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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
(MARK ONE)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended May 31, 1994.
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to ____________________
[NO FEE REQUIRED]
Commission file number: I-7293
NATIONAL MEDICAL ENTERPRISES, INC.
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(Exact name of registrant as specified in its charter)
NEVADA 95-2557091
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2700 COLORADO AVENUE
SANTA MONICA, CALIFORNIA 90404
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE) (ZIP CODE)
AREA CODE (310) 998-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
COMMON STOCK NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
12 1/8% NOTES DUE APRIL 1, 1995 NEW YORK STOCK EXCHANGE
PREFERRED STOCK PURCHASE RIGHTS NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO
------- -------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [_]
As of July 31, 1994 there were 166,194,728 shares of Common Stock outstanding.
The aggregate market value of the shares of Common Stock held by non-affiliates
of the Registrant, based on the closing price of these shares on the New York
Stock Exchange, was approximately $2,866,859,058. For the purposes of the
foregoing calculation only, all directors and executive officers of the
Registrant have been deemed affiliates.
Portions of the Registrant's Annual Report to Shareholders for the fiscal year
ended May 31, 1994, have been incorporated by reference into Parts I, II and IV
of this Report. Portions of the definitive Proxy Statement for the Registrant's
1994 Annual Meeting of the Shareholders have been incorporated by reference into
Part III of this Report.
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Note: The purpose of this Amendment No. 1 is to revise the Report of
Independent Auditors contained in Exhibit 13 of the Registrant's 1994
Annual Report on Form 10-K. The Report of Independent Auditors as
originally filed inadvertently neglected to refer to a change in
accounting policy adopted by the Registrant during fiscal year 1994.
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TABLE OF CONTENTS
FORM 10-K/A ANNUAL REPORT -- 1994
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
Page
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Part IV
Item 14. Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 1
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 3. EXHIBITS.
(13) 1994 Annual Report to Shareholders (The purpose of this
Amendment No. 1 is to revise the Report of Independent Auditors
contained in Exhibit 13 of the Registrant's 1994 Annual Report
on Form 10-K. The Report of Independent Auditors as originally
filed inadvertently neglected to refer to a change in accounting
policy adopted by the Registrant during fiscal year 1994)
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) AND RULE 12B-15 OF THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED, THE REGISTRANT HAS DULY CAUSED THIS
REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED,
ON JANUARY 18, 1995.
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ Scott M. Brown
-----------------------------
Name: Scott M. Brown
Title: Senior Vice President
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GRAPHICS APPENDIX LIST
PAGE WHERE
GRAPHIC
APPEARS DESCRIPTION OF GRAPHIC OR CROSS-REFERENCE
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Page 1 of Cover of NME's 1994 Annual Report to Shareholders
Exhibit 13 (Exhibit 13).
The cover of the 1994 Annual Report to Shareholders contains
an illustration of people putting blocks into a sun. The
illustration symbolizes NME building a brighter future.
Page 5 of Stock Price Graph
Exhibit 13
A graph showing the price of NME's common stock on various
dates between February 28, 1992 and August 5, 1994 is
included on page 5 of the 1994 Annual Report to Shareholders
of NME (Exhibit 13). The dates shown are the dates of
significant events for the Company which occurred during such
period. Figures indicating the stock price on each
significant date are shown on page 5 of Exhibit 13.
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EXHIBIT INDEX
Exhibit
Number Description Page
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13. 1994 Annual Report to Shareholders....................
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NATIONAL MEDICAL ENTERPRISES, INC
[ARTWORK]
1994 ANNUAL REPORT
<PAGE>
National Medical Enterprises, Inc.
National Medical Enterprises, Inc. (NME), headquartered in Santa Monica,
Calif., owns and operates general hospitals and related health care businesses
in the United States and overseas. NME was founded in 1969 as a publicly held
hospital management company. The company employs approximately 35,000 people.
The Year's Highlights
. Implemented companywide ethics program
. Changed top executive management
. Restructured board of directors
. Settled federal government investigations
. Resolved major litigation
. Refocused on core general hospital business
. Divested nearly all psychiatric and physical rehabilitation hospitals
. Increased general hospital operating margins
. Reduced total debt by $341 million; lowered total debt-to-equity from .67 to
.63
. Simplified corporate structure and reduced overhead
. Increased market value 73 percent, from $1.57 billion to $2.72 billion in
fiscal 1994
Cover illustration by Steve Dininno
2
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NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES'
To Our Shareholders:
Any way you look at it, it was an unforgettable year at National Medical
Enterprises. It was a period of painful adjustments and acknowledgments, hard
work and gratifying successes. Ultimately, we believe it will be remembered as
a year of transition for NME.
We have finally cleared up the most significant of the legal difficulties
that have been casting a shadow over our company for the past two years. As we
said in last year's annual report, resolving these problems was our top
priority. We are pleased to have met our goal.
Most importantly, soon after the fiscal year ended, we signed a final
settlement agreement with the federal government that ended its investigations
of NME and subsidiaries. Now we can fully dedicate our energies and resources
to our profitable general hospital business and on ways to enhance shareholder
value.
NME is in good financial condition to support aggressive growth as our
nation's health care system changes. In fiscal 1994 NME's fully diluted
earnings from continuing operations were $1.23 per share, compared with $1.49
per share in fiscal 1993. However, after excluding the impact of restructuring
charges and gains on the disposals of assets, NME's fully diluted earnings from
continuing operations would have been $1.19 per share in both years. Despite
the heavy costs the company has incurred during the past year, NME's balance
sheet and cash flow remain strong.
Our core business of general hospitals continues to perform well. Even
though our revenue base declined due to the sale of noncore assets, earnings
before interest, taxes, depreciation and amortization (EBITDA) from continuing
operations before restructuring charges were $553 million, only $10 million
below last year.
Let's review major events at NME since we assumed management responsibilities
in June 1993. We have accomplished a lot in that short time.
First, we reduced our board from 18 members to 12, most of whom are outside
directors. We are the only two board members employed by NME. A majority of the
board's executive committee members are also outside directors. Following the
annual meeting of shareholders in September, the number of directors will be
further reduced to 10. We have a new general counsel, a new chief financial
officer and a new executive in charge of public affairs. These appointments
complete changes to NME's top tier of executives, the first major management
transition in our company's 25-year history.
NME's legal problems and resulting public relations woes got worse before
they got better in fiscal 1994. In August 1993 federal investigators searched a
number of our facilities and offices. We cooperated fully with them in their
widely publicized examination of our operations.
We improved our outlook significantly in September when we agreed to settle
litigation over disputed psychiatric claims with six insurers for $125 million.
In December we agreed to settle with another 13 insurers for $90 million. This
resolved all major insurance litigation and allowed us to get back to business
as usual with these companies.
We also have resolved approximately two-thirds of the psychiatric patient
claims that faced us involving fraud and conspiracy allegations. Two
class-action lawsuits filed by shareholders are now in voluntary mediation.
Effective in December, our board of directors suspended the payment of
dividends on NME's common stock. This helped us conserve cash otherwise needed
to solve our legal problems.
Executing a final agreement with the federal
3
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government on June 29 resolved our company's most pressing problem. NME
agreed to pay $363 million to conclude the federal investigations, which had
been focused principally on our psychiatric subsidiaries. Most importantly, the
agreement allows us to continue to participate in Medicare and other federally
funded health care programs essential to our operations.
We also have agreed in principle to pay $16 million to settle potential
claims with all the states in which our former psychiatric subsidiary operated.
Having built up cash reserves during the year, we were prepared to pay these
federal and state settlements.
To ensure our ongoing integrity, NME has implemented what we believe is the
most comprehensive ethics program in the health care industry. Nearly all of
our 35,000 employees, including every one of our executive-level managers, have
participated in our ethics awareness and training workshops. The program makes
employees more alert to potential ethical dilemmas and gives them the tools to
make the right decisions. And, because we know that our written code of conduct
cannot anticipate every ethical issue in our complex business, we have
established a toll-free ethics hotline that employees can call with questions
and concerns. Our compliance program is directed by a management-level
committee, chaired by Michael H. Focht Sr., president and chief operating
officer, and supervised by the ethics and quality assurance committee of the
board. We have made it very clear that NME will not tolerate ethical misconduct.
Much of our fiscal 1994 efforts have gone into refocusing on the company's
core general hospital business. We now operate 33 domestic and 13 international
general hospitals. We have divested or are in the process of divesting almost
all of our rehabilitation and psychiatric hospitals and have reduced our
involvement in other lines of business.
In fiscal 1994 we completed a series of transactions that simplified NME's
relationship with a former subsidiary, The Hillhaven Corporation, a Tacoma,
Wash.-based owner and operator of nursing centers. NME received $135 million in
cash before taxes from these transactions and reduced contingent liabilities
during fiscal 1994 by approximately $420 million. Although NME is no longer a
lender or lessor to Hillhaven, we now own approximately 33 percent of
Hillhaven's common shares.
In January we sold 28 inpatient physical rehabilitation hospitals and 45
outpatient clinics to HEALTHSOUTH Rehabilitation Corporation for approximately
$350 million. We have kept six physical rehabilitation hospitals located on or
near NME general hospital campuses.
In May NME signed an agreement with DLJ Merchant Banking Partners, L.P. and
affiliated investment partnerships through which they will acquire a
controlling interest in Total Renal Care, Inc. (formerly Medical Ambulatory
Care). Total Renal Care provides dialysis services at 37 outpatient facilities
and on an inpatient basis at 28 hospitals. NME received a $76 million dividend
from the company in August 1994 and retains a 25 percent interest in it.
We have also sold, closed or are in the process of selling or closing nearly
all of our psychiatric hospitals. As of August 12, 1994, we had sold 27
psychiatric facilities to Charter Medical Corporation and 25 facilities to
other buyers. Charter has agreed to buy 20 additional facilities; those sales
are pending. We also intend to sell 11 more facilities to other buyers. We are
retaining four
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psychiatric hospitals located near NME general hospitals.
As we moved to concentrate our business on our general hospitals and
hospital campuses, we also moved quickly to bring our corporate staffing levels
in line with the new NME. In July with the help of McKinsey & Co., a leading
management consulting firm, we completed a comprehensive analysis of our
corporate, regional and divisional operations, which eliminated about 240
positions. This reorganization will result in a leaner, more efficient central
operation and will reduce annual overhead by approximately $32 million.
Clearly, we've had an extraordinary number of problems to confront and
adjustments to make this year. We even contended with a major earthquake. The
quake didn't affect service at or damage our Southern California hospitals, but
it did result in extensive cosmetic damage at our headquarters.
All this has been played out against a backdrop of enormous, accelerating change
in the health care business. A wave of mergers and takeovers has transformed our
industry, while legislators continue to debate how to provide health care to
more people and how to pay for it.
The changes we're making today at NME will serve us well in the new age of
health care. Already, we are
(Stock price in dollars per share)
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<TABLE>
<CAPTION>
Date Description Stock Price
<S> <C> <C>
2/28/92 Earnings outlook revised downward. $14.625
4/23/92 $250 million charge to divest certain $14.500
psych hospitals announced.
6/3/92 Psych settlement reached with Texas $14.500
attorney general.
7/30/92 Eight insurers sue NME. $16.250
9/14/92 Two insurers sue NME. $13.500
11/11/92 Ethics program implemented. $13.000
1/8/93 Negative Wall Street Journal article on $ 9.875
NME published.
4/27/93 Stock at 6 1/2 , the lowest level in more $ 6.500
than 10 years, on 4/27/93.
4/28/93 Barbakow named CEO; Focht COO on 4/28/93. $ 7.500
6/23/93 Restructuring of Hillhaven relationship announced. $ 9.500
8/27/93 Trading resumed after Department of $ 7.750
Justice searches.
9/29/93 Settlement reached with three insurers. $10.000
10/28/93 Dividend suspended. $11.250
11/16/93 59 psych patient cases settled. $11.500
12/3/93 Rehab hospitals' sale announced. $12.500
12/13/93 Settlement reached with 13 insurers. $13.625
1/11/94 Discontinuance of psych business announced. $14.625
3/8/94 23 psych patient cases settled. $16.500
3/30/94 Psych hospitals' sale announced. $16.500
4/5/94 Corporate downsizing announced. $16.125
4/14/94 Agreement in principle with federal government $16.875
announced.
4/19/94 Dialysis sale announced. $15.375
6/28/94 Government settlement finalized. $15.875
6/30/94 27 psych hospitals sold. $15.625
7/11/94 Corporate downsizing implemented. $16.625
8/5/94 Stock closed at 18 1/4 on 8/5/94. $18.250
</TABLE>
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NATIONAL MEDICAL ENTERPRISES' STOCK PRICE: In recent years the company's
stock price has reflected its problemsbut has recovered during the past 15
months as those problems were resolved. NME's stock price increased from 9-1/2
to 16-3/8 in fiscal 1994.
5
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pursuing innovative ways to work with the increasingly demanding, powerful
and large groups that buy medical care; we are strengthening our base in the
medical community; and we are actively looking for strategic acquisitions. As
always, we are continually improving our facilities and our patient service, as
well as finding new ways to reduce costs.
We see opportunities to expand internationally. Our existing successful
operations overseas, our resources and our hospital management expertise put us
in a good position to meet growing foreign demand for quality health care.
The investment community has reacted positively to our efforts to refocus
our company. Although we've made substantial progress, we still have much to
do. We must satisfy rapidly changing markets. We must be prepared to adjust to
health care reform at the national and state levels. We must look for ways to
enlarge our company -- through mergers or acquisitions, through the purchase or
lease of single facilities, or through strengthening the provider networks
within our key geographic markets.
Even as we return to our general hospital roots, we realize that running
hospitals is a much different business than it used to be. The economics of
health care has changed the way we operate, while new technology has
transformed the way we care for patients. Although no one yet knows how the
rules will change under health care reform, we can be sure that providing the
best possible care to patients and vigilantly controlling expenses will always
serve us well. We will build our business on these tenets and on a strengthened
ethical foundation.
We thank you, our shareholders, for your support during this critical
period. We also thank NME's employees, their families and our board for their
extra efforts, which have made our company's many accomplishments possible this
year.
Sincerely,
Jeffrey C. Barbakow
Chairman and Chief Executive Officer
Michael H. Focht Sr.
President and Chief Operating Officer
August 12, 1994
6
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Operations Review
In fiscal 1994 we refocused on the profitable core business of National
Medical Enterprises -- general hospitals -- and on our hospital campuses. Today
NME operates 33 general hospitals in six U.S. states and 13 hospitals in four
foreign countries. We spun off most of our long-term-care operations in 1990,
sold most of our physical rehabilitation hospitals in fiscal 1994, and are in
the process of divesting our psychiatric facilities. To maintain strategic
service networks in some key metropolitan areas, we have retained seven
long-term-care facilities, six rehabilitation hospitals and four psychiatric
hospitals on or near our general hospital campuses.
GENERAL HOSPITALS
Amid major changes in the health care industry, our general hospitals
continue to perform well both in the fee-for-service arena and in the managed
care environment.
Admission and utilization rates at our hospitals declined slightly as more
patients utilize managed care. In fiscal 1994 we reduced the impact of these
declines through outstanding expense control. For example, NME works closely
with hospital medical staffs to more effectively manage the use of ancillary
services and supplies. Another important cost-control component is
restructuring the staffing and functions of hospital personnel. A new
multidisciplinary approach to patient care, in place at five NME hospitals,
allows staff to provide more services on the patient floors instead of in
ancillary departments.
Through national purchasing, NME negotiates money-saving contracts for
hospital supplies. For example, we save an average of 30 percent to 40 percent
off the list price on pharmaceuticals and IV therapy products.
Cost control is not the only way to improve our performance. At NME, we've
known for years that the market for traditional fee-for-service medicine will
continue to shrink; managed care is the future of health care. In many areas,
the future is already here. Managed care -- in different forms in different
marketplaces -- is the basis of the development plans of every one of our
hospitals. Our goal is to be a key player in an integrated health care delivery
system.
Toward that end, we are ensuring that NME hospitals can provide effective
capitated services. Under capitation, providers contract with a health plan to
offer comprehensive services to plan members in return for a flat monthly
per-member fee. Consequently, doctors and hospitals share the financial risks
as well as the rewards of capitation. This gives physicians more incentive than
ever to treat patients cost-efficiently and to form physician/hospital
alliances to better manage financial risks.
Providing physicians with access to excellent hospital facilities and staff
always has been central to NME's business philosophy. Today we also provide
specialized management services to help them navigate the increasing
complexities of the health care business under capitation and other forms of
managed care.
Of course, cost-efficiency and physician support are only means to an end:
Outstanding patient care and patient satisfaction is the mission of our
business. To measure satisfaction and further improve our service, this fiscal
year we began a centralized, standardized survey of every patient who stays
overnight or has outpatient surgery at NME hospitals. Results have been
positive and indicate that most patients are very happy with the care at our
hospitals.
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Additionally, we continue efforts to measure our patients' clinical outcomes
from medical records. Ultimately, we believe patient satisfaction and outcome
study data will provide the kind of information patients and payors look for
when they select hospitals and physicians for their provider networks.
Our acquisition goals, too, focus on expanding NME's role in the integrated
health care system. In May 1994 NME signed an operating lease for the 138-bed
Doctors Hospital of Jefferson near New Orleans that was well-suited to these
goals. NME owns four other general hospitals in the area, along with two
psychiatric hospitals, two long-term-care facilities and one physical
rehabilitation hospital. This move gives our company improved ability to serve
a greater portion of the New Orleans metropolitan area and to develop a
stronger provider network to contract with health plans.
In early fiscal 1995 NME sold Doctors Hospital of Montclair and Ontario
Community Hospital, two smaller Southern California community hospitals that do
not fit in our future of integrated health care.
National Health Plans, an NME subsidiary in Modesto, Calif., the location of
NME's largest domestic hospital, does complement our strategic plans. This
subsidiary has grown dramatically in its decade of involvement in managed care.
Its preferred provider organization (PPO) includes more than 1,500 providers
and serves more than 20,000 members; its health maintenance organization (HMO)
has more than 40,000 members; and its insurance products and services firm
serves approximately 23,000 policyholders. We are expanding National Health
Plans' service area in California and elsewhere and are offering new programs
and products.
Systemwide, we are careful to maintain, upgrade and remodel our hospitals.
Most of our capital expenditures go toward these ends, rather than toward
increasing the number of licensed beds. An important element of modernization,
which also reflects the influence of managed care, is the expansion of
outpatient services at many of our hospitals.
In addition, NME has six medical office buildings under construction to meet
physicians' demands for space near NME hospitals and to serve patients more
conveniently. We currently operate 28 medical office buildings domestically,
most adjacent to our hospitals.
Where there is a need and where market conditions warrant, we continue to
introduce new medical equipment and procedures that promise to improve patient
care and assist our physicians.
For example, two of our more-sophisticated hospitals recently acquired gamma
knives to treat some patients with certain brain tumors and vascular
malformations. With this tool, which is not a knife but a device that focuses
multiple beams of gamma radiation on a precise spot, surgeons can perform brain
surgery in a single short session without opening a patient's skull. Gamma
knives can reduce the attendant risks of neurosurgery and minimize
hospitalization and recovery time. Only 16 other U.S. hospitals have this
equipment.
INTERNATIONAL HOSPITALS
NME is well-positioned to take full advantage of a world of health care
opportunities. In Asia, we are helping to meet the rapidly growing middle
class's demand for quality care. In Australia, NME is modernizing hospitals and
foresees solid growth in the private health care industry. In Europe, where some
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countries are beginning to shift toward the private sector as an alternative
to overburdened public health systems, we are pursuing selective expansion.
Our Singapore operations, which include two hospitals plus lab and radiology
services, are thriving. They provide a sturdy base for continued development in
Southeast Asia. One of the region's largest private tertiary hospitals, 505-bed
Mount Elizabeth Hospital in Singapore draws 30 percent of its patients from
outside the country and has a reputation as a regional center of medical
excellence. Mount Elizabeth has established medical affiliations with China,
Indonesia, Myanmar and neighboring countries.
Subang Jaya Medical Centre, our successful joint venture in Malaysia, will
expand to 375 beds when it opens a 150-bed inpatient tower in November.
In June 1996 NME will open and manage another Asian venture -- the 554-bed
Bumrungrad Hospital in Bangkok. We own 40 percent of the project, which will be
Thailand's largest private hospital. We plan further expansion in Malaysia and
Thailand. Other countries we're examining include Indonesia, India and China.
NME owns 52 percent of Australian Medical Enterprises Limited (AME), which
has been expanding and upgrading its nine hospitals and improving its
successful pathology business. The company issued new shares in June 1994 to
raise funds for expansion. Additionally, AME is building the 202-bed St. George
Medical Complex adjacent to one of metropolitan Sydney's leading public
teaching hospitals. Scheduled to open in late 1995, it will be one of
Australia's largest private hospitals.
NME has just begun to operate private hospitals in Europe. In June 1994 we
assumed full ownership of Centro Medico Teknon, a 184-bed, full-service
hospital in Barcelona, Spain. We previously owned 50 percent of the hospital,
which opened in February 1994.
Internationally and domestically, NME's 35,000 employees continue to work
closely with physicians to find new ways to better serve our patients and to
adapt successfully to the world's changing health care delivery systems. The
result should be high-quality health care and satisfied patients.
9
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Selected Financial Data and Ratios
Continuing Operations
<TABLE>
<CAPTION>
Years Ended May 31,
(dollar amounts, except per-share -------------------------------------------------------------
amounts, are expressed in millions) 1994 1993 1992 1991 1990
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<S> <C> <C> <C> <C> <C>
Operating Results
Net operating revenues $2,967 $3,191 $2,941 $2,610 $2,917
Total costs and expenses(1) (2,723) (2,915) (2,642) (2,394) (2,746)
Investment earnings 28 21 29 29 29
Gain on sale of subsidiary's
common stock 0 29 0 0 0
Net gain on disposals of facilities
and long-term investments 88 93 31 0 0
------------------------------------------------------------
Income from continuing operations 360 419 359 245 200
Taxes on income (144) (155) (141) (100) (77)
------------------------------------------------------------
Income from continuing operations 216 264 218 145 123
------------------------------------------------------------
Earnings per share from continuing
operations:
Primary 1.29 1.59 1.27 0.91 0.78
Fully diluted 1.23 1.49 1.19 0.87 0.76
Cash dividends per common share 0.12 0.48 0.46 0.40 0.36
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Balance Sheet Data
Total assets 3,697 4,173 4,236 4,060 3,807
Long-term debt 223 892 1,066 1,140 1,361
Total debt 834 1,177 1,305 1,243 1,638
Stockholders' equity 1,320 1,752 1,674 1,762 1,257
Book value per common share 7.95 10.56 10.03 10.08 7.97
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Ratios
Pretax margin 12.1% 13.1% 12.2% 9.4% 6.9%
------------------------------------------------------------
Current ratio 0.88/1 1.17/1 1.26/1 1.58/1 1.36/1
------------------------------------------------------------
Total debt/equity ratio 0.63/1 0.67/1 0.78/1 0.71/1 1.30/1
------------------------------------------------------------
Return on assets, after tax 5.5% 6.2% 5.3% 3.7% 3.2%
------------------------------------------------------------
Return on equity, after tax 13.8% 15.2% 12.2% 10.4% 9.9%
------------------------------------------------------------
Interest expense coverage 6.1 6.6 5.0 3.0 2.5
------------------------------------------------------------
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</TABLE>
(1) Total costs and expenses for 1994, 1993 and 1992 include unusual
restructuring charges of $77 million, $52 million and $18 million
respectively, which are explained elsewhere in this report.
10
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Management's Discussion and Analysis of Financial Condition and Results of
Operations
(All references to years are to fiscal years, and all note references are to
the accompanying Notes to Consolidated Financial Statements.)
Liquidity and Capital Resources
A number of events occurred in 1994 that had a significant impact on the
Company's financial statements, liquidity and results of operations. These
events included the settlement of insurance company litigation, settlement of
the government investigations, adoption of a formal plan to discontinue the
psychiatric hospital business, the sale of most of the Company's rehabilitation
hospitals, and a corporate restructuring to significantly reduce overhead.
In November 1993 and in February 1994 the Company executed settlement
agreements covering the three lawsuits previously filed by several insurance
companies. Under the settlements, the Company paid an aggregate of $214.9
million as complete and final resolution of these disputed claims alleging that
certain psychiatric hospitals engaged in fraudulent practices.
In June 1994 the Company agreed to settle for $362.7 million all
investigations by federal government agencies and in May 1994 reached
agreements in principle with 27 states and the District of Columbia to settle
all investigations by them for $16.3 million. (See Note 7B).
In April 1994 the Company announced and initiated a formal plan to reduce
corporate and division staffing levels, to review the resulting office space
needs of all corporate operations, and to otherwise lower the Company's
corporate overhead. As a result, the Company announced in July 1994 that 240
staff positions were being eliminated and that it had decided to sell its
corporate headquarters building and to lease less office space in that building
or at an alternative site. A reserve of $77 million was recorded in the quarter
ended May 31, 1994, to cover the costs of a write-down of the building,
employee severance benefits and other expenses directly related to the overhead
reduction plan. The Company expects its annual overhead savings from
implementation of this plan to approximate $32 million and that the sale of its
corporate headquarters building, which may take two years to consummate, should
generate after-tax proceeds in excess of $40 million.
The Company's cash and cash equivalents at May 31, 1994, were $313 million,
an increase of $172 million over May 31, 1993. The ratio of total debt to
equity was 0.63:1, compared with 0.67:1 at May 31, 1993, and 0.78:1 at May 31,
1992. Working capital (deficit) at May 31, 1994, was ($196) million, compared
with $155 million at May 31, 1993, and $223 million at May 31, 1992. The
principal reasons for the decline in working capital in 1994 were 1) a $424
million increase in current portion of long-term debt, most of which matures in
April 1995, and 2) a $393 million increase in current reserves related to
discontinued operations and restructuring charges.
During 1994 net cash provided by operating activities was $466 million
before pretax expenditures of $319 million related to the discontinued
psychiatric hospital business and for restructuring charges. (See Notes 2 and
16.) Corresponding figures for 1993 were $494 million and $96 million,
respectively. In 1992 they were $583 million and $24 million, respectively.
Proceeds from the sales of facilities, investments and other assets were
$569 million during 1994, compared with $70 million in 1993 and $109 million in
1992. Sales in 1994 included 23 long-term-care facilities previously leased to
The Hillhaven Corporation, 29 inpatient rehabilitation hospitals and 45 related
satellite outpatient clinics, 15 psychiatric facilities and one general
hospital. In June 1994 the Company sold 31 more psychiatric facilities for $137
million in cash. The Company has agreed to sell 20 more psychiatric facilities
for $71 million in cash. (See Note 2.) In August 1994 the Company received a
$75.5 million dividend from a wholly owned subsidiary in connection with a
debt/equity offering in which the Company's interest in the subsidiary will be
reduced to approximately 25%. (See Notes 13 and 15.)
Cash payments for property, plant and equipment were $185 million in 1994,
compared with $319 million in 1993 and $421 million in 1992. The estimated cost
to complete major approved construction projects at wholly owned subsidiaries
is approximately $120 million, all of which is related to expansion,
improvement and equipping of existing domestic hospital facilities, and the
significant portion of which will be spent over the next three years. The
Company expects to finance all such expenditures with either internally
generated or borrowed funds. The Company intends to continue to invest
domestically and internationally in existing and new facilities within its
existing health care business.
During 1994 the Company had a net reduction in current and long-term debt of
approximately $337 million. In September 1993 the Company repaid $50 million of
its then-outstanding bank borrowings under its unsecured revolving credit and
term loan agreement and refinanced the $246.2 million balance of such loans
with new term loans maturing in April 1995 and requiring quarterly installments
aggregating $56.4 million through February 1995. These loans were repaid in
April 1994 with $222 million in loans under a new $464.7 million revolving
credit and letter of credit agreement with four banks. Indebtedness under the
new agreement is secured by a pledge of all the outstanding capital stock of a
wholly owned subsidiary of the Company, which also guarantees the loans. The
new agreement also provides for $242.7 million in letters of credit to support
certain of the
11
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Company's obligations relating to commercial paper and remarketable bond
programs. All of the outstanding revolving loans under the new agreement mature
on April 12, 1995, and there are no earlier installments of principal due or
reductions of availability. The Company has no unused revolving credit
availability under the new agreement and has no other unused committed credit
facilities.
The Company is having discussions with several banks regarding the
establishment of new lines of credit that could be utilized to repay the
current portion of long-term debt, most of which matures in April 1995, and
believes that, based on the progress to date of these discussions, such new
lines of credit will be available if needed.
In June 1993 Moody's Investors Service, Inc. lowered its rating on the
Company's senior debt from Baa1 to Baa3 and in August 1993 placed the Baa3
rating under review for possible further downgrading. In September 1993
Standard and Poor's Corporation lowered its rating on the Company's senior debt
from BBB- to BB. In April 1994 the BB rating was upgraded to BB+.
The Company suspended the payment of quarterly dividends in October 1993.
Management believes that patient volumes, cash flows and operating results
at the Company's principal health care businesses have been adversely affected
by the legal proceedings and investigations described elsewhere in this annual
report. The most significant of these legal proceedings and investigations have
now been resolved. The Company has recorded reserves for the remaining legal
proceedings not yet settled as of May 31, 1994, and an estimate of the legal
fees related to these matters to be incurred subsequent to May 31, 1994,
totaling approximately $81 million, of which $69 million is expected to be paid
within one year. These reserves represent management's estimate of the net
costs of the ultimate disposition of these matters. However, there can be no
assurance that the ultimate liability will not exceed such estimates.
The Company's liquidity, including cash proceeds from operating activities,
anticipated disposals of assets and the realization of current deferred tax
assets ($372 million), is believed to be adequate to finance planned capital
expenditures and known operating needs, including the settlements of the
federal and state investigations and other unusual legal proceedings referred
to herein.
Results of Operations
The most significant transactions affecting the results of continuing
operations were the sale of most of the Company's rehabilitation hospitals and
related outpatient clinics in 1994 (see Note 13) and other unusual pretax items
as shown below.
Table I Unusual Items -- Continuing Operations:
<TABLE>
<CAPTION>
(in millions) 1994 1993 1992
---------------------------------------------------------------------
<S> <C> <C> <C>
Gains on sales of facilities and long-term
investments (see Note 13) 88 93 31
Gain on sale of subsidiary's stock (see Note 15) -- 29 --
Restructuring charges (see Note 16) $(77) $(52) $(18)
------------------
Net unusual pretax items (after-tax $0.04
fully diluted per share in 1994, $0.30 in
1993and $0.04 in 1992) $11 $70 $ 13
==================
</TABLE>
In November 1993 the Company decided to discontinue its psychiatric hospital
business and adopted a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities within one year. In 1994 the Company had a
loss from the psychiatric operations of $701 million net of income tax benefits
of $412 million. The loss includes the costs of settling federal and state
investigations of the psychiatric business, provisions for losses during the
phase-out period, including the costs of settling unusual psychiatric
litigation, and the write-down of assets to net realizable value. Losses from
discontinued operations in 1993 and 1992 were $104 million and $85 million, net
of income tax benefits, respectively. Results for 1993 and 1992 have been
restated to reflect the operating results for the discontinued business
separately from continuing operations.
12
<PAGE>
Income from continuing operations before income taxes and cumulative effect
of a change in accounting was $360 million in 1994, compared with $419 million
and $359 million in 1993 and 1992, respectively. Excluding the unusual items as
shown in Table I, income from continuing operations before income taxes and
cumulative effect of a change in accounting would have been $349 million in
both 1994 and 1993 and $346 million in 1992.
Net operating revenues and operating profits from continuing operations
before interest are shown in Table II. The revenues and expenses of the sold
rehabilitation hospitals and related outpatient clinics are included in the
Company's results of operations through December 1993. Net operating revenues
of the sold facilities were $266 million in 1994 and $470 million in 1993.
Pretax income of the sold facilities, before general corporate overhead costs,
was $22 million in 1994 and $55 million in 1993.
Table II Operating Revenues and Profits:
<TABLE>
<CAPTION>
Increase (Decrease)
1993 to 1994
-------------------
(in millions) 1994 1993 1992 Amount Percent
----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net Operating Revenues:
Hospitals $2,807 $2,979 $2,757 $(172) (6)%
Other Businesses 160 212 184 (52) (25)%
----------------------------------------------
Total $2,967 $3,191 $2,941 $(224) (7)%
==============================================
Operating Profits Before
Interest and Net
Unusual Items (Table I):
Hospitals $358 $359 $369 $(1) --
Other Businesses 42 54 44 (12) (22)%
----------------------------------------------
Total $400 $413 $413 $(13) (3)%
==============================================
</TABLE>
The hospital line of business includes primarily the operations of the
Company's domestic and international general hospitals, its rehabilitation
hospitals and the management services business. Net operating revenues
decreased in 1994 due to the sale of the rehabilitation facilities. Operating
profits were virtually unchanged from the prior year. The hospitals' operating
profit margin was 12.8% in 1994, compared with 12.1% in 1993 and 13.4% in 1992.
The operating profit margin increase from 1993 to 1994 was primarily due to
more effective cost-control programs and the sale of the rehabilitation
hospitals, which, as a whole, had lower margins than the general hospitals.
Selected statistics for domestic general hospital operations are shown below:
Table III
<TABLE>
<CAPTION>
Increase
(Decrease)
1993 to
1994 1993 1992 1994
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
General Hospitals:
Facilities owned or operated 35 35 35 --
Year-end licensed beds 6,873 6,818 6,559 0.8%
Average licensed beds in period 6,760 6,811 6,563 (0.7)%
Average occupancy 46.8% 47.8% 50.5% (1.0)%*
Patient days 1,154,030 1,187,181 1,211,187 (2.8)%
Net inpatient revenues
(in millions) $1,568 $1,529 $1,445 2.6%
Net inpatient revenue per
patient day $1,359 $1,288 $1,193 5.5%
Admissions 207,868 210,669 208,307 (1.3)%
Average length of stay (days) 5.6 5.6 5.8 --
Net outpatient revenues
(in millions) $557 $535 $465 4.1%
% of net patient revenues
from Medicare and Medicaid 44.4% 41.4% 38.5% 3.0%*
</TABLE>
*This % change is the difference between the 1994 and 1993 percentages shown.
13
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Domestic General Hospitals
Domestic general hospital net patient revenues were $2.1 billion in 1994 and
1993 and $1.9 billion in 1992. There continue to be increases in inpatient
acuity and intensity of services and higher inpatient revenue per patient day
as less intensive services shift from an inpatient to an outpatient basis or to
alternative health care delivery services because of technology improvements
and as cost controls by payors become greater. Allowances and discounts are
expected to continue to rise because of increasing cost controls by government
and group health payors and because the percentage of business from managed
care programs (and related discounts) continues to grow.
The Medicare program accounted for approximately 36% of the net patient
revenues of the domestic general hospitals in 1994 and 34% and 32% in 1993 and
1992, respectively. Historically, rates paid under the Medicare's prospective
payment system have increased, but such increases have been less than cost
increases.
The general hospital industry in the United States and the Company's general
hospitals continue to have significant unused capacity, and thus there is
substantial competition for patients. Inpatient utilization continues to be
negatively affected by payor-required pre-admission authorization and by payor
pressure to maximize outpatient and alternative health care delivery services
for less acutely ill patients. Increased competition, admissions constraints
and payor pressures are expected to continue. The Company offers discounts to
private payor groups, enters into capitation contracts in some service areas,
upgrades facilities and equipment and offers new programs and services. The
Company has been implementing various cost-control programs focused on reducing
operating costs. The Company's general hospitals have been successful in
increasing operating profits in a very competitive environment, due in large
part to enhanced cost control and efficiencies being achieved throughout the
Company. The Company, however, does not expect to be able to sustain the growth
rates from its existing domestic general hospitals that were achieved in recent
years.
Psychiatric Hospitals
Psychiatric hospitals' statistics and commentary have not been included
herein because of the Company's decision on November 30, 1993, to discontinue
its psychiatric hospital business by disposing of its psychiatric hospitals and
substance abuse recovery facilities. The Company entered into two separate
asset sale agreements, each dated as of March 1994, to sell 47 psychiatric
facilities, and the Company currently has reached an agreement to sell or is
negotiating with various other parties for the sale of 10 psychiatric hospitals
and is seeking a buyer for one other facility. (See Note 2.) Even though the
Company will continue to operate its psychiatric hospital business until the
completion of the divestiture program, the expected results of operations
already have been reported as discontinued operations in the Company's
financial statements.
The action to discontinue its psychiatric hospital business and the sale of
the psychiatric and off-campus rehabilitation hospitals described above
comprise significant elements of the Company's previously announced decision to
focus on its core general hospital business.
Other Businesses
During 1994 other businesses included the operating results of the Company's
dialysis centers, seven domestic long-term-care facilities, the Company's
equity interest in the net income of The Hillhaven Corporation, loan and lease
guarantee fees from Hillhaven, leasing of long-term-care facilities and
retirement centers to Hillhaven, the Company's equity interest in the net
income of Westminster Health Care Holdings PLC, and other smaller businesses.
Most of the declines in net operating revenues of other businesses for the
1994 year compared with the 1993 year are due to a reduction in the Company's
ownership of Westminster from approximately 90% to approximately 42% and the
restructuring of its relationship with Hillhaven described below. Operating
profits have been affected for the same reasons.
14
<PAGE>
In September 1993 the Company and Hillhaven substantially completed a series
of transactions that resulted in: 1) the Company selling to Hillhaven all
remaining leased long-term-care nursing facilities, and no longer being a
lessor to Hillhaven, but remaining a significant holder of Hillhaven common and
preferred stock; 2) all indebtedness owed to the Company from Hillhaven being
paid in full; and 3) reducing Hillhaven obligations guaranteed by the Company.
After reflecting these transactions, including the sale of long-term-care
facilities to Hillhaven, the Company's lease income for 1994 was $3 million,
compared with $20 million in 1993. The Company's equity in Hillhaven's net
income was $15 million in 1994, compared with $8 million in 1993. The
significant increase in equity earnings is due to Hillhaven's improved overall
earnings and the Company's increasing its investment in Hillhaven in 1994. (See
Note 14.)
In May 1994 the Company entered into an agreement pursuant to which DLJ
Merchant Banking Funding, Inc. and certain of its affiliates will acquire a
controlling interest in the Company's wholly owned subsidiary that operates its
dialysis centers. After completion of the transaction in August 1994, the
Company will own approximately 25% of the outstanding common stock of the
subsidiary. Thereafter, the Company's share of the operating results of the
subsidiary will be recognized using the equity method of accounting and is
expected to be minimal in 1995. Net operating revenues of the subsidiary were
$80.5 million in 1994, and net income was $5.7 million. (See Note 15.)
Other Operating Results
Depreciation and amortization expense as a percentage of net operating
revenues was 5.4% in 1994, 5.0% in 1993 and 4.8% in 1992. Interest expense was
2.4% in 1994 and 1993 and 3.0% in 1992.
Investment earnings were $28 million in 1994, $21 million in 1993 and $29
million in 1992, and were derived primarily from notes receivable and
investments in short-term marketable securities. Effective tax rates on income
from continuing operations before extraordinary charges were 40.0% in 1994,
37.0% in 1993 and 39.3% in 1992. The 1993 effective rate on pretax income from
continuing operations excluding the gain on the sale of Westminster's common
stock would have been 39.7%. (See Note 15.)
The financial statements reflect operating and depreciation expenses based
on historical cost. Except for depreciation expense, the expenses are recorded
in the amounts approximating current purchasing power. Depreciation expense
would be greater if based on current costs of the Company's property, plant and
equipment rather than historical costs. The Company mitigates the impact of
inflation on its operating costs and provision for depreciation by price
increases and by continuing renovation and replacement of the physical plant
and equipment. As a result, the Company believes that inflation does not have a
significant impact on its earnings, except when Medicare and Medicaid rate
increases are inadequate in relation to rising costs and when other payors also
implement programs to control their health costs as discussed above.
Business Outlook
Because of intense national, state and private industry efforts to reform
the health care delivery and payment systems in this country, the health care
industry as a whole faces increased uncertainty. While the Company is unable to
predict which, if any, proposals for health care reform will be adopted, it
continues to monitor their progress and analyze their potential impacts in
order to formulate its future business strategies.
Another factor impacting operating results is the slow recovery of the
California economy from the recent recession. At May 31, 1994, 43% of the
Company's domestic general hospital beds were in California.
The challenge facing the Company and the health care industry is to continue
to provide quality patient care in an environment of rising costs, strong
competition for patients, and a general reduction of reimbursement by both
private and government payors.
15
<PAGE>
Consolidated Statements of Operations
<TABLE>
<CAPTION>
Years Ended May 31,
(dollar amounts, except per-share amounts, ------------------------------------------
are expressed in millions) 1994 1993 1992
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating revenues $2,967 $3,191 $2,941
------------------------------------------
Operating and administrative expenses (2,492) (2,680) (2,412)
Depreciation and amortization (161) (160) (141)
Interest, net of capitalized portion
($4 in 1994, $9 in 1993, $11 in 1992) (70) (75) (89)
------------------------------------------
Total costs and expenses (2,723) (2,915) (2,642)
------------------------------------------
Investment earnings 28 21 29
Net gain on disposals of facilities
and long-term investments 88 93 31
Gain on sale of subsidiary's
common stock 0 29 0
------------------------------------------
Income from continuing operations
before income taxes 360 419 359
Taxes on income (144) (155) (141)
------------------------------------------
Income from continuing operations 216 264 218
------------------------------------------
Discontinued operations (701) (104) (85)
Extraordinary charges -- net of tax 0 0 (29)
Cumulative effect of a change
in accounting for income taxes 60 0 0
------------------------------------------
Net income (loss) $(425) $160 $104
==========================================
Earnings (loss) per share:
Primary:
Continuing operations $1.29 $1.59 $1.27
Discontinued operations (4.19) (0.63) (0.50)
Extraordinary charges 0.00 0.00 (0.17)
Cumulative effect of a change
in accounting principle 0.36 0.00 0.00
------------------------------------------
$(2.54) $0.96 $0.60
==========================================
Fully diluted:
Continuing operations $1.23 $1.49 $1.19
Discontinued operations (4.10) (0.58) (0.44)
Extraordinary charges 0.00 0.00 (0.15)
Cumulative effect of a change
in accounting principle 0.33 0.00 0.00
------------------------------------------
$(2.54) $0.91 $0.60
==========================================
Weighted average shares and share
equivalents outstanding--primary
(in thousands) 167,024 166,111 171,853
- -------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
16
<PAGE>
Consolidated Balance Sheets
<TABLE>
<CAPTION>
May 31,
-----------------------
(dollar amounts are expressed in millions) 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 313 $ 141
Short-term investments, at
cost which approximates market 60 98
Accounts and notes receivable,
less allowance for doubtful accounts
($77 in 1994 and $115 in 1993) 385 502
Inventories of supplies, at cost 55 62
Deferred income taxes 372 120
Assets held for sale 204 56
Prepaid expenses and other current assets 55 89
-----------------------
Total current assets 1,444 1,068
-----------------------
Long-term receivables 73 190
Investments and other assets 309 205
Property, plant and equipment, net 1,764 2,492
Intangible assets, at cost, less accumulated
amortization ($54 in 1994 and $176 in 1993) 107 218
-----------------------
$3,697 $4,173
=======================
- ---------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Current liabilities:
Short-term borrowings and notes $ 67 $ 163
Accounts payable 176 140
Employee compensation and benefits 93 104
Reserves related to discontinued operations 465 101
Other current liabilities 236 254
Income taxes 58 30
Current portion of long-term debt 545 121
-----------------------
Total current liabilities 1,640 913
-----------------------
Long-term debt, net of current portion 223 892
Other long-term liabilities 389 299
Deferred income taxes 125 317
Commitments and contingencies
(see accompanying notes)
Stockholders' equity:
Common stock, $0.075 par value; authorized
450,000,000 shares; 185,587,666 shares
issued at May 31, 1994, and 185,698,524
shares at May 31, 1993 14 14
Additional paid-in-capital 1,015 1,007
Notes receivable on exercise of stock
options (2) (2)
Retained earnings 575 1,019
Less common stock in treasury, at cost,
19,507,161 shares at May 31, 1994,
and 19,800,103 at May 31, 1993 (282) (286)
-----------------------
Total stockholders' equity 1,320 1,752
-----------------------
$3,697 $4,173
=======================
- ---------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
17
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------------
(dollar amounts are expressed in millions) 1994 1993 1992
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $(425) $ 160 $ 104
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 198 199 196
Deferred income taxes (253) (32) (96)
Gains on sales of facilities and long-term
investments (88) (93) (31)
Gain on sale of subsidiary's common stock 0 (29) 0
Extraordinary charges 0 0 34
Additions to reserves related to discontinued
operations and restructuring charges 1,175 189 218
Cumulative change in accounting principle (60) 0 0
Other items 38 33 35
Increases (decreases) in cash from changes in
operating assets and liabilities, net of
effects from purchases of new businesses:
Accounts and notes receivable, net (65) 65 46
Inventories, prepaid expenses and other
current assets (21) (43) (13)
Accounts payable, accrued expenses and
income taxes payable (31) 21 55
Noncurrent accrued expenses and other
liabilities (2) 24 35
------------------------------
Net cash provided by operating activities,
before expenditures for discontinued
operations and restructuring charges 466 494 583
Net expenditures for discontinued
operations and restructuring charges (319) (96) (24)
------------------------------
Net cash provided by operating activities 147 398 559
------------------------------
Cash Flows From Investing Activities:
Purchases of property, plant and equipment (185) (319) (421)
Purchases of new businesses, net of cash acquired (5) (3) (14)
Proceeds from sales of facilities, investments
and other assets 569 70 109
Investments in Hillhaven (63) 0 0
Collections on notes 100 27 74
Increase in intangible and other assets (24) (29) (53)
Increase in notes receivable (4) (21) (24)
Equity investments in partnerships (11) (8) 0
Other items 9 (16) (8)
------------------------------
Net cash provided by (used in) investing
activities 386 (299) (337)
------------------------------
</TABLE>
18
<PAGE>
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
Years Ended May 31,
------------------------
(dollar amounts are expressed in millions) 1994 1993 1992
- -------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows From Financing Activities:
Net proceeds from (payments of) unsecured
lines of credit and reverse purchase agreements (151) (10) 220
Payments of other borrowings (217) (93) (103)
Proceeds from other borrowings 31 131 271
Redemptions of notes and debentures 0 0 (383)
Cash dividends paid to shareholders (40) (78) (76)
Purchases of treasury stock 0 (19) (150)
Other items 16 (3) (3)
------------------------
Net cash used in financing activities (361) (72) (224)
------------------------
Net increase (decrease) in cash and cash
equivalents 172 27 (2)
Cash and cash equivalents at beginning
of year 141 114 116
------------------------
Cash and cash equivalents at end of year $ 313 $ 141 $ 114
========================
- -------------------------------------------------------------------------
Supplemental Disclosures:
Interest paid, net of amounts capitalized $ 62 $ 87 $ 78
Income taxes paid 30 125 186
Notes received in connection with sales
of facilities 0 92 4
Conversions of notes and debentures into
common stock 0 0 15
- -------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
19
<PAGE>
Consolidated Statements of Changes
in Stockholders' Equity
<TABLE>
<CAPTION>
Years Ended May 31, 1992, 1993, 1994
---------------------------------------------------------------------
Common Stock Stock
---------------------- Additional Option
(dollar amounts are expressed in millions, Outstanding Issued Paid-in Notes Retained Treasury
share amounts in thousands) Shares Amount Capital Receivable Earnings Stock
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balances, May 31, 1991 174,765 $14 $ 969 $(2) $ 914 $(133)
Net income 104
Cash dividends ($0.46 per share) (79)
Purchases of treasury stock (9,288) (150)
Stock options exercised 457 6 (2) 2
Notes receivable collections 2
Restricted share awards, net of
cancellations 129 13 1
Conversions of notes and
debentures 915 8 7
Other (15)
- --------------------------------------------------------------------------------------------------------------------
Balances, May 31, 1992 166,963 14 996 (2) 939 (273)
Net income 160
Cash dividends ($0.48 per share) (80)
Purchases of treasury stock (1,034) (15)
Stock options exercised 36 1
Restricted share cancellations (67) 11 1
- --------------------------------------------------------------------------------------------------------------------
Balances, May 31, 1993 165,898 14 1,007 (2) 1,019 (286)
Net loss (425)
Cash dividends ($0.12 per share) (19)
Stock options exercised 293 (1) 4
Restricted share cancellations (110) 9
- --------------------------------------------------------------------------------------------------------------------
Balances, May 31, 1994 166,081 $14 $1,015 $(2) $ 575 $(282)
===================================================================
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
20
<PAGE>
Notes to Consolidated Financial Statements
Note 1 Significant Accounting Policies
A. Principles of Consolidation
The consolidated financial statements include the accounts of National
Medical Enterprises, Inc. and its wholly owned and majority-owned subsidiaries.
Investments in other affiliated companies are accounted for by the equity
method. Significant intercompany accounts and transactions are eliminated in
consolidation.
The Company is primarily engaged in the operation of domestic and
international general hospitals. During 1994 the Company sold most of its
physical rehabilitation hospitals and decided to discontinue its psychiatric
hospital business, adopting a plan to dispose of its psychiatric hospitals and
substance abuse recovery facilities within one year. (See Note 2.)
B. Net Operating Revenues
These revenues consist primarily of net patient service revenues, which are
based on the hospitals' established billing rates less allowances and discounts
principally for patients covered by Medicare, Medicaid and other contractual
programs. These allowances and discounts were $2.7 billion, $2.6 billion and
$2.3 billion for the years ended May 31, 1994, 1993 and 1992, respectively.
Payments under these programs are based on either predetermined rates or the
costs of services. Settlements for retrospectively determined rates are
estimated in the period the related services are rendered and are adjusted in
future periods as final settlements are determined. Management believes that
adequate provision has been made for adjustments that may result from final
determination of amounts earned under these programs. Approximately 40% of
fiscal 1994 consolidated net operating revenues is from participation of
domestic general and physical rehabilitation hospitals in Medicare and Medicaid
programs. In 1993 it was approximately 37%, and in 1992 it was approximately
35%.
The Company provides care to patients who meet certain financial or economic
criteria without charge or at amounts substantially less than its established
rates. Because the Company does not pursue collection of amounts determined to
qualify as charity care, they are not reported as gross revenue and are not
included in deductions from revenue or in operating and administrative expenses.
C. Provision for Doubtful Accounts
A provision for estimated uncollectible accounts and notes receivable, net
of recoveries, is included in operating and administrative expenses and was
$107 million, $115 million and $123 million for 1994, 1993 and 1992,
respectively.
D. Property, Plant and Equipment
The Company uses the straight-line method of depreciation for buildings,
improvements and equipment over their estimated useful lives as follows:
buildings and improvements -- generally 25 to 50 years; equipment -- three to
15 years.
E. Intangible Assets
Preopening costs generally are amortized over four years. Costs in excess of
the fair value of identifiable net assets of purchased businesses generally are
amortized over 40 years. Deferred financing costs and the costs of acquiring
certain management contracts are amortized over the lives of the related loans
or contracts. The straight-line method is used to amortize most intangible
assets.
F. Stock Benefit Plans
The fair market value of restricted shares on the date of award and the fair
market value of the Company's common shares on the date of grant of discounted
stock options in excess of the exercise price are expensed, with appropriate
credits to additional paid-in capital, over the periods that the restrictions
as to forfeiture or exercise lapse. For restricted units, an amount equivalent
to the fair market value of shares of the Company's common stock on the date of
vesting, subject to a maximum amount, is expensed over the vesting period. (See
Note 10.)
G. Leases
Capital leases are recorded at the beginning of the lease term as assets and
liabilities at the lower of the present value of the minimum lease payments or
the fair value of the assets.
H. Cash Equivalents
The Company treats highly liquid investments with an original maturity of
three months or less as cash equivalents.
I. Interest Rate Swap Agreements
The differential to be paid or received under interest rate swap agreements
is accrued as the interest rates change and is recognized over the life of the
agreements as an adjustment to interest expense. (See Note 8B.)
21
<PAGE>
Notes to Consolidated Financial Statements
J. Sales of Common Stock of Subsidiaries
At the time a subsidiary sells existing or newly issued common stock to
unrelated parties at a price in excess of its book value, the Company's policy
is to record a gain reflecting its share of the increase in the subsidiary's
stockholders' equity resulting from the sale. (See Note 15.)
K. Translation of Foreign Currencies
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with Statement of Financial
Accounting Standards No. 52. All balance sheet accounts have been translated at
fiscal year-end exchange rates. Income statement amounts have been translated
at the average exchange rate for the year. The resulting currency translation
adjustments and the effect of transaction gains and losses are insignificant
for all years presented.
Note 2 Discontinued Operations -- Psychiatric Hospital Business
At November 30, 1993, the Company decided to discontinue its psychiatric
hospital business and adopted a plan to dispose of its psychiatric hospitals
and substance abuse recovery facilities within one year. Also, in connection
with the settlement of federal investigations of the Company described in Note
7B, the Company agreed to dispose of its psychiatric hospital business and not
to re-enter such business for five years. The Consolidated Statements of
Operations reflect the net operating results of the discontinued business
separately from continuing operations, and previously issued financial
statements have been restated to report these operations as discontinued.
Operating results for periods subsequent to November 30, 1993, are charged to
the reserve for estimated operating losses during the phase-out period. The
discontinued operations are summarized as follows:
<TABLE>
<CAPTION>
Twelve Months Ended May 31,
(in millions) 1994 1993 1992
- ------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net operating revenues $ 476 $ 571 $1,010
Loss from operations:
Loss before income taxes (266) (160) (129)
Income tax benefit 111 56 44
-----------------------
(155) (104) (85)
Loss on disposal:
Estimated losses upon disposal (414) -- --
Estimated operating losses during the phase-out period (433) -- --
Income tax benefit 301 -- --
-----------------------
(546) -- --
-----------------------
Total loss from discontinued operations $(701) $(104) $(85)
=======================
</TABLE>
The estimated losses upon disposal consist primarily of provisions for the
write-down of assets to estimated net realizable value and other costs
associated with the disposal of assets. The estimated net realizable value is
included in assets held for sale in the accompanying consolidated balance
sheet. The estimated operating losses during the phase-out period include the
costs of settling federal and state investigations and other unusual legal
costs related to the psychiatric hospital business. The loss from operations
also includes provisions for unusual legal costs and certain asset write-downs
related to the psychiatric business that were recorded prior to November 30,
1993. (See Note 7B.)
The Company entered into two separate sale agreements, each dated as of
March 29, 1994, to sell 47 psychiatric facilities to Charter Medical
Corporation for approximately $200 million, including the net book values of
certain inventory, receivables and other items of working capital, subject to
certain adjustments. One agreement provides for the sale of 30 hospitals for an
approximate sales price of $134 million. In June 1994 the Company sold 27 of
the 30 hospitals for a sales price of approximately $129 million. The sales of
the remaining three hospitals are anticipated to close in the near future. The
second agreement provides for the sale of 17 psychiatric hospitals. The Federal
Trade Commission (FTC) issued a request for additional information regarding
22
<PAGE>
these remaining hospitals. The Company and Charter are responding to the
FTC's request. No specific date has been set to close these sales, except that
if such closings do not occur prior to September 30, 1994, and the parties do
not extend that date, the agreement will terminate on September 30. Based on
discussions to date with the FTC, the Company believes it may not be able to
sell at least five facilities to Charter. However, it believes it will receive
similar proceeds upon their sale to other parties.
During fiscal year 1994 and through July 27, 1994, the Company sold an
additional 16 psychiatric hospitals, two substance abuse recovery facilities
and one residential treatment center to other parties. The aggregate sales
price for the 19 facilities approximated $44 million. The Company currently has
reached an agreement to sell or is negotiating with various other parties for
the sale of 10 psychiatric hospitals and is seeking a buyer for one other
facility.
Note 3 Disclosures About Fair Value of Financial Instruments
The carrying amounts of cash, accounts receivable, accounts payable and
interest payable approximate fair value because of the short maturity of these
instruments. The carrying values of investments, both short-term and long-term
(excluding investments accounted for by the equity method), long-term
receivables and long-term debt are not materially different than the estimated
fair values of these instruments. The estimated fair values of interest rate
swap agreements and foreign currency contracts also are not material to the
Company's financial position.
Note 4 Property, Plant and Equipment
Property, plant and equipment is stated at cost and consists of the
following:
<TABLE>
<CAPTION>
(in millions) 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Land $ 173 $ 249
Buildings and improvements 1,388 1,957
Construction in progress 59 47
Equipment 916 1,061
------ ------
2,536 3,314
Less accumulated depreciation and amortization 772 822
------ ------
Net property, plant and equipment $1,764 $2,492
====== ======
</TABLE>
Note 5 Long-Term Debt and Lease Obligations
A. Long-Term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
(in millions) 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Unsecured loans payable to banks $ -- $ 86
Secured loans payable to banks 13 --
Secured loans payable 143 158
Convertible floating rate debentures due 1996 219 220
Unsecured medium-term notes due through 1997 111 175
12-1/8% unsecured notes due April 1995 (not redeemable) 93 93
Notes secured by property, plant and equipment, weighted average
interest rate of approximately 9.5% in 1994 and 10.4% in 1993,
payable in installments to 2012 28 88
7-3/8% unsecured notes due 1997 (not redeemable) 58 58
Obligations under capital leases 49 80
Other, primarily unsecured 54 55
-------------
768 1,013
Less current portion 545 121
-------------
$223 $ 892
=============
</TABLE>
23
<PAGE>
Notes to Consolidated Financial Statements
Unsecured Loans Payable to Banks
In September 1993 the Company repaid $50 million of its then-outstanding
revolving bank borrowings under its $300 million unsecured bank revolving
credit and term loan agreement and refinanced the $246.2 million balance of
such loans with new term loans maturing in April 1995 and requiring quarterly
installments of $11.4 million through May 1994 and $15 million through February
1995. These loans were repaid in April 1994 with new secured bank loans, as
described below. The weighted average interest rate on these and other
unsecured loans payable to banks was 4.7% during 1994, 3.9% during 1993 and
5.3% during 1992.
Also in September 1993 the Company canceled its $120 million short-term
revolving credit agreement entered into in December 1992. No loans were ever
outstanding under this agreement.
Secured Loans Payable
In April 1994 the Company entered into a new $464.7 million revolving credit
and letter of credit agreement with several banks. Indebtedness of the Company
under the new agreement is secured by a pledge of all the outstanding capital
stock of NME Hospitals, Inc., a wholly owned subsidiary of the Company, and is
also guaranteed by NME Hospitals, Inc. The new agreement provides for revolving
loans of up to $222 million and for letters of credit in an aggregate amount of
$242.7 million to support certain of the Company's obligations relating to
commercial paper and remarketable bond programs. Loans of $222 million under
the new agreement were used to repay all of the Company's obligations under,
and to effect termination of, its then-existing unsecured bank term loan
agreement described above. All of this amount, including $209 million related
to the convertible floating rate debentures discussed below, was outstanding at
May 31, 1994.
All outstanding revolving loans under the new agreement mature on April 12,
1995, and there are no earlier installments of principal due or reductions of
availability thereunder. Revolving loans under the new agreement bear interest
at a base rate that is equal to the prime rate announced by Morgan Guaranty
Trust of New York or, if higher, the federal funds rate plus 0.5% or, at the
option of the Company, a London Interbank Offered Rate (LIBOR) plus 1.0% per
annum, for interest periods of one, two, three or six months.
The Company also has $143 million of secured loans payable outstanding at
May 31, 1994, that were used for project financings and are secured by liens on
real property or leasehold interests. These loans expire on April 12, 1995, and
provide for interest at the lender's fluctuating cost of funds plus 1/8%. The
weighted average interest rate during 1994 was 5.1%. It was 4.6% in 1993 and
6.4% in 1992.
Floating Rate Debentures -- Convertible
The floating rate debentures consist of two components: $209 million of
secured loans payable to banks and $10 million (5% of the debenture face
amount) of generally nontransferable performance investment options to key
employees of the Company. Because the proceeds from the exercise of the
investment options must be used by the Company to retire the debt underlying
the debentures, these loans, together with the outstanding balance of the
investment options, are classified as convertible floating rate debentures. The
weighted average interest rate for the debentures was 4.8% during 1994, 3.6% in
1993 and 6.3% in 1992. The debentures are subject to mandatory redemption in
April 1996 and after the occurrence of certain events.
The performance investment options permit the holder to purchase debentures
at 95% of their $105,264 face value. The debentures are convertible into
preferred stock, which in turn is convertible into common stock. The investment
options ultimately are convertible into 13,977,549 shares of common stock at an
exercise price equivalent to $15.83 per share. The 13,977,549 shares include
1,828,652 shares that are the subject of litigation between the Company and two
of its former executive officers. The Company believes that the investment
options held by those executive officers no longer are exercisable but has
included these shares pending final resolution of the dispute. The investment
options became fully vested in March 1994. The Company may repurchase the
investment options without a premium with the consent of the holder or by
paying a redemption premium sufficient to provide the holder a 6% annual
return. Under certain conditions, the investment options are subject to
mandatory redemption at a redemption price including a 6% annual return.
When investment options are exercised, the Company reduces taxable income by
any excess of the fair market value of the stock at the date of conversion over
the principal amount of the debentures redeemed. The resulting tax benefit
increases additional paid-in capital.
Unsecured Medium-Term Notes
These notes have had both fixed and floating rates of interest. The floating
rate notes were repaid during fiscal 1994. The weighted average interest rate
on these notes was 8.1% during 1994, 7.3% during 1993 and 8.6% during 1992. The
notes are not redeemable.
24
<PAGE>
Loan Covenants
Certain loan agreements have, among other requirements, limitations on
dividends, investments, borrowings, and acquisitions and dispositions of assets
and require maintenance of specified operating ratios, as well as specified
levels of working capital and net worth. The Company is in compliance with the
loan covenants. There are no compensating balance requirements for any credit
line or borrowing.
B. Long-Term Debt Maturities and Lease Obligations
Future long-term debt maturities and minimum operating lease payments are as
follows:
<TABLE>
<CAPTION>
Later
(in millions) 1995 1996 1997 1998 1999 Years
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Long-term debt $545 $60 $61 $66 $ 3 $ 33
Long-term leases $ 69 $64 $60 $55 $52 $250
</TABLE>
Rental expense under operating leases, including short-term leases, was
approximately $98 million in 1994, $114 million in 1993 and $113 million in
1992.
Note 6 Income Taxes
Taxes on income from continuing operations consist of the following amounts:
<TABLE>
<CAPTION>
(in millions) 1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Currently payable:
Federal $159 $148 $148
State 31 30 26
Foreign 6 7 7
--------------------------
196 185 181
Deferred:
Federal (46) (29) (39)
State (6) (3) (6)
--------------------------
(52) (32) (45)
Charges equivalent to federal and state income taxes,
primarily the benefit associated with stock benefit plans -- 2 5
--------------------------
$144 $155 $141
==========================
</TABLE>
The difference between the Company's effective income tax rate and the
statutory federal income tax rate is shown below:
<TABLE>
<CAPTION>
1994 1993 1992
------------------------------------------------------
(in millions of dollars and as a percent of pretax income) Amount Percent Amount Percent Amount Percent
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tax provision at statutory federal rate $126 35.0% $142 34.0% $122 34.0%
State income taxes, net of federal income tax benefit 17 4.6% 18 4.3% 14 3.9%
Gain on sale of subsidiary's common stock -- -- (10) (2.4)% -- --
0ther 1 .4% 5 1.1% 5 1.4%
------------------------------------------------------
Taxes on income from continuing operations and effective tax rates $144 40.0% $155 37.0% $141 39.3%
=====================================================
</TABLE>
No tax provision has been made for U.S. or additional foreign taxes on $68
million of undistributed earnings of foreign subsidiaries or on a $29 million
gain on the sale of a foreign subsidiary's common stock as the Company's
overseas investments are intended to be permanent. Such earnings would become
taxable upon the remittance of dividends or upon the sale or liquidation of the
investments.
25
<PAGE>
Notes to Consolidated Financial Statements
Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." Among other
provisions, this standard requires deferred tax balances to be determined using
enacted income tax rates for the years in which the taxes actually are paid or
refunds actually are received instead of when the deferrals were initiated. The
Company has recognized $60 million as income in the fiscal year ended May 31,
1994, for the cumulative effect on prior years of adopting this standard based
on tax rates in effect at June 1, 1993.
Deferred tax assets and liabilities as of May 31, 1994, relate to the
following:
<TABLE>
<CAPTION>
Deferred Tax
-------------------
(in millions) Assets Liabilities
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation and fixed asset basis differences $ -- $182
Reserves related to discontinued operations and restructuring charges 306 --
Receivables -- doubtful accounts and adjustments 69 --
Cash-basis accounting change -- 23
Accruals for insurance risks 35 --
Intangible assets -- 7
Other long-term liabilities 20 --
Benefit plans 18 --
Other accrued liabilities 10 --
Investments 9 --
Valuation allowance (7) --
Other items -- 1
---- ---
$460 $213
==== ====
</TABLE>
Management believes that the deferred tax assets at May 31, 1994, will be
realized by offsetting current tax provisions against future income or through
tax loss carrybacks.
Prior-year financial statements are not restated to reflect the new
accounting standard. The following reflect the principal sources of deferred
income tax credits for those years:
<TABLE>
<CAPTION>
(in millions) 1993 1992
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Depreciation and asset disposition differences $ 4 $ 9
Cash-basis accounting (8) (9)
Doubtful accounts and adjustments (5) (15)
Costs included in intangible assets, net of amortization -- (2)
Equity method accounting 2 (5)
Accruals for insurance risks (7) (7)
Restructuring charges (14) (14)
Other items (4) (2)
---- ----
$(32) $(45)
==== ====
</TABLE>
Note 7 Claims and Lawsuits
A. Professional and General Liability Insurance
The Company currently insures all of its professional and comprehensive
general liability risks through an insurance company owned by several health
care companies and in which the Company has a significant minority interest.
Risks in excess of $3 million per occurrence are reinsured with major
independent insurance companies. Through May 31, 1994, the Company insured its
professional and comprehensive general liability risks related to its
psychiatric and physical rehabilitation hospitals through a wholly owned
insurance subsidiary that reinsured risks in excess of $500,000 with major
independent insurance companies. The Company has reached the policy limits
provided by its insurance subsidiary related to the psychiatric hospitals in
certain years, and, in addition, damages, if any, arising from fraud and
conspiracy claims in psychiatric malpractice cases may not be insured.
(See Note 7B.)
26
<PAGE>
The Company's estimated liability for the self-insured portion of
professional and comprehensive general liability claims is $93 million at May
31, 1994, after discounting the liability to its present value based on
expected loss reporting patterns and a weighted average discount rate of 8.8%.
The Company believes that claims and lawsuits arising in the ordinary course
of business are adequately covered by insurance or are adequately provided for
in the Company's consolidated financial statements. However, the final
liability may vary from the estimated liability.
B. Significant Legal Proceedings
The Company has been involved in significant legal proceedings and
investigations of an unusual nature related principally to its psychiatric
business. During the years ended May 31, 1994, and 1993, the Company recorded
provisions to estimate the cost of the ultimate disposition of all these
proceedings and investigations and to estimate the legal fees that it expects
to incur. As discussed further below, the Company has settled the most
significant of these matters. The remaining reserves for unusual litigation
costs that relate to the matters that have not been settled as of May 31, 1994,
and an estimate of the legal fees to be incurred subsequent to May 31, 1994,
total approximately $81 million and represent management's estimate of the net
costs of the ultimate disposition of these matters. There can be no assurance,
however, that the ultimate liability will not exceed such estimates.
All of the costs associated with these legal proceedings and investigations
are classified in discontinued operations. (See Note 2.)
1) Insurance Litigation -- In November 1993 the Company signed agreements to
settle two of its lawsuits with certain insurance companies, and in February
1994 the Company signed an agreement to settle the remaining lawsuit. Under the
settlements, the Company agreed to pay up to $125 million and $89.9 million,
respectively, as complete and final resolution of the disputed claims alleging
that the psychiatric hospitals engaged in certain fraudulent practices. The
final installment of these settlements was paid in March 1994. In return, the
insurers agreed on an individual basis to strengthen standard business
relations with the Company, including, for example, allowing the Company to
compete for managed care contracts and participate in provider networks. The
settlements also addressed the processing by the insurance companies of pending
claims from psychiatric facilities owned by the Company's subsidiaries. The
Company has received inquiries from various other insurance companies and
health benefit providers regarding the possible filing of claims with similar
allegations. To date, the amounts involved are not significant.
2) Investigations -- On June 29, 1994, the Company executed plea agreements
that were approved by a federal judge and other settlement agreements under
which it agreed to pay a total of $362.7 million to conclude the federal
investigations of the Company and its subsidiaries: $324.2 million in civil
restitution and penalties, $34 million in criminal fines, $2 million to the
Department of Health and Human Services to support a children's mental health
program, and $2.5 million to the National Institute of Mental Health to fund
research relating to federally funded health care in substance abuse recovery
or mental health treatment facilities. Under the agreements, the Company's
remaining hospitals will continue to be eligible to participate in all
federally funded health care programs.
As part of the settlement, a subsidiary operating the Company's psychiatric
hospitals pled guilty to six counts of paying illegal remuneration for referral
of Medicare patients and one count of conspiracy to make such payments and paid
a $33 million fine. Another subsidiary operating a single general hospital pled
guilty to one count of illegal payments and paid a $1 million fine. The count
relates to activities that occurred while an individual convicted of defrauding
the hospital was its chief executive.
The federal settlement agreements pertain only to the Company and its
subsidiaries and will not extend to individuals. The Company is obligated to
cooperate with the government in its investigation of individuals. The Company
has numerous other obligations under the agreements, including disposing of its
psychiatric hospital business and not re-entering it for five years,
implementation and maintenance of compliance programs, and reporting
requirements to the federal government, designed to assure that the Company
complies with federal laws relating to the provision of health care.
In May 1994 the Company also reached agreements in principle with 27 states
and the District of Columbia to pay an additional $16.3 million to settle
investigations. The Company has signed agreements with 26 of those states and
the District of Columbia, five of which contain errors or changes that the
Company is attempting to resolve. The 27 states and the District of Columbia
are all of the areas in which the Company's subsidiaries operated psychiatric
facilities.
On July 12, 1994, the Company, without admitting or denying liability,
consented to the entry of a civil injunctive order in response to a complaint
filed that day by the Securities and Exchange Commission. The complaint alleged
that the Company failed to comply with anti-fraud and recordkeeping
requirements of the federal securities laws concerning the manner in which the
Company recorded the revenues from the activities that were the subject of the
federal government settlement referred to above. In the order, the Company
consented to comply with such requirements of the federal securities laws.
27
<PAGE>
Notes to Consolidated Financial Statements
3) Shareholders' Lawsuits -- In October and November 1991 shareholder
derivative actions and federal shareholder class-action suits were filed
against the Company and certain of its officers and directors. Those derivative
and federal class-action suits have been consolidated into one derivative and
one federal class action, respectively. The consolidated derivative action,
purportedly brought on behalf of the Company, alleged breach of fiduciary duty
and other causes of action against the directors and various officers of the
Company. The derivative action was dismissed by the court in May 1993; the
dismissal is being appealed by the plaintiffs. The consolidated federal class
action alleges violations of federal securities laws against the Company and
certain of its executive officers. All parties in the federal class action and
the derivative action have been participating in a voluntary mediation process,
which has included directors and officers liability insurance carriers. Through
this mediation process, the parties have reached an agreement in principle for
the settlement of both lawsuits, including contributions to the settlement by
certain insurance companies. Any agreement in principle is conditioned upon the
execution of formal settlement documentation and court approval.
Two additional federal class actions filed in August 1993 now have been
consolidated into one action. The consolidated action alleges violations of
federal securities laws against the Company and certain of its executive
officers. The parties commenced a voluntary mediation in July 1994.
4) Psychiatric Malpractice Cases Involving Fraud and Conspiracy Claims --
The Company and certain of its officers and directors are defendants in
numerous lawsuits filed on behalf of psychiatric patients making various
claims, including conspiracy, false imprisonment, fraud and gross negligence.
The Company has settled 90 of these patient care lawsuits for approximately
$20.5 million. These cases represent approximately two-thirds of the
psychiatric patient care cases filed to date that contain allegations of
conspiracy or fraud. The Company expects that additional similar lawsuits will
be filed.
Note 8 Other Contingencies and Financial Instruments With Off-Balance-Sheet
Risks
A. Guarantees and Letters of Credit
The Company is contingently liable for $503 million under various guarantees,
standby letters of credit and lease obligations not included in Note 5. Included
in this amount are The Hillhaven Corporation's obligations to third parties
totaling $286 million, including $216 million of lease obligations and $70
million of long-term debt and other obligations. During the year, Hillhaven
reduced by approximately $420 million its obligations that were guaranteed by
the Company. Also included in the $503 million is approximately $208 million in
obligations, substantially all of which are lease obligations, relating to
rehabilitation hospitals sold to HEALTHSOUTH Rehabilitation Corporation in
January 1994.
B. Interest Rate Swaps
At May 31, 1994, and 1993, the Company had outstanding interest rate swap
agreements, generally with commercial banks, having a total notional principal
of $120 million, expiring through 2000. These agreements call for the payment
of fixed rate interest by the Company in return for the assumption by other
contracting parties of the variable rate cost, which effectively changes the
Company's interest rate on a portion of its dollar-denominated floating rate
debt to a fixed rate of 8.5%. Additionally, on May 31, 1994, and 1993, the
Company had outstanding swap agreements with a notional amount of $29 million
expiring through 1997, in which it receives interest from other contracting
parties at a weighted average fixed interest rate of 7.0% and pays interest at
variable rates to those parties. The Company's exposure to credit loss under
these agreements is limited to the interest rate spread in the event of
nonperformance by the other parties. Nonperformance is not anticipated due to
the credit rating of the other parties. The weighted average interest rates in
Note 5A do not include the effects of these agreements.
C. Currency Swap and Forward Exchange Contracts
The Company has entered into currency swap agreements and forward exchange
contracts to hedge the foreign currency exposure attributable to its net
investment in foreign operations. At May 31, 1994, the Company had outstanding
agreements with commercial banks having a total notional principal amount of
75,800,000 Australian dollars, 1,650,000,000 Spanish pesetas and 10,000,000
British pounds at average exchange rates to the U.S. dollar of 1.38, 123.48 and
0.67, expiring through 1999, 1998 and fiscal 1995, respectively.
Note 9 Preferred Stock Purchase Rights and Preferred Stock
A. Preferred Stock Purchase Rights
In 1988 the Company distributed Preferred Stock Purchase Rights to holders
of the Company's common stock and authorized the issuance of additional rights
for common stock issued after that date. The Company may redeem the rights at
$.025 per right at
28
<PAGE>
any time until they become exercisable. The rights become exercisable 10
days after a public announcement that an investor has acquired 20% or more of
the Company's common stock or has commenced a tender or exchange offer for 30%
or more of the common stock. The rights may be exchanged for one two-thousandth
(.0005) of a share of Series A Junior Participating Preferred Stock at an
exercise price of $40.61.
In the event the Company is acquired or merged into another company and the
rights have not been redeemed, rights holders will be entitled to purchase, for
the then-current exercise price of the rights, common stock of the surviving
company having a market value equal to two times the exercise price of the
rights. The rights expire in December 1998 unless exercised or redeemed and do
not entitle the holders thereof to vote as shareholders or receive dividends.
B. Preferred Stock
The Series A Junior Participating Preferred Stock for which the Preferred
Stock Purchase Rights may be exchanged is non-redeemable and has a par value of
$0.15 per share. None of the 225,000 authorized shares are outstanding.
The Company has also authorized a Series B Convertible Preferred Stock,
issuable solely upon conversion of the Company's convertible floating rate
debentures. (See Note 5A.) The par value of the stock is $0.15 per share; its
liquidation and redemption value is $105,264 per share; 2,087 shares are
reserved for future issuance; and no shares are outstanding. Since it is likely
that this preferred stock would be converted immediately to common stock, all
references in Note 5A are to common stock rather than preferred stock.
Note 10 Stock Benefit Plans
Under the Company's 1983 and 1991 stock incentive plans, stock options and
incentive stock awards (restricted shares and restricted units) have been made
to certain officers and other key employees. Stock options generally are
granted at an exercise price equal to the fair market value of the shares on
the date of grant (except for discounted stock options granted at an exercise
price equal to 50% of the fair market value of the shares and options for
600,000 shares granted during fiscal 1993 at an exercise price equal to 110% of
the fair market value of the shares) and are exercisable at the rate of
one-third per year beginning one year from the date of grant. In addition,
during fiscal 1994 526,000 options were granted to certain senior officers that
are exercisable on May 31, 1996. Stock options generally expire 10 years from
the date of grant. Certain 1991 plan stock options may be canceled in
connection with the vesting of restricted units under circumstances described
below.
Restricted shares generally are issued at no cost to the recipient and are
held in trust by the Company for release in generally equal amounts over five
to seven years from the date of the award (as long as the recipient continues
to be employed by the Company).
Restricted units were granted in fiscal 1992, 1993 and 1994. A restricted
unit is a grant that entitles the recipient to a payment of cash at the end of
each vesting period equivalent to the fair market value of a share of the
Company's common stock on the date of vesting subject to a maximum value per
unit, which is equivalent to the fair market value of a share of the Company's
common stock on the date of grant. These restricted units were granted along
with stock options. Restricted units vest normally one-third each year over
three years and also earn dividend equivalents during the vesting period.
Subject to approval by the shareholders in September 1994, a new Directors
Stock Option Plan will replace the 1991 Director Restricted Share Plan and will
make available options to purchase 500,000 shares of common stock for issuance
to nonemployee directors. Under the plan each nonemployee director will be
entitled to receive a stock option for 5,000 common shares upon initially being
elected to the Board of Directors and each January, beginning retroactively in
January 1994 when the plan was approved by the Board of Directors. Awards will
vest one year after the date of grant, will have an exercise price equal to the
fair market value of the Company's common stock on the date of grant, and will
expire 10 years after the date of grant.
All awards granted under the 1983 and 1991 plans will vest under
circumstances defined in the plans or under certain employment arrangements,
including, with the consent of the Compensation and Stock Option Committee of
the Board of Directors, a change in control of the Company.
Charges to continuing operations associated with discounted stock options,
restricted shares (including the Director Restricted Share Plan) and restricted
units were $12 million in fiscal 1994, $11 million in fiscal 1993 and $11
million in fiscal 1992. The remaining amount to be charged to future
operations, principally over the next two years, is approximately $7 million.
29
<PAGE>
Notes to Consolidated Financial Statements
Differences in accrued income tax benefits associated with restricted shares
and discounted stock options and the amounts realized in income tax returns are
reflected as adjustments to additional paid-in capital. Income tax benefits
associated with stock options having exercise prices equal to fair market value
at date of grant are credited to additional paid-in capital as realized.
Stock awards may be made only under the 1991 Plan. At May 31, 1994, there
were 8,331,456 shares of common stock available under the 1991 Plan for future
awards. The table below summarizes the transactions in all stock option plans
in which employees participate, including discounted stock options but
excluding restricted shares and units:
<TABLE>
<CAPTION>
(shares of common stock) 1994 1993
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Outstanding at beginning of year (1983 and 1991 Plans) 11,682,204 9,597,490
Granted 5,719,175 2,977,745
Exercised ($4.60 to $16.813 per share in 1994 and 1993) (282,482) (36,650)
Canceled and other adjustments (1,692,304) (856,381)
-------------------------
Outstanding at end of year ($4.41 to $22.44 per share
at May 31, 1994) 15,426,593 11,682,204
=========================
Exercisable at end of year 6,472,708 4,131,859
=========================
</TABLE>
The Company has received full recourse interest-bearing notes in connection
with the exercise of certain stock options. The notes, secured by the common
stock purchased, reduce stockholders' equity. See Note 5A for information
regarding Performance Investment Options (debenture purchase rights) sold to
certain key employees of the Company.
Note 11 Earnings Per Share
Primary earnings per share of common stock are based on after-tax income
applicable to common stock and the weighted average number of shares of common
stock and common stock equivalents outstanding during each period as
appropriate.
Fully diluted earnings-per-share calculations are based on the assumption
that all dilutive convertible debentures were converted into shares of common
stock as of the beginning of the year, or as of the issue date if later, and 1)
that those shares are added to the weighted average number of common shares and
share equivalents outstanding used in the calculation of primary earnings per
share, and 2) that after-tax income is adjusted accordingly.
Note 12 Employee Retirement Plans
Substantially all domestic employees upon qualification are eligible to
participate in a defined contribution 401(k) plan, the NME Retirement Savings
Plan. Employees who elect to participate make mandatory contributions equal to
3% of their eligible compensation, and such contributions are matched by the
Company. Company contributions from continuing operations to all plans for the
fiscal years 1994, 1993 and 1992 were approximately $17 million, $18 million
and $16 million, respectively. The Company does not have a plan that provides
postretirement benefits other than pensions to retired employees.
Note 13 Disposals and Acquisition of Facilities
In January 1994 the Company sold 28 inpatient rehabilitation hospitals and
45 related satellite outpatient clinics for approximately $350 million in cash,
including the net book values of certain inventory, receivables and other items
of working capital, subject to certain adjustments. The sale resulted in a gain
of $66.2 million. The Company retained six rehabilitation hospitals on or near
general hospital campuses and in March 1994 sold its other remaining
rehabilitation hospital for approximately $14 million. For the fiscal year
ended May 31, 1994, net operating revenues of the sold rehabilitation hospitals
were $266 million, while pretax income, before general corporate overhead
costs, was $22 million.
During fiscal year 1994 The Hillhaven Corporation purchased the remaining 23
nursing centers it previously leased from the Company for $112 million. (See
Note 14.) The sales resulted in a gain of $17 million.
In May 1994 the Company entered into a long-term operating lease of a
138-bed general hospital in the New Orleans area. In July 1993 the Company sold
a 120-bed general hospital in Tennessee. In June 1994 the Company announced the
sale of two general hospitals in Southern California. Also in June 1994 the
Company acquired, through a wholly owned subsidiary, an additional 50% interest
in Centro Medico Teknon, its general hospital project in Barcelona, Spain, to
bring the Company's ownership of the hospital to 100%. None of these
transactions were significant.
30
<PAGE>
Note 14 The Hillhaven Corporation
In September 1993 the Company substantially completed a series of
transactions with The Hillhaven Corporation that resulted in: 1) the Company
selling to Hillhaven all remaining leased long-term-care nursing facilities,
and no longer being a lessor to Hillhaven; 2) all indebtedness owed to the
Company from Hillhaven being paid in full; 3) reducing Hillhaven obligations
guaranteed by the Company; and 4) the Company purchasing 120,000 shares of
Hillhaven nonvoting Series D Preferred Stock for $120 million. In February 1994
the Company exercised its warrants to purchase 6 million shares of Hillhaven
common stock at the exercise price of $10.55 per share (after giving effect to
Hillhaven's 5-to-1 reverse stock split). The total exercise price of $63.3
million was paid by liquidating 63,300 shares of Hillhaven Series D Preferred
Stock acquired in September 1993. The Company, as of May 31, 1994, owned: 1)
approximately 33% (8,878,147 shares) of the outstanding common stock of
Hillhaven; 2) 35,000 shares of Hillhaven 8-1/4% accumulative nonvoting Series C
Preferred Stock; and 3) 60,546 shares of Hillhaven nonvoting 6-1/2% payable in
kind Series D Preferred Stock.
Note 15 Sales of Subsidiaries' Common Stock
In May 1994 the Company entered into an agreement pursuant to which DLJ
Merchant Banking Funding, Inc. and certain of its affiliates (DLJMB) will
acquire a controlling interest in the Company's wholly owned subsidiary that
operates its 37 outpatient renal dialysis facilities. Under the terms of the
agreement, and as subsequently agreed among the parties, the subsidiary is
expected to consummate a public debt/equity offering in August 1994, the
proceeds of which will be used to partially fund the payment of a $75.5 million
dividend to the Company. Immediately after payment of the dividend, DLJMB will
purchase common stock of the subsidiary for $10.5 million, and certain members
of the subsidiary's management are expected to purchase common stock for
approximately $1.9 million. After consummation of these transactions, the
Company will own approximately 25% of the outstanding common stock of the
subsidiary. Net operating revenues of the subsidiary were $80.5 million in the
fiscal year ended May 31, 1994, and net income was $5.7 million. This
transaction is expected to result in a gain to the Company of approximately $35
million in the first quarter of fiscal 1995.
In March 1993 the Company's long-term-care subsidiary in the United Kingdom,
Westminster Health Care Holdings PLC, issued 3,500,000 shares of its common
stock to third parties in a private placement and in April 1993 sold 26,001,923
shares in an initial public offering; those transactions resulted in a gain to
the Company of $29 million. As a result of the sale and issuance of shares, the
Company's percentage ownership of Westminster changed from 90% to approximately
42%.
Note 16 Restructuring Charges
In April 1994 the Company initiated a plan to significantly decrease
overhead costs through a reduction in corporate and division staffing levels
and to review the resulting office space needs of all corporate operations.
Accordingly, in July 1994 the Company announced that approximately 240
positions were being eliminated and other cost-saving efficiencies were
implemented. The Company also decided to sell its corporate headquarters
building and to lease substantially less office space in that building or at an
alternative site. Costs of the write-down of the building, employee severance
benefits and other expenses directly related to the overhead reduction plan are
estimated to be approximately $77 million and have been expensed in the quarter
ended May 31, 1994. In the quarter ended May 31, 1993, the Company recorded a
charge of $52 million for restructuring costs related to continuing operations
that were associated with the combination of the Rehabilitation Hospital
Division into the General Hospital Division, a corporate overhead reduction
program that began in April 1993, and severance costs incurred in connection
with a change in senior executive management.
These restructuring charges, as well as $18 million in the year ended May
31, 1992, have been charged to operating and administrative expenses.
Note 17 Information About Lines of Business
On June 1, 1993, the Company combined its former Rehabilitation Hospital
Division and its General Hospital Division into a new division called the
Hospital Division. In January 1994 the Company sold substantially all of its
rehabilitation hospitals. (See Note 13.) Also during fiscal 1994 the Company
announced that it had discontinued its psychiatric hospital business. (See Note
2.) At May 31, 1994, the Company operated 35 general hospitals and six
rehabilitation hospitals in the United States and 12 general hospitals
overseas, which accounted for approximately 95% of the Company's consolidated
net revenues. The net revenues and operating profits of the overseas general
hospitals accounted for approximately 5.9% and 7.6% of the Company's
consolidated net revenues and operating profits in 1994 and approximately 5.1%
and 7.3%, respectively, in 1993.
31
<PAGE>
Report of Independent Auditors
The Board of Directors
National Medical Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of National
Medical Enterprises, Inc. and subsidiaries as of May 31, 1994 and 1993, and the
related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended May 31, 1994. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
As discussed in Notes 2, 7B and 13 to the consolidated financial statements,
during 1994 the Company has discontinued its psychiatric hospital operations,
settled a number of lawsuits and governmental investigations, and sold a
significant number of its rehabilitation hospitals. These events have had a
significant impact on the Company's consolidated financial position and
results of operations.
In our opinion, the consolidated financial statements referred to above
present fairly the financial position of National Medical Enterprises, Inc. and
subsidiaries as of May 31, 1994 and 1993, and the results of their operations
and their cash flows for each of the years in the three-year period ended May
31, 1994, in conformity with generally accepted accounting principles.
As discussed in Note 6 to the consolidated financial statements, the Company
changed its method of accounting for income taxes effective June 1, 1993.
KPMG Peat Marwick LLP
Los Angeles, California
July 27, 1994
Supplementary Financial Information
Selected Quarterly Financial Data (unaudited)
<TABLE>
<CAPTION>
Fiscal 1994 Quarters Fiscal 1993 Quarters
------------------------------- ------------------------------
(in millions, except per-share data) First Second Third Fourth First Second Third Fourth
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net operating revenues $775 $ 770 $ 720 $ 702 $ 791 $ 785 $ 795 $ 820
============================== ==============================
Income from continuing operations $ 53 $ 61 $ 91 $ 11 $ 50 $ 78 $ 65 $ 70
Net income (loss) $(41) $(226) $(164) $ 6 $ 51 $ 52 $ 54 $ 3
============================== ==============================
Income per share from continuing
operations:
Primary $0.32 $0.37 $0.55 $0.07 $0.30 $0.47 $0.39 $0.42
Fully diluted $0.30 $0.35 $0.51 $0.07 $0.29 $0.44 $0.37 $0.40
============================== ==============================
</TABLE>
Quarterly operating results are not necessarily representative of operations
for a full year for various reasons, including levels of occupancy, interest
rates, acquisitions, disposals, revenue allowance and discount fluctuations,
the timing of price changes, unusual litigation costs, restructuring charges
and fluctuations in quarterly tax rates.
32
<PAGE>
Board of Directors
- ------------------
Jeffrey C. Barbakow(1,4) Chairman and Chief Executive Officer, NME
Michael H. Focht Sr.(1,5) President and Chief Operating Officer, NME
Bernice B. Bratter(1,3,4) Executive Director, Senior Health and Peer
Counseling
Maurice J. DeWald(1,3,6) Chairman, Verity Financial Group, Inc.
Peter de Wetter(1) Executive Vice President, NME, Retired
Edward Egbert, M.D.(2,4,6) Physician, Retired
Raymond A. Hay(2,4,5) Chairman, Aberdeen Associates
Lester B. Korn(1,3) Chairman, Korn Tuttle Capital Group
James P. Livingston(2,4,5) Executive Vice President, NME, Retired
Richard S. Schweiker(2,5) President, American Council of Life Insurance
John C. Bedrosian+ Former Senior Executive Vice President, NME
Nita Puig-Heckendorn+ Former Executive Vice President, NME
Board Committees
1. Executive Committee
2. Audit Committee
3. Compensation and Stock Option Committee
4. Nominating Committee
5. Ethics and Quality Assurance Committee
6. Performance Investment Plan Committee
+ Term expires at the 1994 annual meeting. Not renominated for a new term.
Executive Officers
- ------------------
Jeffrey C. Barbakow Chairman and Chief Executive Officer
Michael H. Focht Sr. President and Chief Operating Officer
Maris Andersons Executive Vice President and Treasurer
William S. Banowsky, Ph.D. Executive Vice President (Retiring 8/31/94)
Scott M. Brown Senior Vice President, General Counsel and
Secretary
Vincent J. Lico Executive Vice President (Retiring 10/31/94)
Raymond L. Mathiasen Senior Vice President and Chief Financial
Officer
Barry P. Schochet Executive Vice President, President and Chief
Operating Officer, Hospital Division
Corporate Staff
Senior Vice Presidents
- ----------------------
Peter J. Andriet Materiel Management
Bruce G. Carpenter Associate General Counsel
Thomas J. Dey Government Relations
Steven Dominguez Government Programs
Edward A. Elliott Taxation
Wajeeh Ersheid Internal Audit
Alan R. Ewalt Human Resources
Lawrence G. Hixon Corporate Controller
33
<PAGE>
Corporate Staff (continued)
Senior Vice Presidents
- ---------------------------
T. Dennis Jorgensen Administration
William Loorz Construction and Design
David R. Mayeux Strategic Planning and Development
Terence P. McMullen Financial Services
Kim Mendenhall Facilities Administration
John A. Meyers Assistant General Counsel
Paul J. Russell Investor Relations
Christi R. Sulzbach Public Affairs and Associate General Counsel
Operating Divisions and
Subsidiary Staff
- -----------------------
Hospital Division
Barry P. Schochet President and Chief Operating Officer
Neil M. Sorrentino Senior Executive Vice President, Western
District
Michael W. Gallo Executive Vice President and Chief Financial
Officer
Alan E. London, M.D. Executive Vice President, Medical Affairs
Thomas B. Mackey Executive Vice President
Frank Tidikis Executive Vice President, Eastern District
Senior Vice Presidents
- ----------------------
Barry S. Ganley Information Systems
Ben F. King Finance
William W. Leyhe Integrated Delivery Systems
Nancee E. Mendenhall Managed Care Business Development
Martin J. Paris, M.D., M.P.H. Technology Assessment Medical Director,
General Hospitals
Clive E. Riddle National Health Plans
Arnold M. Robin President, Syndicated Office Systems
Robert L. Smith Operations
Leann L. Strasen, R.N. Patient Care Services
Davis L. Watts Revenue and Receivable Management
William R. Wilson Finance
International
Hospital Division
Michael H. Ford President and Chief Operating Officer
Carl V. Stanifer Executive Vice President, Operations
34
<PAGE>
Corporate Finance
Common Stock Transfer Agent and Registrar
The Bank of New York
101 Barclay St.
New York, NY 10286
Stock Exchanges for Common Stock
New York Stock Exchange
Pacific Stock Exchange
London Exchange
12 1/8% Notes Trustee/Registrar
The Bank of New York
101 Barclay St.
New York, NY 10286
Listing New York Stock Exchange
Annual Meeting
The annual meeting of the shareholders of National Medical Enterprises, Inc.
will be held at 10 a.m., Wednesday, Sept 28, 1994, at Loews Santa Monica Beach
Hotel, 1700 Ocean Ave., Santa Monica, Calif.
Availability of Form 10-K
The company reports annually to the Securities and Exchange Commission on Form
10-K. You may obtain a copy at no charge by writing to NME Investor Relations or
by telephoning (310) 998-8200.
Corporate Office
National Medical Enterprises, Inc.
2700 Colorado Ave.
P.O. Box 4070
Santa Monica, CA 90411-4070
(310) 998-8000
This annual report is printed on recycled paper.
Supplementary Financial Information
Common Stock Information (unaudited)
<TABLE>
<CAPTION>
Fiscal 1994 Quarters Fiscal 1993 Quarters
---------------------------------------- ---------------------------------------------
First Second Third Fourth First Second Third Fourth
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Price range:
High 12 1/4 12 16 1/4 18 1/8 16 3/4 14 1/4 13 1/4 9 7/8
Low 7 7 3/8 11 1/2 14 3/8 13 3/4 9 5/8 9 1/4 6 1/2
</TABLE>
At May 31, 1994, there were approximately 16,000 holders of record of the
Company's common stock. The Company's common stock is listed and traded on the
New York, Pacific and London stock exchanges. The stock prices above are the
high and low sales prices as reported in the NYSE Composite Tape for the last
two fiscal years. On October 27, 1993, the Board of Directors suspended payments
of dividends on the Company's common stock in order to give the Company maximum
flexibility to respond to rapidly developing opportunities, to refocus on its
general hospital core business and to resolve its legal issue.
The Company's cash dividends per share were $0.12 in 1994 and $0.48 in
1993. The Company suspended the payment of quarterly cash dividends following
the first quarter of fiscal 1994.
35
