.5x 4.3x 4.2x 4.2x 5.0x
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
AS OF
AS OF MAY 31, AUGUST 31,
-------------------------------------------- -----------------
1990 1991 1992 1993 1994 1993 1994
-------- -------- -------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital
(deficit)............. $ 249.0 $ 346.0 $ 223.9 $ 155.9 $ (196.3) $ 122.5 $ (123.7)
Total assets........... 3,806.7 4,060.2 4,236.4 4,173.4 3,697.0 4,230.7 3,336.3
Long-term debt,
excluding current
portion............... 1,361.2 1,140.4 1,066.2 892.4 223.1 804.7 243.9
Shareholders' equity... 1,257.9 1,762.3 1,674.0 1,752.1 1,319.9 1,697.7 1,388.1
</TABLE>
- ---------------------
(1) Results of operations for all periods presented exclude NME's psychiatric
division, which was discontinued as of November 30, 1993, but include
other divested businesses through the date of their divestiture that were
not classified as discontinued operations.
(2) Results of operations for the fiscal year ended May 31, 1990 include the
operations of Hillhaven for the eight months ended January 31, 1990, on
which date 85% of the common stock of Hillhaven was distributed to NME
shareholders.
(3) Results of operations for periods prior to April 1993 include, on a
consolidated basis, the results of Westminster, the ownership of which was
reduced from approximately 90% to approximately 42% in April 1993 through
a public offering of Westminster common stock.
(4) Results of operations for the periods presented include the results,
through the respective dates of sale, of 29 inpatient rehabilitation
hospitals and 45 related satellite outpatient clinics sold in fiscal 1994,
23 long-term care facilities sold to Hillhaven in fiscal 1994 and TRC, in
which NME sold an approximately 75% interest in August 1994. See notes (l)
and (v) of Notes to the Unaudited Pro Forma Condensed Combined Financial
Statements.
(5) The restructuring charges for 1994 relate to a plan initiated by NME in
April 1994 to decrease overhead costs by reducing corporate and division
staffing levels and selling the corporate headquarters building. In fiscal
1992 and fiscal 1993, the restructuring charges related to the combination
of NME's rehabilitation hospital division into its general hospital
division, a corporate overhead reduction program begun in April 1993, and
severance costs incurred in connection with a change in senior executive
management.
(6) The ratio of earnings to fixed charges is calculated by dividing income
from continuing operations before income taxes plus fixed charges by fixed
charges. Fixed charges consist of interest expense, including amortization
of financing costs, and that portion of rental expense deemed to be
representative of the interest component of rental expense.
36
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF NME
(All references to years are to fiscal years, and all note references are to
the accompanying Notes to Consolidated Financial Statements.)
IMPACT OF THE MERGER
NME intends to finance the cash portion of the Merger Consideration and the
related transactions, together with the fees and expenses incurred in
connection with the Merger and such related transactions, with the proceeds
from this Offering and borrowings under the New Credit Facility. See "The
Merger and Financing," and "Description of the New Credit Facility." On a pro
forma combined basis after giving effect to the Merger, the Company's EBITDA
for the 12 months ended August 31, 1994 would have been $991.2 million. These
pro forma combined results do not give effect to certain cost savings that
management believes may be realized following the Merger, currently estimated
to be approximately $60.0 million annually beginning in fiscal 1996 (before any
severance or other costs of implementing certain efficiencies), equivalent to
approximately 1.2% of pro forma combined net operating revenues for the 12
months ended August 31, 1994. These savings are expected to be realized through
the elimination of duplicative corporate overhead expenses, reduced supplies
expense through the incorporation of AMH into the Company's group purchasing
program and improved collection of delinquent AMH accounts receivable by SOS.
No assurances can be made as to the amount of cost savings, if any, that will
actually be realized.
Estimated capital expenditures for the combined entity are expected to be up
to approximately $400.0 million per year for each of the next three fiscal
years. Upon consummation of the Merger, the Company will have in place the New
Credit Facility which matures in 2002 and which provides for up to $500.0
million for borrowings on a revolving basis and letters of credit to finance
the working capital needs of the Company. At the closing of the Merger, the
Company expects to have unused borrowing capacity of approximately $225.0
million under the New Credit Facility. The New Credit Facility will include
various affirmative, negative and financial covenants with which the Company
must comply, including among others, a requirement to maintain certain
financial ratios and limitations on the Company's ability to incur additional
indebtedness. See "Description of the New Credit Facility."
Following the Merger, the Company believes that its primary liquidity needs
will consist of capital expenditure and debt service requirements and working
capital needs. The Company believes that cash generated by operations and
amounts available under the revolving credit portion of the New Credit Facility
will be sufficient to meet its liquidity needs. The Company's strategy includes
the pursuit of growth through strategic acquisitions. All or a portion of such
acquisitions may be financed through available credit under the New Credit
Facility or, depending on capital markets conditions, the issuance of
additional indebtedness or equity securities or other bank borrowings.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at August 31, 1994 were
$112.3 million, a decrease of $200.9 million from May 31, 1994. The decrease
was primarily due to expenditures relating to the resolution of unusual legal
proceedings and government investigations associated with the discontinued
psychiatric division. The ratio of total debt to equity was 0.61:1, at August
31, 1994 compared with 0.63:1 at May 31, 1994. The working capital deficit at
August 31, 1994 was $123.7 million compared to a deficit of $196.3 million at
May 31, 1994. The principal reason for the deficits in working capital at
August 31 and May 31, 1994 was the fiscal 1994 increase in the current portion
of long-term debt. At August 31, 1994 the current portion of long-term debt was
$495.0 million compared to $545.0 million at May 31, 1994.
Cash used in operating activities was $377.2 million for the three months
ended August 31, 1994, compared to $79.2 million of cash provided by operating
activities in the same period last year, including
37
<PAGE>
pre-tax expenditures of $405.4 million and $18.4 million, respectively, related
to the discontinued psychiatric hospital business and for restructuring
charges. Of these pre-tax expenditures during the quarter ended August 31,
1994, $379.6 million were related to the payments of settlements of
investigations by federal and state government agencies.
Proceeds from the sales of facilities, investments and other assets were
$157.6 million during the quarter ended August 31, 1994, compared with $52.0
million in the prior year quarter. Sales during the quarter ended August 31,
1994 included two general hospitals, 34 psychiatric hospitals and five
outpatient psychiatric centers. The Company received approximately $50.0
million in the second quarter of fiscal 1995 related to additional sales of
psychiatric hospitals.
Cash payments for property and equipment were $28.1 million for the three
months ended August 31, 1994 and $21.5 million for the same period last year.
The estimated cost to complete major approved construction projects at wholly
owned subsidiaries is approximately $102.6 million, all of which is related to
expansion, improvement and equipping of existing domestic hospital facilities,
and a significant portion of which will be spent over the next three years. The
Company expects to finance all such expenditures with either internally
generated funds or borrowed funds. The Company intends to continue to invest
domestically and internationally in existing and new facilities within its
existing healthcare business.
A number of events occurred in fiscal 1994 that had a significant impact on
the Company's financial statements, liquidity and results of operations. These
events included the settlement of insurance company litigation, the settlement
of various federal and state government investigations, the adoption of a
formal plan to discontinue the psychiatric hospital business, the sale of
substantially all of the Company's rehabilitation hospitals, and a corporate
restructuring to significantly reduce overhead. See "Business--Certain Legal
Proceedings."
In November 1993 and in February 1994, the Company executed settlement
agreements covering the three lawsuits previously filed by several insurance
companies. Under the settlements, the Company paid an aggregate of $214.9
million as complete and final resolution of these disputed claims alleging that
certain psychiatric hospitals engaged in fraudulent practices.
In April 1994, the Company announced and initiated a formal plan to reduce
corporate and division staffing levels, to review the resulting office space
needs of all corporate operations, and to otherwise lower the Company's
corporate overhead. As a result, the Company announced in July 1994 that 240
staff positions were being eliminated and that it had decided to sell its
corporate headquarters building and to lease less office space in that building
or at an alternative site. A reserve of $77.0 million was recorded in the
quarter ended May 31, 1994 to cover the costs of a write-down of the building,
employee severance benefits and other expenses directly related to the overhead
reduction plan. The Company expects its annual overhead savings from
implementation of this plan to approximate $32.0 million, most of which is
attributable to discontinued and divested operations, including its psychiatric
and rehabilitation operations. The Company also expects that the sale of its
corporate headquarters building, which may take two years to consummate, should
generate after-tax proceeds in excess of $40.0 million. During the quarter
ended August 31, 1994, actual costs incurred and charged against the reserve
were $2.9 million, consisting principally of severance payments to terminated
employees. The Company expects to incur approximately $14.3 million in
additional payments (principally severance) before May 31, 1995, all of which
were included in the May 1994 reserve.
Management believes that patient volumes, cash flows and operating results at
the Company's principal healthcare businesses have been adversely affected by
the legal proceedings and investigations described in "Business--Certain Legal
Proceedings." In June 1994, the Company agreed to settle for $362.7 million all
investigations by federal government agencies and in May 1994 reached
agreements in principle with 27 states and the District of Columbia to settle
all investigations by them for $16.3 million. See Note 7B to the Consolidated
Financial Statements of NME. The Company has recorded reserves for the
remaining legal proceedings not yet settled as of August 31, 1994, and an
estimate of the legal fees related to these matters to
38
<PAGE>
be incurred subsequently, totaling approximately $75.1 million, of which $63.1
million is expected to be paid within one year. These reserves represent
management's estimate of the net costs of the ultimate disposition of these
matters. However, there can be no assurance that the ultimate liability will
not exceed such estimates.
During fiscal 1994, net cash provided by operating activities was $466.0
million before pretax expenditures of $319.0 million related to the
discontinued psychiatric hospital business and for restructuring charges. See
Notes 2 and 16 of Notes to the Consolidated Financial Statements of NME.
Corresponding figures for fiscal 1993 were $494.0 million and $96.0 million,
respectively. In fiscal 1992, they were $583.0 million and $24.0 million,
respectively.
Proceeds from the sales of facilities, investments and other assets were
$569.0 million during fiscal 1994, compared with $70.0 million in fiscal 1993
and $109.0 million in fiscal 1992. Sales in fiscal 1994 included 23 long-term
care facilities previously leased to Hillhaven, 29 inpatient rehabilitation
hospitals and 45 related satellite outpatient clinics, 15 psychiatric
facilities and one general hospital. In August 1994, the Company received a
$75.5 million dividend from TRC in connection with a debt/equity offering in
which the Company's interest in TRC was reduced to approximately 25%. See Note
15 of Notes to the Consolidated Financial Statements of NME.
Cash payments for property, plant and equipment were $185.0 million in fiscal
1994, compared with $319.0 million in fiscal 1993 and $421.0 million in fiscal
1992.
The Company suspended payment of dividends on its common stock in October
1993.
RESULTS OF OPERATIONS
Three Months Ended August 31, 1994 Compared to Three Months Ended August 31,
1993
Income from continuing operations before income taxes was $107.0 million for
the quarter ended August 31, 1994, compared with $90.7 million for the prior
year quarter. These results include pre-tax net gains on disposals of
facilities and long-term investments of $29.5 million (approximately $.09 per
share after taxes, fully diluted) and $15.4 million (approximately $0.05 per
share after taxes, fully diluted), respectively.
Net operating revenues from continuing operations for the quarter were $662.9
million, compared with $771.5 million in the prior year quarter. The principal
reason for the 14% decline in revenues is the sale of 28 physical
rehabilitation hospitals and 45 related outpatient clinics. The revenues and
expenses of these facilities are included in the Company's results of
operations through December 31, 1993. Operating profits from continuing
operations before interest for the quarter were $84.9 million, compared with
$84.7 million for the prior year quarter. The operating profit margin increased
for the current quarter from 11.0% to 12.8%. The increase in the operating
margin is primarily due to effective cost control programs in the hospitals,
initial benefits of the overhead reductions implemented during the quarter and
the sale of the rehabilitation hospitals, which as a whole, had lower margins
than the general hospitals.
39
<PAGE>
Selected statistics for the Company's domestic general hospital operations
are shown below:
<TABLE>
<CAPTION>
THREE MONTHS ENDED AUGUST
31,
------------------------------
INCREASE
1993 1994 (DECREASE)
-------- -------- ----------
<S> <C> <C> <C>
Facilities owned or operated (at end of period). 34 33 (1)
Quarter-end licensed beds....................... 6,691 6,622 (1.0)%
Average licensed beds in period................. 6,731 6,764 0.5 %
Average occupancy............................... 44.7% 43.2% (1.5)%*
Patient days.................................... 276,876 268,939 (2.9)%
Net inpatient revenues per patient day.......... $ 1,352 $ 1,388 2.7 %
Admissions...................................... 50,605 49,078 (3.0)%
Average length of stay (days)................... 5.5 5.5 --
Net inpatient revenues (in thousands)........... $374,210 $373,378 (0.2)%
Net outpatient revenues (in thousands).......... $137,085 $144,144 5.1 %
Outpatient visits............................... 365,731 377,539 3.2 %
% of net patient revenues from Medicare and Med-
icaid.......................................... 40.6% 42.4% 1.8 %*
</TABLE>
- ---------------------
* These percentage changes are the differences between the percentages shown
for the two periods.
Domestic hospital inpatient admissions decreased by 3.0% over the prior year
quarter and net inpatient revenues decreased by 0.2% over the prior year
quarter. Outpatient visits and outpatient revenues increased by 3.2% and 5.1%,
respectively, over the prior year quarter. There continue to be increases in
inpatient acuity and intensity of services as less intensive services shift
from an inpatient to an outpatient basis or to alternative healthcare delivery
services because of technology improvements and as cost controls by payors
become greater. Allowances and discounts are expected to continue to rise
because of increasing cost controls by government and group health payors and
because the percentage of business from managed care programs (and related
discounts) continues to grow.
In August 1994, the Company sold two general hospitals (202 beds). Patient
days and admissions decreased by 2.8% and 2.3%, respectively, at the same 32
facilities owned during both the current quarter and the prior year quarter.
Outpatient visits at the same 32 facilities increased by 4.0% over the prior
year quarter.
The general hospital industry in the United States and the Company's general
hospitals continue to have significant unused capacity, and thus there is
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative healthcare delivery services
for less acutely ill patients. Increased competition, admission constraints and
payor pressures are expected to continue. The Company has been implementing
various cost-control programs focused on reducing operating costs. The
Company's general hospitals have been successful in increasing operating
profits in a very competitive environment, due in large part to enhanced cost
controls and efficiencies being achieved throughout the Company. The Company,
however, does not expect to be able to sustain the growth rates from its
existing domestic hospitals that were achieved in recent years. See "Business--
Competition."
In September 1993, the Company and Hillhaven substantially completed a series
of transactions that resulted in: (i) the Company selling to Hillhaven all
remaining leased long-term care facilities, and no longer being a lessor to
Hillhaven, but remaining a significant holder of Hillhaven common and preferred
stock; (ii) all indebtedness owed to the Company from Hillhaven being paid in
full; and (iii) reducing Hillhaven obligations guaranteed by the Company. After
reflecting these transactions, including the sale of long-term care facilities
to Hillhaven, the Company's equity in Hillhaven's net income was $3.2 million
for the three months ended August 31, 1994, compared with $1.3 million for the
three months ended August 31, 1993. The significant increase in equity income
in unconsolidated subsidiaries is due to Hillhaven's improved overall earnings
and the Company's increasing its investment in Hillhaven in the second quarter
of fiscal 1994, from approximately 14% to approximately 33%.
40
<PAGE>
The patient volumes and adjusted net operating revenues of the Company's
domestic general hospitals are subject to seasonal variations caused by a
number of factors, including but not necessarily limited to, seasonal cycles of
illness, climate and weather conditions, vacation patterns of both hospital
patients and admitting physicians and other factors relating to the timing of
elective hospital procedures. Generally, the patient volumes and adjusted net
operating revenues experienced by the Company's domestic general hospitals are
lowest in the first fiscal quarter ended August 31, and increase through the
fourth fiscal quarter ended May 31.
In addition to the specific items mentioned above that continue to have an
impact on the Company's results of operations, there are a number of other
factors affecting NME's domestic business. Because of intense national, state
and private industry efforts to reform the healthcare delivery and payment
systems in this country and other countries in which NME operates, the
healthcare industry as a whole faces increased uncertainty. The Company is
continuing to monitor these reform efforts and analyze their potential impacts
in order to formulate its business strategies for the future.
Fiscal Years Ended May 31, 1992, 1993 and 1994
The most significant transactions affecting the results of continuing
operations were the sale of most of the Company's rehabilitation hospitals and
related outpatient clinics in 1994 (see Note 13 of Notes to the Consolidated
Financial Statements of NME) and other unusual pretax items as shown below.
TABLE I UNUSUAL ITEMS--CONTINUING OPERATIONS:
<TABLE>
<CAPTION>
YEARS ENDED
MAY 31,
----------------
1992 1993 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Gains on sales of
facilities and long-term
investments(1).............$ 31 $ 93 $ 88
Gain on sale of
subsidiary's stock(2)...... -- 29 --
Restructuring charges (3)... (18) (52) (77)
---- ---- ----
Net unusual pretax items
(after-tax $0.04 fully
diluted per share in
1994, $0.30 in 1993 and
$0.04 in 1992).......... $ 13 $ 70 $ 11
==== ==== ====
</TABLE>
- --------
(1) See Note 13 of Notes to the Consolidated Financial Statements of NME.
(2) See Note 15 of Notes to the Consolidated Financial Statements of NME.
(3) See Note 16 of Notes to the Consolidated Financial Statements of NME.
In November 1993 the Company decided to discontinue its psychiatric hospital
business and adopted a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities within one year. In fiscal 1994, the
Company had a loss from the psychiatric operations of $701 million net of
income tax benefits of $412 million. The loss includes the costs of settling
federal and state investigations of the psychiatric business, provisions for
losses during the phase-out period, including the costs of settling unusual
psychiatric litigation, and the write-down of assets to net realizable value.
Losses from discontinued operations in fiscal 1993 and fiscal 1992 were $104
million and $85 million, net of income tax benefits, respectively. Results for
fiscal 1993 and fiscal 1992 have been restated to reflect the operating results
for the discontinued business separately from continuing operations.
Income from continuing operations before income taxes and the cumulative
effect of a change in accounting was $360 million in fiscal 1994, compared with
$419 million and $359 million in fiscal 1993 and fiscal 1992, respectively.
Excluding the unusual items as shown in Table I, income from continuing
operations before income taxes and the cumulative effect of a change in
accounting would have been $349 million in both fiscal 1994 and fiscal 1993 and
$346 million in fiscal 1992.
41
<PAGE>
Net operating revenues and operating profits from continuing operations
before interest are shown in Table II. The revenues and expenses of the sold
rehabilitation hospitals and related outpatient clinics are included in the
Company's results of operations through December 1993. Net operating revenues
of the sold facilities were $266 million in 1994 and $470 million in fiscal
1993. Pretax income of the sold facilities, before general corporate overhead
costs, was $22 million in fiscal 1994 and $55 million in fiscal 1993.
TABLE II OPERATING REVENUES AND PROFITS:
<TABLE>
<CAPTION>
INCREASE
(DECREASE)
YEARS ENDED MAY 31, 1993 TO 1994
-------------------- ---------------
1992 1993 1994 AMOUNT PERCENT
------ ------ ------ ------ -------
(IN MILLIONS)
<S> <C> <C> <C> <C> <C>
Net Operating Revenues:
Hospitals............................ $2,757 $2,979 $2,807 $(172) (6)%
Other Businesses..................... 184 212 160 (52) (25)%
------ ------ ------ ----- ---
Total................................ $2,941 $3,191 $2,967 $(224) (7)%
====== ====== ====== ===== ===
Operating Profits Before Interest and
Net Unusual Items (Table I):
Hospitals............................ $ 369 $ 359 $ 358 $(1) --
Other Businesses..................... 44 54 42 (12) (22)%
------ ------ ------ ----- ---
Total................................ $ 413 $ 413 $ 400 $(13) (3)%
====== ====== ====== ===== ===
</TABLE>
The hospital line of business includes primarily the operations of the
Company's domestic and international general hospitals, its rehabilitation
hospitals and the management services business. Net operating revenues
decreased in fiscal 1994 due to the sale of the rehabilitation facilities.
Operating profits were virtually unchanged from the prior year. The hospitals'
operating profit margin was 12.8% in fiscal 1994, compared with 12.1% in fiscal
1993 and 13.4% in fiscal 1992. The operating profit margin increase from fiscal
1993 to fiscal 1994 was primarily due to more effective cost-control programs
and the sale of the rehabilitation hospitals, which, as a whole, had lower
margins than the general hospitals.
Selected statistics for domestic general hospital operations are shown below:
TABLE III SELECTED OPERATING STATISTICS FOR DOMESTIC GENERAL HOSPITALS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
----------------------------------
INCREASE (DECREASE)
1992 1993 1994 1993 TO 1994
---------- ---------- ---------- -------------------
<S> <C> <C> <C> <C>
General Hospitals:
Facilities owned or
operated............. 35 35 35 --
Year-end licensed
beds................. 6,559 6,818 6,873 0.8%
Average licensed beds
in period............ 6,563 6,811 6,760 (0.7)%
Average occupancy..... 50.5% 47.8% 46.8% (1.0)%*
Patient days.......... 1,211,187 1,187,181 1,154,030 (2.8)%
Net inpatient revenues
(in millions)........ $ 1,445 $ 1,529 $ 1,568 2.6%
Net inpatient revenue
per patient day...... $ 1,193 $ 1,288 $ 1,359 5.5%
Admissions............ 208,307 210,669 207,868 (1.3)%
Average length of stay
(days)............... 5.8 5.6 5.6 --
Net outpatient reve-
nues (in millions)... $ 465 $ 535 $ 557 4.1%
% of net patient reve-
nues from Medicare
and Medicaid......... 38.5% 41.4% 44.4% 3.0%*
</TABLE>
- ---------------------
* These percentage changes are the difference between the percentages shown
for the two periods.
42
<PAGE>
DOMESTIC GENERAL HOSPITALS
Domestic general hospital net patient revenues were $2.1 billion in fiscal
1994 and fiscal 1993 and $1.9 billion in fiscal 1992. There continue to be
increases in inpatient acuity and intensity of services and higher inpatient
revenue per patient day as less intensive services shift from an inpatient to
an outpatient basis or to alternative healthcare delivery services because of
technology improvements and as cost controls by payors become greater.
Allowances and discounts are expected to continue to rise because of increasing
cost controls by government and group health payors and because the percentage
of business from managed care programs (and related discounts) continues to
grow.
The Medicare program accounted for approximately 36% of the net patient
revenues of the domestic general hospitals in 1994 and 34% and 32% in 1993 and
1992, respectively. Historically, rates paid under the Medicare's prospective
payment system have increased, but such increases have been less than cost
increases.
PSYCHIATRIC FACILITIES
Psychiatric hospitals' statistics and commentary have not been included
herein because of the Company's decision on November 30, 1993 to discontinue
its psychiatric facilities business by disposing of its psychiatric and
substance abuse recovery facilities. The Company has sold most of those
facilities, including 40 sold to Charter Medical Corporation in June, October
and November, 1994. The Company has reached agreements to sell or is
negotiating with various other parties for the sale of 12 of its remaining 18
psychiatric facilities and is holding the other six facilities, two of which
have been closed, pending further disposition. See Note 2 of Notes to the
Consolidated Financial Statements of NME. Even though the Company will continue
to operate its psychiatric facilities business until the completion of the
divestiture program, the results of operations are charged against the reserve
for discontinued operations in the Company's financial statements.
The action to discontinue its psychiatric facilities business and the sale of
off-campus rehabilitation hospitals described above comprise significant
elements of the Company's previously announced decision to focus on its core
general hospital business.
OTHER BUSINESSES
During fiscal 1994 other businesses included the operating results of the
Company's dialysis centers, seven domestic long-term care facilities, the
Company's equity interest in the net income of Hillhaven, loan and lease
guarantee fees from Hillhaven, leasing of long-term care facilities and
retirement centers to Hillhaven, the Company's equity interest in the net
income of Westminster, and other smaller businesses.
Most of the declines in net operating revenues of other businesses for fiscal
1994 compared with fiscal 1993 are due to a reduction in the Company's
ownership of Westminster from approximately 90% to approximately 42% and the
restructuring of its relationship with Hillhaven described above. Operating
profits have been affected for the same reasons.
After reflecting these transactions, including the sale of long-term care
facilities to Hillhaven, the Company's lease income for fiscal 1994 was $3.0
million, compared with $20.0 million in fiscal 1993. The Company's equity in
Hillhaven's net income was $15.0 million in fiscal 1994, compared with $8.0
million in fiscal 1993. The significant increase in equity earnings is due to
Hillhaven's improved overall earnings and the Company's increasing its
investment in Hillhaven in fiscal 1994. See Note 14 of Notes to the
Consolidated Financial Statements of NME.
In August 1994, the Company completed the sale of approximately 75% of the
outstanding common stock of TRC. Since that time, the Company's share of the
operating results of the subsidiary has been recognized using the equity method
of accounting and is expected to be minimal in 1995. Net operating revenues of
TRC were $80.5 million in 1994, and net income was $5.7 million. See Note 15 of
Notes to the Consolidated Financial Statements of NME.
43
<PAGE>
OTHER OPERATING RESULTS
Depreciation and amortization expense as a percentage of net operating
revenues was 5.4% in fiscal 1994, 5.0% in fiscal 1993 and 4.8% in fiscal 1992.
Interest expense was 2.4% in fiscal 1994 and fiscal 1993 and 3.0% in fiscal
1992.
Investment earnings were $28.0 million in fiscal 1994, $21.0 million in
fiscal 1993 and $29.0 million in fiscal 1992, and were derived primarily from
notes receivable and investments in short-term marketable securities. Effective
tax rates on income from continuing operations before extraordinary charges
were 40.0% in fiscal 1994, 37.0% in fiscal 1993 and 39.3% in fiscal 1992. The
fiscal 1993 effective rate on pretax income from continuing operations
excluding the gain on the sale of Westminster's common stock would have been
39.7%. See Note 15 to the Company's Consolidated Financial Statements.
Equity in earnings of unconsolidated affiliates increased from $6.7 million
in fiscal 1992 to $12.5 million in 1993 and $23.8 million in 1994 primarily due
to (i) improved earnings at Hillhaven during 1993 and 1994, (ii) an increase in
the Company's ownership of Hillhaven from approximately 14% to approximately
33% during fiscal 1994, and (iii) the March 1993 public offering of Westminster
common stock. As a result of this latter transaction, the Company began
accounting for its investment in Westminster on the equity method instead of
consolidating the results of operations of Westminster.
Minority interest in income of consolidated subsidiaries represents outside
shareholders' interests in consolidated, but not wholly owned, subsidiaries of
the Company and consists primarily of the approximately 48% minority
shareholder interest in AME. Other components historically include minority
interests in certain subsidiaries of the predecessor of TRC, RHSC Hospitals,
Inc. and contain hospital division joint ventures. Minority interest expense
fell to $8.2 million in fiscal 1994 from $10.0 million in fiscal 1993,
primarily as a result of the divestiture of certain rehabilitation hospitals
and the restructuring or elimination of certain joint venture arrangements
controlled by the Company. The $3.2 million increase during fiscal 1993
resulted from acquisitions by NME and improved earnings at AME.
The financial statements reflect operating and depreciation expenses based on
historical cost. Except for depreciation expense, the expenses are recorded in
the amounts approximating current purchasing power. Depreciation expense would
be greater if based on current costs of the Company's property, plant and
equipment rather than historical costs. The Company mitigates the impact of
inflation on its operating costs and provision for depreciation by price
increases and by continuing renovation and replacement of the physical plant
and equipment. As a result, the Company believes that inflation does not have a
significant impact on its earnings, except when Medicare and Medicaid rate
increases are inadequate in relation to rising costs and when other payors also
implement programs to control their health costs as discussed above.
BUSINESS OUTLOOK
Because of intense national, state and private industry efforts to reform the
health care delivery and payment systems in this country, the health care
industry as a whole faces increased uncertainty. While the Company is unable to
predict which, if any, proposals for health care reform will be adopted, it
continues to monitor their progress and analyze their potential impacts in
order to formulate its future business strategies. See "Business--Healthcare
Reforms."
Another factor impacting operating results is the slow recovery of the
California economy from the recent recession. At May 31, 1994, 43% of the
Company's domestic general hospital beds were in California.
The challenge facing the Company and the healthcare industry is to continue
to provide quality patient care in an environment of rising costs, strong
competition for patients, and a general reduction of reimbursement by both
private and government payors. See "Healthcare Industry Overview."
44
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION OF AMH
The following tables set forth selected historical financial data and other
operating information for AMI, the predecessor company to AMH, for the two
months ended October 31, 1989 and for AMH for the ten months ended August 31,
1990, for each of the fiscal years in the four-year period ended August 31,
1994 and for the three months ended August 31, 1993 and 1994. The selected
information for the two months ended October 31, 1989 has been derived from the
Consolidated Financial Statements of AMI which have been audited by Price
Waterhouse LLP, independent accountants for AMI, and from the underlying
accounting records of AMI. The selected information for the ten months ended
August 31, 1990 and for the fiscal years in the four-year period ended August
31, 1994 has been derived from the Consolidated Financial Statements of AMH
which have been audited by Price Waterhouse LLP, independent accountants for
AMH, and from the underlying accounting records of AMH. The selected financial
information for the three-month periods has been derived from unaudited
condensed financial statements of AMH and reflects all adjustments (consisting
of normal recurring adjustments) that, in the opinion of the management of AMH,
are necessary for a fair presentation of such information.
All information contained in the following tables should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations of AMH" and with the Consolidated Financial
Statements and related notes of AMH included herein. Certain amounts from the
consolidated statements of operations of AMI and AMH have been reclassified to
conform with the presentation below.
<TABLE>
<CAPTION>
THREE
AMI FOR THE MONTHS
TWO MONTHS TEN MONTHS ENDED
ENDED ENDED YEARS ENDED AUGUST 31, AUGUST 31,
OCTOBER 31, AUGUST 31, -------------------------------------- --------------
1989 (1) 1990 (1) 1991 (2) 1992 (3) 1993 1994 1993 1994
----------- ---------- -------- -------- -------- -------- ------ ------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Net operating revenues. $ 480.9 $2,052.4 $2,545.9 $2,237.9 $2,238.5 $2,381.7 $565.0 $638.2
Operating expenses:
Salaries and benefits.. 176.9 715.9 916.4 838.7 815.3 869.0 200.1 234.0
Supplies............... 61.0 254.4 318.7 316.5 315.9 340.0 76.2 92.1
Provision for doubtful
accounts.............. 28.7 119.8 162.8 163.8 148.1 165.5 37.1 47.4
Other operating ex-
penses................ 132.0 570.1 687.8 496.3 505.7 524.3 139.3 137.8
Depreciation........... 27.9 98.8 126.3 109.6 110.3 118.1 28.7 30.9
Amortization........... 4.9 28.6 39.1 39.4 37.1 38.6 9.3 10.0
Merger costs........... 128.2 -- -- -- -- -- -- --
------- -------- -------- -------- -------- -------- ------ ------
Operating income....... (78.7) 264.8 294.8 273.6 306.1 326.2 74.3 86.0
Interest expense....... (28.3) (298.1) (330.4) (214.5) (180.5) (157.2) (43.5) (40.0)
Investment earnings.... 3.9 27.6 20.2 9.9 13.9 2.7 9.7 0.8
Minority interest
expense............... (2.5) (0.8) (2.3) (2.1) (6.1) (5.9) (2.0) (0.9)
Gain on disposals of
facilities and long-
term investments...... -- -- 18.6 119.8 -- 69.3 -- --
------- -------- -------- -------- -------- -------- ------ ------
Income/(loss) before
income taxes.......... (105.6) (6.5) 0.9 186.7 133.4 235.1 38.5 45.9
Taxes on income........ 37.0 (7.2) (19.9) (77.1) (66.5) (96.1) (22.1) (19.0)
------- -------- -------- -------- -------- -------- ------ ------
Income (loss) before
extraordinary losses.. $ (68.6) $ (13.7) $ (19.0) $ 109.6 $ 66.9 $ 139.0 $ 16.4 $ 26.9
======= ======== ======== ======== ======== ======== ====== ======
Earnings (loss) per
common share
before extraordinary
losses................ $ (0.98) $ (0.27) $ (0.38) $ 1.43 $ 0.87 $ 1.80 $ 0.21 $ 0.35
Cash dividends per
common share.......... -- -- -- -- -- -- -- --
Ratio of earnings to
fixed
charges (4)........... -- -- -- 1.8x 1.8x 2.4x 2.1x 2.0x
</TABLE>
45
<PAGE>
<TABLE>
<CAPTION>
AS OF AUGUST 31,
------------------------------------------------
1990 1991 1992 1993 1994
-------- -------- -------- -------- --------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents... $ 69.7 $ 30.9 $ 70.5 $ 44.3 $ 31.9
Working capital (deficit)... (313.4) (263.4) (222.2) (140.0) (187.7)
Total assets................ 3,595.7 3,153.5 2,963.3 2,868.4 2,976.5
Long-term debt, excluding
current portion............ 2,246.4 1,613.3 1,343.7 1,294.2 1,141.7
Shareholders' equity........ 332.0 552.2 663.7 697.8 848.7
</TABLE>
- ---------------------
(1) AMH acquired AMI on October 26, 1989. The period from September 1, 1989
through October 31, 1989 includes the historical results of AMI and the
periods after October 31, 1989 reflect the consolidated results of AMH and
AMI.
(2) Results of operations through fiscal 1991 include results from nine
domestic general hospitals, three psychiatric hospitals, and certain other
assets sold during that fiscal year.
(3) Results of operations through fiscal 1992 include results from four
domestic general hospitals sold during that fiscal year.
(4) The ratio of earnings to fixed charges is calculated by dividing income
before income taxes plus fixed charges by fixed charges. Fixed charges
consist of interest expense, including amortization of financing costs,
and that portion of rental expense deemed to be representative of the
interest component of rental expense. For the fiscal year ended August 31,
1991, the ten months ended August 31, 1990 and the two months ended
October 31, 1989, earnings were inadequate to cover fixed charges by
approximately$3.7 million, $20.6 million and $108.5 million, respectively.
(5) EBITDA represents operating income before depreciation, amortization and
merger costs. EBITDA should not be construed as a substitute for operating
income or a better indicator of liquidity than cash flows from operating
activities, which are determined in accordance with generally accepted
accounting principles.
46
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF AMH
To provide prospective purchasers of the Notes with certain additional
information about AMH, set forth below are selected portions of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations of AMH from AMH's Annual Report on Form 10-K for the fiscal year
ended August 31,1994.
YEARS ENDED AUGUST 31, 1992, 1993 AND 1994
The following table summarizes certain consolidated results of AMH.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
----------------------------------------
1994 1993 1992
------------ ------------ ------------
% OF NET % OF NET % OF NET
REVENUE REVENUE REVENUE
------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Net operating revenues............... $2,382 100.0% $2,238 100.0% $2,238 100.0%
------ ----- ------ ----- ------ -----
Operating expenses:
Salaries and benefits: 869 36.5 815 36.4 839 37.5
Provision for uncollectible ac-
counts............................. 166 6.9 148 6.6 164 7.3
Other operating expenses............ 524 22.0 506 22.6 496 22.2
Depreciation......................... 118 5.0 110 4.9 110 4.9
Amortization......................... 39 1.6 37 1.7 39 1.8
------ ----- ------ ----- ------ -----
Operating Income..................... $ 326 13.7% $ 306 13.7% $ 273 12.1%
====== ===== ====== ===== ====== =====
</TABLE>
The following table sets forth certain operating statistics of AMH's
hospitals for the three years ended August 31, 1994.
<TABLE>
<CAPTION>
YEARS ENDED AUGUST 31,
-------------------------------
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
HISTORICAL OPERATING DATA (1):
Number of hospitals (at year end).............. 37 36 35
Admissions..................................... 242,219 229,596 233,090
Licensed beds (at year end).................... 8,831 8,003 7,822
Equivalent admissions (2)...................... 333,071 309,972 308,722
Patient days................................... 1,435,487 1,372,232 1,456,542
Equivalent patient days (2).................... 1,943,842 1,830,169 1,906,304
Net inpatient revenues per patient day......... $ 1,146 $ 1,135 $ 1,098
Utilization of licensed beds................... 46.6% 46.8% 47.9%
Outpatient visits.............................. 2,255,498 1,660,015 1,618,068
Outpatient surgeries........................... 123,867 120,854 120,008
</TABLE>
- ---------------------
(1) Represents statistics for hospitals only and has not been adjusted to
include statistics for related healthcare entities.
(2) Represents actual admissions/patient days as adjusted to include outpatient
and emergency room services by adding to actual admissions/patient days an
amount derived by dividing outpatient and emergency room revenue by
inpatient revenue per admission/patient days.
Net revenues for the year ended August 31, 1994 increased 6.4% to $2,382
million from $2,238 million for the year ended August 31, 1993 as a result of
new patient care services, higher utilization of outpatient and ancillary
services and higher third party reimbursement rates. Net revenues for the year
ended August 31, 1992 of $2,238 million included a benefit of approximately $10
million relating to a Medicare settlement and $69 million relating to
facilities sold during fiscal 1992.
47
<PAGE>
A shift in volume from inpatient services to outpatient services over the
past three years, the development of home health services and the addition of
ancillary facilities at certain of AMH's hospitals have contributed to net
revenues from outpatient services accounting for a larger percent of total net
patient revenues in recent years. Net revenues from outpatient services
accounted for 29.6%, 29.4% and 27.6% of total net patient revenues for the
years ended August 31, 1994, 1993 and 1992, respectively. For the year ended
August 31, 1994, AMH experienced a greater increase in admissions (5.5% as
compared to the year ended August 31, 1993) than seen in prior years, due
primarily to the addition of Saint Francis Hospital. Admissions, which were
impacted by the addition of Encino Hospital in fiscal 1993 and the disposition
of hospitals during fiscal 1992, decreased 1.5% for the year ended August 31,
1993 when compared to the year ended August 31, 1992. Net revenues from
inpatient services accounted for 70.4%, 70.6% and 72.4% of total net patient
revenues for the years ended August 31, 1994, 1993, and 1992, respectively.
Net revenues derived from Medicare/Medicaid programs for the year ended
August 31, 1994, increased 19.1% as compared to the year ended August 31, 1993
as a greater portion of the population continues to qualify for such coverage.
Saint Francis Hospital, which derives a large portion of its business from
Medicare patients, contributed to the increase in net revenues derived from
Medicare/Medicaid programs. An increasing number of various third-party payors,
including states, insurance companies and employers' networks, are negotiating
contracted amounts paid for services rendered, accounting for the increase in
contracted business and a corresponding decline in non-contracted business.
Expense management continues to be a significant factor in maintaining the
operating margin improvement experienced by AMH (13.7% for the years ended
August 31, 1994 and 1993 and 12.1% for the year ended August 31, 1992). The
sale of facilities during fiscal 1992, which operated at a slightly lower
margin, also contributed to the increase in AMH's operating margin for the year
ended August 31, 1993. AMH's adherence to the cost-control program implemented
by management in fiscal 1992 has continued to stabilize operating costs and
expenses as a percent of net revenues. Labor management (i.e. hospital staffing
monitored with volume) and the decline in benefit costs as a result of changes
implemented in the employee benefits program has decreased labor costs for the
years ended August 31, 1994 and 1993 as a percent of net revenues compared to
the year ended August 31, 1992.
For the year ended August 31, 1994 operating expenses (including depreciation
and amortization) increased 6.4% over the year ended August 31, 1993.
Approximately one-third of the overall increase is due to operating expenses
associated with Saint Francis Hospital. As a percent of net revenues, operating
expenses for the year ended August 31, 1994 remained flat as compared to the
year ended August 31, 1993. The decrease in total operating costs and expenses
for the year ended August 31, 1993 as compared to the year ended August 31,
1992 was primarily due to the following adjustments recognized during fiscal
1992: (i) the disposition of hospitals during fiscal 1992, (ii) an $11.0
million adjustment to salaries and benefits to increase reserves associated
with workers' compensation liabilities as a result of adverse development of
claims arising from prior periods, (iii) the impact of an adverse adjustment to
the provision for uncollectible accounts for the refinement in procedures used
to estimate bad debts and (iv) a foreign currency translation loss of $7.8
million. Foreign currency translation was immaterial for the years ended August
31, 1994 and 1993.
The gains on the sales of securities for the years ended August 31, 1994 and
1992 are the result of the sale of various securities of EPIC Holdings, Inc.
and EPIC Healthcare Group, Inc.
Interest expense, net decreased to $154 million for the year ended August 31,
1994 from $166 million for the year ended August 31, 1993 and $204 million for
the year ended August 31, 1992 as a result of debt refinancings in fiscal 1994
and 1993 and the use of cash from operations and the proceeds from the sale of
facilities in fiscal 1992 to reduce outstanding indebtedness. The year ended
August 31, 1993 includes a refund of $8.6 million for excess interest paid to
the IRS in prior periods.
48
<PAGE>
The tax provision for each of the years ended August 31, 1994, 1993 and 1992
is greater than that which would occur using AMH's marginal tax rate against
its income before taxes, minority equity interest and extraordinary loss, due
in large part to the amortization of cost in excess of net assets acquired not
being deductible for tax provision purposes. In August 1993, the Revenue
Reconciliation Act of 1993 was enacted increasing the corporate income tax rate
to 35% from 34% effective January 1, 1993.
The extraordinary loss on early extinguishment of debt is a result of the
redemption or repurchase of debt prior to its stated maturity.
49
<PAGE>
HEALTHCARE INDUSTRY OVERVIEW
Healthcare is one of the largest industries in the United States,
representing total expenditures of approximately $940 billion, or 13.9% of
gross domestic product ("GDP"), in 1993 according to the Federal Health Care
Financing Administration ("HCFA"). Due to, among other factors, the aging of
the population and the increased availability and use of high-technology
treatments and tests, increases in healthcare expenditures, including hospital
expenditures, historically have outpaced inflation. According to HCFA,
healthcare expenditures increased by approximately 12% in 1993 compared to
approximately $839 million in 1992. According to the United States
Congressional Budget Office, there were approximately 5,633 acute care general
hospitals in the United States in 1991, of which approximately , or %,
were investor-owned hospitals. The remaining hospitals were operated by tax-
exempt institutions or were government-owned.
In response to escalating healthcare costs, government and private purchasers
of healthcare services have undertaken substantial revisions in their payment
methodologies and have increased significantly the degree to which they monitor
the utilization of services. For instance, instead of reimbursing healthcare
providers for retrospectively determined actual costs, Medicare now reimburses
for inpatient services under a prospective payment system that pays a fixed-
rate based on each Medicare patient's assigned diagnostic related group of
services ("DRGs"). See "Business--Medicare, Medicaid and Other Revenues." Under
that system, hospitals bear the financial risk of providing healthcare services
since they receive a specific, fixed reimbursement for each treatment,
regardless of the actual costs of providing the care. That payment system,
together with closer monitoring of expenditures by managed care payors, private
health insurers and employers, has resulted in increased contractual allowances
and discounts to hospitals' standard charges for services and a shift from
inpatient to outpatient care. In addition, payors increasingly are utilizing
HMOs and PPOs as cost-effective alternatives to traditional fee-for-service
health insurance plans. Under arrangements with HMOs and PPOs, hospitals
contract to provide services on a discounted fixed-fee basis or a capitated
basis, under which the hospitals receive specific fixed periodic payments based
on the number of members of the HMO or PPO, regardless of the actual costs
incurred and services provided.
These changes in payment methodologies have created many changes in the
provision of healthcare. A significant shift from inpatient to outpatient care
has resulted in significant unused hospital capacity and increases in the
utilization of outpatient services and outpatient gross revenues. See
"Business--Domestic Healthcare Operations." As a result, in part, of the
changes in the industry there has been significant consolidation in the
hospital industry over the past decade and many hospitals have closed.
NME's management believes that continuing cost-containment pressures will
lead to a continued increase in managed care and further consolidation in the
hospital industry. As managed care penetration increases, the Company expects
that a greater percentage of its services will be provided under managed care
contracts, including capitated payment arrangements with payors. Accordingly,
NME will continue to develop integrated healthcare delivery systems that
deliver quality, cost-effective care to better compete for managed care
contracts .
50
<PAGE>
BUSINESS
GENERAL
NME is a leading investor-owned healthcare company that operates general
hospitals and related healthcare facilities serving primarily urban and
regional areas in the United States and abroad and that holds investments in
other healthcare companies. At November 30, 1994, NME operated 33 domestic
general hospitals, with a total of 6,622 licensed beds, located in California,
Florida, Louisiana, Missouri, Tennessee and Texas. NME operates six
rehabilitation hospitals, seven long-term care facilities and four psychiatric
facilities, located on the same campus as, or nearby, the Company's general
hospitals. In addition, NME operates ancillary facilities, including outpatient
surgery centers, home healthcare programs and ambulatory, occupational and
rural healthcare clinics. Through its international hospital division, NME also
operated 13 general hospitals in Australia, Singapore, Spain and Malaysia, with
a total of 1,845 licensed beds at November 30, 1994. For the 12 months ended
August 31, 1994, NME had adjusted net operating revenues and adjusted EBITDA of
$2.6 billion and $508.3 million, respectively. See "Supplemental Discussion of
Adjusted Results of Operations of NME."
NME's investments in other healthcare companies include: (i) an approximately
31% interest in Hillhaven, a publicly traded company listed on the NYSE that
operated 287 long-term care facilities, 57 pharmacies and 19 retirement housing
communities in the United States at November 30, 1994; (ii) an approximately
42% interest in Westminster, a publicly traded company listed on the London
Stock Exchange that operated 65 long-term care facilities in the United Kingdom
at November 30, 1994; and (iii) an approximately 21% interest in TRC, which
operated 41 freestanding and mobile kidney dialysis units in eight states at
November 30, 1994.
As a result of the Merger, AMH will become a wholly owned subsidiary of the
Company. AMH is a leading investor-owned healthcare company that operates
general hospitals and related healthcare facilities serving primarily urban and
regional areas in 13 states. At November 30, 1994, AMH operated 37 general
hospitals with a total of 8,831 licensed beds and one psychiatric hospital with
171 licensed beds. The AMH hospitals are located in Texas, Florida, California,
Louisiana, Missouri, Tennessee, Arkansas, North Carolina, South Carolina,
Georgia, Alabama, Indiana and Nebraska. AMH also operates ancillary facilities
located on the same campus as, or nearby, many of its hospitals, including
outpatient surgery centers, rehabilitation units, long-term care facilities,
home healthcare programs and ambulatory, occupational and rural healthcare
clinics. For the fiscal year ended August 31, 1994, AMH had net operating
revenues and EBITDA of $2.4 billion and $482.9 million, respectively. See
"Selected Historical Financial Information of AMH."
Following the Merger, the Company will operate 70 domestic general hospitals,
with a total of 15,453 licensed beds, serving primarily urban and regional
areas in 13 states. On a pro forma combined basis, the Company's net operating
revenues, EBITDA and income from continuing operations for the 12 months ended
August 31, 1994, would have been approximately $5.0 billion, $991.2 million,
and $227.5 million, respectively, after giving effect to the Merger, the
issuance of the Notes, the Refinancing and certain other adjustments related to
asset dispositions completed by NME subsequent to the beginning of such period.
See "Pro Forma Financial Information."
NME believes that the Merger represents an opportunity to acquire a
substantial portfolio of hospitals providing quality, cost-effective care.
AMH's general hospitals operate primarily in urban and regional areas and are
comparable in size to those operated by the Company, with an average size at
November 30, 1994, of 239 licensed beds as compared to 201 licensed beds for
NME. In addition, a number of these hospitals are located in geographic areas
where NME currently operates hospitals, including southern California,
southeastern Florida, the greater New Orleans area and the central coast of
California. The Merger will provide an opportunity for the Company to
coordinate the services it provides in these geographic areas with those
services provided by AMH, which the Company believes will accelerate its
development of integrated healthcare delivery systems in these areas. The
Merger also expands the Company's operations into several new geographic areas,
including Arkansas, North Carolina, South Carolina, Georgia, Alabama, Indiana
and Nebraska.
51
<PAGE>
BUSINESS STRATEGY
The Company's strategic objective is to provide quality, cost-effective
healthcare services in selected geographic areas. NME believes that competition
among healthcare providers occurs primarily at the local level. Accordingly,
the Company tailors its local strategies to address the specific competitive
characteristics of each geographic area in which it operates, including the
number of facilities operated by NME, the nature and structure of physician
practices and physician groups, the extent of managed care penetration, the
number and size of competitors and the demographic characteristics of the area.
Key elements of the Company's strategy are:
. to develop integrated healthcare delivery systems by coordinating the
operations and services of the Company's facilities with other
hospitals and ancillary care providers and through alliances with
physicians and physician groups;
. to reduce costs through enhanced operating efficiencies while
improving the quality of care provided;
. to develop and maintain its strong relationships with physicians and
generally to foster a physician-friendly culture;
. to enter into discounted fee for service arrangements, capitated
contracts and other managed care contracts with third party payors;
and
. to acquire hospitals, groups of hospitals, other healthcare
businesses, ancillary healthcare providers, physician practices and
physician practice assets where appropriate to accelerate the
development of quality, cost-effective integrated healthcare delivery
systems.
Develop Integrated Healthcare Delivery Systems. In each geographic area it
serves, the Company has established or is developing an integrated healthcare
delivery system to offer a full range of quality patient care on a cost-
effective basis by coordinating the services offered by its hospitals and
related facilities with the services offered by other providers. The Company
believes that general hospitals will serve as the hubs for the development of
integrated healthcare delivery systems due to their highly developed
infrastructure, extensive service base, sophisticated equipment and skilled
personnel. The Company's strategy is implemented in a number of ways depending
upon the characteristics of the local area. In areas where there is significant
managed care penetration or in which the Company anticipates such penetration,
the Company encourages physicians practicing at its hospitals to form
independent physician associations ("IPAs"). As part of its strategy, the
Company intends to form physician hospital organizations ("PHOs") that bring
together its hospitals and IPAs, physicians or physician groups under a variety
of arrangements to negotiate for managed care contracts, including capitated
contracts. NME has formed a PHO for the New Orleans area and is in the process
of forming PHOs in several other geographic areas. The Company also has formed
management service organizations ("MSOs"), which provide management and
administrative services to physicians, physician group practices and IPAs, and
which enter into managed care contracts on behalf of these groups and, in
certain circumstances, PHOs. Where appropriate, the Company also purchases
physician and physician group practices and employs such physicians or
purchases the assets of those practices and manages such practices through its
MSOs.
The Company uses various combinations of one or all of the foregoing methods
in each geographic area to create a community of interest between its hospitals
and the physicians who practice there, to which it adds additional resources,
where necessary, to create an integrated healthcare delivery system capable of
providing a full range of services to payors. One example of how this
integrated delivery strategy is being implemented is the Company's Redding
Medical Center, a tertiary care hospital located in a primarily rural area in
northern California, around which hospital the Company is developing such a
system, with the hospital itself acting as the hub. Affiliations with physician
practices, non-NME primary care hospitals, an outpatient surgery center
developed in partnership with local physicians and affiliated ancillary care
providers in the surrounding area enable this system to provide a full range of
healthcare services. In addition, the Company recently has introduced its HMO
product to this geographic area. The Company believes the
52
<PAGE>
development of such integrated healthcare delivery systems will augment cash
flow by enhancing the Company's ability to contract with payors in those areas
that have experienced or will experience a high degree of managed care
penetration.
The Company believes that the Merger will enhance its ability to implement
its strategy. NME will be able to expand existing integrated healthcare
delivery systems in southeastern Florida and the greater New Orleans area, and
to develop new systems in Southern California and the central coast of
California, in each of which areas NME's and AMH's hospitals complement each
other. For example, in the greater Los Angeles area the Company expects to form
an integrated system comprised of NME's USC University Hospital, Garfield
Medical Center, Los Alamitos Medical Center, Century City Hospital, Placentia
Linda Community Hospital and Lakewood Regional Medical Center and AMH's Irvine
Medical Center, Tarzana/Encino Regional Medical Centers, Medical Center of
North Hollywood, South Bay Hospital, San Dimas Community Hospital and Garden
Grove Hospital and Medical Center, which system will provide a full range of
services over a large geographic area. In addition, the Merger will extend the
Company's operations into several additional geographic areas, some of which do
not yet exhibit (and in some cases are not expected to exhibit in the near
term) the high degree of managed care penetration experienced in California and
in certain other parts of the country.
Reduce Costs Through Enhanced Operating Efficiency while Improving the
Quality of Care. The Company continues to position itself as a cost-effective
provider of quality healthcare services by enhancing operating efficiencies at
the hospital, regional and corporate levels. For example, the Company has
implemented programs at the hospital level to monitor and adjust staffing
levels in response to patient acuity and hospital census, and to improve
service and the quality of outcomes while reducing operating expenses through
the reengineering of the delivery of patient care in its hospitals. At several
of the Company's hospitals, job functions have been redefined and services have
been moved directly to the patient floors. Management believes that increasing
the amount of patient care delivered at the bedside will increase patient
satisfaction while reducing costs. This initiative also has enhanced the
ability of professionals to focus their attention on higher levels of patient
care. For example, at the Company's Delray Community Hospital, pharmacy and
respiratory therapy services are provided more efficiently by healthcare
professionals located on the patient floors rather than by less accessible
personnel from other parts of the hospital.
In order to reduce costs and achieve economies of scale at the regional
level, the Company has combined hospital business offices for facilities
located in close geographic proximity. Consolidating business offices allows
the Company's hospitals to reduce staffing levels while enhancing the
effectiveness of their billing and collection efforts. The Company has reduced
costs and achieved economies of scale at the hospital, regional and corporate
levels by consolidating the collection of accounts receivable through SOS and
negotiating purchase contracts that take advantage of its group purchasing
program. Management believes that certain cost savings, currently estimated to
be approximately $60.0 million annually beginning in fiscal 1996 (before any
severance or other costs of implementing certain efficiencies), may be realized
following the Merger primarily through the application of the foregoing
measures to the AMH hospitals.
Develop and Maintain Strong Relationships with Physicians. NME believes that
its success will depend in large part on maintaining strong relationships with
physicians, and has devoted substantial management effort and resources to
establishing and maintaining such relationships and to fostering a physician-
friendly culture at each of its hospitals to better serve the needs of
patients. The Company attracts physicians to its hospitals by equipping its
hospitals with sophisticated equipment, providing physicians with a large
degree of independence in conducting their hospital practice and sponsoring
training programs to educate physicians on advanced medical procedures. The
Company often is at the forefront in introducing new services, medical
equipment and medical technologies designed to improve patient care and assist
physicians. Over the last three fiscal years, the Company has invested
approximately $433.0 million in capital expenditures to add equipment and
expand and upgrade facilities at its 33 continuing domestic general hospitals.
These efforts serve the dual purposes of developing and maintaining strong
relationships with physicians and better serving the needs of patients.
53
<PAGE>
The Company looks to physicians to play an active role in the governance of
its hospitals. For example, each of the Company's hospitals has a governing
board, the only voting members of which are physicians who are active members
of the medical staff and local community members. The Company has no voting
representatives on any of its hospitals governing boards. These boards develop
short and long-term plans for the hospitals and review and approve, as
appropriate, actions of the medical staff, including staff appointments,
credentialing, peer review and quality assurance. The Company also maintains a
physician advisory board that provides advice to the Company with respect to
long-term strategy, emerging technologies, training programs and significant
hospital operational issues. This advisory board serves as another vehicle
through which physicians on the staffs of the Company's hospitals can
communicate their views to the Company.
Enter into Managed Care Contracts. The Company believes that its extensive
experience operating in California, which has a high degree of managed care
penetration, will enhance its ability to compete successfully in other
geographic areas that are experiencing an increase in managed care. Pressures
to control healthcare costs have resulted in a continuing increase in the
percentage of the United States population that is covered by managed
healthcare plans. To increase the cost-effectiveness of healthcare delivery,
managed care payors have introduced new utilization review systems, increased
the use of discounted and capitated fee arrangements and have attempted, where
appropriate, to direct patients to less intensive alternatives along the
continuum of patient care. Managed care payors typically require members or
provide financial incentives for members to utilize only healthcare providers
that have contracted with such payors to provide care on a discounted or
capitated basis. Accordingly, as managed care penetration increases, it is
important for providers to enter into such contracts in order to maintain and
increase their patient base. In determining with which providers to contract,
payors consider, among other factors, the quality of care provided, the range
of services, the geographic coverage and the cost-effectiveness of the care
provided. NME believes that the development and expansion of its integrated
healthcare delivery systems will enable it to better compete for managed care
contracts with payors, which, in turn, should allow it to expand its patient
volume and cash flow, notwithstanding the reduced rates at which services are
provided.
Pursue Strategic Acquisitions. The Company intends to pursue strategic
acquisitions of hospitals, other healthcare businesses, ancillary healthcare
providers, physician practices and physician practice assets where appropriate
to accelerate the development of quality, cost-effective integrated healthcare
delivery systems or to complement existing systems. Management believes that
significant opportunities will exist to make strategic acquisitions, including
acquisitions of physician groups or physician practice assets and tax-exempt
hospitals. On a pro forma basis, immediately following the Merger the Company
expects to have approximately $225.0 million available under the revolving
portion of the New Credit Facility to take advantage of strategic acquisition
opportunities. One example of a strategic acquisition is the Company's March
31, 1994 long-term lease of Doctors Hospital of Jefferson, a 138-bed hospital
in Metairie, Louisiana. This hospital's location on the east bank of the
Mississippi River complements the Company's other facilities in the greater New
Orleans area. The Company continually analyzes whether each of its hospitals
fits within its strategic plans and has and will continue to analyze ways in
which such assets may best be used to maximize shareholder value.
54
<PAGE>
DOMESTIC HEALTH CARE OPERATIONS
As a result of the Merger, the Company will operate 70 general hospitals
serving primarily urban and regional areas in 13 states, including southern
California, southeastern Florida and the greater New Orleans, Louisiana area
and the central coast of California. On a combined basis, NME's and AMH's
general hospitals had a total of 15,453 licensed beds at November 30, 1994.
With an average size of 201 and 239 licensed beds, respectively, the average
sizes of the domestic hospitals operated by NME and AMH are larger than those
of other investor-owned hospital management companies. In addition, the Company
and AMH operate ancillary healthcare facilities such as rehabilitation
hospitals, long-term care facilities and psychiatric facilities located on the
same campus as, or nearby, their general hospitals, and operated all or a
substantial part of 68 medical office buildings as of November 30, 1994. With
the exception of AMH's Keller Memorial Hospital and East Cooper Community
Hospital, which have not sought to be accredited, each of the Company's and
AMH's facilities that is eligible for accreditation is fully accredited by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), the
Commission on Accreditation of Rehabilitation Facilities (in the case of the
rehabilitation hospitals) or another appropriate accreditation agency, which
accreditation generally is required for participation in government payment
programs.
Each of NME's and AMH's general hospitals offers acute care services and
generally offers fully equipped operating and recovery rooms, radiology
services, intensive care and coronary care nursing units, pharmacies, clinical
laboratories, respiratory therapy services, physical therapy services and
outpatient facilities. A number of the hospitals also offer tertiary care
services such as open heart surgery, neonatal intensive care, neurosciences,
orthopaedics services and oncology services and two of the hospitals, USC
University Hospital and Sierra Medical Center, offer quartenary care in such
areas as heart, lung, liver and kidney transplants and gamma knife brain
surgery. During the last three fiscal years, NME and AMH have spent an
aggregate of approximately $433.0 million and $325.4 million, respectively, on
capital expenditures at their domestic hospitals to expand and upgrade the
facilities and to acquire medical equipment. The Company expects to continue to
make the capital expenditures necessary to maintain and improve the NME and AMH
facilities. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations of NME--Liquidity and Capital Resources." Management
believes that NME and AMH hospitals are well-positioned to compete effectively
in the rapidly evolving healthcare environment.
Technological developments permitting more procedures to be performed on an
outpatient basis, in conjunction with pressures to contain healthcare costs,
have led to a shift from inpatient care to ambulatory or outpatient care
whenever possible. NME aggressively has responded to this trend by enhancing
its hospitals' outpatient service capabilities, including (i) establishing
freestanding outpatient surgery centers at or near certain of its hospital
facilities, (ii) reconfiguring certain hospitals to more effectively accomodate
outpatient treatment, by, among other things, providing more convenient
registration procedures and dedicated entrances, and (iii) restructuring
existing surgical capacity to allow a greater number and range of procedures to
be performed on an outpatient basis. NME's facilities will continue to
emphasize those outpatient services that can be provided on a cost-effective
basis and which the Company believes will experience increased demand.
In addition, inpatient care has moved, in part, to increasing levels of sub-
acute care. NME has been proactive in the development of a variety of sub-acute
inpatient services to utilize a portion of its unused capacity, thereby
retaining a larger share of overall healthcare expenditures. By offering cost-
effective ancillary services in appropriate circumstances, NME is able to
provide a continuum of care where the demand for such services exists. For
example, in certain hospitals the Company has developed transitional care units
and pediatric, rehabilitation and long-term care sub-acute units. Such units
utilize less intensive staffing levels to provide the range of services sought
by payors, with a lower cost structure.
55
<PAGE>
GEOGRAPHIC AREA DISCUSSION
The following discussion summarizes the Company's strategy in three selected
geographic areas where the AMH hospitals being acquired pursuant to the Merger
will complement NME's existing hospitals.
Southern California. The southern California area is a highly competitive
environment characterized by a high degree of managed care penetration. Los
Angeles County and Orange County had a combined population of over 11 million
people as of 1990 according to the United States Bureau of the Census. As
managed care penetration continues to increase in southern California,
providers increasingly are forming integrated healthcare delivery systems to
contract with payors.
Based upon the characteristics of the southern California area, NME's
strategy is to develop an integrated healthcare delivery system comprised of
its network of hospitals, together with physicians and physician groups and
ancillary health care providers where appropriate in order to compete more
effectively for managed care contracts. Combining AMH's hospitals with those
operated by NME significantly enlarges the number and geographic coverage of
the Company's hospitals, extending their coverage from the San Fernando Valley
to Orange County. In the greater Los Angeles area, NME and AMH together
operate ten primary care hospitals, two tertiary care hospitals and one
tertiary/quartenary care hospital, USC University Hospital. The Company's
system will be one of the largest integrated systems serving the southern
California area and will offer payors both wide geographic coverage and access
to advanced tertiary and quartenary care. To facilitate the integration of
these hospitals into a single contracting entity, the Company intends to join
with physicians and IPAs at each of these hospitals to form a PHO through
which the physicians and the NME hospitals can jointly enter into managed care
contracts.
The table below sets forth on a pro forma combined basis, certain selected
historical operating statistics for those hospitals operated by NME and AMH in
the greater Los Angeles area.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,(1)
--------------------------
1992 1993 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Number of hospitals (at end of period)........... 12 13 13
Licensed beds (at end of period)................. 2,165 2,343 2,326
Net operating revenues........................... $652,029 $710,023 $766,377
Admissions....................................... 68,269 72,422 75,409
Equivalent admissions............................ 87,446 92,899 96,466
Patient days..................................... 363,249 375,034 397,534
Equivalent patient days.......................... 461,889 476,615 502,847
Total outpatient visits.......................... 392,530 404,857 413,000
</TABLE>
- ---------------------
(1) For purposes of the above, financial and operating data for each of NME's
fiscal years ended May 31 of the respective years has been combined with
financial and operating data for each of AMH's fiscal years ended August
31 of such year. Excluded from the above for all three years are the
results of operations of Ontario Community Hospital and Doctors Hospital
of Montclair, which facilities were sold in June 1994.
Southeastern Florida. The southeastern Florida area, comprised of Palm
Beach, Broward and Dade counties, had a population of approximately 4.1
million people as of 1990, according to the United States Bureau of the
Census, and is a highly competitive environment with a high degree of managed
care penetration. Following the Merger, NME will operate six hospitals that
will provide coverage from northern Palm Beach County through northern Dade
county. All three AMH hospitals and one of NME's hospitals in southeastern
Florida currently participate in the 16-hospital Medconnect integrated
healthcare delivery system. The Company anticipates that the two NME hospitals
that currently are not members of this system will join. The Medconnect system
offers a full range of services throughout southeastern Florida, which makes
the system an attractive provider for managed care payors. The Company expects
its hospitals, three of which have open heart surgery programs and one of
which provides Level III neonatal intensive care services, to benefit from
business generated by those contracts, including referrals by other hospitals
in the Medconnect
56
<PAGE>
system. To further enhance its ability to enter into managed care contracts,
the Company also is working with physicians and IPAs to form PHOs that can bid
on managed care contracts on which the Medconnect system chooses not to bid.
Furthermore, the Company has established an MSO that provides management and
administrative services to these IPAs and other physicians and physician
groups in southeastern Florida.
The table below sets forth, on a pro forma combined basis, certain selected
historical operating statistics for those facilities operated by NME and AMH
in southeastern Florida.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,(1)
--------------------------
1992 1993 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Number of hospitals (at end of year)........... 6 6 6
Licensed beds (at end of year)................. 1,689 1,689 1,689
Net operating revenues......................... $468,571 $500,699 $543,629
Admissions..................................... 47,105 49,709 52,140
Equivalent admissions.......................... 60,795 64,456 69,682
Patient days................................... 304,441 299,493 294,072
Equivalent patient days........................ 390,235 386,411 389,986
Total outpatient procedures.................... 272,060 287,811 657,308(2)
</TABLE>
- ---------------------
(1) For purposes of the above, financial and operating data for each of NME's
fiscal years ended May 31 of the respective years has been combined with
financial and operating data for each of AMH's fiscal years ended August
31 of such year.
(2) In fiscal 1994, AMH acquired a home health agency.
Greater New Orleans, Louisiana Area. The New Orleans metropolitan
statistical area had a population of approximately 1.3 million people as of
1990 according to the United States Bureau for the Census. Management believes
that although the level of managed care penetration in New Orleans
historically has been relatively low, it recently has increased significantly
and will continue to increase in this area over the next several years. The
Company currently operates five hospitals in the greater New Orleans,
Louisiana area, including two hospitals on the east bank of the Mississippi
River, two on the west bank of the Mississippi River and one hospital located
across Lake Pontchartrain in Slidell, Louisiana. NME's hospitals have joined
with certain physicians and IPA's to form an integrated healthcare delivery
system to negotiate managed care contracts in this area. The addition of AMH's
300-bed St. Jude Medical Center in Kenner, Louisiana will complement the
Company's system, providing improved coverage of patients in the western area
of the east bank. In negotiating for managed care and other contracts in this
area, the Company believes it will benefit significantly from its well-
positioned and geographically diverse base of hospitals and the strong support
of physicians.
The Company competes in the greater New Orleans area principally against
tax-exempt hospitals. This area presently is experiencing aggressive campaigns
to acquire primary care physician groups. Because the development of a large,
stable primary care network is essential for the effective management of
capitated risk, the Company recently has developed an MSO for the purposes of
pursuing the acquisition of physician practices and providing administrative
and management services to physicians' group practices in this geographic
area. The acquisition of physician practices will enable the Company to expand
its base of affiliated physicians. The integration of these practices also
should allow the Company more effectively to compete for managed care
contracts and to manage such contracts more effectively. As the level of
managed care penetration increases and participating or acquired physician
practices are more fully integrated into the Company's management systems, the
Company's MSO will be prepared with the systems and expertise to provide
single-source contracting, utilization review and clinical outcomes
management.
57
<PAGE>
The table below sets forth, on a pro forma combined basis, certain selected
historical operating statistics for those facilities operated by NME and AMH
in the greater New Orleans area.
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, (1)
--------------------------
1992 1993 1994
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Number of hospitals (at end of period)........... 5 5 6
Licensed beds (at end of period)................. 987 1,011 1,149
Net operating revenues........................... $223,866 $228,282 $225,954
Admissions....................................... 23,976 23,097 22,905
Equivalent admissions............................ 29,969 29,409 29,242
Patient days..................................... 147,267 143,554 136,266
Equivalent patient days.......................... 180,826 180,008 171,791
Total outpatient procedures...................... 124,926 134,695 142,641
</TABLE>
- ---------------------
(1) For purposes of the above, financial and operating data for each of NME's
fiscal years ended May 31 of the respective years has been combined with
financial and operating data for each of AMH's fiscal years ended August
31 of such year. Included in the above are the results of operations of
Doctors Hospital of Jefferson, which facility was acquired by the Company
in March 1994.
The following discussion summarizes the Company's strategy in three selected
geographic areas where integrated healthcare delivery systems have been
developed around a single NME or AMH hospital.
Modesto, California. The Company's Doctors Medical Center of Modesto is a
433-bed tertiary care hospital serving a large regional, predominantly rural,
area consisting primarily of Stanislaus County and the San Joaquin valley. The
hospital, which management of NME considers to be its "flagship" hospital,
offers a wide range of services ranging from primary medical and surgical
procedures to complex cardiology, oncology, neurosciences and sophisticated
orthopaedics programs. The hospital has a large open heart surgery program and
one of the largest women's and children's center in California's central
valley, including Level III neonatal intensive care services. NME has
developed a full range of services in the central valley, all of which benefit
from and complement the services offered by Doctors Medical Center. For
example, NME's Doctors Hospital of Manteca, a 73-bed primary care hospital is
located approximately 18 miles north of the Modesto hospital and serves as an
important primary care referral source for the Doctors Medical Center. NME
also has developed a 100-bed rehabilitation hospital, two urgent care centers
and, through a joint venture with local physicians, an outpatient surgery
center in this area.
As is true with all of its hospitals, NME believes its relationships with
the physicians who practice at its Modesto hospital are essential to the
hospital's success. An important factor in the success of the Modesto hospital
is the presence of NME's National Health Plans, which operates an HMO and
offers other health plans and insurance products throughout the central
valley. National Health Plans manages physicians group practices throughout
the central valley and has fostered the development of an IPA by local
physicians. The HMO, which managed the healthcare needs of approximately
44,000 members at November 30, 1994, has entered into capitated and other
managed care contracts with Doctors Medical Center and with other healthcare
facilities operated by NME. The Company believes that its experience in the
Modesto area will allow it to duplicate this type of comprehensive integrated
healthcare expertise in other areas as appropriate.
Birmingham, Alabama. AMH's Brookwood Medical Center, a 586-bed tertiary care
hospital located in Birmingham, Alabama, offers a full range of services in an
area with a significant and growing managed care presence. Brookwood is the
largest single provider for major managed care programs in the greater
Birmingham area. AMH believes that Brookwood has strong clinical programs and
physician relationships. Brookwood also has implemented comprehensive programs
to reengineer resource utilization, case management, and the provision of
patient care. These programs have helped Brookwood reduce its operating costs,
and enhanced its ability to compete effectively for managed care contracts.
The hospital's major programs include neurosurgery, a freestanding women's
comprehensive care center, gastrointestinal,
58
<PAGE>
orthopedics, comprehensive cancer care, ophthalmology and cardiac care.
Brookwood has developed a geographically diverse primary care physician
referral base through the employment of over 37 primary care physicians and the
ownership of 19 community-based clinics. Management expects to continue to
expand upon this strong primary care physician base. Brookwood also is a
shareholder of Alabama Health Services, Inc.("AHS"), a corporation jointly
owned with two tax-exempt hospitals in the Birmingham area. AHS was formed for
the purpose of developing vehicles for managed care contracting and integrated
ownership of healthcare facilities and services. NME intends to work with the
shareholders of AHS to develop a state-wide system to more effectively compete
in the managed care arena.
Hickory, North Carolina. The development of relationships with primary care
physicians also is critical in areas such as Hickory, North Carolina, where AMH
operates Frye Regional Medical Center, a 355-bed tertiary care facility serving
a wide area of western North Carolina. Frye Regional Medical Center offers a
full range of services, including neurosurgery and cardiovascular surgery
programs. The hospital also employs physicians or manages physician practices
in the surrounding communities. Through outreach programs, specialists
affiliated with the hospital provide specialty services on a rotational basis
in these areas. As a result, the hospital has been successful in attracting
increased referrals for its tertiary care services. AMH believes it has also
been successful in attracting physicians into the area by providing a
physician-friendly environment with sophisticated equipment and attractive
facilities. These initiatives have contributed significantly to the hospital's
success in obtaining referrals from surrounding communities, thereby increasing
cash flow. In response to the increase in managed care penetration, the
hospital has joined with physicians to form a PHO that has entered into
contracts with certain employers and managed care providers in the market. It
is anticipated that the majority of the hospital's existing direct contracts
with large, self-insured employers and insurance companies will be converted
over time into contracts with the PHO covering both hospital and physician
services rather than remaining as contracts with only the hospital. AMH has
taken these and other measures in advance of significant managed care
penetration in order to position the hospital to compete effectively as managed
care penetration increases.
HMO, PPO AND INDEMNITY OPERATIONS
Through various subsidiaries, NME offers HMO, PPO and indemnity products in
California. Plans offered include National HMO, a federally qualified HMO
serving 44,000 members, as of November 30, 1994, including 35,000 on a
capitated basis; Assured Investors Life Company, an insurance company that
provided healthcare indemnity insurance to 10,000 persons and managed 13,000
members of other HMOs on a capitated basis, as of November 30, 1994; and
Preferred Medical Systems, a PPO serving 19,000 members, as of November 30,
1994.
The Company's extensive experience in managed care contracting and business
development, physician group organization and insurance product development has
been an important part of its success in California, where there has been a
high penetration of managed care. NME believes that this experience, including
the management information systems and policies that the Company has developed,
distinguishes the Company from other investor-owned healthcare companies and
provides NME with a competitive advantage in other geographic areas where NME
anticipates greater penetration of managed care.
59
<PAGE>
DOMESTIC PROPERTIES
The following table sets forth certain information relating to each of the
hospitals operated by the Company and by AMH at November 30, 1994, grouped by
geographic area and by state. Hospitals operated by AMH appear in italicized
type.
<TABLE>
<CAPTION>
LICENSED
GEOGRAPHIC AREA/STATE FACILITY LOCATION BEDS STATUS
--------------------- -------- -------- -------- ------
<S> <C> <C> <C> <C>
DOMESTIC GENERAL
HOSPITALS(1)
Greater Los Angeles, Lakewood Regional Medical Center Lakewood 175 Owned
California Area Los Alamitos Medical Center Los Alamitos 173 Owned
Century City Hospital Los Angeles 190 Leased
USC University Hospital Los Angeles 261 Owned
Garfield Medical Center Monterey Park 223 Owned
Placentia Linda Community Hospital Placentia 114 Owned
Irvine Medical Center Irvine 176 Leased
Medical Center of North Hollywood North Hollywood 163 Owned
Garden Grove Hospital and Medical Center Garden Grove 167 Owned
South Bay Hospital Redondo Beach 201 Leased
Encino Hospital Encino 151 Leased(2)
San Dimas Community Hospital San Dimas 99 Owned
Tarzana Regional Medical Center Tarzana 233 Leased(2)
Central California Coast Twin Cities Community Hospital Templeton 84 Owned
Sierra Vista Regional Medical Center San Luis Obispo 195 Owned
Other California John F. Kennedy Memorial Hospital Indio 130 Owned
Community Hospital & Rehabilitation
Center of Los Gatos Los Gatos 175 Leased
Doctors Medical Center of Modesto Modesto 433 Owned
Doctors Hospital of Manteca Manteca 73 Owned
Doctors Hospital of Pinole Pinole 137 Leased
Redding Medical Center Redding 185 Owned
Alvarado Hospital Medical Center San Diego 231 Owned
San Ramon Regional Medical Center San Ramon 123 Owned
Southeastern Florida West Boca Medical Center Boca Raton 185 Owned
Delray Community Hospital Delray Beach 211 Owned
Hollywood Medical Center Hollywood 334 Owned
Palm Beach Gardens Medical Center Palm Beach Gardens 204 Leased
North Ridge Medical Center Ft. Lauderdale 395 Owned
Palmetto General Hospital Hialeah 360 Owned
Greater Tampa/St. Seven Rivers Community Hospital Crystal River 128 Owned
Petersburg, Palms of Pasadena Hospital St. Petersburg 310 Owned
Florida Area Memorial Hospital of Tampa Tampa 174 Owned
Town and Country Hospital Tampa 201 Owned
</TABLE>
60
<PAGE>
<TABLE>
<CAPTION>
LICENSED
REGION/STATE FACILITY LOCATION BEDS STATUS
------------ -------- -------- -------- ------
<S> <C> <C> <C> <C>
Greater New Orleans, Meadowcrest Hospital Gretna 200 Owned
Louisiana Area Doctors Hospital of Jefferson Metarie 138 Leased
Jo Ellen Smith Medical Center New Orleans 164 Owned
St. Charles General Hospital New Orleans 173 Owned
Northshore Regional Medical Center Slidell 174 Leased
St. Jude Medical Center Kenner 300 Owned
Dallas, Texas Area Trinity Medical Center Carrollton 149 Leased
Doctors Hospital Dallas 270 Owned
RHD Memorial Medical Center Dallas 190 Leased(3)
Houston, Texas Area Park Plaza Houston 468 Owned
Twelve Oaks Hospital Houston 336 Owned
Other Texas Sierra Medical Center El Paso 365 Owned
Brownsville Medical Center Brownsville 165 Owned
Mid-Jefferson Hospital Nederland 138 Owned
Nacogdoches Medical Center Nacogdoches 150 Owned
Odessa Regional Hospital Odessa 100 Owned
Park Place Hospital Port Arthur 223 Owned
Missouri Kirksville Osteopathic Medical Center Kirksville 119 Leased
Lutheran Medical Center St. Louis 408 Owned
Lucy Lee Hospital Poplar Bluff 201 Leased
Columbia Regional Hospital Columbia 301 Owned
Tennessee University Medical Center Lebanon 260 Owned
John W. Harton Regional Medical Center Tullahoma 137 Owned
St. Francis Hospital Memphis 890 Owned(4)
Arkansas Central Arkansas Hospital Searcy 169 Owned
National Park Medical Center Hot Springs 166 Owned
St. Mary's Regional Hospital Russellville 170 Owned
North Carolina Central Carolina Hospital Sanford 137 Owned
Frye Regional Medical Center Hickory 355 Leased
South Carolina East Cooper Community Hospital Mount Pleasant 100 Owned
Piedmont Medical Center Rock Hill 268 Owned
Hilton Head Hospital Hilton Head 68 Owned(5)
Georgia North Fulton Regional Hospital Roswell 167 Leased
Spalding Regional Hospital Griffin 160 Owned
Other Brookwood Medical Center Birmingham, AL 586 Owned
Saint Joseph Hospital Omaha, NE 374 Owned
Culver Union Hospital Crawfordsville, IN 120 Owned
</TABLE>
61
<PAGE>
<TABLE>
<CAPTION>
LICENSED
REGION/STATE FACILITY LOCATION BEDS STATUS
- ------------ -------- -------- -------- ------
<S> <C> <C> <C> <C>
REHABILITATION HOSPITALS
California Central California Rehabilitation Hospital Modesto 100 Owned
San Diego Rehabilitation Institute at Alvarado San Diego 80 Owned
Golden State Rehabilitation Hospital San Ramon 80 Owned
Florida Pinecrest Rehabilitation Hospital Delray Beach 90 Owned
Louisiana Rehabilitation Institute of New Orleans New Orleans 105 Leased
Texas Rio Vista Rehabilitation Hospital El Paso 100 Owned
LONG TERM CARE FACILITIES(6)
California John Douglas French Center Los Alamitos 148 Owned
Alvarado Convalescent and Rehabilitation Hospital San Diego 269 Owned
Florida Menorah House--Hillhaven Boca Raton 120 Owned
Convalescent Center of Delray Beach Delray Beach 120 Owned
Louisiana NorthShore Living Center Slidell 120 Owned(7)
Jo Ellen Smith Convalescent Center New Orleans 180 Owned
Texas Doctors Healthcare Center Dallas 180 Owned
PSYCHIATRIC HOSPITALS(8)
California Redding Specialty Hospital Redding 84 Owned
Louisiana NorthShore Psychiatric Hospital Slidell 58 Owned
Jo Ellen Smith Psychiatric Hospital New Orleans 69 Owned
Florida Fair Oaks Hospital at Boca-Delray Delray Beach 102 Owned
Nebraska Saint Joseph Center for Mental Health Omaha 171 Leased
</TABLE>
- ------------------
(1) Excludes non-hospital operations, facilities in which NME holds a minority
equity interest and Keller Memorial Hospital, a 64-bed general hospital
operated by AMI in Columbia, Missouri, the operations of which are combined
with the Columbia Regional Hospital.
(2) Owned by a partnership, 75% of which is owned by AMH and 25% of which is
owned by Healthtrust, Inc.--The Hospital Company.
(3) Although this hospital has 323 licensed beds, only 190 are operational.
(4) Includes a 197-bed long-term care facility.
(5) Acquired by AMH on September 1, 1994.
(6) Managed by Hillhaven on behalf of NME.
(7) 50% Owned by NME through a partnership.
(8) Does not include certain psychiatric hospitals currently held for sale.
62
<PAGE>
INTERNATIONAL OPERATIONS
The Company currently operates two general hospitals in Singapore, with an
aggregate of 650 beds. One of the region's largest private tertiary hospitals,
the 505-bed Mount Elizabeth Hospital in Singapore draws over 23 percent of its
patients, accounting for over 30% of its revenues, from outside Singapore and
has established a reputation as a regional center of medical excellence. The
Company also provides radiology and laboratory services in this market and owns
a minority interest in a 17-story medical office building adjacent to Mount
Elizabeth Hospital.
The Company also owns 101,006,395 shares of common stock or approximately
52.6% of AME, an Australian company listed on the Australian Stock Exchange
under the symbol "AEP". AME operates four general hospitals in the Perth area,
five general hospitals in the Sydney area and Western Diagnostic Pathology, the
largest private provider of pathology services in Western Australia. In fiscal
1994, AME commenced construction on St. George Medical Complex, a 202-bed
general hospital adjacent to one of metropolitan Sydney's leading public
teaching hospitals. Scheduled to open in mid fiscal 1996, St. George will be
one of Australia's largest private hospitals.
NME has begun to operate its newly constructed Centro Medico Teknon, a 184-
bed tertiary care facility located in Barcelona, Spain. The Company completed
the construction of this facility in February 1994 and, in June 1994, the
Company purchased the 50% interest of its joint venture partner in this
hospital and is now its sole owner.
The Company owns a 30% interest in the Subang Jaya Medical Center, a 375-bed
tertiary care facility managed by the Company, located in Kuala Lumpur,
Malaysia. During fiscal 1994, the Company became a 40% partner in a joint
venture with Bumrungrad Hospital Public Company Limited, a Thai company listed
on the Stock Exchange of Thailand, to develop a 554-bed tertiary care hospital
in Bangkok, Thailand. This hospital is expected to be completed in the first
quarter of fiscal 1997.
The following table sets forth certain information relating to each of the
international general hospitals operated by the Company at November 30, 1994.
<TABLE>
<CAPTION>
LICENSED
COUNTRY FACILITY(1) LOCATION BEDS STATUS
------- ----------- -------- -------- ------
<C> <S> <C> <C> <C>
Australia Attadale Hospital Attadale, WA 54 Owned
Bicton Hospital Bicton, WA 73 Owned
Glengarry Hospital Dungraig, WA 96 Owned
Mount Hospital Perth, WA 150 Owned
Castlecrag Private
Hospital Castlecrag, NSW 48 Owned
Jamison Private Hospital Penrith, NSW 72 Owned
Kogarah Private Hospital Kogarah, NSW 45 Owned
Liverpool Private
Hospital Liverpool, NSW 48 Owned
Pacific Private Hospital Brighton-le-Sands, NSW 50 Owned
Singapore East Shore Hospital Singapore 145 Owned
Mount Elizabeth Hospital Singapore 505 Owned
Spain Centro Medico Teknon Barcelona 184 Owned(2)
Subang Jaya Medical
Malaysia Center Kuala Lumpur 375 Owned(3)
</TABLE>
- ----------------
(1) Excludes non-hospital operations.
(2) NME acquired its partner's 50% interest in Centro Medico Teknon in June
1994 and is now its sole owner.
(3) NME provides management services for the Subang Jaya Medical Center, in
which it owns a 30% interest.
63
<PAGE>
OTHER HEALTHCARE INTERESTS
The Company owns 8,878,147 shares, or approximately 31% of the outstanding
common stock of Hillhaven, a Nevada corporation listed on the NYSE under the
symbol "HIL." In addition, at August 31, 1994, the Company held 35,000 shares
of Hillhaven's cumulative nonvoting 8 1/4% Series C Preferred Stock, with an
aggregate liquidation preference of $35.0 million, and 61,467 shares of
Hillhaven's cumulative non-voting 6 1/2% payable-in-kind Series D Preferred
Stock, with an aggregate liquidation preference of $61.5 million.
Based upon the number of beds in service and on net revenues, Hillhaven is
the second largest long-term care provider in the United States. At November
30, 1994, Hillhaven operated 287 long-term care facilities with an aggregate of
36,153 licensed beds. Hillhaven also is a leading provider of institutional
pharmacy services through its subsidiary, Medisave Pharmacies, Inc., which, as
of November 30, 1994 operated 39 institutional pharmacies and 18 retail
pharmacies located in 19 states. In addition, Hillhaven operated 19 retirement
housing communities in the United States at November 30, 1994. Hillhaven also
provides management and advisory services in connection with the operation of
the Company's seven long-term care facilities, for which the Company paid
Hillhaven management fees of $2.3 million during fiscal 1994.
NME has determined to review its investment in equity securities of Hillhaven
in light of NME's determination to focus its operations on its general hospital
operations and the development of integrated healthcare delivery systems. NME
currently intends to engage in discussions with Hillhaven regarding possible
means by which all or a portion of the investment may be sold. Among the
possibilities which may be discussed is a transaction between NME and Hillhaven
in respect of the investment; the issuance by NME of debt or equity securities
that would be exchangeable or convertible into equity securities of Hillhaven;
and the maintenance of either some or all of the investment in Hillhaven. There
can be no assurance that the discussions with Hillhaven will result in any
transaction. In addition, NME may explore other alternatives with respect to
its investment, including the sale of all or a portion of the investment in a
negotiated sale to one or more third parties or otherwise.
The Company owns 21,500,000 shares, or approximately 42% of the outstanding
common stock of Westminster, a United Kingdom company listed on the London
Stock Exchange under the symbol "WHC." Westminster, which operated 65 nursing
homes at November 30, 1994, currently is the second largestlong-term care
provider in the United Kingdom.
Additionally, the Company owns approximately 23% of Health Care Property
Partners ("HCPP"), a partnership originally formed by the Company and Health
Care Property Investors, Inc. for the purpose of acquiring from and leasing
back to the Company 21 long-term care facilities, two general hospitals and one
psychiatric facility. Since that time, the Company has assigned to Hillhaven
and other third parties its leasehold interests in the 21 long-term care
facilities, but remains contingently liable for the lease payments on those
facilities. The Company continues to lease the three other facilities from
HCPP. HCPP does not own any properties other than those originally purchased
from the Company.
The Company also owns approximately 21% of TRC, a leading dialysis services
provider in the United States. TRC operated 41 freestanding and mobile kidney
dialysis units in eight states at November 30, 1994.
COMPETITION
NME's general hospitals, rehabilitation hospitals, long-term care facilities
and psychiatric hospitals operate in competitive environments. A facility's
competitive position within the geographic area in which it operates is
affected by such competitive factors as the quality of care provided, including
the number, quality and specialties of the physicians, nurses and other
healthcare professionals on staff, its reputation, the number of competitive
facilities, the state of its physical plant, the quality and the state of the
art of its medical equipment, its location and, in the case of private
patients, its charges for services. Tax-exempt competitors may have certain
financial advantages such as endowments, charitable contributions, tax-exempt
financing
64
<PAGE>
and exemption from sales, property and income taxes not available to NME
facilities. The length of time a facility has been a part of the community and
the availability of other healthcare alternatives are also competitive factors.
An emerging factor in the competitive position of NME's facilities is the
ability of NME to obtain managed care contracts with payors that contract with
healthcare providers on a discounted or capitated basis in exchange for sending
some or all of their members/employees to those providers. The importance of
obtaining managed care contracts has increased over the years as employers and
others attempt to control rising healthcare costs. NME is well positioned to
compete in the managed care market, and its healthcare facilities have been
actively pursuing and entering into such contracts both on a local and national
level.
The Company, and the healthcare industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payors. As both private and government payors
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, national and state efforts to reform the United States
healthcare system may further impact reimbursement rates. Changes in medical
technology, existing and future legislation, regulations and interpretations
and competitive contracting for provider services by private and government
payors may require changes in the Company's facilities, equipment, personnel,
rates and/or services in the future.
The general hospital industry and the Company's general hospitals continue to
have significant unused capacity, and thus there is substantial competition for
patients. Inpatient utilization, average lengths of stay and average occupancy
continue to be negatively affected by payor-required pre-admission
authorization, utilization review and by payor pressure to maximize outpatient
and alternative healthcare delivery services for less acutely ill patients.
Increased competition, admissions constraints and payor pressures are expected
to continue. There continue to be increases in inpatient acuity and intensity
of services as less intensive services shift from an inpatient to an outpatient
basis or to alternative healthcare delivery services because of technology
improvements and as cost controls by payors become greater. Allowances and
discounts are expected to continue to rise, and to cause decreases in revenues,
because of increasing cost controls by government and private payors and
because of the increasing percentage of business (and related discounts) from
payors. To meet these challenges, the Company has expanded many of its general
hospitals' facilities to include outpatient centers, offer discounts to private
payor groups, enter into capitation contracts in some service areas, upgrade
facilities and equipment and offer new programs and services.
The Company also is responding to these changes by forming integrated
healthcare delivery systems. Components of these systems include encouraging
physicians practicing at its hospitals to form IPAs, joining with those IPAs,
physicians and physician group practices to form PHOs to bid for managed care
contracts and forming MSOs to purchase physician practices or their assets, as
appropriate, provide management and administrative services to physicians,
physician group practices and IPAs and enter into managed care contracts on
behalf of those groups and, in certain circumstances, PHOs.
In most cases, hospital revenues depend on the physicians on staff who admit
or refer patients to the hospital. Physicians refer patients to hospitals on
the basis of the quality of services provided by the hospital to patients and
their physicians, the hospital's location, the quality of the medical staff
affiliated with the hospital and the quality of the hospital's facilities,
equipment and employees. The Company attracts physicians to its hospitals by
equipping its hospitals with sophisticated equipment, providing physicians with
a large degree of independence in conducting their hospital practices, and
sponsoring training programs to educate physicians on advanced medical
procedures. While physicians may terminate their association with a hospital at
any time, NME believes that by striving to maintain and improve the excellence
of care of its hospitals and by maintaining high ethical and professional
standards, it will retain qualified physicians with a variety of specialties. A
hospital's revenues also may be affected by the ability of its management to
negotiate favorable group health service contracts with payors. The number of
persons and the patient mix represented by such group contracts affect the
impact such contracts have on hospital operating results.
65
<PAGE>
MEDICARE, MEDICAID AND OTHER REVENUES
NME receives payments for patient care from private insurance carriers,
federal Medicare programs for elderly and disabled patients, HMOs, PPOs, state
Medicaid programs for indigent and cash grant patients, Civilian Health and
Medical Program of the Uniformed Services ("CHAMPUS"), employers and patients
directly. In general, Medicare payments for general hospital outpatient
services, psychiatric care and physical rehabilitation are based on allowable
costs subject to certain limits. General hospital inpatient services are
reimbursed under Medicare based on a prospective payment system ("PPS"),
discussed below. Payments from state Medicaid program are based on reasonable
costs or are at fixed rates. Substantially all Medicare and Medicaid payments
are below retail rates for NME facilities. Payments from other sources usually
are based on the hospital's established charges, a percentage discount or all-
inclusive per diem rates.
The approximate percentages of NME's net patient revenue by payment sources
for NME's general hospitals are as follows:
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
---------------------------------
1990 1991 1992 1993 1994
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Medicare............................... 33.4% 31.8% 32.1% 33.9% 35.9%
Medicaid............................... 5.9 6.0 6.4 7.5 8.5
Private and Other...................... 60.7 62.2 61.5 58.6 55.6
----- ----- ----- ----- -----
Totals............................... 100.0% 100.0% 100.0% 100.0% 100.0%
</TABLE>
The following table presents the percentage of net revenues of AMH for fiscal
1992, 1993 and 1994 under each of the following programs:
<TABLE>
<CAPTION>
YEARS ENDED
AUGUST 31,
-------------------
1992 1993 1994
----- ----- -----
<S> <C> <C> <C>
Medicare/Medicaid.................................... 37 % 38 % 43 %
Contracted Services.................................. 24 26 25
Non-contracted Services.............................. 37 33 29
Other Sources........................................ 2 3 3
----- ----- -----
Totals............................................. 100.0% 100.0% 100.0%
</TABLE>
Medicare payments for general hospital inpatient care are based on a PPS that
generally has been applicable to NME facilities since June, 1984. Under the
PPS, a general hospital receives for each Medicare patient a fixed amount for
operating costs based on each Medicare patient's assigned DRG. DRG payments do
not consider a specific hospital's costs, but are adjusted for area wage
differentials. DRG payments exclude the reimbursement of (a) capital costs,
including depreciation, interest relating to capital expenditures, property tax
and lease expenses ("Capital Costs") and (b) outpatient services.
Medicare reimburses general hospitals' capital costs separately from DRG
payments. Beginning June 1, 1992, a prospective payment system for Medicare
reimbursement of general hospitals' inpatient capital costs ("PPS-CC"),
described in the following paragraph, generally became effective with respect
to the Company's general hospitals. The Omnibus Budget Reconciliation Act of
1990 ("OBRA '90") provides that through September 30, 1995, the total annual
estimated aggregate payment to all PPS hospitals for capital costs under the
PPS-CC is to be 10% less than the estimated aggregate amount that would be paid
if all such hospitals were to be reimbursed for 100% of their actual capital
costs.
The PPS-CC applies an estimated national average of Medicare capital costs
per patient discharge (the "Federal Rate") in making payments to each
individual hospital based on its actual number of patient discharges. The
Federal Rate is based on national 1989 capital costs and patient discharges and
has been and will be updated annually to reflect estimated increases in capital
costs per patient discharges. In addition, the Federal Rate actually applied to
each hospital is adjusted based on various factors such as that hospital's case
mix and geographic location. The Company expects PPS-CC payments for the 12
months beginning October 1, 1994, to be lower than the payments for the prior
12-month period.
66
<PAGE>
Rules adopted by the HCFA provide that the PPS-CC will be phased in over a
10-year transition period, during which many hospitals' actual capital costs
will be given less consideration, and the Federal Rate will be given more
consideration, each year. The Company's general hospitals will receive a major
portion of their reimbursement in the early years of the transition priced
based on their own capital costs. The impact in later years will depend on the
Company's need for new capital as compared to the updated Federal Rate.
Outpatient services provided at general hospitals, physical rehabilitation
facilities and psychiatric facilities generally are reimbursed by Medicare at
the lower of customary charges or 94.2% of actual cost. Notwithstanding the
foregoing, Congress has established additional limits on the reimbursement of
the following outpatient services: (i) clinical laboratory services, which are
reimbursed based on a fee schedule and (ii) ambulatory surgery procedures and
certain imaging and other diagnostic procedures, which are reimbursed based on
a blend of the hospital's specific cost and the rate paid by Medicare to non-
hospital providers for such services.
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 by HCFA to adjust the DRG rates gives
consideration to the cost of goods and services purchased by hospitals as well
as non-hospitals (the "Market Basket"). The increase in the Market Basket for
the year beginning October 1, 1994, is 3.6%. Based on the Omnibus Budget
Reconciliation Act of 1993 ("OBRA '93"), the DRG rates for urban hospitals will
be adjusted by the annual Market Basket percentage change: (1) minus 2.5%,
effective October 1, 1994, (2) minus 2.0%, effective October 1, 1995, (3) minus
.5%, effective October 1, 1996, and (4) without reduction, effective October 1,
1997 and each year thereafter, unless altered by subsequent legislation (which
legislation NME believes has become more likely in light of the November 1994
election results). Substantially all of the NME hospitals are urban hospitals
for purposes of DRG rates.
Hospitals exempt form the PPS, such as qualified psychiatric and physical
rehabilitation facilities, are reimbursed by Medicare on a cost-based system
wherein target rates for each facility are used in applying various limitations
and incentives. Based on the provisions of OBRA '90, such NME facilities
received a Market Basket increase of 3.3% in target rates effective June 1,
1994. Based on OBRA '93, the target rates for NME's hospitals exempt from the
PPS are scheduled to be adjusted on June 1, 1995, 1996 and 1997 by the
applicable annual Market Basket percentage change minus 1%. Proposals have been
made that would change the method of payment for services provided at these
facilities to a prospective payment system. OBRA '90 requires the HHS to
develop a proposal to modify the current target rate system or to replace it
with a prospective payment system. It is not known if any such proposals will
be implemented.
OBRA '93 provides for certain budget targets for the next four years which,
if not met, may result in adjustments in payment rates. The Company is unable
to predict whether there will be any future reductions in hospital payments due
to existing or future legislation.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and 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 payments 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 that 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.
HEALTHCARE REGULATION AND LICENSING
Certain Background Information. Healthcare, as one of the largest industries
in the United States, continues to attract much legislative interest and public
attention. Medicare, Medicaid, mandatory and other public and private hospital
cost-containment programs, proposals to limit healthcare spending, proposals to
limit prices and industry competitive factors are highly significant to the
healthcare industry.
67
<PAGE>
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 NME and proposals to increase co-payments and deductibles from program
and private patients. NME'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 a reduction of patient access to certain treatments
and procedures. 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 also is a
requirement of many managed care arrangements. Utilization review entails the
review of the admission and course of treatment of a patient by a third party.
Tennessee has implemented a revision to its Medicaid program that covers its
Medicaid and uninsured population through a managed care program. California
has created a voluntary health insurance purchasing cooperative that seeks to
make healthcare coverage more affordable for businesses with five to 50
employees and, effective January 1, 1995, will begin changing the payment
system for participants in its Medicaid program in certain counties from fee-
for-service arrangements to managed care plans. Florida has enacted a program
creating a system of local purchasing cooperatives and has proposed other
changes that have not yet been enacted. Louisiana and Texas are planning to
consider wider use of managed care for their Medicaid populations. These
proposals also may attempt to include coverage for some people who presently
are uninsured. A number of other states are considering the enactment of
managed care initiatives designed to provide universal low-cost coverage.
Florida has adopted, and other states are considering adopting, legislation
imposing a tax on revenues of hospitals to help finance or expand those states'
Medicaid systems. The Company currently operates as a part of its ongoing
operations five general hospitals, two domesticlong-term care facilities (which
are managed by Hillhaven) and one rehabilitation hospital in Florida.
Certificate of Need Requirements. Some states require state approval for
construction and expansion of healthcare facilities, including findings of need
for additional or expanded healthcare facilities or services. Certificates of
Need, which are issued by governmental agencies with jurisdiction over
healthcare facilities, are at times required for capital expenditures exceeding
a prescribed amount, changes in bed capacity or services and certain other
matters. Following a number of years of decline, the number of states requiring
Certificates of Need is once again on the rise. State legislators once again
are looking at the Certificate of Need process as a way to contain rising
healthcare costs.
Antifraud Regulations. Participation in the Medicare program is regulated by
federal statute. The Antifraud Amendments under the Social Security Act (the
"Act") essentially prohibit the payment or receipt of renumeration for the
referral of patients whose care will be paid for by Medicare or other
government programs. As written, the statute technically prohibits many common
arrangements between healthcare providers and their physicians. As guidance,
however, the Office of the Inspector General of the HHS has issued regulations
which detail the Safe Harbors under Section 1128B(b) of the Act. The fact that
a given business arrangement does not fall into a Safe Harbor does not render
the arrangement per se illegal, but the Company believes that the government
intends to increase its scrutiny of arrangements that do not fall within the
Safe Harbors. In addition, many states have adopted or are considering adopting
statutes similar to the Antifraud Amendments. Many of the state statutes,
however, are broader because they prohibit the payment or receipt of
renumeration for the referral of patients regardless of the source of the
payment for the care. The Company systematically reviews all of its operations
to ensure that it complies with the Act and similar state statutes.
Environmental Regulations. The Company's healthcare 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 are
also subject to compliance with various other environmental laws, rules and
regulations. Such compliance does not, and the Company anticipates that such
compliance will not, materially affect the Company's capital expenditures,
earnings or competitive position.
68
<PAGE>
Healthcare Facility Licensing Requirements. NME's healthcare facilities are
subject to extensive federal, state and local legislation and regulation. In
order to maintain their operating licenses, healthcare facilities must comply
with strict standards concerning medical care, equipment and hygiene. Various
licenses and permits also are required in order to dispense narcotics, operate
pharmacies, handle radioactive materials and operate certain equipment. NME's
healthcare facilities hold all required governmental approvals, licenses and
permits. Each operated healthcare facility eligible for accreditation is fully
accredited by the JCAHO, the Commission on Accreditation of Rehabilitation
Facilities (in the case of the rehabilitation hospitals) or another appropriate
accreditation agency, which accreditation generally is required for
participation in government-sponsored provider programs.
NME's healthcare facilities are subject to and comply with various forms of
utilization review. In addition, under the Medicare PPS, each state must have a
PRO to carry out a federally mandated system of review of Medicare patient
admissions, treatments and discharges in general hospitals. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each healthcare facility, are reviewed by each healthcare
facility's local governing board, comprised of healthcare professionals,
community members and hospital representatives, and are reviewed by NME'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 of medical staff.
CERTAIN LEGAL PROCEEDINGS
NME has been involved in certain significant legal proceedings and
investigations related principally to its discontinued psychiatric business.
These proceedings and investigations include class-action and derivative
lawsuits by certain stockholders, psychiatric patient litigation alleging fraud
and conspiracy, certain lawsuits filed by third-party private payor insurance
companies and investigation by various state and Federal agencies. NME has
resolved its litigation with the insurers, has entered into agreements in
principle to resolve the shareholder derivative lawsuit and certain of the
class action lawsuits and continues to resolve the cases brought by psychiatric
patients. As a result of negotiations between NME and the Civil and Criminal
Divisions of the DOJ and HHS, subsidiaries of NME entered into various
agreements on June 29, 1994, resolving all open healthcare investigations of
NME, its subsidiaries and its facilities by the Federal government and its
agencies (but various government agencies are continuing to pursue
investigations against certain individuals). As a result of those agreements,
on July 12, 1994, the United States District Court for the District of Columbia
accepted a plea by a subsidiary operating NME's psychiatric hospitals for
violations relating to the payment of renumeration to induce referrals and a
conspiracy to make such payments. In addition, NME agreed to pay $362.7 million
to the Federal government. The court also accepted a plea agreement relating to
a single general hospital and activities that occurred while an individual
convicted of defrauding the hospital was its chief executive, pursuant to which
another subsidiary pled guilty to making illegal payments concerning programs
receiving Federal funds. On July 12, 1994, NME, without admitting or denying
liability, consented to the entry, by the United States District Court for the
District of Columbia, of a civil injunctive order in response to a complaint by
the Commission. The complaint alleged that NME failed to comply with anti-fraud
and recordkeeping requirements of the Federal securities laws concerning the
manner in which NME recorded the revenues from the activities that were the
subject of the Federal government settlement relating to the psychiatric
operations referred to above. In the order, NME is directed to comply with such
requirements of the Federal securities laws. On October 17, 1994, NME also
signed final agreements with 26 states and the District of Columbia,
representing all of the jurisdictions from which NME's psychiatric subsidiaries
received Medicaid payments during the time frame at issue in the Federal
investigations. These agreements settle all potential state claims related to
the matters that were the subject of the Federal investigations. NME has
received inquiries from various other insurance companies and health benefit
providers regarding the possible filing of claims. NME expects that additional
lawsuits alleging malpractice at its psychiatric facilities and the existence
of a corporate-wide conspiracy to commit wrongful acts may be filed from time
to time against NME, its officers and directors.
69
<PAGE>
LITIGATION RELATING TO THE MERGER
To date, a total of nine purported class actions (the "Class Actions") have
been filed against AMH and the directors of AMH (and in two cases against NME).
Seven of the Class Actions have been filed in the Delaware Court of Chancery
and are entitled (i) Jeffrey Stark and Gary Plotkin v. Robert W. O'Leary,
Robert J. Buchanan, John T. Casey, Robert B. Calhoun, Harry J. Gray, Harold J.
[sic] Handelsman, Sheldon S. King, Melvyn N. Klein, Dan W. Lufkin, William E.
Mayer and Harold S. Williams (the "AMH Directors") and AMH, C.A. No. 13792,
(ii) 7457 Partners v. the AMH Directors and AMH, C.A. No. 13793, (iii) Moise
Katz v. the AMH Directors and AMH, C.A. No. 13794, (iv) Constantinos Kafalas v.
the AMH Directors and AMH, C.A. No. 13795, (v) F. Richard Manson v. the AMH
Directors, NME and AMH, C.A. 13797, (vi) Lisbeth Greenfeld v. the AMH Directors
and AMH, C.A. No. 13799 and (vii) Joseph Frankel v. the AMH Directors and AMH,
C.A. No. 13800. In addition, two purported class actions have been filed in the
Superior Court of the State of California, County of Los Angeles, entitled Ruth
LeWinter and Raymond Cayuso v. the AMH Directors (with the exception of Harold
S. Williams), NME and AMH, Case No. BC115206 and David F. and Sylvia Goldstein
v. O'Leary, NME, AMI, et al., Case No. BC-116104. The seven Class Actions filed
in the Delaware Court of Chancery have been consolidated. The complaints filed
in each of the Class Actions are substantially similar, are brought by
purported stockholders of AMH and, in general, allege that the defendants
breached their fiduciary duties to the plaintiffs and other members of the
purported class. One of the Class Actions alleges that the defendants have
committed or aided and abetted a gross abuse of trust. The complaints further
allege that the directors of AMH wrongfully failed to hold an open auction and
encourage bona fide bids for AMH and failed to take action to maximize value
for AMH stockholders. The complaints seek preliminary and permanent injunctions
against the proposed transaction until such time as a transaction to be entered
into between AMH and NME results from bona fide arms' length negotiation and/or
requiring a fair auction for AMH. In addition, if the Merger is consummated,
the complaints seek recession or recessionary damages, and two of the Class
Actions seek an accounting of all profits realized and to be realized by the
defendants in connection with the Merger and the imposition of a constructive
trust for the benefit of the plaintiffs and other members of the purported
classes pending such an accounting. The complaints also seek monetary damages
of an unspecified amount together with prejudgment interest and attorneys' and
experts' fees. The California action has been stayed pending the resolution of
the Delaware actions. AMH and NME believe that the complaints are without merit
and intend to defend them vigorously.
COMPLIANCE PROGRAM
One component of the Company's settlement with federal agencies executed in
June 1994 is the adoption of a corporate compliance program under which the
Company has agreed, among other things, to: complete the disposition of its
psychiatric division facilities (with the exception of four campus psychiatric
facilities, no later than November 30, 1995); not own or operate other
psychiatric facilities (defined for the purposes of the agreement to include
residential treatment centers and substance abuse facilities) for the five
years from the date of completion of the disposition of its psychiatric
division facilities; and divest any psychiatric facilities acquired incidental
to a corporate transaction within 180 days of such acquisition. In addition,
the Company has agreed to implement certain oversight procedures pertaining to
the matters that were the subject of the government investigations and to
continue its ethics training program and ethics telephone hotline. Should the
oversight procedures or hotline reveal, after investigation by the Company,
credible evidence of violations of criminal, or potential material violations
of civil, laws, rules or regulations governing federally funded programs, NME
is required to report any such violation to the DOJ and HHS.
70
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The following table provides information as of January 1, 1995, with respect
to each of NME's directors, director nominees, and executive officers.
<TABLE>
<CAPTION>
NAME AGE POSITION
<S> <C> <C>
EXECUTIVE OFFICERS AND DIRECTORS
Jeffrey C. Barbakow ............... 50 Chairman of the Board and
Chief Executive Officer
Michael H. Focht Sr................ 51 President, Chief Operating Officer
and Director
Maris Andersons.................... 57 Executive Vice President and
Treasurer
Scott M. Brown..................... 49 Senior Vice President, General
Counsel and Secretary
Raymond L. Mathiasen .............. 51 Senior Vice President and
Chief Financial Officer
Barry P. Schochet.................. 43 Executive Vice President and
President-Hospital Division
Bernice B. Bratter ................ 56 Director
Maurice J. DeWald ................. 54 Director
Peter de Wetter.................... 74 Director
Edward Egbert, M.D................. 69 Director
Raymond A. Hay..................... 66 Director
Lester B. Korn..................... 58 Director
James P. Livingston................ 68 Director
Richard S. Schweiker............... 68 Director
AMH NOMINEES(1)
Robert W. O'Leary.................. 50 Chairman of the Board and
Chief Executive Officer of AMH
John T. Casey...................... 49 Director, President and
Chief Operating Officer of AMH
[ ]...................... [ ]
</TABLE>
- ---------------------
(1) Pursuant to the Merger Agreement, NME has agreed that, promptly following
the Merger, it will increase the size of the NME Board of Directors to 13
persons and elect three nominees named by AMH to fill the vacancies. Each
of these nominees has agreed to serve as a director of NME following the
Merger. No determination has yet been made as to which class each such
person will be elected, but one will be elected to each of the three
classes. For information about each such nominee see "AMH Nominees" below.
Jeffrey C. Barbakow was elected by the Board to serve as Chief Executive
Officer and President of NME effective June 1, 1993. Effective July 28, 1993,
Mr. Barbakow was elected Chairman of the Board, at which time he relinquished
the office of President. From September 1991 through May 31, 1993, Mr. Barbakow
served as a Managing Director of DLJ. From 1988 until 1991, Mr. Barbakow served
as Chairman, President and Chief Executive Officer of MGM/UA Communications,
Inc. Prior to October 1988, Mr. Barbakow served as a Managing Director of
Merrill Lynch Capital Markets and an executive officer of several Merrill Lynch
affiliates. Mr. Barbakow has been a director since 1990.
Michael H. Focht was elected by the Board to serve as Chief Operating Officer
of NME effective April 28, 1993, and to serve in the additional position of
President effective July 28, 1993. Mr. Focht served as Senior Executive Vice
President, Operations, of NME from 1991 to April 28, 1993, and President and
Chief Executive Officer of NME's General Hospital Division from 1986 to 1991.
Mr. Focht joined NME in 1978 and has served as a director of NME since 1990.
71
<PAGE>
Maris Andersons has served as Treasurer of NME since 1981, and as Executive
Vice President since 1991. He is a director of Hillhaven and TRC. Mr. Andersons
joined NME in 1976, prior to which he served as a Vice President of Bank of
America.
Scott M. Brown is Senior Vice President, Secretary and, since February, 1994,
General Counsel of the Company. He joined NME in 1981. Mr. Brown was elected
Secretary in 1984 and Senior Vice President in 1990. Mr. Brown was appointed
acting General Counsel in July 1993 and General Counsel in February 1994.
Raymond L. Mathiasen is Senior Vice President and, since February 1994, Chief
Financial Officer of the Company. From September 1993 to February 1994, Mr.
Mathiasen was Senior Vice President and acting Chief Financial Officer. Prior
to joining NME as a Vice President in 1985, he was a partner with Arthur Young
& Company (now known as Ernst & Young). Mr. Mathiasen was elected to the
position of Senior Vice President in 1990, Chief Operating Financial Officer in
1991 and Chief Financial Officer in February 1994.
Barry P. Schochet has served as President and Chief Operating Officer of
NME's Hospital Division since March 1992. Prior to that he served as Assistant
Vice President of hospital operations, Senior Vice President and then Executive
Vice President of NME's Eastern region and most recently as Executive Vice
President and Chief Operating Officer of the Hospital Division. Mr. Schochet
began his service to NME as an Assistant Vice President of NME's Eastern region
in 1979, prior to which he served as the Executive Director of a hospital in
Florida.
Bernice B. Bratter serves as Executive Director of Senior Health and Peer
Counseling, a non-profit health care organization located in Santa Monica,
California. Ms. Bratter has been a director of NME since 1990.
Maurice J. DeWald is Chairman and Executive Officer of Verity Financial
Group, Inc., a private firm that he founded in 1993, which is involved in
investment and development projects, and President of DeWald Enterprises, a
private investment firm that he founded in 1991. From 1986 until 1990, Mr.
DeWald served as Managing Partner of the Los Angeles office of KPMG Peat
Marwick LLP. Mr. DeWald also is a director of Dai-Ichi Kangyo Bank of
California. Mr. DeWald has been a director since 1991.
Peter de Wetter served as Executive Vice President of NME from October, 1979
until his retirement in May, 1989. Mr. de Wetter also serves as a director of
Hillhaven. Mr. de Wetter has been a director of NME since 1977.
Edward Egbert was a physician in private practice until his retirement on
January 1, 1994. From 1975 to 1982, Dr. Egbert served on the Governing Board of
Sierra Medical Center, a general hospital owned and operated by one of NME's
subsidiaries. Dr. Egbert has been a director of NME since 1975.
Raymond A. Hay has been Chairman and Chief Executive Officer of Aberdeen
Associates, a private investment firm, since 1992. Mr. Hay held the same
position with Hay-Faulstich & Associates from 1991 through January 1992, when
its operations were assumed by Aberdeen Associates. From 1983 until June 1991,
Mr. Hay served as Chairman and Chief Executive Officer, and through June 1993,
Mr. Hay served as a director of The LTV Corporation, which filed a voluntary
petition under Chapter 11 of the Federal Bankruptcy Code in 1986. The petition
received final approval in June 1993. Mr. Hay also serves as a director of
Maxus Energy Corporation. Mr. Hay has been a director of NME since 1985.
Lester B. Korn has been a director of NME since 1993. Mr. Korn is Chairman
and Chief Executive Officer of Korn Tuttle Capital Group, a diversified holding
company based in Los Angeles, California. Mr. Korn served as the Chairman of
Korn/Ferry International, an executive search firm which he founded, from 1965
until May 1991, when he retired and became Chairman Emeritus. During 1987-88,
he served as United States Ambassador to the United Nations Economic and Social
Council. Mr. Korn also serves as a director of ConAm Properties, Ltd.
72
<PAGE>
James P. Livingston served as an Executive Vice President of NME from 1977
until his retirement in June 1986. From 1984 until his retirement, Mr.
Livingston also served as President and Chief Executive Officer of NME's former
Health Products and Services Group. Mr. Livingston has been a director of NME
since 1975.
Richard S. Schweiker served as president of the American Council of Life
Insurance from 1983 through December 31, 1994. Mr. Schweiker also serves as a
director of Univax Biologics, Inc. and LabOne, Inc. Mr. Schweiker has been a
director of NME since 1984. From 1981 to 1983, Mr. Schweiker served as
Secretary of Health and Human Services.
AMH NOMINEES
Robert W. O'Leary has served as a director, Chairman and Chief Executive
Officer of AMH and AMI since July 1991. Prior to joining AMH, Mr. O'Leary was
President and Chief Executive Officer of Voluntary Hospitals of America, Inc.,
a hospital alliance representing approximately 850 domestic hospitals from 1989
to June 1991, and President and Chief Executive Officer of St. Joseph Health
System, a multi-hospital, multi-purpose health services organization from 1983
to 1989.
John T. Casey has served as President and Chief Operating Officer of AMH and
AMI since November 1991 and as a director of AMH and AMI since 1992. Prior to
joining AMH, Mr. Casey was President and Chief Executive Officer of The
Samaritan Foundation, the then ninth largest private healthcare system in the
United States, from March 1990 to November 1991, and President and Chief
Executive Officer of Methodist Health Systems, a regional healthcare system,
from 1987 to 1990.
[ ].
73
<PAGE>
DESCRIPTION OF NOTES
GENERAL
The Senior Notes will be issued pursuant to an Indenture (the "Senior Note
Indenture") between the Company and The Bank of New York, as Trustee (the
"Senior Note Trustee"). The Senior Subordinated Notes will be issued pursuant
to an Indenture (the "Senior Subordinated Note Indenture" and, together with
the Senior Note Indenture, the "Indentures") between the Company and The Bank
of New York, as Trustee (the "Senior Subordinated Note Trustee" and, together
with the Senior Note Trustee, the "Trustees"). The terms of the Notes include
those stated in the Indentures and those made part of the Indentures by
reference to the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The Notes are subject to all such terms, and Holders of Notes are
referred to the Indentures and the Trust Indenture Act for a statement thereof.
The following summary of certain provisions of the Indentures does not purport
to be complete and is qualified in its entirety by reference to the Indentures,
including the definitions therein of certain terms used below. Copies of the
proposed forms of Indentures have been filed as exhibits to the Registration
Statement of which this Prospectus is a part. The definitions of certain terms
used in the following summary are set forth below under "--Certain
Definitions." As used herein, the term the "Company" refers to National Medical
Enterprises, Inc. and not to any of its Subsidiaries, and the term
"Subsidiaries" excludes the International Subsidiaries (as defined herein).
The Senior Notes will be general unsecured obligations of the Company ranking
senior to all subordinated Indebtedness of the Company, including the Senior
Subordinated Notes, and pari passu in right of payment with all other
Indebtedness of the Company, including borrowings under the New Credit
Facility. Borrowings under the New Credit Facility will be secured by a first
priority Lien on the Capital Stock of the Company's present and future direct
Subsidiaries (other than certain Subsidiaries that do not have material
assets), certain intercompany Indebtedness owed to the Company and the
Company's and certain of its Subsidiaries' equity investments in Westminster
and Hillhaven and will have priority as to such collateral over the Senior
Notes. The Senior Subordinated Notes will be general unsecured obligations of
the Company, subordinated in right of payment to all existing and future Senior
Debt of the Company, including the Senior Notes and all Obligations under the
New Credit Facility.
The operations of the Company are conducted through its Subsidiaries and,
therefore, the Company is dependent upon the cash flow of its Subsidiaries to
meet its obligations, including its obligations under the Notes. The Notes will
be effectively subordinated to all outstanding Indebtedness and other
liabilities and commitments (including trade payables and lease obligations) of
the Company's Subsidiaries. Any right of the Company to receive assets of any
of its Subsidiaries upon the latter's liquidation or reorganization (and the
consequent right of the Holders of Notes to participate in those assets) will
be effectively subordinated to the claims of that Subsidiary's creditors,
except to the extent that the Company is itself recognized as a creditor of
such Subsidiary, in which case the claims of the Company would still be
subordinate to any security in the assets of such Subsidiary and any
Indebtedness of such Subsidiary senior to that held by the Company. On a pro
forma basis at August 31, 1994 after giving effect to the Merger and certain
refinancing transactions, the outstanding Indebtedness and other obligations of
the Company's Subsidiaries would have been approximately $ million (based
upon certain assumptions as to the amounts of indebtedness of AMI to be
redeemed or repurchased and excluding trade payables of $ million at August
31, 1994).
PRINCIPAL, MATURITY AND INTEREST
The Senior Notes will be unsecured senior obligations of the Company limited
in aggregate principal amount to $400 million and will mature on ,
2002. Interest on the Senior Notes will accrue at the rate per annum set forth
on the cover page of this Prospectus and will be payable semi-annually in
arrears on and of each year, commencing on ,
1995, to Holders of record on the immediately preceding and
. Interest on the Senior Notes will accrue from the most recent date
to which interest has been paid or, if no interest has been paid, from the date
of original issuance.
74
<PAGE>
The Senior Subordinated Notes will be unsecured obligations of the Company
limited in aggregate principal amount to $600 million and will mature on
, 2005. Interest on the Senior Subordinated Notes will accrue at the
rate per annum set forth on the cover page of this Prospectus and will be
payable semi-annually in arrears on and of each year, commencing
on , 1995, to Holders of record on the immediately preceding and
. Interest on the Senior Subordinated Notes will accrue from the most
recent date to which interest has been paid or, if no interest has been paid,
from the date of original issuance.
Interest on the Notes will be computed on the basis of a 360-day year
comprised of twelve 30-day months. Principal, premium, if any, and interest on
the Notes will be payable at the office or agency of the Company maintained for
such purpose within the City and State of New York or, at the option of the
Company, payment of interest may be made by check mailed to the Holders of the
Notes at their respective addresses set forth in the register of Holders of
Notes; provided that all payments with respect to Notes having a principal
amount of $10 million or more the Holders of which have given wire transfer
instructions to the Company will be required to be made by wire transfer of
immediately available funds to the accounts specified by such Holders. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the applicable Trustee maintained for such purpose. The
Notes will be issued in denominations of $1,000 and integral multiples thereof.
OPTIONAL REDEMPTION
The Senior Notes will not be redeemable at the option of the Company prior to
their maturity.
The Senior Subordinated Notes will not be redeemable at the option of the
Company prior to , 2000. Thereafter, the Senior Subordinated Notes will
be subject to redemption at the option of the Company, in whole or from time to
time in part, upon not less than 30 nor more than 60 days' notice, at the
redemption prices (expressed as percentages of principal amount) set forth
below plus accrued and unpaid interest thereon to the applicable redemption
date, if redeemed during the twelve-month period beginning on of the
years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2000........................................................... %
2001........................................................... %
2002........................................................... %
2003 and thereafter............................................ 100.00%
</TABLE>
If less than all of the Senior Subordinated Notes are to be redeemed at any
time, selection of Senior Subordinated Notes for redemption will be made by the
Senior Subordinated Note Trustee in compliance with the requirements of the
principal national securities exchange, if any, on which the Senior
Subordinated Notes are then listed, or, if the Senior Subordinated Notes are
not so listed, on a pro rata basis, by lot or by such method as the Senior
Subordinated Note Trustee shall deem fair and appropriate; provided that Senior
Subordinated Notes with a principal amount of $1,000 shall not be redeemed in
part. Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Senior
Subordinated Notes to be redeemed at its registered address. If any Senior
Subordinated Note is to be redeemed in part only, the notice of redemption that
relates to such Senior Subordinated Note shall state the portion of the
principal amount thereof to be redeemed. A new Senior Subordinated Note in
principal amount equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Senior
Subordinated Note. On and after the redemption date, interest will cease to
accrue on Senior Subordinated Notes or portions of them called for redemption.
MANDATORY REDEMPTION
Except as set forth below under "Repurchase at the Option of Holders," the
Company will not be required to make any mandatory redemption or sinking fund
payments with respect to the Notes.
75
<PAGE>
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control Triggering Event, each Holder of
Notes will have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof
plus accrued and unpaid interest thereon to the date of purchase (the "Change
of Control Payment") on a date that is not more than 90 days after the
occurrence of such Change of Control Triggering Event (the "Change of Control
Payment Date"). Within 30 days following any Change of Control Triggering
Event, the Company will mail, or at the Company's request the applicable
Trustee will mail, a notice to each Holder offering to repurchase the Notes
held by such Holder pursuant to the procedures specified in such notice. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such
laws and regulations are applicable in connection with the repurchase of the
Notes as a result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (1) accept for payment all Notes or portions thereof properly tendered
and not withdrawn pursuant to the Change of Control Offer, (2) deposit with the
Paying Agent an amount equal to the Change of Control Payment in respect of all
Notes or portions thereof so tendered and (3) deliver or cause to be delivered
to the applicable Trustee the Notes so accepted together with an Officers'
Certificate stating the aggregate principal amount of Notes or portions thereof
being purchased by the Company. The Paying Agent will promptly mail to each
Holder of Notes so tendered the Change of Control Payment for such Notes, and
the applicable Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Note equal in principal amount
to any unpurchased portion of the Notes surrendered, if any; provided that each
such new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Senior Subordinated Note Indenture will provide that, prior to
complying with the provisions of this covenant, but in any event within 90 days
following a Change of Control Triggering Event, the Company will either repay
all outstanding Senior Debt or obtain the requisite consents, if any, under all
agreements governing outstanding Senior Debt to permit the repurchase of Senior
Subordinated Notes required by this covenant. Failure to comply with the
provisions of the preceding sentence will constitute a Default under the Senior
Subordinated Note Indenture. The Company will publicly announce the results of
the Change of Control Offer on or as soon as practicable after the Change of
Control Payment Date.
Except as described above with respect to a Change of Control, the Indentures
will not contain provisions that permit the Holders of the Notes to require
that the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar transaction.
The New Credit Facility will prohibit the Company from purchasing any Notes
more than twelve months prior to the final maturity thereof, and also will
provide that certain change of control events with respect to the Company will
constitute a default thereunder. See "Description of the New Credit Facility."
The Senior Note Indenture will not restrict the Company's ability to purchase
Senior Subordinated Notes upon a Change of Control Triggering Event. See "--
Certain Covenants--Restricted Payments." Any future credit agreements or other
agreements relating to Senior Debt to which the Company becomes a party may
contain similar restrictions and provisions. In the event a Change of Control
occurs at a time when the Company is prohibited from purchasing Notes, the
Company could seek the consent of its lenders to the purchase of Notes or could
attempt to refinance the borrowings that contain such prohibition. If the
Company does not obtain such a consent or repay such borrowings, the Company
will remain prohibited from purchasing Notes. In such case, the Company's
failure to purchase tendered Notes would constitute an Event of Default under
the applicable Indenture which would, in turn, constitute a default under the
New Credit Facility. In such circumstances, the subordination provisions in the
Senior Subordinated Note Indenture would likely restrict payments to the
Holders of Senior Subordinated Notes. See "Risk Factors--Subsidiary Operations;
Subordination."
76
<PAGE>
ASSET SALES
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, consummate an Asset Sale unless (i) the Company (or
the Subsidiary, as the case may be) receives consideration at the time of such
Asset Sale at least equal to the fair market value (as conclusively determined
by a resolution of the Board of Directors set forth in an Officers' Certificate
delivered to the Trustees) of the assets or Equity Interests issued or sold or
otherwise disposed of and (ii) except in the case of a sale of Specified
Assets, at least 80% of the consideration therefor received by the Company or
such Subsidiary is in the form of cash; provided that for purposes of this
provision, (x) the amount of (A) any liabilities (as shown on the Company's or
such Subsidiary's most recent balance sheet or in the notes thereto), of the
Company or any Subsidiary (other than, in the case of an Asset Sale by the
Company, liabilities that are by their terms subordinated to the Notes) that
are assumed by the transferee of any such assets and (B) any securities or
other obligations received by the Company or any such Subsidiary from such
transferee that are immediately converted by the Company or such Subsidiary
into cash (or as to which the Company or such Subsidiary has received at or
prior to the consummation of the Asset Sale a commitment (which may be subject
to customary conditions) from a nationally recognized investment, merchant or
commercial bank to convert into cash within 90 days of the consummation of such
Asset Sale and which are thereafter actually converted into cash within such
90-day period) will be deemed to be cash (but shall not be deemed to be Net
Proceeds for purposes of the following provisions until reduced to cash); and
(y) the fair market value of any Non-Cash Consideration received by the Company
or a Subsidiary in any Asset Sale shall be deemed to be cash (but shall not be
deemed to be Net Proceeds for purposes of the following provisions until
reduced to cash) to the extent that the aggregate fair market value (as
conclusively determined by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustees) of all Non-Cash
Consideration (measured at the time received and without giving effect to any
subsequent changes in value) held by the Company immediately after consummation
of such Asset Sale does not exceed 10% of the Company's Stockholders' Equity.
Pursuant to the Senior Note Indenture, within 365 days after the receipt of
any Net Proceeds from an Asset Sale, the Company may apply such Net Proceeds
(w) to purchase one or more Hospitals or Related Businesses and/or a
controlling interest in the Capital Stock of a Person owning one or more
Hospitals and/or one or more Related Businesses, (x) to make a capital
expenditure or to acquire other tangible assets, in each case, that are used or
useful in any business in which the Company is permitted to be engaged pursuant
to the covenant described below under the caption "--Certain Covenants--Line of
Business," (y) to permanently reduce Senior Term Debt or Existing Indebtedness
of a Subsidiary or (z) to permanently reduce Senior Revolving Debt (and to
correspondingly reduce commitments with respect thereto), except that up to an
aggregate of $200 million of Net Proceeds from Asset Sales may be applied after
the date of the Senior Note Indenture to reduce Senior Revolving Debt without a
corresponding reduction in commitments with respect thereto. Pending the final
application of any such Net Proceeds, the Company may temporarily reduce Senior
Revolving Debt or otherwise invest such Net Proceeds in any manner that is not
prohibited by the Senior Note Indenture. Any Net Proceeds from Asset Sales that
are not applied or invested as provided in the first sentence of this paragraph
will be deemed to constitute "Excess Proceeds." When the aggregate amount of
Excess Proceeds exceeds $25 million, the Company will be required to make an
offer to all Holders of Senior Notes and any other Indebtedness of the Company
ranking on a parity with the Senior Notes from time to time outstanding with
similar provisions requiring the Company to make an offer to purchase or to
redeem such Indebtedness with the proceeds from any asset sales, pro rata in
proportion to the respective principal amounts of the Senior Notes and such
other Indebtedness then outstanding (a "Senior Asset Sale Offer") to purchase
the maximum principal amount of Senior Notes and such other Indebtedness that
may be purchased out of the Excess Proceeds, at an offer price in cash equal to
100% of the principal amount thereof plus accrued and unpaid interest thereon
to the date of purchase, in accordance with the procedures set forth in the
Senior Note Indenture. To the extent that the aggregate amount of Senior Notes
and such other Indebtedness tendered pursuant to a Senior Asset Sale Offer is
less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes, including an offer to
77
<PAGE>
redeem Senior Subordinated Notes pursuant to the Asset Sale covenant contained
in the Senior Subordinated Note Indenture. If the aggregate principal amount of
Senior Notes and such other Indebtedness surrendered by holders thereof exceeds
the amount of Excess Proceeds, the Senior Notes and such other Indebtedness
will be purchased on a pro rata basis. Upon completion of a Senior Asset Sale
Offer, the amount of Excess Proceeds shall be reset at zero.
Pursuant to the Senior Subordinated Note Indenture, within 465 days after the
receipt of any Net Proceeds from an Asset Sale, the Company may apply such Net
Proceeds (v) to purchase one or more Hospitals or Related Businesses and/or a
controlling interest in the Capital Stock of a Person owning one or more
Hospitals and/or one or more Related Businesses, (w) to make a capital
expenditure or to acquire other tangible assets, in each case, in any business
in which the Company is permitted to be engaged pursuant to the covenant
described below under the caption "--Certain Covenants--Line of Business," (x)
to permanently reduce Senior Term Debt or Existing Indebtedness of a
Subsidiary, (y) to permanently reduce Senior Revolving Debt (and to
correspondingly reduce commitments with respect thereto), except that up to an
aggregate of $200 million of Net Proceeds from Asset Sales may be applied after
the date of the Senior Subordinated Note Indenture to reduce Senior Revolving
Debt without a corresponding reduction in commitments with respect thereto, or
(z) to redeem or repurchase Senior Notes or redeem or repurchase other Senior
Debt. Pending the final application of any such Net Proceeds, the Company may
temporarily reduce Senior Revolving Debt or otherwise invest such Net Proceeds
in any manner that is not prohibited by the Senior Subordinated Note Indenture.
Any Net Proceeds from Asset Sales that are not applied or invested as provided
in the first sentence of this paragraph will be deemed to constitute
"Subordinated Excess Proceeds." When the aggregate amount of Subordinated
Excess Proceeds exceeds $25 million, the Company will be required to make an
offer to all Holders of Senior Subordinated Notes (a "Senior Subordinated Asset
Sale Offer") to purchase the maximum principal amount of Senior Subordinated
Notes that may be purchased out of the Subordinated Excess Proceeds, at an
offer price in cash equal to 100% of the principal amount thereof plus accrued
and unpaid interest thereon to the date of purchase, in accordance with the
procedures set forth in the Senior Subordinated Note Indenture. To the extent
that the aggregate amount of Senior Subordinated Notes tendered pursuant to a
Senior Subordinated Asset Sale Offer is less than the Subordinated Excess
Proceeds, the Company may use any remaining Subordinated Excess Proceeds for
general corporate purposes. If the aggregate principal amount of Senior
Subordinated Notes surrendered by Holders thereof exceeds the amount of
Subordinated Excess Proceeds, the Senior Subordinated Note Trustee shall select
the Senior Subordinated Notes to be purchased on a pro rata basis. Upon
completion of a Senior Subordinated Asset Sale Offer, the amount of
Subordinated Excess Proceeds shall be reset at zero.
SUBORDINATION OF SENIOR SUBORDINATED NOTES
The payment of principal of, premium, if any, and interest on the Senior
Subordinated Notes will be subordinated in right of payment, as set forth in
the Senior Subordinated Note Indenture, to the prior payment in full of all
Senior Debt, whether outstanding on the date of the Senior Subordinated Note
Indenture or thereafter incurred.
Upon any distribution to creditors of the Company in a liquidation or
dissolution of the Company or in a bankruptcy, reorganization, insolvency,
receivership or similar proceeding relating to the Company or its property, an
assignment for the benefit of creditors or any marshalling of the Company's
assets and liabilities, the holders of Senior Debt will be entitled to receive
payment in full of all Obligations due in respect of such Senior Debt
(including interest accruing after the commencement of any such proceeding at
the rate specified in the applicable Senior Debt, whether or not allowed or
allowable as a claim in such proceeding) before the Holders of Senior
Subordinated Notes will be entitled to receive any payment with respect to the
Senior Subordinated Notes, and until all Obligations with respect to Senior
Debt are paid in full, any distribution to which the Holders of Senior
Subordinated Notes would be entitled shall be made to the Holders of Senior
78
<PAGE>
Debt (except (a) that Holders of Senior Subordinated Notes may receive
securities that (i) are subordinated at least to the same extent as the Senior
Subordinated Notes to Senior Debt and any securities issued in exchange for
Senior Debt, (ii) are unsecured (except to the extent the Senior Subordinated
Notes are secured), (iii) are not Guaranteed by any Subsidiary of the Company
(except to the extent the Senior Subordinated Notes are so Guaranteed), and
(iv) have a Weighted Average Life to Maturity and final maturity that are not
shorter than the Weighted Average Life to Maturity of the Senior Subordinated
Notes or any securities issued to Holders of Senior Debt under the New Credit
Facility pursuant to a plan of reorganization or readjustment, and (b) payments
made from the trust described under "--Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment upon or in respect of the Senior
Subordinated Notes (except in such subordinated securities or from the trust
described under "--Legal Defeasance and Covenant Defeasance") if (i) a default
in the payment of the principal of, premium, if any, or interest on Designated
Senior Debt occurs and is continuing beyond any applicable period of grace or
(ii) any other default occurs and is continuing with respect to Designated
Senior Debt that permits holders of the Designated Senior Debt as to which such
default relates to accelerate its maturity and the Senior Subordinated Note
Trustee receives a notice of such default (a "Payment Blockage Notice"), for so
long as any Obligations are outstanding under the New Credit Facility, from the
Representative thereunder and, thereafter, from the Holders or Representative
of any Designated Senior Debt. Payments on the Senior Subordinated Notes may
and shall be resumed (a) in the case of a payment default, upon the date on
which such default is cured or waived and (b) in case of a nonpayment default,
the earlier of the date on which such nonpayment default is cured or waived or
179 days after the date on which the applicable Payment Blockage Notice is
received, unless the maturity of any Designated Senior Debt has been
accelerated. No new period of payment blockage may be commenced within 360 days
after the receipt by the Senior Subordinated Note Trustee of any prior Payment
Blockage Notice. No nonpayment default that existed or was continuing on the
date of delivery of any Payment Blockage Notice to the Subordinated Note
Trustee shall be, or be made, the basis for a subsequent Payment Blockage
Notice.
The Senior Subordinated Note Indenture will further require that the Company
promptly notify holders of Senior Debt if payment of the Senior Subordinated
Notes is accelerated because of an Event of Default.
As a result of the subordination provisions described above, in the event of
a liquidation or insolvency, Holders of Senior Subordinated Notes may recover
less ratably than creditors of the Company who are Holders of Senior Debt. On a
pro forma basis, after giving effect to the Merger and the Refinancing, Senior
Debt of the Company at August 31, 1994 would have been approximately
$ billion, of which $ billion would have been secured
Indebtedness under the New Credit Facility. The Senior Subordinated Note
Indenture will limit, subject to certain financial tests, the amount of
additional Indebtedness, including Senior Debt, that the Company and its
Subsidiaries can incur. See "--Certain Covenants--Incurrence of Indebtedness
and Issuance of Preferred Stock."
"Designated Senior Debt" means (i) so long as any Obligations are outstanding
under the New Credit Facility, such Obligations and (ii) thereafter, any other
Senior Debt permitted under the Senior Subordinated Note Indenture the
principal amount of which is $100 million or more and that has been designated
by the Company as "Designated Senior Debt."
"Senior Debt" means (i) the Senior Term Debt and the Senior Revolving Debt,
(ii) the Senior Notes, (iii) any other Indebtedness permitted to be incurred by
the Company under the terms of the Senior Subordinated Note Indenture, unless
the instrument under which such Indebtedness is incurred expressly provides
that it is on a parity with or subordinated in right of payment to the Senior
Subordinated Notes and (iv) all Obligations with respect to any of the
foregoing. Notwithstanding anything to the contrary in the foregoing, Senior
Debt will not include (w) any liability for Federal, state, local or other
taxes owed or owing by the Company, (x) any Indebtedness of the Company to any
of its Subsidiaries or other Affiliates, (y) any trade payables or (z) any
Indebtedness that is incurred in violation of the Senior Subordinated Note
Indenture.
79
<PAGE>
CERTAIN COVENANTS
RESTRICTED PAYMENTS
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly: (i) declare or pay any
dividend or make any distribution on account of the Company's or any of its
Subsidiaries' Equity Interests (other than (w) Physician Joint Venture
Distributions,(x) dividends or distributions payable in Qualified Equity
Interests of the Company, (y) dividends or distributions payable to the Company
or any Subsidiary of the Company, and (z) dividends or distributions by any
Subsidiary of the Company payable to all holders of a class of Equity Interests
of such Subsidiary on a pro rata basis); (ii) purchase, redeem or otherwise
acquire or retire for value any Equity Interests of the Company; (iii) make any
principal payment on, or purchase, redeem, defease or otherwise acquire or
retire for value any Indebtedness that is subordinated to the Notes issued
under such Indenture, except at the original final maturity date thereof or
pursuant to the Refinancing; or (iv) make any Restricted Investment (all such
payments and other actions set forth in clauses (i) through (iv) above being
collectively referred to as "Restricted Payments"), unless, at the time of and
after giving effect to such Restricted Payment (the amount of any such
Restricted Payment, if other than cash, shall be the fair market value (as
conclusively evidenced by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustees within 60 days prior to the
date of such Restricted Payment) of the asset(s) proposed to be transferred by
the Company or such Subsidiary, as the case may be, pursuant to such Restricted
Payment):
(a) no Default or Event of Default shall have occurred and be continuing
or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and after
giving pro forma effect thereto as if such Restricted Payment had been made
at the beginning of the most recently ended four full fiscal quarter period
for which internal financial statements are available immediately preceding
the date of such Restricted Payment, have been permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage
Ratio test set forth in the first paragraph of the covenant in the
applicable Indenture described below under the caption "--Incurrence of
Indebtedness and Issuance of Preferred Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the date
of the Indentures (excluding Restricted Payments permitted by clauses (u),
(v), (w) and (x) of the next succeeding paragraph), is less than the sum of
(i) 50% of the Consolidated Net Income of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the date of the Indentures to the end of the Company's
most recently ended fiscal quarter for which internal financial statements
are available at the time of such Restricted Payment (or, if such
Consolidated Net Income for such period is a deficit, less 100% of such
deficit), plus (ii) 100% of the aggregate net cash proceeds received by the
Company from the issue or sale (other than to a Subsidiary of the Company)
since the date of the Indentures of Qualified Equity Interests of the
Company or of debt securities of the Company or any of its Subsidiaries
that have been converted into or exchanged for such Qualified Equity
Interests of the Company, plus (iii) $20 million.
The foregoing provisions will not prohibit the following Restricted Payments:
(t) the payment of any dividend within 60 days after the date of declaration
thereof, if at said date of declaration such payment would have complied with
the provisions of the Indentures; (u) the payment of cash dividends on any
series of Disqualified Stock issued after the date of the Indentures in an
aggregate amount not to exceed the cash received by the Company since the date
of the Indentures upon issuance of such Disqualified Stock; (v) the repurchase
of [PIP Equity Component] (w) the redemption, repurchase, retirement or other
acquisition of any Equity Interests of the Company or any Subsidiary in
exchange for, or out of the net cash proceeds of, the substantially concurrent
sale (other than to a Subsidiary of the Company) of Qualified Equity Interests
of the Company); provided that the amount of any such net cash proceeds that
are utilized for any such
80
<PAGE>
redemption, repurchase, retirement or other acquisition shall be excluded from
clause (c)(ii) of the preceding paragraph; (x) the defeasance, redemption or
repurchase of subordinated Indebtedness with the net cash proceeds from an
incurrence of Permitted Refinancing Indebtedness or in exchange for or out of
the net cash proceeds from the substantially concurrent sale (other than to a
Subsidiary of the Company) of Qualified Equity Interests of the Company;
provided, that the amount of any such net cash proceeds that are utilized for
any such redemption, repurchase, retirement or other acquisition shall be
excluded from clause (c)(ii) of the preceding paragraph; (y) the repurchase,
redemption or other acquisition or retirement for value of any Equity Interests
of the Company or any Subsidiary of the Company held by any member of the
Company's (or any of its Subsidiaries') management pursuant to any management
equity subscription agreement or stock option agreement; provided that the
aggregate price paid for all such repurchased, redeemed, acquired or retired
Equity Interests shall not exceed $5 million in any twelve-month period and no
Default or Event of Default shall have occurred and be continuing immediately
after such transaction; and (z) the making and consummation of (A) a Senior
Subordinated Asset Sale Offer in accordance with the provisions of the Senior
Subordinated Note Indenture with any Excess Proceeds that remain after
consummation of a Senior Asset Sale Offer, within 120 days of the consummation
of such Senior Asset Sale Offer, or (B) a Change of Control Offer with respect
to the Senior Subordinated Notes in accordance with the provisions of the
Senior Subordinated Note Indenture.
Not later than the date of making any Restricted Payment, the Company shall
deliver to the Trustees an Officers' Certificate stating that such Restricted
Payment is permitted and setting forth the basis upon which the calculations
required by the covenant "Restricted Payments" were computed.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF PREFERRED STOCK
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create, incur, issue,
assume, Guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") after the
date of the Indentures any Indebtedness (including Acquired Debt) and that the
Company will not issue any Disqualified Stock and will not permit any of its
Subsidiaries to issue any shares of preferred stock; provided, however, that
the Company may incur Indebtedness (including Acquired Debt) and the Company
may issue shares of Disqualified Stock if the Fixed Charge Coverage Ratio for
the Company's most recently ended four full fiscal quarters for which internal
financial statements are available immediately preceding the date on which such
additional Indebtedness is incurred or such Disqualified Stock is issued would
have been at least (x) 2.25 to 1 if such incurrence or issuance occurs on or
before March 31, 1996, or (y) 2.5 to 1 if such incurrence or issuance occurs at
any time thereafter, in each case determined on a pro forma basis (including a
pro forma application of the net proceeds therefrom), as if the additional
Indebtedness had been incurred, or the Disqualified Stock had been issued, as
the case may be, at the beginning of such four-quarter period. Indebtedness
consisting of reimbursement obligations in respect of a letter of credit will
be deemed to be incurred when the letter of credit is first issued. The Company
will not permit any of the International Subsidiaries to incur any Indebtedness
other than Non-Recourse Debt.
The foregoing provisions will not apply to:
(i) the incurrence by the Company of Senior Term Debt pursuant to the New
Credit Facility in an aggregate principal amount at any time outstanding
not to exceed an amount equal to $2.0 billion less the aggregate amount of
all repayments, optional or mandatory, of the principal of any Senior Term
Debt (other than repayments that are immediately reborrowed) that have been
made since the date of the Indentures;
(ii) the incurrence by the Company of Senior Revolving Debt and letters
of credit pursuant to the New Credit Facility in an aggregate principal
amount at any time outstanding (with letters of credit being deemed to have
a principal amount equal to the maximum potential reimbursement obligation
of the Company with respect thereto) not to exceed an amount equal to $500
million less the aggregate amount of all Net Proceeds of Asset Sales
applied to permanently reduce the commitments with respect to such
Indebtedness pursuant to the covenant described above under the caption "--
Asset Sales";
81
<PAGE>
(iii) the incurrence by the Company of Indebtedness represented by the Notes;
(iv) the incurrence by the Company and its Subsidiaries of the Existing
Indebtedness;
(v) the incurrence by the Company or any of its Subsidiaries of Permitted
Refinancing Indebtedness in exchange for, or the net proceeds of which are used
to extend, refinance, renew, replace, defease or refund, Indebtedness that was
permitted by the Indentures to be incurred (including, without limitation,
Existing Indebtedness);
(vi) the incurrence by the Company or any of its Subsidiaries of intercompany
Indebtedness between or among the Company and any of its Subsidiaries;
(vii) the incurrence by the Company of Hedging Obligations that are incurred
for the purpose of fixing or hedging interest rate or currency risk with
respect to any fixed or floating rate Indebtedness that is permitted by the
Indentures to be outstanding or any receivable or liability the payments of
which is determined by reference to a foreign currency; provided, that the
notional principal amount of any such Hedging Obligation does not exceed the
principal amount of the Indebtedness to which such Hedging Obligation relates;
(viii) the incurrence by the Company or any of its Subsidiaries of Physician
Support Obligations;
(ix) the incurrence by the Company or any of its Subsidiaries of Indebtedness
represented by performance bonds, standby letters of credit or appeal bonds, in
each case to the extent incurred in the ordinary course of business of the
Company or such Subsidiary;
(x) the incurrence by any Subsidiary of the Company of Indebtedness, the
aggregate principal amount of which, together with all other Indebtedness of
the Company's Subsidiaries at the time outstanding (excluding the Existing
Indebtedness until repaid or refinanced and excluding Physician Support
Obligations), does not exceed the greater of (1) 10% of the Company's
Stockholders' Equity or (2) $10 million; provided that, in case of clause (1)
only, the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such Indebtedness is incurred would
have been at least (x) 2.25 to l if such incurrence occurs on or before March
31, 1996, or (y) 2.5 to l if such incurrence occurs at any time thereafter, in
each case determined on a pro forma basis (including a pro forma application of
the net proceeds therefrom), as if such Indebtedness has been incurred at the
beginning of such four-quarter period; and
(xi) the incurrence by the Company of Indebtedness (in addition to
Indebtedness permitted by any other clause of this paragraph) in an aggregate
principal amount at any time outstanding not to exceed $150 million.
LIENS
The Senior Note Indenture will provide that the Company will not, and will
not permit any of its Subsidiaries to, directly or indirectly, create, incur,
assume or suffer to exist any Lien (except Permitted Liens) on any asset now
owned or hereafter acquired, or any income or profits therefrom or assign or
convey any right to receive income therefrom unless all payments due under the
Senior Note Indenture and the Senior Notes are secured on an equal and ratable
basis with the Obligations so secured until such time as such Obligations are
no longer secured by a Lien.
The Senior Subordinated Note Indenture will provide that the Company will
not, and will not permit any of its Subsidiaries to, directly or indirectly,
create, incur, assume or suffer to exist any Lien to secure Indebtedness that
is pari passu with or subordinated in right of payment to the Senior
Subordinated Notes (except Permitted Liens) on any asset now owned or hereafter
acquired, or any income or profits therefrom or assign or convey any right to
receive income therefrom unless all payments due under the Senior Subordinated
Note Indenture and the Senior Subordinated Notes are secured on an equal and
ratable basis with the Obligations so secured until such time as such
Obligations are no longer secured by a Lien.
82
<PAGE>
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, directly or indirectly, create or otherwise cause
or suffer to exist or become effective any consensual encumbrance or
restriction on the ability of any Subsidiary to (i)(a) pay dividends or make
any other distributions to the Company or any of its Subsidiaries (1) on its
Capital Stock or (2) with respect to any other interest or participation in, or
measured by, its profits, or (b) pay any indebtedness owed to the Company or
any of its Subsidiaries, (ii) make loans or advances to the Company or any of
its Subsidiaries or (iii) transfer any of its properties or assets to the
Company or any of its Subsidiaries, except for such encumbrances or
restrictions existing under or by reason of (a) Existing Indebtedness as in
effect on the date of the Indentures, (b) the Indentures, (c) applicable law,
(d) any instrument governing Indebtedness or Capital Stock of a Person acquired
by the Company or any of its Subsidiaries as in effect at the time of such
acquisition (except to the extent such Indebtedness was incurred in connection
with or in contemplation of such acquisition or in violation of the covenant
described above under the caption "--Incurrence of Indebtedness and Issuance of
Preferred Stock"), which encumbrance or restriction is not applicable to any
Person, or the properties or assets of any Person, other than the Person, or
the property or assets of the Person, so acquired, provided that the
Consolidated Cash Flow of such Person is not taken into account in determining
whether such acquisition was permitted by the terms of the Indentures except to
the extent that such Consolidated Cash Flow would be permitted to be dividends
to the Company without the prior consent or approval of any third party, (e)
customary non-assignment provisions in leases entered into in the ordinary
course of business, (f) purchase money obligations for property acquired in the
ordinary course of business that impose restrictions of the nature described in
clause (iii) above on the property so acquired, (g) Permitted Refinancing
Indebtedness, provided that the restrictions contained in the agreements
governing such Permitted Refinancing Indebtedness are no more restrictive than
those contained in the agreements governing the Indebtedness being refinanced,
or (h) the New Credit Facility and related documentation as the same is in
effect on the date of the Indentures and as amended or replaced from time to
time, provided that no such amendment or replacement is more restrictive as to
the matters enumerated above than the New Credit Facility and related
documentation as in effect on the date of the Indentures.
LINE OF BUSINESS
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, engage to any material extent in any business other
than the ownership, operation and management of Hospitals and Related
Businesses.
MERGER, CONSOLIDATION, OR SALE OF ASSETS
The Indentures will provide that the Company may not consolidate or merge
with or into (whether or not the Company is the surviving corporation), or
sell, assign, transfer, lease, convey or otherwise dispose of all or
substantially all of its properties or assets in one or more related
transactions, to another corporation, Person or entity unless (i) the Company
is the surviving corporation or the entity or the Person formed by or surviving
any such consolidation or merger (if other than the Company) or to which such
sale, assignment, transfer, lease, conveyance or other disposition shall have
been made is a corporation organized or existing under the laws of the United
States, any state thereof or the District of Columbia; (ii) the entity or
Person formed by or surviving any such consolidation or merger (if other than
the Company) or the entity or Person to which such sale, assignment, transfer,
lease, conveyance or other disposition shall have been made assumes all the
obligations of the Company under the Notes and the Indentures pursuant to
supplemental indentures in forms reasonably satisfactory to the Senior Note
Trustee and the Senior Subordinated Note Trustee, as the case may be; (iii)
immediately after such transaction no Default or Event of Default exists; and
(iv) the Company or the entity or Person formed by or surviving any such
consolidation or merger (if other than the Company), or to which such sale,
assignment, transfer, lease, conveyance or other disposition shall have been
made (A) will have Consolidated Net Worth immediately after the transaction
equal to or greater than the Consolidated Net Worth of the Company immediately
preceding the transaction and (B) will, at the time of
83
<PAGE>
such transaction and after giving pro forma effect thereto as if such
transaction had occurred at the beginning of the applicable four-quarter
period, be permitted to incur at least $1.00 of additional Indebtedness
pursuant to the Fixed Charge Coverage Ratio test set forth in the first
paragraph of the covenant in the applicable Indenture described above under the
caption "--Incurrence of Indebtedness and Issuance of Preferred Stock."
TRANSACTIONS WITH AFFILIATES
The Indentures will provide that the Company will not, and will not permit
any of its Subsidiaries to, sell, lease, transfer or otherwise dispose of any
of its properties or assets to, or purchase any property or assets from, or
enter into or make any contract, agreement, understanding, loan, advance or
guarantee with, or for the benefit of, any Affiliate (each of the foregoing, an
"Affiliate Transaction"), unless (i) such Affiliate Transaction is on terms
that are no less favorable to the Company or the relevant Subsidiary than those
that could have been obtained in a comparable transaction by the Company or
such Subsidiary with an unrelated Person and (ii) the Company delivers to the
applicable Trustee (a) with respect to any Affiliate Transaction involving
aggregate consideration in excess of $5.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members of the Board of
Directors and (b) with respect to any Affiliate Transaction involving aggregate
consideration in excess of $15 million, an opinion as to the fairness to the
Company or such Subsidiary of such Affiliate Transaction from a financial point
of view issued by an investment banking firm of national standing; provided
that (x) transactions or payments pursuant to any employment arrangements or
employee or director benefit plans entered into by the Company or any of its
Subsidiaries in the ordinary course of business and consistent with the past
practice of the Company or such Subsidiary, (y) transactions between or among
the Company and/or its Subsidiaries and (z) transactions permitted by the
provisions of the Indentures described above under the caption "--Restricted
Payments," in each case, shall not be deemed Affiliate Transactions.
LIMITATIONS ON ISSUANCES OF GUARANTEES OF INDEBTEDNESS BY SUBSIDIARIES
The Senior Note Indenture will provide that the Company will not permit any
Subsidiary, directly or indirectly, to Guarantee or secure the payment of any
other Indebtedness of the Company or any of its Subsidiaries (except
Indebtedness of a Subsidiary of such Subsidiary or Physician Support
Obligations) unless such Subsidiary simultaneously executes and delivers a
supplemental indenture to the Senior Note Indenture providing for the Guarantee
of the payment of the Senior Notes by such Subsidiary, which Guarantee shall be
senior to or pari passu with such Subsidiary's Guarantee of or pledge to secure
such other Indebtedness. The Senior Subordinated Note Indenture will provide
that the Company will not permit any Subsidiary, directly or indirectly, to
Guarantee or secure the payment of any other Indebtedness of the Company or any
of its Subsidiaries (except Indebtedness of a Subsidiary of such Subsidiary or
Physician Support Obligations) unless such Subsidiary simultaneously executes
and delivers a supplemental indenture to the Senior Subordinated Note Indenture
providing for the Guarantee of the payment of the Senior Subordinated Notes by
such Subsidiary, which Guarantee shall be subordinated to such Subsidiary's
Guarantee of or pledge to secure such other Indebtedness to the same extent as
the Senior Subordinated Notes are subordinated to such other Indebtedness under
the Senior Subordinated Note Indenture. Notwithstanding the foregoing, any such
Guarantee by a Subsidiary of the Notes shall provide by its terms that it shall
be automatically and unconditionally released and discharged upon the sale or
other disposition, by way of merger or otherwise, to any Person not an
Affiliate of the Company, of all of the Company's stock in, or all or
substantially all the assets of, such Subsidiary, which sale or other
disposition is made in compliance with, and the Net Proceeds therefrom are
applied in accordance with, the applicable provisions of the Indentures. The
forms of such Guarantees will be attached as exhibits to the Indentures. The
foregoing provisions will not be applicable to any one or more Guarantees of up
to $10 million in aggregate principal amount of Indebtedness of the Company at
any time outstanding.
84
<PAGE>
NO AMENDMENT TO SUBORDINATION PROVISIONS
The Senior Note Indenture will provide that the Company will not amend,
modify or alter the Senior Subordinated Note Indenture in any way that would
(i) increase the principal of, advance the final maturity date of or shorten
the Weighted Average Life to Maturity of any Senior Subordinated Notes such
that the final maturity date of the Senior Subordinated Notes is earlier than
the 91st day following the final maturity date of the Senior Notes or (ii)
amend the provisions of Article 10 of the Senior Subordinated Note Indenture
(which relates to subordination) in a manner that would be adverse to the
Holders of the Senior Notes.
NO SENIOR SUBORDINATED DEBT
The Senior Subordinated Note Indenture will provide that the Company will not
incur any Indebtedness that is subordinate or junior in right of payment to any
Senior Debt and senior in any respect in right of payment to the Senior
Subordinated Notes.
REPORTS
The Indentures will provide that, whether or not required by the rules and
regulations of the Commission, so long as any Notes are outstanding, the
Company will furnish to the Holders of Notes (i) all quarterly and annual
financial information that would be required to be contained in a filing with
the Commission on Forms 10-Q and 10-K if the Company were required to file such
Forms, including a "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and, with respect to the annual information only, a
report thereon by the Company's certified independent accountants and (ii) all
current reports that would be required to be filed with the Commission on Form
8-K if the Company were required to file such reports. In addition, whether or
not required by the rules and regulations of the Commission, the Company will
file a copy of all such information and reports with the Commission for public
availability and make such information available to securities analysts and
prospective investors upon request.
EVENTS OF DEFAULT AND REMEDIES
The Indentures will provide that each of the following constitutes an Event
of Default: (i) default for 30 days in the payment when due of interest on the
respective series of Notes (whether or not prohibited by the subordination
provisions of the Senior Subordinated Note Indenture); (ii) default in payment
when due of the principal of or premium, if any, on the respective series of
Notes (whether or not prohibited by the subordination provisions of the Senior
Subordinated Note Indenture); (iii) failure by the Company to comply with the
provisions described under the captions "--Change of Control," "--Asset Sales,"
"--Restricted Payments" or "--Incurrence of Indebtedness and Issuance of
Preferred Stock"; (iv) failure by the Company for 60 days after notice to
comply with any of its other agreements in the Indentures or the Notes; (v)
default under any mortgage, indenture or instrument under which there may be
issued or by which there may be secured or evidenced any Indebtedness for money
borrowed by the Company or any of its Significant Subsidiaries (or the payment
of which is guaranteed by the Company or any of its Significant Subsidiaries)
whether such Indebtedness or guarantee now exists, which default (a)
constitutes a Payment Default or (b) results in the acceleration of such
Indebtedness prior to its express maturity and, in each case, the principal
amount of any such Indebtedness, together with the principal amount of any
other such Indebtedness under which there has been a Payment Default or the
maturity of which has been so accelerated, aggregates $25 million or more; (vi)
failure by the Company or any of its Significant Subsidiaries to pay final
judgments aggregating in excess of $25 million, which judgments are not paid,
discharged or stayed for a period of 60 days; and (vii) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in principal amount of the then outstanding Senior Notes or
Senior Subordinated Notes, as the case may be, may declare all the Senior Notes
or Senior Subordinated Notes, as the case may be, to be due and payable
immediately.
85
<PAGE>
Notwithstanding the foregoing, in the case of an Event of Default arising from
certain events of bankruptcy or insolvency with respect to the Company, all
outstanding Notes will become due and payable without further action or notice.
Holders of the Notes may not enforce the Indentures or the Notes except as
provided in the Indentures. Subject to certain limitations, Holders of a
majority in principal amount of the then outstanding Notes may direct the
applicable Trustee in its exercise of any trust or power. Either Trustee may
withhold from Holders of the Notes notice of any continuing Default or Event of
Default (except a Default or Event of Default relating to the payment of
principal or interest) if it determines that withholding notice is in their
interest.
In the case of any Event of Default occurring by reason of any willful action
(or inaction) taken (or not taken) by or on behalf of the Company with the
intention of avoiding payment of the premium that the Company would have had to
pay if the Company then had elected to redeem the Senior Subordinated Notes
pursuant to the optional redemption provisions of the Senior Subordinated Note
Indenture, an equivalent premium shall also become and be immediately due and
payable to the extent permitted by law upon the acceleration of the Senior
Subordinated Notes. If an Event of Default occurs under the Senior Note
Indenture prior to the maturity of the Senior Notes or under the Senior
Subordinated Note Indenture prior to , 2000 by reason of any
willful action (or inaction) taken (or not taken) by or on behalf of the
Company with the intention of avoiding the prohibition on redemption of such
Notes prior to such dates, then the premium specified in the applicable
Indenture shall also become immediately due and payable to the extent permitted
by law upon the acceleration of such Notes.
The Holders of a majority in aggregate principal amount of the Senior Notes
or Senior Subordinated Notes, as the case may be, then outstanding by notice to
the applicable Trustee on behalf of the Holders of all of the Senior Notes or
Senior Subordinated Notes, as the case may be, may waive any existing Default
or Event of Default and its consequences under the applicable Indenture except
a continuing Default or Event of Default in the payment of interest on, or the
principal of, the Senior Notes or Senior Subordinated Notes, as the case may
be.
The Company is required to deliver to each Trustee annually a statement
regarding compliance with the respective Indentures, and the Company is
required upon becoming aware of any Default or Event of Default, to deliver to
the Trustees a statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No director, officer, employee, incorporator or stockholder of the Company,
as such, shall have any liability for any obligations of the Company under the
Notes, the Indentures or for any claim based on, in respect of, or by reason
of, such obligations or their creation. Each Holder of Notes by accepting a
Note waives and releases all such liability. The waiver and release are part of
the consideration for issuance of the Notes. Such waiver may not be effective
to waive liabilities under the federal securities laws and it is the view of
the Commission that such a waiver is against public policy.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Senior Notes or Senior
Subordinated Notes ("Legal Defeasance") except for (i) the rights of Holders of
outstanding Notes to receive payments in respect of the principal of, premium,
if any, and interest on such Notes when such payments are due from the trust
referred to below, (ii) the Company's obligations with respect to the Notes
concerning issuing temporary Notes, registration of Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payment and money for security payments held in trust, (iii) the rights,
powers, trusts, duties and immunities of the applicable Trustee, and the
Company's obligations in connection therewith and (iv) the Legal Defeasance
provisions of the applicable Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants that are described in the Senior Note
86
<PAGE>
Indenture or the Senior Subordinated Note Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations shall not constitute a
Default or Event of Default with respect to the Senior Notes or the Senior
Subordinated Notes, as the case may be. In the event Covenant Defeasance
occurs, certain events (not including non-payment, bankruptcy, receivership,
rehabilitation and insolvency events) described under "Events of Default" will
no longer constitute an Event of Default with respect to the Senior Notes or
the Senior Subordinated Notes, as the case may be.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the appropriate Trustee, in trust, for
the benefit of the Holders of the Senior Notes or the Senior Subordinated
Notes, as the case may be, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal of, premium, if any, and interest on such outstanding
Notes on the stated maturity or on the applicable redemption date, as the case
may be, and the Company must specify whether the Notes are being defeased to
maturity or to a particular redemption date (in which case the Company shall
issue an irrevocable notice of redemption as of a specified date that will be
delivered by the applicable Trustee in accordance with the redemption
provisions of the applicable Indenture); (ii) in the case of Legal Defeasance,
the Company shall have delivered to the appropriate Trustee an opinion of
counsel in the United States that is reasonably acceptable to the appropriate
Trustee confirming that (A) the Company has received from, or there has been
published by, the Internal Revenue Service a ruling or (B) since the date of
the applicable Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders of such outstanding Notes
will not recognize income, gain or loss for federal income tax purposes as a
result of such Legal Defeasance and will be subject to federal income tax on
the same amounts, in the same manner and at the same times as would have been
the case if such Legal Defeasance had not occurred; (iii) in the case of
Covenant Defeasance, the Company shall have delivered to the appropriate
Trustee an opinion of counsel in the United States that is reasonably
acceptable to the appropriate Trustee confirming that the Holders of such
outstanding Notes will not recognize income, gain or loss for federal income
tax purposes as a result of such Covenant Defeasance and will be subject to
federal income tax on the same amounts, in the same manner and at the same
times as would have been the case if such Covenant Defeasance had not occurred;
(iv) no Default or Event of Default shall have occurred and be continuing on
the date of such deposit (other than a Default or Event of Default resulting
from the borrowing of funds to be applied to such deposit) or insofar as Events
of Default from bankruptcy or insolvency events are concerned, at any time in
the period ending on the 91st day after the date of deposit; (v) such Legal
Defeasance or Covenant Defeasance will not result in a breach or violation of,
or constitute a default under any material agreement or instrument (other than
the applicable Indenture) to which the Company or any of its Subsidiaries is a
party or by which the Company or any of its Subsidiaries is bound; (vi) the
Company must have delivered to the appropriate Trustee an opinion of counsel to
the effect that after the 91st day following the deposit, the trust funds will
not be subject to the effect of any applicable bankruptcy, insolvency,
reorganization or similar laws affecting creditors' rights generally; (vii) the
Company must deliver to the appropriate Trustee an Officers' Certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders of such Notes over the other creditors of the Company
with the intent of defeating, hindering, delaying or defrauding creditors of
the Company or others; and (viii) the Company must deliver to the appropriate
Trustee an Officers' Certificate and an opinion of counsel, each stating that
all conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange Notes in accordance with the Indentures.
The Registrar and the Trustees may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and the Company may
require a Holder to pay any taxes and fees required by law or permitted by the
Indentures. The Company is not required to transfer or exchange any Note
selected for redemption. Also, the Company is not required to transfer or
exchange any Note for a period of 15 days before a selection of Notes to be
redeemed.
87
<PAGE>
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indentures or
the Notes may be amended or supplemented with the consent of the Holders of at
least a majority in principal amount of the Senior Notes or Senior Subordinated
Notes, as the case may be, then outstanding (including consents obtained in
connection with a tender offer or exchange offer for such Notes), and any
existing default or compliance with any provision of the Indentures or the
Notes may be waived with the consent of the Holders of a majority in principal
amount of the then outstanding Senior Notes or Senior Subordinated Notes, as
the case may be (including consents obtained in connection with a tender offer
or exchange offer for such Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a non-consenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
(other than provisions relating to the covenants described above under the
caption "--Repurchase at the Option of Holders"), (iii) reduce the rate of or
change the time for payment of interest on any Note, (iv) waive a Default or
Event of Default in the payment of principal of or premium, if any, or interest
on the Notes (except a rescission of acceleration of the Senior Notes or Senior
Subordinated Notes, as the case may be, by the Holders of at least a majority
in aggregate principal amount thereof and a waiver of the payment default that
resulted from such acceleration), (v) make any Note payable in money other than
that stated in the Notes, (vi) make any change in the provisions of the
Indentures relating to waivers of past Defaults or the rights of Holders of
Notes to receive payments of principal of or premium, if any, or interest on
the Notes, (vii) waive a redemption payment with respect to any Note (other
than a payment required by one of the covenants described above under the
caption "--Repurchase at the Option of Holders") or (viii) make any change in
the foregoing amendment and waiver provisions. In addition, any amendment to
the provisions of Article 10 of the Senior Subordinated Note Indenture (which
relate to subordination) will require the consent of the Holders of at least
75% in aggregate principal amount of the Senior Subordinated Notes then
outstanding if such amendment would adversely affect the rights of Holders of
Senior Subordinated Notes.
Notwithstanding the foregoing, without the consent of any Holder of Notes,
the Company and the appropriate Trustee may amend or supplement the Indentures
or the Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes, to
provide for the assumption of the Company's obligations to Holders of Notes in
the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of Notes or that does not
adversely affect the legal rights under the Indentures of any such Holder, or
to comply with requirements of the Commission in order to effect or maintain
the qualification of the Indentures under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indentures will contain certain limitations on the rights of the
Trustees, should either Trustee become a creditor of the Company, to obtain
payment of claims in certain cases, or to realize on certain property received
in respect of any such claim as security or otherwise. The Trustees will be
permitted to engage in other transactions; however, if either Trustee acquires
any conflicting interest it must eliminate such conflict within 90 days, apply
to the Commission for permission to continue or resign.
The Holders of a majority in principal amount of the then outstanding Senior
Notes or Senior Subordinated Notes, as the case may be, will have the right to
direct the time, method and place of conducting any proceeding for exercising
any remedy available to the applicable Trustee, subject to certain exceptions.
The Indentures provide that in case an Event of Default shall occur (which
shall not be cured), the Trustees
88
<PAGE>
will be required, in the exercise of their power, to use the degree of care of
a prudent man in the conduct of his own affairs. Subject to such provisions,
neither Trustee will be under any obligation to exercise any of its rights or
powers under the Indentures at the request of any Holder of Notes, unless such
Holder shall have offered to the appropriate Trustee security and indemnity
satisfactory to it against any loss, liability or expense.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indentures. Reference
is made to the Indentures for a full disclosure of all such terms, as well as
any other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i) Indebtedness
of any other Person existing at the time such other Person is merged with or
into or became a Subsidiary of such specified Person, including, without
limitation, Indebtedness incurred in connection with, or in contemplation of,
such other Person merging with or into or becoming a Subsidiary of such
specified Person, and (ii) Indebtedness secured by a Lien encumbering any asset
acquired by such specified Person.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, 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 power to direct or cause
the direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that
beneficial ownership of 10% or more of the voting securities of a Person shall
be deemed to be control.
"AMI" means American Medical International, Inc., a Delaware corporation.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition of
any assets (including, without limitation, by way of a sale and leaseback)
other than in the ordinary course of business consistent with past practices
(provided that the sale, lease, conveyance or other disposition of all or
substantially all of the assets of the Company and its Subsidiaries taken as a
whole will be governed by the provisions of the applicable Indenture described
above under the caption "--Change of Control" and/or the provisions described
above under the caption "--Merger, Consolidation or Sale of Assets" and not by
the provisions of the Asset Sale covenant), and (ii) the issue or sale by the
Company or any of its Subsidiaries of Equity Interests of any of the Company's
Subsidiaries, in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $25 million or (b) for net proceeds in excess of $25
million. Notwithstanding the foregoing: (a) a transfer of assets by the Company
to a Subsidiary or by a Subsidiary to the Company or to another Subsidiary, (b)
an issuance of Equity Interests by a Subsidiary to the Company or to another
Subsidiary, (c) a Restricted Payment that is permitted by the covenant
described above under the caption "--Restricted Payments" and (d) a Hospital
Swap will not be deemed to be an Asset Sale.
"Capital Lease Obligation" means, at the time any determination thereof is to
be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance
with GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock, (ii)
in the case of an association or business entity, any and all shares,
interests, participation, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
89
<PAGE>
"Change of Control" means the occurrence of any of the following: (i) the
sale, lease, transfer, conveyance or other disposition, in one or a series of
related transactions, of all or substantially all of the assets of the Company
and its Subsidiaries taken as a whole to any Person or group (as such term is
used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than to a
Person or group who, prior to such transaction, held a majority of the voting
power of the voting stock of the Company, (ii) the acquisition by any Person or
group (as defined above) of a direct or indirect interest in more than 50% of
the voting power of the voting stock of the Company, by way of merger or
consolidation or otherwise, or (iii) the first day on which a majority of the
members of the Board of Directors of the Company are not Continuing Directors.
"Change of Control Triggering Event" means the occurrence of both a Change of
Control and a Rating Decline.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person for such period plus (i) an amount
equal to any extraordinary loss plus any net loss realized in connection with
an Asset Sale (to the extent such losses were deducted in computing such
Consolidated Net Income), plus (ii) provision for taxes based on income or
profits of such Person and its Subsidiaries for such period, to the extent that
such provision for taxes was included in computing such Consolidated Net
Income, plus (iii) the Fixed Charges of such Person and its Subsidiaries for
such period, to the extent that such Fixed Charges were deducted in computing
such Consolidated Net Income, plus (iv) depreciation and amortization
(including amortization of goodwill and other intangibles but excluding
amortization of prepaid cash expenses that were paid in a prior period) of such
Person and its Subsidiaries for such period to the extent that such
depreciation and amortization were deducted in computing such Consolidated Net
Income, in each case, on a consolidated basis and determined in accordance with
GAAP. Notwithstanding the foregoing, the provision for taxes on the income or
profits of, and the depreciation and amortization of, a Subsidiary of the
referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in same proportion) that the Net
Income of such Subsidiary was included in calculating the Consolidated Net
Income of such Person and only if a corresponding amount would be permitted at
the date of determination to be dividended to the Company by such Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to that Subsidiary or
its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP but
excluding any one-time charge or expense incurred in order to consummate the
Refinancing; provided that (i) the Net Income of any Person that is not a
Subsidiary or that is accounted for by the equity method of accounting shall be
included only to the extent of the amount of dividends or distributions paid in
cash to the referent Person or a Wholly Owned Subsidiary thereof, (ii) the Net
Income of any Subsidiary shall be excluded to the extent that the declaration
or payment of dividends or similar distributions by that Subsidiary of that Net
Income is not at the date of determination permitted without any prior
governmental approval (that has not been obtained) or, directly or indirectly,
by operation of the terms of its charter or any agreement, instrument,
judgment, decree, order, statute, rule or governmental regulation applicable to
that Subsidiary or its stockholders, (iii) the Net Income of any Person
acquired in a pooling of interests transaction for any period prior to the date
of such acquisition shall be excluded and (iv) the cumulative effect of a
change in accounting principles shall be excluded.
"Consolidated Net Worth" means, with respect to any Person as of any date,
the sum of (i) the consolidated equity of the common stockholders of such
Person and its consolidated Subsidiaries as of such
90
<PAGE>
date plus (ii) the respective amounts reported on such Person's balance sheet
as of such date with respect to any series of preferred stock (other than
Disqualified Stock), less all write-ups (other than write-ups resulting from
foreign currency translations and write-ups of tangible assets of a going
concern business made in accordance with GAAP as a result of the acquisition of
such business) subsequent to the date of the Indentures in the book value of
any asset owned by such Person or a consolidated Subsidiary of such Person, and
excluding the cumulative effect of a change in accounting principles, all as
determined in accordance with GAAP.
"Continuing Directors" means, as of any date of determination, any member of
the Board of Directors of the Company who (i) was a member of such Board of
Directors on the date of the Indentures or (ii) was nominated for election or
elected to such Board of Directors with the affirmative vote of a majority of
the Continuing Directors who were members of such Board at the time of such
nomination or election.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Disqualified Stock" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable
at the option of the Holder thereof, in whole or in part, on or prior to the
date on which the applicable Notes mature.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Existing Indebtedness" means Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Facility) in
existence on the date of the Indentures, until such amounts are repaid,
including all reimbursement obligations with respect to letters of credit
outstanding as of the date of the Indentures (other than letters of credit
issued pursuant to the New Credit Facility).
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Subsidiaries incurs, assumes, Guarantees or redeems any
Indebtedness (other than revolving credit borrowings) or issues preferred stock
subsequent to the commencement of the period for which the Fixed Charge
Coverage Ratio is being calculated but prior to the date on which the event for
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, Guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the Company or any of its Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date shall be deemed to
have occurred on the first day of the four-quarter reference period, and (ii)
the Consolidated Cash Flow and Fixed Charges attributable to discontinued
operations, as determined in accordance with GAAP, and operations or businesses
disposed of prior to the Calculation Date, shall be excluded.
"Fixed Charges" means, with respect to any Person for any period, the sum of
(i) the consolidated interest expense of such Person and its Subsidiaries for
such period, whether paid or accrued, (including, without limitation,
amortization of original issue discount, non-cash interest payments, the
interest component of any deferred payment obligations, the interest component
of all payments associated with
91
<PAGE>
Capital Lease Obligations, commissions, discounts and other fees and charges
incurred in respect of letters of credit or bankers' acceptance financings, and
net payments (if any) pursuant to Hedging Obligations) and (ii) the
consolidated interest expense of such Person and its Subsidiaries that was
capitalized during such period, and (iii) any interest expense on Indebtedness
of another Person that is Guaranteed by such Person or one of its Subsidiaries
or secured by a Lien on assets of such Person or one of its Subsidiaries
(whether or not such Guarantee or Lien is called upon) and (iv) the product of
(a) all cash dividend payments (and non-cash dividend payments in the case of a
Person that is a Subsidiary) on any series of preferred stock of such Person,
times (b) a fraction, the numerator of which is one and the denominator of
which is one minus the then current combined federal, state and local statutory
tax rate of such Person, expressed as a decimal, in each case, on a
consolidated basis and in accordance with GAAP.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, as in effect from time to time.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Hedging Obligations" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements (ii) foreign exchange contracts
or currency swap agreements and (iii) other agreements or arrangements designed
to protect such Person against fluctuations in interest rates or currency
values.
"Hospital" means a hospital, outpatient clinic, long-term care facility or
other facility that is used or useful in the provision of healthcare services.
"Hospital Swap" means an exchange of assets by the Company or a Subsidiary of
the Company for one or more Hospitals and/or one or more Related Businesses or
for the Capital Stock of any Person owning one or more Hospitals and/or one or
more Related Businesses.
"Indebtedness" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or banker's acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of
the purchase price of any property or representing any Hedging Obligations,
except any such balance that constitutes an accrued expense or trade payable,
if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability upon a balance
sheet of such Person prepared in accordance with GAAP, as well as all
indebtedness of others secured by a Lien on any asset of such Person (whether
or not such indebtedness is assumed by such Person) and, to the extent not
otherwise included, the Guarantee by such Person of any indebtedness of any
other Person.
"International Subsidiaries" means International-NME, Inc., NME (Australia)
Pty. Limited, and National Medical Enterprises Corp., and each of such Person's
respective Subsidiaries.
"Investment Grade" means a rating of BBB- or higher by S&P or Baa3 or higher
by Moody's or the equivalent of such ratings by S&P or Moody's. In the event
that the Company shall select any other Rating Agency, the equivalent of such
ratings by such Rating Agency shall be used.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations),
advances or capital contributions, purchases or other acquisitions for
consideration of
92
<PAGE>
Indebtedness, Equity Interests or other securities and all other items that are
or would be classified as investments on a balance sheet prepared in accordance
with GAAP; provided that an acquisition of assets, Equity Interests or other
securities by the Company for consideration consisting of common equity
securities of the Company shall not be deemed to be an Investment.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset given to
secure Indebtedness, whether or not filed, recorded or otherwise perfected
under applicable law (including any conditional sale or other title retention
agreement, any lease in the nature thereof, any option or other agreement to
sell or give a security interest in and any filing of or agreement to give any
financing statement under the Uniform Commercial Code (or equivalent statutes)
of any jurisdiction with respect to any such lien, pledge, charge or security
interest).
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Income" means, with respect to any Person, the net income (loss) of such
Person, determined in accordance with GAAP and before any reduction in respect
of preferred stock dividends, excluding, however, (i) any gain (but not loss),
together with any related provision for taxes on such gain (but not loss),
realized in connection with (a) any Asset Sale (including, without limitation,
dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries
and (ii) any extraordinary or nonrecurring gain (but not loss), together with
any related provision for taxes on such extraordinary or nonrecurring gain (but
not loss).
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Subsidiaries in respect of any Asset Sale (including, without
limitation, any cash received upon the sale or other disposition of any
Permitted Non-Cash Consideration received in any Asset Sale), net of the direct
costs relating to such Asset Sale (including, without limitation, legal,
accounting and investment banking fees, and sales commissions) and any other
expenses incurred or to be incurred by the Company or a Subsidiary as a direct
result of the sale of such assets (including, without limitation, severance,
relocation, lease termination and other similar expenses), taxes actually paid
or payable as a result thereof, amounts required to be applied to the repayment
of Indebtedness (other than Senior Term Debt or Senior Revolving Debt) secured
by a Lien on the asset or assets that were the subject of such Asset Sale and
any reserve for adjustment in respect of the sale price of such asset or assets
established in accordance with GAAP.
"New Credit Facility" means that certain Credit Agreement, dated as of
, 1995, by and among the Company and , providing for
$2.0 billion in aggregate principal amount of Senior Term Debt and up to $500
million in aggregate principal amount of Senior Revolving Debt, including any
related notes, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, modified, extended, renewed,
refunded, replaced or refinanced, in whole or in part, from time to time.
"Non-Cash Consideration" means any non-cash consideration received by the
Company or a Subsidiary of the Company in connection with an Asset Sale and any
non-cash consideration received by the Company or any of its Subsidiaries upon
disposition thereof.
"Non-Recourse Debt" means Indebtedness of an International Subsidiary (i) as
to which neither the Company nor any of its Subsidiaries (other than the
International Subsidiaries) (a) provides credit support of any kind (including
any undertaking, agreement or instrument that would constitute Indebtedness of
the Company or any of its Subsidiaries), or (b) is directly or indirectly
liable (as a guarantor or otherwise); and (ii) no default with respect to which
(including any rights that the holders thereof may have to take enforcement
action against an International Subsidiary) would permit (upon notice, lapse of
time or both) any holder of any other Indebtedness of the Company or any of its
Subsidiaries (other than the International Subsidiaries) to declare a default
on such other Indebtedness or cause the payment thereof to be accelerated or
payable prior to its stated maturity (except any provisions set forth in
Existing Indebtedness until the same is repaid or refinanced).
93
<PAGE>
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Permitted Collateral" means, collectively, (i) all Capital Stock and other
Equity Interests of the Company's present and future direct Subsidiaries, (ii)
certain intercompany Indebtedness owed to the Company, and (iii) all Capital
Stock and other Equity Interests in Westminster and Hillhaven owned by the
Company.
"Permitted Liens" means (i) Liens on Permitted Collateral securing Senior
Term Debt of the Company under the New Credit Facility in an aggregate
principal amount at any time outstanding not to exceed an amount equal to $2.0
billion less the aggregate amount of all repayments, optional or mandatory, of
the principal of any Senior Term Debt (other than repayments that are
immediately reborrowed) that have been made since the date of the Indentures;
(ii) Liens on Permitted Collateral securing Senior Revolving Debt and letters
of credit of the Company incurred pursuant to the New Credit Facility in an
aggregate principal amount at any time outstanding (with letters of credit
being deemed to have a principal amount equal to the maximum potential
reimbursement obligation of the Company with respect thereto) not to exceed an
amount equal to $500 million less the aggregate amount of all Net Proceeds of
Asset Sales applied to permanently reduce commitments with respect to such
Indebtedness pursuant to the covenant described above under the caption "--
Certain Covenants--Asset Sales"; (iii) Liens in favor of the Company; (iv)
Liens on property of a Person existing at the time such Person is merged into
or consolidated with the Company or any Subsidiary of the Company; provided
that such Liens were in existence prior to the contemplation of such merger or
consolidation and do not extend to any assets other than those of the Person
merged into or consolidated with the Company; (v) Liens on property existing at
the time of acquisition thereof by the Company or any Subsidiary of the
Company, provided that such Liens were in existence prior to the contemplation
of such acquisition; (vi) Liens to secure the performance of statutory
obligations, surety or appeal bonds, performance bonds or other obligations of
a like nature incurred in the ordinary course of business; (vii) Liens existing
on the date of the Indentures; (viii) Liens for taxes, assessments or
governmental charges or claims that are not yet delinquent or that are being
contested in good faith by appropriate proceedings promptly instituted and
diligently concluded, provided that any reserve or other appropriate provision
as shall be required in conformity with GAAP shall have been made therefor;
(ix) other Liens on assets of the Company or any Subsidiary of the Company
securing Indebtedness that is permitted by the terms of the Indentures to be
outstanding having an aggregate principal amount at any one time outstanding
not to exceed 10% of the Stockholders' Equity of the Company; and (x) Liens to
secure Permitted Refinancing Indebtedness incurred to refinance Indebtedness
that was secured by a Lien permitted under the Indentures and that was incurred
in accordance with the provisions of the Indentures; provided, that such Liens
do not extend to or cover any property or assets of the Company or any
Subsidiary other than assets or property securing the Indebtedness so
refinanced.
"Permitted Refinancing Indebtedness" means any Indebtedness of the Company or
any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used solely to extend, refinance, renew, replace, defease or refund, other
Indebtedness of the Company or any of its Subsidiaries; provided that, except
in the case of Indebtedness of the Company issued in exchange for, or the net
proceeds of which are used solely to extend, refinance, renew, replace, defease
or refund Indebtedness of a Subsidiary of the Company: (i) the principal amount
of such Permitted Refinancing Indebtedness does not exceed the principal amount
of the Indebtedness so extended, refinanced, renewed, replaced, defeased or
refunded (plus the amount of any premiums paid and reasonable expenses incurred
in connection therewith); (ii) such Permitted Refinancing Indebtedness has a
final maturity date later than the final maturity date of, and has a Weighted
Average Life to Maturity equal to or greater than the Weighted Average Life to
Maturity of, the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded; (iii) if the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded is subordinated in right of payment to
the Senior Notes, such Permitted Refinancing Indebtedness has a final maturity
date later than the final maturity date of, and is subordinated in right of
payment to, the Senior Notes on terms at least as favorable to the Holders of
94
<PAGE>
Senior Notes as those contained in the documentation governing the Indebtedness
being extended, refinanced, renewed, replaced, defeased or refunded; and (iv)
such Indebtedness is incurred either by the Company or by the Subsidiary who is
the obligor on the Indebtedness being extended, refinanced, renewed, replaced,
defeased or refunded.
"Physician Joint Venture Distributions" means distributions made by the
Company or any of its Subsidiaries to any physician, pharmacist or other allied
healthcare professional in connection with the unwinding, liquidation or other
termination of any joint venture or similar arrangement between any such Person
and the Company or any of its Subsidiaries.
"Physician Support Obligations" means any obligation or Guarantee incurred in
the ordinary course of business by the Company or a Subsidiary of the Company
in connection with any advance, loan or payment to, or on behalf of or for the
benefit of any physician, pharmacist or other allied healthcare professional
for the purpose of recruiting, redirecting or retaining the physician,
pharmacist or other allied healthcare professional to provide service to
patients in the service area of any Hospital or Related Business owned or
operated by the Company or any of its Subsidiaries; excluding, however,
compensation for services provided by physicians, pharmacists or other allied
healthcare professionals to any Hospital or Related Business owned or operated
by the Company or any of its Subsidiaries.
"Qualified Equity Interests" shall mean all Equity Interests of the Company
other than Disqualified Stock of the Company.
"Rating Agencies" means (i) S&P and (ii) Moody's or (iii) if S&P or Moody's
or both shall not make a rating of the Notes publicly available, a nationally
recognized securities rating agency or agencies, as the case may be, selected
by the Company, which shall be substituted for S&P or Moody's or both, as the
case may be.
"Rating Category" means (i) with respect to S&P, any of the following
categories: BB, B, CCC, CC, C and D (or equivalent successor categories); (ii)
with respect to Moody's, any of the following categories: Ba, B, Caa, Ca, C and
D (or equivalent successor categories); and (iii) the equivalent of any such
category of S&P or Moody's used by another Rating Agency. In determining
whether the rating of the Notes has decreased by one or more gradations,
gradations within Rating Categories (+ and--for S&P, 1, 2 and 3 for Moody's; or
the equivalent gradations for another Rating Agency) shall be taken into
account (e.g., with respect to S&P, a decline in a rating from BB+ to BB, as
well as from BB- to B+, will constitute a decrease of one gradation).
"Rating Date" means the date which is 90 days prior to the earlier of (i) a
Change of Control and (ii) the first public notice of the occurrence of a
Change of Control or of the intention by the Company to effect a Change of
Control.
"Rating Decline" means the occurrence on or within 90 days after the date of
the first public notice of the occurrence of a Change of Control or of the
intention by the Company to effect a Change of Control (which period shall be
extended so long as the rating of the Notes is under publicly announced
consideration for possible downgrade by any of the Rating Agencies) of: (a) in
the event the Notes are rated by either Moody's or S&P on the Rating Date as
Investment Grade, a decrease in the rating of the Notes by both Rating Agencies
to a rating that is below Investment Grade, or (b) in the event the Notes are
rated below Investment Grade by both Rating Agencies on the Rating Date, a
decrease in the rating of the Notes by either Rating Agency by one or more
gradations (including gradations within Rating Categories as well as between
Rating Categories).
"Related Business" means a healthcare business affiliated or associated with
a Hospital or any business related or ancillary to the provision of healthcare
services or the operation of a Hospital.
"Restricted Investment" means an Investment in any of the International
Subsidiaries.
"Senior Revolving Debt" means revolving credit loans outstanding from time to
time under the New Credit Facility.
95
<PAGE>
"Senior Term Debt" means term loans outstanding from time to time under the
New Credit Facility.
"Significant Subsidiary" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Act, as such Regulation is in effect on the date hereof.
"S&P" means Standard & Poor's Corporation and its successors.
"Specified Assets" means the Company's and its Subsidiaries' interest in The
Hillhaven Corporation and Westminster Healthcare Holdings PLC owned as of the
date of the Indentures and the Capital Stock and assets of the International
Subsidiaries.
"Stockholders' Equity" means, with respect to any Person as of any date, the
stockholders' equity of such Person determined in accordance with GAAP as of
the date of the most recent available internal financial statements of such
Person, and calculated on a pro forma basis to give effect to any acquisition
or disposition by such Person consummated or to be consummated since the date
of such financial statements and on or prior to the date of such calculation.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a
combination thereof) and (ii) any partnership (a) the sole general partner or
the managing general partner of which is such Person or a Subsidiary of such
Person or (b) the only general partners of which are such Person or of one or
more Subsidiaries of such Person (or any combination thereof); provided that no
International Subsidiary shall be deemed to be a "Subsidiary" for any purpose
under the Indentures for so long as such International Subsidiary: (a) has no
Indebtedness other than Existing Indebtedness and Non-Recourse Debt; (b) is not
a party to any agreement, contract, arrangement or understanding with the
Company or any of its other Subsidiaries (other than International
Subsidiaries) except any such agreement, contract, arrangement or understanding
that (i) was in effect on the date of the Indentures, or (ii) meets the
requirements of the covenant described above under the caption "--Certain
Covenants--Transactions with Affiliates"; (c) is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified level of operating results except, in each case, any
such obligation in existence on the date of the Indentures or created pursuant
to the terms of any Investment permitted by the covenant described above under
the caption "--Certain Covenants--Restricted Payments"; and (d) has not
Guaranteed or otherwise directly or indirectly provided credit support for any
Indebtedness of the Company or any of its Restricted Subsidiaries. If, at any
time, any International Subsidiary would fail to meet the foregoing
requirements, it shall thereafter be deemed to be a Subsidiary for all purposes
of the Indentures and any Indebtedness of such International Subsidiary shall
be deemed to be incurred by a Subsidiary of the Company as of such date (and,
if such Indebtedness is not permitted to be incurred as of such date under the
covenant described above under the caption "--Certain Covenants--Incurrence of
Indebtedness and Issuance of Preferred Stock," the Company shall be in default
of such covenant).
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse
between such date and the making of such payment, by (ii) the then outstanding
principal amount of such Indebtedness.
"Wholly Owned Subsidiary" of any Person means a Subsidiary of such Person all
of the outstanding Capital Stock or other ownership interests of which (other
than directors' qualifying shares) shall at the time be owned by such Person or
by one or more Wholly Owned Subsidiaries of such Person and one or more Wholly
Owned Subsidiaries of such Person.
96
<PAGE>
DESCRIPTION OF THE NEW CREDIT FACILITY
THE NEW CREDIT FACILITY
In connection with the Merger and the Refinancing, Morgan Guaranty Trust
Company of New York ("Morgan Guaranty"), Bank of America NT&SA, The Bank of New
York and Bankers Trust Company, (collectively, the "Arranging Agents"), and a
syndicate of other lenders (the "Lenders") have committed to provide NME with a
$2.5 billion credit facility expiring in 2001 consisting of (i) a six and a
half year amortizing term loan in the aggregate principal amount of $2.0
billion (the "Term Loan") and (ii) a six and a half year $500.0 million
revolving credit facility, with a letter of credit option not to exceed $100.0
million (the "Revolver"). The Arranging Agents have also committed to provide a
separate letter of credit facility to NME in an aggregate principal amount of
approximately $91.0 million, upon the same terms and conditions as the New
Credit Facility (the "Metrocrest Letter of Credit Facility"). The Metrocrest
Letter of Credit Facility is intended to replace an existing letter of credit
facility established in connection with the issuance of certain industrial
revenue bonds by Metrocrest Hospital Authority as part of the financing of two
hospitals operated by subsidiaries of NME. NME's obligations under the New
Credit Facility and the Metrocrest Letter of Credit Facility will rank pari
passu with the Senior Notes and will constitute Senior Debt with respect to the
Senior Subordinated Notes and any other subordinated debt of NME outstanding at
any time after the Effective Time.
Interest Rate. Loans under the New Credit Facility will bear interest, at the
option of NME, at either (i) a base rate equal to the higher of the rate
announced from time to time by Morgan Guaranty as its prime rate or the daily
federal funds rate plus 50 basis points plus an interest margin ranging from
zero to 50 basis points based on the ratios of NME's consolidated net earnings
before interest, taxes, depreciation and amortization ("EBITDA") to interest
expense and the ratio of NME's consolidated total debt to EBITDA or (ii) the
London interbank offered rate (as adjusted for certain reserve requirements)
for 1-, 2-, 3- or 6-month periods plus an interest margin ranging from 50 to
150 basis points based on the respective levels of the same ratios. EBITDA to
interest expense and the ratio of NME's consolidated total debt to EBITDA.
Commitment fees also will be payable to each Lender based on the unused amount
of such Lender's commitment to make loans, including the aggregate amount of
issued but undrawn letters of credit issued, at rates ranging from 18.75 basis
points to 50 basis points as determined by reference to the same ratios.
Security. NME's obligations under the financing documents will be secured by
a first priority lien on (i) the capital stock of NME's present and future
direct subsidiaries (including, without limitation, AMH, NME Hospitals, Inc.,
NME Properties Corp., all of NME's domestically incorporated direct
international subsidiaries, and a portion of the stock of NME's foreign
incorporated direct international subsidiaries but excluding certain
subsidiaries that do not have material assets), (ii) certain indebtedness owed
to the Company by certain of its subsidiaries and (iii) NME's equity
investments in Westminster and Hillhaven.
Mandatory Payments. NME must make quarterly mandatory payments on the Term
Loan in each fiscal year in the annual amounts set forth below, with the first
installment due on August 31, 1995:
<TABLE>
<CAPTION>
YEAR ENDED MAY 31, (DOLLARS IN MILLIONS)
------------------ ---------------------
<S> <C>
1996 $200.0
1997 200.0
1998 250.0
1999 350.0
2000 400.0
2001 450.0
August 31, 2001 150.0
</TABLE>
Additional prepayments will be required from the proceeds of certain events,
including (i) the sale of hospitals, (ii) the sale of NME's existing equity
investments in Hillhaven, Westminster or any of the international subsidiaries
and (iii) offerings of certain debt or equity securities. The Credit Agreement
will
97
<PAGE>
require the repayment of the Revolver with a portion of proceeds of a sale of
the equity investments in Hillhaven or Westminster or of the international
subsidiaries, up to an aggregate of $200.0 million. Thereafter, the proceeds of
such sales shall be applied to prepay the installments on the Term Loan in
inverse order of maturity until the installments due August 31, 2001 and in
fiscal year 2001 are paid in full and then to the remaining installments on a
pro rata basis.
Covenants. It is contemplated that the credit agreement entered into in
connection with the New Credit Facility (the "Credit Agreement") will include
various affirmative, negative and financial covenants, including, without
limitation, (i) restrictions on disposition of assets and the making of
acquisitions and other investments, (ii) prohibitions or limitations on the
prepayment, redemption or defeasance of the Notes and other NME indebtedness
prior to the last year before the stated maturity thereof, (iii) limitations on
capital expenditures, debt incurrence, lien incurrence, dividends, stock
repurchases, and joint ventures, (iv) limitations on mergers and changes of
business, and (v) a minimum consolidated net worth requirement and a minimum
fixed charge coverage ratio.
Events of Default. It is anticipated that events of default under the Credit
Agreement will include various events of default customary for such type of
agreement. In addition, it is anticipated that the Credit Agreement will
include events of default for any change in control of the Company and the
cessation of any lien on any of the collateral under the Credit Agreement as a
perfected first priority lien.
Conditions. It is contemplated that the Credit Agreement will provide that
the obligations of the Lenders to provide the New Credit Facility will be
subject to the satisfaction or waiver of certain conditions, including, among
others: (i) the perfection of certain security interests, (ii) consummation of
the Merger,(iii) repayment and cancellation of indebtedness under NME's
existing credit facility, (iv) repayment and cancellation of approximately
$600.0 million of AMI's indebtedness, (v) no material adverse change in the
financial condition, results of operations, business or prospects of NME and
its subsidiaries, taken as a whole, or AMH and its subsidiaries, taken as a
whole, since August 31, 1994, (vi) cash available to fund the Merger, prior to
drawing upon the New Credit Facility or using proceeds from the issuance of the
Notes, of at least $135.0 million, and (vii) gross cash proceeds of $1.0
billion from the issuance of the Notes.
98
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
(the "Underwriting Agreement") between the Company and Donaldson, Lufkin &
Jenrette Securities Corporation ("DLJ"), Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Morgan Stanley & Co. Incorporated ("Morgan
Stanley"), Salomon Brothers Inc ("Salomon Brothers"), J. P. Morgan Securities
Inc. ("J. P. Morgan") BT Securities Corporation ("BTSC"), Smith Barney Inc.
("Smith Barney") and BA Securities, Inc. ("BASI" and, together with DLJ,
Merrill Lynch, Morgan Stanley, Salomon Brothers, J. P. Morgan, BTSC and Smith
Barney, the "Underwriters"), each of the Underwriters has severally agreed to
purchase from the Company, and the Company has agreed to sell to each of the
Underwriters, the respective principal amounts of Senior Notes and Senior
Subordinated Notes set forth opposite its name below, at the public offering
price set forth on the cover page of this Prospectus, less the underwriting
discount:
<TABLE>
<CAPTION>
SENIOR
SUBORDINATED
SENIOR NOTES NOTES
------------ ------------
<S> <C> <C>
Donaldson, Lufkin & Jenrette Securities Corporation...
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.................................
Morgan Stanley & Co. Incorporated.....................
Salomon Brothers Inc .................................
J. P. Morgan Securities Inc. .........................
BT Securities Corporation.............................
Smith Barney Inc. ....................................
BA Securities, Inc....................................
------------ ------------
$400,000,000 $600,000,000
============ ============
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters are subject to certain conditions precedent, including the
consummation of the Merger and the Consent Solicitations. The Company has
agreed to indemnify the Underwriters against certain liabilities and expenses,
including liabilities under the Securities Act, or to contribute to payments
that the Underwriters may be required to make in respect thereof. The nature of
the Underwriters' obligations is such that the Underwriters are committed to
purchase all of the Notes if any of the Notes are purchased by them.
The Underwriters have advised the Company that they propose to offer the
Notes directly to the public initially at the public offering price set forth
on the cover page of this Prospectus and to certain dealers at such offering
price less a concession not to exceed % of the principal amount of the Notes.
The Underwriters may allow, and such dealers may reallow, discounts not in
excess of % of the principal amount of the Notes to certain other dealers.
After the initial public offering of the Notes, the offering price and other
selling terms may be changed by the Underwriters.
Application will be made to list the Notes on the NYSE, subject to official
notice of issuance. Nevertheless, the Notes are new issues of securities, have
no established trading market and may not be widely distributed. The Company
has been advised by the Underwriters that, following the completion of this
Offering, the Underwriters presently intend to make a market in the Notes as
permitted by applicable laws and regulations. However, the Underwriters are
under no obligation to do so and may discontinue any market making activities
at any time at the sole discretion of the Underwriters. No assurance can be
given as to the liquidity of any trading market for the Notes.
DLJ has provided and is currently retained to provide certain investment
banking services to the Company for which it has received and is entitled to
receive usual and customary fees. In August 1994, DLJ Merchant Banking
Partners, L.P., an affiliate of DLJ, acquired approximately 75% of TRC from
NME, and
99
<PAGE>
DLJ subsequently managed a public debt offering for TRC for which it received
customary fees. DLJ acted as financial advisor to the Company in connection
with the Merger, for which it is entitled to receive usual and customary fees.
DLJ is also acting as financial advisor to the Company in connection with the
concurrent Consent Solicitations and as the dealer manager in connection with
the NME Tender Offers and the AMI Tender Offers, and will receive usual and
customary fees for such services.
Merrill Lynch has provided and currently is providing certain financial
advisory services to the Company for which it has received and is entitled to
receive usual and customary fees. From time to time in the ordinary course of
their respective businesses, affiliates of J.P. Morgan have engaged and may in
the future engage in commercial banking and investment banking transactions
with the Company, for which they have received and may in the future receive
usual and customary fees. Morgan Guaranty, an affiliate of J. P. Morgan,
Bankers Trust Company, an affiliate of BTSC, and Bank of America NT & SA, an
affiliate of BASI, will be Arranging Agents and lenders under the New Credit
Facility, for which they will receive usual and customary fees.
Salomon Brothers acted as financial advisor and rendered a fairness opinion
to AMH in connection with the Merger for which it received usual and customary
fees. Salomon Brothers also has rendered certain financial advisory and
investment banking services to AMH for which it has received usual and
customary fees.
LEGAL MATTERS
Certain legal matters as to the validity of the Notes offered hereby will be
passed upon for the Company by Skadden, Arps, Slate, Meagher & Flom, Los
Angeles, California. Certain legal matters in connection with this Offering
will be passed upon for the Underwriters by Latham & Watkins, New York, New
York. With respect to certain matters governed by Nevada law, Skadden, Arps,
Slate, Meagher & Flom and Latham & Watkins will rely on the opinion of Woodburn
and Wedge, Reno, Nevada.
EXPERTS
The consolidated financial statements and schedules of National Medical
Enterprises, Inc. as ofMay 31, 1994 and 1993, and for each of the years in the
three-year period ended May 31, 1994, have been included and incorporated by
reference herein and in the Registration Statement in reliance upon the reports
of KPMG Peat Marwick LLP, independent certified public accountants, included
and incorporated by reference herein, and upon the authority of said firm as
experts in accounting and auditing. The report of KPMG Peat Marwick LLP
covering the May 31, 1994 consolidated financial statements refers to a change
in the method of accounting for income taxes.
The consolidated financial statements of American Medical Holdings, Inc. and
American Medical International, Inc. as of August 31, 1994 and 1993 and for
each of the three years in the period endedAugust 31, 1994 included in this
Prospectus have been so included in reliance on the report ofPrice Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
100
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
Financial Statements:
Report of Independent Auditors.......................................... F-2
Consolidated Balance Sheets as of May 31, 1993 and 1994................. F-3
Consolidated Statements of Operations for the years ended May 31, 1992,
1993 and 1994.......................................................... F-4
Consolidated Statements of Cash Flows for the years ended May 31, 1992,
1993 and 1994.......................................................... F-5
Consolidated Statements of Changes in Shareholders' Equity for the years
ended May 31, 1992, 1993 and 1994...................................... F-6
Notes to Consolidated Financial Statements.............................. F-7
Unaudited Condensed Consolidated Balance Sheets as of May 31, 1994 and
August 31, 1994........................................................ F-22
Unaudited Condensed Consolidated Statements of Operations for the three
months ended August 31, 1993 and 1994.................................. F-23
Unaudited Condensed Consolidated Statements of Cash Flows for the three
months ended August 31, 1993 and 1994.................................. F-24
Notes to Unaudited Condensed Consolidated Financial Statements.......... F-25
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
Financial Statements:
Report of Independent Accountants....................................... F-29
Consolidated Balance Sheets as of August 31, 1994 and 1993.............. F-30
Consolidated Statements of Income for the years ended August 31, 1994,
1993 and 1992.......................................................... F-32
Consolidated Statements of Cash Flows for the years ended August 31,
1994, 1993 and 1992.................................................... F-33
Consolidated Statements of Shareholders' Equity for the years ended
August 31, 1994, 1993
and 1992............................................................... F-34
Notes to Consolidated Financial Statements.............................. F-35
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
National Medical Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of National
Medical Enterprises, Inc. and subsidiaries as of May 31, 1994 and 1993, and the
related consolidated statements of operations, shareholders' equity and cash
flows for each of the years in the three-year period ended May 31, 1994. 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 audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. 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.
As discussed in Notes 2, 7B and 13 to the consolidated financial statements,
during 1994 the Company has discontinued its psychiatric hospital operations,
settled a number of lawsuits and governmental investigations, and sold a
significant number of its rehabilitation hospitals. These events have had a
significant impact on the Company's consolidated financial position and results
of operations.
In our opinion, the consolidated financial statements referred to above
present fairly the financial position of National Medical Enterprises, Inc. and
subsidiaries as of May 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective June 1, 1993.
KPMG Peat Marwick LLP
Los Angeles, California
July 27, 1994
F-2
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31,
------------------------
1993 1994
----------- -----------
(DOLLAR AMOUNTS ARE
EXPRESSED IN MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $ 141 $ 313
Short-term investments, at cost which approximates
market............................................ 98 60
Accounts and notes receivable, less allowance for
doubtful accounts ($115 in 1993 and $77 in 1994).. 502 385
Inventories of supplies, at cost................... 62 55
Deferred income taxes.............................. 120 372
Assets held for sale............................... 56 204
Prepaid expenses and other current assets.......... 89 55
----------- -----------
Total current assets............................. 1,068 1,444
----------- -----------
Long-term receivables................................ 190 73
Investments and other assets......................... 205 309
Property, plant and equipment, net................... 2,492 1,764
Intangible assets, at cost, less accumulated
amortization ($176 in 1993 and $54 in 1994)......... 218 107
----------- -----------
$ 4,173 $ 3,697
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and notes.................... $ 163 $ 67
Accounts payable................................... 140 176
Employee compensation and benefits................. 104 93
Reserves related to discontinued operations........ 101 465
Income taxes payable............................... 30 58
Other current liabilities.......................... 254 236
Current portion of long-term debt.................. 121 545
----------- -----------
Total current liabilities........................ 913 1,640
----------- -----------
Long-term debt, net of current portion............... 892 223
Other long-term liabilities and minority interest.... 299 389
Deferred income taxes................................ 317 125
Commitments and contingencies (see accompanying
notes)
Shareholders' equity:
Common stock, $0.075 par value; authorized
450,000,000 shares; 185,698,524 shares at May 31,
1993 and 185,587,666 shares issued at May 31,
1994.............................................. 14 14
Additional paid-in-capital......................... 1,007 1,015
Notes receivable on exercise of stock options...... (2) (2)
Retained earnings.................................. 1,019 575
Less common stock in treasury, at cost, 19,800,103
at May 31, 1993 and 19,507,161 shares at May 31,
1994.............................................. (286) (282)
----------- -----------
Total shareholders' equity....................... 1,752 1,320
----------- -----------
$ 4,173 $ 3,697
=========== ===========
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED MAY 31,
-------------------------
1992 1993 1994
------- ------- -------
(DOLLAR AMOUNTS, EXCEPT
PER SHARE AMOUNTS, ARE
EXPRESSED IN MILLIONS)
<S> <C> <C> <C>
Net operating revenues.............................. $ 2,934 $ 3,178 $ 2,943
------- ------- -------
Operating and administrative expenses:
Salaries and benefits.............................. (1,328) (1,465) (1,293)
Supplies........................................... (319) (349) (339)
Provision for doubtful accounts.................... (123) (115) (107)
Other operating expenses........................... (617) (689) (667)
Depreciation....................................... (122) (142) (143)
Amortization....................................... (18) (18) (18)
Restructuring charges.............................. (18) (52) (77)
------- ------- -------
Operating income.................................... 389 348 299
Interest, net of capitalized portion ($11 in 1992,
$9 in 1993, $4 in 1994)............................ (89) (75) (70)
Investment earnings................................. 29 21 28
Equity in earnings of unconsolidated affiliates..... 6 13 24
Minority interest expense........................... (7) (10) (8)
Net gain on disposals of facilities and long-term
investments........................................ 31 93 87
Gain on sale of subsidiary's common stock........... 0 29 0
------- ------- -------
Income from continuing operations before income
taxes.............................................. 359 419 360
Taxes on income..................................... (141) (155) (144)
------- ------- -------
Income from continuing operations................... 218 264 216
------- ------- -------
Discontinued operations............................. (85) (104) (701)
Extraordinary charges--net of tax................... (29) 0 0
Cumulative effect of a change in accounting for
income taxes....................................... 0 0 60
------- ------- -------
Net income (loss)................................... $ 104 $ 160 $ (425)
======= ======= =======
Earnings (loss) per share:
Primary:
Continuing operations............................. $ 1.27 $ 1.59 $ 1.29
Discontinued operations........................... (0.50) (0.63) (4.19)
Extraordinary charges............................. (0.17) 0.00 0.00
Cumulative effect of a change in accounting
principle........................................ 0.00 0.00 0.36
------- ------- -------
$ 0.60 $ 0.96 $ (2.54)
======= ======= =======
Fully diluted:
Continuing operations............................. $ 1.19 $ 1.49 $ 1.23
Discontinued operations........................... (0.44) (0.58) (4.10)
Extraordinary charges............................. (0.15) 0.00 0.00
Cumulative effect of a change in accounting
principle........................................ 0.00 0.00 0.33
------- ------- -------
$ 0.60 $ 0.91 $ (2.54)
======= ======= =======
Weighted average shares and share equivalents
outstanding--primary (in thousands)................ 171,853 166,111 167,024
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED MAY
31,
--------------------
1992 1993 1994
----- ----- ------
(DOLLAR AMOUNTS
ARE EXPRESSED IN
MILLIONS)
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss)....................................... $ 104 $ 160 $ (425)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization........................... 196 199 198
Deferred income taxes................................... (96) (32) (253)
Gains on sales of facilities and long-term investments.. (31) (93) (88)
Gain on sale of subsidiary's common stock............... 0 (29) 0
Extraordinary charges................................... 34 0 0
Additions to reserves related to discontinued operations
and restructuring charges.............................. 218 189 1,175
Cumulative change in accounting principle............... 0 0 (60)
Other items............................................. 35 33 38
Increases (decreases) in cash from changes in operating
assets and liabilities, net of effects from purchases of
new businesses:
Accounts and notes receivable, net...................... 46 65 (65)
Inventories, prepaid expenses and other current assets.. (13) (43) (21)
Accounts payable, accrued expenses and income taxes
payable................................................ 55 21 (31)
Noncurrent accrued expenses and other liabilities....... 35 24 (2)
----- ----- ------
Net cash provided by operating activities, before
expenditures for discontinued operations and
restructuring charges.................................. 583 494 466
Net expenditures for discontinued operations and
restructuring charges.................................. (24) (96) (319)
----- ----- ------
Net cash provided by operating activities............... 559 398 147
----- ----- ------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment.............. (421) (319) (185)
Purchases of new businesses, net of cash acquired....... (14) (3) (5)
Proceeds from sales of facilities, investments and other
assets................................................. 109 70 569
Investments in Hillhaven................................ 0 0 (63)
Collections on notes.................................... 74 27 100
Increase in intangible and other assets................. (53) (29) (24)
Increase in notes receivable............................ (24) (21) (4)
Equity investments in partnerships...................... 0 (8) (11)
Other items............................................. (8) (16) 9
----- ----- ------
Net cash provided by (used in) investing activities..... (337) (299) 386
----- ----- ------
Cash Flows From Financing Activities:
Net proceeds from (payments of) unsecured lines of
credit and reverse purchase agreements................. 220 (10) (151)
Payments of other borrowings............................ (103) (93) (217)
Proceeds from other borrowings.......................... 271 131 31
Redemptions of notes and debentures..................... (383) 0 0
Cash dividends paid to shareholders..................... (76) (78) (40)
Purchases of treasury stock............................. (150) (19) 0
Other items............................................. (3) (3) 16
----- ----- ------
Net cash used in financing activities................... (224) (72) (361)
----- ----- ------
Net increase (decrease) in cash and cash equivalents.... (2) 27 172
Cash and cash equivalents at beginning of year.......... 116 114 141
----- ----- ------
Cash and cash equivalents at end of year................ $ 114 $ 141 $ 313
===== ===== ======
Supplemental Disclosures:
Interest paid, net of amounts capitalized............... $ 78 $ 87 $ 62
Income taxes paid....................................... 186 125 30
Notes received in connection with sales of facilities... 4 92 0
Conversion of notes and debentures into common stock.... 15 0 0
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
YEARS ENDED MAY 31, 1992, 1993, AND 1994
----------------------------------------------------------
COMMON STOCK STOCK
------------------ ADDITIONAL OPTION
OUTSTANDING ISSUED PAID-IN NOTES RETAINED TREASURY
SHARES AMOUNT CAPITAL RECEIVABLE EARNINGS STOCK
----------- ------ ---------- ---------- -------- --------
(DOLLAR AMOUNTS ARE EXPRESSED IN MILLIONS, SHARE AMOUNTS
IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCES, MAY 31, 1991.. 174,765 $14 $ 969 $(2) $ 914 $(133)
Net income............ 104
Cash dividends ($0.46
per share)........... (79)
Purchases of treasury
stock................ (9,288) (150)
Stock options
exercised............ 457 6 (2) 2
Notes receivable
collections.......... 2
Restricted share
awards, net of
cancellations........ 129 13 1
Conversions of notes
and debentures....... 915 8 7
Other................. (15)
------- --- ------ --- ----- -----
BALANCES, MAY 31, 1992.. 166,963 14 996 (2) 939 (273)
Net income............ 160
Cash dividends ($0.48
per share)........... (80)
Purchases of treasury
stock................ (1,034) (15)
Stock options
exercised............ 36 1
Restricted share
cancellations........ (67) 11 1
------- --- ------ --- ----- -----
BALANCES, MAY 31, 1993.. 165,898 14 1,007 (2) 1,019 (286)
Net loss.............. (425)
Cash dividends ($0.12
per share)........... (19)
Stock options
exercised............ 293 (1) 4
Restricted share
cancellations........ (110) 9
------- --- ------ --- ----- -----
BALANCES, MAY 31, 1994.. 166,081 $14 $1,015 $(2) $ 575 $(282)
======= === ====== === ===== =====
</TABLE>
See Accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 SIGNIFICANT ACCOUNTING POLICIES
A. Principles of Consolidation
The consolidated financial statements include the accounts of National
Medical Enterprises, Inc. and its wholly-owned and majority-owned subsidiaries.
Investments in other affiliated companies are accounted for by the equity
method. Significant intercompany accounts and transactions are eliminated in
consolidation.
The Company is primarily engaged in the operation of domestic and
international general hospitals. During 1994 the Company sold most of its
physical rehabilitation hospitals and decided to discontinue its psychiatric
hospital business, adopting a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities within one year. (See Note 2.)
B. Net Operating Revenues
These revenues consist primarily of net patient service revenues, which are
based on the hospitals' established billing rates less allowances and discounts
principally for patients covered by Medicare, Medicaid and other contractual
programs. These allowances and discounts were $2.7 billion, $2.6 billion and
$2.3 billion for the years ended May 31, 1994, 1993 and 1992, respectively.
Payments under these programs are based on either predetermined rates or the
costs of services. Settlements for retrospectively determined rates are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined. Management believes that
adequate provision has been made for adjustments that may result from final
determination of amounts earned under these programs. Approximately 40% of
fiscal 1994 consolidated net operating revenues is from participation of
domestic general and physical rehabilitation hospitals in Medicare and Medicaid
programs. In 1993 it was approximately 37%, and in 1992 it was approximately
35%.
The Company provides care to patients who meet certain financial or economic
criteria without charge or at amounts substantially 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 gross revenue and are not
included in deductions from revenue or in operating and administrative
expenses.
C. Provision for Doubtful Accounts
A provision for estimated uncollectible accounts and notes receivable, net of
recoveries, is included in operating and administrative expenses and was $107
million, $115 million and $123 million for 1994, 1993 and 1992, respectively.
D. Property, Plant and Equipment
The Company uses the straight-line method of depreciation for buildings,
improvements and equipment over their estimated useful lives as follows:
buildings and improvements--generally 25 to 50 years; equipment--three to 15
years.
E. Intangible Assets
Preopening costs generally are amortized over four years. Costs in excess of
the fair value of identifiable net assets of purchased businesses generally are
amortized over 40 years. Deferred financing costs and the costs of acquiring
certain management contracts are amortized over the lives of the related loans
or contracts. The straight-line method is used to amortize most intangible
assets.
F-7
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
F. Stock Benefit Plans
The fair market value of restricted shares on the date of award and the fair
market value of the Company's common shares on the date of grant of discounted
stock options in excess of the exercise price are expensed, with appropriate
credits to additional paid-in capital, over the periods that the restrictions
as to forfeiture or exercise lapse. For restricted units, an amount equivalent
to the fair market value of shares of the Company's common stock on the date of
vesting, subject to a maximum amount, is expensed over the vesting period. (See
Note 10.)
G. Leases
Capital leases are recorded at the beginning of the lease term as assets and
liabilities at the lower of the present value of the minimum lease payments or
the fair value of the assets.
H. Cash Equivalents
The Company treats highly liquid investments with an original maturity of
three months or less as cash equivalents.
I. Interest Rate Swap Agreements
The differential to be paid or received under interest rate swap agreements
is accrued as the interest rates change and is recognized over the life of the
agreements as an adjustment to interest expense. (See Note 8B.)
J. Sales of Common Stock of Subsidiaries
At the time a subsidiary sells existing or newly issued common stock to
unrelated parties at a price in excess of its book value, the Company's policy
is to record a gain reflecting its share of the increase in the subsidiary's
stockholders' equity resulting from the sale. (See Note 15.)
K. Translation of Foreign Currencies
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated at
fiscal year-end exchange rates. Income statement amounts have been translated
at the average exchange rate for the year. The resulting currency translation
adjustments and the effect of transaction gains and losses are insignificant
for all years presented.
F-8
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 2 DISCONTINUED OPERATIONS--PSYCHIATRIC HOSPITAL BUSINESS
At November 30, 1993, the Company decided to discontinue its psychiatric
hospital business and adopted a plan to dispose of its psychiatric hospitals
and substance abuse recovery facilities within one year. Also, in connection
with the settlement of federal investigations of the Company described in Note
7B, the Company agreed to dispose of its psychiatric hospital business and not
to re-enter such business for five years. The Consolidated Statements of
Operations reflect the net operating results of the discontinued business
separately from continuing operations, and previously issued financial
statements have been restated to report these operations as discontinued.
Operating results for periods subsequent to November 30, 1993, are charged to
the reserve for estimated operating losses during the phase-out period. The
discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED MAY 31,
------------------------------
1992 1993 1994
--------- --------- ---------
(IN MILLIONS)
<S> <C> <C> <C>
Net operating revenues.......................... $ 1,010 $ 571 $ 476
Loss from operations:
Loss before income taxes...................... (129) (160) (266)
Income tax benefit............................ 44 56 111
--------- -------- --------
(85) (104) (155)
--------- -------- --------
Loss on disposal:
Estimated losses upon disposal................ -- -- (414)
Estimated operating losses during the phase-
out period................................... -- -- (433)
Income tax benefit............................ -- -- 301
--------- -------- --------
-- -- (546)
--------- -------- --------
Total loss from discontinued operations......... $ (85) $ (104) $ (701)
========= ======== ========
</TABLE>
The estimated losses upon disposal consist primarily of provisions for the
write-down of assets to estimated net realizable value and other costs
associated with the disposal of assets. The estimated net realizable value is
included in assets held for sale in the accompanying consolidated balance
sheet. The estimated operating losses during the phase-out period include the
costs of settling federal and state investigations and other unusual legal
costs related to the psychiatric hospital business. The loss from operations
also includes provisions for unusual legal costs and certain asset write-downs
related to the psychiatric business that were recorded prior to November 30,
1993. (See Note 7B.)
The Company entered into two separate sale agreements, each dated as of March
29, 1994, to sell 47 psychiatric facilities to Charter Medical Corporation for
approximately $200 million, including the net book values of certain inventory,
receivables and other items of working capital, subject to certain adjustments.
One agreement provides for the sale of 30 hospitals for an approximate sales
price of $134 million. In June 1994 the Company sold 27 of the 30 hospitals for
a sales price of approximately $129 million. The sales of the remaining three
hospitals are anticipated to close in the near future. The second agreement
provides for the sale of 17 psychiatric hospitals. The Federal Trade Commission
(FTC) issued a request for additional information regarding these remaining
hospitals. The Company and Charter are responding to the FTC's request. No
specific date has been set to close these sales, except that if such closings
do not occur prior to September 30, 1994, and the parties do not extend that
date, the agreement will terminate on September 30. Based on discussions to
date with the FTC, the Company believes it may not be able to sell at least
five facilities to Charter. However, it believes it will receive similar
proceeds upon their sale to other parties.
F-9
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal year 1994 and through July 27, 1994, the Company sold an
additional 16 psychiatric hospitals, two substance abuse recovery facilities
and one residential treatment center to other parties. The aggregate sales
price for the 19 facilities approximated $44 million. The Company currently has
reached an agreement to sell or is negotiating with various other parties for
the sale of 10 psychiatric hospitals and is seeking a buyer for one other
facility.
NOTE 3 DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of cash, accounts receivable, accounts payable and
interest payable approximate fair value because of the short maturity of these
instruments. The carrying values of investments, both short-term and long-term
(excluding investments accounted for by the equity method), long-term
receivables and long-term debt are not materially different than the estimated
fair values of these instruments. The estimated fair values of interest rate
swap agreements and foreign currency contracts also are not material to the
Company's financial position.
NOTE 4 PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
1993 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Land...................................................... $ 249 $ 173
Buildings and improvements................................ 1,957 1,388
Construction in progress.................................. 47 59
Equipment................................................. 1,061 916
------ ------
3,314 2,536
Less accumulated depreciation and amortization............ 822 772
------ ------
Net property, plant and equipment......................... $2,492 $1,764
====== ======
NOTE 5 LONG-TERM DEBT AND LEASE OBLIGATIONS
A. Long-Term Debt
Long-term debt consists of the following:
<CAPTION>
1993 1994
------ ------
(IN MILLIONS)
<S> <C> <C>
Unsecured loans payable to banks.......................... $ 86 $ --
Secured loans payable to banks............................ -- 13
Secured loans payable..................................... 158 143
Convertible floating rate debentures due 1996............. 220 219
Unsecured medium-term notes due through 1997.............. 175 111
12 1/8% unsecured notes due April 1995 (not redeemable)... 93 93
Notes secured by property, plant and equipment, weighted
average interest rate of approximately 10.4% in 1993 and
9.5% in 1994 payable in installments to 2012............. 88 28
7 3/8% unsecured notes due 1997 (not redeemable).......... 58 58
Obligations under capital leases.......................... 80 49
Other, primarily unsecured................................ 55 54
------ ------
1,013 768
Less current portion...................................... 121 545
------ ------
$ 892 $ 223
====== ======
</TABLE>
F-10
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Unsecured Loans Payable to Banks
In September 1993 the Company repaid $50 million of its then-outstanding
revolving bank borrowings under its $300 million unsecured bank revolving
credit and term loan agreement and refinanced the $246.2 million balance of
such loans with new term loans maturing in April 1995 and requiring quarterly
installments of $11.4 million through May 1994 and $15 million through February
1995. These loans were repaid in April 1994 with new secured bank loans, as
described below. The weighted average interest rate on these and other
unsecured loans payable to banks was 5.3% during 1992, 3.9% during 1993 and
4.7% during 1994.
Also in September 1993 the Company canceled its $120 million short-term
revolving credit agreement entered into in December 1992. No loans were ever
outstanding under this agreement.
Secured Loans Payable
In April 1994 the Company entered into a new $464.7 million revolving credit
and letter of credit agreement with several banks. Indebtedness of the Company
under the new agreement is secured by a pledge of all the outstanding capital
stock of NME Hospitals, Inc., a wholly owned subsidiary of the Company, and is
also guaranteed by NME Hospitals, Inc. The new agreement provides for revolving
loans of up to $222 million and for letters of credit in an aggregate amount of
$242.7 million to support certain of the Company's obligations relating to
commercial paper and remarketable bond programs. Loans of $222 million under
the new agreement were used to repay all of the Company's obligations under,
and to effect termination of, its then-existing unsecured bank term loan
agreement described above. All of this amount, including $209 million related
to the convertible floating rate debentures discussed below, was outstanding at
May 31, 1994.
All outstanding revolving loans under the new agreement mature on April 12,
1995, and there are no earlier installments of principal due or reductions of
availability thereunder. Revolving loans under the new agreement bear interest
at a base rate that is equal to the prime rate announced by Morgan Guaranty
Trust of New York or, if higher, the federal funds rate plus 0.5% or, at the
option of the Company, a London Interbank Offered Rate (LIBOR) plus 1.0% per
annum, for interest periods of one, two, three or six months.
The Company also has $143 million of secured loans payable outstanding at May
31, 1994, that were used for project financings and are secured by liens on
real property or leasehold interests. These loans expire on April 12, 1995, and
provide for interest at the lender's fluctuating cost of funds plus 1/8%. The
weighted average interest rate during 1994 was 5.1%. It was 4.6% in 1993 and
6.4% in 1992.
Floating Rate Debentures--Convertible
The floating rate debentures consist of two components: $209 million of
secured loans payable to banks and $10 million (5% of the debenture face
amount) of generally nontransferable performance investment options to key
employees of the Company. Because the proceeds from the exercise of the
investment options must be used by the Company to retire the debt underlying
the debentures, these loans, together with the outstanding balance of the
investment options, are classified as convertible floating rate debentures. The
weighted average interest rate for the debentures was 6.3% in 1992, 3.6% in
1993 and 4.8% during 1994. The debentures are subject to mandatory redemption
in April 1996 and after the occurrence of certain events.
The performance investment options permit the holder to purchase debentures
at 95% of their $105,264 face value. The debentures are convertible into
preferred stock, which in turn is convertible into common stock. The investment
options ultimately are convertible into 13,977,549 shares of common stock at an
F-11
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
exercise price equivalent to $15.83 per share. The 13,977,549 shares include
1,828,652 shares that are the subject of litigation between the Company and two
of its former executive officers. The Company believes that the investment
options held by those executive officers no longer are exercisable but has
included these shares pending final resolution of the dispute. The investment
options became fully vested in March 1994. The Company may repurchase the
investment options without a premium with the consent of the holder or by
paying a redemption premium sufficient to provide the holder a 6% annual
return. Under certain conditions, the investment options are subject to
mandatory redemption at a redemption price including a 6% annual return.
When investment options are exercised, the Company reduces taxable income by
any excess of the fair market value of the stock at the date of conversion over
the principal amount of the debentures redeemed. The resulting tax benefit
increases additional paid-in capital.
Unsecured Medium-Term Notes
These notes have had both fixed and floating rates of interest. The floating
rate notes were repaid during fiscal 1994. The weighted average interest rate
on these notes was 8.6% during 1992, 7.3% during 1993 and 8.1% in 1994. The
notes are not redeemable.
Loan Covenants
Certain loan agreements have, among other requirements, limitations on
dividends, investments, borrowings, and acquisitions and dispositions of assets
and require maintenance of specified operating ratios, as well as specified
levels of working capital and net worth. The Company is in compliance with the
loan covenants. There are no compensating balance requirements for any credit
line or borrowing.
B. Long-Term Debt Maturities and Lease Obligations
Future long-term debt maturities and minimum operating lease payments are as
follows:
<TABLE>
<CAPTION>
LATER
1995 1996 1997 1998 1999 YEARS
---- ---- ---- ---- ---- -----
(IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C>
Long-term debt................................... $545 $60 $61 $66 $ 3 $ 33
Long-term leases................................. $ 69 $64 $60 $55 $52 $250
</TABLE>
Rental expense under operating leases, including short-term leases, was
approximately $113 million in 1992, $114 million in 1993 and $98 million in
1994.
F-12
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 6 INCOME TAXES
Taxes on income from continuing operations consist of the following amounts:
<TABLE>
<CAPTION>
1992 1993 1994
---- ---- ----
(IN MILLIONS)
<S> <C> <C> <C>
Currently payable:
Federal................................................ $148 $148 $159
State.................................................. 26 30 31
Foreign................................................ 7 7 6
---- ---- ----
181 185 196
Deferred:
Federal................................................ (39) (29) (46)
State.................................................. (6) (3) (6)
---- ---- ----
(45) (32) (52)
Charges equivalent to federal and state income taxes,
primarily
the benefit associated with stock benefit plans......... 5 2 --
---- ---- ----
$141 $155 $144
==== ==== ====
</TABLE>
The difference between the Company's effective income tax rate and the
statutory federal income tax rate is shown below:
<TABLE>
<CAPTION>
1992 1993 1994
-------------- -------------- --------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
(IN MILLIONS OF DOLLARS AND AS A PERCENT OF
PRETAX INCOME)
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory federal
rate............................. $122 34.0% $142 34.0% $126 35.0%
State income taxes, net of federal
income tax benefit............... 14 3.9% 18 4.3% 17 4.6%
Gain on sale of subsidiary's
common stock..................... -- -- (10) (2.4)% -- --
Other............................. 5 1.4% 5 1.1% 1 .4%
---- ---- ---- ---- ---- ----
Taxes on income from continuing
operations and effective tax
rates............................ $141 39.3% $155 37.0% $144 40.0%
==== ==== ==== ==== ==== ====
</TABLE>
No tax provision has been made for U.S. or additional foreign taxes on $68
million of undistributed earnings of foreign subsidiaries or on a $29 million
gain on the sale of a foreign subsidiary's common stock as the Company's
overseas investments are intended to be permanent. Such earnings would become
taxable upon the remittance of dividends or upon the sale or liquidation of the
investments.
Effective June 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes." Among other provisions, this
standard requires deferred tax balances to be determined using enacted income
tax rates for the years in which the taxes actually are paid or refunds
actually are received instead of when the deferrals were initiated. The Company
has recognized $60 million as income in the fiscal year ended May 31, 1994, for
the cumulative effect on prior years of adopting this standard based on tax
rates in effect at June 1, 1993.
F-13
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax assets and liabilities as of May 31, 1994, relate to the
following:
<TABLE>
<CAPTION>
DEFERRED TAX
------------------
ASSETS LIABILITIES
------ -----------
(IN MILLIONS)
<S> <C> <C>
Depreciation and fixed asset basis differences.............. $ -- $182
Reserves related to discontinued operations and
restructuring charges...................................... 306 --
Receivables--doubtful accounts and adjustments.............. 69 --
Cash-basis accounting change................................ -- 23
Accruals for insurance risks................................ 35 --
Intangible assets........................................... -- 7
Other long-term liabilities................................. 20 --
Benefit plans............................................... 18 --
Other accrued liabilities................................... 10 --
Investments................................................. 9 --
Valuation allowance......................................... (7) --
Other items................................................. -- 1
---- ----
$460 $213
==== ====
Management believes that the deferred tax assets at May 31, 1994, will be
realized by offsetting current tax provisions against future income or through
tax loss carrybacks.
Prior-year financial statements are not restated to reflect the new accounting
standard. The following reflect the principal sources of deferred income tax
credits for those years:
<CAPTION>
1992 1993
------ -----------
(IN MILLIONS)
<S> <C> <C>
Depreciation and asset disposition differences.............. $ 9 $ 4
Cash-basis accounting....................................... (9) (8)
Doubtful accounts and adjustments........................... (15) (5)
Costs included in intangible assets, net of amortization.... (2) --
Equity method accounting.................................... (5) 2
Accruals for insurance risks................................ (7) (7)
Restructuring charges....................................... (14) (14)
Other items................................................. (2) (4)
---- ----
$(45) $(32)
==== ====
</TABLE>
NOTE 7 CLAIMS AND LAWSUITS
A. Professional and General Liability Insurance
The Company currently insures all of its professional and comprehensive
general liability risks through an insurance company owned by several health
care companies and in which the Company has a significant minority interest.
Risks in excess of $3 million per occurrence are reinsured with major
independent insurance companies. Through May 31, 1994, the Company insured its
professional and comprehensive general liability risks related to its
psychiatric and physical rehabilitation hospitals through a wholly owned
insurance subsidiary that reinsured risks in excess of $500,000 with major
independent insurance companies. The Company has reached the policy limits
provided by its insurance subsidiary related to the psychiatric hospitals in
certain years, and, in addition, damages, if any, arising from fraud and
conspiracy claims in psychiatric malpractice cases may not be insured. (See
Note 7B.)
F-14
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company's estimated liability for the self-insured portion of
professional and comprehensive general liability claims is $93 million at May
31, 1994, after discounting the liability to its present value based on
expected loss reporting patterns and a weighted average discount rate of 8.8%.
The Company believes that claims and lawsuits arising in the ordinary course
of business are adequately covered by insurance or are adequately provided for
in the Company's consolidated financial statements. However, the final
liability may vary from the estimated liability.
B. Significant Legal Proceedings
The Company has been involved in significant legal proceedings and
investigations of an unusual nature related principally to its psychiatric
business. During the years ended May 31, 1994, and 1993, the Company recorded
provisions to estimate the cost of the ultimate disposition of all these
proceedings and investigations and to estimate the legal fees that it expects
to incur. As discussed further below, the Company has settled the most
significant of these matters. The remaining reserves for unusual litigation
costs that relate to the matters that have not been settled as of May 31, 1994,
and an estimate of the legal fees to be incurred subsequent to May 31, 1994,
total approximately $81 million and represent management's estimate of the net
costs of the ultimate disposition of these matters. There can be no assurance,
however, that the ultimate liability will not exceed such estimates.
All of the costs associated with these legal proceedings and investigations
are classified in discontinued operations. (See Note 2.)
(1) Insurance Litigation--In November 1993 the Company signed agreements to
settle two of its lawsuits with certain insurance companies, and in February
1994 the Company signed an agreement to settle the remaining lawsuit. Under the
settlements, the Company agreed to pay up to $125 million and $89.9 million,
respectively, as complete and final resolution of the disputed claims alleging
that the psychiatric hospitals engaged in certain fraudulent practices. The
final installment of these settlements was paid in March 1994. In return, the
insurers agreed on an individual basis to strengthen standard business
relations with the Company, including, for example, allowing the Company to
compete for managed care contracts and participate in provider networks. The
settlements also addressed the processing by the insurance companies of pending
claims from psychiatric facilities owned by the Company's subsidiaries. The
Company has received inquiries from various other insurance companies and
health benefit providers regarding the possible filing of claims with similar
allegations. To date, the amounts involved are not significant.
(2) Investigations--On June 29, 1994, the Company executed plea agreements
that were approved by a federal judge and other settlement agreements under
which it agreed to pay a total of $362.7 million to conclude the federal
investigations of the Company and its subsidiaries: $324.2 million in civil
restitution and penalties, $34 million in criminal fines, $2 million to the
Department of Health and Human Services to support a children's mental health
program, and $2.5 million to the National Institute of Mental Health to fund
research relating to federally funded health care in substance abuse recovery
or mental health treatment facilities. Under the agreements, the Company's
remaining hospitals will continue to be eligible to participate in all
federally funded health care programs.
As part of the settlement, a subsidiary operating the Company's psychiatric
hospitals pled guilty to six counts of paying illegal remuneration for referral
of Medicare patients and one count of conspiracy to make such payments and paid
a $33 million fine. Another subsidiary operating a single general hospital pled
guilty to one count of illegal payments and paid a $1 million fine. The count
relates to activities that occurred while an individual convicted of defrauding
the hospital was its chief executive.
F-15
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The federal settlement agreements pertain only to the Company and its
subsidiaries and will not extend to individuals. The Company is obligated to
cooperate with the government in its investigation of individuals. The Company
has numerous other obligations under the agreements, including disposing of its
psychiatric hospital business and not re-entering it for five years,
implementation and maintenance of compliance programs, and reporting
requirements to the federal government, designed to assure that the Company
complies with federal laws relating to the provision of health care.
In May 1994 the Company also reached agreements in principle with 27 states
and the District of Columbia to pay an additional $16.3 million to settle
investigations. The Company has signed agreements with 26 of those states and
the District of Columbia, five of which contain errors or changes that the
Company is attempting to resolve. The 27 states and the District of Columbia
are all of the areas in which the Company's subsidiaries operated psychiatric
facilities.
On July 12, 1994, the Company, without admitting or denying liability,
consented to the entry of a civil injunctive order in response to a complaint
filed that day by the Securities and Exchange Commission. The complaint alleged
that the Company failed to comply with anti-fraud and recordkeeping
requirements of the federal securities laws concerning the manner in which the
Company recorded the revenues from the activities that were the subject of the
federal government settlement referred to above. In the order, the Company
consented to comply with such requirements of the federal securities laws.
(3) Shareholders' Lawsuits--In October and November 1991 shareholder
derivative actions and federal shareholder class-action suits were filed
against the Company and certain of its officers and directors. Those derivative
and federal class-action suits have been consolidated into one derivative and
one federal class action, respectively. The consolidated derivative action,
purportedly brought on behalf of the Company, alleged breach of fiduciary duty
and other causes of action against the directors and various officers of the
Company. The derivative action was dismissed by the court in May 1993; the
dismissal is being appealed by the plaintiffs. The consolidated federal class
action alleges violations of federal securities laws against the Company and
certain of its executive officers. All parties in the federal class action and
the derivative action have been participating in a voluntary mediation process,
which has included directors and officers liability insurance carriers. Through
this mediation process, the parties have reached an agreement in principle for
the settlement of both lawsuits, including contributions to the settlement by
certain insurance companies. Any agreement in principle is conditioned upon the
execution of formal settlement documentation and court approval.
Two additional federal class actions filed in August 1993 now have been
consolidated into one action. The consolidated action alleges violations of
federal securities laws against the Company and certain of its executive
officers. The parties commenced a voluntary mediation in July 1994.
(4) Psychiatric Malpractice Cases Involving Fraud and Conspiracy Claims--The
Company and certain of its officers and directors are defendants in numerous
lawsuits filed on behalf of psychiatric patients making various claims,
including conspiracy, false imprisonment, fraud and gross negligence. The
Company has settled 90 of these patient care lawsuits for approximately $20.5
million. These cases represent approximately two-thirds of the psychiatric
patient care cases filed to date that contain allegations of conspiracy or
fraud. The Company expects that additional similar lawsuits will be filed.
NOTE 8 OTHER CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET
RISKS
A. Guarantees and Letters of Credit
The Company is contingently liable for $503 million under various guarantees,
standby letters of credit and lease obligations not included in Note 5.
Included in this amount are The Hillhaven Corporation's
F-16
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
obligations to third parties totaling $286 million, including $216 million of
lease obligations and $70 million of long-term debt and other obligations.
During the year, Hillhaven reduced by approximately $420 million its
obligations that were guaranteed by the Company. Also included in the $503
million is approximately $208 million in obligations, substantially all of
which are lease obligations, relating to rehabilitation hospitals sold to
HEALTHSOUTH Rehabilitation Corporation in January 1994.
B. Interest Rate Swaps
At May 31, 1993, and 1994, the Company had outstanding interest rate swap
agreements, generally with commercial banks, having a total notional principal
of $120 million, expiring through 2000. These agreements call for the payment
of fixed rate interest by the Company in return for the assumption by other
contracting parties of the variable rate cost, which effectively changes the
Company's interest rate on a portion of its dollar-denominated floating rate
debt to a fixed rate of 8.5%. Additionally, on May 31, 1993, and 1994, the
Company had outstanding swap agreements with a notional amount of $29 million
expiring through 1997, in which it receives interest from other contracting
parties at a weighted average fixed interest rate of 7.0% and pays interest at
variable rates to those parties. The Company's exposure to credit loss under
these agreements is limited to the interest rate spread in the event of
nonperformance by the other parties. Nonperformance is not anticipated due to
the credit rating of the other parties. The weighted average interest rates in
Note 5A do not include the effects of these agreements.
C. Currency Swap and Forward Exchange Contracts
The Company has entered into currency swap agreements and forward exchange
contracts to hedge the foreign currency exposure attributable to its net
investment in foreign operations. At May 31, 1994, the Company had outstanding
agreements with commercial banks having a total notional principal amount of
75,800,000 Australian dollars, 1,650,000,000 Spanish pesetas and 10,000,000
British pounds at average exchange rates to the U.S. dollar of 1.38, 123.48 and
0.67, expiring through 1999, 1998 and fiscal 1995, respectively.
NOTE 9 PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK
A. Preferred Stock Purchase Rights
In 1988 the Company distributed Preferred Stock Purchase Rights to holders of
the Company's common stock and authorized the issuance of additional rights for
common stock issued after that date. The Company may redeem the rights at $.025
per right at any time until they become exercisable. The rights become
exercisable 10 days after a public announcement that an investor has acquired
20% or more of the Company's common stock or has commenced a tender or exchange
offer for 30% or more of the common stock. The rights may be exchanged for one
two-thousandth (.0005) of a share of Series A Junior Participating Preferred
Stock at an exercise price of $40.61.
In the event the Company is acquired or merged into another company and the
rights have not been redeemed, rights holders will be entitled to purchase, for
the then-current exercise price of the rights, common stock of the surviving
company having a market value equal to two times the exercise price of the
rights. The rights expire in December 1998 unless exercised or redeemed and do
not entitle the holders thereof to vote as shareholders or receive dividends.
B. Preferred Stock
The Series A Junior Participating Preferred Stock for which the Preferred
Stock Purchase Rights may be exchanged is non-redeemable and has a par value of
$0.15 per share. None of the 225,000 authorized shares are outstanding.
F-17
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company has also authorized a Series B Convertible Preferred Stock,
issuable solely upon conversion of the Company's convertible floating rate
debentures. (See Note 5A.) The par value of the stock is $0.15 per share; its
liquidation and redemption value is $105,264 per share; 2,087 shares are
reserved for future issuance; and no shares are outstanding. Since it is likely
that this preferred stock would be converted immediately to common stock, all
references in Note 5A are to common stock rather than preferred stock.
NOTE 10 STOCK BENEFIT PLANS
Under the Company's 1983 and 1991 stock incentive plans, stock options and
incentive stock awards (restricted shares and restricted units) have been made
to certain officers and other key employees. Stock options generally are
granted at an exercise price equal to the fair market value of the shares on
the date of grant (except for discounted stock options granted at an exercise
price equal to 50% of the fair market value of the shares and options for
600,000 shares granted during fiscal 1993 at an exercise price equal to 110% of
the fair market value of the shares) and are exercisable at the rate of one-
third per year beginning one year from the date of grant. In addition, during
fiscal 1994 526,000 options were granted to certain senior officers that are
exercisable on May 31, 1996. Stock options generally expire 10 years from the
date of grant. Certain 1991 plan stock options may be canceled in connection
with the vesting of restricted units under circumstances described below.
Restricted shares generally are issued at no cost to the recipient and are
held in trust by the Company for release in generally equal amounts over five
to seven years from the date of the award (as long as the recipient continues
to be employed by the Company).
Restricted units were granted in fiscal 1992, 1993 and 1994. A restricted
unit is a grant that entitles the recipient to a payment of cash at the end of
each vesting period equivalent to the fair market value of a share of the
Company's common stock on the date of vesting subject to a maximum value per
unit, which is equivalent to the fair market value of a share of the Company's
common stock on the date of grant. These restricted units were granted along
with stock options. Restricted units vest normally one-third each year over
three years and also earn dividend equivalents during the vesting period.
Subject to approval by the shareholders in September 1994, a new Directors
Stock Option Plan will replace the 1991 Director Restricted Share Plan and will
make available options to purchase 500,000 shares of common stock for issuance
to nonemployee directors. Under the plan each nonemployee director will be
entitled to receive a stock option for 5,000 common shares upon initially being
elected to the Board of Directors and each January, beginning retroactively in
January 1994 when the plan was approved by the Board of Directors. Awards will
vest one year after the date of grant, will have an exercise price equal to the
fair market value of the Company's common stock on the date of grant, and will
expire 10 years after the date of grant.
All awards granted under the 1983 and 1991 plans will vest under
circumstances defined in the plans or under certain employment arrangements,
including, with the consent of the Compensation and Stock Option Committee of
the Board of Directors, a change in control of the Company.
Charges to continuing operations associated with discounted stock options,
restricted shares (including the Director Restricted Share Plan) and restricted
units were $12 million in fiscal 1994, $11 million in fiscal 1993 and $11
million in fiscal 1992. The remaining amount to be charged to future
operations, principally over the next two years, is approximately $7 million.
Differences in accrued income tax benefits associated with restricted shares
and discounted stock options and the amounts realized in income tax returns are
reflected as adjustments to additional paid-in capital. Income tax benefits
associated with stock options having exercise prices equal to fair market value
at date of grant are credited to additional paid-in capital as realized.
F-18
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Stock awards may be made only under the 1991 Plan. At May 31, 1994, there
were 8,331,456 shares of common stock available under the 1991 Plan for future
awards. The table below summarizes the transactions in all stock option plans
in which employees participate, including discounted stock options but
excluding restricted shares and units:
<TABLE>
<CAPTION>
1993 1994
------------ ------------
(SHARES OF COMMON STOCK)
<S> <C> <C>
Outstanding at beginning of year (1983 and 1991
Plans)......................................... 9,597,490 11,682,204
Granted ($4.688 to $13.613 per share in 1993 and
$9.50 to $17.50 in 1994)....................... 2,977,745 5,719,175
Exercised ($4.60 to $16.813 per share in 1993
and 1994)...................................... (36,650) (282,482)
Canceled and other adjustments.................. (856,381) (1,692,304)
------------ ------------
Outstanding at end of year ($4.41 to $22.44 per
share at
May 31, 1994).................................. 11,682,204 15,426,593
============ ============
Exercisable at end of year...................... 4,131,859 6,472,708
============ ============
</TABLE>
The Company has received full recourse interest-bearing notes in connection
with the exercise of certain stock options. The notes, secured by the common
stock purchased, reduce stockholders' equity. See Note 5A for information
regarding Performance Investment Options (debenture purchase rights) sold to
certain key employees of the Company.
NOTE 11 EARNINGS PER SHARE
Primary earnings per share of common stock are based on after-tax income
applicable to common stock and the weighted average number of shares of common
stock and common stock equivalents outstanding during each period as
appropriate.
Fully diluted earnings-per-share calculations are based on the assumption
that all dilutive convertible debentures were converted into shares of common
stock as of the beginning of the year, or as of the issue date if later, and 1)
that those shares are added to the weighted average number of common shares and
share equivalents outstanding used in the calculation of primary earnings per
share, and 2) that after-tax income is adjusted accordingly.
NOTE 12 EMPLOYEE RETIREMENT PLANS
Substantially all domestic employees upon qualification are eligible to
participate in a defined contribution 401(k) plan, the NME Retirement Savings
Plan. Employees who elect to participate make mandatory contributions equal to
3% of their eligible compensation, and such contributions are matched by the
Company. Company contributions from continuing operations to all plans for the
fiscal years 1992, 1993 and 1994 were approximately $16 million, $18 million
and $17 million, respectively. The Company does not have a plan that provides
postretirement benefits other than pensions to retired employees.
NOTE 13 DISPOSALS AND ACQUISITION OF FACILITIES
In January 1994 the Company sold 28 inpatient rehabilitation hospitals and 45
related satellite outpatient clinics for approximately $350 million in cash,
including the net book values of certain inventory, receivables and other items
of working capital, subject to certain adjustments. The sale resulted in a gain
of $66.2 million. The Company retained six rehabilitation hospitals on or near
general hospital campuses and in March 1994 sold its other remaining
rehabilitation hospital for approximately $14 million. For the fiscal year
ended May 31, 1994, net operating revenues of the sold rehabilitation hospitals
were $266 million, while pretax income, before general corporate overhead
costs, was $22 million.
F-19
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
During fiscal year 1994 The Hillhaven Corporation purchased the remaining 23
nursing centers it previously leased from the Company for $112 million. (See
Note 14.) The sales resulted in a gain of $17 million.
In March 1994 the Company entered into a long-term operating lease of a 138-
bed general hospital in the New Orleans area. In July 1993 the Company sold a
120-bed general hospital in Tennessee. In June 1994 the Company announced the
sale of two general hospitals in Southern California. Also in June 1994 the
Company acquired, through a wholly owned subsidiary, an additional 50% interest
in Centro Medico Teknon, its general hospital project in Barcelona, Spain, to
bring the Company's ownership of the hospital to 100%. None of these
transactions were significant.
NOTE 14 THE HILLHAVEN CORPORATION
In September 1993 the Company substantially completed a series of
transactions with The Hillhaven Corporation that resulted in: 1) the Company
selling to Hillhaven all remaining leased long-term-care nursing facilities,
and no longer being a lessor to Hillhaven; 2) all indebtedness owed to the
Company from Hillhaven being paid in full; 3) reducing Hillhaven obligations
guaranteed by the Company; and 4) the Company purchasing 120,000 shares of
Hillhaven nonvoting Series D Preferred Stock for $120 million. In February 1994
the Company exercised its warrants to purchase 6 million shares of Hillhaven
common stock at the exercise price of $10.55 per share (after giving effect to
Hillhaven's 5-to-1 reverse stock split). The total exercise price of $63.3
million was paid by liquidating 63,300 shares of Hillhaven Series D Preferred
Stock acquired in September 1993. The Company, as of May 31, 1994, owned: 1)
approximately 33% (8,878,147 shares) of the outstanding common stock of
Hillhaven; 2) 35,000 shares of Hillhaven 8 1/4% accumulative nonvoting Series C
Preferred Stock; and 3) 60,546 shares of Hillhaven nonvoting 6 1/2% payable in
kind Series D Preferred Stock.
NOTE 15 SALES OF SUBSIDIARIES' COMMON STOCK
In May 1994 the Company entered into an agreement pursuant to which DLJ
Merchant Banking Funding, Inc. and certain of its affiliates (DLJMB) will
acquire a controlling interest in the Company's wholly owned subsidiary that
operates its 37 outpatient renal dialysis facilities. Under the terms of the
agreement, and as subsequently agreed among the parties, the subsidiary is
expected to consummate a public debt/equity offering in August 1994, the
proceeds of which will be used to partially fund the payment of a $75.5 million
dividend to the Company. Immediately after payment of the dividend, DLJMB will
purchase common stock of the subsidiary for $10.5 million, and certain members
of the subsidiary's management are expected to purchase common stock for
approximately $1.9 million. After consummation of these transactions, the
Company will own approximately 25% of the outstanding common stock of the
subsidiary. Net operating revenues of the subsidiary were $80.5 million in the
fiscal year ended May 31, 1994, and net income was $5.7 million. This
transaction is expected to result in a gain to the Company of approximately $35
million in the first quarter of fiscal 1995.
In March 1993 the Company's long-term care subsidiary in the United Kingdom,
Westminster Health Care Holdings PLC, issued 3,500,000 shares of its common
stock to third parties in a private placement and in April 1993 sold 26,001,923
shares in an initial public offering; those transactions resulted in a gain to
the Company of $29 million. As a result of the sale and issuance of shares, the
Company's percentage ownership of Westminster changed from 90% to approximately
42%.
F-20
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
NOTE 16 RESTRUCTURING CHARGES
In April 1994 the Company initiated a plan to significantly decrease overhead
costs through a reduction in corporate and division staffing levels and to
review the resulting office space needs of all corporate operations.
Accordingly, in July 1994 the Company announced that approximately 240
positions were being eliminated and other cost-saving efficiencies were
implemented. The Company also decided to sell its corporate headquarters
building and to lease substantially less office space in that building or at an
alternative site. Costs of the write-down of the building, employee severance
benefits and other expenses directly related to the overhead reduction plan are
estimated to be approximately $77 million and have been expensed in the quarter
ended May 31, 1994. In the quarter ended May 31, 1993, the Company recorded a
charge of $52 million for restructuring costs related to continuing operations
that were associated with the combination of the Rehabilitation Hospital
Division into the General Hospital Division, a corporate overhead reduction
program that began in April 1993, and severance costs incurred in connection
with a change in senior executive management.
These restructuring charges, as well as $18 million in the year ended May 31,
1992, have been charged to operating and administrative expenses.
NOTE 17 INFORMATION ABOUT LINES OF BUSINESS
On June 1, 1993, the Company combined its former Rehabilitation Hospital
Division and its General Hospital Division into a new division called the
Hospital Division. In January 1994 the Company sold substantially all of its
rehabilitation hospitals. (See Note 13.) Also during fiscal 1994 the Company
announced that it had discontinued its psychiatric hospital business. (See Note
2.) At May 31, 1994, the Company operated 35 general hospitals and six
rehabilitation hospitals in the United States and 12 general hospitals
overseas, which accounted for approximately 95% of the Company's consolidated
net revenues. The net revenues and operating profits of the overseas general
hospitals accounted for approximately 5.9% and 7.6% of the Company's
consolidated net revenues and operating profits in 1994 and approximately 5.1%
and 7.3%, respectively, in 1993.
NOTE 18 SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
<TABLE>
<CAPTION>
FISCAL 1993 QUARTERS FISCAL 1994 QUARTERS
------------------------- ----------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ----- ------ ----- ------ ----- ------
(IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues.. $ 791 $ 785 $ 795 $ 820 $ 775 $ 770 $ 720 $ 702
----- ----- ----- ----- ----- ----- ----- -----
Income from continuing
operations............. $ 50 $ 78 $ 65 $ 70 $ 53 $ 61 $ 91 $ 11
Net income (loss)....... $ 51 $ 52 $ 54 $ 3 $ (41) $(226) $(164) $ 6
===== ===== ===== ===== ===== ===== ===== =====
Income per share from
continuing operations:
Primary............. $0.30 $0.47 $0.39 $0.42 $0.32 $0.37 $0.55 $0.07
Fully diluted....... $0.29 $0.44 $0.37 $0.40 $0.30 $0.35 $0.51 $0.07
===== ===== ===== ===== ===== ===== ===== =====
</TABLE>
Quarterly operating results are not necessarily representative of operations
for a full year for various reasons, including levels of occupancy, interest
rates, acquisitions, disposals, revenue allowance and discount fluctuations,
the timing of price changes, unusual litigation costs, restructuring charges
and fluctuations in quarterly tax rates.
F-21
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1994 1994
------- -----------
(UNAUDITED)
(DOLLARS IN
MILLIONS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................ $ 313 $ 112
Short-term investments, at cost which approximates
market.................................................. 60 53
Accounts and notes receivable, less allowance for
doubtful accounts ($77 at May 31 and $67 at August 31).. 385 373
Inventories of supplies, at cost......................... 55 54
Deferred income taxes.................................... 372 329
Assets held for sale (Note 4)............................ 204 80
Prepaid expenses and other current assets................ 55 54
------- ------
Total current assets.................................. 1,444 1,055
------- ------
Long-term receivables..................................... 73 72
Investments and other assets.............................. 309 303
Property, plant and equipment, at cost.................... 2,536 2,582
Less: accumulated depreciation and amortization......... 772 788
------- ------
Net property, plant and equipment..................... 1,764 1,794
------- ------
Net intangible assets, at cost............................ 160 162
Less: accumulated amortization.......................... 53 50
------- ------
Net intangible assets................................. 107 112
------- ------
$ 3,697 $3,336
======= ======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and notes.......................... $ 67 $ 111
Accounts payable......................................... 176 144
Employee compensation and benefits....................... 93 72
Reserve related to discontinued operations (Note 4)...... 465 102
Income taxes payable..................................... 58 24
Other current liabilities................................ 236 230
Current portion of long-term debt........................ 545 495
------- ------
Total current liabilities............................. 1,640 1,178
------- ------
Long-term debt, net of current portion.................... 223 244
Other long-term liabilities and minority interests........ 389 399
Deferred income taxes..................................... 125 126
Shareholders' equity:
Common stock, $0.075 par value; authorized 450,000,000
shares; 185,587,666 shares issued at May 31, 1994 and
at August 31, 1994..................................... 14 14
Other shareholders' equity.............................. 1,588 1,654
Less treasury stock, at cost, 19,507,161 shares at May
31, 1994 and 19,311,722 shares at August 31, 1994...... (282) (279)
------- ------
Total shareholders' equity............................ 1,320 1,389
------- ------
$ 3,697 $3,336
======= ======
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
F-22
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED AUGUST 31, 1993 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1993 1994
-------------- --------------
(DOLLARS IN MILLIONS, EXCEPT
PER SHARE AMOUNTS)
<S> <C> <C>
Net operating revenues (Notes 1, 2, 4 and 5)... $ 772 $ 663
-------------- --------------
Operating and administrative expenses (Notes 3
and 7)
Salaries and benefits......................... (352) (283)
Supplies...................................... (84) (81)
Provisions for doubtful accounts.............. (35) (26)
Other operating expenses...................... (173) (150)
Depreciation.................................. (38) (34)
Amortization.................................. (5) (4)
-------------- --------------
Operating income........................... 85 85
-------------- --------------
Interest, net of capitalized portion........... (18) (18)
Investment earnings............................ 8 6
Equity in earnings of unconsolidated affiliates
(Note 1)...................................... 3 6
Minority interests in income of consolidated
subsidiaries (Note 1)......................... (2) (2)
Net gain (loss) on disposals of facilities and
long-term investments......................... 15 (2)
Gain on sale of subsidiary's common stock (Note
6)............................................ -- 32
-------------- --------------
Income from continuing operations before income
taxes and cumulative effect of a change in
accounting.................................... 91 107
Taxes on income................................ (38) (43)
-------------- --------------
Income from continuing operations before
cumulative effect of a change in accounting... 53 64
Discontinued operations, net of taxes (Note 4). (154) --
Cumulative effect of a change in accounting for
income taxes (Note 8)......................... 60 --
-------------- --------------
Net income (loss).............................. $ (41) $ 64
============== ==============
Earnings (loss) per share:
Primary:
Continuing operations...................... $ 0.32 $ 0.38
Discontinued operations.................... (0.93) --
Change in accounting....................... 0.36 --
-------------- --------------
Net...................................... $ (0.25) $ 0.38
============== ==============
Fully diluted:
Continuing operations...................... $ 0.30 $ 0.36
Discontinued operations.................... (0.88) --
Change in accounting....................... 0.33 --
-------------- --------------
Net...................................... $ (0.25) $ 0.36
============== ==============
Cash dividends per common share................ $ 0.12 --
Weighted average shares and share equivalents
outstanding--primary.......................... 166,108,461 168,460,943
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements.
F-23
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED AUGUST 31, 1993 AND 1994
(UNAUDITED)
<TABLE>
<CAPTION>
1993 1994
---- -----
(IN
MILLIONS)
<S> <C> <C>
Net cash provided by (used in) operating activities, including net
expenditures for discontinued operations and restructuring
charges.......................................................... $ 79 $(377)
---- -----
Cash flows from investing activities:
Purchases of property, plant and equipment...................... (22) (28)
Purchases of new businesses, net of cash acquired............... -- (9)
Proceeds from sales of facilities and other assets.............. 27 150
Proceeds from sales of investments.............................. 25 8
Collections on notes............................................ 2 1
Increase in intangible and other assets......................... (5) (11)
Equity investments in partnerships.............................. (3) (1)
Other items..................................................... 1 (1)
---- -----
Net cash provided by investing activities..................... 25 109
---- -----
Cash flows from financing activities:
Net proceeds from (payments of) unsecured lines of credit....... (22) 43
Proceeds from other borrowings.................................. 10 78
Payments of other borrowings.................................... (37) (57)
Cash dividends paid to shareholders............................. (20) --
Proceeds from stock options exercised........................... -- 3
Other items..................................................... -- --
---- -----
Net cash provided by (used in) financing activities........... (69) 67
---- -----
Net increase (decrease) in cash and cash equivalents.......... 35 (201)
Cash and cash equivalents at beginning of year................ 141 313
---- -----
Cash and cash equivalents at end of period.................... $176 $ 112
==== =====
Supplemental disclosures:
Interest paid, net of amounts capitalized....................... $ 14 $ 21
Income taxes paid, net of refunds received...................... 8 34
Notes received in connection with sales of facilities........... 2 --
Major effects of consolidating new businesses:
Assets acquired, primarily accounts receivable and property,
plant and equipment............................................ -- $ 59
Liabilities assumed, primarily long-term debt................... -- 35
Major effects of excluding an unconsolidated affiliate from the
consolidated financial statements (Note 6):
Decrease in assets, primarily accounts receivable and property,
plant and equipment............................................ -- $ (32)
Decrease in liabilities, primarily long-term debt............... -- (83)
</TABLE>
See Accompanying Notes to Condensed Consolidated Financial Statements
F-24
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(1) The unaudited financial information furnished herein, in the opinion of
management, reflects all determinable adjustments which are necessary to
fairly state the Company's financial position, its cash flows and the
results of its operations for the periods indicated. All the adjustments
affecting income from continuing operations are of a normal recurring
nature.
The Company presumes that users of this interim financial information have
read or have access to the Company's audited financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the preceding fiscal year and that the adequacy of
additional disclosure needed for a fair presentation may be determined in
that context. Accordingly, footnotes and other disclosures which would
substantially duplicate the disclosures contained in the Company's most
recent annual report to security holders have been omitted. Income from
continuing operations is not necessarily representative of continuing
operations for a full year for various reasons, including levels of
occupancy, interest rates, facility acquisitions, disposals of facilities
and long-term assets, revenue allowance and discount fluctuations, the
timing of price changes and fluctuations in quarterly tax rates. These same
considerations apply to all year-to-year comparisons.
The Condensed Consolidated Statement of Operations for the three months
ended August 31, 1993 has been reclassified to show equity in earnings of
unconsolidated affiliates and minority interests in income of consolidated
subsidiaries as separate line items, to be comparable with the presentation
for the current period. Previously, these items were included in net
operating revenues and in operating and administrative expenses,
respectively.
(2) The Company's net operating revenues from continuing operations consist
primarily of net patient service revenues, which are based on established
billing rates less applicable allowances and discounts. These allowances
and discounts, primarily for patients covered by Medicare, Medicaid and
other contractual programs, amounted to $684 million and $666 million for
the three-month periods ended August 31, 1993 and 1994, respectively.
(3) The provision for doubtful accounts and notes receivable is included in
operating and administrative expenses net of any recoveries of previously
written-off accounts or notes. The net provisions related to continuing
operations for the three-month periods ended August 31, 1993 and 1994 were
$35 million and $26 million, respectively.
(4) At November 30, 1993, the Company decided to discontinue its psychiatric
hospital business and adopted a plan to dispose of its psychiatric
hospitals and substance abuse recovery facilities within one year. The
Condensed Consolidated Statements of Operations reflect the operating
results of the discontinued business separately from continuing operations.
Accordingly, prior periods have been restated.
Operating results for the discontinued business for the three months ended
August 31, 1993 were:
<TABLE>
<CAPTION>
(IN MILLIONS)
<S> <C>
Net operating revenues...................................... $ 117
-----
Loss before income taxes.................................... (265)
Income tax benefit.......................................... 111
-----
Loss from operations........................................ $(154)
=====
</TABLE>
Operating results and gains or losses on disposals of facilities for
periods subsequent to November 30, 1993 have been charged to a provision
for estimated losses during the phase-out period.
F-25
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Assets and liabilities of the discontinued business at May 31, 1994 and
August 31, 1994 consisted of the following (in millions):
<TABLE>
<CAPTION>
MAY 31, AUGUST 31,
1994 1994
------- ----------
<S> <C> <C>
Accounts and notes receivable.......................... $ 91 $39
Inventories of supplies................................ 2 1
Property, plant and equipment.......................... 105 33
Prepaid expenses and other current assets.............. 4 2
Investments and other non-current assets............... 20 19
---- ---
Total assets......................................... 222 94
Accounts payable....................................... 10 3
Other accrued liabilities.............................. 11 5
Capital lease obligation............................... 6 6
---- ---
Net assets to be disposed of......................... $195 $80
==== ===
</TABLE>
Assets are shown at their expected net realizable values and capital lease
obligation is shown at its face amount.
As previously reported, the Company has been involved in significant legal
proceedings and investigations of an unusual nature related principally to
its psychiatric business and has settled the most significant of these
matters. The reserves related to discontinued operations in the
accompanying balance sheet include $75,103,000 for unusual litigation costs
and legal fees relating to matters that have not been settled as of August
31, 1994 and represent management's estimate of the net costs of the
ultimate disposition of these matters. However, there can be no assurance
that the ultimate liability will not exceed such estimates.
In June 1994, the Company sold 27 of 30 psychiatric hospitals pursuant to a
March 1994 asset sale agreement with Charter Medical Corporation (Charter)
for a sales price of approximately $129 million. The deadline for closing
the sales of the remaining three hospitals is November 30, 1994, unless the
parties extend such deadline. In September 1994 amendments to another March
1994 agreement with Charter reduced the number of other psychiatric
facilities to be sold from 17 to 11 and reduced the purchase price to
approximately $31 million. The agreement also has been amended to extend
the closing deadline to November 30, 1994, unless the parties extend such
deadline. The Company has agreed with the Federal Trade Commission not to
sell the other six hospitals to Charter. The Company believes these
hospitals can be sold to other parties.
In addition to the sales to Charter during the three months ended August
31, 1994, seven psychiatric hospitals and five outpatient centers were sold
to various parties for an aggregate price of approximately $14 million. In
September 1994, two additional psychiatric hospitals were sold for an
aggregate price of approximately $8 million. The Company currently has
reached an agreement to sell or is negotiating with various parties for the
sale of its 14 remaining psychiatric hospitals, including the six
facilities which cannot be sold to Charter.
(5) In January 1994, the Company sold 28 inpatient rehabilitation hospitals and
45 related satellite outpatient clinics. The Company retained six
rehabilitation hospitals on or near acute hospital campuses and in March
1994 sold its other remaining rehabilitation hospital. For the quarter
ended August 31, 1993, net operating revenues of the sold facilities were
$112 million and pre-tax income, before general corporate overhead costs,
was $11 million.
F-26
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(6) On August 11, 1994, the Company completed the sale of a controlling
interest in Total Renal Care, Inc. (formerly Medical Ambulatory Care,
Inc.), the operator of the Company's outpatient renal dialysis centers, to
DLJ Merchant Banking Partners, L.P. and affiliated investment partnerships.
As part of the transaction, the Company received a $75 million cash
distribution from Total Renal Care prior to the sale and retains an
approximate 25% minority interest. The transaction resulted in a $32
million gain to the Company in the quarter ended August 31, 1994.
(7) During the 4th quarter of fiscal 1994, the Company initiated a plan to
significantly decrease overhead costs through a reduction in corporate and
division staffing levels and to review the resulting office space needs of
all corporate operations. In July 1994, the Company announced that
approximately 240 positions were being eliminated and other cost-saving
efficiencies were implemented. The Company also decided to sell its
corporate headquarters building and to lease substantially less office
space in that building or at an alternative site. Costs associated with
this plan were estimated to be approximately $77 million and were expensed
in the quarter ended May 31, 1994. Of the $77 million reserve, $61 million
represented the write-down of the corporate headquarters building to net
realizable value, based on independent appraisals; the estimated costs of
employee severance packages was $10 million, based on actual agreements
communicated to the employees involved; and $6 million was for other
expenses related to the overhead reduction plan, including consulting fees
and employee outplacement costs. During the quarter ended August 31, 1994,
actual costs incurred and charged against the reserve were approximately $3
million. The write-down of the corporate headquarters building has been
recorded as a reduction in the carrying value of property, plant and
equipment in the accompanying condensed consolidated balance sheet. The
rest of the reserve is included in other current liabilities and other
long-term liabilities.
(8) Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company
recognized $60 million as income in the quarter ended August 31, 1993, for
the cumulative effect on prior years of adopting this standard based on tax
rates in effect at June 1, 1993.
Management believes that the net deferred tax asset at August 31, 1994 will
be realized from offsetting tax provisions against future income or through
tax loss carrybacks.
(9) On October 11, 1994, the Company announced the signing of a definitive
merger agreement with American Medical Holdings, Inc. ("AMH"). Under the
terms of the agreement, AMH shareholders will receive $19 in cash and
42/100 of a share of NME common stock for each share of AMH stock they own.
The transaction has been valued at more than $3.3 billion, including the
assumption of approximately $1.3 billion of AMH debt, and is expected to
close in the first part of calendar year 1995. It is subject to customary
regulatory approvals. NME plans to finance the transaction through a new
credit facility and public issuance of debt securities. Upon completion of
the acquisition, which will be accounted for as a purchase, the new company
will have 84 acute care hospitals in 13 states and four foreign countries.
(10) The Company has entered into currency swap agreements and forward exchange
contracts to protect its net investments in foreign subsidiaries or
unconsolidated foreign affiliates and to minimize foreign currency
translation gains and losses. The Company's exposures primarily relate to
assets and liabilities denominated in foreign currency in Australia, Great
Britain, Malaysia, Singapore, Spain and Thailand. To the extent that a
foreign currency appreciates or depreciates against the U.S. dollar, and
the Company's investment denominated in that foreign currency is not
hedged by a currency swap agreement or forward exchange contract, the
value of the Company's invesment in that country would increase or decline
by the amount of the appreciation or depreciation times the Company's net
assets
F-27
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(CONCLUDED)
denominated in that currency (the translation gain or loss). At such time as
the Company disposes of some or all of the foreign currency denominated net
assets, the translation gain or loss would be realized and charged to
earnings.
Gains and losses on swap agreements and forward exchange contracts are
included as part of the Company's cumulative translation adjustment. The
Company's foreign currency positions, by currency, as of May 31, 1994 and
November 30, 1994 are presented in the following table, expressed in thousands
of U.S. dollars:
<TABLE>
<CAPTION>
MAY 31, 1994 NOVEMBER 30, 1994
--------------------------- ---------------------------
CARRYING EXTENT OF UNHEDGED CARRYING EXTENT OF UNHEDGED
CURRENCY VALUE HEDGE EXPOSURE VALUE HEDGE EXPOSURE
-------- -------- --------- -------- -------- --------- --------
<S> <C> <C> <C> <C> <C> <C>
Singapore dollars....... $108,663 -- $108,633 $116,078 -- $116,078
Australian dollars...... 63,992 54,817 9,175 66,439 55,915 10,524
Thai baht............... 4,986 -- 4,986 5,954 -- 5,954
Malaysian ringgitt...... 2,957 -- 2,957 3,385 -- 3,385
Spanish pesetas......... 9,243 13,363 (4,120) 23,291 26,705 (3,414)
UK pounds............... 62,375 15,020 47,355 67,778 15,638 52,140
</TABLE>
The Company's foreign currency swap agreements and forward exchange
contracts, as of May 31, 1994 and November 30, 1994 are shown in the tables
below:
<TABLE>
<CAPTION>
MAY 31, 1994 NOVEMBER 30, 1994
----------------------------- -----------------------------
NOTIONAL INTEREST MATURITY NOTIONAL INTEREST MATURITY
CURRENCY SWAPS AMOUNT RATE DATE AMOUNT RATE DATE
- -------------- ----------- -------- -------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Australian dollars...... 20,500,000 10.54% 02/24/99 20,500,000 10.54% 02/24/99
Australian dollars...... 14,300,000 5.78% 03/04/98 14,300,000 5.78% 03/04/98
Spanish pesetas......... 300,000,000 12.00% 10/09/98 300,000,000 12.00% 10/09/98
Spanish pesetas......... 300,000,000 11.33% 10/09/98 300,000,000 11.33% 10/09/98
</TABLE>
<TABLE>
<CAPTION>
MAY 31, 1994 NOVEMBER 30, 1994
-------------------- ----------------------
FOREIGN FOREIGN
CURRENCY MATURITY CURRENCY MATURITY
FORWARD EXCHANGE CONTRACTS AMOUNT DATE AMOUNT DATE
-------------------------- ----------- -------- ------------- --------
<S> <C> <C> <C> <C>
Australian dollars................ 18,000,000 08/31/94 18,000,000 12/30/94
Australian dollars................ 20,000,000 07/18/94 23,000,000 03/20/95
Australian dollars................ 3,000,000 07/18/94 -- --
Spanish pesetas................... 150,000,000 10/05/94 450,000,000 12/09/94
Spanish pesetas................... -- -- 1,700,000,000 12/02/94
Spanish pesetas................... 450,000,000 06/24/94 625,000,000 12/30/94
Spanish pesetas................... 100,000,000 06/30/94 150,000,000 01/05/94
Spanish pesetas................... 350,000,000 06/30/94 200,000,000 02/28/95
U.K. pounds....................... 10,000,000 06/27/94 10,000,000 12/30/94
</TABLE>
F-28
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Boards of Directors and
Shareholders of American Medical Holdings, Inc.
and American Medical International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of American
Medical Holdings, Inc. and subsidiaries and American Medical International,
Inc. and subsidiaries at August 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Companies' management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
Price Waterhouse llp
Dallas, Texas
October 20, 1994
F-29
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
AS OF AUGUST 31,
-------------------------------------------
1994 1993
--------------------- ---------------------
HOLDINGS AMI HOLDINGS AMI
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......... $ 31,941 $ 31,941 $ 44,335 $ 44,335
Accounts receivable, less reserves
for uncollectible accounts of
$98,622 in 1994 and $98,143 in
1993............................. 147,415 147,415 90,596 90,596
Inventory of supplies............. 63,444 63,444 59,516 59,516
Income taxes, net (including
current portion of deferred
income taxes).................... 30,876 30,876 24,641 24,641
Prepaid expenses.................. 15,133 15,133 11,617 11,617
---------- ---------- ---------- ----------
288,809 288,809 230,705 230,705
---------- ---------- ---------- ----------
PROPERTY AND EQUIPMENT:
Land.............................. 117,841 117,841 104,723 104,723
Buildings and improvements........ 1,253,411 1,253,411 1,151,890 1,151,890
Equipment......................... 577,687 577,687 507,505 507,505
Construction in progress.......... 22,457 22,457 35,827 35,827
---------- ---------- ---------- ----------
1,971,396 1,971,396 1,799,945 1,799,945
Less--Accumulated depreciation.... 507,653 507,653 395,736 395,736
---------- ---------- ---------- ----------
1,463,743 1,463,743 1,404,209 1,404,209
---------- ---------- ---------- ----------
OTHER ASSETS:
Notes receivable.................. 15,559 15,559 10,791 10,791
Investments....................... 24,523 24,523 27,982 27,982
Cost in excess of net assets
acquired, net.................... 1,153,887 1,153,887 1,165,435 1,165,435
Deferred costs.................... 30,026 30,026 29,248 29,248
---------- ---------- ---------- ----------
1,223,995 1,223,995 1,233,456 1,233,456
---------- ---------- ---------- ----------
$2,976,547 $2,976,547 $2,868,370 $2,868,370
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-30
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
AS OF AUGUST 31,
----------------------------------------------
1994 1993
---------------------- ----------------------
HOLDINGS AMI HOLDINGS AMI
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-
term debt.................... $ 156,028 $ 156,028 $ 40,831 $ 40,831
Accounts payable.............. 86,898 86,898 84,513 84,513
Accrued liabilities:
Payroll and benefits........ 116,961 116,961 131,170 131,170
Interest.................... 20,563 20,563 20,641 20,641
Taxes, other than income.... 26,322 26,322 26,353 26,353
Other....................... 69,692 69,692 67,147 67,147
---------- ---------- ---------- ----------
476,464 476,464 370,655 370,655
---------- ---------- ---------- ----------
LONG-TERM DEBT................ 1,130,967 1,130,967 1,283,665 1,283,665
---------- ---------- ---------- ----------
CONVERTIBLE SUBORDINATED DEBT. 10,707 10,707 10,487 10,487
---------- ---------- ---------- ----------
DEFERRED CREDITS AND OTHER
LIABILITIES:
Deferred income taxes......... 218,651 218,651 211,451 211,451
Reserve for professional
liability risks.............. 103,099 103,099 100,496 100,496
Other deferred credits and
liabilities.................. 187,941 187,941 187,743 187,743
---------- ---------- ---------- ----------
509,691 509,691 499,690 499,690
---------- ---------- ---------- ----------
COMMITMENTS AND CONTINGENCIES
Common Stock Subject to
Repurchase Obligations....... -- -- 6,046 --
---------- ---------- ---------- ----------
SHAREHOLDERS' EQUITY:
AMI common stock, $0.01 par
value--200,000 shares
authorized 72,481 shares
issued and outstanding in
1994 and 1993................ -- 725 -- 725
Holdings preferred stock,
$0.01 par value-- 5,000
shares authorized No shares
outstanding.................. -- -- -- --
Holdings common stock, $0.01
par value--200,000 shares
authorized 77,491 shares
issued and outstanding in
1994 and 76,873 in 1993...... 775 -- 768 --
Additional paid-in capital.... 608,096 592,494 596,623 587,060
Retained earnings............. 245,547 261,199 108,436 124,088
Adjustment for minimum pension
liability.................... (5,700) (5,700) (8,000) (8,000)
---------- ---------- ---------- ----------
848,718 848,718 697,827 703,873
---------- ---------- ---------- ----------
$2,976,547 $2,976,547 $2,868,370 $2,868,370
========== ========== ========== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
F-31
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
----------------------------------------------------------------------
1994 1993 1992
---------------------- ---------------------- ----------------------
HOLDINGS AMI HOLDINGS AMI HOLDINGS AMI
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
NET REVENUES............. $2,381,689 $2,381,689 $2,238,525 $2,238,525 $2,237,912 $2,237,912
OPERATING COSTS AND EX-
PENSES:
Salaries and benefits.. 869,020 869,020 815,323 815,323 838,727 838,727
Supplies............... 339,985 339,985 315,935 315,935 316,541 316,541
Provision for uncol-
lectible accounts..... 165,539 165,539 148,135 148,135 163,824 163,824
Depreciation and amor-
tization.............. 156,718 156,718 147,397 147,397 149,051 149,051
Other operating costs.. 524,221 524,221 505,614 505,614 496,180 496,180
---------- ---------- ---------- ---------- ---------- ----------
Total operating costs
and expenses........ 2,055,483 2,055,483 1,932,404 1,932,404 1,964,323 1,964,323
---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME......... 326,206 326,206 306,121 306,121 273,589 273,589
Gains on sales of secu-
rities................ 69,328 69,328 -- -- 119,803 119,803
Interest expense, net.. (154,507) (154,507) (166,582) (166,582) (204,556) (204,556)
---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE TAXES, MI-
NORITY EQUITY INTEREST
AND EXTRAORDINARY LOSS.. 241,027 241,027 139,539 139,539 188,836 188,836
Provision for income
taxes................. (98,300) (98,300) (68,800) (68,800) (77,900) (77,900)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME BEFORE MINOR-
ITY EQUITY INTEREST AND
EXTRAORDINARY LOSS...... 142,727 142,727 70,739 70,739 110,936 110,936
Minority equity inter-
est................... (3,707) (3,707) (3,770) (3,770) (1,318) (1,318)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME BEFORE EX-
TRAORDINARY LOSS........ 139,020 139,020 66,969 66,969 109,618 109,618
Extraordinary loss on
early extinguishment
of debt............... (1,909) (1,909) (25,431) (25,431) (9,997) (9,997)
---------- ---------- ---------- ---------- ---------- ----------
NET INCOME............... $ 137,111 $ 137,111 $ 41,538 $ 41,538 $ 99,621 $ 99,621
========== ========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
PER SHARE DATA:
Net income before extraordinary loss........ $1.80 N/A $0.87 N/A $1.43 N/A
Extraordinary loss on early
extinguishment of debt................... (0.02) N/A (0.33) N/A (0.13) N/A
------ ------ ------
NET INCOME PER COMMON AND COMMON EQUIVALENT
SHARE...................................... $1.78 N/A $0.54 N/A $1.30 N/A
====== ====== ======
SHARES USED FOR COMPUTATION OF
NET INCOME PER SHARE....................... 77,143 N/A 76,760 N/A 76,645 N/A
</TABLE>
See Notes to Consolidated Financial Statements.
F-32
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------
1994 1993 1992
-------------------- ------------------ --------------------
HOLDINGS AMI HOLDINGS AMI HOLDINGS AMI
--------- --------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERAT-
ING ACTIVITIES:
Income before
extraordinary loss.... $ 139,020 $ 139,020 $ 66,969 $ 66,969 $ 109,618 $ 109,618
Adjustments to
reconcile to net cash
provided by operating
activities:
Depreciation and
amortization.......... 156,718 156,718 147,397 147,397 149,051 149,051
Deferred income taxes.. (8,100) (8,100) 300 300 19,600 19,600
Amortization of debt
discount, deferred
financing costs and
non-cash interest..... 49,021 49,021 60,617 60,617 62,396 62,396
Gains on sales of
securities............ (43,428) (43,428) -- -- (119,803) (119,803)
Financing fees paid.... (1,630) (1,630) (5,515) (5,515) (3,297) (3,297)
Foreign exchange
translation (income)
loss.................. 215 215 (613) (613) 7,761 7,761
Decrease (increase) in
accounts receivable,
net................... (18,745) (18,745) 25,512 25,512 36,859 36,859
Increase in inventory
of supplies and
prepaid expenses...... (1,206) (1,206) (515) (515) (4,980) (4,980)
Decrease in accounts
payable and accrued
liabilities........... (10,086) (10,086) (9,671) (9,671) (54,064) (54,064)
Decrease in accrued
interest.............. (664) (664) (1,409) (1,409) (1,553) (1,553)
Income taxes, net...... 18,283 18,283 (17,983) (17,983) 81,687 81,687
Decrease in other
liabilities........... (14,273) (14,273) (6,751) (6,751) (27,527) (27,527)
Other non-cash items,
net................... 4,506 4,506 (1,058) (1,058) (301) (301)
--------- --------- -------- -------- --------- ---------
NET CASH PROVIDED BY
OPERATING ACTIVITIES... 269,631 269,631 257,280 257,280 255,447 255,447
--------- --------- -------- -------- --------- ---------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Payments on debt....... (62,169) (62,169) (653,884) (653,884) (506,406) (506,406)
Reducing Revolving
Credit Facility....... (21,000) (21,000) 287,000 287,000 -- --
Borrowing Base
Facility.............. -- -- -- -- (39,495) (39,495)
Borrowings............. 890 890 152,047 152,047 185,794 185,794
Contribution to AMI by
Holdings.............. -- 5,434 -- 2,381 -- 9,988
Stock repurchases...... (20) -- (118) -- (3,170) --
Issuance of Holdings
common stock.......... 5,454 -- 2,499 -- 11,927 --
--------- --------- -------- -------- --------- ---------
NET CASH USED IN
FINANCING ACTIVITIES... (76,845) (76,845) (212,456) (212,456) (351,350) (350,119)
--------- --------- -------- -------- --------- ---------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Property and equipment
additions............. (112,214) (112,214) (116,322) (116,322) (96,816) (96,816)
Acquisitions........... (111,606) (111,606) -- -- -- --
Disposition of assets.. -- -- -- -- 100,089 100,089
Sales of securities.... 46,537 46,537 -- -- 153,371 153,371
Decrease (increase) in
deferred costs........ (7,279) (7,279) (3,956) (3,956) 4,107 4,107
Additions to notes
receivable and
investments........... (15,536) (15,536) (4,969) (4,969) (43,531) (43,531)
Decrease in notes
receivable and
investments........... 7,270 7,270 63,758 63,758 33,204 33,204
Other, net............. (12,352) (12,352) (9,536) (9,536) (14,848) (14,848)
--------- --------- -------- -------- --------- ---------
NET CASH PROVIDED BY
(USED IN) INVESTING
ACTIVITIES............. (205,180) (205,180) (71,025) (71,025) 135,576 135,576
--------- --------- -------- -------- --------- ---------
INCREASE (DECREASE) IN
CASH AND CASH
EQUIVALENTS............ (12,394) (12,394) (26,201) (26,201) 39,673 40,904
Cash and cash
equivalents, beginning
of period.............. 44,335 44,335 70,536 70,536 30,863 29,632
--------- --------- -------- -------- --------- ---------
CASH AND CASH
EQUIVALENTS, END OF
PERIOD................. $ 31,941 $ 31,941 $ 44,335 $ 44,335 $ 70,536 $ 70,536
========= ========= ======== ======== ========= =========
</TABLE>
See Notes to Consolidated Financial Statements.
F-33
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE THREE YEARS ENDED AUGUST 31, 1994
<TABLE>
<CAPTION>
ADJUSTMENT
FOR
ADDITIONAL RETAINED MINIMUM
PAID-IN EARNINGS PENSION
SHARES AMOUNT CAPITAL (DEFICIT) LIABILITY
------ ------ ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
HOLDINGS
Balance, August 31, 1991........ 75,615 $756 $584,145 $(32,723) $ --
------ ---- -------- -------- -------
Issuance of stock............. 1,315 13 11,914 -- --
Stock repurchases............. (290) (3) (3,167) -- --
Common Stock Subject to Repur-
chase Obligations............ -- -- 3,105 -- --
Net income.................... -- -- -- 99,621 --
------ ---- -------- -------- -------
Balance, August 31, 1992........ 76,640 766 595,997 66,898 --
------ ---- -------- -------- -------
Issuance of stock............. 247 2 2,497 -- --
Stock repurchases............. (14) -- (118) -- --
Common Stock Subject to Repur-
chase Obligations............ -- -- (1,753) -- --
Net income.................... -- -- -- 41,538 --
Adjustment for minimum pension
liability.................... -- -- -- -- (8,000)
------ ---- -------- -------- -------
Balance, August 31, 1993........ 76,873 768 596,623 108,436 (8,000)
------ ---- -------- -------- -------
Issuance of stock............. 621 7 5,447 -- --
Stock repurchases............. (3) -- (20) -- --
Common Stock Subject to Repur-
chase Obligations............ -- -- 6,046 -- --
Net income.................... -- -- -- 137,111 --
Adjustment for minimum pension
liability.................... -- -- -- -- 2,300
------ ---- -------- -------- -------
Balance, August 31, 1994........ 77,491 $775 $608,096 $245,547 $(5,700)
====== ==== ======== ======== =======
AMI
Balance, August 31, 1991........ 72,481 $725 $567,444 $(17,071) $ --
------ ---- -------- -------- -------
Contributions from Holdings... -- -- 17,235 -- --
Net income.................... -- -- -- 99,621 --
------ ---- -------- -------- -------
Balance, August 31, 1992........ 72,481 725 584,679 82,550 --
------ ---- -------- -------- -------
Contributions from Holdings... -- -- 2,381 -- --
Net income.................... -- -- -- 41,538 --
Adjustment for minimum pension
liability.................... -- -- -- -- (8,000)
------ ---- -------- -------- -------
Balance, August 31, 1993........ 72,481 725 587,060 124,088 (8,000)
------ ---- -------- -------- -------
Contributions from Holdings... -- -- 5,434 -- --
Net income.................... -- -- -- 137,111 --
Adjustment for minimum pension
liability.................... -- -- -- -- 2,300
------ ---- -------- -------- -------
Balance, August 31, 1994........ 72,481 $725 $592,494 $261,199 $(5,700)
====== ==== ======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements
F-34
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
American Medical Holdings, Inc. ("Holdings") was organized in July 1989 to
acquire American Medical International, Inc. ("AMI" and, together with
Holdings, the "Company"). As a result of this transaction, Holdings is the
owner of all of the outstanding shares of common stock of AMI.
The accompanying consolidated financial statements include the accounts of
Holdings, AMI and all majority owned subsidiary companies and have been
prepared in accordance with generally accepted accounting principles. All
significant intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to prior years' financial statements
to be consistent with the fiscal 1994 presentation.
AMI's financial statements are the same as Holdings' financial statements,
except for the components of shareholders' equity, and for the years ended
August 31, 1993 and 1992 the impact of Holdings' common stock subject to
repurchase obligations (See Note 9 Capital Stock).
Cash and Cash Equivalents
All highly liquid debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents.
Accounts Receivable
The Company receives payment for services rendered to patients from (i) the
federal and state governments under the Medicare, Medicaid and CHAMPUS
programs, (ii) privately sponsored managed care programs for which payment is
made based on terms defined under contracts and (iii) other payers. As of
August 31, 1994 and 1993, government patient receivables represented
approximately 37% and 30%, respectively, contracted patient receivables
represented approximately 32% and 35%, respectively, and other third party
payer receivables represented approximately 31% and 35%, respectively of net
patient receivables.
Receivables from government agencies represent a concentrated group of credit
for the Company; however, management does not believe that there are any credit
risks associated with these governmental agencies. The only other significant
credit concentration is with various Blue Cross affiliates. The remaining
balance of payers including entities and individuals involved in diverse
activities, and subject to differing economic conditions, do not represent any
known concentrated credit risks to the Company. Furthermore, management
continually monitors and adjusts its reserves and allowances associated with
these receivables.
Inventory of Supplies
Inventories are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Amounts capitalized as part of property and equipment, including additions
and improvements to existing facilities, are recorded at cost, including
interest capitalized during construction which is computed at the cost of funds
borrowed. Maintenance costs and repairs are expensed as incurred. Buildings and
improvements and equipment are depreciated using the straight-line method of
depreciation over their estimated useful lives. The estimated lives of
buildings and improvements are generally 20 to 25 years and equipment is 3 to
15 years.
F-35
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investments
Investments are accounted for under either the equity method or the cost
method. Investments accounted for under the cost method are stated at the lower
of cost or market in the accompanying financial statements.
Cost in Excess of Net Assets Acquired
Cost in excess of net assets acquired is being amortized over 40 years from
the original acquisition date of AMI resulting in an annual amortization of
approximately $32.0 million. The cumulative amortization of cost in excess of
net assets acquired as of August 31, 1994 and 1993 is $157.2 million and $125.2
million, respectively.
Deferred Costs
Deferred financing costs are amortized under the interest method over the
term of the expected life of the debt. Costs incurred prior to the opening of
new facilities and costs incurred in the development of data processing systems
are deferred and amortized on a straight-line basis over a two to five-year
period.
Income Taxes
Income taxes are computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires deferred tax liabilities or assets be recognized for the anticipated
tax effects of temporary differences that arise as a result of differences in
the book basis and tax basis of assets and liabilities.
Net Revenues
The Company's sources of revenues are primarily provided from patient
services and are presented net of reserves to recognize the difference between
the hospitals' established billing rates for covered services and the amounts
paid by third party or private payers. Patient revenues received under
government and privately sponsored insurance programs are based on cost as
defined under the programs or at predetermined rates based upon the diagnosis,
plus capital costs, return on equity and other adjustments rather than
customary charges. Adjustments are recorded in the period the services are
rendered based on estimated amounts to be reimbursed and contract
interpretations, however, such adjustments are generally subject to final audit
and settlement. Net revenues include adjustments for the years ended August 31,
1994, 1993 and 1992 of $2.1 billion, $1.9 billion and $1.8 billion,
respectively. In management's opinion, the reserves established are adequate to
cover the ultimate liabilities that may result from final settlements.
The Company provides healthcare services free of charge to individuals who
meet certain financial or economic criteria (i.e. charity care). The billings
for such services have not been recognized as receivables or revenues in the
financial statements since they are not expected to result in cash flows.
Translation of Foreign Currencies
Revaluation gains or losses on assets and liabilities denominated in
currencies other than the functional currency are included in the determination
of income. Revaluation gains or losses for debt denominated in foreign
currencies for the years ended August 31, 1994 and 1993 were immaterial.
Revaluation losses for debt denominated in foreign currencies for the year
ended August 31, 1992 totaled $7.8 million. As of September 1, 1992,
substantially all of the Company's foreign denominated debt obligations have
been redeemed or the Company has entered into swap agreements that hedge
against any future fluctuations and, therefore, eliminated any future material
revaluation gains or losses associated with the applicable debt obligations
(See Note 5 Long Term Debt -- Swap Agreements).
F-36
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions to estimate the fair
value of its financial instruments at August 31, 1994:
Cash and Cash Equivalents
The carrying value of cash and cash equivalents approximates fair value due
to the short-term nature of these instruments.
Investments
The Company has various investments for which the determination of the fair
value is not practicable.
Long-Term Debt
Fair values of publicly traded notes have been determined using the quoted
market prices at August 31, 1994. The fair value of certain non-publicly traded
notes is based on cash flows discounted using interest rates found on
comparable traded securities. The aggregate carrying value of long-term debt at
August 31, 1994, of $1,297.7 million had an estimated fair value of $1,392.3
million.
3. ACQUISITIONS
Effective May 1, 1994, the Company completed the purchase of Saint Francis
Hospital located in Memphis, Tennessee. In conjunction with this purchase, in
June 1994 the Company completed the acquisition of a management services
organization in the Memphis area. During fiscal 1994, the Company also acquired
additional outpatient businesses, including home health, diagnostic centers and
physician practices.
During fiscal 1993, the Company merged the operations of AMI's Tarzana
Regional Medical Center with the operations of HealthTrust, Inc. -- The
Hospital Company's ("HealthTrust") Encino Hospital. AMI owns 75% of the
combined hospital operations and therefore the results of operations for the
hospitals are fully consolidated with the results of operations of the Company
for periods subsequent to January 1, 1993.
4. DISPOSITIONS
During 1994, AMI recognized a $69.3 million pre-tax gain ($43.4 million net
of tax), related to the sale of the Company's interest in EPIC Holdings, Inc.
During fiscal 1992, the Company completed the sale of $89.3 million principal
amount of Zero Coupon Notes Due 2001, issued by EPIC Healthcare Group, Inc. in
September 1988 as partial consideration for AMI's sale of certain hospitals.
AMI also completed the sale of its investment in EPIC Holdings, Inc. Class A
and Class B Preferred Stock for aggregate cash proceeds of $130 million. The
total pre-tax gain recorded in fiscal 1992 from these transactions was $119.8
million ($80.7 million, net of tax). The gains on the sale of the EPIC
securities in fiscal 1994 and 1992 is presented in the accompanying financial
statements as "Gains on sales of securities."
During fiscal 1992, the Company sold four domestic acute care hospitals for
aggregate cash proceeds of approximately $100.1 million. These assets were
valued at their respective sales prices, and therefore, no gains or losses were
recognized from these sales in fiscal 1992.
F-37
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT
The components of Holding's and AMI's long-term debt at August 31, 1994 and
1993 are summarized as follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
---------- ----------
<S> <C> <C>
Reducing Revolving Credit Facility, 5.7% at August 31,
1994................................................... $ 266,000 $ 287,000
Senior debt, 11 1/4% to 11 3/8% at August 31, 1994, net
of unamortized discount at August 31, 1994 of $9.4
million and due from 1995 through 2015................. 127,179 125,854
11% Senior Notes, due 2000.............................. 100,000 100,000
6 1/2% Swiss franc/dollar dual currency senior notes due
1997, $74.9 million face value, net of $11.2 million
unamortized discount at August 31, 1994................ 63,760 60,526
11 1/4% Senior notes due 1995, (Pounds)37 million face
value, net of $0.9 million unamortized discount at
August 31, 1994........................................ 61,793 60,084
5% Swiss franc bonds due 1996, SFr.78 million face
value, net of $5.1 million unamortized discount at
August 31, 1994........................................ 47,379 44,537
Zero Coupon Guaranteed Bonds due 1997 and 2002, $179.3
million face value, net of $83.6 million unamortized
discount at August 31, 1994............................ 95,714 84,577
9 1/2% Senior Subordinated Notes, due 2006.............. 150,000 150,000
13 1/2% Senior Subordinated Notes, due 2001............. 193,790 193,790
15% Junior Subordinated Discount Debentures, due 2005... 104,473 104,485
Notes, and capital lease obligations (notes secured by
trust deeds on real property with an aggregate net book
value of approximately $96.8 million at August 31,
1994) with varying maturities through 2014 with
interest at an average rate of 9.6%.................... 76,907 113,643
---------- ----------
1,286,995 1,324,496
Less -- current maturities.............................. 156,028 40,831
---------- ----------
$1,130,967 $1,283,665
========== ==========
</TABLE>
Revolving Credit Facility
The Company's $600 million revolving credit facility ("Reducing Revolving
Credit Facility") was amended in June 1994 extending the term to September 1999
and reducing the rate at which interest accrues. Amounts outstanding under the
Reducing Revolving Credit Facility will accrue interest, at the option of AMI,
at (i) adjusted LIBOR plus .875% (subject to reduction upon the satisfaction of
certain conditions) or (ii) at the alternative base rate specified for the
Reducing Revolving Credit Facility. Upon completion of the fiscal 1994 loan
compliance report, anticipated to be prior to the end of the first quarter of
fiscal 1995, the rate at which interest accrues based on LIBOR will be reduced
to LIBOR plus .75%. Under the Reducing Revolving Credit Facility, $31.3 million
in letters of credit were outstanding as of August 31, 1994.
Swap Agreements
AMI has entered into swap agreements which hedge any foreign currency gains
or losses on the (Pounds)37 million senior notes, face amount $62.7 million,
and the SFr.78 million bonds, face amount $52.4 million. At August 31, 1994 no
loss would be recognized if the counter parties to these swap agreements failed
to perform their obligations.
Debt Covenants
The terms of certain of the Company's indebtedness impose operating and
financial restrictions requiring the Company to maintain certain financial
ratios and restrict the Company's ability to incur additional indebtedness and
enter into leases and guarantees of debt; to make capital expenditures; to make
loans and
F-38
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
investments; to pay dividends or repurchase shares of stock; to repurchase,
retire or refinance indebtedness prior to maturity, and to purchase or sell
assets. The Company has pledged the capital stock of certain direct (first
tier) subsidiaries as security its obligations under the Reducing Revolving
Credit Facility and certain other senior indebtedness. In addition, the Company
has granted a security interest in its accounts receivable as security for its
obligations under the Reducing Revolving Credit Facility. Management believes
that the Company is currently in compliance with all covenants and restrictions
contained in all financing agreements.
Maturities of Long-Term Debt and Capital Lease Obligations
As of August 31, 1994 the maturities of long-term debt, including capital
lease obligations, for the five years ending August 31, 1999 are $156.0 million
in fiscal 1995, $57.0 million in fiscal 1996, $182.1 million in fiscal 1997,
$2.3 million in fiscal 1998 and $2.3 million in fiscal 1999.
Convertible Subordinated Debt
Convertible subordinated debentures are unsecured obligations of the Company
and are redeemable at declining premiums prior to their respective payment
dates. The 9 1/2% Convertible Subordinated Debentures Due 2001, of which $3.4
million and $3.3 million was outstanding at August 31, 1994 and 1993,
respectively, are convertible at $24.38 per share into 209,639 shares of
Holdings' common stock at August 31, 1994, net of unamortized discount of $1.7
million. The 8 1/4% Convertible Subordinated Debentures Due 2008 of which $7.3
million and $7.2 million was outstanding at August 31, 1994 and 1993,
respectively, are convertible at $40.00 per share into 361,400 shares of
Holdings' common stock at August 31, 1994 net of unamortized discount of $7.1
million.
6. BENEFIT PLANS
Pension Plans
The Company has defined benefit pension plans (the "Plans") covering
substantially all of the Company's employees. The benefits are based on years
of service and the employee's base compensation as defined in the Plans. The
Company's policy is to fund pension costs accrued within the limits allowed
under federal income tax regulations. Contributions are intended to provide not
only for benefits attributed to credited service to date, but also for those
expected to be earned in the future.
In accordance with SFAS No. 87 Holdings and AMI have recorded an adjustment
to recognize a minimum pension liability. The following table sets forth the
funded status of the Plans and amounts recognized in the consolidated financial
statements as of August 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
--------- ---------
<S> <C> <C>
Actuarial present value of accumulated benefit
obligation:
Vested................................................. $ 182,600 $ 147,600
========= =========
Accumulated............................................ $ 191,000 $ 155,100
========= =========
Projected benefit obligation............................. $ 209,600 $ 170,500
Plan assets at fair value, primarily listed stock and
corporate bonds......................................... (204,600) (133,000)
--------- ---------
Projected benefit obligation in excess of plan assets.... 5,000 37,500
Unrecognized net loss.................................... (24,700) (25,900)
Adjustment for minimum pension liability................. 6,500 10,500
--------- ---------
Pension liability........................................ $ (13,200) $ 22,100
========= =========
</TABLE>
F-39
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. BENEFIT PLANS (CONTINUED)
Holdings' and AMI's net pension cost for the years ended August 31, 1994,
1993 and 1992 includes the following components (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- -------
<S> <C> <C> <C>
Service cost -- benefits
earned during the peri-
od..................... $ 8,300 $ 6,800 $ 7,600
Interest cost on pro-
jected benefit obliga-
tion................... 14,200 12,200 10,000
Actual return on plan
assets................. (14,400) (18,500) (4,500)
Net amortization and de-
ferral................. 1,100 7,000 (7,100)
-------- -------- -------
Net periodic pension
cost................... $ 9,200 $ 7,500 $ 6,000
======== ======== =======
</TABLE>
In addition, Holdings and AMI have a unfunded supplemental defined benefit
retirement plan for Company executives ("SERP"). The following table sets forth
the amounts recognized for the unfunded SERP in the consolidated financial
statements as of August 31, 1994 and 1993 (in thousands):
<TABLE>
<CAPTION>
1994 1993
------- -------
<S> <C> <C>
Actuarial present value of accumulated benefit obligation:
Vested..................................................... $43,500 $43,000
======= =======
Accumulated................................................ $45,100 $43,900
======= =======
Projected benefit obligation (unfunded)...................... $52,200 $49,700
Unrecognized net gain (loss)................................. 700 (900)
Unrecognized transition costs................................ (200) (300)
Unrecognized prior service costs............................. 200 200
Adjustment for minimum pension liability..................... 3,100 2,900
------- -------
SERP liability............................................... $56,000 $51,600
======= =======
</TABLE>
Holdings' and AMI's net cost of the SERP plan for the years ended August 31,
1994, 1993 and 1992 includes the following components (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
Service cost -- benefits earned during the period........ $1,400 $ 900 $ 100
Interest cost on projected benefit obligation............ 3,800 3,600 3,700
Net amortization and deferral............................ 600 (300) (100)
------ ------ ------
Net periodic SERP cost................................... $5,800 $4,200 $3,700
====== ====== ======
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation for the SERP and the pension plan
approximated 8.75% and 7.5% as of August 31, 1994 and 1993, respectively. The
rate of increase in future compensation levels for the pension plan was 5.0%,
3.5% and 5.0% for the years ended August 31, 1994, 1993 and 1992, respectively.
The rate of increase in future compensation levels for the SERP was 6.0%, 5.0%
and 8.0% for the years ended August 31, 1994, 1993 and 1992, respectively. The
expected long-term rate of return on assets was 10.0% for the years ended
August 31, 1994 and 1993, for the pension plan.
Deferred Savings Plan
The Company also has a tax deferred savings plan. Expenses relating to this
plan were $8.8 million,$7.3 million and $5.6 million for the years ended August
31, 1994, 1993 and 1992, respectively, for Holdings and AMI.
F-40
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. BENEFIT PLANS (CONTINUED)
Other
The Company does not provide any post-retirement or post-employment
healthcare or life insurance benefits to retired or former employees.
Disclosures for the Company's Options Plans and the Employee Stock Purchase
Plan are included in Note 9 Capital Stock.
7. PROFESSIONAL LIABILITY RISKS
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients in the ordinary course of business. The Company
self-insures the professional and general liability claims for nine of its
hospitals up to $500,000 per occurrence and for 26 of its hospitals up to $3
million per occurrence. Prior to June 1993, the self-insured retention was $5
million per occurrence. Coverage for professional and general liability claims
for the Company's two remaining hospitals is maintained with outside insurance
carriers.
The Company owns a 35% equity interest in an insurance company which insures
excess professional and general liability risks for those hospitals which are
self-insured. The excess coverage provided by this insurance company is
limited to $25 million per claim. The Company purchases additional excess
insurance from a commercial carrier. For the period from January 1986 to
February 1991, the Company had no excess coverage for the majority of its
hospitals. However, in March 1991 the Company purchased prior acts coverage
which substantially reduces the uninsured liability for claims during this
period. For the years ended August 31, 1994, 1993 and 1992, the Company paid
$4.3 million, $5.0 million and $4.6 million, respectively, in premiums to this
insurance company. In fiscal 1993 and 1992, the Company received distributions
of prior year premiums of $2.4 million and $3.8 million, respectively, from
this insurance company. In fiscal 1994, the Company received no distributions
of prior years premiums. The Company also received dividends of $3.5 million,
$2.7 million and $4.7 million from this insurance company in fiscal 1994, 1993
and 1992, respectively.
The Company maintains an unfunded reserve for its professional liability
risks which is based, in part, on actuarial estimates calculated and evaluated
by an independent actuary. Actual hospital professional and general liability
costs for a particular period are not normally known for several years after
the period has ended. The delay in determining the actual cost associated with
a particular period is due to the amount of lapsed time between the occurrence
of an incident, the reporting thereof and the settlement of related claims. As
a result, reserves for losses and related expenses are estimated using
expected loss reporting patterns determined in conjunction with the actuary
and are discounted using a rate of 9% to their present value. Adjustments to
the total reserves are determined in conjunction with the actuary and on an
annual basis are recorded by the Company as an increase or decrease in the
current year's earnings.
As of August 31, 1994 and 1993, the unfunded reserve for self insurance was
$118.8 million and $117.6 million, respectively, of which $15.7 and $17.0
million in fiscal 1994 and 1993, respectively is included in current
liabilities. For the fiscal years ended August 31, 1994, 1993 and 1992,
payments for claims and expenses totaled $15.7 million, $19.3 million and
$17.1 million, respectively. For the fiscal years ended August 31, 1994, 1993
and 1992, the Company recorded self insurance expense of $16.9 million, $19.7
million and $13.5 million, respectively.
F-41
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain office space, office equipment and medical
equipment. Future minimum payments under these operating leases for fiscal
1995, 1996, 1997, 1998, 1999 and thereafter are $35.3 million, $22.2 million,
$17.4 million, $13.9 million, $10.0 million and $38.2 million, respectively.
Future minimum payments for six acute care hospitals leased under a REIT
agreement are $36.9 million for each of the years ended fiscal 1995, 1996,
1997, and 1998, $23.3 million for fiscal 1999 and $43.5 million for the
remaining years thereafter. In addition, the Company incurs certain additional
rents (contingency rents), in relation to the REIT agreements, based on a
percentage of the increase in net revenues. These additional rents were $6.7
million, $6.4 million and $5.7 million for the years ended August 31, 1994,
1993 and 1992, respectively.
Construction Commitments
The Company has approximately $19.5 million of construction commitments
outstanding for new construction and renovations as of August 31, 1994.
Guarantees
The Company has guaranteed long-term debt and lease obligations of
unconsolidated subsidiaries and affiliates aggregating $30.8 million at August
31, 1994.
Legal Proceedings
Litigation Relating to the Merger (See Note 17 Subsequent Events). To date, a
total of nine purported class action suits (the "Class Actions") have been
filed against Holdings and the directors of Holdings (and in two cases against
NME). Seven of such Class Actions have been filed in the Delaware Court of
Chancery and are entitled (i) Jeffrey Stark and Gary Plotkin v. Robert W.
O'Leary, Robert J. Buchanan, John T. Casey, Robert B. Calhoun, Harry J. Gray,
Harold J. [sic] Handelsman, Sheldon S. King, Melvyn N. Klein, Dan W. Lufkin,
William E. Mayer and Harold S. Williams (the "Holdings Directors") and
Holdings, C.A. No. 13792, (ii) 7457 Partners v. the Holdings Directors and
Holdings, C.A. No. 13793, (iii) Moise Katz v. the Holdings Directors and
Holdings, C.A. No. 13794, (iv) Constantinos Kafalas v. the Holdings Directors
and Holdings, C.A. No. 13795, (v) F. Richard Manson v. the Holdings Directors,
NME and Holdings, C.A. No. 13797, (vi) Lisbeth Greenfeld v. the Holdings
Directors and Holdings, C.A. No. 13799 and (vii) Joseph Frankel v. the Holdings
Directors and Holdings, C.A. No. 13800 and two purported Class Actions have
been filed in the Superior Court of the State of California, County of Los
Angeles, entitled Ruth LeWinter and Raymond Cayuso v. the Holdings Directors
(with the exception of Harold S. Williams), NME and Holdings, Case No. BC115206
and David F. and Sylvia Goldstein v. O'Leary, NME, AMI, et al., Case No.
BC116104. The complaints filed in each of the Class Actions are substantially
similar, are brought by purported stockholders of Holdings and, in general,
allege that the defendants breached their fiduciary duties to the plaintiffs
and other members of the purported class. One of the Class Actions alleges that
the defendants have committed or aided and abetted a gross abuse of trust. The
complaints further allege that the directors of Holdings wrongfully failed to
hold an open auction and encourage bona fide bids for Holdings and failed to
take action to maximize value for Holdings stockholders. The complaints seek
preliminary and permanent injunctions against the proposed transaction until
such time as a transaction to be entered into between Holdings and NME results
from bona fide arms' length negotiation and/or requiring a fair auction for
Holdings. In addition, if the Merger is consummated, the complaints seek
recision or recessionary damages and two of the Class Actions seek an
accounting of all profits realized and to be realized by the defendants in
connection
F-42
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
with the Merger and the imposition of a constructive trust for the benefit of
the plaintiffs and other members of the purported classes pending such an
accounting. The complaints also seek monetary damages of an unspecified amount
together with prejudgment interest and attorneys' and experts' fees. Holdings
and NME believe that the complaints are without merit and intend to defend
them vigorously.
In addition, Holdings and AMI are subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of all pending legal proceedings will not have a material adverse
effect on the business, results of operations or financial condition of
Holdings and AMI.
9. CAPITAL STOCK
Option Plans
The Company maintains two stock option plans, the Nonqualified Employee
Stock Option Plan (the "Option Plan") and the Nonqualified Performance Stock
Option Plan for Key Employees (the "Key Employees Plan"), pursuant to which
employees of Holdings and its subsidiaries are eligible to receive stock
options to purchase shares of common stock.
The table below summarizes the transactions in the Company's stock option
plans for the years ended August 31, 1994, 1993 and 1992 (shares of common
stock):
<TABLE>
<CAPTION>
1994 1993 1992
--------- --------- ---------
<S> <C> <C> <C>
Outstanding at beginning of period....... 3,342,683 3,179,317 3,450,246
Granted.................................. 437,862 525,696 565,000
Exercised................................ (471,549) (192,548) (114,849)
Cancelled or expired..................... (175,311) (169,782) (721,080)
--------- --------- ---------
Outstanding at end of period............. 3,133,685 3,342,683 3,179,317
========= ========= =========
Exercisable at end of period............. 1,402,780 1,280,513 908,999
========= ========= =========
</TABLE>
The Option Plan generally provides options that are exercisable at prices
ranging from $7.03 to $19.21 per share, vest over a period of five years and
expire ten years from the date of grant. The Key Employees Plan generally
provides options that are exercisable at prices ranging from $7.03 to $22.17
per share, vest over a period of five to ten years based on the attainment of
specified performance goals and expire ten years from the date of grant.
Employee Stock Purchase Plan
In January 1993 the Company adopted an Employee Stock Purchase Plan (the
"Plan"). The purpose of the Plan is to provide an incentive for employees of
the Company to own Holdings' common stock. The plan allows eligible employees
to contribute up to 10% of their base earnings to purchase Holdings' common
stock quarterly, through payroll deductions, at 85% of the lower of the
closing price on the first or last day of the Plan quarter. The Company has
reserved 2,300,000 shares of Holdings' common stock for the Plan.
Common Stock Subject to Repurchase Obligations
The Company's obligation to repurchase shares of Holdings' common stock held
by certain executive officers no longer exists. Accordingly, the amount
related to common stock subject to repurchase obligations was recognized as
shareholders' equity as of August 31, 1994. As of August 31, 1993 and 1992,
shares of Holdings' common stock subject to repurchase obligations were
431,858 and 445,976, respectively.
F-43
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED PARTY TRANSACTIONS
In connection with the sale of the Company's interest in EPIC Holdings, Inc.,
during fiscal 1994 the Company was represented by and paid a fee of
approximately $2.3 million to a major shareholder.
In fiscal 1992, an affiliate of a major shareholder served as the lead
managing underwriter of the public offering of 16.2 million shares of Holdings
common stock, the issuance of the 13 1/2% Senior Subordinated Notes Due 2001
and the 11% Senior Notes Due 2000. This related party received underwriting
fees of $.9 million and in addition received advisory fees of $1.3 million in
connection with divestitures during fiscal 1992.
An entity associated with a general partner of a major shareholder agreed to
provide credit support to domestic hospital subsidiaries of AMI for which such
entity received an annual fee in fiscal 1993 and 1992 of $750,000. The credit
support commitment was replaced with the fiscal 1993 refinancing of the bank
credit facility.
11. EARNINGS PER SHARE
Holdings' earnings per share for the years ended August 31, 1994, 1993 and
1992 is based upon the weighted average number of shares of Holdings' common
stock outstanding. The impact of common stock equivalents is not considered
since they either have an anti-dilutive effect or the effect on dilution is
less than three percent.
12. INCOME TAXES
(Provision) benefit for income taxes, excluding the tax effect of minority
equity interest and the extraordinary loss, for the years ended August 31,
1994, 1993 and 1992 for Holdings and AMI consists of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1993 1992
--------- -------- --------
<S> <C> <C> <C>
Current (including current portion of
deferred)
Federal................................ $ (95,500) $(58,600) $(50,100)
State.................................. (10,900) (9,900) (8,200)
--------- -------- --------
(106,400) (68,500) (58,300)
--------- -------- --------
Deferred
Federal................................ 10,400 (400) (18,700)
State.................................. (2,300) 100 (900)
--------- -------- --------
8,100 (300) (19,600)
--------- -------- --------
Total provision for income taxes.... $ (98,300) $(68,800) $(77,900)
========= ======== ========
</TABLE>
F-44
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
12. INCOME TAXES--(CONTINUED)
The net tax effects of temporary differences and carryforwards that give rise
to deferred tax assets and liabilities as of August 31, 1994 and 1993 are as
follows (in thousands):
<TABLE>
<CAPTION>
1994 1993
-------- --------
<S> <C> <C>
Deferred tax liabilities:
Property and equipment................................ $294,000 $278,700
Change in accounting method........................... 18,800 20,000
Debt discounts and deferred loan costs................ 9,900 10,400
Other, net............................................ 45,169 59,951
-------- --------
Total deferred tax liabilities...................... 367,869 369,051
-------- --------
Deferred tax assets:
Self-insurance reserves............................... 55,700 54,300
Other deferred expenses............................... 20,100 20,900
Deferred gains and losses............................. 16,000 26,400
Bad debt reserves..................................... 5,400 4,600
Deferred compensation................................. 36,300 46,800
Other, net............................................ 76,100 43,000
-------- --------
Total deferred tax assets........................... 209,600 196,000
-------- --------
Net deferred tax liability.............................. $158,269 $173,051
======== ========
</TABLE>
The net deferred tax liability of $158.3 million and $173.1 million as of
August 31, 1994 and 1993, respectively, includes a current asset of $60.3
million and $38.4 million, respectively, and a noncurrent liability of $218.6
million and $211.5 million, respectively. No valuation allowance has been
recorded against any deferred tax asset.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted. Among
other tax law changes, such law increased the corporate income tax rate from
34% to 35% effective for the period beginning on or after January 1, 1993. For
the year ended August 31, 1994, the U.S. statutory tax rate for the Company is
35%.
Holdings' and AMI's income tax provision differed from the amount computed
using the U.S. statutory rate for the years ended August 31, 1994, 1993 and
1992 for the following reasons (in thousands):
<TABLE>
<CAPTION>
1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
Tax at U.S. statutory rate................. $(84,400) $(48,400) $(64,200)
Amortization of goodwill................... (11,200) (11,100) (11,000)
State income tax, net of federal benefit... (8,600) (5,500) (6,000)
Impact on deferred taxes of change in fed-
eral tax rate............................. -- (4,000) --
Other, net................................. 5,900 200 3,300
-------- -------- --------
Provision for income taxes................. $(98,300) $(68,800) $(77,900)
======== ======== ========
</TABLE>
Prior to fiscal 1992, Holdings had operating loss and capital loss
carryforwards for tax purposes of $42 million and $9 million, respectively,
which were fully utilized against net income and capital gains arising in
fiscal 1992 and against capital gains on assets sold prior to the acquisition
of AMI.
F-45
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
13. EXTRAORDINARY LOSSES ON EARLY EXTINGUISHMENT OF DEBT
The Company has recognized extraordinary losses on early extinguishment of
debt in fiscal 1994, 1993, and 1992. Fiscal 1994 includes an extraordinary loss
of $1.9 million ($3.0 million pre-tax) from the repurchase of $15.4 million
principal amount of the 15% Junior Subordinated Discount Debentures Due 2005.
Fiscal 1993 includes an extraordinary loss of $25.4 million ($41.0 million pre-
tax) from the repurchase or redemption of $146.8 million principal amount of
outstanding indebtedness. Fiscal 1992 includes an extraordinary loss of $10.0
million ($15.6 million pre-tax) from the repurchase or redemption of $159.0
million of senior indebtedness and $55.4 million of the 9 7/8% unsecured loan
stock due 2011.
14. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes (net of refunds) of $86.0 million and $83.6
million for the years ended August 31, 1994 and 1993, respectively, and
received income tax refunds (net of payments) of $22.5 million for the year
ended August 31, 1992. The Company paid interest (net of capitalized costs) for
the years ended August 31, 1994, 1993 and 1992 of $108.3 million, $120.5
million and $154.1 million, respectively. Capitalized interest costs were $3.5
million, $1.4 million and $2.6 million for August 31, 1994, 1993 and 1992.
Interest income was $2.7 million, $13.9 million and $10.0 million for the years
ended August 31, 1994, 1993 and 1992.
Non-Cash Transactions
During fiscal 1994, the Company assumed net assets of approximately $92.0
million related to the purchase of Saint Francis Hospital and during fiscal
1993, the Company assumed net assets of approximately $8.0 million as a result
of the merger of AMI's Tarzana Regional Medical Center and HealthTrust's Encino
Hospital.
For the years ended August 31, 1993 and 1992 an $8.2 million and $9.3 million
loss, net of tax, respectively, was recognized as a result of the write-off of
the discounts and deferred financing costs associated with the early
extinguishment of debt.
For the year ended August 31, 1994 approximately $6.0 million was recognized
as an increase in shareholders' equity of Holdings due to the elimination of
common stock subject to repurchase obligations. For the year ended August 31,
1993 $1.8 million was recognized as a decrease in shareholders' equity of
Holdings for the common stock subject to repurchase obligations due to market
price changes. For the year ended August 31, 1992, there was no market price
change and, therefore, no effect on the value of the common stock subject to
repurchase obligations.
In fiscal 1992, the Company recognized $27.1 million of debt as a result of
the acquisition of the remaining interest in an entity that was previously
unconsolidated.
F-46
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for Holdings and AMI for the two years ended
August 31, 1994 is summarized below (in millions, except per share amounts):
<TABLE>
<CAPTION>
FISCAL 1994 FISCAL 1993
--------------------------- ---------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
----- ------ ------ ------ ----- ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues............ $ 558 $ 583 $ 602 $6638 $ 542 $ 566 $ 565 $ 565
Income before extraordi-
nary loss.............. 17 24 71 27 11 18 22 16
Extraordinary loss...... -- -- (2) -- -- -- (7) (18)
Net income (loss)....... $ 17 $ 24 $ 69 $ 27 $ 11 $ 18 $ 15 $ (2)
Holdings' income (loss)
per share:
Income before
extraordinary loss... $0.21 $0.32 $ 0.92 $0.35 $0.14 $0.24 $ 0.28 $ 0.21
Extraordinary loss.... -- -- (0.02) -- -- -- (0.09) (0.24)
Net income (loss)..... $0.21 $0.32 $ 0.90 $0.35 $0.14 $0.24 $ 0.19 $(0.03)
</TABLE>
The third quarter of fiscal 1994 includes the gain on sale of securities of
$43.4 million, net of tax, (See Note 4 Dispositions). The results of operations
of Saint Francis Hospital were consolidated with the Company's results of
operations effective May 1, 1994.
The fourth quarter of fiscal 1993 reflects a charge of $3.5 million for costs
incurred related to the relocation of the Houston regional office to the Dallas
headquarters. Additional charges totaling $3.0 million were recognized in
previous quarters offset by benefits. Income before extraordinary loss includes
an$8.6 million refund of interest paid to the Internal Revenue Service in prior
periods. Additionally in the fourth quarter of fiscal 1993, the provision for
income taxes includes the impact of a $5.1 million increase in the provision
for income taxes due to the enactment of the Revenue Reconciliation Act of 1993
which increased the corporate income tax rate.
16. BUSINESS SEGMENT
The Company's only material business segment is "healthcare" which accounted
for substantially all of its revenues and operating results for each of the
periods presented.
F-47
<PAGE>
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
17. SUBSEQUENT EVENTS
On October 10, 1994, Holdings, National Medical Enterprises, Inc, a Nevada
corporation ("NME") and a wholly-owned subsidiary of NME ("Merger Sub"),
executed an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to
the Merger Agreement, Merger Sub will merge with and into Holdings (the
"Merger"). As a result of the Merger, Holdings will become a wholly-owned
subsidiary of NME and the resulting company will be the second-largest
healthcare services company in the nation. Under terms of the Merger Agreement
each share of common stock of Holdings will be converted into (i) $19.00 in
cash, if the closing occurs on or before March 31, 1995, and $19.25 thereafter
and (ii) 0.42 of a newly issued share of NME common stock. Under the Merger
Agreement, Holdings will pay a special dividend of $0.10 per share before the
effective date of the Merger. Following the Merger, Holdings will have the
right to nominate three members to the 13 member board of the combined company.
Approximately 50% of the Company's indebtedness contains put provisions whereby
the holders of such debt have the right to require repayment following a change
of control of the Company. The transaction has been approved by shareholders of
approximately 61.4% of Holdings' outstanding shares of common stock and,
therefore, further action by Holdings' shareholders is not required. The
transaction, which is currently anticipated to close in the first quarter of
calendar 1995, is subject to certain conditions including, among other things,
expiration of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
On September 1, 1994, a limited partnership, of which AMI is the general
partner, acquired Hilton Head Hospital in Hilton Head, South Carolina
containing 68 beds. In connection with the Company's efforts to re-establish a
presence in Europe, the Company has entered into a joint venture agreement with
a community organization (the "Burgergemeinde") located in Cham, Canton Zug,
Switzerland. The joint venture will be owned 90% by the Company and 10% by the
Burgergemeinde. Under the terms of the proposed transaction, the Company has
entered into a long term lease for the land where the existing hospital is
located and will then construct a new 56 bed acute care wing, convert an
existing structure into a medical office building and renovate and remodel the
existing acute care facility. In addition, the Company plans to contract to
provide management, food, physical therapy and rehabilitation services to the
hospital, an on-site nursing home and an affiliated retirement community.
F-48
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON, OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY NME OR ANY OF THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY THE NOTES
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER
OR SOLICITATION IS UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION
THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE
HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Available Information..................................................... 2
Incorporation of Certain Documents by Reference........................... 2
Prospectus Summary........................................................ 3
Risk Factors.............................................................. 9
The Merger and Financing.................................................. 15
Use of Proceeds........................................................... 19
Historical and Pro Forma Capitalization................................... 19
Pro Forma Financial Information........................................... 20
Supplemental Discussion of Adjusted Results of Operations of NME.......... 28
Selected Operating Statistics............................................. 34
Selected Historical Financial Information of NME.......................... 35
Management's Discussion and Analysis of Financial Condition and Results of
Operations of NME........................................................ 37
Selected Historical Financial Information of AMH.......................... 45
Management's Discussion and Analysis of Financial Condition and Results of
Operations of AMH........................................................ 47
Healthcare Industry Overview.............................................. 50
Business.................................................................. 51
Management................................................................ 71
Description of Notes...................................................... 74
Description of the New Credit Facility.................................... 97
Underwriting.............................................................. 99
Legal Matters............................................................. 100
Experts................................................................... 100
Index to Financial Statements............................................. F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
$1,000,000,000
[LOGO]
NATIONAL MEDICAL ENTERPRISES, INC.
$400,000,000 % SENIOR
NOTES DUE 2002
$600,000,000 % SENIOR
SUBORDINATED NOTES DUE 2005
------------------
PROSPECTUS
------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
MERRILL LYNCH & CO.
MORGAN STANLEY & CO.
INCORPORATED
SALOMON BROTHERS INC
J. P. MORGAN SECURITIES INC.
BT SECURITIES CORPORATION
SMITH BARNEY INC.
BA SECURITIES, INC.
, 1995
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with the
sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All of the amounts shown are estimated
except the SEC registration fee and the NASD filing fee. The Company will bear
all of such expenses.
<TABLE>
<S> <C>
SEC registration fee............................................ $344,830
NASD filing fee................................................. 30,500
Rating Agency Fee*..............................................
Blue sky fees and expenses*.....................................
Printing and engraving expenses*................................
Legal fees and expenses*........................................
Accounting fees and expenses*...................................
Trustee fees*...................................................
Miscellaneous*..................................................
--------
Total....................................................... $ *
========
</TABLE>
- ---------------------
* To be supplied by amendment.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 78.751 of the Nevada General Corporation Law ("Nevada Law") provides
generally and in pertinent part that a Nevada corporation may indemnify its
directors and officers against expenses, judgments, fines, and settlements
actually and reasonably incurred by them in connection with any civil suit or
action, except actions by or in the right of the corporation, or any
administrative or investigative proceeding if, in connection with the matters
in issue, they acted in good faith and in a manner they reasonably believed to
be in, or not opposed to, the best interests of the corporation, and in
connection with any criminal suit or proceeding, if in connection with the
matters in issue, they had no reasonable cause to believe their conduct was
unlawful. Section 78.751 further provides that, in connection with the defense
or settlement of any action by or in the right of the corporation, a Nevada
corporation may indemnify its directors and officers against expenses actually
and reasonably incurred by them if, in connection with the matters in issue,
they acted in good faith, in a manner they reasonably believed to be in, or not
opposed to, the best interest of the corporation. Section 78.751 further
permits a Nevada corporation to grant its directors and officers additional
rights of indemnification through by-law provisions and otherwise.
Article X of the Restated Articles of Incorporation, as amended, of the
Registrant and Article X of the Restated By-Laws, as amended, of the Registrant
provide that the Registrant shall indemnify its directors and officers to the
fullest extent permitted by Nevada Law. The Registrant has entered into
indemnification agreements with each of its directors and executive officers.
Such indemnification agreements are intended to provide a contractual right to
indemnification, to the maximum extent permitted by law, for expenses
(including attorneys' fees), judgments, penalties, fines, and amounts paid in
settlement actually and reasonably incurred by the person to be indemnified in
connection with any proceeding (including, to the extent permitted by
applicable law, any derivative action) to which they are, or are threatened to
be made, a party by reason of their status in such positions. Such
indemnification agreements do not change the basic legal standards for
indemnification set forth under Nevada Law or the Restated Articles of
Incorporation, as amended, of the Registrant. Such agreements are intended to
be in furtherance, and not in limitation of, the general right to
indemnification provided in the Registrant's Restated Articles of
Incorporation, as amended.
II-1
<PAGE>
Section 78.037 of the Nevada Law provides that the articles of incorporation
may contain a provision eliminating or limiting the personal liability of a
director or officer to the corporation or its shareholders for monetary damages
for breach of fiduciary duty as a director provided that such provision shall
not eliminate or limit the liability of a director or officer (i) for acts or
omissions which involve intentional misconduct or a knowing violation of law,
or (ii) under Section 78.300 of the Nevada Law (relating to liability for
unauthorized acquisitions or redemptions of, or dividends on, capital stock).
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed 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.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<C> <S>
1.1* Form of Underwriting Agreement between NME and the Underwriters
2.1 Agreement and Plan of Merger, dated as of October 10, 1994, by and among
NME, AMH Acquisition Co. and American Medical Holdings, Inc.
(incorporated by reference to Exhibit 2(A) to NME's Quarterly Report on
Form 10-Q for the fiscal quarter ended August 31, 1994)
3.1 Restated By-Laws of NME, as amended September 28, 1994
4.1* Form of Indenture between NME and Bank of New York, as Trustee, relating
to the Senior Notes (including the form of certificate representing the
Senior Notes)
4.2* Form of Indenture between NME and Bank of New York, as Trustee, relating
to the Senior Subordinated Notes (including the form of certificate
representing the Senior Subordinated Notes)
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom
11.1 Statement of Computation of Per Share Earnings for the three fiscal years
ended May 31, 1994 (incorporated by reference to Exhibit 11 to NME's Annual
Report on Form 10-K for the fiscal year ended May 31, 1994).
11.2 Statement of Computation of Per Share Earnings for the three months ended
August 31, 1993 and 1994 (incorporated by reference to Exhibit 11 to
NME's Quarterly Report on Form 10-Q for the fiscal quarter ended August
31, 1994).
11.3 Statement of Computation of Pro Forma Per Share Earnings for the fiscal
year ended May 31, 1994 and the three months ended August 31, 1993 and 1994.
12.1 Statement of Computation of Ratios of Earnings to Fixed Charges
12.2 Statement of Computation of Pro Forma Ratios of Earnings to Fixed Charges
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom (to be included in their
opinion filed as Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Price Waterhouse LLP
23.4* Consent of Robert W. O'Leary
23.5* Consent of John T. Casey
23.6* Consent of [ ]
24.1 Power of Attorney (included on page II-4)
25.1* Statement of Eligibility of Bank of New York, as Trustee with respect to
the Senior Notes
25.2* Statement of Eligibility of Bank of New York, as Trustee with respect to
the Senior Subordinated Notes
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
II-2
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned Registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
Registrant's annual report pursuant to Section 13(a) or 15(d) of the Securities
Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan's annual report pursuant to Section 15(d) of the Securities Exchange Act
of 1934) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities offered
herein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(b) The undersigned Registrant hereby undertakes to deliver or cause to be
delivered with the Prospectus, to each person to whom the Prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the Prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the Prospectus, to deliver, or
cause to be delivered to each person to whom the Prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the Prospectus to provide such interim financial information.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the foregoing provisions, the Nevada Law, the
Restated Articles of Incorporation, and the Restated Bylaws, as amended, 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 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 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 Act and will be governed by the final adjudication of such
issue.
(d) The Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of Prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of Prospectus filed by the 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
of 1933, each post-effective amendment that contains a form of prospectus
shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Santa Monica, State of California on December 22,
1994.
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ Jeffrey C. Barbakow
___________________________________
Jeffrey C. Barbakow
Chairman of the Board
and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Jeffrey C. Barbakow, Raymond L. Mathiasen and
Scott M. Brown and each of them, his true and lawful attorneys-in-fact and
agents, with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this Registration Statement
and to file the same with all exhibits thereto, and other documents in
connection therewith, with the Securities and Exchange Commission, granting
unto said attorney-in-fact and agents, and each of them, full power and
authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitute, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Jeffrey C. Barbakow Chairman of the Board December 22, 1994
------------------------------------ of Directors and Chief
Jeffrey C. Barbakow Executive Officer
Attorney-in-fact (Principal Executive
Officer)
/s/ Michael H. Focht, Sr. President, Chief December 22, 1994
------------------------------------ Operating Officer
Michael H. Focht, Sr. and Director
/s/ Raymond L. Mathiasen Senior Vice President December 22, 1994
------------------------------------ and Chief Financial
Raymond L. Mathiasen Officer
Attorney-in-fact (Principal Financial
and
Accounting Officer)
/s/ Bernice B. Bratter Director December 22, 1994
------------------------------------
Bernice B. Bratter
/s/ Maurice J. DeWald Director December 22, 1994
------------------------------------
Maurice J. DeWald
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ Peter de Wetter Director December 22, 1994
------------------------------------
Peter de Wetter
/s/ Edward Egbert Director December 22, 1994
------------------------------------
Edward Egbert, M.D.
/s/ Raymond A. Hay Director December 22, 1994
------------------------------------
Raymond A. Hay
/s/ Lester B. Korn Director December 22, 1994
------------------------------------
Lester B. Korn
/s/ James P. Livingston Director December 22, 1994
------------------------------------
James P. Livingston
/s/ Richard S. Schweiker Director December 22, 1994
------------------------------------
Richard S. Schweiker
</TABLE>
II-5
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION PAGE
------- ----------- ------------
<C> <S> <C>
1.1* Form of Underwriting Agreement between NME and the
Underwriters
2.1 Agreement and Plan of Merger, dated as of October 10, 1994, by
and among NME, AMH Acquisition Co. and American Medical
Holdings, Inc. (incorporated by reference to Exhibit 2(A) to
NME's Quarterly Report on Form 10-Q for the fiscal quarter
ended August 31, 1994)
3.1 Restated By-Laws of NME, as amended September 28, 1994
4.1* Form of Indenture between NME and Bank of New York, as
Trustee, relating to the Senior Notes (including the form of
certificate representing the Senior Notes)
4.2* Form of Indenture between NME and Bank of New York, as
Trustee, relating to the Senior Subordinated Notes (including
the form of certificate representing the Senior Subordinated
Notes)
5.1* Opinion of Skadden, Arps, Slate, Meagher & Flom
11.1 Statement of Computation of Per Share Earnings for the three
fiscal years ended May 31, 1994 (incorporated by reference to
Exhibit 11 to NME's Annual Report on Form 10-K for the fiscal
year ended May 31, 1994).
11.2 Statement of Computation of Per Share Earnings for the three
months ended August 31, 1993 and 1994 (incorporated by
reference to Exhibit 11 to NME's Quarterly Report on Form 10-
Q for the fiscal quarter ended August 31, 1994).
11.3 Statement of Computation of Pro Forma Per Share Earnings for
the fiscal year ended May 31, 1994 and the three months ended
August 31, 1993 and 1994.
12.1 Statement of Computation of Ratios of Earnings to Fixed
Charges
12.2 Statement of Computation of Pro Forma Ratios of Earnings to
Fixed Charges
23.1 Consent of Skadden, Arps, Slate, Meagher & Flom (to be
included in their opinion filed as Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Price Waterhouse LLP
23.4* Consent of Robert W. O'Leary
23.5* Consent of John T. Casey
23.6* Consent of [ ]
24.1 Power of Attorney (included on page II-4)
25.1* Statement of Eligibility of Bank of New York, as Trustee with
respect to the Senior Notes
25.2* Statement of Eligibility of Bank of New York, as Trustee with
respect to the Senior Subordinated Notes
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment.
<PAGE>
EXHIBIT 3.1
RESTATED BY-LAWS OF
NATIONAL MEDICAL ENTERPRISES, INC.
A NEVADA CORPORATION
AS AMENDED SEPTEMBER 28, 1994
ARTICLE I
SHAREHOLDERS' MEETINGS
SECTION 1.1 PLACE OF MEETINGS.
All meetings of the shareholders shall be held at the principal office of
the Corporation in the State of California, or at any other place within or
without the State of Nevada as may be designated for that purpose from time to
time by the Board of Directors.
SECTION 1.2 ANNUAL MEETINGS.
The Annual meeting of the shareholders shall be held not later than 210
days after the close of the fiscal year, on the date and at the time set by the
Board of Directors, at which time the shareholders shall elect by plurality vote
an annual Class of the Board of Directors, consider reports of the affairs of
the Corporation, and transact such other business as may properly be brought
before the meeting.
SECTION 1.3 SPECIAL MEETINGS.
Special meetings of the shareholders, for any purpose or purposes
whatsoever, may be called at any time by the Chief Executive Officer or by the
Board of Directors.
SECTION 1.4 NOTICE OF MEETINGS.
1.4.1. Notice of each meeting of shareholders, whether annual or
special, shall be given at least 10 and not more than 60 days prior to the day
thereof by the Secretary or any Assistant Secretary causing to be delivered to
each shareholder of record entitled to vote at such meeting a written notice
stating the time and place of the meeting and the purpose or purposes for which
the meeting is called. Such notice shall be signed by the Chief Executive
Officer, the President, the Secretary or any Assistant Secretary and shall be
mailed postage prepaid to each shareholder at his address as it appears on the
stock books of the Corporation. If any shareholder has failed to supply an
address, notice shall be deemed to have been given if mailed to the address of
the principal office of the Corporation, or published at least once in a
newspaper having general circulation in the county in which the principal office
is located.
<PAGE>
-2-
1.4.2. It shall not be necessary to give any notice of the
adjournment of or the business to be transacted at an adjourned meeting other
than by announcement at the meeting at which such adjournment is taken; provided
that when a meeting is adjourned for 30 days or more, notice of the adjourned
meeting shall be given as in the case of an original meeting.
SECTION 1.5 CONSENT BY SHAREHOLDERS.
Any action which may be taken at a regular meeting of the shareholders,
except election of directors, may be taken without a meeting, if authorized by a
writing signed by holders of the number of shares required under the law to give
their approval for such purpose.
SECTION 1.6 QUORUM.
1.6.1. The presence in person or by proxy of the persons entitled
to vote a majority of the voting shares at any meeting constitutes a quorum for
the transaction of business. Shares shall not be counted in determining the
number of shares represented or required for a quorum or in any vote at a
meeting, if voting of them at the meeting has been enjoined or for any reason
they cannot be lawfully voted at the meeting.
1.6.2. The shareholders present at a duly called or held meeting at
which a quorum is present may continue to do business until adjournment,
notwithstanding the withdrawal of enough shareholders to leave less than a
quorum.
1.6.3. In the absence of a quorum, a majority of the shares present
in person or by proxy and entitled to vote may adjourn any meeting from time to
time, but not for a period of more than 30 days at any one time, until a quorum
shall attend.
SECTION 1.7 VOTING RIGHTS.
1.7.1. Every shareholder of record of the Corporation shall be
entitled at each meeting of the shareholders to one vote for each share of stock
standing in his name on the books of the Corporation. Except as otherwise
provided by law, or by the Articles of Incorporation or any amendment thereto,
or by the By-Laws, if a quorum is present, the majority of votes cast in person
or by proxy shall be binding upon all shareholders of the Corporation.
1.7.2. The Board of Directors shall designate a day not more than
60 days prior to any meeting of the shareholders as the day as of which
shareholders entitled to notice of and to vote at such meetings shall be
determined.
SECTION 1.8 PROXIES.
Every shareholder entitled to vote or to execute consents may do so either
in person or by written proxy executed in accordance with the provisions
<PAGE>
-3-
of Section 78.355 of the Nevada Revised Statutes and filed with the Secretary of
the Corporation.
SECTION 1.9 MANNER OF CONDUCTING MEETINGS.
To the extent not in conflict with the provisions of the law relating
thereto, the Articles of Incorporation, or express provisions of these By-Laws,
meetings shall be conducted pursuant to such rules as may be adopted by the
chairman presiding at, or a majority of the shares represented at, the meeting.
ARTICLE II
DIRECTORS - MANAGEMENT
SECTION 2.1 POWERS.
Subject to the limitation of the Articles of Incorporation, of the By-
Laws, and of the laws of the State of Nevada as to action to be authorized or
approved by the shareholders, all corporate powers shall be exercised by or
under authority of, and the business and affairs of this Corporation shall be
controlled by, a Board of Directors.
SECTION 2.2 NUMBER AND QUALIFICATION.
The authorized number of directors of this Corporation shall be 10, all of
whom shall be of full age and at least a majority of whom shall be citizens of
the United States.
SECTION 2.3 CLASSIFICATION AND ELECTION.
The Board of Directors shall be classified into three annual Classes, with
three directors in Class 1, three directors in Class 2, and four directors in
Class 3. Each Class of directors shall be elected for terms of three years.
Each term shall continue for the number of years stated and until their
successors are elected and have qualified. Their term of office shall begin
immediately after election. These By-Laws are being adopted subsequent to the
initial classification of directors in 1975. The directors in office as of the
date of adoption hereof shall continue to serve the terms for which they have
been previously elected.
SECTION 2.4 INCREASE IN THE NUMBER OF DIRECTORS.
The Board of Directors may change the number of directors from time to
time; provided, however, neither the Board of Directors nor the shareholders may
ever increase the number of directorships by more than one during any twelve-
month period, except upon the affirmative vote of two-thirds of the directors of
each Class, or the affirmative vote of the holders of two-thirds of all
outstanding shares voting together and not by class. This provision may not be
amended except by a like vote.
<PAGE>
-4-
SECTION 2.5 VACANCIES.
2.5.1. Any vacancies in the Board of Directors, except vacancies
first filled by the shareholders, may be filled by the affirmative vote of two-
thirds of the remaining directors of each Class, though less than a quorum, or
by a sole remaining director. Each director so elected shall hold office for
the balance of the term of the resigning director and until his successor is
elected. The power to fill vacancies shall in no event be delegated to any
committee appointed in accordance with these By-Laws.
2.5.2. The shareholders may at any time elect a director to fill
any vacancy not filled by the directors, and may elect the additional directors
at the meeting at which an amendment of the By-Laws is voted authorizing an
increase in the number of directors.
2.5.3. A vacancy or vacancies shall be deemed to exist in case of
the death, resignation, or removal of any director, or if the directors or
shareholders shall increase the authorized number of directors but shall fail at
a meeting at which such increase is authorized or at an adjournment thereof to
elect the additional director so provided for, or in case the shareholders fail
at any time to elect the full number of authorized directors.
2.5.4. If the Board of Directors accepts the resignation of a
director tendered to take effect at a future time, the Board or the shareholders
shall have power to immediately elect a successor who shall take office when the
resignation shall become effective.
2.5.5. No reduction of the number of directors shall have the
effect of removing any director prior to the expiration of his term of office.
SECTION 2.6 REMOVAL OF DIRECTORS.
The entire Board of Directors or any individual director may be removed
from office, with or without cause, by the vote or written consent of
shareholders representing two-thirds of the issued and outstanding capital stock
entitled to vote.
SECTION 2.7 RESIGNATIONS.
Any director of the Corporation may resign at any time either by oral
tender of resignation at any meeting of the Board or by giving written notice
thereof to the Secretary, the Chief Executive Officer or the President. Such
resignation shall take effect at the time it specifies, and the acceptance of
such resignation shall not be necessary to make it effective.
SECTION 2.8 PLACE OF MEETINGS.
Meetings of the Board of Directors shall be held at the principal office
of the Corporation in the State of California, or at such other place within or
without the State of Nevada as may be designated for that purpose by the Board
of Directors. Any meeting shall be valid, wherever held, if held by the written
<PAGE>
-5-
consent of all members of the Board of Directors, given before or after the
meeting and filed with the Secretary of the Corporation.
SECTION 2.9 MEETINGS AFTER ANNUAL SHAREHOLDERS' MEETING.
The first meeting of the Board of Directors held after the annual
shareholders' meeting shall be held at such time and place within or without the
State of Nevada as shall be fixed by announcement of the Chief Executive Officer
or the President given at the annual shareholders' meeting, and no other notice
of such meeting shall be necessary, provided a majority of the whole Board shall
be present. Alternatively, such meeting may be held at such time and place as
shall be fixed pursuant to notice given under other provisions of these By-Laws.
SECTION 2.10 OTHER REGULAR MEETINGS.
2.10.1. Regular meetings of the Board of Directors shall be held at
such time and place within or without the State of Nevada as may be agreed upon
from time to time by the Board.
2.10.2. No notice need be given of regular meetings, except that a
written notice shall be given to each director of the resolution establishing
specific meeting dates or a regular meeting date, which notice shall set forth
the date of the month, the time, and the place of the meetings.
SECTION 2.11 SPECIAL MEETINGS.
Special meetings of the Board of Directors shall be held whenever called
by the Chief Executive Officer or the President or by two-thirds of the
directors of each Class. Notice of any such meeting shall be mailed to each
director not later than three days before the day on which the meeting is to be
held, or shall be sent to him by telegraph, or delivered personally or by
telephone, not later than midnight of the day before the day of the meeting.
Any meeting of the Board of Directors shall be a legal meeting without any
notice thereof having been given, if each director consents to the holding
thereof or waives notice by a writing filed with the Secretary, or is present
thereat and their oral consents are entered on the minutes, or they take part in
the deliberations thereat without objection. Except as otherwise provided in
the By-Laws or as may be indicated in the notice thereof, any and all business
may be transacted at any special meeting.
SECTION 2.12 WAIVER OF NOTICE.
Anything herein to the contrary notwithstanding, notice of any meeting of
directors shall not be required as to any director who shall waive notice in
writing (including telex, facsimile telephonic transmission, telegram, cablegram
or radiogram) before or after such meeting.
<PAGE>
-6-
SECTION 2.13 NOTICE OF ADJOURNMENT.
Notice of the time and place of holding an adjourned meeting need not be
given to absent directors if the time and place is fixed at the meeting
adjourned.
SECTION 2.14 QUORUM.
A majority of the number of directors as fixed by the Articles of
Incorporation or By-Laws shall be necessary to constitute a quorum for the
transaction of business, and the action of a majority of the directors present
at any meeting at which there is a quorum, when duly assembled, is valid as a
corporate act; provided, that a minority of the directors, in the absence of a
quorum, may adjourn from time to time or fill vacant directorships in accordance
with Section 2.5 but may not transact any business.
SECTION 2.15 ACTION BY UNANIMOUS WRITTEN CONSENT.
Any action required or permitted to be taken at any meeting of the Board
of Directors may be taken without a meeting, if all members of the Board shall
individually or collectively consent in writing thereto. Such written consent
shall be filed with the minutes of the proceedings of the Board and shall have
the same force and effect as a unanimous vote of such directors.
SECTION 2.16 COMPENSATION.
The directors may be paid their expenses of attendance at each meeting of
the Board of Directors. Additionally, the Board of Directors may from time to
time, in its discretion, pay to directors either or both a fixed sum for
attendance at each meeting of the Board of Directors or a stated salary for
services as a director. No such payment shall preclude any director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
reimbursement and compensation for attending committee meetings.
SECTION 2.17 TRANSACTIONS INVOLVING INTERESTS OF DIRECTORS.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
directors of the Corporation are in any way interested in, or connected with,
any other party to, such contract or transaction or are themselves parties to
such contract or transaction, provided that such transaction satisfies Section
78.140 of the Nevada Revised Statutes; and each and every person who may become
a director of the Corporation is hereby relieved, to the extent permitted by
law, from any liability that might otherwise exist from contracting in good
faith with the Corporation for the benefit of himself or any person in which he
may be in any way interested or with which he may be in any way connected. Any
director of the Corporation may vote and act upon any matter, contract or
transaction between the Corporation and any other person without regard to the
fact that he is also a stockholder, director or officer of, or has any interest
in, such other person.
<PAGE>
-7-
SECTION 2.18 EMERITUS POSITIONS.
The Board of Directors may authorize parties to serve in an emeritus
position with respect to the Board of Directors, included by way of example but
not by way of limitation, as an Emeritus Director, as a Chairman Emeritus of the
Board of Directors or as a Vice-Chairman Emeritus of the Board of Directors.
These positions shall be honorary positions and parties elected to those
positions may be asked to attend meetings of the board of directors and meeting
of the shareholders from time to time. A party holding an emeritus position
shall not be an officer or director of the Company, shall have no vote at a
director's meeting, shall receive no fees for service in that position and shall
not be given access to material, non-published information pertaining, to the
Company. A party filling an emeritus position shall be requested to do so
because of his or her experience with and contributions to the Company.
ARTICLE III
OFFICERS
SECTION 3.1 EXECUTIVE OFFICERS.
The executive officers of the Corporation shall be a Chairman, a Vice
Chairman, a Chief Executive Officer, a President, one or more Senior Executive
Vice Presidents, one or more Executive Vice Presidents, one or more Group
Presidents and Chief Executive Officers, one or more Senior Vice Presidents, one
or more Vice Presidents, a Secretary, and a Treasurer. Any person may hold two
or more offices. The executive officers of the Corporation shall be elected
annually by the Board of Directors and shall hold office for one year or until
their respective successors shall be elected and shall qualify.
SECTION 3.2 APPOINTED OFFICERS: TITLES.
3.2.1. The Chief Executive Officer or the Secretary in the case of
Assistant Secretaries or the Treasurer in the case of Assistant Treasurers may
appoint one or more Assistant Secretaries or one or more Assistant Treasurers,
each of whom shall hold such title at the pleasure of the appointing officer,
have such authority and perform such duties as are provided in the By-Laws, or
as the Chief Executive Officer or the appointing officer may determine from time
to time. Any person appointed under this Section 3.2.1 to serve in any of the
foregoing positions shall be deemed by reason of such appointment or service in
such capacity to be an "officer" of the corporation.
3.2.2. The Chief Executive Officer or a person designated by the
Chief Executive Officer may also appoint a president, one or more executive vice
presidents, one or more senior vice presidents, one or more vice presidents and
one or more assistant vice presidents for each operating group and division of
the Corporation and one or more senior vice presidents, one or more vice
presidents and one or more assistant vice presidents for each corporate staff
function and a corporate controller and one or more assistant controllers. Each
of such persons will hold such title at the pleasure of the Chief Executive
<PAGE>
-8-
Officer and have authority to act for and shall perform duties with respect to
only the group, division or corporate staff function for which the person is
appointed. Any person appointed under this Section 3.2.2 to serve in any of the
foregoing positions shall not be deemed by reason of such appointment or service
in such capacity to be an "officer" of the Corporation.
SECTION 3.3 REMOVAL AND RESIGNATION.
3.3.1. Any officer may be removed, either with or without cause, by
a majority of the directors at the time in office, at any regular or special
meeting of the Board. Any appointed person may be removed from such position at
any time by the person making such appointment or his successor.
3.3.2. Any officer may resign at any time, by giving written notice
to the Board of Directors, the Chief Executive Officer, the President or the
Secretary of the Corporation. Any such resignation shall take effect at the
date of the receipt of such notice, or at any later time specified therein; and
unless otherwise specified therein, the acceptance of such resignation shall not
be necessary to make it effective.
SECTION 3.4 VACANCIES.
A vacancy in any office because of death, resignation, removal,
disqualification or any other cause shall be filled in the manner prescribed in
the By-Laws for regular appointments to such office.
SECTION 3.5 CHAIRMAN AND VICE CHAIRMAN.
The Chairman shall preside at all meetings of the Board of Directors and
shall exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors. The Vice Chairman shall, in the
absence of the Chairman, preside at all meetings of the Board of Directors and
shall exercise and perform such other powers and duties as may be from time to
time assigned to him by the Board of Directors.
SECTION 3.6 CHIEF EXECUTIVE OFFICER.
The Chief Executive Officer shall, subject to the control of the Board of
Directors, have general supervision, direction, and control of the business and
affairs of the Corporation. He shall preside at all meetings of the
shareholders and, in the absence of the Chairman of the Board and the Vice
Chairman of the Board, at all meetings of the Board of Directors. He shall be
ex officio a member of the Executive Committee and shall have the general powers
and duties of management usually vested in the office of chief executive officer
of a corporation and such other powers and duties as may be prescribed by the
Board of Directors.
SECTION 3.7 PRESIDENT.
In the absence or disability of the Chief Executive Officer, the President
shall perform all of the duties of the Chief Executive Officer and when
<PAGE>
-9-
so acting shall have all the powers and be subject to all the restrictions upon
the Chief Executive Officer, including the power to sign all instruments and to
take all actions which the Chief Executive Officer is authorized to perform by
the Board of Directors or the By-Laws. The President shall have the general
powers and duties usually vested in the office of president of a corporation and
such other powers and duties as may be prescribed by the Chief Executive Officer
or the Board of Directors.
SECTION 3.8 SENIOR EXECUTIVE VICE PRESIDENT, EXECUTIVE VICE PRESIDENT, SENIOR
VICE PRESIDENT AND VICE PRESIDENT.
In the absence or disability of the Chief Executive Officer and the
President, a Senior Executive Vice President, an Executive Vice President or a
Group President and Chief Executive Officer, in the order of his rank and
seniority shall perform all of the duties of the Chief Executive Officer, and
when so acting shall have all the powers of and be subject to all the
restrictions upon the Chief Executive Officer, including the power to sign all
instruments and to take all actions which the Chief Executive Officer is
authorized to perform by the Board of Directors or the By-Laws. The Senior
Executive Vice Presidents, Executive Vice Presidents, Senior Vice Presidents and
Vice Presidents shall have the general powers and duties usually vested in the
office of a vice president of a corporation; the Group Presidents and Chief
Executive Officers shall have the general powers and duties of a principal
executive officer of an operating group of a corporation; and each of them shall
have such other powers and perform such other duties as from time to time may be
prescribed for them respectively by the Board of Directors, the Executive
Committee of the Board of Directors, the Chief Executive Officer or the By-Laws.
SECTION 3.9 SECRETARY AND ASSISTANT SECRETARIES.
3.9.1. The Secretary shall (1) attend all sessions of the Board and
all meetings of the shareholders; and (2) record and keep, or cause to be kept,
all votes and the minutes of all proceedings in a book to be kept for that
purpose at the principal office of the Corporation, or at such other place as
the Board of Directors may from time to time determine, specifying therein (i)
the time and place of holding, (ii) whether regular or special, and if special,
how authorized, (iii) the notice thereof given, (iv) the names of those present
at directors' meetings, (v) the number of shares present or represented at
shareholders' meetings, and (vi) the proceedings thereof; and (3) perform like
duties for the Executive and other standing committees, when required. In
addition, he shall keep or cause to be kept, at the principal office of the
Corporation in the State of Nevada, those documents required to be kept thereat
by Section 5.2 of the By-Laws and Section 78.105 of the Nevada Revised Statutes.
3.9.2. The Secretary shall give, or cause to be given, notice of
meetings of the shareholders and special meetings of the Board of Directors, and
shall perform such other duties as may be prescribed by the Board of Directors
or the Chief Executive Officer, under whose supervision he shall be. He shall
keep in safe custody the seal of the Corporation, and, when authorized by the
Board, affix the same to any instrument requiring it, and when so affixed, it
shall be attested by his signature or by the signature of the Treasurer or an
<PAGE>
-10-
Assistant Secretary. The Secretary is hereby authorized to issue certificates,
to which the corporate seal may be affixed, attesting to the incumbency of
officers of this Corporation or to actions duly taken by the Board of Directors
or the shareholders.
3.9.3. The Assistant Secretaries, in the order of their seniority,
shall in the absence or disability of the Secretary, perform the duties and
exercise the powers of the Secretary, and shall perform such other duties as the
Chief Executive Officer or the Secretary shall prescribe.
SECTION 3.10 TREASURER AND ASSISTANT TREASURERS.
3.10.1. The Treasurer shall deposit all moneys and other valuables
in the name, and to the credit, of the Corporation, with such depositories as
may be ordered by the Board of Directors. He shall disburse the funds of the
Corporation as may be ordered by the Board of Directors, shall render to the
Chief Executive Officer and directors, whenever they request it, an account of
all his transactions as Treasurer, and of the financial condition of the
Corporation, and shall have such other powers and perform such other duties as
may be prescribed by the Board of Directors or the By-Laws.
3.10.2. The Assistant Treasurers, in the order of their seniority,
shall in the absence or disability of the Treasurer, perform the duties and
exercise the powers of the Treasurer, and shall perform such other duties as the
Chief Executive Officer or the Treasurer shall prescribe.
SECTION 3.11 ADDITIONAL POWERS, SENIORITY AND SUBSTITUTION OF OFFICERS.
In addition to the foregoing powers and duties specifically prescribed for
the respective officers, the Board of Directors may from time to time by
resolution (i) impose or confer upon any of the officers such additional duties
and powers as the Board of Directors may see fit, (ii) determine the order of
seniority among the officers, and/or (iii) except as otherwise provided above,
provide that in the absence of any officer or officers, any other officer or
officers shall substitute for and assume the duties, powers and authority of the
absent officer or officers. Any such resolution may be final, subject only to
further action by the Board of Directors, or the resolution may grant such
discretion, as the Board of Directors deems appropriate, to the Chairman, the
Vice Chairman, the Chief Executive Officer, the President (or in his absence the
Senior Executive Vice President or the Executive Vice President serving in his
place) to impose or confer additional duties and powers, to determine the order
of seniority among officers, and/or to provide for substitution of officers as
above described.
SECTION 3.12 COMPENSATION.
The officers of the Corporation shall receive such compensation as shall
be fixed from time to time by the Board of Directors. No officer shall be
prohibited from receiving such salary by reason of the fact that he is also a
director of the Corporation.
<PAGE>
-11-
SECTION 3.13 TRANSACTION INVOLVING INTEREST OF OFFICER.
In the absence of fraud, no contract or other transaction of the
Corporation shall be affected or invalidated by the fact that any of the
officers of the Corporation are in any way interested in, or connected with, any
other party to such contract or transaction, or are themselves parties to such
contract or transaction, provided that such transaction complies with Section
78.140 of the Nevada Revised Statutes; and each and every person who is or may
become an officer of the Corporation is hereby relieved, to the extent permitted
by law, when acting in good faith, from any liability that might otherwise exist
from contracting with the Corporation for the benefit of himself or any person
in which he may be in any way interested or with which he may be in any way
connected.
ARTICLE IV
EXECUTIVE AND OTHER COMMITTEES
SECTION 4.1 STANDING COMMITTEES.
The Board of Directors shall appoint an Executive Committee, an Audit
Committee and a Compensation and Stock Option Committee, consisting of such
number of its members as it may designate, consistent with the Articles of
Incorporation, the By-Laws and the laws of the State of Nevada.
4.1.1. The Executive Committee shall have and may exercise, when
the Board is not in session, all of the powers of the Board of Directors in the
management of the business and affairs of the Corporation, but the Executive
Committee shall not have the power to fill vacancies on the Board, or to change
the membership of or to fill vacancies in the Executive Committee or any other
Committee of the Board, or to adopt, amend or repeal the By-Laws, or to declare
dividends.
4.1.2. The Audit Committee shall select and engage on behalf of the
Corporation, subject to the consent of the shareholders, and fix the
compensation of, a firm of certified public accountants whose duty it shall be
to audit the books and accounts of the Corporation and its subsidiaries for the
fiscal year in which they are appointed, and who shall report to such Committee.
The Audit Committee shall confer with the auditors and shall determine, and from
time to time shall report to the Board of Directors upon, the scope of the
auditing of the books and accounts of the Corporation and its subsidiaries. The
Audit Committee shall also be responsible for determining that the business
practices and conduct of employees and other representatives of the Corporation
and its subsidiaries comply with the policies and procedures of the Corporation.
None of the members of the Audit Committee shall be officers or employees of the
Corporation.
4.1.3. The Compensation and Stock Option Committee shall establish
a general compensation policy for the Corporation and shall have responsibility
for the approval of increases in directors' fees and in salaries
<PAGE>
-12-
paid to officers and senior employees earning in excess of an annual salary to
be determined by the Committee. The Compensation and Stock Option Committee
shall have all of the powers of administration under all of the Corporation's
employee benefit plans, including any stock option plans, long-term incentive
plans, bonus plans, retirement plans, stock purchase plans and medical, dental
and insurance plans. In connection therewith, the Compensation and Stock Option
Committee shall determine, subject to the provisions of the Corporation's plans,
the directors, officers and employees of the Corporation eligible to participate
in any of the plans, the extent of such participation and the terms and
conditions under which benefits may be vested, received or exercised. None of
the members of the Compensation and Stock Option Committee shall be officers or
employees of the Corporation.
SECTION 4.2 OTHER COMMITTEES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada as to action to be authorized or approved by
the shareholders, or duties not delegable by the Board of Directors, any or all
of the corporate powers may be exercised by or under authority of, and the
business and affairs of this Corporation may be controlled by, such other
committee or committees as may be appointed by the Board of Directors. The
powers to be exercised by any such committee shall be designated by the Board of
Directors.
SECTION 4.3 PROCEDURES.
Subject to the limitations of the Articles of Incorporation, the By-Laws
and the laws of the State of Nevada regarding the conduct of business by the
Board of Directors and its appointed committees, any committee created under
this Article may use any procedures for conducting its business and exercising
its powers, including but not limited to actions by the unanimous written
consent of its members in the manner set forth in Section 2.15. A majority (but
not less than two members) shall constitute a quorum. Notices of meetings may
be in any reasonable manner and may be waived as for meetings of directors.
ARTICLE V
CORPORATE RECORDS AND REPORTS - INSPECTION
SECTION 5.1 RECORDS.
The Corporation shall maintain adequate and correct accounts, books and
records of its business and properties. All of such books, records and accounts
shall be kept at its principal place of business in the State of California, as
fixed by the Board of Directors from time to time.
SECTION 5.2 ARTICLES, BY-LAWS AND STOCK LEDGER.
The Corporation shall maintain and keep the following documents at its
principal place of business in the State of Nevada: (i) a certified copy of the
<PAGE>
-13-
Articles of Incorporation and all amendments thereto; (ii) a certified copy of
the By-Laws and all amendments thereto; and (iii) a statement setting forth the
following: "The Secretary of the Corporation, whose address is 2700 Colorado
Avenue, Santa Monica California 90404, is the custodian of the duplicate stock
ledger of the Corporation."
SECTION 5.3 INSPECTION.
Any person who has been a shareholder of record for at least six months
immediately preceding his demand, or any person holding, or thereunto authorized
in writing by the holders of, at least five percent of all of the Corporation's
outstanding shares, upon at least five days' written demand, or any judgment
creditor without prior demand, shall have the right to inspect in person or by
agent or attorney, during usual business hours, the duplicate stock ledger of
the Corporation and to make extracts therefrom; provided, however, that such
inspection may be denied to any shareholder or other person upon his refusal to
furnish to the Corporation an affidavit that such inspection is not desired for
a purpose which is in the interest of a business or object other than the
business of the Corporation and that he has not at any time sold or offered for
sale any list of shareholders of any corporation or aided or abetted any person
in procuring any such record of shareholders for any such purpose.
SECTION 5.4 CHECKS, DRAFTS, ETC.
All checks, drafts, or other orders for payment of money, notes, or other
evidences of indebtedness, issued in the name of, or payable to, the
Corporation, shall be signed or endorsed by such person or persons, and in such
manner as shall be determined from time to time by resolution of the Board of
Directors.
ARTICLE VI
OTHER AUTHORIZATIONS
SECTION 6.1 EXECUTION OF CONTRACTS.
The Board of Directors, except as the By-Laws otherwise provide, may
authorize any officer or officers or agent or agents to enter into any contract
or execute any instrument in the name of and on behalf of the Corporation. Such
authority may be general, or confined to specific instances. Unless so
authorized by the Board of Directors, no officer, agent or employee shall have
any power or authority, except in the ordinary course of business, to bind the
Corporation by any contract or engagement or to pledge its credit, or to render
it liable for any purpose or in any amount.
SECTION 6.2 REPRESENTATION OF OTHER CORPORATIONS.
All shares of any other corporation, standing in the name of the
Corporation, shall be voted, represented, and all rights incidental thereto
exercised as directed by written consent or resolution of the Board of Directors
expressly referring thereto. In general, such rights shall be delegated by the
<PAGE>
-14-
Board of Directors under express instructions from time to time as to each
exercise thereof to the Chief Executive Officer, the President, any Senior
Executive Vice President, any Executive Vice President, any Senior Vice
President, any Vice President, the Treasurer or the Secretary of this
Corporation, or any other person expressly appointed by the Board of Directors.
Such authority may be exercised by the designated officers in person, or by any
other person authorized so to do by proxy, or power of attorney, duly executed
by such officers.
SECTION 6.3 DIVIDENDS.
The Board of Directors may from time to time declare, and the Corporation
may pay, dividends on its outstanding shares in the manner and on the terms and
conditions provided by the laws of the State of Nevada, and the Articles of
Incorporation, subject to any contractual restrictions to which the Corporation
is then subject.
ARTICLE VII
CERTIFICATES FOR AND TRANSFER OF SHARES
SECTION 7.1 CERTIFICATES FOR SHARES.
7.1.1. Certificates for shares shall be of such form and device as
the Board of Directors may designate and shall be numbered and registered as
they are issued. Each shall state the name of the record holder of the shares
represented thereby; its number and date of issuance; the number of shares for
which it is issued; the par value; a statement of the rights, privileges,
preferences and restrictions, if any; a statement as to rights of redemption or
conversion, if any; and a statement of liens or restrictions upon transfer or
voting, if any, or, alternatively, a statement that certificates specifying such
matters may be obtained from the Secretary of the Corporation.
7.1.2. Every certificate for shares must be signed by the Chief
Executive Officer or the President and the Secretary or an Assistant Secretary,
or must be authenticated by facsimiles of the signatures of the Chief Executive
Officer or the President and the Secretary or an Assistant Secretary. Before it
becomes effective, every certificate for shares authenticated by a facsimile or
a signature must be countersigned by a transfer agent or transfer clerk, and
must be registered by an incorporated bank or trust company, either domestic or
foreign, as registrar of transfers.
7.1.3. Even though an officer who signed, or whose facsimile
signature has been written, printed, or stamped on a certificate for shares
ceases, by death, resignation, or otherwise, to be an officer of the Corporation
before the certificate is delivered by the Corporation, the certificate shall be
as valid as though signed by a duly elected, qualified and authorized officer,
if it is countersigned by the signature or facsimile signature of a transfer
clerk or transfer agent and registered by an incorporated bank or trust company,
as registrar of transfers.
<PAGE>
-15-
7.1.4. Even though a person whose facsimile signature as, or on
behalf of, the transfer agent or transfer clerk has been written, printed or
stamped on a certificate for shares ceases, by death, resignation, or otherwise,
to be a person authorized to so sign such certificate before the certificate is
delivered by the Corporation, the certificate shall be deemed countersigned by
the facsimile signature of a transfer agent or transfer clerk for purposes of
meeting the requirements of this section.
SECTION 7.2 TRANSFER ON THE BOOKS.
Upon surrender to the Secretary or transfer agent of the Corporation of a
certificate for shares duly endorsed or accompanied by proper evidence of
succession, assignment or authority to transfer, it shall be the duty of the
Corporation to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.
SECTION 7.3 LOST OR DESTROYED CERTIFICATES.
The Board of Directors may direct, or may authorize the Secretary to
direct, a new certificate or certificates to be issued in place of any
certificate or certificates theretofore issued by the Corporation alleged to
have been lost or destroyed, upon the making of an affidavit of that fact by the
person claiming the certificate for shares so lost or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors or Secretary may, in its or his discretion, and as a condition
precedent to the issuance thereof, require the owner of such lost or destroyed
certificate or certificates, or his legal representative, to advertise the same
in such manner as it shall require and/or give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation with respect to the certificate alleged to have been lost or
destroyed.
SECTION 7.4 TRANSFER AGENTS AND REGISTRARS.
The Board of Directors may appoint one or more transfer agents or transfer
clerks, and one or more registrars, who may be the same person, and may be the
Secretary of the Corporation, or an incorporated bank or trust company, either
domestic or foreign, who shall be appointed at such times and places as the
requirements of the Corporation may necessitate and the Board of Directors may
designate.
SECTION 7.5 FIXING RECORD DATE FOR DIVIDENDS, ETC.
The Board of Directors may fix a time, not exceeding 50 days preceding the
date fixed for the payment of any dividend or distribution, or for the allotment
of rights, or when any change or conversion or exchange of shares shall go into
effect, as a record date for the determination of the shareholders entitled to
receive any such dividend or distribution, or any such allotment of rights, or
to exercise the rights in respect to any such change, conversion, or exchange of
shares, and, in such case, only shareholders of record on the date so fixed
shall be entitled to receive such dividend, distribution, or allotment
<PAGE>
-16-
of rights, or to exercise such rights, as the case may be, notwithstanding any
transfer of any shares on the books of the Corporation after any record date
fixed as aforesaid.
SECTION 7.6 RECORD OWNERSHIP.
The Corporation shall be entitled to recognize the exclusive right of a
person registered as such on the books of the Corporation as the owner of shares
of the Corporation's stock to receive dividends, and to vote as such owner, and
shall not be bound to recognize any equitable or other claim to or interest in
such shares on the part of any other person, whether or not the Corporation
shall have express or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
AMENDMENTS TO BY-LAWS
SECTION 8.1 BY SHAREHOLDERS.
New or restated by-laws may be adopted, or these By-Laws may be repealed
or amended, at the annual shareholders' meeting or at any other meeting of the
shareholders called for that purpose, by a vote of shareholders entitled to
exercise a majority of the voting power of the Corporation.
SECTION 8.2 BY DIRECTORS.
Subject to the right of the shareholders to adopt, amend, or repeal by-
laws, as provided in Section 8.1, the Board of Directors may adopt, amend, or
repeal any of these By-Laws by the affirmative vote of two-thirds of the
directors of each Class except as otherwise provided in Section 2.4. This power
may not be delegated to any committee appointed in accordance with these By-
Laws.
SECTION 8.3 RECORD OF AMENDMENTS.
Whenever an amendment or a new By-Law is adopted, it shall be copied in
the book of minutes with the original By-Laws, in the appropriate place. If any
By-Law is repealed, the fact of repeal, with the date of the meeting at which
the repeal was enacted, or written assent was filed, shall be stated in said
book.
ARTICLE IX
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 9.1 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS OTHER THAN THOSE
BY OR IN THE RIGHT OF THE CORPORATION.
Subject to Section 9.3 of this Article IX, each person who was or is a
party or is threatened to be made a party to or is involved in any action, suit
<PAGE>
-17-
or proceeding, whether civil, criminal, administrative or investigative
(hereinafter a "proceeding") (other than an action by or in the right of the
Corporation), by reason of the fact that he, or a person of whom he is the legal
representative, is or was a director or officer of the Corporation or is or was
serving at the request of the Corporation as a director, officer, employee,
fiduciary or agent of another corporation or of a partnership, joint venture,
trust or other enterprise, including service with respect to employee benefit
plans, whether the basis of such proceeding is alleged action or inaction in an
official capacity or in any other capacity while serving as a director, officer,
employee, fiduciary or agent shall be indemnified and held harmless by the
Corporation to the fullest extent permitted by the laws of Nevada, as the same
exist or may hereafter be amended, against all costs, charges, expenses,
liabilities and losses (including attorneys' fees, judgments, fines, employee
benefit plan exercise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection with
such proceeding if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the Corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any proceeding by judgment, order,
settlement, conviction, or upon a plea of nolo contendere or its equivalent,
---------------
shall not, of itself, create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation, and, with respect to any criminal action
or proceeding, had reasonable cause to believe that his conduct was unlawful.
SECTION 9.2 POWER TO INDEMNIFY IN ACTIONS, SUITS OR PROCEEDINGS BY OR IN THE
RIGHT OF THE CORPORATION.
Subject to Section 9.3 of this Article IX, the Corporation shall indemnify
any person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action or suit by or in the right of the
Corporation to procure a judgment in its favor by reason of the fact that he, or
a person of whom he is the legal representative, is or was a director or officer
of the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, fiduciary or agent of enterprise, including service
with respect to employee benefit plans, whether the basis of such proceeding is
alleged action or inaction in an official capacity or in any other capacity
while serving as a director, officer, employee, fiduciary or agent, against
expenses (including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Corporation; except that no indemnification shall be made
in respect of any claim, issue or matter as to which such person shall have been
adjudged to be liable to the Corporation unless and only to the extent that the
court in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all the circumstances
of the case, such person is fairly and reasonably entitled to indemnity for such
expenses which the court shall deem proper.
<PAGE>
-18-
SECTION 9.3 AUTHORIZATION OF INDEMNIFICATION.
Any indemnification under this Article IX (unless ordered by a court or
advanced pursuant to Section 9.6 hereof) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director or officer is proper in the circumstances because he has met the
applicable standard of conduct set forth in Section 9.1 or Section 9.2 of this
Article IX, as the case may be. Such determination shall be made (i) by the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit or proceeding, or (ii) if a majority vote
of a quorum consisting of directors who were not parties to the act, suit or
proceeding so orders, by independent legal counsel in a written opinion, or
(iii) if such a quorum is not obtainable, by independent legal counsel in a
written opinion, or (iv) by the shareholders. To the extent, however, that a
director or officer of the Corporation has been successful on the merits or
otherwise in defense of any action, suit or proceeding described above, or in
the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith, without the necessity of authorization in the
specific case.
SECTION 9.4 GOOD FAITH DEFINED.
For purposes of any determination under Section 9.3 of this Article IX, a
person shall be deemed to have acted in good faith and in a manner he reasonably
believed to be in or not opposed to the best interests of the Corporation, or,
with respect to any criminal action or proceeding, to have had no reasonable
cause to believe his conduct was unlawful, if his action is based on the records
or books of account of the Corporation or another enterprise, or on information
supplied to him by the officers of the Corporation or another enterprise in the
course of their duties, or on the advice of legal counsel for the Corporation or
another enterprise or on information or records given or reports made to the
Corporation or another enterprise by an independent certified public accountant
or by an appraiser or other expert selected with reasonable care by the
Corporation or another enterprise. The term "another enterprise" as used in
this Section 9.4 shall mean any other corporation or any partnership, joint
venture, trust, employee benefit plan or other enterprise of which such person
is or was serving at the request of the Corporation as a director, officer,
employee or agent. The provisions of this Section 9.4 shall not be deemed to be
exclusive or to limit in any way the circumstances in which a person may be
deemed to have met the applicable standard of conduct set forth in Sections 9.1
or 9.2 of this Article IX, as the case may be.
SECTION 9.5 INDEMNIFICATION BY A COURT.
If a claim under Sections 9.1 or 9.2 is not paid in full by the
Corporation within thirty days after a written claim has been received by the
Corporation, the claimant may at any time thereafter bring suit against the
Corporation to recover the unpaid amount of the claim and, if successful in
whole or in part, the claimant shall be entitled to be paid also the expense of
prosecuting such claim. It shall be a defense to any such action (other than an
action brought to enforce a claim for expenses incurred in defending any
<PAGE>
-19-
proceeding in advance of its final disposition where the required undertaking,
if any is required, has been tendered to the Corporation) that the claimant has
failed to meet a standard of conduct which makes it permissible under Nevada law
for the Corporation to indemnify the claimant for the amount claimed. Neither
the failure of the Corporation (including the Board, independent legal counsel,
or its shareholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is permissible in the
circumstances because he has met such standard of conduct, nor an actual
determination by the Corporation (including the Board, independent legal
counsel, or its shareholders) that the claimant has not met such standard of
conduct, shall be a defense to the action or create a presumption that the
claimant has failed to meet such standard of conduct.
SECTION 9.6 EXPENSES PAYABLE IN ADVANCE.
The right to indemnification conferred in this Article IX shall include
the right to be paid by the Corporation the expenses incurred in defending any
such proceeding in advance of its final disposition; provided, however, that, if
the Nevada General Corporation Law required, the payment of such expenses
incurred by a director or officer in his capacity as a director or officer (and
not in any other capacity in which service was or is rendered by such person
while a director or officer, including, without limitation, service to any
employee benefit plan) in advance of the final disposition of a proceeding,
shall be made only upon delivery to the Corporation of an undertaking, by or on
behalf of such director of officer, to repay all amounts so advanced if it shall
ultimately be determined that such director or officer is not entitled to be
indemnified under this Section 9.6 or otherwise.
SECTION 9.7 NONEXCLUSIVITY OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The right to indemnification and the payment of expenses incurred in
defending a proceeding in advance of its final disposition conferred in this
Article IX shall not be exclusive of any other right which any person may have
or hereafter acquire under any statute, provision of the Articles of
Incorporation, By-Law, agreement, vote of shareholders or disinterested
directors or otherwise.
SECTION 9.8 INSURANCE.
The Corporation may maintain insurance, at its expense, to protect itself
and any director, officer, employee, fiduciary or agent of the Corporation or
another corporation, partnership, joint venture, trust or other enterprise
against any such expense, liability or loss, whether or not the Corporation
would have the power to indemnify such person against such expense, liability or
loss under Nevada law.
SECTION 9.9 CERTAIN DEFINITIONS.
For purposes of this Article IX, references to "the Corporation" shall
include, in addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a consolidation or
<PAGE>
-20-
merger which, if its separate existence had continued, would have had power and
authority to indemnify its directors or officers, so that any person who is or
was a director or officer of such constituent corporation, or is or was a
director or officer of such constituent corporation serving at the request of
such constituent corporation as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust, employee benefit plan or
other enterprise, shall stand in the same position under the provisions of this
Article IX with respect to the resulting or surviving corporation as he would
have with respect to such constituent corporation if its separate existence had
continued. For purposes of this Article IX, references to "fines" shall include
any excise taxes assessed on a person with respect to an employee benefit plan;
and references to "serving at the request of the Corporation" shall include any
service as a director, officer, employee or agent of the Corporation which
imposes duties on, or involves services by, such director or officer with
respect to an employee benefit plan, its participants or beneficiaries; and a
person who acted in good faith and in a manner he reasonably believed to be in
the interest of the participants and beneficiaries of an employee benefit plan
shall be deemed to have acted in a manner "not opposed to the best interests of
the Corporation" as referred to in this Article IX.
SECTION 9.10 SURVIVAL OF INDEMNIFICATION AND ADVANCEMENT OF EXPENSES.
The indemnification and advancement of expenses provided by or granted
pursuant to, this Article IX shall, unless otherwise provided when authorized or
ratified, continue as to a person who has ceased to be a director, officer,
employee, fiduciary or agent and shall inure to the benefit of his heirs,
executors and administrators.
SECTION 9.11 LIMITATION ON INDEMNIFICATION.
Notwithstanding anything contained in this Article IX to the contrary,
except as provided in Section 9.3, the Corporation shall indemnify any such
person seeking indemnification in connection with a proceeding (or part thereof)
initiated by such person only if such proceeding (or part thereof) was
authorized or consented to by the Board.
SECTION 9.12 INDEMNIFICATION OF EMPLOYEES AND AGENTS.
The Corporation may, by action of the Board, provide indemnification to
employees and agents of the Corporation with the same scope and effect as the
foregoing indemnification of directors and officers.
SECTION 9.13 INDEMNIFICATION OF WITNESSES.
To the extent that any director, officer, employee, fiduciary or agent of
the Corporation is by reason of such position, or a position with another entity
at the request of the Corporation, a witness in any action, suit or proceeding,
he shall be indemnified against all costs and expenses actually and reasonably
incurred by him or on his behalf in connection therewith.
<PAGE>
-21-
SECTION 9.14 INDEMNIFICATION AGREEMENTS.
The Corporation may enter into agreements with any director, officer,
employee, fiduciary or agent of the Corporation providing for indemnification to
the full extent permitted by Nevada law.
SECTION 9.15 DEFINITION OF BOARD.
For purposes of this Article IX, the term "Board" shall mean the Board of
Directors of the Corporation or, to the extent permitted by the laws of Nevada,
as the same exist or may hereafter be amended, its Executive Committee. On vote
of the Board, the Corporation may assent to the adoption of this Article IX by
any subsidiary, whether or not wholly owned.
SECTION 9.16 ACTIONS PRIOR TO ADOPTION OF ARTICLE IX.
The rights provided by this Article IX shall be available whether or not
the claim asserted against the director, officer, employee, fiduciary or agent
is based on matters which antedate the adoption of this Article IX.
SECTION 9.17 SEVERABILITY.
If any provision of this Article IX shall for any reason be determined to
be invalid, the remaining provisions hereof shall not be affected thereby but
shall remain in full force and effect.
SECTION 9.18 APPLICABILITY TO FEDERAL ELECTION CAMPAIGN ACT OF 1971, AS
AMENDED.
The rights provided by this Article IX shall be applicable to the officers
(including without limitation the Chairman, Vice Chairman, treasurer and
assistant treasurer) appointed from time to time by the Chief Executive Officer
of the Corporation or his designee to serve in the administration and management
of any separate, segregated fund established for purposes of collecting and
distributing voluntary employee political contributions to federal election
campaigns pursuant to the Federal Election Campaign Act of 1971, as amended.
ARTICLE X
CORPORATE SEAL
The corporate seal shall be circular in form and shall have inscribed
thereon the name of the Corporation, and the date of its incorporation, and the
word "Nevada".
<PAGE>
-22-
ARTICLE XI
INTERPRETATION
Reference in these By-Laws to any provision of the Nevada Revised Statutes
shall be deemed to include all amendments thereto and the effect of the
construction and determination of validity thereof by the Nevada Supreme Court.
<PAGE>
EXHIBIT 11.3
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF PRO FORMA PER SHARE EARNINGS*
<TABLE>
<CAPTION>
THREE MONTHS ENDED
AUGUST 31,
-------------------
YEAR ENDED
MAY 31, 1994 1993 1994
------------ --------- ---------
PRO FORMA PRO FORMA PRO FORMA
COMBINED COMBINED COMBINED
------------ --------- ---------
(AMOUNTS IN MILLIONS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning of period..... 165,898 165,898 166,081
Shares issued upon exercise of stock options.. 60 1 93
Shares issued as grants of restricted stock,
net of cancellations......................... (48) -- --
Dilutive effect of outstanding stock options.. 1,114 209 2,287
Shares assumed issued in the Merger........... 33,190 33,190 33,190
-------- -------- --------
Pro forma weighted average number of shares
and share equivalents outstanding............ 200,214 199,298 201,651
======== ======== ========
Pro forma income from continuing operations... $ 214.4 $ 29.2 $ 52.9
Adjustment for interest on debentures, net of
tax.......................................... .3 .1 .1
-------- -------- --------
Pro forma income for primary calculation..... $ 214.7 $ 29.3 $ 53.0
======== ======== ========
Earnings per share from continuing operations
before cumulative effect of a change in
accounting principle......................... $ 1.07 $ .15 $ .26
======== ======== ========
FOR FULLY DILUTED EARNINGS PER SHARE
Pro forma weighted average number of shares
used in primary calculation.................. 200,214 199,298 201,651
Additional dilutive effect of stock options... 97 -- 335
Assumed conversion of dilutive convertible
debentures................................... 13,966 13,978 11,357
-------- -------- --------
Pro forma fully diluted weighted average
number of shares............................. 214,277 213,276 213,343
======== ======== ========
Pro forma income from continuing operations
used in primary calculation.................. $ 214.7 $ 29.3 $ 53.0
Adjustments for interest expense, contractual
allowances and income taxes.................. 6.6 1.2 1.7
-------- -------- --------
Adjusted pro forma income from continuing
operations used in fully diluted calculation. $ 221.3 $ 30.5 $ 54.7
======== ======== ========
Pro forma earnings per share from continuing
operations before cumulative effect of a
change in accounting principle............... $ 1.03 $ .14 $ .26
======== ======== ========
</TABLE>
- ------------------
* All shares in these tables are weighted on the basis of the number of days
the shares were outstanding or assumed to be outstanding during each
period.
<PAGE>
EXHIBIT 12.1
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENT RE:COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
For the
Three Months
For the Year Ended May 31, Ended August 31,
------------------------------------------------------- ---------------------
1990 1991 1992 1993 1994 1993 1994
---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
Income from continuing operations
before income taxes.............. $200,486 $245,142 $359,199 $418,644 $359,901 $ 90,728 $107,028
Less: Equity in Earnings
of Unconsolidated Affiliates...... (2,902) (5,338) (6,673) (12,489) (23,846) (3,470) (6,329)
Add:
Cash dividends received from
unconsolidated affiliates....... - - - - 178 178 894
Portion of rents representative
of interest..................... 38,257 31,803 35,477 35,822 30,728 8,029 6,668
Interest, net of capitalized
portion......................... 130,882 123,852 89,376 75,343 70,037 18,406 17,660
Amortization of previously
capitalized interest............ 2,538 2,967 3,368 3,595 3,784 899 946
------- ------- -------- --------- ------- ------- -------
Income, as adjusted................ 369,261 398,426 480,747 520,915 440,782 114,770 126,867
======= ======= ======== ========= ======= ======= =======
Fixed charges:
Interest, net of capitalized
portion.......................... 130,882 123,852 89,376 75,343 70,037 18,406 17,660
Capitalized interest............... 19,492 16,890 11,021 9,028 3,749 801 1,129
Portion of rents representative
of interest...................... 38,257 31,803 35,477 35,822 30,728 8,029 6,668
-------- -------- ------- -------- -------- ------- --------
Total fixed charges................ $188,631 $172,545 $135,874 $120,193 $104,514 $27,236 $ 25,457
======== ======== ======== ======== ======== ======= ========
Ratio of earnings to fixed
charges: 2.0x 2.3x 3.5x 4.3x 4.2x 4.2x 5.0x
</TABLE>
<PAGE>
EXHIBIT 12.2
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF RATIO OF PRO FORMA EARNINGS TO FIXED CHARGES
For the three months ended August 31, 1994
<TABLE>
<CAPTION>
Historical NME NME Historical Pro Forma Pro Forma
NME Adjustments As Adjusted AMH Adjustments Combined
---------- ----------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Income from continuing
operations before income taxes...... $107,028 $(31,900) $ 75,128 $ 45,900 $(27,900) $ 93,128
Less: Equity in Earnings of
Unconsolidated Affiliates........... 6,300 (100) 6,200 - - 6,200
Add:
Cash dividends received from
unconsolidated affiliates......... 894 - 894 - - 894
Portion of rents representative
of interest....................... 6,668 (188) 6,480 4,400 - 10,880
Interest, net of capitalized
portion........................... 17,660 - 17,660 39,200 25,400 82,260
Amortization of previously
capitalized interest.............. 946 - 946 - - 946
-------- -------- -------- -------- -------- --------
Income, as adjusted................... 126,896 (31,988) 94,908 89,500 (2,500) 181,908
======== ======== ======== ======== ======== ========
Fixed charges:
Interest, net of capitalized
portion............................. 17,660 - 17,660 39,200 25,400 82,260
Capitalized interest.................. 1,129 - 1,129 1,100 - 2,229
Portion of rents representative
of interest......................... 6,668 (188) 6,480 4,400 - 10,880
-------- -------- -------- -------- -------- --------
Total fixed charges................... $ 25,457 $ (188) $ 25,269 $ 44,700 $ 25,400 $ 95,369
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges: 5.0X 3.8X 2.0X 1.9X
</TABLE>
<PAGE>
EXHIBIT 12.2
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF RATIO OF PRO FORMA EARNINGS TO FIXED CHARGES
For the three months ended August 31, 1993
<TABLE>
<CAPTION>
HISTORICAL NME NME HISTORICAL PRO FORMA PRO FORMA
NME ADJUSTMENTS AS ADJUSTED AMH ADJUSTMENTS COMBINED
---------- ----------- ----------- ---------- ----------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Income from continuing operations before
income taxes............................. $ 90,728 $(33,700) $57,028 $38,500 $(28,600) $ 66,928
Less: Equity in Earnings of
Unconsolidated Affiliates................ 3,500 - 3,500 - - 3,500
Add:
Cash dividends received from
unconsolidated affiliates.............. 178 178 178
Portion of rents representative of
interest............................... 8,029 (2,638) 5,391 3,400 8,791
Interest, net of capitalized portion..... 18,406 (1,900) 16,506 33,800 25,400 75,706
Amortization of previously capitalized
interest............................... 899 - 899 - - 899
-------- -------- ------- -------- --------- --------
Income, as adjusted......................... 114,740 (38,238) 76,502 75,700 (3,200) 149,002
======== ======== ======= ======= ======== ========
Fixed charges:
Interest, net of capitalized portion........ 18,406 (1,900) 16,506 33,800 25,400 75,706
Capitalized interest........................ 801 801 500 1,301
Portion of rents representative of interest. 8,029 (2,638) 5,391 3,400 - 8,791
-------- -------- ------- -------- --------- --------
Total fixed charges......................... $ 27,236 $ (4,538) $22,698 $37,700 $ 25,400 $ 85,798
======== ======== ======= ======= ======== ========
Ratio of earnings to fixed charges:......... 4.2x 3.4x 2.0x 1.7x
</TABLE>
<PAGE>
EXHIBIT 12.2
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
STATEMENT RE: COMPUTATION OF RATIO OF PRO FORMA EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Historical Historical
NME AMH
Year Ended Year Ended Pro
May 31, NME NME August 31, AMH AMH Forma Pro Forma
1994 Adjustments As Adjusted 1994 Adjustments As Adjusted Adjustments Combined
---------- ----------- ----------- ------------ ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Income from continuing
operations before income taxes...... $359,901 $(35,300) $324,601 $235,100 $(69,300) $165,800 $(112,700) $377,701
Less: Equity in Earnings of
Unconsolidated Affiliates........... 23,800 500 24,300 - - - - 24,300
Add:
Cash dividends received from
unconsolidated affiliates......... 178 - 178 - - - - 178
Portion of rents representative
of interest....................... 30,728 (6,500) 24,228 16,300 - 16,300 - 40,528
Interest, net of capitalized
portion........................... 70,037 (5,000) 65,037 154,500 - 154,500 101,400 320,937
Amortization of previously
capitalized interest.............. 3,784 - 3,784 - - - - 3,784
-------- -------- -------- -------- -------- -------- --------- --------
Income, as adjusted................... 440,828 (47,300) 393,528 405,900 (69,300) 336,600 (11,300) 718,828
======== ======== ======== ======== ======== ======== ========= ========
Fixed charges:
Interest, net of capitalized
portion............................. 70,037 (5,000) 65,037 154,500 - 154,500 101,400 320,937
Capitalized interest.................. 3,749 - 3,749 3,500 - 3,500 - 7,249
Portion of rents representative
of interest......................... 30,728 (6,500) 24,228 16,300 - 16,300 - 40,528
-------- -------- -------- -------- -------- -------- --------- --------
Total fixed charges................... $104,514 $(11,500) $ 93,014 $174,300 $ - $174,300 $ 101,400 $368,714
======== ======== ======== ======== ======== ======== ========= ========
Ratio of earnings to fixed charges: 4.2X 4.2X 2.3X 1.9X 1.9X
</TABLE>
<PAGE>
EXHIBIT 23.2
ACCOUNTANTS' CONSENT
The Board of Directors
National Medical Enterprises, Inc.
We consent to the use of our reports dated July 27, 1994 included and
incorporated by reference in the registration statement (No. 33-xxxx) on Form
S-3 of National Medical Enterprises, Inc., relating to the consolidated balance
sheets of National Medical Enterprises, Inc. and subsidiaries as of May 31,
1994 and 1993, and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the years in the three-year
period ended May 31, 1994, and all related schedules, and to the reference to
our firm under the headings "Selected Historical Financial Information of NME"
and "Experts" in the prospectus. Our report on the 1994 consolidated financial
statements refers to a change in the method of accounting for income taxes.
KPMG Peat Marwick LLP
Los Angeles, California
December 22, 1994
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of National Medical Enterprises, Inc. of our
report dated October 20, 1994, relating to the financial statements of American
Medical Holdings, Inc. and American Medical International, Inc., which appear
in such Prospectus. We also consent to the references to us under the headings
"Experts" and "Selected Historical Financial Information of AMH and AMI" in
such Prospectus. However, it should be noted that Price Waterhouse LLP has not
prepared or certified such "Selected Historical Financial Information of AMH
and AMI."
Price Waterhouse LLP
Dallas, Texas
December , 1994
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAY-31-1994
<PERIOD-START> JUN-01-1993
<PERIOD-END> MAY-31-1994
<CASH> 313
<SECURITIES> 60
<RECEIVABLES> 462
<ALLOWANCES> 77
<INVENTORY> 55
<CURRENT-ASSETS> 1,444
<PP&E> 2,536
<DEPRECIATION> 772
<TOTAL-ASSETS> 3,697
<CURRENT-LIABILITIES> 1,640
<BONDS> 223
<COMMON> 14
0
0
<OTHER-SE> 1,306
<TOTAL-LIABILITY-AND-EQUITY> 3,697
<SALES> 0
<TOTAL-REVENUES> 2,943
<CGS> 0
<TOTAL-COSTS> 2,644
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 107
<INTEREST-EXPENSE> 70
<INCOME-PRETAX> 360
<INCOME-TAX> 144
<INCOME-CONTINUING> 216
<DISCONTINUED> 701
<EXTRAORDINARY> 0
<CHANGES> 60
<NET-INCOME> (425)
<EPS-PRIMARY> 1.29
<EPS-DILUTED> 1.23
</TABLE>
