<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED
NOVEMBER 30, 1994.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NUMBER I-7293
------------------------
NATIONAL MEDICAL ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
------------------------
<TABLE>
<S> <C>
NEVADA 95-2557091
(State or other jurisdiction (I.R.S. Employer
of Identification No.)
incorporation or
organization)
</TABLE>
2700 COLORADO AVENUE
SANTA MONICA, CA 90404
(Address of principal executive offices)
(310) 998-8000
(Registrant's telephone number, including area code)
------------------------
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 ____
As of December 30, 1994 there were 166,379,049 shares of $0.075 par value
common stock outstanding.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
---------
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -- November 30, 1994 and May 31, 1994..................... 2
Condensed Consolidated Statements of Operations -- Three Months and Six Months Ended November
30, 1994 and 1993.............................................................................. 3
Condensed Consolidated Statements of Cash Flows -- Six Months Ended November 30, 1994 and
1993........................................................................................... 5
Notes to Condensed Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 10
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................................................... 16
Item 4. Submission of Matters to a Vote of Security Holders............................................. 18
Item 5. Other Events.................................................................................... 18
Item 6. Exhibits and Reports on Form 8-K................................................................ 18
Signature....................................................................................... 19
</TABLE>
Note: Items 2 and 3 of Part II are omitted because they are not applicable.
1
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
NOVEMBER 30,
1994 MAY 31,
(UNAUDITED) 1994
------------ ----------
(IN MILLIONS)
<S> <C> <C>
Current Assets:
Cash and cash equivalents............................................................ $ 131.8 $ 313.2
Short-term investments at cost, which approximates market............................ 51.4 60.2
Accounts and notes receivable, less allowance for doubtful accounts ($67.2 at
November 30 and $77.2 at May 31).................................................... 411.4 384.9
Inventories of supplies, at cost..................................................... 54.8 55.1
Deferred income taxes................................................................ 304.0 371.7
Assets held for sale................................................................. 26.5 203.8
Prepaid expenses and other current assets............................................ 56.5 54.8
------------ ----------
Total current assets............................................................. 1,036.4 1,443.7
------------ ----------
Long-term receivables.................................................................. 67.7 73.3
Investments and other assets........................................................... 306.2 308.8
Property, plant and equipment, at cost................................................. 2,622.5 2,536.1
Less accumulated depreciation and amortization....................................... 841.6 771.6
Net property, plant and equipment.................................................... 1,780.9 1,764.5
------------ ----------
Intangible assets, at cost less accumulated amortization ($46.9 at November 30 and
$53.6 at May 31)...................................................................... 112.2 106.7
------------ ----------
$ 3,303.4 $ 3,697.0
------------ ----------
------------ ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and notes...................................................... $ 112.9 $ 66.4
Accounts payable..................................................................... 139.0 176.0
Employee compensation and benefits................................................... 82.5 93.4
Reserves related to discontinued operations (Note 3)................................. 76.5 465.2
Income taxes payable................................................................. 22.5 58.1
Other current liabilities............................................................ 203.9 236.4
Current portion of long-term debt.................................................... 495.1 544.5
------------ ----------
Total current liabilities........................................................ 1,132.4 1,640.0
------------ ----------
Long-term debt, net of current portion................................................. 236.3 223.1
Other long-term liabilities and minority interests..................................... 374.1 388.9
Deferred income taxes.................................................................. 126.0 125.1
Shareholders' equity:
Common stock, $0.075 par value; authorized 450,000,000 shares; 185,587,666 shares
issued at November 30, 1994 and at May 31, 1994..................................... 13.9 13.9
Other shareholders equity............................................................ 1,698.8 1,588.2
Less common stock in treasury, at cost, 19,226,212 shares at November 30, 1994 and
19,507,161 at May 31, 1994.......................................................... (278.1) (282.2)
------------ ----------
Total shareholders' equity....................................................... 1,434.6 1,319.9
------------ ----------
$ 3,303.4 $ 3,697.0
------------ ----------
------------ ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
2
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
-------------------- ----------------------
1994 1993 1994 1993
--------- --------- ---------- ----------
(IN MILLIONS, EXCEPT PER SHARE AND SHARE
AMOUNTS)
<S> <C> <C> <C> <C>
Net operating revenues (Notes 1, 2, 4 and 5)....................... $ 638.8 $ 758.7 $ 1,301.6 $ 1,530.3
--------- --------- ---------- ----------
Operating expenses:
Salaries and benefits............................................ 273.0 346.2 556.2 698.1
Supplies......................................................... 78.5 83.4 159.1 167.9
Provision for doubtful accounts.................................. 20.7 23.5 46.8 58.5
Other operating expenses......................................... 144.6 169.7 294.7 342.5
Depreciation..................................................... 33.1 36.9 67.4 75.0
Amortization..................................................... 4.1 4.8 7.7 9.5
--------- --------- ---------- ----------
Operating income................................................... 84.8 94.2 169.7 178.8
--------- --------- ---------- ----------
Interest expense, net of capitalized portion....................... (17.3) (19.3) (35.0) (37.7)
Investment earnings................................................ 4.4 6.3 10.4 14.1
Equity in earnings of unconsolidated affiliates.................... 6.1 11.2 12.4 14.7
Minority interests in income of consolidated subsidiaries.......... (1.8) (2.8) (3.8) (5.0)
Net gain (loss) on disposals of facilities and long-term
investments....................................................... -- 13.6 (2.5) 29.0
Gain on sale of subsidiary's common stock (Note 5)................. -- -- 32.0 --
--------- --------- ---------- ----------
Income from continuing operations before income taxes and
cumulative effect of a change in accounting....................... 76.2 103.2 183.2 193.9
Taxes on income.................................................... (30.0) (42.0) (73.0) (80.0)
--------- --------- ---------- ----------
Income from continuing operations before cumulative effect of a
change in accounting.............................................. 46.2 61.2 110.2 113.9
Discontinued operations, net of taxes (Note 3)..................... -- (287.4) -- (441.0)
Cumulative effect of a change in accounting for income taxes (Note
7)................................................................ -- -- -- 60.1
--------- --------- ---------- ----------
Net income (loss).................................................. $ 46.2 $ (226.2) $ 110.2 $ (267.0)
--------- --------- ---------- ----------
--------- --------- ---------- ----------
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
3
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (CONTINUED)
THREE MONTHS AND SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS SIX MONTHS
------------------------------ ------------------------------
1994 1993 1994 1993
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Earnings (loss) per share:
Primary:
Continuing operations....................... $0.27 $ 0.37 $0.65 $ 0.69
Discontinued operations..................... -- (1.73) -- (2.66)
Change in accounting........................ -- -- -- 0.36
-------------- -------------- -------------- --------------
Net....................................... $0.27 $(1.36) $0.65 $(1.61)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Fully diluted:
Continuing operations....................... $0.27 $ 0.35 $0.63 $ 0.65
Discontinued operations..................... -- (1.71) -- (2.59)
Change in accounting........................ -- -- -- 0.33
-------------- -------------- -------------- --------------
Net....................................... $0.27 $(1.36) $0.63 $(1.61)
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Cash dividends per common share................. $ -- $ -- $ -- $ 0.12
Weighted average shares and share equivalents
outstanding -- primary......................... 168,319,000 166,077,000 168,390,000 166,093,000
Weighted average shares, share equivalents and
other dilutive securities outstanding -- fully
diluted........................................ 182,169,000 180,143,000 181,467,000 180,115,000
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
4
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED NOVEMBER 30, 1994 AND 1993
(UNAUDITED)
<TABLE>
<CAPTION>
1994 1993
------- -------
(IN MILLIONS)
<S> <C> <C>
Net cash provided by (used in) operating activities, including net expenditures for
discontinued operations and restructuring charges.......................................... $(320.5) $ 109.6
------- -------
Cash flows from investing activities:
Purchases of property, plant and equipment................................................ (59.6) (58.9)
Purchases of new businesses, net of cash acquired......................................... (9.0) --
Proceeds from sales of facilities and other assets........................................ 154.4 127.6
Proceeds from sales of investments........................................................ 8.8 46.2
Collections on notes...................................................................... 1.9 96.2
Purchase of Hillhaven preferred stock..................................................... -- (63.4)
Increase in intangible and other assets................................................... (16.0) (15.6)
Equity investments in partnerships........................................................ (2.0) (3.0)
Other items............................................................................... (0.8) 2.8
------- -------
Net cash provided by investing activities............................................... 77.7 131.9
------- -------
Cash flows from financing activities:
Net proceeds from (payments of) unsecured lines of credit................................. 43.3 (149.2)
Proceeds from other borrowings............................................................ 86.0 14.4
Payments of other borrowings.............................................................. (72.4) (43.0)
Cash dividends paid to shareholders....................................................... -- (39.6)
Proceeds from stock options exercised..................................................... 3.9 --
Other items............................................................................... 0.6 0.2
------- -------
Net cash provided by (used in) financing activities..................................... 61.4 (217.2)
------- -------
Net increase (decrease) in cash and cash equivalents.................................... (181.4) 24.3
Cash and cash equivalents at beginning of year.......................................... 313.2 140.9
------- -------
Cash and cash equivalents at end of period.............................................. $ 131.8 $ 165.2
------- -------
------- -------
Supplemental disclosures:
Interest paid, net of amounts capitalized................................................. $ 45.9 $ 39.4
Income taxes paid, net of refunds received................................................ 38.9 18.4
Major effects of consolidating new businesses:
Assets acquired, primarily accounts receivable and property, plant and equipment.......... $ 59.1 --
Liabilities assumed, primarily long-term debt............................................. 34.9 --
Major effects of excluding an unconsolidated affiliate from the consolidated financial
statements:
Decrease in assets, primarily accounts receivable and property, plant and equipment....... $ (31.9) --
Decrease in liabilities, primarily long-term debt......................................... (83.2) --
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
5
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. The unaudited financial information furnished herein, in the opinion of
management, reflects all adjustments which are necessary to fairly state the
Company's financial position, its cash flows and the results of its
operations for the periods indicated. All the adjustments affecting income
from continuing operations are of a normal recurring nature.
The Company presumes that users of this interim financial information have
read or have access to the Company's audited financial statements and
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the preceding fiscal year and that the adequacy of additional
disclosure needed for a fair presentation may be determined in that context.
Accordingly, footnotes and other disclosure which would substantially
duplicate the disclosure contained in the Company's most recent annual
report to security holders have been omitted. Income from continuing
operations is not necessarily representative of continuing operations for a
full year for various reasons, including levels of occupancy, interest
rates, acquisitions and disposals of facilities and long-term assets,
revenue allowance and discount fluctuations, the timing of price changes and
fluctuations in quarterly tax rates. These same considerations apply to all
year-to-year comparisons.
The Condensed Consolidated Statements of Operations for the three months and
six months ended November 30, 1993 have been reclassified to show equity in
earnings of unconsolidated affiliates and minority interests in income of
consolidated subsidiaries as separate line items, to be comparable with the
presentation for the current period. Previously, these items were included
in net operating revenues and in operating and administrative expenses,
respectively.
2. The Company's net operating revenues from continuing operations consist
primarily of net patient service revenues, which are based on established
billing rates less applicable allowances and discounts. These allowances and
discounts, primarily for patients covered by Medicare, Medicaid and other
contractual programs, amounted to $661.5 million and $661.6 million for the
three-month periods ended November 30, 1994 and 1993, and $1,327.9 million
and $1,345.6 million for the six-month periods, respectively.
3. 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. The Condensed Consolidated
Statements of Operations reflect the operating results of the discontinued
business separately from continuing operations. Operating results and gains
or losses on disposals of facilities for the discontinued business for
periods subsequent to November 30, 1993 have been charged to a provision for
estimated losses during the phase-out period.
Assets and liabilities of the discontinued business at November 30, 1994 and
at May 31, 1994 consisted of the following (in millions):
<TABLE>
<CAPTION>
NOVEMBER 30, MAY 31,
1994 1994
------------- -------------
<S> <C> <C>
Accounts and notes
receivable................... $10.7 $ 90.9
Inventories of supplies....... 0.4 2.8
Property, plant and
equipment.................... 23.5 104.9
Prepaid expenses and other
current assets............... 0.5 3.7
Investments and other
non-current assets........... -- 20.1
----- -------------
Total assets................ 35.1 222.4
Accounts payable.............. 0.6 10.6
Other accrued liabilities..... 2.6 10.7
Capital lease obligation...... 5.4 6.3
----- -------------
Net assets to be disposed
of........................... $26.5 $ 194.8
----- -------------
----- -------------
</TABLE>
6
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Assets are shown at their expected net realizable values and the liabilities
are shown at their face amounts.
As previously reported, the Company has been involved in significant legal
proceedings and investigations of an unusual nature related principally to
its psychiatric business and has settled the most significant of these
matters. The reserves related to discontinued operations in the accompanying
balance sheet include $70.8 million for unusual litigation costs and legal
fees relating to matters that have not been resolved as of November 30, 1994
and represent management's estimate of the net costs of the ultimate
disposition of these matters. However, there can be no assurance that the
ultimate liability will not exceed such estimates.
During the six months ended November 30, 1994, the Company sold 49
psychiatric facilities and five outpatient centers for an aggregate sales
price, excluding working capital, of approximately $145.6 million. The
Company continues to operate the 14 remaining psychiatric facilities as a
discontinued operation pending their planned closure, sale or conversion to
another use.
4. In January 1994, the Company sold 28 inpatient rehabilitation hospitals and
45 related satellite outpatient clinics. The Company retained six
rehabilitation hospitals on or near acute hospital campuses and in March
1994 sold its other remaining rehabilitation hospital. For the quarter and
six-month period ended November 30, 1993, net operating revenues of the sold
facilities were approximately $110.3 million and $221.8 million,
respectively, and pre-tax income, before general corporate overhead was
approximately $10.7 million and $21.2 million, respectively.
5. In August 1994, the Company completed the sale of a controlling interest in
Total Renal Care, Inc. (formerly Medical Ambulatory Care, Inc., the operator
of the Company's outpatient renal dialysis centers), to DLJ Merchant Banking
Partners, L.P. and affiliated investment partnerships. As part of the
transaction, the Company received a $75.5 million cash distribution from
Total Renal Care prior to the sale and retained an approximate 25% minority
interest, which since has been reduced to approximately 23% due to the
issuance of additional shares by Total Renal Care in connection with
acquisitions. The transaction resulted in a $32.0 million gain. For the
quarter and six-month period ended November 30, 1993, net operating revenues
of the predecessor of Total Renal Care were $19.7 million and $39.3 million,
respectively, and operating profits, before interest and taxes on income
were approximately $2.9 million and $5.2 million, respectively. Revenues and
operating profits before interest and taxes on income included in the
current year's statement of operations, for the period from June 1, 1994
through August 11, 1994 were $16.6 million and $2.7 million, respectively.
6. During the fourth quarter of fiscal 1994, the Company initiated a plan to
significantly decrease overhead costs through a reduction in corporate and
division staffing levels and to review the resulting office space needs of
all corporate operations. In July 1994, the Company announced that
approximately 240 positions were being eliminated and other cost-saving
efficiencies were implemented. The Company also decided to sell its
corporate headquarters building and to lease substantially less office space
in that building or at an alternative site. Costs associated with this plan
were estimated to be approximately $77.0 million and were expensed in the
quarter ended May 31, 1994. Of the $77.0 million reserve, $61.1 million
represented the write-down of the corporate headquarters building to net
realizable value, based on independent appraisals; the estimated costs of
employee severance packages was $10.0 million, based on actual agreements
communicated to the employees involved; and $5.9 million was for other
expenses related to the overhead reduction plan, including consulting fees
and employee outplacement costs. During the six-month period ended November
30, 1994, actual costs incurred and charged against the reserve were
approximately $6.9 million. The write-down of the corporate headquarters
building has
7
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
been recorded as a reduction in the carrying value of property, plant and
equipment in the accompanying condensed consolidated balance sheet. The rest
of the reserve is included in other current liabilities or other long-term
liabilities.
7. Effective June 1, 1993, the Company adopted Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes." The Company
recognized $60.1 million as income in fiscal 1994, for the cumulative effect
on prior years of adopting this standard based on tax rates in effect at
June 1, 1993.
Management believes that the net deferred tax asset at November 30, 1994
will be realized from offsetting tax provisions against future income or
through tax loss carrybacks.
8. On October 11, 1994, the Company announced the signing of a definitive
merger agreement with American Medical Holdings, Inc. ("AMH"). Under the
terms of the agreement, AMH shareholders will receive $19 in cash and 42/100
of a share of NME common stock for each share of AMH stock they own. The
transaction has been valued at approximately $3.3 billion, including the
assumption of approximately $1.3 billion of AMH debt, and is expected to
close in March 1995. NME plans to finance the transaction through a new
credit facility and public issuance of debt securities. Upon completion of
the acquisition, which will be accounted for as a purchase, the new company
will have 83 general hospitals in 13 states and four foreign countries.
9. The Company has entered into currency swap agreements and forward exchange
contracts to hedge its net investments in foreign subsidiaries or
unconsolidated foreign affiliates. The Company's exposures primarily relate
to assets and liabilities denominated in foreign currency in Australia,
Great Britain, Malaysia, Singapore, Spain and Thailand. To the extent that a
foreign currency appreciates or depreciates against the U.S. dollar, and the
Company's investment denominated in that foreign currency is not hedged by a
currency swap agreement, forward exchange or other contract, the value of
the Company's investment in that country would increase or decline by the
amount of the appreciation or depreciation times the Company's net assets
denominated in that currency (the translation gain or loss). The translation
gains or losses are recorded as part of the cumulative translation
adjustment until such time as the Company disposes of some or all of the
foreign currency denominated net assets, when any translation gain or loss
would be realized and credited or charged to earnings.
Gains and losses on swap agreements and forward exchange contracts are
included as part of the Company's cumulative translation adjustment. The
Company's foreign currency positions, by currency, as of May 31, 1994 and
November 30, 1994 are presented in the following table, expressed in
millions of U.S. dollars:
<TABLE>
<CAPTION>
NOVEMBER 30, 1994 MAY 31, 1994
------------------------------------- -------------------------------------
CARRYING EXTENT OF UNHEDGED CARRYING EXTENT OF UNHEDGED
CURRENCY VALUE HEDGE EXPOSURE VALUE HEDGE EXPOSURE
- ---------------------------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Singapore dollars........... $ 123.8 -- $ 123.8 $ 108.7 -- $ 108.7
Australian dollars.......... 70.5 55.9 14.6 64.0 54.8 9.2
Thai baht................... 7.0 -- 7.0 5.0 -- 5.0
Malaysian ringgitt.......... 3.6 -- 3.6 3.0 -- 3.0
Spanish pesetas............. 21.6 30.2 (8.6) 9.2 13.7 (4.5)
UK pounds................... 69.3 15.6 53.7 62.4 15.0 47.4
</TABLE>
8
<PAGE>
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Company's foreign currency swap agreements and forward exchange
contracts, as of May 31, 1994 and November 30, 1994 are shown in the tables
below, expressed in millions:
<TABLE>
<CAPTION>
NOVEMBER 30, 1994 MAY 31, 1994
----------------------------- -----------------------------
NOTIONAL INTEREST MATURITY NOTIONAL INTEREST MATURITY
CURRENCY SWAPS AMOUNT RATE DATE AMOUNT RATE DATE
- -------------------------------------------------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Australian dollars................................ 20.5 10.54% 02/24/99 20.5 10.54% 02/24/99
Australian dollars................................ 14.3 4.86% 03/04/98 14.3 5.78% 03/04/98
Spanish pesetas................................... 300.0 12.00% 10/09/98 300.0 12.00% 10/09/98
Spanish pesetas................................... 300.0 11.33% 10/09/98 300.0 11.33% 10/09/98
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30, 1994 MAY 31, 1994
------------------ ------------------
FOREIGN FOREIGN
CURRENCY MATURITY CURRENCY MATURITY
FORWARD EXCHANGE CONTRACTS AMOUNT DATE AMOUNT DATE
- ----------------------------------------------------------------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
Australian dollars............................................... 18.0 12/30/94 18.0 08/31/94
Australian dollars............................................... 23.0 03/20/95 20.0 07/18/94
Australian dollars............................................... -- -- 3.0 07/18/94
Spanish pesetas.................................................. 450.0 12/09/94 150.0 10/05/94
Spanish pesetas.................................................. 1,700.0 12/22/94 -- --
Spanish pesetas.................................................. 625.0 12/30/94 450.0 06/24/94
Spanish pesetas.................................................. 150.0 01/05/95 100.0 06/30/94
Spanish pesetas.................................................. 200.0 02/28/95 350.0 06/30/94
U.K. pounds...................................................... 10.0 12/30/94 10.0 06/27/94
</TABLE>
9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
IMPACT OF THE MERGER
On October 11, 1994, the Company and American Medical Holdings, Inc. ("AMH")
announced the signing of a definitive merger agreement. Pursuant to the merger,
which is expected to close in March 1995, AMH will become a wholly-owned
subsidiary of NME. Upon completion of the acquisition, the Company will have 83
general hospitals in 13 states and four foreign countries. Under the terms of
the agreement, AMH shareholders will receive $19 in cash and 42/100 of a share
of NME common stock for each AMH share they own. The transaction is valued at
approximately $3.3 billion, including the assumption of approximately $1.3
billion of AMH debt. NME would pay approximately $1.5 billion in cash to acquire
AMH's common stock outstanding. The Company plans to finance the transaction
through a new bank credit facility for which it already has received
commitments, that will provide for borrowings of $2.5 billion, of which $2.0
billion will be term loans and $500.0 million will be available as revolving
credit loans and letters of credit, and through the issuance of approximately
$1.0 billion in debt securities. Donaldson, Lufkin & Jenrette Securities
corporation ("DLJ"), the Company's financial advisor in connection with the
transaction, has delivered a fairness opinion to the Company's board of
directors with respect to the merger and a letter stating DLJ is highly
confident that it can complete the sale of the debt securities.
Management believes that the transaction will strengthen the Company in its
existing markets and enhance the Company's ability to deliver quality,
cost-effective health care. The consolidation of the two companies is expected
to result in certain cost savings, currently estimated to be approximately $60.0
million in fiscal 1996 (before any severance or other costs of implementing
certain efficiencies). These savings are expected to be realized through the
elimination of duplicate corporate overhead expenses, reduced supplies expense
through the incorporation of AMH into the Company's group purchasing program and
improved collection of delinquent AMH accounts receivable by NME's wholly owned
debt collection business. No assurances can be made as to the amount of cost
savings, if any, that actually will be realized.
Following the merger, the Company believes that its primary liquidity needs
will consist of capital expenditures, debt service and working capital.
Estimated capital expenditures for the combined entity are expected to be up to
approximately $400.0 million per year for each of the next three fiscal years.
The Company believes that cash generated by operations and amounts available
under the revolving credit portion of the new credit facility will be sufficient
to meet its liquidity needs. The Company's strategy includes the pursuit of
growth through strategic acquisitions. All or a portion of such acquisitions may
be financed through available credit under the new credit facility or, depending
on capital market conditions, the issuance of additional indebtedness or equity
securities or other bank borrowings. At the closing of the merger, the Company
expects to have significant unused borrowing capacity under the new credit
facility. The new credit facility and the debt securities will include various
affirmative, negative and financial covenants with which the Company must
comply, including among others, a requirement to maintain certain financial
ratios and limitations on the Company's ability to incur additional indebtedness
and pay dividends.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents at November 30, 1994 were $131.8
million, a decrease of $181.4 million from May 31, 1994. The decrease was
primarily due to expenditures relating to the resolution of unusual legal
proceedings and government investigations associated with the discontinued
psychiatric business. The ratio of total debt to equity was 0.59:1 at November
30, 1994 compared with 0.63:1 at May 31, 1994. The working capital deficit at
November 30, 1994 was $96.0 million compared to a deficit of $196.3 million at
May 31, 1994. The principal reason for the deficits in working
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
capital at November 30 and May 31, 1994 was the fiscal 1994 increase in the
current portion of long-term debt. At November 30, 1994 the current portion of
long-term debt was $495.1 million compared to $544.5 million at May 31, 1994.
Cash used in operating activities was $320.5 million for the six months
ended November 30, 1994, compared to $109.6 million of cash provided by
operating activities in the same period last year, including net pre-tax
expenditures of $411.8 million in 1994 and $89.7 million in 1993, related to the
discontinued psychiatric hospital business and restructuring charges. Of these
net pre-tax expenditures during the six months ended November 30, 1994, $379.8
million were related to payments in connection with the resolution of
investigations by federal and state government agencies.
Proceeds from the sales of facilities, investments and other assets were
$163.2 million during the six months ended November 30, 1994, compared with
$173.8 million in the prior six-month period.
Cash payments for property and equipment were $59.6 million for the six
months ended November 30, 1994 and $58.9 million for the same period last year.
The estimated cost to complete major approved construction projects at wholly
owned subsidiaries is approximately $81.3 million, all of which is related to
expansion, improvement and equipping of existing domestic hospital facilities,
and a significant portion of which will be spent over the next three years. The
Company expects to finance all such expenditures with either internally
generated funds or borrowed funds. The Company intends to continue to invest in
existing and new facilities.
A number of events in fiscal 1994 had a significant impact on the Company's
financial statements, liquidity and results of operations. These events include
the settlement of insurance company litigation, the resolution of various
federal and state government investigations, the adoption of a formal plan to
discontinue the psychiatric hospital business, the sale of substantially all of
the Company's rehabilitation hospitals and a corporate restructuring to
significantly reduce overhead.
As of May 31, 1994 the Company recorded a $77.0 million restructuring charge
and reserve in connection with an announced plan to reduce corporate and
division overhead costs. During the six months ended November 30, 1994, actual
costs incurred and charged against the reserve were $6.9 million, consisting
principally of severance payments to terminated employees. The Company expects
to incur approximately $13.4 million in additional payments (principally
severance) before May 31, 1995, all of which are included in the May 1994
reserve. The Company expects its annual overhead savings from implementation of
this plan to approximate $32.0 million, most of which is attributable to
discontinued and divested operations, including its psychiatric and
rehabilitation operations. The Company also expects that the sale of its
corporate headquarters building, which may take two years to consummate, should
generate after-tax proceeds in excess of $40.0 million.
Management believes that patient volumes, cash flows and operating results
at the Company's principal healthcare businesses have been adversely affected by
the legal proceedings and investigations described in the Annual Report to
Shareholders on Form 10-K for the fiscal year ended May 31, 1994. The Company
has recorded reserves for the remaining legal proceedings not yet settled as of
November 30, 1994 and an estimate of the legal fees related to these matters to
be incurred subsequently, totaling approximately $70.8 million, of which $62.8
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. There can be no assurance, however, that the ultimate liability will
not exceed such estimates.
The Company's liquidity, including cash proceeds from operating activities,
anticipated disposals of assets, realization of tax benefits associated with the
expenditures and losses on sales of facilities related to the discontinued
psychiatric hospital business, anticipated establishment of the new credit
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
facility and sale of the debt securities, is believed to be adequate to finance
planned capital expenditures, known operating needs, including settlements of
the unusual legal proceedings referred to herein, and the AMH merger
transaction.
RESULTS OF OPERATIONS
Income from continuing operations before income taxes was $76.2 million for
the quarter ended November 30, 1994, compared with $103.2 million for the prior
year quarter. As discussed below, the results of operations for the prior year
periods include the results of certain businesses and significant assets which
have since been divested. The prior year quarter also includes pre-tax gains on
disposals of facilities and long-term investments of $13.6 million
(approximately $.05 per share after taxes, fully diluted). Income from
continuing operations before income taxes was $183.2 million for the six months
ended November 30, 1994, compared with $193.9 for the prior year period. These
results include pre-tax net gains on disposals of facilities and long-term
investments of $29.5 million (approximately $.09 per share after taxes, fully
diluted) in 1994 and $29 million (approximately $.10 per share after taxes,
fully diluted) in 1993.
Net operating revenues from continuing operations for the quarter and
six-month period were $638.8 million and $1,301.6 million, respectively,
compared with $758.7 million and $1,530.3 million in the prior year periods. The
principal reason for the 15.8% decline in revenues in the quarter and 14.9%
decline in revenues in the six-month period is (i) the August 1994 sale of
approximately 75% of NME's common stock interest in Total Renal Care, Inc.; (ii)
the March 1994 sale of one inpatient rehabilitation hospital and the January
1994 sale of 28 inpatient rehabilitation hospitals and 45 related satellite
outpatient clinics; and (iii) the February 1994 sale to The Hillhaven
Corporation ("Hillhaven") of four long-term care facilities and the September
1993 sale of 19 long-term care facilities (all of which properties previously
had been leased to Hillhaven) (collectively, the "divested operations"). For the
quarter and six months ended November 30, 1993, net operating revenues of the
divested operations were $136.9 million and $278.6 million, respectively.
Operating income from continuing operations before interest decreased by
$9.4 million (or 10.0%) from the prior year quarter and by $9.1 million (or
5.1%) for the six months ended November 30, 1994 from the comparable prior year
period primarily due to the divested operations referred to above. The operating
income margin for the current quarter increased to 13.3% from 12.4% a year ago
and for the current six-month period it increased to 13.0% from 11.7% a year
ago. The increases in the operating margins are primarily due to effective cost
control programs in the hospitals, initial benefits of the overhead reduction
plan referred to above and the sale of the rehabilitation hospitals, which as a
whole, had lower margins than the general hospitals.
Net operating revenues from the Company's domestic general hospital
operations increased 0.6% to $1,042.4 million for the six months ended November
30, 1994, compared to $1,036.3 million for the prior year period, representing
an increase of $6.1 million. Net operating revenues for the Company's domestic
general hospitals have remained relatively unchanged as less intensive services
continue to shift from an inpatient to an outpatient basis or to alternative
healthcare delivery services because of technological improvements and continued
increases in cost containment pressures by payors. In addition, management
believes that patient volumes, cash flows and operating results at the Company's
domestic general hospitals have been adversely affected by the legal proceedings
and investigations mentioned herein. Management believes that these legal
proceedings adversely affected the Company's ability to pursue its business
strategy, particularly during fiscal 1994. The most significant of these legal
proceedings and investigations now have been resolved.
On a same store basis, net operating revenues for the Company's domestic
general hospitals increased 0.8% to $1,016.1 million for the six months ended
November 30, 1994, compared to $1,007.6
12
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
million in the prior year period. Same store operating results represent the
combined results of the 32 general hospitals operated by the Company throughout
both the six months ended November 30, 1994 and the prior year period.
The patient volumes and net operating revenues of the Company's domestic
general hospitals are subject to seasonal variations caused by a number of
factors, including but not necessarily limited to, seasonal cycles of illness,
climate and weather conditions, vacation patterns of both hospital patients and
admitting physicians and other factors relating to the timing of elective
hospital procedures.
The table below sets forth certain selected operating statistics for the
Company's domestic general hospitals. Included in these statistics are the
operations of one hospital that was sold in June 1993, two hospitals that were
sold in July 1994, and the operations of one hospital that was acquired in March
1994.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTH ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------------------------------- --------------------------------------------
INCREASE INCREASE
1994 1993 (DECREASE) 1994 1993 (DECREASE)
------------- ------------- -------------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Number of hospitals (at end of
period).............................. 33 34 (1) 33 34 (1)
Licensed beds (at end of period)...... 6,622 6,749 (1.9)% 6,622 6,749 (1.9)%
Net inpatient revenues (in
thousands)........................... $ 366,775 $ 377,078 (2.7)% $ 740,153 $ 751,288 (1.5)%
Net outpatient revenues (in
thousands)........................... $ 138,396 $ 136,023 1.7 % $ 282,540 $ 273,108 3.5 %
Admissions............................ 48,663 50,506 (3.6)% 97,741 101,111 (3.3)%
Equivalent admissions................. 64,496 66,158 (2.5)% 129,662 132,845 (2.4)%
Average length of stay (days)......... 5.5 5.5 -- 5.5 5.5 --
Patient days.......................... 266,541 276,815 (3.7)% 535,480 553,691 (3.3)%
Equivalent patient days............... 350,812 360,134 (2.6)% 704,624 721,634 (2.4)%
Net inpatient revenues per patient
day.................................. $ 1,376 $ 1,362 1.0 % $ 1,382 $ 1,357 1.8 %
Utilization of licensed beds.......... 44.2% 45.2% (1.0)%* 43.7% 44.9% (1.2)%*
Outpatient visits..................... 369,211 357,893 3.2 % 746,750 723,624 3.2 %
<FN>
- ------------------------
* These percentage changes are the differences between the 1994 and 1993
percentages (%s) shown.
</TABLE>
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, admission constraints and
payor pressures are expected to continue. 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 Company has been implementing
various cost-control programs focused on reducing operating costs. The Company's
general hospitals have been successful in increasing operating profits in a very
competitive environment, due in large part to enhanced cost controls and
efficiencies being achieved throughout the Company. The Company, however, does
not expect to be able to sustain the operating profit growth rates from its
existing domestic hospitals that were achieved in recent years.
13
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
In addition to the specific items mentioned above that continue to have an
impact on the Company's results of operations, there are a number of other
factors affecting our domestic business. Because of intense national, state and
private industry efforts to reform the healthcare delivery and payment systems
in this country and other countries in which NME operates, the healthcare
industry as a whole faces increased uncertainty. The Company is continuing to
monitor these reform efforts and analyze their potential impact in order to
formulate its business strategies for the future.
Net operating revenues from the Company's other domestic operations
increased 7.1% to $138.2 million for the six months ended November 30, 1994,
compared to $129.0 million for the prior year period, representing an increase
of $9.2 million. This increase primarily reflects continued growth of National
Health Plans, the Company's HMO and insurance subsidiary, to approximately
43,000 members at November 30, 1994, compared to approximately 36,000 members at
the end of the prior year period. Net operating revenues from other domestic
operations include the revenues principally of the following: (i) six
rehabilitation hospitals and seven long-term care facilities located on the same
campus as, or nearby, the Company's general hospitals; (ii) certain healthcare
joint ventures operated by the Company; (iii) various subsidiaries of the
Company that offer health maintenance organizations, preferred provider
organizations and indemnity products in California; and (iv) revenues earned by
the Company in consideration of the guarantee of certain indebtedness and leases
of Hillhaven and of other third parties.
Net operating revenues from the Company's international operations increased
20.8% to $104.4 million for the six months ended November 30, 1994, compared to
$86.4 million for the prior year period, representing an increase of $18.0
million. This increase is principally attributable to a 21.0% increase in net
operating revenues of Australian Medical Enterprises, Ltd. ("AME"), and a 9.8%
increase in the net operating revenues of the Company's two hospitals in
Singapore. In addition, Centro Medico Teknon in Barcelona, Spain was opened in
February 1994 and became a wholly owned subsidiary in June 1994, when the
Company acquired its partner's 50% interest.
Operating expenses, which include salaries and benefits, supplies, provision
for doubtful accounts, depreciation and amortization, and other operating
expenses, were $554.0 million for the quarter ended November 30, 1994, compared
with $664.4 million for the prior year quarter. These expenses for the prior
year periods include the divested operations, as discussed above, and to that
extent, the current year and prior year periods are not comparable.
Salaries and benefits expense decreased $73.2 million to 42.7% of net
operating revenues in the three months ended November 30, 1994, compared to
45.6% in the prior year quarter. For the six-month periods, the decrease was
$141.9 million. The improvement is primarily attributable to the divested
operations and a reduction in corporate and divisional staffing levels.
Supplies expense decreased in dollar amounts in both the three-month and
six-month periods, but increased as a percentage of net operating revenues: to
12.3% from 11.0% in the three-month periods and to 12.2% from 11.0% in the
six-month periods. Most of this change is due to the sales of the rehabilitation
hospitals, which were less supplies-intensive than are general hospitals.
The provision for doubtful accounts decreased $2.8 million to 3.2% of net
operating revenues for the three months ended November 30, 1994, compared to
3.1% for the prior year quarter. For the six months ended November 30, 1994, the
provision decreased $11.7 million to 3.6% of net operating revenues, compared to
3.8% in the year-earlier period. The decrease is primarily attributable to the
divested operations.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Other operating expenses decreased $25.1 million in the quarter ended
November 30, 1994, compared to the year earlier period. The decline for the
six-month periods was $47.8 million. Both the quarter and the six-month period
ended November 30, 1994 had slight increases as a percent of net operating
revenues, from 22.4% to 22.6%.
Depreciation and amortization expense decreased $4.5 million in the three
months ended November 30, 1994, compared to the year-ago three-month period, and
$9.4 million in the six-month period, primarily due to the divested operations
as discussed above.
Interest expense, net of capitalized interest, declined $2.7 million for the
six months ended November 30, 1994, compared to the year ago period, due to debt
reductions during a period of rising interest rates.
Investment earnings were $10.4 million in the six months ended November 30,
1994, compared to $14.1 million for the prior year period, and were derived
primarily from notes receivable and investments in short-term marketable
securities. The decrease is largely due to the restructuring of Hillhaven and
the recent expenditures made in connection with the discontinued psychiatric
hospital business, including the resolution of federal and state investigations
and restructuring charges.
Equity in earnings of unconsolidated affiliates decreased to $12.4 million
during the six months ended November 30, 1994, as compared to $14.7 million for
the prior year period, primarily due to unusual non-recurring income at
Hillhaven recorded in November 1993. The decrease has been partially offset by
the increase in the Company's ownership of Hillhaven from approximately 14% to
approximately 33.0% during fiscal 1994. The Company's ownership of Hillhaven was
reduced to approximately 31.0% during the quarter ended November 30, 1994, as a
result of the issuance by Hillhaven of additional stock in connection with an
acquisition.
Minority interest in income of consolidated subsidiaries represents outside
shareholders' interests in consolidated, but not wholly owned, subsidiaries of
the Company, and, at November 30, 1994, consists primarily of the approximately
48% minority shareholder interest in AME. Minority interest expense fell to $3.8
million in the six months ended November 30, 1994, as compared to $5.0 million
for the prior year period, primarily as a result of the divestiture of
rehabilitation hospitals and the restructuring or elimination of certain joint
venture arrangements controlled by the Company.
15
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Material Developments in Previously Reported Legal Proceedings:
IN RE: NATIONAL MEDICAL ENTERPRISES, INC. SECURITIES LITIGATION AND HARRY
POLIKOFF, ET AL. V. RICHARD K. EAMER, ET AL.
The Company previously has reported on In re: National Medical Enterprises,
Inc. Securities Litigation and Harry Polikoff, et al. v. Richard K. Eamer, et
al. in the Company's Form 10-K for the fiscal year ended May 31, 1994. The
parties in each of these lawsuits have executed Memorandums of Understanding
regarding the terms of settlement of the lawsuits, which settlements involve
substantial contributions by certain of the Company's directors and officers
("D&O") insurance carriers. The Company has agreed to contribute $31.25 million
for the global settlement of both sets of litigation. The Company's D&O carriers
have agreed to contribute $32.5 million to the global settlement. In addition,
one of the D&O carriers has reimbursed the Company for $5.5 million of its legal
fees and costs advanced on behalf of its insureds. Each of the settlements must
be approved by the respective courts before the settlements become final. The
parties are in the process of drafting formal settlement documents for
submission to the respective courts.
In addition, it is possible that a portion of the Company's $31.25 million
contribution to the global settlement will be recouped as a result of the
Company's efforts to secure payment from one of the Company's D&O carriers that
has refused to contribute to the settlement.
STATE SETTLEMENTS
NME has executed agreements with the District of Columbia and each state
where NME's psychiatric facilities received Medicaid payments, settling
potential state claims arising from matters involved in the previously reported
federal investigation, as discussed in the Company's Form 10-K for the fiscal
year ended May 31, 1994.
JOHN C. BEDROSIAN V. NATIONAL MEDICAL ENTERPRISES, INC., JEFFREY C. BARBAKOW,
MICHAEL H. FOCHT, SR., BERNICE B. BRATTER, MAURICE J. DEWALD, PETER DE WETTER
AND LESTER B. KORN
This lawsuit was previously reported in the Company's Form 10-K for the
fiscal year ended May 31, 1994, and Form 10-Q for the quarter ended August 31,
1994. Mr. Bedrosian's employment claims against the Company were tried before a
Superior Court Referee during the summer of 1994. The Referee issued a Statement
of Decision on those claims on November 4, 1994. The Referee held that Mr.
Bedrosian's claim for age discrimination was without merit and that he was
entitled only to the benefits and bonus payments enumerated under his written
employment contract with the Company. All of Mr. Bedrosian's other employment
claims, including his claim that he was entitled to work for the Company until
age 65, were dismissed before or during the trial.
Mr. Bedrosian's motion to have the Referee's decision vacated was heard by
the California Superior Court on December 30, 1994. The California Superior
Court denied Mr. Bedrosian's motion. Mr. Bedrosian then filed a Motion for
Reconsideration of that ruling. That Motion will be heard by the Court on
January 23, 1995. The Company believes that Mr. Bedrosian's Motion for
Reconsideration is without merit.
Certain of Mr. Bedrosian's other claims against the Company and several
directors of the Company, as well as certain claims by the Company against Mr.
Bedrosian, are still pending in California Superior Court. Included in those
claims are the Company's claims against Mr. Bedrosian for his failure to repay
certain loans made to him by the Company. The Company already has obtained
summary judgment on a portion of the Company's loans to Mr. Bedrosian and
intends to file an additional motion for summary judgment on the remainder of
the outstanding loans. The Company believes that Mr. Bedrosian's claims against
the Company that remain pending in the California Superior Court are without
merit.
16
<PAGE>
NITA P. HECKENDORN V. NATIONAL MEDICAL ENTERPRISES, INC., JEFFREY C.
BARBAKOW, RAYMOND A. HAY, MAURICE J. DEWALD AND PETER DE WETTER
This lawsuit was previously reported in the Company's Form 10-K for the
fiscal year ended May 31, 1994, and Form 10-Q for the quarter ended August 31,
1994. This matter was settled by agreement of the parties on November 4, 1994,
and the entire action was dismissed, with prejudice, as to all causes of action
and all defendants. A related action brought by Ms. Heckendorn against Hillhaven
also was dismissed as part of that settlement.
PSYCHIATRIC MALPRACTICE CASES
The Company has continued to resolve the lawsuits to which the Company and
its officers and directors are subject alleging the existence of a
corporate-wide conspiracy to commit wrongful acts, which lawsuits are discussed
in the Company's Form 10-K for the fiscal year ended May 31, 1994. More of such
lawsuits were filed during the quarter ended November 30, 1994, and the Company
expects that additional lawsuits will be filed from time to time.
OTHER LEGAL PROCEEDINGS
LITIGATION RELATING TO THE MERGER OF NME AND AMH
To date, a total of nine purported class actions (the "Class Actions") have
been filed challenging the Merger. Seven of the Class Actions have been filed in
the Delaware Court of Chancery and are entitled (i) Jeffrey Stark and Gary
Plotkin v. Robert W. O'Leary, Robert J. Buchanan, John T. Casey, Robert B.
Calhoun, Harry J. Gray, Harold J. [sic] Handelsman, Sheldon S. King, Melvyn N.
Klein, Dan W. Lufkin, William E. Mayer and Harold S. Williams (the "AMH
Directors") and AMH, C.A. No. 13792, (ii) 7457 Partners v. the AMH Directors and
AMH, C.A. No. 13793, (iii) Moise Katz v. the AMH Directors and AMH, C.A. No.
13794, (iv) Constantinos Kafalas v. the AMH Directors and AMH, C.A. No. 13795,
(v) F. Richard Manson v. the AMH Directors, NME and AMH, C.A. No. 13797, (vi)
Lisbeth Greenfeld v. the AMH Directors and AMH, C.A. No. 13799 and (vii) Joseph
Frankel v. the AMH Directors and AMH, C.A. No. 13800. The seven Class Actions
filed in the Delaware Court of Chancery have been consolidated under the
caption, In re: American Medical Holdings, Inc., Shareholders Litigation, C.A.
No. 13797. In addition, two purported class actions, entitled Ruth LeWinter and
Raymond Cayuso v. the AMH Directors (with the exception of Harold S. Williams),
NME and AMH, Case No. BC115206 and David F. and Sylvia Goldstein v. O'Leary,
NME, AMH, et al., Case No. BC-116104, have been filed in the Superior Court of
the State of California, County of Los Angeles. The California actions have been
stayed pending the resolution of the Delaware actions. The complaints filed in
each of the Class Actions are substantially similar, are brought by purported
stockholders of AMH and, in general, allege that the directors of AMH breached
their fiduciary duties to the plaintiffs and other members of the purported
class. Plaintiffs allege that NME has aided and abetted the AMH directors'
alleged breach of their fiduciary duties. Plaintiffs further allege that the
directors of AMH wrongfully failed to hold an open auction and encourage bona
fide bids for AMH and failed to take action to maximize value for AMH
stockholders. Plaintiffs seek preliminary and permanent injunctions against the
proposed transaction until such time as a transaction to be entered into between
AMH and NME results from bona fide arms' length negotiation and/or requiring a
fair auction for AMH. In addition, if the Merger is consummated, plaintiffs seek
rescission or rescissory damages, an accounting of all profits realized and to
be realized by the defendants in connection with the Merger and the imposition
of a constructive trust for the benefit of the plaintiffs and other members of
the purported classes pending such an accounting. Plaintiffs also seek monetary
damages of an unspecified amount together with prejudgment interest and
attorneys' and experts' fees. AMH and NME believe that the complaints are
without merit.
Items 2 and 3 are not applicable.
17
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of shareholders was held on September 28, 1994.
The shareholders elected all of the Company's nominees for director, approved
the 1994 Directors Stock Option Plan, approved the 1994 Annual Incentive Plan
and ratified the selection of KPMG Peat Marwick LLP as the Company's independent
auditors for the fiscal year ended May 31, 1995. The votes were as follows:
1. Election of Directors:
<TABLE>
<CAPTION>
FOR WITHHELD
-------------- -----------
<S> <C> <C>
Jeffrey C. Barbakow................................... 143,765,971 2,168,203
Peter de Wetter....................................... 143,500,989 2,433,185
James P. Livingston................................... 143,733,091 2,201,083
Richard L. Schweiker.................................. 144,209,860 1,724,314
</TABLE>
2. Approval of the 1994 Directors Stock Option Plan:
<TABLE>
<S> <C>
For: 115,516,636
Against: 27,411,925
Abstaining: 3,005,613
</TABLE>
3. Approval of the 1994 Annual Incentive Plan:
<TABLE>
<S> <C>
For: 130,232,802
Against: 13,052,786
Abstaining: 2,648,586
</TABLE>
4. Ratification of selection of KPMG Peat Marwick LLP:
<TABLE>
<S> <C>
For: 145,409,623
Against: 257,889
Abstaining: 266,662
</TABLE>
ITEM 5. OTHER EVENTS
The Company is evaluating its investment in equity securities of Hillhaven
in light of the Company's determination to focus its operation on its general
hospital operations and the development of integrated healthcare delivery
systems. The Company currently intends to engage in discussions with Hillhaven
regarding possible means by which all or a portion of the investment may be
sold. Among the possibilities which may be discussed is a transaction between
the Company and Hillhaven in respect of the investment; the issuance by the
Company of debt or equity securities that would be exchangeable or convertible
into equity securities of Hillhaven; and the maintenance of either some or all
of the investment in Hillhaven. There can be no assurance that the discussions
with Hillhaven will result in any transaction. In addition, the Company may
explore other alternatives with respect to its investment, including the sale of
all or a portion of the investment in a negotiated sale to one or more third
parties or otherwise.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
(11) (Page 25) Statement Re: Computation of Per Share Earnings for the
three months and six months ended November 30, 1994 and 1993.
(27) Financial Data Schedule (included only in the EDGAR filing).
(b) Reports on Form 8-K: None.
18
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL MEDICAL ENTERPRISES, INC.
(Registrant)
________/s/_RAYMOND L. MATHIASEN_______
Raymond L. Mathiasen
SENIOR VICE PRESIDENT,
CHIEF FINANCIAL OFFICER
Date: January 17, 1995
19
<PAGE>
EXHIBIT 11
NATIONAL MEDICAL ENTERPRISES, INC.
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS *
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
NOVEMBER 30, NOVEMBER 30,
-------------------- ------------------------
1994 1993 1994 1993
--------- --------- ----------- -----------
<S> <C> <C> <C> <C>
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at beginning of period....................... 166,276 165,899 166,081 165,898
Shares issued upon exercise of stock options.................... 55 15 171 8
Dilutive effect of outstanding stock options.................... 1,988 186 2,138 198
Shares issued as grants of restricted stock, net of
cancellations.................................................. -- (23) -- (11)
--------- --------- ----------- -----------
Weighted average number of shares and share equivalents
outstanding.................................................... 168,319 166,077 168,390 166,093
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Income from continuing operations before cumulative effect of a
change in accounting principle................................. $ 46,218 $ 61,180 $ 110,246 $ 113,908
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Earnings per share from continuing operations before cumulative
effect of a change in accounting principle..................... $ 0.27 $ 0.37 $ 0.65 $ 0.69
--------- --------- ----------- -----------
--------- --------- ----------- -----------
FOR FULLY DILUTED EARNINGS PER SHARE
Weighted average number of shares used in primary calculation... 168,319 166,077 168,390 166,093
Additional dilutive effect of stock options..................... -- 88 168 44
Assumed conversion of dilutive convertible debentures........... 13,850 13,978 12,909 13,978
--------- --------- ----------- -----------
Fully diluted weighted average number of shares................. 182,169 180,143 181,467 180,115
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Income from continuing operations used in primary calculation... $ 46,218 $ 61,180 $ 110,246 $ 113,908
Adjustments for interest expense, contractual allowances and
income taxes................................................... 2,258 1,405 3,728 2,491
--------- --------- ----------- -----------
Adjusted income from continuing operations used in fully diluted
calculation.................................................... $ 48,476 $ 62,585 $ 113,974 $ 116,399
--------- --------- ----------- -----------
--------- --------- ----------- -----------
Earnings per share from continuing operations before cumulative
effect of a change in accounting principle..................... $ 0.27 $ 0.35 $ 0.63 $ 0.65
--------- --------- ----------- -----------
--------- --------- ----------- -----------
<FN>
- ------------------------
* All shares in these tables are weighted on the basis of the number of days the
shares were outstanding or assumed to be outstanding during each period.
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAY-31-1994
<PERIOD-END> NOV-30-1994
<CASH> 131,800
<SECURITIES> 51,400
<RECEIVABLES> 742,100
<ALLOWANCES> 67,200
<INVENTORY> 54,800
<CURRENT-ASSETS> 1,036,400
<PP&E> 2,622,500
<DEPRECIATION> 841,600
<TOTAL-ASSETS> 3,303,400
<CURRENT-LIABILITIES> 1,132,400
<BONDS> 236,300
<COMMON> 13,900
0
0
<OTHER-SE> 1,420,700
<TOTAL-LIABILITY-AND-EQUITY> 3,303,400
<SALES> 0
<TOTAL-REVENUES> 1,301,600
<CGS> 0
<TOTAL-COSTS> 1,085,100
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 46,800
<INTEREST-EXPENSE> 35,000
<INCOME-PRETAX> 183,200
<INCOME-TAX> 73,000
<INCOME-CONTINUING> 110,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 110,200
<EPS-PRIMARY> .65
<EPS-DILUTED> .63
</TABLE>
