<PAGE>
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[_] Preliminary Proxy Statement
[X] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to (S) 240.14a-11(c) or (S) 240.14a-12
NATIONAL MEDICAL ENTERPRISES, INC.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
SCOTT M. BROWN
NATIONAL MEDICAL ENTERPRISES, INC.
2700 COLORADO AVENUE
SANTA MONICA, CALIFORNIA 90404
(310) 998-8000
(NAME OF PERSON(S) FILING PROXY STATEMENT)
Payment of Filing Fee (Check the appropriate box):
[X]$125 per Exchange Act Rules 0-11(c)(1)(ii), 14a-6(i)(1), or 14a-6(j)(2).
[_]$500 per each party to the controversy pursuant to Exchange Act Rule
14a-6(i)(3).
[_]Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11:*
(4) Proposed maximum aggregate value of transaction:
*Set forth the amount on which the filing fee is calculated and state how it
was determined.
[_] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
----------------
(2) Form, Schedule or Registration No.:
----------------
(3) Filing Party:
----------------
(4) Date Filed:
----------------
<PAGE>
NATIONAL MEDICAL
ENTERPRISES, INC.
MAILING ADDRESS:
2700 COLORADO AVENUE POST OFFICE BOX 4070
SANTA MONICA, CALIFORNIA 90404 (310) 998-8000
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD ON WEDNESDAY, SEPTEMBER 28, 1994
August 25, 1994
To our Shareholders:
The Annual Meeting of Shareholders of National Medical Enterprises, Inc. (the
"Company") will be held on Wednesday, September 28, 1994 at 10:00 a.m.,
Pacific Daylight Time, in the Arcadia Ballroom, Loews Santa Monica Beach
Hotel, 1700 Ocean Avenue, Santa Monica, California, 90401, for the following
purposes:
1. To elect four directors for terms of three years each;
2. To approve the 1994 Directors Stock Option Plan;
3. To approve the 1994 Annual Incentive Plan;
4. To ratify the selection of KPMG Peat Marwick LLP as independent auditors
for the fiscal year ending May 31, 1995; and
5. To transact such other business as properly may come before the meeting.
Only shareholders of record at the close of business on August 15, 1994 (the
record date) will be entitled to vote at the meeting and any adjournments
thereof.
PLEASE PROMPTLY VOTE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD. This will
ensure that your shares are voted in accordance with your wishes and that a
quorum will be present. You are cordially invited to attend the meeting and
you may vote in person even though you have returned your proxy card.
SCOTT M. BROWN
Secretary
<PAGE>
PROXY STATEMENT
GENERAL INFORMATION
August 25, 1994
Your proxy is solicited by the Board of Directors (the "Board") of National
Medical Enterprises, Inc. ("NME" or the "Company") for use at the Annual
Meeting of Shareholders ("Annual Meeting") to be held on Wednesday, September
28, 1994, and any adjournments thereof, for the purposes set forth in the
foregoing Notice of Annual Meeting of Shareholders. This Proxy Statement and
the accompanying proxy are being mailed on or about August 29, 1994.
If the proxy is properly executed and returned, the shares it represents will
be voted at the meeting in accordance with the instructions noted thereon. If
no direction is indicated, the proxy will be voted in accordance with the
Board's recommendations as set forth herein. Any shareholder executing a proxy
has the power to revoke it at any time before it is voted. Any proxy may be
revoked at any time prior to its exercise by filing with the Secretary of the
Company a written notice of revocation, by delivering a duly executed proxy
bearing a later date or by attending the Annual Meeting and voting in person.
The Board knows of no unspecified matters to be voted upon at the Annual
Meeting.
Only shareholders of record at the close of business on August 15, 1994 are
entitled to receive notice of and to vote at the Annual Meeting. On August 15,
1994, NME had outstanding 166,255,862 shares of common stock, each of which is
entitled to one vote. The presence, in person or by proxy, of the holders of a
majority of the shares of common stock outstanding on such date is necessary to
constitute a quorum at the Annual Meeting. Abstentions (including instructions
to withhold authority to vote for one or more nominees) and broker non-votes
will be counted for purposes of determining the presence or absence of a
quorum, but will not be counted as votes cast except as otherwise provided
herein.
The cost of solicitation of proxies by the Board will be borne by the
Company. The Company has engaged Kissel-Blake, Inc. ("Kissel-Blake") to assist
in the solicitation of proxies for the meeting. The Company will pay Kissel-
Blake $13,000 in fees for its services and will reimburse it for its reasonable
out-of-pocket expenses. In addition to solicitation by mail and by Kissel-
Blake, proxies may be solicited by directors, executive officers and employees
of the Company personally or by telephone or telegram. Forms of proxy material
also may be distributed through brokers, custodians and other like parties to
the beneficial owners of the Company's common stock, and the Company may
reimburse such parties for their reasonable out-of-pocket and clerical expenses
incurred in connection therewith.
1
<PAGE>
1. DIRECTORS AND NOMINEES
Jeffrey C. Barbakow
Chairman and Chief Executive Officer
Chairperson of Executive Committee and
Member of Nominating Committee
Age: 50
Mr. 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 Donaldson, Lufkin & Jenrette Securities Corporation. 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. His current term as director of NME expires at this year's Annual
Meeting.
- --------------------------------------------------------------------------------
Michael H. Focht, Sr.
President and Chief Operating Officer
Member of Executive Committee and
Ethics and Quality Assurance Committee
Age: 51
Mr. 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. His
current term as a director of NME expires at the 1996 Annual Meeting.
- --------------------------------------------------------------------------------
Bernice B. Bratter
Director
Member of Executive Committee,
Nominating Committee and Chairperson of
Compensation and Stock Option Committee
Age: 56
Ms. 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. Her current term as a director
of NME expires at the 1996 Annual Meeting.
- --------------------------------------------------------------------------------
2
<PAGE>
Maurice J. DeWald
Director
Member of Executive Committee,
Compensation and Stock Option Committee
and Chairperson of Performance Investment
Plan Committee
Age: 54
Mr. DeWald is Chairman and Chief 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. Mr.
DeWald also is a director of Dai-Ichi Kangyo Bank of California. Mr. DeWald has
been a director since 1991. His current term as a director of NME expires at
the 1995 Annual Meeting.
- --------------------------------------------------------------------------------
Peter de Wetter
Director
Member of Executive Committee
Age: 74
Mr. 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
The Hillhaven Corporation. Mr. de Wetter has been a director of NME since 1977.
His current term as a director of NME expires at this year's Annual Meeting.
- --------------------------------------------------------------------------------
Edward Egbert, M.D.
Director
Member of Audit Committee, Nominating Committee
and Performance Investment Plan Committee
Age: 69
Dr. 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. His current
term as a director of NME expires at the 1995 Annual Meeting.
- --------------------------------------------------------------------------------
Raymond A. Hay
Director
Member of Audit Committee,
Ethics and Quality Assurance Committee
and Chairperson of Nominating Committee
Age: 66
Mr. 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. His current term as
a director of NME expires at the 1995 Annual Meeting.
- --------------------------------------------------------------------------------
3
<PAGE>
Lester B. Korn
Director
Member of Executive Committee and
Compensation and Stock Option Committee
Age: 58
Mr. 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. His current term
as a director of NME expires at the 1996 Annual Meeting.
- --------------------------------------------------------------------------------
James P. Livingston
Director
Member of Audit Committee,
Ethics and Quality Assurance Committee
and Nominating Committee
Age: 68
Mr. 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. His
current term as a director of NME expires at this year's Annual Meeting.
- --------------------------------------------------------------------------------
Richard S. Schweiker
Director
Chairperson of Audit Committee and
Chairperson of Ethics and Quality Assurance Committee
Age: 68
Mr. Schweiker is president of the American Council of Life Insurance, a
position he has held since 1983. Mr. Schweiker also serves as a director of
Univax Biologics, 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. His current term as a director of NME expires at this year's Annual
Meeting.
- --------------------------------------------------------------------------------
DIRECTORS BY CLASS
Class 3 (term expires at the 1994 Annual Meeting of Shareholders)
Jeffrey C. Barbakow
Peter de Wetter
James P. Livingston
Richard S. Schweiker
Class 1 (term expires at the 1995 Annual Meeting of Shareholders)
Maurice J. DeWald
Edward Egbert, M.D.
Raymond A. Hay
Class 2 (term expires at the 1996 Annual Meeting of Shareholders)
Bernice B. Bratter
Michael H. Focht, Sr.
Lester B. Korn
4
<PAGE>
NOMINEES AND VOTING
During fiscal year 1994, the size of the Board was reduced from 18 to 12
directors. In July, 1994, the Nominating Committee met and recommended for
nomination by the Board each of Messrs. Barbakow, de Wetter, Livingston and
Schweiker to serve another three-year term as a director. The Nominating
Committee chose not to recommend the renomination of John C. Bedrosian and Nita
P. Heckendorn, each of whom is a former officer of the Company with whom the
Company is engaged in litigation. After considering the Nominating Committee's
actions, the Board met on July 27, 1994, and nominated the directors
recommended by the Nominating Committee and amended the Company's Bylaws,
effective as of September 28, 1994, to reduce the size of the Board from 12 to
10 directors.
Directors are divided into three classes and serve for three-year overlapping
terms. Following the election of the four Class 3 directors, there will be
three Class 1 directors, three Class 2 directors and four Class 3 directors. At
this meeting, four Class 3 directors are to be elected to serve until the 1997
Annual Meeting. The terms of the other directors do not expire until 1995 or
1996. Directors are to be elected by a majority of the votes cast. Votes may
not be cumulated.
The individuals nominated by the Board to serve as Class 3 directors with
terms of office that expire at the 1997 Annual Meeting of Shareholders are:
Jeffrey C. Barbakow, Peter de Wetter, James P. Livingston and Richard S.
Schweiker. The Board recommends the election of each of them for a three-year
term as director.
The shares represented by proxies solicited by the Board will be voted,
unless otherwise directed, for these persons. The Board believes each of its
nominees will be able and willing to serve if elected. If any named nominee
becomes unavailable, the Board's proxies will be voted for the remaining
nominees and for such other person or persons as the Board may recommend.
SHAREHOLDER APPROVAL
Election of the nominees by the shareholders requires the affirmative vote of
a majority of the votes cast by holders of shares entitled to vote in the
election at the Annual Meeting, provided a quorum is present. Unless marked to
the contrary, proxies will be voted "FOR" the election of the nominees at the
Annual Meeting.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR ITS NOMINEES FOR
DIRECTORS.
5
<PAGE>
STOCK OWNERSHIP
As of August 15, 1994, ownership of common stock by all directors, all
nominees, each of the named executive officers (as defined herein on page 12)
and all executive officers and directors as a group (18 persons) was as
follows:
Except as otherwise indicated, each individual named has sole control as to
the investment and voting power with respect to the securities owned.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
--------------------------------
OPTIONS
EXERCISABLE
SHARES OF PRIOR TO
COMMON OCTOBER 15, PERCENT OF
NAME STOCK 1994(1) CLASS(2)
---- --------- ----------- ----------
<S> <C> <C> <C>
William S. Banowsky......................... 20,606 828,213
Jeffrey C. Barbakow......................... 19,100 666,666
John C. Bedrosian (3)....................... 549,944 350,920
Bernice B. Bratter.......................... 11,000 0
Maurice J. DeWald........................... 10,800 0
Peter de Wetter............................. 15,200 50,357
Edward Egbert, M.D.......................... 102,445 10,460
Michael H. Focht............................ 155,294 995,188
Raymond A. Hay.............................. 11,200 20,920
Nita P. Heckendorn (4)...................... 44,100 0
Lester B. Korn.............................. 22,700 0
James P. Livingston......................... 138,060 31,380
Raymond L. Mathiasen........................ 67,500 194,790
Barry P. Schochet........................... 74,200 154,397
Richard S. Schweiker........................ 11,400 62,760
Executive officers and directors
as a group (18 persons).................... 1,359,549 4,522,584 3.5%
</TABLE>
- --------
(1) These figures include investment options purchased under the Company's 1989
Performance Investment Plan (the "PIP") entitling the following executives
and directors to purchase convertible debentures which in turn are
convertible in two steps into the following number of shares of the
Company's common stock at an effective exercise price equivalent to $15.83:
Banowsky (698,213); de Wetter (39,897); Focht (698,213); Mathiasen
(99,744); and Schochet (39,897) and executive officers who are not
directors, nominees or named executive officers (964,198). Also included
for Mr. Bedrosian are stock options ("Options") to purchase 163,334 shares
of the Company's common stock, the vesting dates of which were accelerated
pursuant to the terms of Mr. Bedrosian's employment agreement with the
Company, dated December 5, 1990, when Mr. Bedrosian 's employment with the
Company was terminated without cause pursuant to the terms of his
employment agreement on September 24, 1993.
(2) Except as indicated, no executive officer or director beneficially owned,
including Options exercisable prior to October 15, 1994, 1% or more of the
outstanding shares of common stock of the Company.
(3) As described more fully on page 32, the Company currently is involved in
litigation with Mr. Bedrosian. It is the Company's position that Mr.
Bedrosian's employment with the Company was terminated without cause on
September 24, 1993 pursuant to the terms of his employment agreement. One
element of the litigation involves the exercisability of 203 investment
options purchased by Mr. Bedrosian under the PIP that are convertible in
three steps into 1,349,878 shares of the Company's common stock. It is the
Company's position that since Mr. Bedrosian did not exercise his 203
investment options within the time period after the termination without
cause of
6
<PAGE>
his employment with the Company pursuant to the terms of his employment
agreement on September 24, 1993 required under the PIP, such investment
options have expired. Consequently, such shares are not included in this
table. Mr. Bedrosian asserts that the 203 investment options have not
expired.
(4) As described more fully on page 32, the Company currently is involved in
litigation with Ms. Heckendorn. It is the Company's position that Ms.
Heckendorn resigned from her employment with the Company on August 16,
1993. As of that date, 50,000 of the 200,000 Options granted to Ms.
Heckendorn had vested. It is the Company's position that since Ms.
Heckendorn did not exercise the 50,000 vested Options within 90 days of her
resignation on August 16, 1993 (as required under the terms of the grant),
such 50,000 vested Options have expired. Furthermore, it is the Company's
position that the 150,000 unvested Options were canceled as of August 16,
1993. In addition to the Options, Ms. Heckendorn had purchased 72
investment options under the PIP which were convertible in three steps into
478,774 shares of the Company's common stock. It is the Company's position
that since Ms. Heckendorn did not exercise her 72 investment options within
the time period after her resignation on August 16, 1993 required by the
PIP, the 72 investment options have expired. Consequently, neither such
Options nor such investment options are included in this table. Ms.
Heckendorn asserts that her employment with the Company was terminated by
the Company on August 16, 1994, that she did not resign, and that she did
not forfeit any Option rights or investment option rights held at that
time. Ms. Heckendorn asserts that the 50,000 Options have not expired, that
the 150,000 unvested Options have not been canceled and that the 72
investment options have not expired and Ms. Heckendorn therefore asserts
that the table is inaccurate with respect to said Options and investment
options.
THE BOARD OF DIRECTORS AND COMMITTEES OF THE BOARD
The Company's By-Laws provide for 12 directors, but have been amended
effective September 28, 1994 to reduce the size of the Board to 10 directors.
The Board is divided into three classes, each of which serves for three years.
Following this year's Annual Meeting, there will be three directors in each of
Classes 1 and 2 and four directors in Class 3. Currently, there are six
directors in Class 3, two of whom have not been nominated to serve another
term.
It is the Company's position that Mr. Bedrosian, who served as Senior
Executive Vice President during a portion of fiscal 1994, was terminated
without cause pursuant to the terms of his employment agreement effective
September 24, 1993. Furthermore, it is the Company's position that Ms.
Heckendorn, who served as Executive Vice President during a portion of fiscal
1994, resigned from her employment effective August 16, 1993. Ms. Heckendorn
asserts that she was relieved by the Company of her duties with the Company on
August 16, 1994, and that she did not resign. Consequently, Mr. Bedrosian and
Ms. Heckendorn are treated as employee directors for the purposes of the
following discussion for the time periods prior to September 24, 1993 and
August 16, 1993, respectively, and as non-employee directors for the time
periods after September 24, 1993 and August 16, 1993, respectively.
The Board acted 13 times during the fiscal year ended May 31, 1994. Each
director participated in at least 75% of the aggregate of meetings of the Board
and the committees on which he/she served, during the period he/she served as a
director.
The Company's Executive Committee consisted during fiscal year 1994 of
employee directors Barbakow (Chairperson) and Focht, and non-employee directors
Bratter, DeWald, de Wetter and Korn. The Executive Committee, which met four
times during fiscal 1994, may exercise, when the Board is not in session, all
of the powers of the Board in the management of the business and affairs of the
Company, but may not fill vacancies on the Board, change the membership of, or
fill vacancies in, any committee of the Board, adopt, amend or repeal the By-
Laws or declare dividends.
7
<PAGE>
The Company's Audit Committee currently consists of non-employee directors
Schweiker (Chairperson), Egbert, Hay and Livingston. During fiscal 1994, the
Company's Audit Committee consisted of non-employee directors Schweiker
(Chairperson), Egbert, Hay, Livingston and former non-employee director
Martinson until September 29, 1993 when he resigned from the Board. The Audit
Committee selects, engages on behalf of the Company (subject to the consent of
the shareholders) and fixes the compensation of, a firm of independent
certified public accountants whose duty it is to audit the books and accounts
of the Company and its subsidiaries for the fiscal year in which they are
appointed. The Audit Committee confers with the auditors and determines the
scope of the auditing of the books and accounts of the Company and its
subsidiaries. The Audit Committee also is responsible for determining that the
business practices and conduct of employees and other representatives of the
Company and its subsidiaries complies with the policies and procedures of the
Company. None of the members of the Audit Committee may be officers or
employees of the Company. The Audit Committee met three times during fiscal
1994.
The Company's Compensation and Stock Option Committee (the "Compensation
Committee") currently consists of non-employee directors Bratter (Chairperson),
DeWald and Korn. During fiscal 1994, the Compensation Committee's members were
non-employee directors de Wetter until September 29, 1993, when he resigned
from the committee, Bratter, DeWald, Korn, former non-employee director
Martinson until September 29, 1993 when he resigned from the Board and former
non-employee director Stever until September 29, 1993 when his term on the
Board ended. Except as noted below, the Compensation Committee has the
authority to establish a general compensation policy for the Company and has
responsibility for the approval of increases in directors' fees and in salaries
paid to officers and senior employees earning in excess of an annual salary to
be determined by the Compensation Committee. The Compensation Committee has all
of the powers of administration under all of the Company's employee benefit
plants, 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 Committee determines (subject
to the provisions of the Company's plans) the directors, officers and employees
of the Company 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 Committee may be
officers or employees of the Company. This Committee met 18 times in fiscal
1994.
The Company's Performance Investment Plan Committee currently consists of
non-employee directors DeWald (Chairperson) and Egbert. Former non-employee
director Stever was Chairperson of the Committee until September 29, 1993 when
his term on the Board ended. The committee, which is responsible for
administering the PIP, did not meet in fiscal 1994.
The Company's Nominating Committee currently consists of non-employee
directors Hay (Chairperson), Bratter, Egbert and Livingston and employee
director Barbakow, all of whom were also members during fiscal 1994. The
Nominating Committee, which is responsible for making recommendations to the
Board regarding the qualifications of candidates for the Board, nominees to
fill vacancies on the Board and Board committees, the director selection
process, the tenure of Board members and the size, composition and committee
structure of the Board, met two times in fiscal year 1994. Nominations by
shareholders will be considered by the board if written information concerning
the proposed nominee, including the proposed nominee's name, biographical
information and signed consent to be nominated and to serve if elected, is
submitted to the Secretary of the Company on or before April 28, 1995.
The Company's Ethics and Quality Assurance Committee, which was created in
July of 1992, currently is comprised of non-employee directors Schweiker
(Chairperson), Hay and Livingston and employee director Focht. During fiscal
year 1994, non-employee directors Bratter and DeWald also served as members of
the committee until September 29, 1993 when they resigned from the committee.
8
<PAGE>
The purpose of the committee is to recommend policies and procedures that will
help cause the Company and its employees to act in accordance with high ethical
standards and deliver high quality medical care to the public. The committee
met three times in fiscal year 1994.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors, officers and persons who
beneficially own more than 10% of a registered class of the Company's equity
securities (collectively, the Reporting Persons) to file certain reports on
Forms 3, 4 and/or 5 describing ownership and changes in ownership in the
Company's registered equity securities. Based solely on a review of the Forms 3
and 4 (and amendments thereto) furnished to the Company during fiscal year
1994, the Forms 5 (and amendments thereto) furnished to the company with
respect to fiscal year 1994 and written representations from the Reporting
Persons that no Forms 5 were required, the Company believes that all filings
required by Section 16(a) of the Exchange Act were made in a timely fashion
except that one Form 4, reporting a sale of shares with respect to which a Form
144 had been filed, was not filed on a timely basis for Mr. de Wetter. The
Company inadvertently failed to file that Form 4 on behalf of Mr. de Wetter.
The transaction subsequently was reported when his Form 5 for fiscal year 1994
was filed.
REMUNERATION OF DIRECTORS
Directors Bratter, DeWald, de Wetter, Egbert, Hay, Korn, Livingston, and
Schweiker, NME's non-employee directors during fiscal 1994, each received
$30,000 as a retainer fee during the fiscal year ended May 31, 1994 for serving
on the Board, as well as an attendance fee of $900 for attending each Board
meeting. In addition, each non-employee director received $1,000 for attending
each meeting of the respective committee(s) of which he or she was a member. In
addition, commencing October 1, 1993, Mr. de Wetter received $1,000 per month
for serving as an advisor to the Compensation Committee pursuant to a one-year
consulting agreement. Mr. Bedrosian and Ms. Heckendorn became entitled, by
virtue of changes in their status, to a pro-rata portion of the Board retainer
fee from September 24, 1993 and August 16, 1993, respectively, to May 31, 1994
and the attendance fee for each Board and committee meeting each attended after
such dates. Mr. Bedrosian received payment for such fees. Ms. Heckendorn, who
disputes the Company's position that she resigned from her employment with the
Company on August 16, 1993, and asserts that her employment with the Company
was terminated by the Company on that date, until recently had refused to
accept the Board retainer fee or attendance fees paid to non-employee
directors. Ms. Heckendorn recently requested that such fees be paid to her
retroactively to August 16, 1993, but continues to assert that her employment
with the Company was terminated by the Company and that she did not resign from
her employment with the Company. The Company is considering her request.
Each committee Chairperson received $4,000 during the fiscal year for each
committee chaired by him or her. Directors also are reimbursed for travel
expenses and other out-of-pocket costs incurred in attending meetings.
DIRECTORS RETIREMENT PLAN
NME has a Board of Directors Retirement Plan (the "Directors Retirement
Plan") for non-employee directors. The Company believes that the Directors
Retirement Plan enables NME to attract and retain non-employee directors who
render necessary and important services to NME. During fiscal 1994, the
following non-employee directors participated in the Directors Retirement Plan:
Bratter, DeWald, de Wetter, Egbert, Hay, Korn, Livingston, Schweiker, Stever,
and Martinson. During the fiscal year, the participation of Mr. Stever ended
when he chose not to seek reelection at the 1993 Annual Meeting and the
participation of Dr. Martinson ended when he resigned from the Board at the
1993 Annual Meeting. Mr. Stever and Dr. Martinson, however, currently are
receiving the benefits under the Directors Retirement Plan they earned while
they were directors of the Company. Mr. Bedrosian and Ms. Heckendorn are
eligible to participate in the Directors Retirement Plan but have not entered
into agreements to do so.
9
<PAGE>
Under the Directors Retirement Plan, the Company is obligated to pay to the
non-employee director an annual normal retirement benefit for a period of 10
years upon the director's retirement. The director's interest in the retirement
benefit becomes partially vested after five years of service as a non-employee
director and fully vested after 10 years of service as a non-employee director
(counting only years of service from January 1, 1985, for directors retiring
prior to age 65 and all years of service for directors retiring at age 65 or
older so long as such director has served at least ten years as a non-employee
director). The retirement benefit paid shall be in an amount equal to the
lesser of (i) the director's Final Annual Board Retainer, and (ii) $25,000,
increased by a compounded rate of six percent per year from 1985 to the
director's termination of service. "Final Annual Board Retainer" is defined
under the Directors Retirement Plan as the annual retainer paid to the director
for service on NME's Board (excluding fees paid for individual Board or
committee meetings or for serving as a committee chair) at the time of the
termination of the director's service on the Board.
Normal retirement benefits, with certain adjustments, are paid to
participants whose services are terminated for any reason other than death
prior to normal retirement, so long as the participant has completed at least
five years of service. In the event of the death of any participant, before or
after retirement, the normal retirement benefit will be paid to his/her
surviving spouse or eligible children under the age of 21. In the event of a
"Change of Control" (as defined below) of NME followed by a participant's
termination as a director of NME or a participant's failure to be re-elected as
a director upon the expiration of his/her term in office, participants under
the Directors Retirement Plan will be deemed fully vested without regard to
years of service and shall be entitled to receive full normal retirement
benefits.
A "Change of Control" is deemed to have occurred under the Directors
Retirement Plan if (a) any person (as defined in Sections 13(c) and 14(d)(2) of
the Exchange Act) becomes the beneficial owner directly or indirectly of 30% or
more of the combined voting power of the Company's then outstanding securities
or (ii) during any two-year period individuals who at the beginning of such
period constitute the Company's Board cease for any reason other than death or
disability to constitute at least a majority of the Board.
The Directors Retirement Plan was amended in fiscal year 1994 to permit
participation by former employees who are directors, with years of service
measured from the date on which the director's employment with the Company
terminates. Non-employee directors Livingston, de Wetter, Bedrosian and
Heckendorn previously were employed by the Company and are eligible to receive
benefits under the Company's Supplemental Executive Retirement Plan (the
"SERP") which is described on page 16.
DIRECTORS LIFE INSURANCE PROGRAM
The Company provides a Directors Life Insurance Program (the "Program") for
all directors who elect to participate in the Program. The Company believes
that the Program enables it to retain the services of its existing directors
and to attract highly qualified directors.
Under the Program, the Company is willing to enter into split dollar life
insurance agreements with an owner designated by a director providing for the
purchase of joint life, second to die, life insurance policies insuring the
lives of the director and another person designated by the director. The amount
of insurance to be purchased will be sufficient to provide a death benefit up
to $1,000,000 to beneficiaries to be designated by the owner and to allow the
Company to recover the premiums it has paid to keep the policies in force until
the deaths of both the director and the designated other person. The owner will
pay the cost of pure term insurance and the Company will pay the balance of the
premiums, which will be paid over seven years if its original assumptions as to
interest rates, mortality rates, tax rates and certain other factors are
accurate.
10
<PAGE>
The Program is administered by the Compensation Committee, members of which
may be participants under the Program. As of July 31, 1994, life insurance
policies had been purchased by the owners on the lives of directors Bedrosian,
Bratter, de Wetter, Egbert, Focht, Hay, Korn and Livingston and their
respective designated other person. Directors Barbakow, DeWald, Heckendorn and
Schweiker do not participate in the Program.
DIRECTOR RESTRICTED SHARE PLAN
In 1991, the shareholders approved the Director Restricted Share Plan (the
"Restricted Plan"). The Restricted Plan replaced the Director Stock Option Plan
approved by the shareholders in 1985 (the "1985 Director Plan"). Although the
1985 Director Plan was terminated upon the effectiveness of the Restricted
Plan, Options previously granted under the 1985 Director Plan remain in effect.
Subject to the approval of the shareholders, the Company intends to replace the
Restricted Plan, described below, with the 1994 Directors Stock Option Plan
(the "DSOP") discussed on page 33. The Company believes that the DSOP will be
more effective in providing non-employee directors with an interest in common
with the interest of the Company's shareholders. Although the Restricted Plan
will terminate upon the approval of the DSOP by the Company's shareholders,
restricted shares previously granted under the Restricted Plan will remain in
effect.
Only those directors who are not employees of NME are eligible to participate
in the Restricted Plan. Such directors are not eligible to participate in the
Company's 1991 Stock Incentive Plan. Under the Restricted Plan, each
participant is to receive 5,400 restricted shares on the last Thursday of
October of each year. The Board, however, unanimously agreed to suspend the
fiscal year 1994 grant of restricted shares under the Restricted Plan. The
aggregate number of shares of NME common stock that may be issued or
transferred under the Restricted Plan is 1,500,000 shares. The shares awarded
vest in equal annual installments over a period of three years, commencing one
year after the date of grant. Each participant shall have the right to vote the
shares and to receive dividends on the shares. In the event of a director's
retirement, the award will vest in accordance with its terms. In the event of a
director's death or total disability, the award will be fully vested.
In the event of any future change in the capitalization of the Company, such
as a stock dividend or stock split, the Compensation Committee may make an
appropriate and proportionate adjustment to the number and kind of shares
subject to then-outstanding awards as well as to the maximum number and kind of
shares available for future awards.
The Restricted Plan provides for all awards then outstanding under the plan
to fully vest without restrictions in the event of certain conditions,
including a dissolution or liquidation of the Company, a reorganization, merger
or consolidation of the Company as a result of which NME is not the surviving
corporation or a takeover bid or tender offer, not approved by the Company's
Board, pursuant to which 20% or more of the outstanding securities of the
Company is acquired.
In order to induce Mr. Korn to join the Board in April 1993, he was promised
5,400 restricted shares. Since the Board unanimously agreed to suspend the
fiscal year 1994 grant of restricted shares, Mr. Korn did not receive his 5,400
shares. In fiscal year 1994, the Board compensated Mr. Korn for not receiving
the 5,400 restricted shares by paying him a one-time cash award of $60,750, the
value of 5,400 shares of NME stock on the date of the award.
11
<PAGE>
MANAGEMENT AND CERTAIN SECURITY HOLDERS
COMPENSATION OF EXECUTIVE OFFICERS
SUMMARY COMPENSATION TABLE
The following table summarizes the compensation paid by the Company for
fiscal years 1994, 1993 and 1992 to the person acting as Chief Executive
Officer at May 31, 1994, and the four other most highly compensated executive
officers (the "named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
- ---------------------------------------------------------------- -------------------------------------
AWARDS PAYOUTS
------------------------- -----------
NAME AND OTHER RESTRICTED SECURITIES ALL OTHER
PRINCIPAL ANNUAL COM- STOCK UNDERLYING LTIP COMPENSA-
POSITION YEAR SALARY (1) BONUS (1) PENSATION (2) AWARDS (3) OPTIONS (4) PAYOUTS (5) TION (2)(6)
--------- ---- ---------- --------- ------------- ------------ ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Barbakow(7)............. 1994 $850,000 $892,500 $110,000(8) $ -- 2,098,000 $ -- $3,647
CEO and 1993 -- -- -- -- -- -- --
Chairman 1992 -- -- -- 61,425(9) -- -- --
Focht................... 1994 535,000 483,750 105,060(10) 1,443,750(11) 259,000 12,180 29,320
President 1993 510,000 198,900 (12) -- 70,000 116,343 33,145
and COO 1992 475,000 328,950 -- -- 200,000 136,018 --
Schochet................ 1994 400,000 300,000 269,208(13) -- 104,000 53,625 24,053
EVP and President and 1993 400,000 210,667 265,911(13) 154,688(14) 20,625 72,591 21,316
COO of NME 1992 346,667 189,239 -- 245,438(14) 76,500 60,285 --
Hospital Division
Banowsky................ 1994 326,300 244,725 (12) -- 78,000 -- 18,344
EVP 1993 328,300 81,575 (12) -- 30,000 59,198 19,149
1992 310,000 93,000 -- -- 120,000 79,986 --
Mathiasen............... 1994 299,408 224,556 (12) -- 73,000 -- 14,159
SVP and CFO 1993 244,300 67,183 (12) 168,750(14) 22,500 30,656 13,611
1992 202,700 83,444 -- 267,750(14) 118,000 33,858 --
</TABLE>
- --------
(1) Includes compensation deferred at the election of an executive.
(2) In accordance with the transition rules of the Securities and Exchange
Commission, amounts of Other Annual Compensation and All Other Compensation
have not been included for fiscal year 1992.
(3) As of May 31, 1994, the number and value of the aggregate restricted stock
holdings and aggregate restricted unit holdings of the named executive
officers were as follows:
<TABLE>
<CAPTION>
RESTRICTED STOCK RESTRICTED UNITS
---------------- ------------------
NUMBER VALUE NUMBER VALUE
------ --------- ------- ----------
<S> <C> <C> <C> <C>
Barbakow............................... 5,400 $ 88,425 0 $ 0
Focht.................................. 28,580 467,998 150,000 1,443,750
Schochet............................... 12,000 196,500 19,250 184,938
Banowsky............................... 0 0 0 0
Mathiasen.............................. 12,000 196,500 21,000 201,750
</TABLE>
Dividends or dividend equivalents are paid on all of the restricted shares
and restricted units held by the named executive officers when and if
dividends are paid on the Company's common stock.
(4) Option totals reflect two-for-one stock split effective August 16, 1991.
12
<PAGE>
(5) The Company did not meet its pre-established return on equity threshold for
the three-year period ended in fiscal year 1994 and consequently no awards
were paid except to executive officers who had responsibility for an
operating division during a portion of the three-year period. The Hospital
Division met its threshold of aggregate pre-tax income for such three-year
period and consequently those executive officers who had responsibility for
the Hospital Division during some portion of the three-year period received
a pro-rata portion of the 50% of their awards earned based on the pre-
established formula for the Hospital Division. The Company did not meet its
pre-established return on equity threshold for the three-year period ending
in fiscal year 1993 and consequently Long Term Incentive Payments for such
period were made at the discretion of the Compensation Committee.
(6) The aggregate amounts set forth in "All Other Compensation" include the
following: (i) matching company contributions to the NME Retirement Savings
Plan, a 401(k) savings plan, (ii) matching company contributions to the
Deferred Compensation Plan, which exists because the Internal Revenue
Service limits the amount that may be deferred under the NME Retirement
Savings Plan, (iii) certain amounts in respect of life insurance and
disability insurance policies available under the SERP, (iv) certain
amounts in respect of joint life, second to die whole life insurance
available under the Company's Directors Life Insurance Program, and (v)
certain amounts in respect of a personal catastrophic liability insurance
policy available to the named executive officers, as follows:
<TABLE>
<CAPTION>
BARBAKOW FOCHT SCHOCHET BANOWSKY MATHIASEN
-------- ------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
NME Retirement Savings Plan.... $ 0 $ 5,200 $ 7,378 $7,077 $8,171
Deferred Compensation Plan..... 0 19,145 12,979 6,937 3,146
Life and Disability Insurance
Under SERP.................... 3,127 4,355 3,176 3,490 2,322
Directors Life Insurance Pro-
gram.......................... 0 100 0 320 0
Personal Catastrophic Insur-
ance.......................... 520 520 520 520 520
</TABLE>
(7) Mr. Barbakow became CEO and President of the Company 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. Prior to June
1, 1993, Mr. Barbakow served as a non-employee director of the Company.
Consequently, compensation information for Mr. Barbakow for the fiscal
years 1993 and 1992 is not included in this table.
(8) Total includes $43,700, the incremental cost to NME attributable to Mr.
Barbakow's personal use of the Company aircraft.
(9) Mr. Barbakow, who was a non-employee director of the Company prior to
becoming CEO effective June 1, 1993, was granted 5,400 restricted shares in
each of fiscal years 1991 and 1992 under the Restricted Plan described on
page 11. Those restricted shares vest in equal annual installments over a
period of three years, commencing one year after the date of grant.
(10) Total includes $69,355, the incremental cost to NME attributable to Mr.
Focht's personal use of the Company aircraft.
(11) This amount represents the value on the date of grant of a grant of
restricted units. The restricted units vest at the end of three years.
Upon vesting, a cash amount equivalent to the lesser of (i) the value of
the Company's common stock on the date of grant or (ii) the value of the
Company's common stock on the last day of the vesting period, shall be
paid with respect to each restricted unit held by Mr. Focht.
(12) No such compensation was paid other than perquisites, which have not been
included because their aggregate value did not meet the reporting
threshold of the lesser of $50,000 or 10 percent of salary plus bonus.
13
<PAGE>
(13) Total includes $255,544 attributable to certain amounts paid to Mr.
Schochet in connection with his move to California at the request of the
Company. In order to induce Mr. Schochet to move from Tampa, Florida to
become the Executive Vice President and Chief Operating Officer of NME's
Hospital Division in Santa Monica, California in 1991, NME agreed to pay
Mr. Schochet $21,295 per month for 72 months to compensate him for the
higher cost of housing in California and the fact that California has an
income tax while Florida does not. In fiscal year 1994, Mr. Schochet and
the Compensation Committee agreed to amend that arrangement by reducing
the amount of the monthly differential compensation to $4,000 upon the
sale by Mr. Schochet of his Santa Monica, California home and agreeing
that NME will reimburse Mr. Schochet for the selling costs and after-tax
loss, if any, upon the sale of the home (grossed up, in each case, for the
tax effect of such reimbursement); provided, however, that if Mr. Schochet
receives such reimbursement and voluntarily terminates his employment with
NME within 36 months of receiving such reimbursement, Mr. Schochet must
reimburse NME for a pro rata portion of such reimbursement.
(14) This amount represents the value on the date of grant of a grant of
restricted units. The restricted units vest in equal annual installments
over a period of three years, commencing one year after the date of grant.
Upon vesting, a cash amount equivalent to the lesser of (i) the value of
the Company's common stock on the date of grant or (ii) the value of the
Company's common stock on the last day of the vesting period shall be paid
with respect to each restricted unit held by the named executive officer.
In addition, for every two restricted units granted in fiscal year 1992
("1992 Units") that vest, three Options granted on August 19, 1991 ("1991
Options") will be canceled. For every three 1991 Options that are
exercised, two 1992 Units and two Options granted on May 18, 1992 will be
canceled. For every restricted unit granted in fiscal year 1993 ("1993
Units") that vests, one 1991 Option will be canceled. For every 1991 Option
that is exercised, one 1993 Unit and one Option granted on April 27, 1993
will be canceled.
OPTION GRANTS
The following table sets forth information concerning Options granted to the
named executive officers in fiscal year 1994.
OPTION GRANTS IN FISCAL YEAR 1994
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------
NUMBER OF % OF TOTAL
SHARES OPTIONS
UNDERLYING GRANTED TO EXERCISE GRANT DATE
OPTIONS EMPLOYEES PRICE EXPIRATION PRESENT
NAME GRANTED($) IN FY94 ($/SHARE) DATE VALUE
- ---- ----------- ---------- --------- ---------------- ------------
<S> <C> <C> <C> <C> <C>
Barbakow...... 2,000,000(1) 38.9 $ 9.50 June 1, 2003 $7,828,000
98,000(2) 1.9 11.625 December 1, 2003 421,400
Focht......... 200,000(3) 3.9 9.625 October 1, 2003 684,000
59,000(2) 1.1 11.625 December 1, 2003 253,700
Schochet...... 70,000(4) 1.4 11.625 December 1, 2003 301,000
34,000(2) 0.7 11.625 December 1, 2003 144,200
Banowsky...... 50,000(4) 1.0 11.625 December 1, 2003 215,000
28,000(2) 0.5 11.625 December 1, 2003 120,400
Mathiasen..... 50,000(4) 1.0 11.625 December 1, 2003 215,000
23,000(2) 0.4 11.625 December 1, 2003 98,900
</TABLE>
14
<PAGE>
- --------
(1) The Options are exercisable at a price equal to the closing price of the
Company's common stock on the date of grant (June 1, 1993), vest in equal
portions over three years from the date of grant and expire ten years from
the date of grant.
(2) The Options are exercisable at a price equal to the closing price of the
Company's common stock on the date of grant (December 1, 1993), vest on May
31, 1996, and expire 10 years from the date of grant. These Options were
granted in lieu of the Company granting new LTIP cash award opportunities
for the three-year period ending May 31, 1996.
(3) The Options are exercisable at a price equal to the closing price of the
Company's common stock on the date of grant (October 1, 1993), vest in
equal portions over three years from the date of grant and expire ten years
from the date of grant.
(4) The Options are exercisable at a price equal to the closing price of the
Company's common stock on the date of grant (December 1, 1993), vest in
equal portions over three years from the date of grant and expire ten years
from the date of grant.
(5) These values were established using standard Black-Scholes stock option
valuation models. The assumptions used to calculate the Grant Date Present
Value of all option shares granted during fiscal year 1994 were as follows:
<TABLE>
<CAPTION>
GRANT DATE/EXPIRATION DATE
---------------------------------------------
6-1-93/6-1-03 10-1-93/10-1-03 12-1-93/12-1-03
------------- --------------- ---------------
<S> <C> <C> <C>
Expected Volatility............ .359 .352 .345
Risk Free Rate of Return....... 7.0% 7.0% 7.0%
Dividend Yield................. 2.7% 3.1% 3.6%
Time of Exercise............... 10 Years 10 Years 10 Years
From the Date From the Date From the Date
of Grant of Grant of Grant
</TABLE>
The Expected Volatility is the average of quarterly data drawn from the
five years preceding the date of grant. The Risk Free Rate of Return is the
approximate yield on a 10-year bond on the date of grant. The Dividend
Yield is the average of quarterly dividend yields during the five years
preceding the date of grant including one quarter in which no dividend was
paid. The Time of Exercise is the maximum exercise period for each grant.
The valuation model was not adjusted for non-transferability, risk of
forfeiture or the vesting restrictions of the Options, all of which would
reduce the value if factored into the calculation.
The Company does not believe that the Black-Scholes model or any other
valuation model is a reliable method of computing the present value of the
Company's employee Options. The value ultimately realized, if any, will
depend on the amount by which the market price of the Company's common
stock on the date of exercise exceeds the exercise price.
15
<PAGE>
OPTION EXERCISES
The following table sets forth information concerning Options exercised by
each of the named executive officers in fiscal year 1994 and unexercised
Options held by each of them as of May 31, 1994.
OPTION EXERCISES IN FISCAL YEAR 1994 AND YEAR-END VALUE TABLE
<TABLE>
<CAPTION>
NUMBER OF VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT 5/31/94 AT 5/31/94(1)
ACQUIRE ON REALIZE -------------------------- -------------------------
NAME EXERCISE($) ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- ------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Barbakow................ 0 $ 0 0 2,098,000 $ 0 $14,215,500
Focht................... 0 0 861,855(2) 372,334 528,475 1,759,149
Schochet................ 0 0 114,397(2) 163,250 99,259 624,281
Banowsky................ 0 0 788,213(2) 138,000 408,146 425,740
Mathiasen............... 0 0 161,456(2) 127,334 151,443 488,875
</TABLE>
- --------
(1) The closing price of the Company's common stock on May 31, 1994, was
$16.375.
(2) This figure includes exercisable investment options purchased under the PIP
entitling Messrs. Focht, Schochet, Banowsky and Mathiasen to purchase
debentures which in turn are convertible in two steps into 698,213, 39,897,
698,213 and 99,744 shares, respectively, of the Company's common stock.
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The SERP provides executive officers and certain other management employees
with supplemental deferred benefits in the form of retirement payments for
life.
At retirement, the monthly benefit paid to participants will be a product of
four factors: (i) the participant's highest average monthly earnings for any
consecutive 60-month period during the ten years preceding retirement; (ii) the
number of years of service to the Company to a maximum of 20 years
(participants will receive a percentage credit for years of service prior to
enrollment in the plan which increases gradually from 25 percent upon becoming
a participant to 100 percent at the beginning of the sixth year following
enrollment); (iii) a vesting factor; and (iv) a percentage factor not to exceed
2.7% reduced to reflect the projected benefit from other Company retirement
plans available to a participant and from Social Security. The monthly benefit
is adjusted in the event of early retirement or termination of employment with
the Company. The first day on which unreduced retirement benefits are available
is age 62. In the event of the death of a participant, before or after
retirement, one-half of the benefit earned as of the date of death will be paid
to the surviving spouse for life (or to the participant's children until the
age of 21 if the participant dies without a spouse). The SERP was amended in
fiscal year 1994 to provide for lump sum distributions in certain circumstances
and subject to certain limitations.
"Earnings" is defined in the SERP as the participant's base salary excluding
bonuses and other cash and non-cash compensation. For purposes of the SERP,
Earnings may not increase at a rate in excess of 8% per annum measured from the
participant's Earnings at his or her plan entry date, or, for participants who
are regular full time employees actively at work on April 1, 1994 with the
corporate office or a division or a subsidiary that has not been declared to be
a discontinued operation, the Earnings of such participant on April 1, 1994.
The provision allowing Earnings to be measured from April 1, 1994 for certain
employees was added by amendment in fiscal year 1994 to correct certain
inequities that existed due to different participants becoming eligible under
the SERP on different dates.
In the event of a "Change of Control" (as defined below) of the Company,
participants will be deemed fully vested in the SERP for all years of service
to the Company without regard to actual years
16
<PAGE>
of service and will be entitled to full retirement benefits without reduction
on or after age 60. In addition, in fiscal year 1994, the SERP was amended to
provide that if a participant is a regular full time employee actively at work
on April 1, 1994 with the corporate office or a division or a subsidiary which
has not been declared to be a discontinued operation, and who has not yet begun
to receive benefit payments under the SERP and is terminated without cause or
voluntarily terminates his employment following the occurrence of certain
events (defined below as a "Constructive Termination") within two years of a
Change of Control, then such participant will be (i) deemed fully vested in the
SERP without regard to actual years of service, (ii) credited with three
additional years of service, not to exceed a total of 20 years credited
service, and (iii) entitled to full retirement benefits without reduction on or
after 60 or benefits at age 50 with reduction for each year of receipt of
benefit prior to age 60. In addition, the "Earnings" used in calculating the
benefit will include the participant's base salary and the annual cash bonus
paid to the participant, but exclude any cash bonus paid under the Company's
LTIP and other cash and non-cash compensation. Furthermore, the provision in
the SERP prohibiting benefits from being paid to a participant if the
participant becomes an employee or consultant of a competitor of the Company
within three years of leaving the Company is waived. Finally, in no event shall
(x) the total present value of all payments under the SERP that are payable to
a participant and are contingent upon a Change of Control in accordance with
the rules set forth in Section 280G of the Code, when added to (y) the present
value of all other payments (other than payments that are made pursuant to the
SERP) that are payable to a participant and are contingent upon a Change of
Control, exceed an amount equal to 299% of the participant's "base amount" as
that term is defined in Section 280G of the Code.
A Change of Control is deemed to have occurred if (i) any person becomes the
beneficial owner, directly or indirectly, of 20% or more of the Company's
common stock, or (ii) individuals who, as of April 1, 1994, constitute the
Board (the "Incumbent Board") cease for any reason to constitute the majority
of the Board; provided that individuals nominated by a majority of the
directors then constituting the Incumbent Board and elected to the Board after
April 1, 1994, will be deemed to be included in the Incumbent Board and
individuals who initially are elected to the Board as a result of an actual or
threatened election contest or proxy solicitation (other than on behalf of the
Incumbent Board) will be deemed not to be included in the Incumbent Board. The
following events are defined herein to constitute a "Constructive Termination":
(1) a material downward change in the participant's position, (2)(A) a
reduction in the participant's annual base salary, (B) a material reduction in
the participant's annual incentive plan bonus payment other than for financial
performance as it broadly applies to all similarly situated executives in the
same plan, or (C) a material reduction in the participant's retirement or
supplemental retirement benefits that does not broadly apply to all executives
in the same plan, or (3) the transfer of the participant's office to a location
that is more than 50 miles from his or her current principal office.
In 1994, the Company established the 1994 NME Supplemental Executive
Retirement Plan Trust (the "SERP Trust") for the purpose of securing the
Company's obligation to make distributions under the SERP. The SERP Trust is a
"rabbi trust" and initially will be funded with 1,000,000 shares of the
Company's common stock. The SERP Trust will make payments required to be made
to SERP participants and their beneficiaries under the SERP, in the event that
the Company fails to make such payments for any reason other than the
insolvency of the Company. In the event of the insolvency of the Company, the
assets of the SERP Trust will be subject to the claims of general creditors of
the Company. In the event of a Change of Control of the Company, the Company is
required to fund the SERP Trust in an amount that is sufficient, together with
all assets then held by the SERP Trust, to pay each participant and/or
beneficiary of the SERP, on a pre-tax basis, the benefits to which the
participant or the beneficiary would be entitled pursuant to the terms of the
SERP as of the date on which the Change of Control occurred.
The following table presents the estimated maximum annual retirement benefits
payable on a straight-life annuity basis to participating executives under the
Company's SERP in the earnings and
17
<PAGE>
years of service classifications indicated. The benefits listed are subject to
reduction for projected benefits from the NME Employees Retirement Savings
Plan, the related Deferred Compensation Plan and Social Security. The effect of
these reductions is not included in the table.
PENSION PLAN TABLE
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
<TABLE>
<CAPTION>
ESTIMATED ANNUAL RETIREMENT BENEFIT
FOR YEARS OF SERVICE INDICATED
--------------------------------------
25
REMUNERATION 10 YEARS 15 YEARS 20 YEARS YEARS(1)
- ------------ -------- --------- --------- ---------
<S> <C> <C> <C> <C>
$ 100,000........................... $ 27,000 $ 40,500 $ 54,000 $ 54,000
$ 300,000........................... 81,000 121,500 162,000 162,000
$ 500,000........................... 135,000 202,500 270,000 270,000
$ 700,000........................... 189,000 283,500 378,000 378,000
$ 900,000........................... 243,000 364,500 486,000 486,000
$1,100,000........................... 297,000 445,500 594,000 594,000
$1,300,000........................... 351,000 526,500 702,000 702,000
$1,500,000........................... 405,000 607,500 810,000 810,000
$1,700,000........................... 459,000 688,500 918,000 918,000
$1,900,000........................... 513,000 769,500 1,026,000 1,026,000
$2,100,000........................... 567,000 850,500 1,134,000 1,134,000
$2,300,000........................... 621,000 931,500 1,242,000 1,242,000
$2,500,000........................... 675,000 1,012,500 1,350,000 1,350,000
$2,600,000........................... 702,000 1,053,000 1,404,000 1,404,000
</TABLE>
- --------
(1) The benefit is the same for each period beyond 20 years since benefits
under the SERP are calculated based on a maximum of 20 years of service.
As of May 31, 1994, the estimated credited years of service for the
individuals named in the Summary Compensation Table were as follows: Mr.
Barbakow, 1.00 year; Mr. Focht, 16.17 years; Mr. Schochet, 14.88 years; Mr.
Banowsky, 16.51 years, and Mr. Mathiasen, 8.65 years.
The Company has purchased insurance policies on the life of each participant,
the purpose of which is to reimburse the Company, based on actuarial
calculations, for amounts to be paid to such participant under the SERP over
the course of the participant's retirement (assuming that its original
estimates as to interest rates, mortality rates, tax rates and certain other
factors are accurate). SERP participants also are provided a life insurance
benefit for the designee of each participant and a disability insurance policy
for the benefit of each participant.
COMPENSATION COMMITTEE INTERLOCKS AND
INSIDER PARTICIPATION IN COMPENSATION DECISIONS
Mr. de Wetter, who served as an Executive Vice President of NME from 1979
through 1989, was Chairperson of the Compensation Committee of the Board until
September 29, 1993, when he resigned from the committee.
18
<PAGE>
COMPENSATION AND STOCK OPTION COMMITTEE REPORT
COMPENSATION POLICIES
The Compensation and Stock Option Committee (the "Compensation Committee") of
the Company's Board is responsible for establishing and interpreting the
Company's compensation policies and making compensation decisions. The
Compensation Committee is composed entirely of non-employee directors. The
Compensation Committee considers a director to be a non-employee director if
the director (a) has not been employed by the Company in an executive capacity
during the five years prior to appointment to the Compensation Committee, (b)
is not employed by a significant customer or supplier, (c) is not employed by a
charitable organization that receives significant contributions from the
Company, (d) is not related to any executive, (e) does not have a personal
service contract with the Company, (f) is not a member of a company that is one
of the Company's significant advisors or consultants, and (g) does not have a
business relationship required to be disclosed under "Related Party
Transactions" in the Company's Proxy Statement.
The Compensation Committee has retained a nationally-recognized compensation
consulting firm that assists the Compensation Committee in formulating its
compensation policies, applying those policies to the compensation of the
Company's executives and advising the Compensation Committee as to the form and
reasonableness of compensation paid to executives. For purposes of this report,
the term "executives" refers to the executive officers of the Company.
Fiscal year 1994 represented a period of substantial change for the Company.
The Company's new management team achieved a remarkable turnaround over the
last year. The Company's stock price rose from $9.50 per share on June 1, 1993,
when Jeffrey Barbakow became the new Chief Executive Officer, to $16.375 on May
31, 1994. During fiscal year 1994, management either resolved or reached
agreement to resolve substantially all of the unusual legal proceedings facing
the Company at the beginning of the fiscal year. During the year management
decided to focus on NME's core business of domestic and international general
hospitals and by the end of the year the Company had sold substantially all of
its rehabilitation hospitals and was in the process of selling substantially
all of its psychiatric hospitals.
In the transitional environment described above, the Compensation Committee's
decisions on executive compensation were guided by the compensation policies
established during fiscal year 1993, adjusted as necessary to meet the changing
conditions of the Company and the health care industry.
The Company's compensation policy balances the need for executive
compensation to reflect the Company's current financial and common stock price
results with the Company's need to attract, motivate and retain qualified
executives who can maximize long-term shareholder returns in the rapidly-
changing health care industry. In fiscal year 1994, over 80% of the total
compensation opportunities for the named executive officers as a group and the
executive officers as a group were "at risk" based on (i) the price of the
Company's common stock, (ii) the Company meeting its financial goals, quality-
of-care and service goals and (iii) the executives meeting pre-established
corporate and/or individual objectives.
The Compensation Committee recognizes that a variety of circumstances may
influence an individual's or the Company's performance at any given time.
Accordingly, the Compensation Committee is prepared to use its judgment to make
discretionary awards or adjustments to plans when it believes that doing so
would serve the long-term interests of the Company's shareholders.
BASE SALARY AND ANNUAL INCENTIVE PLAN
The Compensation Committee believes that the Company's executives should be
rewarded in the short-term for their contributions to the Company's attaining
annual financial and quality-of-care and service goals and their attaining
annual corporate and/or individual objectives.
19
<PAGE>
When setting the appropriate level of total annual cash compensation
opportunities available to the Company's executives for fiscal year 1994, the
Compensation Committee compared such opportunities primarily with the total
annual cash compensation paid, according to the then most-recently available
information, by the Company's peer companies to their executives, after
adjusting for relative size (in terms of net operating revenues). The peer
group used for this comparison was the peer group shown in the Common Stock
Performance Graph in the Company's 1993 proxy statement, and which, as adjusted
for mergers and acquisitions, is shown in the Common Stock Performance Graph on
page 26. The Compensation Committee makes such comparison with its peer
companies because the Company believes that it is primarily with its peer
companies that the Company must most effectively compete for qualified and
experienced executives.
For fiscal year 1994, the Compensation Committee established a base salary
and target annual incentive structure designed to position total cash
compensation opportunities for the executives in the broad middle range of that
paid by the peer companies, taking into account their relative sizes based on
net operating revenues. The Compensation Committee also compared total cash
compensation opportunities to that paid by general industry for similar
positions at similarly-sized companies, based on net operating revenues, and
set total compensation opportunities in the broad middle range of that paid by
those companies.
In determining an individual executive's actual base salary, the Compensation
Committee also considers other factors, which may include the executive's past
performance and contributions to the Company's success, the executive's
expected future contributions, how long the executive has held the current
position, the executive's vulnerability to recruitment by other companies, the
executive's expected future position and expected increases in base salaries at
health care companies generally.
Salaries for certain executive officers also were adjusted during fiscal year
1994 to reflect additional duties and responsibilities taken on by those
executives as part of the management reorganization of the Company. Mr.
Barbakow's base salary of $850,000 was established prior to his employment as
Chief Executive Officer on June 1, 1993, under his employment arrangements
described on page 27. Mr. Barbakow received no salary increase during fiscal
year 1994.
Salary increases for executive officers, all of which were due to promotions
or an executive taking on additional responsibilities, were based upon the
above-described policy of establishing total cash compensation around the broad
middle range of the competitive peer group and general industry for similar
positions.
The Company's Annual Incentive Plan ("AIP") rewards an executive with a cash
award equal to a percentage of the executive's base salary, based on the extent
to which (a) the Company meets pre-established financial goals, the measure of
which in fiscal year 1994 was the Company's operating divisions' targeted
aggregate pre-tax income before non-recurring activity ("Divisional Pre-Tax
Income") for the fiscal year, (b) the Company achieves its quality-of-care and
service goals (measured in fiscal year 1994 by patient satisfaction at the
Company's general, psychiatric and rehabilitation hospitals, compliance with
specified procedures and professional standards at the Company's psychiatric
hospitals and patient improvement at the Company's psychiatric and
rehabilitation hospitals), and (c) the executive meets pre-established
corporate or individual performance goals. Each executive's individual
objectives are set jointly by the executive and the executive's supervisor.
Personal goals, if any, for the Chief Executive Officer are approved by the
Compensation Committee. Individual objectives relate to an executive's business
objectives. The weight given to each of the three factors is approved annually
by the Compensation Committee and the weight given to each factor may vary for
each participant based on decision-making authority and ability to directly
affect financial performance. No AIP award may be paid except at the discretion
of the Compensation Committee if the Company fails to meet the threshold (which
for fiscal year 1994 was 85% of Divisional Pre-Tax Income) set in advance
20
<PAGE>
by the Compensation Committee. The Compensation Committee also has the
authority to pay discretionary awards if formula-based minimum financial or
quality-of-care and service goals are not met.
When the Company's financial performance exceeds planned levels and/or an
executive's individual performance goals are exceeded, the executive is
rewarded with a larger-than-targeted cash award. When the Company's financial
performance is below planned levels (but above the pre-established threshold)
and/or an executive's individual performance goals are not met, annual
incentive awards are paid at less-than-targeted levels.
For fiscal year 1994, the Compensation Committee met on October 26, 1993, and
determined that, in light of the significant challenges then facing the new
management team and the Company, shareholder value would most effectively be
enhanced by the Company's executive officers focusing on, and rewarding their
achievement of, the following specific goals (with no particular weight being
assigned to any such goal), which (except for number 3 below) are different
from the fiscal year 1994 AIP goals applicable to other participants (described
above):
1. Resolution of the unusual litigation.
2. Resolution of the Justice Department investigations.
3. Attainment of operating divisions' targeted aggregate pre-tax income
before non-recurring activity.
4. Maintenance of supportive banking relationships.
5. Realignment of operations to focus on core business.
6. Achievement of quality-of-care and service goals.
Further, the Compensation Committee determined that it would use its
discretion under the terms of the AIP to judge the achievement of these goals
and determine the percentage of target awards to be paid.
Immediately prior to the close of fiscal year 1994, the Compensation
Committee met several times to review information on the achievement of each of
the above corporate goals, and determined that the threshold had been met and
all goals had been substantially met or exceeded. The Compensation Committee's
judgment was that the management team had done an outstanding job in managing
the Company through its difficulties and enhancing shareholder value. It
determined that executive officer AIP awards generally should be paid at 150%
of target levels to reflect this performance. In considering the award for Mr.
Barbakow, the Compensation Committee considered both the achievement of the
above-described corporate goals and Mr. Barbakow's performance of the following
individual goals (with no particular weight being assigned to any such goal),
approved by the Compensation Committee on November 1, 1993, and decided to pay
Mr. Barbakow's an annual incentive award of $892,500, which is at the same 150%
of target level:
1. Changing the corporate culture.
2. Strengthening the balance sheet to optimize shareholder value.
3. Building a strong management team.
4. Reducing costs.
5. Strengthening corporate governance by restructuring the Board.
6. Strengthening the business focus of the Company.
7. Developing and implementing a strategic plan.
As a result of this award for above-target fiscal year 1994 performance, the
total cash compensation paid to Mr. Barbakow for fiscal year 1994 was in the
upper quartile of total cash compensation paid to chief executive officers of
the Company's peer companies.
LONG-TERM INCENTIVE PLAN AND STOCK INCENTIVE PLAN
The Compensation Committee's long-term compensation goal is to provide the
Company's executives with an interest in common with that of the shareholders
and an incentive to enhance the
21
<PAGE>
Company's long-term financial performance, and thus shareholder value. The
Compensation Committee's policy with respect to long-term compensation awards
in fiscal year 1994 was to consider the practices of not only its peer
companies but other companies generally in setting the target award levels
because: (1) the Company must compete with other companies in all industries in
order to attract and retain qualified and motivated executives who will work to
maximize long-term shareholder value and (2) shareholders consider investing
not only in other health care companies but also other companies generally when
evaluating where best to invest their capital, requiring the Compensation
Committee to create incentives for the executives to cause the Company's common
stock to be competitive with that of other companies generally rather than only
with the stock of the peer companies. The Compensation Committee believes that
long-term compensation opportunities generally should be in the broad middle
range of such opportunities available at those other companies.
The Compensation Committee traditionally has implemented its long-term
compensation policy through awards under the Long-Term Incentive Plan ("LTIP"),
which rewards performance over a three-year period with cash awards, and awards
under the Company's 1991 Stock Incentive Plan ("SIP"), which provides longer-
term opportunities linked directly to the Company's common stock price.
Long Term Incentive Plan
Under the LTIP, an executive is eligible for a cash award equal to a
percentage of the executive's total cash compensation when the Company meets
pre-established three-year financial goals, the measure of which for the three-
year periods ending May 31, 1994 and May 31, 1995, is the Company's average EPS
over such three-year periods. In addition, separate ROE thresholds are
established by the Compensation Committee for each three-year period for the
Company as a whole. Each operating division has a separate three-year threshold
defined in terms of the aggregate pre-tax income of that division for the two
three-year periods referred to above. The threshold applicable to an
executive's LTIP award will be the Company's ROE threshold, unless the
executive has responsibilities relating to a specific operating division, in
which case the threshold applicable to a portion of the award (normally 50%)
will be the Company's ROE threshold and the threshold applicable to the
remaining portion of the award will be the operating division's pre-tax income
threshold. When financial performance exceeds planned levels, the executive is
rewarded with a larger-than-targeted cash LTIP award. When financial
performance is below planned levels, LTIP awards will be paid at less than
targeted levels. If thresholds are not met, LTIP awards will be paid only at
the discretion of the Compensation Committee. The Compensation Committee also
has the authority to pay discretionary awards if formula-based minimum EPS is
not met.
The Compensation Committee met in May of 1994 and determined that the ROE
threshold established for the Company for the three-year period from June 1,
1991 through May 31, 1994, had not been met, and that no awards should be paid
to executive officers who had no responsibility for an operating division
during any portion of the three-year measurement period. Three executive
officers had responsibility for the Hospital Division's operations during some
portion of the three-year measurement period and thus were eligible under the
terms of the plan for a pro-rata portion of the 50% of their awards earned
based on Hospital Division results. Such awards were paid based on the pre-
established formula for the Hospital Division.
On December 1, 1993, the Compensation Committee reviewed the appropriateness
of continuing to make cash LTIP award grants. Targets for the three-year period
ending in fiscal year 1996 normally would be set in fiscal year 1994, with the
amount earned determined by performance over the three-year period from June 1,
1993 through May 31, 1996. The Compensation Committee determined that the
interests of the shareholders would be best served by not granting LTIP cash
award opportunities for such three-year period. The Compensation Committee
instead granted Options (under the SIP) vesting on May 31, 1996 (the end of
such three-year period), thereby providing a direct incentive to the Company's
executives to focus on enhancing shareholder value. Although the Compensation
22
<PAGE>
Committee previously had determined that it would not grant Mr. Barbakow or Mr.
Focht additional Options as long-term awards under the 1991 Stock Incentive
Plan for a period of three years from the dates of Mr. Barbakow's June 1, 1993,
and Mr. Focht's October 1, 1993, awards described below, the Compensation
Committee determined that, as discussed above, it would be in the interests of
the shareholders to grant Mr. Barbakow 98,000 Options and Mr. Focht 59,000
Options, instead of granting the LTIP cash award opportunities for which they
were eligible for the three-year period beginning on June 1, 1993. A nationally
recognized outside compensation consulting firm determined the number of
Options granted to the executives by comparing the present value of the
opportunity value of the Options with the present value of the LTIP cash award
opportunities that would have been granted for such three-year period. The
opportunity value of the Options was calculated by taking the present value of
the gain expected upon the exercise of the Options five years from the date of
their grant at an assumed rate of appreciation in the price of the Company's
common stock. Each of the Options has an exercise price equal to the fair
market value of the Company's common stock on the date of grant and expires ten
years from the date of grant.
Stock Incentive Plan
The Compensation Committee grants stock-based incentive awards to executives
under the SIP in order to provide them with an interest in common with that of
the shareholders and an incentive to enhance the Company's long-term financial
performance, and thus, shareholder value.
In weighing the type and amount of SIP award that is appropriate for a given
executive, the Compensation Committee may consider such factors as that
executive's total compensation, expected future contributions to the Company,
current ownership of the Company's common stock and derivative securities,
awards previously made, the likelihood of being hired away and ability to
influence future financial performance. The Compensation Committee also may
consider the performance of the Company's common stock price and whether the
health care industry in general is experiencing growth or is in a less
favorable place in its business cycle. When the Company's common stock price
appreciates, so that shareholder value is enhanced, the benefits to the
executives will appreciate commensurately. When this is not true, the
executives will recognize lower gains or, in the case of certain types of
awards such as Options, no gains at all.
It is the Compensation Committee's current practice to rely primarily on the
grant of Options to provide long-term incentives to the executives. The
exercise price of Options granted to the executives under the SIP normally will
not be less than 100% of the fair market value of the Company's common stock on
the date such Option is granted. Options normally will vest ratably over three
years and normally will not be exercisable for at least one year after being
granted. Options generally will be exercisable during a term of not more than
ten years from the date of grant.
In certain circumstances, the Compensation Committee may grant Restricted
Units ("Units"). At the time of granting a Unit, the Compensation Committee
will determine the vesting period, normally ratably over three years, and the
maximum value thereof, normally the fair market value of a share of the
Company's common stock on the date of grant. On the last day of the vesting
period for each Unit, a cash amount equal to the fair market value of one share
of the Company's common stock on such day, subject to the pre-determined
maximum value established at the date of grant, will be paid with respect to
such Unit. During the performance or vesting period, the Compensation Committee
may provide for cash payments to be paid on each Unit at the times and in the
amounts that dividends are paid on shares of the Company's common stock
("dividend equivalents"). In its discretion, the Compensation Committee may
provide that one or more Options will expire on the vesting date of one or more
Units and/or that one or more Units will expire upon the exercise of one or
more Options.
In evaluating the type and amount of awards to be made under the SIP during
fiscal year 1994, the Compensation Committee considered the rapidly-changing
health care industry, the management
23
<PAGE>
changes that had taken place at the Company and the challenges facing the
Company as it focuses on its core business of operating domestic and
international general hospitals, as well as awards previously made. The
Compensation Committee reaffirmed its policy that long-term compensation
opportunity, including the opportunity value of SIP awards and LTIP awards, in
general should be in the broad middle range of other companies.
The Compensation Committee met on December 1, 1993, to consider granting SIP
Options (in addition to the Options granted in lieu of setting LTIP target cash
awards discussed above) to the then-existing executives (other than Mr.
Barbakow and Mr. Focht, since the Compensation Committee determined upon making
the grants described below not to make any additional SIP grants to them prior
to fiscal year 1996). Grants of Options at the then fair market value were made
to all of the executives (other than Messrs. Barbakow and Focht). Such Options
vest in equal portions over three years from the date of grant and expire ten
years from the date of grant. Such Option awards, when considered together with
the LTIP Option awards described above, provide those executive officers with a
long-term compensation opportunity in the broad middle range of that available
to executive officers holding similar positions in other companies generally.
As disclosed in the Company's proxy statement for fiscal year 1993, Mr.
Barbakow received a grant of 2,000,000 Options with an exercise price of $9.50
(the closing price of the Company's stock on the date of grant) on June 1, 1993
as part of his employment arrangements with the Company. One-third of the
Options vested on June 1, 1994, and an additional one-third will vest on each
of June 1, 1995 and 1996. As described in more detail under "Employment
Agreements" on page 27, the Options will become fully vested and exercisable
upon the occurrence of a "Change of Control." As noted above, the Compensation
Committee does not intend to make any additional SIP stock option grants
(except, if applicable, stock option grants that may be made in lieu of
granting LTIP cash award opportunities) to Mr. Barbakow prior to fiscal year
1996.
On October 1, 1993, the Compensation Committee authorized a special grant of
150,000 Units and 200,000 Options to Mr. Focht. The purpose of this grant was
to help ensure the retention of an individual the Compensation Committee judged
to be critical to the Company during the difficult transition period described
above. In making its judgment, the Compensation Committee considered his unique
importance as the senior hospital management executive remaining with the
Company, the new duties and responsibilities he had assumed and the risk of
erosion of shareholder value if he were to leave the Company at that time. The
Units vest at the end of three years and have a maximum value equal to the fair
market value of the Company's common stock on the date of grant. During the
vesting period, the Compensation Committee has agreed to provide for dividend
equivalents to be paid on each Unit when dividends are paid on the Company's
common stock. The Options vest one-third per year over three years, expire ten
years from the date of grant and have an exercise price equal to the fair
market value of the Company's common stock on the date of grant ($9.625). In
addition, the Units and Options will vest immediately if Mr. Focht is
terminated without cause or constructively terminated. Constructive termination
is defined as (a) removing Mr. Focht from the position of President and Chief
Operating Officer, (b) reducing his then-current base salary or (c)
transferring his principal office to a location outside of Los Angeles, Ventura
or Santa Barbara County. As noted above, the Compensation Committee does not
intend to make any additional SIP stock option grants (except, if applicable,
stock option grants made in lieu of granting LTIP cash award opportunities) to
Mr. Focht for three years from the date of grant.
POLICY REGARDING ONE MILLION DOLLAR TAX DEDUCTION CAP
The Omnibus Budget Reconciliation Act of 1993 generally provides that for
fiscal years beginning after December 31, 1993, compensation in excess of
$1,000,000 paid to the Chief Executive Officer and the four most highly
compensated other executive officers (the "Covered Employees") will not be
deductible, unless such compensation is paid according to pre-established
performance criteria
24
<PAGE>
approved in advance by the shareholders. In addition, awards of Options or
stock appreciation rights granted at fair market value under the Company's SIP
and the proceeds thereof are not subject to the $1,000,000 cap.
In fiscal 1994 the Board of Directors approved the 1994 Annual Incentive Plan
(the "1994 AIP") upon the recommendation of the Compensation Committee. The
1994 AIP, which will replace the AIP if approved by the shareholders, is
described in more detail on page 36. The Committee believes that the 1994 AIP
will permit the Company to pay an award to Covered Employees and still deduct
the compensation in excess of $1,000,000 from its federal income taxes in
accordance with Section 162(m) of the Internal Revenue Code of 1986, as amended
(the "Code"). It is the intent of the Compensation Committee that the 1994 AIP
and certain awards thereunder ("Code Section 162(m) Awards") satisfy, in the
case of participants who are or may be Covered Employees, the applicable
requirements of Code Section 162(m). The amount available for awards under the
1994 AIP in any year shall be determined by the Compensation Committee. The
aggregate maximum award payable under the 1994 AIP to a Covered Employee with
respect to any year is $1,500,000.
It is the Compensation Committee's policy to administer executive
compensation in conformance with the provisions of Code Section 162(m), except
where, in its judgment, the interests of the Company and its shareholders are
better served by a different approach. A participant who is or may be a Covered
Employee may receive an award under the 1994 AIP or other compensation that is
not a Code Section 162(m) Award, but such award or other compensation may
result in compensation that is not deductible by the Company for federal income
tax purposes.
SUMMARY
The Compensation Committee is committed to attracting, motivating and
retaining executives who will help the Company meet the increasing challenges
of the health care industry. The Compensation Committee recognizes its
responsibility to the Company's shareholders and intends to continue to
establish and implement compensation policies that are consistent with
competitive practice, are based on the Company's and the executives'
performance and permit the Company to attract, motivate and retain executives
who will lead the Company in providing quality health care to its patients,
competitive returns for its shareholders and challenging employment
opportunities for its employees.
This Report has been provided by the Compensation and Stock Option Committee
of the Board of Directors of the Company.
Bernice Bratter (Chairperson)
Maurice J. DeWald
Hon. Lester B. Korn
25
<PAGE>
COMMON STOCK PERFORMANCE GRAPH
The following graph shows the cumulative, five-year total return for NME's
common stock compared with the Standard & Poor's 500 Stock Index (which
includes NME), the Standard & Poor's Health Care Composite Index (a group of 29
companies, including NME) and a peer group of companies (described below). The
Company is pleased by the recovery of its common stock performance since June
1, 1993, when its new management team was put in place.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN
AMONG NATIONAL MEDICAL ENTERPRISES, INC., S&P 500 INDEX,
S&P HEALTH CARE COMPOSITE INDEX AND PEER GROUP
<TABLE>
<CAPTION>
Measurement Period NATIONAL MEDICAL S&P S&P HEALTH CARE
(Fiscal Year Covered) ENTERPRISES, INC. 500 INDEX COMPOSITE INDEX PEER GROUP INDEX
- ------------------- ----------------- --------- --------------- ----------------
<S> <C> <C> <C> <C>
Measurement Pt- MAY, 1989 $100 $100 $100 $100
FYE MAY-1990 $127.21 $116.51 $126.52 $139.47
FYE MAY-1991 $164.23 $130.27 $170.33 $177.32
FYE MAY-1992 $106.75 $143.21 $170.90 $121.73
FYE MAY-1993 $ 73.65 $159.83 $148.67 $123.24
FYE MAY-1994 $128.27 $165.20 $146.60 $239.20
</TABLE>
Performance data assumes that $100.00 was invested on June 1, 1989 in NME
common stock, the two Standard & Poor's indices and the peer group. The data
assumes the reinvestment of all cash dividends, and the cash value of other
distributions. Stock price performance shown in the graph is not necessarily
indicative of future stock price performance.
The peer group is weighted by market capitalization, and consists of:
American Medical Holdings, Inc., Community Psychiatric Centers ("Community"),
Continental Medical Systems, Inc. ("Continental"), Healthsouth Rehabilitation
Corp. ("Healthsouth"), Humana, Inc., until its spinoff of Galen Health Care,
Inc. ("Galen") on March 1, 1993, and Galen thereafter until its acquisition by
Columbia-HCA Healthcare Corporation (formerly Columbia Healthcare Corp.)
("Columbia"), on September 1, 1993, and Columbia thereafter. Healthtrust, Inc.
was added to the peer group beginning June 1, 1992, following its initial
public offering. HCA-Hospital Corporation of America is also included beginning
June 1, 1992, following its public offering, until its acquisition by Columbia
on February 10, 1994, and was replaced by Columbia thereafter.
26
<PAGE>
During fiscal 1994, two companies in the peer group, accounting for 60% of
the weighted index in that year, Galen and HCA, were acquired by a third,
Columbia. Three other companies, Community, Continental and Healthsouth, which
together accounted for 14% of the weighted index in fiscal year 1994, are no
longer significant competitors of the Company due to the Company's sale of
substantially all of its rehabilitation hospitals and the sale or closure of
substantially all of its psychiatric facilities in fiscal year 1994.
Because of the significant changes in the Company's business, the changes in
control of a majority of the peer group on a weighted basis and the prospect of
continuing changes in the structure and ownership of the Company's competitors,
the Company believes that its original peer group index no longer provides a
consistent or valid benchmark for its performance. Beginning with this year,
the Company will use the Standard & Poor's Healthcare Composite Index (which
includes NME) as its peer group. The Healthcare Composite Index currently
includes 29 companies engaged in a variety of health care service and product
businesses. Because of the number and diversity of component companies, the
index is likely to provide a more consistent basis for comparison over a period
of several years. The performance of this index also is available to
shareholders on a continuing basis from various financial publications.
EMPLOYMENT AGREEMENTS
MR. BARBAKOW
Mr. Barbakow was elected President and Chief Executive Officer of the Company
on June 1, 1993. On July 28, 1993, Mr. Barbakow was elected Chairman of the
Board and relinquished the position of President to Michael H. Focht, Sr., who
was elected President. Mr. Barbakow does not have a formal employment
agreement, but the terms of his employment are set forth in letters dated May
26 and June 1, 1993, and a memorandum dated June 14, 1993. His initial annual
base salary is $850,000 and he will participate in the Company's AIP, LTIP,
pension and other benefit plans. In addition, he will receive the same type of
fringe benefits and perquisites that are provided to other executive officers.
Mr. Barbakow is guaranteed minimum annual bonuses of $500,000 for the fiscal
years ending in 1994, 1995 and 1996 if the average closing price of NME's
common stock during April and May of those years exceeds $12.00, $13.25 and
$14.50, respectively. Mr. Barbakow was paid a bonus of $892,500 for fiscal year
1994. Even if the 1995 common stock price target is not met, the minimum
cumulative annual bonuses for the three years will be $1,500,000 if the average
closing price of NME's common stock during April and May of 1996 exceeds
$14.50. In the event of involuntary termination without cause or "constructive
termination" (as such term is described below) of Mr. Barbakow's employment
with NME, payment of the foregoing aggregate guaranteed bonus amounts will be
accelerated to the extent of the lesser of (i) the product of $1,500,000
multiplied by the fraction of which the numerator is (A) the cumulative number
of shares that are vested pursuant to the terms of the "Barbakow Options"
discussed below, and the denominator is (B) 2,000,000, or (ii) $500,000,
$1,000,000 or $1,500,000 if the average closing price of NME's common stock on
the New York Stock Exchange during the sixty days preceding his termination
exceeds $12.00, $13.25 or $14.50 per share, respectively. Payment of any
guaranteed bonus amounts upon termination will be reduced by the cumulative
annual bonuses previously paid to Mr. Barbakow.
On June 1, 1993, Mr. Barbakow received a grant under the SIP of non-qualified
Options for 2,000,000 shares of NME common stock (the "Barbakow Options"). Each
of the Barbakow Options has an exercise price of $9.50, which was the closing
price of NME common stock on the grant date, and a term of ten years. One-third
of the Barbakow Options vested on June 1, 1994, and one-third will vest on each
of June 1, 1995 and 1996. In the event of involuntary termination without cause
or constructive termination (as such term is defined below) of Mr. Barbakow's
employment at any time
27
<PAGE>
after a "Change of Control" (as such term is defined below), all 2,000,000 of
the Barbakow Options will become fully vested and exercisable as of the date of
such termination of employment. In the event of involuntary termination without
cause or constructive termination of Mr. Barbakow's employment without a Change
of Control, a portion of the Barbakow Options equal to (a) (i) 2,000,000
multiplied by (ii)(A) the number of full months that have elapsed from June 1,
1993 to the date of termination of employment divided by (B) 36 months, minus
(b) the number of shares vested on or before the date of the involuntary
termination without cause or constructive termination, but in no event for less
than 500,000 shares, will become vested and exercisable as of the date of such
termination.
In addition to the accelerated bonus payments and the accelerated vesting of
the Barbakow Options discussed above, in the event of Mr. Barbakow's
termination, he will receive the benefits he is entitled to under the Company's
pension and other benefit plans and any other benefits that may be approved at
such time by the Board.
"Constructive termination" is defined as voluntary termination of employment
by Mr. Barbakow following (i) his removal as Chief Executive Officer of the
Company, (ii) a reduction in the annual base salary then paid to him, or (iii)
transfer of his principal office to a location outside of Los Angeles, Ventura
or Santa Barbara County. A "Change of Control" of the Company is deemed to have
occurred if any person (defined to mean an individual, firm, corporation or
other entity), alone or together with its affiliates and associates (as defined
in Rule 12b-2 of the General Rules and Regulations under the Securities
Exchange Act of 1934) becomes the beneficial owner of 20% or more of the
general voting power of the Company.
A special-purpose committee of the Board retained a nationally-recognized
compensation consulting firm to assist it in negotiating the terms of Mr.
Barbakow's employment and received an opinion from that firm stating that the
terms of his employment were fair and reasonable.
MR. BEDROSIAN
Mr. Bedrosian was employed by the Company under a December 1990 employment
agreement through September 24, 1993, when his employment with the Company was
terminated by the Company without cause pursuant to the terms of that
agreement. A number of items related to the termination of Mr. Bedrosian's
employment with the Company and certain terms of Mr. Bedrosian's employment
agreement are the subject of litigation between Mr. Bedrosian and the Company
and are discussed on page 32.
CONSULTING, SEVERANCE, NONCOMPETITION AND CONFIDENTIALITY AGREEMENTS
Taylor R. Jenson, who was an executive officer through August 31, 1993,
entered into a Consulting and Separation Agreement and General Release with the
Company effective September 1, 1993. Under the terms of that agreement Mr.
Jenson will remain an employee of the Company through August 1995 and will be a
consultant to the Company through August 1998. Mr. Jenson's base salary will be
$275,000 through August 1994 and $225,000 from September 1994 through August
1995. His consulting fee will be $155,000 from September 1995 through August
1996, $100,000 per year from September 1996 through August 1998. Mr. Jenson
also will receive certain other benefits through the term of the agreement,
including being eligible to receive an AIP award through fiscal year 1995.
Marcus E. Powers, who was General Counsel (and an executive officer) through
July 15, 1993, retired from the Company effective July 15, 1993 and entered
into a Consulting Agreement and General Release with the Company effective on
that date. Under the terms of that agreement, Mr. Powers continued to receive
his base salary from the Company through July 14, 1994 and agreed to be a
consultant to the Company through July 14, 1998. His consulting fee will be
$150,000 from July 15, 1994 through July 14, 1995 and $75,000 from July 15,
1995 through July 14, 1996. In return for Mr. Powers'
28
<PAGE>
availability as a consultant during the period July 15, 1996 through July 14,
1998, his SERP benefits have been enhanced by approximately $12,000 per year
for so long as his annual benefits under the SERP are payable. He also will be
entitled to exercise his PIP investment options in accordance with the terms
thereof through their expiration in April 1996 and receive all benefits
available to a retiree. In addition, the vesting of certain of Mr. Powers'
Options and restricted shares was accelerated to May 31, 1994.
The duties of two executive officers, William S. Banowsky and Vincent J.
Lico, are being consolidated into the duties of remaining positions. Messrs.
Banowsky and Lico will remain with NME through August 31, 1994, and October 31,
1994, respectively, following which they will receive separation benefits in
the form of salary and benefits continuation for 24 months. At the end of the
24 months Messrs. Banowsky and Lico will be eligible for their retirement
benefits.
On June 28, 1994, the Company entered a Severance Protection Agreement (the
"Schochet Agreement") with Barry Schochet, the President and Chief Operating
Officer of the Company's Hospital Division. The Schochet Agreement provides
that if (a) a Change of Control (which is defined in the Schochet Agreement the
same as it is defined in the SERP as set forth on page 17) occurs within two
years of the date of the Schochet Agreement, and (b) at any time within the two
years following the date of the Change of Control a Constructive Termination
(which is defined in the Schochet Agreement the same as it is defined in the
SERP as set forth on page 17) of Mr. Schochet's employment with the Company
occurs, the Company will pay Mr. Schochet two times his annual base salary then
in effect within 30 days after such termination. In the event of a termination
of employment under the Schochet Agreement on terms entitling Mr. Schochet to
the benefits thereunder, the provision in the SERP prohibiting benefits from
being paid to a participant if the participant becomes an employee or
consultant of a competitor of the Company within three years of leaving the
Company is waived. In no event will (x) the total payments under the Schochet
Agreement that are deemed to be contingent upon a Change of Control in
accordance with Section 280G of the Code, when added to (y) the present value
of all other payments that are payable to Mr. Schochet and are contingent upon
a Change of Control, exceed an amount equal to 299% of his "base amount" as
that term is defined in Code Section 280G and the regulations thereunder.
RELATED PARTY TRANSACTIONS
CERTAIN BUSINESS RELATIONSHIPS
In fiscal year 1994, the Company paid Robert de Wetter, Ph.D., a licensed
psychologist, $170,388 for his services as a psychologist to various NME
facilities. In addition, Dr. de Wetter was reimbursed $18,714 for expenses. Dr.
de Wetter is Peter de Wetter's son. Additionally, in fiscal year 1994 the
Company made charitable contributions of $71,750, which accounted for
approximately 3.5% of gross revenues, to Senior Health and Peer Counseling. Ms.
Bratter is the executive director of Senior Health and Peer Counseling.
29
<PAGE>
INDEBTEDNESS OF MANAGEMENT
The following table reflects for each person who was at July 31, 1994, an
executive officer or director of NME, the largest aggregate amount of
indebtedness outstanding at any one time (exceeding $60,000 per individual) to
the Company during the period from June 1, 1993, through July 31, 1994, and the
amount of indebtedness at July 31, 1994:
<TABLE>
<CAPTION>
LARGEST
AGGREGATE AMOUNT
AMOUNT OF OUTSTANDING
INDEBTEDNESS ON JULY 31,
NAME CAPACITY IN WHICH SERVED OUTSTANDING(1) 1993(1)
---- ------------------------ -------------- -----------
<C> <S> <C> <C>
John C. Bedrosian....... Director $4,148,016 $4,148,016
Michael H. Focht, Sr.... Director, President and
Chief Operating Officer 745,859 196,483
Nita P. Heckendorn...... Director 231,486 0
Maris Andersons......... Executive Vice President
and Treasurer 1,088,074 0
William S. Banowsky..... Executive Vice President 62,031 0
Vincent J. Lico......... Executive Vice President 176,454 0
Raymond L. Mathiasen.... Senior Vice President
and Chief Financial
Officer 170,009 65,914
</TABLE>
- --------
(1) The nature of the indebtedness, the nature of the transactions in which it
was incurred and the interest rate paid or charged thereon are discussed
below.
Except as described below, the amounts shown above consist of principal and
accrued interest on (a) full recourse five-year promissory notes bearing
interest at rates of 6.5%, 8% and 9% given to purchase NME common stock under
the Company's stock option plans and (b) promissory notes given to NME upon its
deposit of the optionees' federal and state income taxes under withholding
requirements. Shares purchased or vested are pledged as security for these
notes. The tax notes bear interest at 8% (except one note at 6.5%) and are
payable on or before April 15 of the succeeding calendar year, unless such date
otherwise is extended by the Company.
Mr. Andersons borrowed $850,000 in fiscal year 1993. That loan, which was
secured and bore interest at the prime rate until July 1, 1993, at which time
the interest rate became prime plus 1%, was repaid in full on July 29, 1994.
As discussed in more detail on page 32, the Company and Mr. Bedrosian are
engaged in litigation over various matters, including the status of loans made
by the Company to Mr. Bedrosian. Mr. Bedrosian currently is a director and was
Senior Executive Vice President of the Company through September 24, 1993. On
January 6, 1992, the Company loaned Mr. Bedrosian $504,405.98 at 6.5% interest.
The interest owed on that loan as of May 31, 1994, was $79,687.05. That loan
was evidenced by a note and secured by shares of the Company's common stock. In
addition, NME loaned Mr. Bedrosian $1,000,000 on October 6, 1992, and $300,000
on March 8, 1993, with interest payable at the prime rate, as that rate may
fluctuate from time to time. The interest due on those loans as of May 31,
1994, was $122,757.55. The $1,000,000 loan and the $300,000 loan were made on a
demand basis and were secured by previously-granted unvested restricted shares
being held by the Company. On May 31, 1994, the Superior Court for the County
of Los Angeles granted the Company's motions with respect to Mr. Bedrosian's
repayment to NME of all of the principal and interest due with respect to each
of the three loans referred to above.
On March 8, 1990, the Company loaned Mr. Bedrosian $787,239.13 at 9%
interest. The interest owed on that loan through May 31, 1994, was $101,553.91.
On March 8, 1990, the Company also loaned Mr. Bedrosian $552,915.60 at 8%
interest. The interest owed on that loan through May 31, 1994, was $63,400.95.
On January 5, 1993, the Company loaned Mr. Bedrosian $543,441.67 at 6%
interest.
30
<PAGE>
The interest owed on that loan through May 31, 1994, was $46,282.15. Each of
those loans is evidenced by a note and is secured by shares of the Company's
common stock. Mr. Bedrosian is in default on the principal and interest
payments on those loans. The Company intends to ask the court to order Mr.
Bedrosian to repay all of the principal and interest owed on those notes and
expects the court to order Mr. Bedrosian to do so.
The Company does not intend to make any similar loans in the future. No
similar loans may be made in the future without the prior approval of the
Compensation Committee.
CERTAIN LEGAL PROCEEDINGS
The shareholder derivative actions filed in the Los Angeles Superior Court in
October and November of 1991 were consolidated into one shareholder derivative
action entitled Harry Polikoff, Harry Ackerman, and Bette Rita Grayson,
Derivatively on Behalf of Nominal Defendant National Medical Enterprises, Inc.
v. Richard K. Eamer, Leonard Cohen, John C. Bedrosian, William S. Banowsky,
Ph.D., Jeffrey C. Barbakow, Bernice B. Bratter, Maurice J. DeWald, Peter de
Wetter, Edward Egbert, M.D., Michael H. Focht, Sr., Raymond A. Hay, Nita P.
Heckendorn, Taylor R. Jenson, Lloyd R. Johnson, James P. Livingston, A.J.
Martinson, M.D., Howard F. Nachtman, M.D., Richard S. Schweiker, Richard L.
Stever, Norman A. Zober, Maris Andersons, Scott M. Brown, Raymond L. Mathiasen
and Marcus E. Powers, Defendants. Plaintiffs' suit was based primarily on
alleged breaches of fiduciary duties and constructive fraud on the part of the
individual defendants. The plaintiffs alleged that, among other things, the
individual defendants knew or should have known of allegedly improper
marketing, billing and other practices within what formerly was known as the
Company's Specialty Hospital Group and failed to take appropriate action as
required by their fiduciary responsibilities. Based on these claims, plaintiffs
sought compensatory damages on behalf of the Company, punitive damages,
injunctive relief, attorneys' fees, interest and costs. Defendants filed three
separate demurrers that were sustained and resulted in dismissal of the action
with prejudice on May 21, 1993. The derivative action was dismissed by the
court in May, 1993, but the dismissal is being appealed by the plaintiffs. The
parties have been participating in a voluntary mediation process, which
commenced in February, 1994 and has included directors and officers liability
insurance carriers. As a result of the voluntary mediation process, the
Company, the other parties to this action and the Company's officers' and
directors' liability insurance carriers have reached an agreement in principle
to settle this matter subject to agreement to contractual terms and court
approval.
The federal class action lawsuits filed in October and November of 1991 were
consolidated into one action now pending in the U.S. District Court in the
Central District of California entitled In Re National Medical Enterprises,
Inc. Securities Litigation I. The defendants in this action are National
Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen, John C. Bedrosian,
William S. Banowsky, Michael H. Focht, Norman A. Zober, Marcus E. Powers and
Maris Andersons. The action is a consolidated class action against each of the
named defendants for alleged violations of Section 10(b) of the Securities
Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew
or recklessly disregarded that the public statements made by the Company and
several of its officers and directors in reports to the Securities and Exchange
Commission, in press releases, communications with shareholders, and
communications with the financial community were false and misleading because
the financial data and projections were based upon a number of alleged illegal
practices at many of NME's psychiatric facilities. Plaintiffs claim that each
of the defendants was a direct participant in this wrongdoing and conspired
with and aided and abetted each of the other defendants in perpetrating the
alleged fraudulent scheme. Plaintiffs also challenge various transactions in
which each of the defendants sold shares of NME stock. Based on these claims,
plaintiffs seek compensatory damages, injunctive relief, attorneys' fees,
interest and costs. Currently, this action is in the discovery stage and no
trial date has been set. In February 1994, the parties and the Company's
insurance carriers commenced a voluntary mediation. As a result of the
voluntary mediation process, the
31
<PAGE>
Company, the other parties to this action and the Company's officers' and
directors' liability insurance carriers have reached an agreement in principle
to settle this matter, subject to agreement to contractual terms and court
approval.
On August 27, 1993, a federal lawsuit entitled Jerrold Schaffer and Jayne M.
Furman v. National Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen,
Jeffrey Barbakow and Michael H. Focht, Sr. was filed in the U.S District Court
in the Central District of California. On August 31, 1993, a federal lawsuit
entitled Bernard Weisfeld v. National Medical Enterprises, Inc., Richard K.
Eamer, Leonard Cohen, Jeffrey Barbakow and Michael H. Focht, Sr. was filed in
the U.S District Court in the Central District of California. On December 20,
1993, the United States District Court for the Central District of California
ordered that these cases be consolidated into one action, captioned In re:
National Medical Enterprises Securities Litigation II. These consolidated
actions are on behalf of a purported class of shareholders who purchased or
sold stock of the Company between January 14, 1993 and August 26, 1993, and
allege that each of the defendants violated Section 10(b) of the Securities
Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew
or recklessly disregarded that the public statements made by the Company and
several of its officers and directors in reports to the Securities and Exchange
Commission, in press releases, communications with shareholders, and
communications with the financial community were false and misleading because
the financial data and projections were based upon a number of alleged illegal
practices at many of NME's psychiatric facilities. Plaintiffs claim that each
of the defendants was a direct participant in this wrongdoing and conspired
with and aided and abetted each of the other defendants in perpetrating the
alleged fraudulent scheme. Based on these claims, plaintiffs seek compensatory
damages, injunctive relief, attorneys' fees, interest and costs. The parties
commenced a voluntary mediation in July, 1994. If the mediation is not
successful, plaintiffs will be required to file an amended and consolidated
complaint in the action. The Company believes it has meritorious defenses to
this action and will defend this litigation vigorously.
On August 16, 1993, the Company was served with a lawsuit in the matter of
Nita P. Heckendorn vs. National Medical Enterprises, Inc., Jeffrey C. Barbakow,
Raymond A. Hay, Maurice J. DeWald and Peter de Wetter. Ms. Heckendorn is a
director and former officer of the Company. Ms. Heckendorn, who joined the
Company in 1982, alleges sex discrimination in employment and retaliation;
sexual harassment; breach of implied employment contract; constructive
discharge in violation of public policy and the California Fair Employment and
Housing Act; tortious interference with prospective economic advantage;
defamation; and intentional infliction of emotional distress. The suit seeks
damages in excess of $15,000,000 for wages, earnings and other benefits,
punitive damages, attorneys fees and costs of suit and other equitable relief.
The plaintiff filed an amended complaint on November 4, 1993. Defendants filed
a demurrer to plaintiff's amended complaint. On January 6, 1994, the Court
sustained defendants' demurrer in part, dismissing certain claims, and denied
defendants' demurrer in part. The remaining claims are pending and the parties
have engaged in discovery. In March, 1994, plaintiff filed a motion for summary
judgment seeking judgment on her claim for retaliatory discharge. After taking
plaintiff's deposition in the Spring of 1994, Defendants filed a cross-motion
for Summary Judgment seeking dismissal of several of plaintiff's claims. In
August, 1994, defendants filed an additional motion for summary judgment on
plaintiff's remaining claims. All three of those motions are set for hearing on
September 19, 1994, and the case is set for trial in mid-December, 1994. The
Company believes that Ms. Heckendorn's claims are without merit.
On October 5, 1993, John Bedrosian filed the lawsuit John C. Bedrosian vs.
National Medical Enterprises, Inc., Jeffrey C. Barbakow, Michael H. Focht, Sr.,
Bernice B. Bratter, Maurice J. DeWald, Peter de Wetter and Lester B. Korn in
the Los Angeles Superior Court. Mr. Bedrosian, who is a director of the Company
and served as its Senior Executive Vice President until September 24, 1993 when
his employment with the Company was terminated without cause pursuant to the
terms of his employment agreement with the Company, alleged: breach of oral
agreement; breach of implied in fact contract; breach of the covenant of good
faith and fair dealing; negligent misrepresentation of material fact; bad
32
<PAGE>
faith denial of existence of a contract; breach of written agreement; age
discrimination in employment; libel; tortious interference with contractual
relations; conspiracy to interfere with contractual relations; and intentional
infliction of emotional distress. The suit seeks damages in excess of
$20,000,000, exemplary and punitive damages, declaratory relief, including
relief from six loans he obtained from the Company totaling $3,730,251.27,
attorneys fees and costs of suit and other equitable relief. The Company has
filed a cross-complaint against him for his refusal to make repayment on his
six loans. The Company also filed a motion to have the portion of Mr.
Bedrosian's lawsuit that pertains to his employment agreement with the Company
referred to a Superior Court Referee as provided in the employment agreement.
The Company's motion was granted and Mr. Bedrosian's employment claims against
the Company were referred to a Superior Court Referee for trial. Before that
trial began, the Company filed motions for summary judgment on several of Mr.
Bedrosian's claims and on its cross-complaint against Mr. Bedrosian for his
failure to repay his loans. The Company's motions were granted as to several of
Mr. Bedrosian's claims against the Company, and also as to its claims against
Mr. Bedrosian on three of his six loans totalling approximately $1,997,500. The
Court declined to grant the Company's motion regarding Mr. Bedrosian's three
remaining loans but allowed the Company to supplement its cross-complaint to
reflect that those loans had since become due and payable. The Company has
supplemented its cross-complaint and intends to renew its motion for summary
judgment on Mr. Bedrosian's three remaining loans. The trial of Mr. Bedrosian's
employment-related claims took place in June and July, 1994 before a retired
California Superior Court Judge. During that trial, the Court granted
defendants' motion to have certain other of Mr. Bedrosian's employment claims
dismissed. The trial on Mr. Bedrosian's two remaining claims was concluded on
July 29, 1994. A decision on those claims is expected in August, 1994.
SHARES OWNED BY CERTAIN SHAREHOLDERS
As of August 24, 1994 no person was known by the Company to beneficially own
more than 5% of its outstanding common stock.
2. 1994 DIRECTORS STOCK OPTION PLAN
The 1994 Directors Stock Option Plan (the "DSOP"), if approved by the
shareholders, will replace the Restricted Plan discussed on page 11. The DSOP
was approved by the Board, subject to the approval of the shareholders, on
January 26, 1994. The Company believes the DSOP promotes the interests of the
Company and its shareholders by strengthening the Company's ability to attract,
motivate and retain Directors of training, experience and ability, and by
encouraging the highest level of Directors' performance by providing Directors
with a proprietary interest in the Company's financial success and growth. The
primary features of the DSOP are summarized below. A copy of the DSOP is
attached as Exhibit A and should be referred to for a complete statement of the
terms of the DSOP.
PLAN SUMMARY
ADMINISTRATION
The DSOP is administered by the Compensation Committee, which is composed of
non-employee directors who are eligible to participate in the DSOP. The
Compensation Committee shall have the power to interpret the Plan, and subject
to its provisions, to prescribe, amend and rescind rules and to make all other
determinations necessary for the DSOP's administration. All action taken by the
Compensation Committee in the administration and interpretation of the DSOP
shall be final and binding upon all parties. No member of the Compensation
Committee will be liable for any action or determination made in good faith by
the Compensation Committee with respect to the DSOP or any
33
<PAGE>
option. The Board will have the power, in its discretion, to amend, suspend or
terminate the DSOP at any time, subject to the approval of the shareholders if
and to the extent necessary for the continued applicability of Rule 16b-3 under
the Exchange Act. The Board may not, however, amend the eligibility
requirements or the granting schedule more than once every six months other
than to comport with changes in the Internal Revenue Code (the "Code"), the
Employee Retirement Income Security Act ("ERISA") or the rules thereunder.
Furthermore, no amendment, suspension or termination of the DSOP, may alter,
terminate, impair or adversely affect any rights or obligations under any
option previously granted without the consent of the holder.
ELIGIBILITY AND GRANTS
Only non-employee directors of the Company are eligible to participant in the
DSOP. Such non-employee directors are not eligible to receive new awards in the
SIP. Following the Annual Meeting, eight non-employee directors will be
participants in the DSOP. Participants will be granted an option to acquire
5,000 shares of common stock of the Company on the last Thursday of January of
each year. In addition, upon initial election to the Board, a non-employee
director will be granted an option to acquire 5,000 shares of common stock on
the last Thursday of the month of such director's election to the Board.
Subject to certain adjustment provisions described in the DSOP, the aggregate
number of shares of common stock that may be acquired upon the exercise of
Options under the DSOP is 500,000. The closing price of the Company's common
stock on August 15, 1994 was $18.375.
Subject to the approval of the shareholders, each non-employee director as of
January 27, 1994 will receive an option to purchase 5,000 shares of the
Company's common stock with a date of grant of January 27, 1994. At such time,
there were 10 non-employee directors. Two of those 10 were not renominated by
the Board to serve an additional term as director.
OPTION TERMS AND CONDITIONS
The maximum term of an option is 10 years from the date of grant. The option
will be exercisable one year from the date of grant. The exercise price will be
the fair market value of a share of common stock on the date of grant. The
exercise price may be paid (i) in cash, or, (ii) with the consent of the
Compensation Committee in its sole discretion, and if otherwise legally
permitted, by delivering to the Company shares of common stock owned by the
holder of the option for at least six months, with a fair market value on the
relevant exercise date equal to the exercise price, (iii) with the consent of
the Compensation Committee in its sole discretion by a promissory note secured
by such number of shares of common stock determined by the Compensation
Committee bearing interest at a rate determined by the Compensation Committee,
or (iv) by a combination of any of the above.
Each option will expire at the time a non-employee director ceases to be a
non-employee director, except as described below. If a non-employee director is
terminated other than for cause (as determined solely by the Company), or if a
director is nominated but not reelected by the shareholders, then the option
will expire one year after the date of termination unless during such one year
period, the non-employee director dies or becomes permanently and totally
disabled in which case the option will expire one year from the date of death
or permanent and total disability. If the non-employee Director retires at the
Company's normal retirement age (59 1/2) or with the consent of the
Compensation Committee, then the option will expire five years after the date
of termination unless during such five year period, the non-employee director
dies or becomes permanently and totally disabled, in which case the option will
expire upon the later of five years after retirement or one year after the date
of death or permanent and total disability. If the non-employee director dies
or becomes permanently and totally disabled while serving as a non-employee
director, then the option will expire five years after the date of death or
permanent and total disability. Notwithstanding anything above to the contrary,
the maximum term of an option is ten years from the date of grant.
34
<PAGE>
No option or right under the DSOP will be assignable or subject to any
encumbrance, pledge or charge of any nature except (i) with the written consent
of the Compensation Committee, (ii) transfer or assignment in favor of the
Company, and (iii) under such rules as the Compensation Committee may establish
pursuant to the terms of the DSOP. Furthermore, no option or right under the
DSOP is transferable by a holder other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Code or Title I of ERISA or the rules thereunder. The designation by a
holder of a beneficiary is not a transfer.
DURATION
Unless the DSOP is previously terminated, the DSOP will terminate on January
26, 2004, except with respect to Options then outstanding.
ADJUSTMENT
If the outstanding shares of common stock of the Company are increased,
decreased or exchanged for a different number or kind of shares or other
securities, or if additional shares or new or different shares or other
securities are distributed with respect to such shares of common stock or other
securities, through merger, consolidation, spin-off, the sale of all or
substantially all the assets of the Company, reorganization, recapitalization,
reclassification, stock dividend, stock split, reverse stock split or other
distribution with respect to such shares of common stock, or other securities,
then an appropriate and proportionate adjustment may be made in (i) the maximum
number and kind of shares covered by the DSOP and (ii) the number and kind of
shares of other securities subject to, and the exercise price of, then
outstanding Options. Notwithstanding the above, upon dissolution, liquidation,
reorganization, merger or consolidation involving the Company as a result of
which the Company is not the surviving corporation, or upon the sale of all or
substantially all of the assets of the Company, all Options then outstanding
under the DSOP will be deemed fully vested unless provisions are made in
connection with such transaction for the continuance of the DSOP or the
assumption or substitution of such Options with new Options of the surviving
corporation.
Upon the occurrence of a change in control or in the event that any person
makes a filing with respect to the Company under Section 13(d) or 14(d) of the
Exchange Act, then all then outstanding Options will be deemed fully vested. A
change in control shall have occurred when one person becomes the beneficial
owner of 20% or more of the common stock of the Company in a transaction or
series of transactions not approved in advance by the Board.
FEDERAL TAX CONSEQUENCES
A non-employee director who receives an Option under the DSOP will not
recognize any income, nor will the Company be entitled to any tax deduction, in
the year of the grant. At the time that an option is exercised, the non-
employee director will recognize ordinary income in an amount equal to the
excess of (a) the Fair Market Value of the shares purchased over (b) the
exercise price paid for such shares. The Company will be entitled to a
deduction in an amount equal to the amount includable in the income of the non-
employee director, in the taxable year in which the non-employee director is
required to recognize the income.
NEW PLAN BENEFITS
No New Plan Benefits Table is provided herein with respect to the DSOP
because, as described on page 34, the only people eligible to receive grants
under the plan are the non-employee directors of the Company (each of whom is
eligible to receive 5,000 Options each year).
35
<PAGE>
Since the non-employee directors will receive 5,000 Options each year under
the DSOP and were entitled to 5,400 restricted shares each year under the
Restricted Plan, the DSOP represents a reduction in compensation for the non-
employee directors in comparison to the Restricted Plan.
Approval of the DSOP by the shareholders requires the affirmative vote of the
majority of the votes cast at the Annual Meeting. Abstentions will count as no
votes. If the stockholders do not approve the Plan, the Options already granted
will be of no force and effect and the Restricted Plan will continue in effect.
THE BOARD RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL OF THE 1994
DIRECTORS STOCK OPTION PLAN.
3. 1994 ANNUAL INCENTIVE PLAN
The Board of Directors approved the 1994 AIP upon the recommendation of the
Compensation Committee. The Plan is intended to replace the AIP. The purpose of
the 1994 AIP is to enhance shareholder value and promote the attainment of
significant business objectives of the Company by basing a portion of an
employees' compensation on the performance of such employee, the Company,
and/or his or her business unit.
Effective for compensation otherwise deductible in taxable years beginning
after December 31, 1993, Section 162(m) of the Code, enacted as part of the
Omnibus Budget Reconciliation Act of 1993, generally precludes a publicly held
corporation from taking a federal income tax deduction for compensation in
excess of $1 million paid to Covered Employees (as defined in Section 162(m)(3)
of the Code). Exceptions are made for, among other things, qualified
performance-based compensation. It is the intent of the Company that the Plan
and Code Section 162(m) Awards (as defined in the 1994 AIP) thereunder satisfy,
in the case of participants who are or may be Covered Employees, the applicable
requirements of Code Section 162(m). A participant who is or may be a Covered
Employee nevertheless may receive an award under the 1994 AIP that is not a
Code Section 162(m) Award, which award may result in compensation that is not
deductible by the Company for federal income tax purposes. The Company
believes, however, that the 1994 AIP will permit the Company to pay Code
Section 162(m) Awards to Covered Employees and still deduct the compensation in
excess of $1,000,000 from its federal income taxes in accordance with Section
162(m) of the Code.
The primary features of the 1994 AIP are summarized below. A copy of the 1994
AIP is attached as Exhibit B and should be referred to for a complete statement
of the terms of the 1994 AIP.
PLAN SUMMARY
ADMINISTRATION
The 1994 AIP is administered by the Compensation Committee, which is composed
of non-employee directors who are not eligible to participate in the 1994 AIP.
ELIGIBILITY
Any key employee of the Company who the Compensation Committee determines, in
its sole discretion, is responsible for producing profits for the Company or
otherwise has a significant effect on the operations of the Company is eligible
to participate in the 1994 AIP. The Compensation Committee determines who is to
be treated as a Covered Employee. Approximately 365 employees currently are
eligible to participate in the 1994 AIP.
36
<PAGE>
DETERMINATION OF AWARDS
Each year the Compensation Committee will establish one or more criteria to
measure performance ("Performance Criteria") and set annual performance
objectives ("Performance Goals") with respect to such Performance Criteria for
the Company, a business unit(s) or an individual.
In the case of a Code Section 162(m) Award, the Performance Criteria will be
limited to one or more of the following.
a. Income, either before or after income taxes, including or excluding
interest, depreciation and amortization, extraordinary items and other
material non-recurring gains or losses, discontinued operations, the
cumulative effect of changes in accounting policies and the effects of any
tax law changes;
b. Return on average equity, which shall be income calculated in accordance
with clause a. above, divided by the average of stockholders' equity as of
the beginning and as of the end of the Year;
c. Primary or fully diluted earnings per share of common stock, which shall be
income calculated in accordance with clause a. above, divided by the
weighted average number of shares and share equivalents of common stock;
d. Net cash provided by operating activities based upon income calculated in
accordance with clause a. above;
e. Quality of service and/or patient care, measured by the extent to which pre-
set quality objectives are achieved by the Company;
For Fiscal Year 1995, the Board has determined that the Performance Criteria
for Code Section 162(m) Awards will be fully diluted earnings per share from
continuing operations and patient satisfaction (measured by the results of
patient satisfaction surveys completed by patients of the Company's general
hospitals) and that payment of awards will be subject to satisfying a return on
equity threshold.
Awards that are not Code Section 162(m) Awards may be based not only on the
foregoing Performance Criteria, but also on any other criteria related to
performance selected by the Compensation Committee.
All determinations regarding the achievement of Performance Goals and the
determination of actual Code Section 162(m) Awards will be made by the
Compensation Committee. With respect to a Code Section 162(m) Award, the
Compensation Committee may in its sole discretion decrease, but not increase,
the amount of the award that otherwise would be payable.
AMOUNT AVAILABLE AND MAXIMUM INDIVIDUAL AWARDS
The amount available for Awards in any year shall be determined by the
Compensation Committee. The aggregate maximum amount payable under the 1994 AIP
to a Covered Employee with respect to any year is $1,500,000.
FORM AND PAYMENT OF AWARDS
All awards will be in cash and will be paid currently, unless the
Compensation Committee determines to defer payment of an award to preserve the
Company's federal income tax deduction therefor. Deferred awards will accrue
interest at a rate the Compensation Committee determines.
37
<PAGE>
TERMINATION OF EMPLOYMENT
Unless the Compensation Committee determines otherwise, an employee must be
actively employed by the Company on the date his or her award is determined by
the Compensation Committee in order to be entitled to payment of any award for
the year. An employee may receive a partial award as determined by the
Compensation Committee.
AMENDMENT OR TERMINATION OF THE 1994 AIP
The Board may at any time amend, suspend or discontinue the 1994 AIP, in
whole or in part. The Committee may at any time alter or amend any or all Award
Agreements under the 1994 AIP to the extent permitted by law. No such action
may, however, without approval of the stockholders of the Company, be effective
with respect to any Code Section 162(m) Award to any Covered Employee if such
approval is required by Code Section 162(m)(4)(C).
NEW PLAN BENEFITS
It is not possible to determine at this time the Awards that will be payable
under the 1994 AIP for fiscal year 1995 performance. The table below sets forth
the amounts that would have been payable for fiscal year 1994 performance to
the named executive officers, all current executive officers as a group (the
"Executive Group"), all current directors who are not executive officers as a
group (the "Non-Executive Director Group") and all employees, including all
current officers who are not executive officers, as a group (the "Employee
Group") if the 1994 AIP had been in effect during fiscal year 1994, based on
fiscal 1994 performance.
<TABLE>
<CAPTION>
ANNUAL INCENTIVE PLAN
------------------------------------------------------------------------
DOLLAR
NAME VALUE ($)
---- ---------
<S> <C>
Barbakow...................................................... 0
Focht......................................................... 0
Schochet...................................................... 0
Banowsky...................................................... (1)
Mathiasen..................................................... (1)
Executive Group............................................... (1)
Non-Executive Director Group(2)............................... 0
Employee Group................................................ (1)
</TABLE>
- --------
(1) Amounts are not determinable because the award criteria and related targets
for fiscal year 1995 performance have not been determined for any executive
officer other than Covered Employees. For information purposes, the amounts
received under the AIP for Mr. Banowsky and Mr. Mathiasen for fiscal year
1994 are included in the Summary Compensation Table on page 12. The amounts
received under the AIP by the Executive Group and the Employee Group for
fiscal year 1994 were $3,006,662 and $15,183,566, respectively.
(2) Non-employee directors were not eligible to participate in the AIP and will
not be eligible to participate in the 1994 AIP.
Approval of the 1994 AIP by the shareholders requires the affirmative vote of
the majority of the votes cast at the Annual Meeting. If the stockholders do
not approve the 1994 AIP, the AIP will remain in effect, and the Board will
consider whether to adopt some alternative arrangement based on its assessment
of the needs of the Company.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE APPROVAL
OF THE 1994 ANNUAL INCENTIVE PLAN.
38
<PAGE>
4. RATIFICATION OF SELECTION OF AUDITORS
SELECTION OF INDEPENDENT AUDITORS
On the recommendation of the Audit Committee, the Board has selected KPMG
Peat Marwick LLP to serve as independent auditors for the fiscal year ending
May 31, 1995. KPMG Peat Marwick LLP is familiar with the operations of the
Company and together with its predecessor organizations have been the Company's
auditors since the Company's inception. The Audit Committee of the Board is
satisfied with KPMG Peat Marwick LLP's reputation in the auditing field, its
personnel, its professional qualifications and its independence.
KPMG Peat Marwick LLP expect their representatives to attend the meeting to
make a statement should they so desire and to respond to questions where
appropriate.
SHAREHOLDER APPROVAL
Ratification of the independent auditors by the shareholders requires the
affirmative vote of a majority of the votes cast by the holders of shares
entitled to vote in the election at the Annual Meeting, provided a quorum is
present. Unless marked to the contrary, proxies will be voted "FOR" the
ratification of the selection of KPMG Peat Marwick LLP as the Company's
auditor. If a favorable vote is not obtained, other auditors will be selected
by the Board.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THE
RATIFICATION OF THE SELECTION OF KPMG PEAT MARWICK LLP.
DATE FOR RECEIPT OF SHAREHOLDER PROPOSALS
Any proposals by security holders intended to be presented at the next annual
meeting must be received by the Company for inclusion in its proxy statement
and form of proxy relating to that meeting by April 28, 1995.
MISCELLANEOUS
A copy of the Company's Annual Report on Form 10-K for the fiscal year ended
May 31, 1994, as filed with the Securities and Exchange Commission, excluding
certain exhibits thereto, may be obtained without charge, by writing Scott M.
Brown, Secretary, National Medical Enterprises, Inc., 2700 Colorado Boulevard,
Santa Monica, California 90404 or by telephoning Mr. Brown at (310) 998-8000 or
by leaving a voice mail request at (310) 998-8200.
By Order of the Board of Directors
Scott M. Brown
Secretary
Santa Monica, California
August 25, 1994
39
<PAGE>
EXHIBIT A
NATIONAL MEDICAL ENTERPRISES, INC.
1994 DIRECTORS STOCK OPTION PLAN
1. PURPOSE OF THE PLAN.
The purpose of the 1994 Directors Stock Option Plan of National Medical
Enterprises, Inc. is to promote the interests of the Company and its
shareholders by strengthening the Company's ability to attract, motivate and
retain Directors of training, experience and ability, and to encourage the
highest level of Directors' performance by providing Directors with a
proprietary interest in the Company's financial success and growth.
2. DEFINITIONS.
(a) "Board" means the Board of Directors of the Company.
(b) "Committee" means the Compensation and Stock Option Committee of the
Board as shall be appointed by the Board from time to time. The Committee shall
consist of two or more members of the Board none of whom shall be Employees of
the Company.
(c) "Common Stock" means the $.075 par value Common Stock of the Company.
(d) "Company" means National Medical Enterprises, Inc., a Nevada corporation.
(e) "Director" means a member of the Board who is not an Employee.
(f) "Employee" means any full-time employee of the Company, or of any of its
present or future parent or subsidiary corporations.
(g) "Fair Market Value" means the closing price of a share of Common Stock on
the Composite Tape on the date as of which fair market value is to be
determined or the actual sale price of the shares acquired upon exercise if the
shares are sold in a same day sale, or if no sales were made on such date, the
closing price of such shares on the Composite Tape on the next preceding date
on which there were such sales.
(h) "Participant" means each Director.
(i) "Option" means a stock option that does not satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended.
(j) "Plan" means the 1994 Directors Stock Option Plan as set forth herein, as
amended from time to time.
3. SHARES OF COMMON STOCK SUBJECT TO THE PLAN.
Subject to the provisions of Section 7, the aggregate number of shares of
Common Stock that may be issued or transferred pursuant to exercise of Options
under the Plan is 500,000 shares of Common Stock. Such shares may be either
authorized but unissued shares or shares issued and thereafter acquired by the
Company.
4. ADMINISTRATION OF THE PLAN.
(a) The Plan shall be administered by the Committee, which shall have the
power to interpret the Plan and, subject to its provisions, to prescribe, amend
and rescind rules and to make all other determinations necessary for the Plan's
administration.
(b) All action taken by the Committee in the administration and
interpretation of the Plan shall be final and binding upon all parties. No
member of the Committee will be liable for any action or determination made in
good faith by the Committee with respect to the Plan or any Option.
A-1
<PAGE>
5. ELIGIBILITY.
Only Directors shall be eligible to participate in the Plan. Prior to the
termination of the Plan, each Director who is serving in such capacity on the
Date of Grant (as hereinafter defined) automatically shall be granted, on the
last Thursday of January of each year, an Option to acquire 5,000 shares of
Common Stock. Each Director upon initial election to the Board automatically
shall be granted an Option to acquire 5,000 shares of Common Stock on the last
Thursday of the month of such Director's election to the Board. Initial
election to the Board shall mean election to the Board by the Board or by the
Shareholders of the Company, whichever first occurs. The date on which an
Option is granted shall be the "Date of Grant" with respect to such Option.
Each Option will be evidenced by a written instrument including terms and
conditions consistent with the Plan, as the Committee may determine.
6. TERMS AND CONDITIONS OF STOCK OPTIONS.
(a) The purchase price of Common Stock under each Option will be the Fair
Market Value of the Common Stock on the Date of Grant. Notwithstanding any
other provision to the contrary contained in the Plan, including without
limitation, Sections 6(c)(i), (ii) and (iii), each Option will expire not later
than ten years from the Date of Grant.
(b) An Option granted under the Plan may not be exercised for a period of one
year after the Date of Grant. After such period, an Option may be exercised
with respect to all shares of Common Stock covered thereby during its term as
provided hereunder.
(c) Subject to the provisions of Section 6 (a), each Option will expire at
the time the Participant ceases to be a Director, except as follows:
(i) If the service of the Director is terminated by the Company other
than for cause, for which the Company will be the sole judge, or if the
Director is nominated but is not reelected by the shareholders of the
Company, then the Option will expire one year after the date of
termination.
(ii) If the Director retires at the Company's normal retirement age as
defined in its NME Retirement Savings Plan or retires with the consent of
the Committee, the Option will expire five years after the date of
termination.
(iii) If the Director dies or becomes permanently and totally disabled
while serving in such capacity, the Option will expire five years after the
date of death or permanent and total disability. If the Director dies or
becomes permanently and totally disabled within the one-year period
referred to in subparagraph (i) above, the Option will expire one year
after the date of death or permanent and total disability. If the Director
dies or becomes permanently and totally disabled within the five-year
period referred to in subparagraph (ii) above, the Option will expire upon
the later of five years after retirement or one year after the date of
death or permanent and total disability.
(d) Upon the exercise of an Option, the exercise price will be payable in
full (i) in cash; or, (ii) with the consent of the Committee in its sole
discretion, (A) by the assignment and delivery to the Company of shares of
Common Stock, owned by the holder of the Option for at least six months, with a
Fair Market Value on the relevant exercise date equal to the exercise price,
(B) by execution and delivery of a promissory note, secured by such number of
shares of Common Stock determined by the Committee, bearing interest at a rate
determined by the Committee, or (C) by a combination of any of the above. No
payment by an assignment of shares or by a promissory note or by any
combination thereof will be allowed unless such payments are allowed under
applicable requirements of federal and state tax, securities and other laws,
rules and regulations and by any regulatory authority having jurisdiction.
7. ADJUSTMENT PROVISIONS.
(a) Subject to Section 7(b), if the outstanding shares of Common Stock of the
Company are increased, decreased, or exchanged for a different number or kind
of shares or other securities, or if additional shares or new or different
shares or other securities are distributed with respect to such
A-2
<PAGE>
shares of Common Stock or other securities, through merger, consolidation,
spin-off, sale of all or substantially all the assets of the Company,
reorganization, recapitalization, reclassification, stock dividend, stock
split, reverse stock split or other distribution with respect to such shares of
Common Stock, or other securities, an appropriate and proportionate adjustment
may be made in (i) the maximum number and kind of shares provided in Section 3
and Section 5 and (ii) the number and kind of shares or other securities
subject to, and the purchase price in, then-outstanding Options.
(b) Despite the provisions of Section 7(a), upon dissolution, or liquidation
of the Company or upon a reorganization, merger or consolidation of the Company
with one or more corporations as a result of which the Company is not the
surviving corporation, or upon the sale of all or substantially all the assets
of the Company, all Options then outstanding under the Plan will be fully
vested and the restrictions upon exercise in Section 6(b) will immediately
cease, unless provisions are made in connection with such transaction for the
continuance of the Plan, the assumption or the substitution for such Options of
new options covering the stock of a successor corporation, or a parent or
subsidiary thereof, with appropriate adjustments as to the number and kind of
shares and prices.
(c) Adjustments under Section 7(a) and 7(b) will be made by the Committee,
whose determination as to what adjustments will be made and the extent thereof
will be final, binding, and conclusive. No fractional interest will be issued
under the Plan on account of any such adjustments.
(d) Upon the occurrence of a "Change of Control" of the Company or in the
event that any Person makes a filing with respect to the Company under Sections
13(d) or 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), all Options then outstanding under the Plan will be fully
vested and the restrictions upon exercise in Section 6(b) will immediately
cease.
For purposes of this Section 7(d) the following definitions shall apply:
(i) A "Change in Control" of the Company shall have occurred when a
Person, alone or together with its Affiliates and Associates, becomes the
beneficial owner of 20% or more of the general voting power of the Company.
(ii) "Affiliate" and "Associate" shall have the respective meanings
ascribed to such terms in Rule 12b-2 of the General Rules and Regulations
under the Exchange Act.
(iii) "Person" shall mean an individual, firm, corporation or other
entity or any successor to such entity, but "Person" shall not include the
Company, any subsidiary of the Company, any employee benefit plan or
employee stock plan of the Company, or any Person organized, appointed,
established or holding Voting Stock by, for or pursuant to the terms of
such a plan or any Person who acquires 20% or more of the general voting
power of the Company in a transaction or series of transactions approved
prior to such transaction or series of transactions by the Board.
(iv) "Voting Stock" shall mean shares of the Company's capital stock
having general voting power, with "voting power" meaning the power under
ordinary circumstances (and not merely upon the happening of a contingency)
to vote in the election of directors.
8. GENERAL PROVISIONS.
(a) Nothing in the Plan or in any instrument executed pursuant to the Plan
will confer upon any Participant any right to continue as a Director or affect
the right of the Company to terminate the services of any Participant in
accordance with the By-Laws.
(b) No shares of Common Stock will be issued or transferred pursuant to an
Option unless and until all then-applicable requirements imposed by federal and
state securities and other laws, rules and regulations and by any regulatory
agencies having jurisdiction, and by any stock exchanges upon which the Common
Stock may be listed, have been fully met. As a condition precedent to the
issuance of shares pursuant to the exercise of an Option, the Company may
require the Participant to take any reasonable action to meet such
requirements.
A-3
<PAGE>
(c) No Participant and no beneficiary or other person claiming under or
through such Participant will have any right, title or interest in or to any
shares of Common Stock allocated or reserved under the Plan or subject to any
Option except as to such shares of Common Stock, if any, that have been issued
or transferred to such Participant.
(d) No Option and no right under the Plan, contingent or otherwise, will be
transferrable or assignable or subject to any encumbrance, pledge or charge of
any nature except (i) with the written consent of the Committee, (ii) a
transfer or assignment in favor of the Company, and (iii) under such rules and
regulations as the Committee may establish pursuant to the terms of the Plan.
(e) No Option and no right under the Plan, contingent or otherwise, will be
transferrable by a Participant other than by will or the laws of descent and
distribution or pursuant to a qualified domestic relations order as defined by
the Internal Revenue Code of 1986, as amended (the "Code") or Title I of the
Employee Retirement Income Security Act ("ERISA"), or the rules thereunder. The
designation of a beneficiary by a Participant does not constitute a transfer.
9. AMENDMENT AND TERMINATION.
(a) The Board will have the power, in its discretion, to amend, suspend or
terminate the Plan at any time, subject to approval of the shareholders of the
Company if and to the extent necessary for the continued applicability of Rule
16b-3 under the Exchange Act.
(b) No amendment, suspension or termination of the Plan will, without the
consent of the holder, alter, terminate, impair or adversely affect any right
or obligation under any Option previously granted under the Plan.
(c) Notwithstanding the provisions of Section 9(a), the Board may not amend
the provisions of Section 5 or the definition of Director in Section 2 more
than once every six months, other than to comport with changes in the Code,
ERISA or the rules thereunder.
10. EFFECTIVE DATE OF PLAN AND DURATION OF PLAN.
This Plan shall become effective upon adoption by the Board, subject to
approval by the holders of a majority of the shares of Common Stock which are
represented in person or by proxy and entitled to vote on the subject at the
1994 Annual Meeting of Shareholders of the Company. Unless the Plan is
previously terminated, the Plan will terminate on January 26, 2004, except with
respect to Options then outstanding.
A-4
<PAGE>
EXHIBIT B
1994 ANNUAL INCENTIVE PLAN
OF
NATIONAL MEDICAL ENTERPRISES, INC.
1. PURPOSE. The purpose of the Annual Incentive Plan (the "Plan") of National
Medical Enterprises, Inc. and its subsidiaries (the "Company") is to provide an
incentive to enhance shareholder value and promote the attainment of
significant business objectives of the Company by basing a portion of selected
employees' compensation on the performance of such employee, the Company,
and/or the employee's Business Unit (as defined below).
2. DEFINITIONS
a. "Award Agreement" means the agreement entered into between the Company and
a participant, setting forth the terms and conditions applicable to an award
granted to the participant.
b. "Award Schedule" means the Award Schedule established pursuant to Article
4.
c. "Business Unit" means any division, group, subsidiary or other unit within
the Company which is designated by the Committee to constitute a Business Unit.
d. "Code" means the Internal Revenue Code of 1986, and any successor statute,
and the regulations promulgated thereunder, as it or they may be amended from
time to time.
e. "Code Section 162(m) Award" means an Award intended to satisfy the
requirements of Code Section 162(m) and designated as such in the Award
Agreement.
f. "Covered Employee" means a Covered Employee within the meaning of Code
Section 162(m)(3).
g. "Performance Criteria" means one or more of the following criteria
selected by, and as further defined by, the Committee each Year to measure
achievement of Performance Goals for a Year:
1. A. Income, either before or after income taxes, including or excluding
interest, depreciation and amortization, extraordinary items and other
material non-recurring gains or losses, discontinued operations, the
cumulative effect of changes in accounting policies and the effects of any
tax law changes;
B. Return on average equity, which shall be income calculated in
accordance with paragraph g.1.A. above, divided by the average of
stockholders' equity as of the beginning and as of the end of the Year;
C. Primary or fully diluted earnings per share of common stock, which
shall be income calculated in accordance with paragraph g.1.A. above,
divided by the weighted average number of shares and share equivalents of
common stock;
D. Net cash provided by operating activities based upon income
calculated in accordance with paragraph g.1.A. above; or
E. Quality of service and/or patient care, measured by the extent to
which pre-set quality objectives are achieved by the Company.
2. Any other criteria related to performance, including the performance of
one or more of the Business Units, individual performance or any other
category of performance selected by the Committee.
B-1
<PAGE>
h. "Performance Goals" are the annual performance objectives with respect to
Performance Criteria established by the Committee for the Company, a Business
Unit or an individual for the purpose of determining whether, and the extent to
which, awards under the Plan will be made for that Year.
i. "Target Award" means the amount payable for meeting 100% of Performance
Goals for the Year.
j. "Year" means the Company's fiscal year.
3. ADMINISTRATION. The Plan shall be administered by the Compensation and
Stock Option Committee (the "Committee") of the Company's Board of Directors
(the "Board").
The Committee's determinations under the Plan need not be uniform and may be
made by it selectively among persons who receive, or are eligible to receive,
awards under the Plan, whether or not such persons are similarly situated.
Without limiting the generality of the foregoing, the Committee will be
entitled, among other things, to make non-uniform and selective determinations
and to establish non-uniform and selective Performance Criteria, Performance
Goals, the weightings thereof, and Target Awards. Whenever the Plan refers to a
determination being made by the Committee, it shall be deemed to mean a
determination by the Committee in its sole discretion.
It is the intent of the Company that this Plan and Code Section 162(m) Awards
hereunder satisfy, and be interpreted in a manner that satisfy, in the case of
participants who are or may be Covered Employees, the applicable requirements
of Code Section 162(m), including the administration requirement of Code
Section 162(m)(4)(C), so that the Company's tax deduction for remuneration in
respect of such an award for services performed by such Covered Employees is
not disallowed in whole or in part by the operation of such Code section. If
any provision of this Plan would otherwise frustrate or conflict with the
intent expressed in this Article, that provision, to the extent possible, shall
be interpreted and deemed amended so as to avoid such conflict. To the extent
of any remaining irreconcilable conflict with such intent, such provision shall
be deemed void as applicable to Covered Employees with respect to whom such
conflict exists. Nothing herein shall be interpreted so as to preclude a
participant who is or may be a Covered Employee from receiving an award that is
not a Code Section 162(m) Award.
The Committee shall have the discretion, subject to the limitations described
in Article 4 below relating to Code 162(m) Awards, to (a) determine the Plan
participants; (b) determine who will be treated as a Covered Employee; (c)
determine Performance Criteria and Performance Goals each Year within the time
period required by Code Section 162(m); (d) establish an Award Schedule; (e)
establish performance thresholds for payment of any awards; (f) determine
whether and to what extent the Performance Goals have been met or exceeded; (g)
make discretionary awards as may be appropriate in order to assure the proper
motivation and retention of personnel and attainment of business goals; (h)
make adjustments to Performance Criteria, Performance Goals and thresholds; and
(i) determine the total amount of funds available for distribution as awards
each Year. Subject to the provisions of the Plan, the Committee shall be
authorized to interpret the Plan, to make, amend and rescind such rules as it
deems necessary for the proper administration of the Plan, to make all other
determinations necessary or advisable for the administration of the Plan and to
correct any defect or supply any omission or reconcile any inconsistency in the
Plan in the manner and to the extent the Committee deems desirable to carry the
Plan into effect. Any action taken or determination made by the Committee shall
be conclusive on all parties.
4. CODE SECTION 162(M) AWARDS. A participant who is or may be a Covered
Employee may receive a Code Section 162(m) Award and/or an award that is not a
Code Section 162(m) Award. The Committee will determine who is to be treated as
a Covered Employee, determine who is eligible to be granted Code Section 162(m)
Awards and establish the Target Awards and Award Schedules for Code Section
162(m) Awards. Such determinations will be made in a timely manner, as required
by Code Section 162(m). Each award shall be evidenced by an Award Agreement
setting forth the Award
B-2
<PAGE>
Schedule and such other terms and conditions applicable to the award, as
determined by the Committee, not inconsistent with the terms of the Plan.
Notwithstanding anything else in this Plan to the contrary, the aggregate
maximum amount payable under the Plan to a Covered Employee with respect to a
Year shall be $1,500,000. In the event of any conflict between an Award
Agreement and the Plan, the terms of the Plan shall govern.
5. ALL AWARDS. Performance Criteria and Performance Goals will be established
by the Committee for each Year, which, in the case of Performance Criteria and
Performance Goals for Covered Persons, will be established within the time
period required by Code Section 162(m). The Committee also shall determine the
extent to which each Performance Criteria shall be weighted in determining
awards. The Committee will establish an Award Schedule for each award to each
participant setting forth the percentage of the Target Award for such
participant payable at specified levels of performance, based on the
Performance Goal for each of the Performance Criteria and the weighting
established for such criteria. The Committee may vary the Performance Criteria,
Performance Goals and weightings from participant to participant, award to
award and Year to Year. Notwithstanding the foregoing, the Performance Criteria
with respect to a Code Section 162(m) Award shall be limited to the Performance
Criteria set forth in Article 2.g.1.
6. ELIGIBLE PERSONS. Any key employee of the Company who the Committee
determines, in its discretion, is responsible for producing profits for the
Company or otherwise has a significant effect on the operations of the Company
shall be eligible to participate in the Plan. Committee members are not
eligible to participate in the Plan. No employee shall have a right (a) to be
selected under the Plan, or (b) having once been selected, to (i) be selected
again or (ii) continue as an employee.
7. AMOUNT AVAILABLE FOR AWARDS. The amount available for awards in any Year
shall be determined by the Committee.
8. DETERMINATION OF AWARDS. The Committee shall select the participants and
determine which participants, if any, are to be treated as Covered Employees
and which awards, if any, are to be Code Section 162(m) Awards. Except in the
case of Code Section 162(m) Awards, the Committee shall determine the actual
award to each participant for each Year, taking into consideration, as it deems
appropriate, the performance for the Year of the Company and/or a Business
Unit, as the case may be, in relation to the Performance Goals theretofore
established by the Committee, and the performance of the respective
participants during the Year. The fact that an employee is selected as a
participant for any Year shall not mean that such employee necessarily will
receive an award for that Year. Except in the case of Code Section 162(m)
Awards, notwithstanding any other provisions of the Plan to the contrary, the
Committee may make discretionary awards as it sees fit under the Plan.
A Code Section 162(m) Award payable to any Covered Employee may range from
zero (0) to one hundred and fifty (150) percent of the Covered Employee's
Target Award, depending upon whether, or the extent to which, the Performance
Goals with respect to such Code Section 162(m) Award have been achieved. Actual
Code Section 162(m) Awards will be derived from the Award Schedule based on the
level of performance achieved and the participant's Target Award. All such
determinations regarding the achievement of Performance Goals and the
determination of actual Code Section 162(m) Awards will be made by the
Committee; provided, however, that with respect to a Code Section 162(m) Award,
the Committee may, in its sole discretion, decrease, but not increase, the
amount of the Award that otherwise would be payable.
9. DISTRIBUTION OF AWARDS. Awards under the Plan for a particular Year shall
be paid in cash as soon as practicable after the end of that Year. To the
extent that the Company's tax deduction for remuneration in respect of the
payment of an Award to a Covered Employee would be disallowed under Code
Section 162(m) by reason of the fact that such Covered Employee's applicable
employee remuneration, as defined in Code Section 162(m)(4), either exceeds or,
if such Award were paid, would
B-3
<PAGE>
exceed the $1,000,000 limitation in Code Section 162(m)(1), the Committee may,
in its sole discretion, defer the payment of such Award, but only to the extent
that, and for so long as, the Company's tax deduction in respect of the payment
thereof would be so disallowed; provided that the Committee may, nevertheless,
accelerate the payment of previously deferred Awards if it determines that the
amount of the tax deduction that would be disallowed is not significant.
Deferred Awards will be deemed credited with interest at a rate determined by
the Committee from time to time.
10. TERMINATION OF EMPLOYMENT. A participant must be actively employed by the
Company on the date his or her award is determined by the Committee ("the
Payment Date") in order to be entitled to payment of any award for that Year.
In the event active employment of a participant shall be terminated before the
Payment Date for any reason other than discharge for cause or voluntary
resignation, such participant may receive such portion of his or her award for
the Year as may be determined by the Committee. A participant discharged for
cause shall not be entitled to receive any award for the Year. A participant
who voluntarily resigns prior to the Payment Date shall not be entitled to
receive any award for the Year unless otherwise determined by the Committee.
11. MISCELLANEOUS.
a. NONASSIGNABILITY. No award will be assignable or transferable without the
written consent of the Committee in its sole discretion, except by will or by
the laws of descent and distribution.
b. WITHHOLDING TAXES. Whenever payments under the Plan are to be made, the
Company will withhold therefrom an amount sufficient to satisfy any applicable
governmental withholding tax requirements related thereto.
c. AMENDMENT OR TERMINATION OF THE PLAN. The Board of Directors of the
Company may at any time amend, suspend or discontinue the Plan, in whole or in
part. The Committee may at any time alter or amend any or all Award Agreements
under the Plan to the extent permitted by law. No such action may, however,
without approval of the stockholders of the Company, be effective with respect
to any Code Section 162(m) Award to any Covered Employee if such approval is
required by Code Section 162(m)(4)(C).
d. OTHER PAYMENTS OR AWARDS. Nothing contained in the Plan will be deemed in
any way to limit or restrict the Company from making any award or payment to
any person under any other plan, arrangement or understanding, whether now
existing or hereafter in effect.
e. PAYMENTS TO OTHER PERSONS. If payments are legally required to be made to
any person other than the person to whom any amount is available under the
Plan, payments will be made accordingly. Any such payment will be a complete
discharge of the liability of the Company.
f. LIMITS OF LIABILITY.
1. Any liability of the Company to any participant with respect to an
award shall be based solely upon contractual obligations created by the
Plan and the Award Agreement.
2. Neither the Company, nor any member of its Board of Directors or of
the Committee, nor any other person participating in any determination of
any question under the Plan, or in the interpretation, administration or
application of the Plan, shall have any liability to any party for any
action taken or not taken in good faith under the Plan.
g. RIGHTS OF EMPLOYEES.
1. Status as an employee eligible to receive an award under the Plan
shall not be construed as a commitment that any award will be made under
this Plan to such employee or to other such employees generally.
B-4
<PAGE>
2. Nothing contained in this Plan or in any Award Agreement (or in any
other documents related to this Plan or to any award or Award Agreement)
shall confer upon any employee or participant any right to continue in the
employ or other service of the Company or constitute any contract or limit
in any way the right of the Company to change such person's compensation or
other benefits or to terminate the employment or other service of such
person with or without cause.
h. SECTION HEADINGS. The section headings contained herein are for the
purposes of convenience only, and in the event of any conflict, the text of the
Plan, rather than the section headings, will control.
i. INVALIDITY. If any term or provision contained herein will to any extent
be invalid or unenforceable, such term or provision will be reformed so that it
is valid, and such invalidity or unenforceability will not affect any other
provision or part hereof.
j. APPLICABLE LAW. The Plan, the Award Agreements and all actions taken
hereunder or thereunder shall be governed by, and construed in accordance with,
the laws of the state of California without regard to the conflict of law
principles thereof.
k. EFFECTIVE DATE. The Plan shall be effective as of June 1, 1994.
B-5
<PAGE>
P R O X Y
NATIONAL MEDICAL ENTERPRISES, INC.
PROXY--SOLICITED BY THE BOARD OF DIRECTORS
The undersigned hereby appoints Michael H. Focht, Sr., Maris Andersons and
Scott M. Brown, and each of them, proxies of the undersigned, with power of
substitution, to represent the undersigned and to vote all shares of National
Medical Enterprises, Inc., which the undersigned would be entitled to vote, at
the Annual Meeting of Shareholders to be held on September 28, 1994, and any
adjournment thereof, on the items set forth on the reverse hereof and on such
other business as may properly come before the meeting.
---------------------------------------
Date
---------------------------------------
Signature
---------------------------------------
Signature
Please mark, date and sign as your
name(s) appear(s) to the left and re-
turn in the enclosed envelope. If act-
ing as an executor, administrator,
trustee, guardian, etc., you should so
indicate when signing. If the signer
is a corporation, please sign the full
corporate name, by duly authorized of-
ficer. If shares are held jointly,
each shareholder named should sign.
(over)
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED BY THE
SHAREHOLDER. IF NO DIRECTION IS GIVEN WHEN THE DULY AUTHORIZED PROXY IS
RETURNED, SUCH SHARES WILL BE VOTED "FOR ALL NOMINEES" IN ITEM 1 AND "FOR"
ITEMS 2, 3 AND 4.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR ALL NOMINEES" IN ITEM 1 AND
"FOR" ITEMS 2, 3 AND 4.
Item 1. Election of the following nominees as Directors: Jeffrey C. Barbakow,
Peter de Wetter, James P. Livingston and Richard S. Schweiker
[_] FOR ALL NOMINEES listed above [_] WITHHOLD AUTHORITY
(except as marked to the contrary)
INSTRUCTION: To withhold authority to vote for any individual nominee, write
that nominee's name in the space provided
----------------------------------------
Item 2. Proposal to approve the 1994 Directors Stock Option Plan.
[_] FOR[_] AGAINST[_] ABSTAIN
Item 3. Proposal to approve the 1994 Annual Incentive Plan.
[_] FOR[_] AGAINST[_] ABSTAIN
Item 4. Proposal to ratify the selection of KPMG Peat Marwick LLP as
independent auditors for the fiscal year ending May 31, 1995.
[_] FOR[_] AGAINST[_] ABSTAIN
- --------------------------------------------------------------------------------
PLEASE SIGN ON THE REVERSE SIDE AND RETURN PROMPTLY
<PAGE>
PROXY NATIONAL MEDICAL ENTERPRISES, INC. PROXY
The undersigned acknowledges receipt of the Notice of Annual Meeting of
Shareholders and Proxy Statement, each dated August 25, 1994, and, revoking all
prior proxies, appoints Michael H. Focht, Sr., Maris Andersons and Scott M.
Brown, and each of them (with full power to act without the other), with full
power of substitution in each, the proxies of the undersigned, to represent the
undersigned and vote all shares of stock of National Medical Enterprises, Inc.
which the undersigned would be entitled to vote if personally present at the
Annual Meeting of Stockholders of National Medical Enterprises, Inc., to be
held on September 28, 1994, and at all adjournments and postponements thereof,
upon the following matters and in the manner designated on the reverse hereof.
THIS PROXY WILL BE VOTED IN ACCORDANCE WITH INSTRUCTIONS INDICATED; HOWEVER,
IF NO INSTRUCTIONS ARE GIVEN, THE PROXIES WILL VOTE THE SHARES FOR ITEMS (1),
(2), (3) AND (4).
(Continued, and to be signed and dated, on reverse side.)
<PAGE>
1. Election [_] FOR the nominees [_] WITHHOLD AUTHORITY [_] EXCEPTIONS* as
of Directors listed below to vote for ALL indicated
nominees listed below
Class 3: Jeffrey C. Barbakow, Peter de Wetter,
James P.Livingston and Richard S. Schweiker
IF YOU DESIRE TO WITHHOLD AUTHORITY TO VOTE FOR ANY INDIVIDUAL NOMINEE, MARK
THE "EXCEPTIONS" BOX AND PLEASE WRITE THAT NOMINEE'S NAME(S) ON THE SPACE
PROVIDED.
*EXCEPTIONS ____________________________________________________________________
2. Proposal to approve the 1994 Directors Stock Option Plan.
[_] FOR[_] AGAINST[_] ABSTAIN
3. Proposal to approve the 1994 Annual Incentive Plan.
[_] FOR[_] AGAINST[_] ABSTAIN
4. Proposal to ratify the selection of KPMG Peat Marwick LLP as independent
auditors for the fiscal year ending May 31, 1995.
[_] FOR[_] AGAINST[_] ABSTAIN
PROXY DEPARTMENT Address Change
NEW YORK, N.Y. 10203-0186 and/or Comments [_]
Note: Please sign exactly as shown at left.
If stock is jointly held, each owner should
sign. Executors, administrators, trustees,
guardians, attorneys and corporate officers
should indicate their fiduciary capacity or
full title when signing.
Dated: ______________________________, 1994
-------------------------------------------
(Signature)
-------------------------------------------
(Signature)
Please mark boxes [_] or [X] in blue
or black ink.
Please Mark, Date, Sign and Mail This Proxy Card Promptly in the Enclosed
Envelope.
