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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------------
FORM 10-K
(MARK ONE)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED AUGUST 31, 1994
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
(COMMISSION FILE NUMBER)
1-10511
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AMERICAN MEDICAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3527632
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
COMMISSION FILE NUMBER
1-7612
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AMERICAN MEDICAL INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 95-2111054
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
14001 N. DALLAS PARKWAY, DALLAS, TEXAS 75240
(Address of principal executive offices) (Zip Code)
(Registrants' telephone number, including area code) (214) 789-2200
--------------------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
AMERICAN MEDICAL HOLDINGS, INC.:
(TITLE OF EACH CLASS) (NAME OF EACH EXCHANGE ON WHICH REGISTERED)
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Common Stock New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
AMERICAN MEDICAL INTERNATIONAL, INC.:
8 1/4% Convertible Subordinated Debentures due 2008
9 1/2% Convertible Subordinated Debentures due 2001
(TITLE OF CLASS)
------------------------------
Indicate by check mark whether the Registrants (1) have 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 (or for such shorter period that the
Registrants were required to file such reports), and (2) have been subject to
such filing requirements for the past 90 days. American Medical Holdings, Inc.
Yes X No __. American Medical International, Inc. Yes X No __.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes X No __.
As of November 9, 1994 there were 77,594,649 shares of American Medical
Holdings, Inc. Common Stock, $.01 par value, outstanding. The aggregate market
value of Common Stock held by non-affiliates of the registrant, based on the
closing price of these shares at November 9, 1994, was approximately $1,108,064.
For the purposes of the foregoing calculation only, all directors and executive
officers and principal stockholders of the registrant have been deemed
affiliates.
All shares of Common Stock, $.01 par value, of American Medical
International, Inc. are held by American Medical Holdings, Inc.
DOCUMENTS INCORPORATED BY REFERENCE
None
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INDEX
PAGE
REFERENCE
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PART I
Item 1. Business.................................................................................. 1
Item 2. Properties................................................................................ 13
Item 3. Legal Proceedings......................................................................... 13
Item 4. Submission of Matters to a Vote of Security Holders....................................... 13
PART II
Market for the Registrant's Common Stock and Related
Stockholder Matters...................................................................... 14
Item 5.
Item 6. Selected Financial Data................................................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations..... 16
Item 8. Financial Statements and Supplementary Data............................................... 21
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure...... 21
PART III
Item 10. Directors and Executive Officers of the Registrants....................................... 22
Item 11. Executive Compensation.................................................................... 27
Item 12. Security Ownership of Certain Beneficial Owners and Management............................ 34
Item 13. Certain Relationships and Related Transactions............................................ 36
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................... 39
PART I
ITEM 1. BUSINESS
American Medical Holdings, Inc. ("Holdings") was organized in July, 1989 to
acquire American Medical International, Inc. ("AMI" and, together with Holdings,
the "Company"). As a result of this acquisition, Holdings is the owner of all of
the outstanding shares of common stock of AMI.
AMI was incorporated in 1957 and in 1960 became the first investor-owned
hospital company. Today, the Company is one of the leading hospital management
companies in the United States. As of August 31, 1994 AMI operated 36 acute care
and one psychiatric hospital containing a total of 9,021 licensed beds.
Subsequent to August 31, 1994, AMI, in partnership with unaffiliated third
parties, acquired an additional acute care hospital, increasing the total acute
care hospitals operated by AMI to 37. AMI focuses on delivering value to its
patients and its communities with a full range of quality inpatient and
outpatient services including medical, surgical, obstetric, diagnostic,
specialty and home health care. The Company also operates ancillary facilities
at each of its hospitals, such as ambulatory, occupational and rural healthcare
clinics. The Company's hospitals are principally located in the suburbs of major
metropolitan areas in 13 states including Texas, Florida and California.
Holdings and AMI are Delaware corporations with principal executive offices
located at 14001 Dallas Parkway, Suite 200, P.O. Box 809088, Dallas, Texas
75380-9088. The telephone number for Holdings and AMI at such address is (214)
789-2200.
RECENT DEVELOPMENTS
On October 10, 1994, Holdings, National Medical Enterprises, Inc, a Nevada
corporation ("NME") and a wholly-owned subsidiary of NME ("Merger Sub"),
executed an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to
the Merger Agreement, Merger Sub will merge with and into Holdings (the
"Merger"). As a result of the Merger, Holdings will become a wholly-owned
subsidiary of NME and the combined company will be the second-largest healthcare
services company in the nation. Under terms of the Merger Agreement each share
of common stock of Holdings will be converted into (i) $19.00 in cash, if the
closing occurs on or before March 31, 1995, and $19.25 thereafter and (ii) 0.42
of a newly issued share of NME common stock. Under the Merger Agreement,
Holdings will pay a special dividend of $0.10 per share before the effective
date of the Merger. Following the Merger, Holdings will have the right to
nominate three members to the 13 member board of directors of the combined
company. The transaction has been approved by shareholders of approximately
61.4% of Holdings' outstanding shares of common stock and, therefore, further
action by Holdings' shareholders is not required. The transaction, which is
currently anticipated to close in the first quarter of calendar 1995, is subject
to certain conditions including, among other things, expiration of any
applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended.
Management believes that the position of the Company's hospitals in each of
their markets, the established physician networks and the alliances being
developed with other healthcare providers will be further enhanced by the
Merger. Holdings and NME each have a portfolio of hospitals in Florida and
California which will strengthen the combined company's presence in each of
these markets. The combined company will be strategically positioned to develop
new comprehensive healthcare delivery systems with physicians and other
healthcare providers in targeted communities and to deal with the current and
future changes in the healthcare industry.
On September 1, 1994, a limited partnership, of which AMI is the general
partner, acquired Hilton Head Hospital in Hilton Head, South Carolina containing
68 beds. In connection with the Company's efforts to re-establish a presence in
Europe, the Company has entered into a joint venture agreement with a community
organization (the "Burgergemeinde") located in Cham, Canton Zug, Switzerland.
The joint venture will be owned 90% by the Company and 10% by the
Burgergemeinde. Under the terms of the proposed transaction, the Company has
entered into a long term lease for the land where the existing hospital is
located and will then construct a new 56 bed acute care wing, convert an
existing structure into a medical office building and renovate and remodel the
existing
acute care facility. In addition, the Company plans to contract to provide
management, food, physical therapy and rehabilitation services to the hospital,
an on-site nursing home and an affiliated retirement community.
PROPERTIES
As of August 31, 1994, the Company owned or leased and operated the
following 36 acute care hospitals and one psychiatric hospital. The Company also
owned and managed medical office buildings and related healthcare facilities
associated with its hospitals, as well as certain undeveloped properties.
YEAR OF
CONSTRUCTION
OR NUMBER OF
NAME OF FACILITY LOCATION RENOVATION (A) LICENSED BEDS
- ---------------------------------------------------- --------------------------- -------------- -----------------
TEXAS
Brownsville Medical Center Brownsville R 1984 168
Mid-Jefferson Hospital Nederland R 1981 128
Nacogdoches Medical Center Nacogdoches C 1975 150
Odessa Regional Hospital (b) Odessa C 1975 100
Park Place Hospital Port Arthur R 1992 223
Park Plaza Hospital Houston R 1992 508
Twelve Oaks Hospital Houston R 1992 336
CALIFORNIA
Encino Hospital (c) Encino C 1954 194
Garden Grove Hospital and Garden Grove R 1983 175
Medical Center
Medical Center of Irvine (d) Irvine C 1990 177
Medical Center of North Hollywood North Hollywood R 1972 163
San Dimas Community Hospital San Dimas C 1972 99
Sierra Vista Regional Medical Center San Luis Obispo C 1959 178
South Bay Hospital (d) Redondo Beach R 1986 203
Tarzana Regional Medical Center (c)(d) Tarzana R 1992 220
FLORIDA
Memorial Hospital of Tampa (b) Tampa R 1985 174
North Ridge Medical Center Ft. Lauderdale C 1975 395
Palm Beach Gardens Medical Center (d) Palm Beach Gardens R 1988 204
Palmetto General Hospital Hialeah R 1989 360
Town and Country Hospital Tampa C 1981 201
ARKANSAS
Central Arkansas Hospital Searcy R 1983 169
National Park Medical Center Hot Springs C 1985 166
St. Mary's Regional Medical Center Russellville R 1992 170
NORTH CAROLINA
Central Carolina Hospital Sanford C 1981 137
Frye Regional Medical Center (d) Hickory R 1982 355
SOUTH CAROLINA
East Cooper Community Hospital Mount Pleasant C 1986 100
Piedmont Medical Center Rock Hill C 1983 268
MISSOURI
Columbia Regional Hospital Columbia R 1987 301
Lucy Lee Hospital (d) Poplar Bluff C 1980 201
2
YEAR OF
CONSTRUCTION
OR NUMBER OF
NAME OF FACILITY LOCATION RENOVATION (A) LICENSED BEDS
- ---------------------------------------------------- --------------------------- -------------- -----------------
GEORGIA
North Fulton Regional Hospital (d) Roswell R 1990 167
Spalding Regional Hospital Griffin C 1989 160
NEBRASKA
Saint Joseph Hospital Omaha R 1990 404
Saint Joseph Center for Mental Health (e) Omaha R 1992 171
OTHER
Brookwood Medical Center Birmingham, Alabama R 1991 586
St. Jude Medical Center (f) Kenner, Louisiana C 1985 300
Culver Union Hospital Crawfordsville, Indiana C 1984 120
St. Francis Hospital Memphis, Tennessee R 1986 890
<FN>
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(a) The Company incurs capital expenditures to renovate and/or expand the
properties to accommodate new programs and to enhance the services
provided. C=Year of Construction, R=Year of Renovation
(b) The Company owns a majority interest in this hospital.
(c) Hospital is operated pursuant to a joint venture organized as of January 1,
1993 with HealthTrust Inc. -- The Hospital Company. AMI is the managing
partner for the joint venture and has a 75% ownership interest therein.
(d) Property held under lease.
(e) Psychiatric hospital.
(f) As of August 31, 1994 this property was held under lease. On October 28,
1994, the Company acquired the property of this hospital previously held
under a capital lease.
EMPLOYEES
As of August 31, 1994, the Company had approximately 30,200 employees, of
which approximately 68% were full time employees. Two of the Company's hospitals
had labor contracts covering approximately 5% of the Company's employees.
Management believes that its relations with its employees are satisfactory.
MEDICAL STAFFS
The medical staff at each hospital generally consists of non-employee
physicians. In certain markets, the Company's hospitals have employed physicians
to further strengthen and expand the Company's managed care contracting ability.
Medical staff members of the Company-owned hospitals who are not employees often
serve on the medical staffs of hospitals not owned by the Company and may
terminate their relationships with the Company-owned hospitals at any time.
Rules and regulations concerning the medical aspects of each hospital's
operations are adopted and enforced by its medical staff. Such rules and
regulations provide that the members of the staff elect officers who, together
with additional physicians selected by them, supervise all medical and surgical
procedures and services. Their supervision is subject to the general oversight
of the hospital's Governing Board.
QUALITY OF SERVICES
Management believes the quality of healthcare services is critical in order
to attract and retain top physicians and increase the market share of the
Company's hospitals. One of the key mechanisms used to monitor the quality of
care at the Company's hospitals is a quality assurance program designed to
measure patient satisfaction, the Patient Satisfaction Monitoring System
("PSMS").
3
PSMS utilizes the results of interviews performed by an independent research
company of a statistically determined sample group of discharged patients at
each hospital to gather patient responses regarding the hospital services
provided. Management uses the results as a tool to improve the quality of
patient services and satisfaction and believes PSMS has assisted the Company in
successfully maintaining and improving the quality of healthcare as perceived by
patients and their physicians and thereby contributing to improved net revenues.
PSMS is also used by the Company as one of the bases upon which hospital
executive directors and other employees are compensated under the Company's
incentive compensation program. Management believes that the Company was the
first in the industry to directly tie compensation to the attainment of
qualitative performance targets.
The Company has also developed and implemented at several of the Company's
hospitals systems similar to PSMS designed to (i) measure physician
satisfaction, the MD Satisfaction Survey and (ii) emergency room services,
Emergency Room PSMS.
COMPETITION
The Company operates its hospitals in competitive markets where other
investor-owned and non-profit hospitals operate and provide services that are
similar to those offered by the Company's hospitals. Competition among the
Company's hospitals and other healthcare providers in the United States has
increased in recent years due to a decline in occupancy rates resulting from
among other things, changes in government regulation and reimbursement, other
cost containment pressures, technology, and most recently, various healthcare
reform plans pending in Congress. Additionally, hospitals owned by government
agencies or other tax-exempt entities benefit from advantages (e.g., endowments,
charitable contributions and tax-exempt financing) which are not available to
the Company's hospitals.
Management believes that a hospital's competitive position within local
markets is affected by various factors including the quality of healthcare
services provided, pricing of healthcare services, the hospital's location and
the types of services offered. The Company expects to improve the performance of
its hospitals by (i) expanding physician network relationships, thereby
attracting and retaining quality physician and medical personnel, (ii)
increasing its emphasis on managed care contracting, (iii) developing and
marketing new healthcare services targeted to the particular needs of the
communities served by its hospitals, (iv) expanding profitable outpatient
services, and (v) expanding geographic coverage by developing affiliations and
alliances with other providers of service. In addition, the Company will
continue to pursue opportunities for growth through acquisitions.
The competitive position of a hospital is also increasingly affected by its
ability to negotiate contracts for healthcare services with managed care
organizations, including health maintenance organizations ("HMOs"), preferred
provider organizations ("PPOs") and other purchasers of group healthcare
services. HMOs and PPOs attempt to direct and control use of hospital services
through strict utilization management programs and by negotiating provider
contracts with only one or a limited number of hospitals in each market area.
The importance of negotiating with managed care organizations varies from market
to market depending on the market strength of such organizations. In some
situations, hospitals have agreed to fixed payments based on the number of
managed care enrollees, resulting in the hospital and, in some cases, the
physician assuming utilization risk (such contracts are referred to as capitated
contracts). Managed care organizations are generally able to obtain, through the
use of various contracting mechanisms including capitated contracts, significant
discounts from hospital established charges. Management believes that the
Company is able to compete effectively for managed care business in part because
of its relationships with local physicians, its hospital management teams, its
attention to cost controls and quality of service and its strategies to
establish service niches in markets served by other hospitals.
SOURCES OF REVENUE
The primary sources of the Company's hospital revenues are room and board
and the provision of ancillary medical services. Room and board represents the
basic charges for the hospital room and related services, such as general
nursing care and meals. Ancillary medical services represent the
4
charges related to the medical support activities performed by the hospital,
such as X-rays, physical therapy and laboratory procedures. The Company receives
payments for services rendered to patients from the federal government under
Medicare programs and the Civilian Health and Medical Program of Uniformed
Services ("CHAMPUS"), state governments under their respective Medicaid
programs, managed care organizations ("contracted services"), private insurers,
self-insured employers and directly from patients. In addition to revenues
received from such programs and patients, the Company receives other non-patient
revenues (e.g. cafeteria and gift shop revenues).
The following table presents the percentage of net revenues for fiscal 1994,
1993 and 1992 under each of the following programs:
1994 1993 1992
--------- --------- ---------
Medicare/Medicaid...................................................... 43% 38% 37%
Contracted Services.................................................... 25 26 24
Non-contracted Services................................................ 29 33 37
Other Sources.......................................................... 3 3 2
The Company's hospital revenues received under Medicare, Medicaid, CHAMPUS,
Blue Cross and from payers of contracted services are generally less than
customary charges for the services covered. The increased percentage of
government paid care subjects providers to greater risk associated with reduced
government reimbursement. Managed care programs which offer prepaid and
discounted medical service packages account for a significant share of the
market and have reduced the historical rate of growth of hospital revenues. As a
result, new kinds of healthcare strategies and provider networks (e.g. physician
networks) are continuing to emerge.
Patients are generally not responsible for any difference between customary
hospital charges and amounts reimbursed under Medicare, Medicaid, CHAMPUS and
some Blue Cross plans or by payers of contracted services for such services,
except to the extent of any exclusions, deductibles or co-insurance features of
their coverage. In recent years insurers and other payers have increased the
amount of such exclusions, deductibles and co-insurance generally increasing the
patient's financial responsibility to directly pay for some services. The
increase in the self-pay portion of a patient's financial responsibility may
also increase the amount of the Company's uncollectible accounts.
MEDICARE PROGRAM
Under the Medicare program the Company receives reimbursement under a
prospective payment system ("PPS") for the routine and ancillary operating costs
of most Medicare inpatient hospital services. Psychiatric, long-term care,
rehabilitation, pediatric and certain designated cancer research hospitals, as
well as psychiatric or rehabilitation units that are distinct parts of a
hospital, are currently exempt from PPS and are reimbursed on a cost based
system, subject to certain cost caps. It is uncertain what impact, if any, the
federal efforts to reform the healthcare system will have on the current method
of Medicare reimbursement.
Under PPS, fixed payment amounts per inpatient discharge were established
based on the patient's assigned diagnosis related group ("DRG"). DRG's classify
patients' treatments for illnesses according to the estimated intensity of
hospital resources necessary to furnish care for each principal diagnosis. DRG
rates have been established for each individual hospital participating in the
Medicare program and are based upon a statistically normal distribution of
severity. Patients falling well outside the normal distribution are afforded
additional payments and defined as "outliers". Under PPS, hospitals may retain
payments in excess of costs but must absorb costs in excess of such payments;
therefore hospitals are encouraged to operate at greater efficiency.
DRG rates are updated and recalibrated periodically and have been affected
by several recent federal enactments. The index used by the Health Care
Financing Administration ("HCFA") to adjust the DRG rates gives consideration to
the inflation experienced by hospitals in purchasing goods and services ("market
basket"). However, for several years the percentage increases to the DRG rates
5
have been lower than the percentage increases in the costs of goods and services
purchased by hospitals. The market basket is adjusted each federal fiscal year
("FY") which begins on October 1. The market basket for FY 1993 was 4.1%, FY
1994 was 4.3% and for FY 1995 is 3.6%.
The Omnibus Budget Reconciliation Act of 1993 ("OBRA-93") extended the
reduction enacted by the Omnibus Budget Reconciliation Act of 1990 ("OBRA-90")
in the Medicare DRG payments to healthcare providers through 1997. A substantial
number of AMI's hospitals are classified as urban hospitals for reimbursement
purposes. The net updates of DRG rates for large urban and other urban hospitals
are established as follows: FY 1994 and FY 1995 market basket, minus 2.5%; FY
1996 market basket, minus 2%; and FY 1997 market basket, minus 0.5%. Management
cannot predict how future adjustments by Congress and HCFA will affect the
profitability of its healthcare facilities.
The Omnibus Budget Reconciliation Act of 1990 required the Secretary of the
Department of Health and Human Services ("HHS") to develop a proposal for a PPS
for all hospital-based outpatient services and inpatient psychiatric care. The
Secretary of HHS' report, which was due on September 1, 1991, has not been
submitted. Until such time as the Secretary of HHS has developed a PPS for all
hospital-based outpatient services, OBRA-90 directs that payments for the
reasonable cost of outpatient hospital services (other than for capital related
costs) be reimbursed at 94.2% of such reasonable costs for cost reporting
periods falling within FY 1991 through FY 1995. OBRA-93 extended this reduction
from FY 1995 through FY 1998.
MEDICARE REIMBURSEMENT FOR CAPITAL COSTS
Subsequent to September 30, 1991 and through FY 1995, capital related
payments for inpatient hospital services are made at the rate of 90% of
reasonable capital costs until capital PPS becomes applicable at the hospital.
The PPS capital costs reimbursement applies an estimated national average of FY
1989 Medicare capital costs per patient discharge updated to FY 1992 by the
estimated increase in Medicare capital costs per discharge (the "Federal Rate").
Capital PPS is applicable to cost reports beginning on or after October 1, 1991.
Under capital PPS reimbursement a 10 year transition period has been
established. A hospital is paid under one of the following two different payment
methodologies during this transition period: (i) hospital with a
hospital-specific rate (the rate established for a hospital based on the cost
report ending on or before December 31, 1990) below the Federal Rate would be
paid on a fully prospective payment methodology and (ii) hospitals with a
hospital-specific rate above the Federal Rate would be paid based on a
hold-harmless payment methodology or 100% of the Federal Rate whichever results
in a higher payment. A hospital is paid under one methodology throughout the
entire transition. After the transition period, all hospitals would be paid the
Federal Rate.
The impact of PPS capital reimbursement in the first two years has not been
material to Medicare capital reimbursement. The hospital-specific rates for FY
1994 decreased 2.16%. The established Federal Rate for FY 1994 was reduced by
9.33% to $378.34 per patient discharge and for FY 1995 was reduced by 0.4% to
$376.83 per patient discharge. Management believes that the decrease in the rate
of reimbursement for capital costs will not have a material adverse effect on
the Company's results of operations.
MEDICAID PROGRAM
The Medicaid program, created by the Social Security Act, is designed to
provide medical assistance to individuals unable to afford care. Medicaid is a
joint federal and state program in which states voluntarily participate.
Reimbursement rates under the Medicaid program are set by each participating
state, and rates and covered services may vary from state to state. Depending on
the average income per person in a state, at least 50% of Medicaid funding comes
from the federal government, with the balance shared by the state and local
governments. The amount of the federal share is called Federal Financial
Participation ("FFP"). Each of the Company's facilities is currently an eligible
Medicaid provider, although certain of the Company's hospitals do not currently
participate as providers of services in their respective state Medicaid
programs.
6
The Omnibus Reconciliation Act of 1981 permitted each state to determine new
reimbursement rates for Medicaid inpatient hospital services that are reasonable
and adequate to meet the costs which must be incurred by efficiently and
economically operated facilities and to assure access to inpatient hospital
services by Medicaid recipients. Providers must accept Medicaid payment as
payment in full for healthcare services provided to Medicaid patients. Actual
payment rates and the methodologies for determining such rates vary from state
to state. For example, in Texas, Medicaid inpatient services are reimbursed on a
DRG based system, while in Florida, Medicaid inpatient services are reimbursed
on a per diem prospective payment system. In many instances, Medicaid
reimbursement does not cover a hospital's costs in providing services to
Medicaid recipients.
The Company operates hospitals in some states that currently levy taxes on
healthcare providers or use healthcare provider donations to meet the state's
share of medical assistance expenditures. HCFA issued a final rule on September
13, 1993 whereby funds donated from Medicaid providers and expenditures that are
attributable to provider-specific state taxes be offset from Medicaid
expenditures incurred on or after January 1, 1992, before calculating the amount
of the federal share of FFP. The Company has historically participated in such
programs and has received reimbursement to offset a portion of the cost of
services provided to indigent patients. Although management believes that as a
result of the final rule such reimbursement will be reduced, steps have been
taken to offset the anticipated reduction in reimbursement.
The Medicare and Medicaid programs have been subject to continual
modification through legislative acts and both federal and state administrative
initiatives. The federal or state governments might in the future reduce the
funds available under these programs or require more stringent utilization
review of hospital facilities. Such actions could have a material adverse impact
on the Company's financial condition and results of operations.
CHAMPUS
The Company's hospitals are reimbursed by the federal government's CHAMPUS
program for care provided to United States military retirees and dependents.
CHAMPUS pays for inpatient acute hospital care on the basis of a prospectively
determined rate applied on a per discharge basis using DRGs similar to the
Medicare system. At this time, inpatient psychiatric hospital services are
reimbursed on an individual hospital's per diem rate calculated based upon the
hospital's prior cost experience. There can be no assurance that the CHAMPUS
program will continue per diem reimbursement for psychiatric hospital services
in the future.
CONTRACTED BUSINESS
Managed care arrangements have typically reimbursed providers based on a
percent of charges or on a per diem basis with stop-loss provisions for high
severity cases. In more developed markets such as California and Florida, the
Company's hospitals are now entering into risk sharing, or capitated,
arrangements. These arrangements reimburse the hospital based on a fixed fee per
participant in a managed care plan with the hospital assuming the cost of
services provided, regardless of the level of utilization. If utilization is
higher than anticipated and/or costs are not effectively controlled, such
arrangements could produce low or negative operating margins.
COMMERCIAL INSURANCE
The Company's hospitals provide services to individuals covered by private
healthcare insurance. Private insurance carriers either reimburse their policy
holders or make direct payment to the Company's hospitals based upon the
particular hospital's established charges and the particular coverage provided
in the insurance policy. Blue Cross is a healthcare financing program that
provides its subscribers with hospital benefits through independent
organizations that vary from state to state. The Company's hospitals are paid
directly by local Blue Cross organizations on the basis agreed to by each
hospital and Blue Cross by a written contract. In some states, the local Blue
Cross affiliate is believed to be experiencing financial difficulty; however,
management does not believe that such difficulties represent a material
financial exposure to the Company.
7
Recently, several commercial insurers have undertaken efforts to limit the
costs of hospital services by adopting PPS or DRG based systems. To the extent
such efforts are successful, and to the extent that the insurers' systems fail
to reimburse hospitals for the costs of providing services to their
beneficiaries, such efforts may have a negative impact on the hospitals' net
revenue.
REGULATION
LICENSURE, CERTIFICATION AND ACCREDITATION
Healthcare facility construction and operation is subject to federal, state
and local regulation relating to the adequacy of medical care, equipment,
personnel, operating policies and procedures, fire prevention, rate-setting and
compliance with building codes and environmental protection laws. Facilities are
subject to periodic inspection by governmental and other authorities to assure
continued compliance with the various standards necessary for licensing and
accreditation. Management believes that all of the Company's healthcare
facilities are properly licensed under appropriate state laws and are certified
under the Medicare program or are accredited by the Joint Commission on
Accreditation of Health Care Organizations ("Joint Commission"), the effect of
which is to permit the facilities to participate in the Medicare and Medicaid
programs. Should any facility lose its Joint Commission accreditation, or
otherwise lose its certification under the Medicare program, the facility would
be unable to receive reimbursement from the Medicare and Medicaid programs.
Management believes that the Company's facilities are in substantial compliance
with applicable federal, state, local and independent review body regulations
and standards. The requirements for licensure, certification and accreditation
are subject to change and, in order to remain qualified, it may be necessary for
the Company to effect changes in its facilities, equipment, personnel and
services. Although the Company intends to continue its qualification, there is
no assurance that its hospitals will be able to comply in the future.
CERTIFICATES OF NEED
The construction of new facilities, the acquisition of existing facilities,
and the addition of new beds or services may be reviewable by state regulatory
agencies under a program frequently referred to as a Certificate of Need. The
Company operates hospitals in nine states that require state approval under the
Certificate of Need program. Such laws generally require appropriate state
agency determination of public need and approval prior to beds or services being
added, or a related capital amount being spent. Failure to obtain necessary
state approval can result in the inability to complete an acquisition or change
of ownership, the imposition of civil or, in some cases, criminal sanctions, the
inability to receive Medicare or Medicaid reimbursement and/or the revocation of
a facility's license.
UTILIZATION REVIEW
In order to ensure efficient utilization of facilities and services, federal
regulations require that admissions to and the utilization of facilities by
Medicare and Medicaid patients be reviewed periodically by a federally funded
Peer Review Organization ("PRO"). Pursuant to federal law, the PRO must review
the need for hospitalization and the utilization of services, and may, where
appropriate, deny payment for services provided. Each of the Company's
facilities has contracted with a PRO and has had in effect a quality assurance
program that provides for retrospective patient care evaluation and utilization
review. While no PRO has taken adverse action against any of the Company's
hospitals to date, PRO review can result in denial of payment for services,
recoupment of monies paid to the hospital, assessment of fines or exclusion from
the Medicare and Medicaid programs.
STATE RATE-SETTING ACTIVITY
The Company currently operates five facilities in Florida wherein the state
has mandated hospital rate-setting. Under Florida law, the maximum annual
percentage any hospital may increase its revenue per admission is limited to the
hospital's prior year actual revenue per adjusted admission inflated forward by
the hospital's applicable current year's maximum allowable rate of increase
("MARI") or the Health Care Cost Containment Board-approved budgeted revenue per
adjusted admission. The MARI is the maximum rate at which a hospital is expected
to increase its average revenue per adjusted admission for a given period. The
Health Care Cost Containment Board, using
8
the most recent audited actual experience for each hospital, calculates the MARI
for each hospital based on the projected rate of increase in the market basket
index, adjusted by the hospital's percentage of Medicare, Medicaid and charity
care days plus two percentage points. As a result, in Florida, the Company's
ability to increase its rates to compensate for increased costs per admission is
limited, and the Company's operating margin at Florida facilities may be
adversely affected. There can be no assurance that other states in which the
Company operates hospitals will not enact rate-setting provisions as well.
FEDERAL LEGISLATION AND RULE-MAKING
The Medicare and Medicaid Antifraud and Abuse Amendments (the "Amendments")
are codified under Section 1128B of the Social Security Act. The Amendments
provide criminal penalties for individuals or entities that knowingly and
willfully offer, pay, solicit or receive remuneration of any kind in order to
induce referrals for goods or services reimbursed under the Medicare or state
Medicaid programs. The statute on its face is very broad with the types of
remuneration covered including kickbacks, bribes and rebates made directly or
indirectly, overtly or otherwise, in cash or in kind. In addition, prohibited
conduct includes remuneration intended to induce the purchasing, leasing,
ordering or arranging for any good, facility or service paid for by Medicare or
state Medicaid programs. In addition to criminal penalties (fines of up to
$25,000 and imprisonment for up to five years per referral), the Amendments also
establish civil monetary penalties and sanctions of excluding violators from
Medicare and Medicaid participation. The Office of the Inspector General ("OIG")
has taken the position that where physicians hold other than bona fide ownership
interests in healthcare providers (e.g., where such ownership is intended to
encourage the physicians to utilize the services of the entity in which they
have invested) such ownership arrangements violate the Amendments.
In recent years, the courts have suggested that any direct or indirect
payment or other financial benefit conferred upon a physician or other referral
source may violate the statute if one purpose of any portion of the payment is
to induce the physician to refer patients to the entity providing the benefit.
Healthcare providers are concerned that many relatively innocuous, or even
beneficial, commercial arrangements are technically covered by the Amendments
and are, therefore, subject to potential criminal prosecution. The Medicare and
Medicaid Patient and Program Protection Act of 1987 added two new provisions
specifically addressing the anti-kickback statute. They first authorized the OIG
to exclude an individual or entity from participation in the Medicare and
Medicaid programs if it is determined through an administrative process that the
party has engaged in a prohibited remuneration scheme. In addition, Congress
directed the HHS to develop regulations specifying those payment practices that
will not be subject to criminal prosecution and not provide a basis for
exclusion from the Medicare and Medicaid programs ("safe harbors"). Final
regulations were published on July 29, 1991 in the Federal Register. Additional
safe harbors were proposed, with a 60 day public comment period, on September
21, 1993. The proposed rule offers protection for investment interests in rural
areas, ambulatory surgical centers, and group practices composed exclusively of
active investors; practitioner recruitment in rural areas; obstetrical
malpractice insurance subsidies; referral arrangements for specialty services;
and cooperative hospital service organizations.
Among the criteria contained in the final regulations are criteria for
investments, leasing, purchasing and ordering arrangements which would apply to
the Company's facilities. The additional proposed regulations will also provide
a safe harbor for physician recruitment by facilities in certain rural areas. If
adopted, such a safe harbor provision would apply to certain of the Company's
facilities. Arrangements with referring physicians involving leasing,
purchasing, ordering and recruitment would not constitute illegal remuneration
so long as all of the criteria set forth in the safe harbors are met. However,
the fact that each provision of such arrangements does not fall within one of
the applicable safe harbor criteria does not necessarily mean that the
arrangement is illegal.
In order to prevent hospitals from entering into arrangements with
physicians that increase the physician payment from Medicare or Medicaid, in
January 1991, the OIG issued a management advisory report identifying potential
violations of the antifraud and abuse statute with respect to
9
certain financial arrangements between hospitals and hospital-based physicians.
Specifically, the report stated that financial agreements that require
physicians to pay more than the fair market value for services provided by the
hospital or that compensate physicians for less than the fair market value of
goods and services that they provide to hospitals create potential liability for
physicians and hospitals engaged in these actions.
In May 1992, the OIG issued a special fraud alert regarding hospital
incentives to physicians. The alert identified the following incentive
arrangements which, if present, are indications of potentially unlawful
activity: (a) payment of any sort of incentive by the hospital each time a
physician refers a patient to the hospital, (b) the use of free or significantly
discounted office space or equipment (in facilities usually located close to the
hospital), (c) provision of free or significantly discounted billing, nursing or
other staff services, (d) free training for a physician's office staff in areas
such as management techniques, CPT coding and laboratory techniques, (e)
guarantees which provide that, if the physician's income fails to reach a
predetermined level, the hospital will supplement the remainder up to a certain
amount, (f) low-interest or interest-free loans, or loans which may be
"forgiven" if a physician refers patients (or some number of patients) to the
hospital, (g) payment of the costs of a physician's travel and expenses for
conferences, (h) coverage on hospital's group health insurance plans at an
inappropriately low cost to the physician and (i) payment for services (which
may include consultations at the hospital) which require few, if any,
substantive duties by the physician, or payment for services in excess of the
fair market value of services rendered.
Certain of the Company's current financial arrangements with physicians,
including joint ventures, may not qualify for the current safe harbor exemptions
and, as a result, such arrangements risk scrutiny by the OIG and may be subject
to enforcement action. As indicated above, the failure of these arrangements to
satisfy all of the conditions of the applicable safe harbor criteria does not
mean that the arrangements are illegal. Nevertheless, certain of the Company's
current financial arrangements with physicians, including joint ventures, and
the Company's future development of joint ventures and other financial
arrangements with physicians, could be adversely affected by the failure of such
arrangements to comply with the safe harbor regulations, or the future adoption
of other legislation or regulation in these areas.
Under provisions of the Omnibus Budget Reconciliation Act of 1989 and
OBRA-90, referrals of Medicare and Medicaid patients to clinical laboratories
with which a referring physician has a financial relationship are prohibited
effective January 1, 1991. As of January 1, 1992, any claim for payment
submitted to Medicare by a provider must identify the name and provider number
of the referring physician and must indicate whether the physician has an
ownership or other financial arrangement with the provider. Under the provisions
of OBRA-93, referrals of Medicare and Medicaid patients to certain "designated
health services" with which a referring physician has a financial relationship
will be prohibited as of January 1, 1995. These designated health services
include the following: clinical laboratory; physical and occupational therapy
services; radiology or other diagnostic services; radiation therapy services;
durable medical equipment; parenteral and enteral nutrients, equipment and
supplies; prosthetics, orthotics and prosthetic devices; home health services;
outpatient prescription drugs; and inpatient and outpatient hospital services.
There are a number of exceptions that may apply to the compensation arrangements
under which the Company's facility contracts with certain of its physicians
including exceptions for bona fide employment relationships, personal service
arrangements, and physician recruitment arrangements.
The Social Security Act also imposes criminal and civil penalties for making
false claims to Medicare and Medicaid for services not rendered or for
misrepresenting actual services rendered in order to obtain higher
reimbursement. Like the antifraud and abuse statute, this statute is very broad.
Careful and accurate coding of claims for reimbursement must be performed to
avoid liability under the false claims statutes.
Management exercises care in an effort to structure its arrangements with
physicians to comply in all material respects with these laws, and management
believes that the Company is in compliance
10
with the Amendments, however, there can be no assurance that (i) government
officials charged with responsibility for enforcing the prohibitions of the
Amendments will not assert that the Company or certain transactions in which it
is involved are in violation of the Amendments, or (ii) courts will interpret
the Amendments in a manner consistent with the practices of the Company.
STATE LEGISLATION
Certain states in which the Company's facilities are located also have
enacted statutes which prohibit the payment of kickbacks, bribes and rebates for
the referral of patients. Many of these statutes have provisions that closely
follow the federal statutes described above, and there have been few actions or
interpretations made under such provisions. Management believes that the Company
is in substantial compliance with such laws; however, there can be no assurance
that government officials who have the responsibility for enforcing such laws
will not assert that the Company or certain transactions in which the Company is
involved are in violation of such laws, or that such laws will ultimately be
interpreted by the government officials in a manner consistent with the
practices of the Company.
GENERAL REGULATION
The Company is committed to providing its employees with an equal
opportunity work environment that is free from discrimination. In keeping with
this commitment, the Company ensures that all human resource programs are
administered without regard to race, religion, color, national origin, sex or
age. Furthermore, the Company embraces and complies with the American
Disabilities Act of 1990 (ADA) and the 1993 Family and Medical Leave Act. Such
human resource programs include, but are not limited to, compensation, benefits,
application of Company policies, company-sponsored training, educational, social
and recreational programs.
The Company is subject to various federal, state and local statutes and
ordinances regulating the discharge of materials into the environment,
including, without limitation, the disposal of certain medical waste and
by-products. Management does not believe that the Company will be required to
expend any material amounts in order to comply with these laws and regulations
or that compliance will materially affect its capital expenditures, earnings or
competitive position.
PROFESSIONAL LIABILITY
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients in the ordinary course of business. The Company
self-insures the professional and general liability claims for nine of its
hospitals up to $500,000 per occurrence and for 26 of its hospitals up to $3
million per occurrence. Prior to June, 1993 the self-insured retention was $5
million per occurrence. Coverage for professional and general liability claims
for the Company's two remaining hospitals is maintained with outside insurance
carriers.
The Company owns a 35% equity interest in an insurance company which insures
the excess professional and general liability risks for those hospitals which
are self-insured. The excess coverage provided by this insurance company is
limited to $25 million per claim. The Company purchases additional excess
insurance from a commercial carrier. For the period from January 1986 to
February 1991, the Company had no excess coverage for the majority of its
hospitals. However, in March 1991, the Company purchased prior acts coverage
which substantially reduces the uninsured liability for risks during this
period.
The Company maintains an unfunded reserve for its professional liability
risks which is based, in part, on actuarial estimates calculated and evaluated
by an independent actuary. Actual hospital professional and general liability
costs for a particular period are not normally known for several years after the
period has ended. The delay in determining the actual cost associated with a
particular period is due to the time between the occurrence of an incident, the
reporting thereof and the settlement of related claims. As a result, reserves
for losses and related expenses are estimated using expected loss reporting
patterns determined in conjunction with the actuary and are discounted using a
rate of 9% to their present value. Adjustments to the total reserves are
determined in conjunction
11
with the actuary and on an annual basis are recorded by the Company as an
increase or decrease in the current year's earnings. Management considers such
reserves to be adequate for professional liability risks. Any losses incurred in
excess of the established reserves will be recorded as a charge to the earnings
of the Company. Any losses incurred within the Company's self-insured limits
will be paid out of the Company's cash from operations. While the Company's cash
from operations has been adequate to provide for alleged and unforeseen
liability claims in the past, there can be no assurance that the Company's cash
flow will continue to be adequate to cover such claims.
12
SEGMENT OPERATING INFORMATION
Holdings' only material business segment is "healthcare," which contributed
substantially all of its revenues and operating profits in fiscal 1994. The
Company's healthcare business is conducted in the United States.
ITEM 2. PROPERTIES
See "ITEM 1. BUSINESS."
ITEM 3. LEGAL PROCEEDINGS
LITIGATION RELATING TO THE MERGER.
To date, a total of nine purported class action suits (the "Class Actions")
have been filed against Holdings and the directors of Holdings (and in two cases
against NME). Seven of such Class Actions have been filed in the Delaware Court
of Chancery and are entitled (i) JEFFREY STARK AND GARY PLOTKIN V. ROBERT W.
O'LEARY, ROBERT J. BUCHANAN, JOHN T. CASEY, ROBERT B. CALHOUN, HARRY J. GRAY,
HAROLD J. [SIC] HANDELSMAN, SHELDON S. KING, MELVYN N. KLEIN, DAN W. LUFKIN,
WILLIAM E. MAYER AND HAROLD S. WILLIAMS (THE "HOLDINGS DIRECTORS") AND HOLDINGS,
C.A. NO. 13792, (ii) 7457 Partners v. the Holdings Directors and Holdings, C.A.
No. 13793, (iii) MOISE KATZ V. THE HOLDINGS DIRECTORS AND HOLDINGS, C.A. NO.
13794, (iv) CONSTANTINOS KAFALAS V. THE HOLDINGS DIRECTORS AND HOLDINGS, C.A.
NO. 13795, (v) F. RICHARD MANSON V. THE HOLDINGS DIRECTORS, NME AND HOLDINGS,
C.A. NO. 13797, (vi) LISBETH GREENFELD V. THE HOLDINGS DIRECTORS AND HOLDINGS,
C.A. NO. 13799 and (vii) JOSEPH FRANKEL V. THE HOLDINGS DIRECTORS AND HOLDINGS,
C.A. NO. 13800 and two purported Class Actions have been filed in the Superior
Court of the State of California, County of Los Angeles, entitled RUTH LEWINTER
AND RAYMOND CAYUSO V. THE HOLDINGS DIRECTORS (WITH THE EXCEPTION OF HAROLD S.
WILLIAMS), NME AND HOLDINGS, CASE NO. BC115206 AND DAVID F. AND SYLVIA GOLDSTEIN
V. O'LEARY, NME, AMI, ET AL., CASE NO. BC116104. The seven Class Actions filed
in the Delaware Court of Chancery have been consolidated The complaints filed in
each of the Class Actions are substantially similar, are brought by purported
stockholders of Holdings and, in general, allege that the defendants breached
their fiduciary duties to the plaintiffs and other members of the purported
class. One of the Class Actions alleges that the defendants have committed or
aided and abetted a gross abuse of trust. The complaints further allege that the
directors of Holdings wrongfully failed to hold an open auction and encourage
bona fide bids for Holdings and failed to take action to maximize value for
Holdings stockholders. The complaints seek preliminary and permanent injunctions
against the proposed transaction until such time as a transaction to be entered
into between Holdings and NME results from bona fide arms' length negotiation
and/or requiring a fair auction for Holdings. In addition, if the Merger is
consummated, the complaints seek recision or recessionary damages and two of the
Class Actions seek an accounting of all profits realized and to be realized by
the defendants in connection with the Merger and the imposition of a
constructive trust for the benefit of the plaintiffs and other members of the
purported classes pending such an accounting. The complaints also seek monetary
damages of an unspecified amount together with prejudgment interest and
attorneys' and experts' fees. Holdings and NME believe that the complaints are
without merit and intend to defend them vigorously.
In addition, Holdings and AMI are subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of all pending legal proceedings will not have a material adverse
effect on the business, results of operations or financial condition of Holdings
or AMI.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
Holdings' common stock is traded on the New York Stock Exchange. Holdings
owns all of AMI's issued and outstanding common stock and such shares are no
longer publicly traded. The following table indicates the quarterly high and low
sales prices of Holdings' common stock for the period from September 1, 1992
through August 31, 1994. Certain covenants in the Company's bank credit and
other financing agreements restrict the payment of cash dividends on Holdings'
common stock (See Item 14(a), Note 5 to the Financial Statements). No dividends
were paid on Holdings' common stock for the periods presented. (See "Item 7.
Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources").
SALES PRICE
------------------
HIGH LOW
------- -------
1994
First Quarter....................................................... $18 1/4 $11 7/8
Second Quarter...................................................... 21 1/4 16 3/4
Third Quarter....................................................... 25 1/2 18
Fourth Quarter...................................................... 26 5/8 21 3/4
1993
First Quarter....................................................... $10 7/8 $ 8
Second Quarter...................................................... 13 3/4 10 5/8
Third Quarter....................................................... 11 5/8 9 7/8
Fourth Quarter...................................................... 14 10 1/4
There were 9,134 holders of record of Holdings' shares as of November 9,
1994.
14
ITEM 6. SELECTED FINANCIAL DATA
FIVE YEAR FINANCIAL SUMMARY
(IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED AUGUST 31,
--------------------------------------------------------------------------------------------------
1994 1993 1992
----------------------- ----------------------- ----------------------- 1991
HOLDINGS AMI HOLDINGS AMI HOLDINGS AMI -----------------------
(1) (2) (3) (4) (5) (6) HOLDINGS AMI
------------ -------- ------------ -------- ------------ -------- ------------ --------
Operating Results:
Net Revenues................ $ 2,381.7 $2,381.7 $ 2,238.5 $2,238.5 $ 2,237.9 $2,237.9 $ 2,545.9 $2,288.6
Net Income (loss)........... $ 137.1 $ 137.1 $ 41.5 $ 41.5 $ 99.6 $ 99.6 $ (19.0) $ (1.8)
Net Income (loss) per
share...................... $ 1.78 N/A $ .54 N/A $ 1.30 N/A $ (.38) N/A
Shares of stock used to
calculate earnings (loss)
per common and common
equivalent share........... 77,143,000 N/A 76,760,000 N/A 76,645,000 N/A 50,698,000 N/A
Other Data:
Working Capital............. $ (187.7) $ (187.7) $ (140.0) $ (140.0) $ (222.2) $ (222.2) $ (263.4) $ (243.0)
Net book value of property
and equipment.............. $ 1,463.7 $1,463.7 $ 1,404.2 $1,404.2 $ 1,394.3 $1,394.3 $ 1,454.6 $1,413.8
Total assets................ $ 2,976.5 $2,976.5 $ 2,868.4 $2,868.4 $ 2,963.3 $2,963.3 $ 3,153.5 $3,199.6
Long-term debt and
convertible subordinated
debt....................... $ 1,141.7 $1,141.7 $ 1,294.2 $1,294.2 $ 1,343.7 $1,343.7 $ 1,613.3 $1,564.6
Common stock subject to
repurchase obligations..... N/A N/A $ 6.1 N/A $ 4.3 N/A $ 7.4 N/A
Shareholders' equity........ $ 848.7 $ 848.7 $ 697.8 $ 703.9 $ 663.7 $ 668.0 $ 552.2 $ 551.1
Book value per share........ $ 10.95 $ 11.71 $ 9.08 $ 9.71 $ 8.66 $ 9.22 $ 7.30 $ 7.60
FOR THE FOR THE
TEN MONTHS TWO MONTHS
ENDED ENDED
AUGUST 31, OCTOBER 31,
1990 1989
----------------------- ------------
HOLDINGS AMI AMI
(7) (8) (9)
------------ -------- ------------
Operating Results:
Net Revenues................ $ 2,052.4 $1,902.6 $ 480.9
Net Income (loss)........... $ (13.7) $ (15.3) $ (68.6 )
Net Income (loss) per
share...................... $ (.27) N/A $ (.98 )
Shares of stock used to
calculate earnings (loss)
per common and common
equivalent share........... 50,080,000 N/A 70,153,000
Other Data:
Working Capital............. $ (313.4) $ (289.6) N/A
Net book value of property
and equipment.............. $ 1,697.0 $1,531.9 N/A
Total assets................ $ 3,595.7 $3,382.3 N/A
Long-term debt and
convertible subordinated
debt....................... $ 2,246.4 $2,066.8 N/A
Common stock subject to
repurchase obligations..... $ 6.6 N/A N/A
Shareholders' equity........ $ 332.0 $ 312.0 N/A
Book value per share........ $ 6.63 $ 4.30 N/A
<FN>
- ------------------------------
(1) Operating results for fiscal 1994 reflect the impact of the $69.3 million
gain ($43.4 million net of tax or $0.56 per share) on the sale of
securities of EPIC Holdings, Inc. and the impact of $1.9 million or $.02
per share for an extraordinary charge for the repurchase of debt. The
Company's obligation to repurchase shares of Holdings' common stock held by
certain executive officers no longer exists. Accordingly, common stock
subject to repurchase obligations was recognized as shareholders' equity as
of August 31, 1994.
(2) Operating result for fiscal 1994 reflect the impact of the $69.3 million
gain ($43.4 million net of tax) on the sale of securities of EPIC Holdings,
Inc. and the impact of $1.9 million for an extraordinary charge for the
repurchase of debt.
(3) Operating results for fiscal 1993 reflect the impact of $25.4 million or
$.33 per share for an extraordinary charge for the repurchase of debt.
(4) Operating results for fiscal 1993 reflect the impact of $25.4 million for
an extraordinary charge for the repurchase of debt.
(5) Operating results for fiscal 1992 reflect the impact of the $119.8 million
gain ($80.7 million net of tax or $1.05 per share) on the sale of certain
securities of EPIC Healthcare Group, Inc. and EPIC Holdings, Inc. and the
impact of $10 million or $.13 per share for an extraordinary charge for the
repurchase of debt has been reflected in operating results for fiscal 1992.
(6) Operating results for fiscal 1992 reflect the impact of the $119.8 million
gain ($80.7 million net of tax) on the sale of certain securities of EPIC
Healthcare Group, Inc. and EPIC Holdings, Inc. and the impact of $10
million for an extraordinary charge for the repurchase of debt.
(7) Operating results for Holdings for the ten months ended August 31, 1990
reflect the elimination of net revenues, loss before taxes and net loss of
$320.9 million, $35.1 million and $23.1 million, respectively, for assets
sold or under binding agreement to sell as of August 31, 1990.
(8) Operating results for AMI for the ten months ended August 31, 1990 reflect
the elimination of net revenues, loss before taxes and net loss of $257.5
million, $26.7 million, and $17.6 million, respectively, for assets sold or
under binding agreement to sell as of August 31, 1990.
(9) Operating results for the two months ended October 31, 1989 reflect the
impact of $128.2 million ($83.3 million net of tax or $1.19 per share) in
merger costs.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash and cash equivalents were $31.9 million at August 31,
1994 compared to $44.3 million at August 31, 1993. Net cash provided by
operating activities increased $12.4 million to $269.6 million for the year
ended August 31, 1994 when compared to the same period in the prior year. In May
1994, the Company received $72.4 million related to the disposition of AMI's
interest in EPIC Holdings, Inc. as a result of the merger of EPIC Holdings, Inc.
with HealthTrust, Inc. -- the Hospital Company. The Company paid income taxes of
$86.0 million for the year ended August 31, 1994 of which $25.9 million related
to the disposition of AMI's interest in EPIC Holdings, Inc. The long-term debt
balance (including current maturities) at August 31, 1994 was $1,297.7 million
compared to $1,335.0 million at August 31, 1993.
In fiscal 1994, the Company invested $112.2 million in capital expenditures
(excluding acquisitions) and as of August 31, 1994, had approximately $19.5
million of capital expenditure commitments outstanding. Capital expenditures
made by the Company are for new construction and renovations to facilitate and
accommodate new inpatient and outpatient programs and to develop and acquire new
or additional lines of business, including home health, surgery centers and
physician practices. In May 1994, the Company completed the purchase of Saint
Francis Hospital located in Memphis, Tennessee for a purchase price of
approximately $92.0 million. In conjunction with this purchase, in June 1994 the
Company completed the acquisition of a management services organization in the
Memphis area.
The Company intends to continue to invest in new and existing operations
within the healthcare industry. On September 1, 1994, a limited partnership, of
which a wholly-owned subsidiary of AMI is the general partner, completed the
purchase of Hilton Head Hospital, located in Hilton Head, South Carolina for a
purchase price of approximately $23.6 million. Through its subsidiary AMI owns
70% of the limited partnership. In connection with the Company's efforts to
re-establish a presence in Europe, the Company has entered into a joint venture
agreement with a community organization (the "Burgergemeinde") located in Cham,
Canton Zug, Switzerland. The joint venture will be owned 90% by the Company and
10% by the Burgergemeinde. Under the terms of the proposed transaction, the
Company will enter into a long term lease for the land where the existing
hospital is located and will then construct a new 56 bed acute care wing,
convert an existing structure into a medical office building and renovate and
remodel the existing acute care facility. In addition, the Company plans to
contract to provide management, food, physical therapy and rehabilitation
services to the hospital, an on-site nursing home and an affiliated retirement
community.
In June 1994, the Company amended its credit facility ("Reducing Revolving
Credit Facility") extending the term of the bank commitments thereunder until
September 1999 and reducing the rate of interest applicable to amounts
outstanding thereunder to, at the option of AMI, (i) adjusted LIBOR plus .875%
(subject to reduction upon the satisfaction of certain conditions) or (ii) the
alternative base rate specified for the Reducing Revolving Credit Facility. Upon
completion of the fiscal 1994 loan compliance report, anticipated to be prior to
the end of the first quarter of fiscal 1995, the rate at which interest accrues
based on LIBOR will be reduced to LIBOR plus .75%.
The Company repaid (excluding repayments on the Reducing Revolving Credit
Facility) $62.2 million of long-term debt during the year ended August 31, 1994
from cash provided by operating activities. During fiscal 1994, the Company (i)
made repayments of $28.0 million for the redemption of the remaining principal
amount of the 6 3/4% Swiss franc/dollar dual currency senior notes due 1997,
(ii) repurchased $15.4 million principal amount of the 15% Junior Subordinated
Discount Debentures, Due 2005 and (iii) made repayments of approximately $18.8
million on certain other indebtedness. The amount outstanding under the Reducing
Revolving Credit Facility decreased to $266.0 million as of August 31, 1994,
from $287.0 million outstanding as of August 31, 1993. Under the Reducing
Revolving Credit Facility, $31.3 million in letters of credit were outstanding
as of August 31, 1994.
16
Management believes that sufficient funds will be generated from operations,
augmented by borrowings under the Reducing Revolving Credit Facility, to finance
operations, capital expenditures and service debt. Scheduled principal payments,
excluding amounts that may become due on the Reducing Revolving Credit Facility,
are $156.0 million in fiscal 1995, $57.0 million in fiscal 1996, $182.1 million
in fiscal 1997, $2.3 million in fiscal 1998, and $2.3 million in fiscal 1999.
The terms of certain indebtedness of the Company impose operating and
financial restrictions requiring the Company to maintain certain financial
ratios and restrict the Company's ability to incur additional indebtedness and
enter into leases and guarantees of debt; to make capital expenditures; to make
loans and investments; to pay dividends or repurchase shares of stock; to
repurchase, retire or refinance indebtedness prior to maturity; and to purchase
or sell assets. The Company has pledged the capital stock of certain direct
(first tier) subsidiaries as security for its obligations under the Reducing
Revolving Credit Facility and certain other senior indebtedness. In addition,
the Company has granted a security interest in its accounts receivable as
security for its obligations under the Reducing Revolving Credit Facility.
Management believes that the Company is currently in compliance with all
covenants and restrictions contained in all financing agreements.
Upon completion of the acquisition of the Company by a wholly-owned
subsidiary of National Medical Enterprises, Inc., management believes that the
combined company's liquidity will be adequate to finance the Company's hospital
operations, capital expenditures and future developments.
RESULTS OF OPERATIONS
GENERAL TRENDS
The Company's net revenues have increased as compared with the same period
of the prior year as a result of the continued increase in volume from
outpatient and inpatient services, the expansion of patient care services and
general price increases. The Company has experienced an increase in outpatient
volume as compared to the prior year as a result of (i) advanced medical
technology and (ii) cost containment pressures from payers to direct more
patients from inpatient facilities to less expensive outpatient facilities.
Accordingly, several of the Company's hospitals continue to expand or redesign
their outpatient facilities and services to accommodate the increased
utilization of such facilities. The growth rate of the Company's outpatient
revenue realized from the shift of inpatient care services to outpatient care
services is expected to occur at a slower pace in the future from the rate
experienced in the past, as the use of such services matures. As a result of
increased demand for specialized healthcare for both inpatient and outpatient
care, the Company has established specialized programs (e.g. long-term care,
rehabilitation units, home health) within separate units in the Company's
existing hospitals. Regulations are currently being proposed by the Health Care
Financing Administration that, if enacted, would limit the opportunity provided
by the development of these specialized programs.
Medicare and Medicaid revenues are expected to continue to increase in the
future as a larger portion of the general population qualifies for coverage as a
result of the aging of the population and expanded state Medicaid programs. This
in turn may decrease the Company's overall rate of revenue growth as a result of
(i) a corresponding change in payer mix and (ii) the disparity between the rate
of increase in the Company's established billing rates and the government's
reimbursement rate. The Medicare program reimburses the Company's hospitals
primarily based on established rates by a diagnosis related group for acute care
hospitals. While Medicare payment rates are indexed for inflation annually, the
increases have historically lagged behind actual inflation.
In addition to the Medicare program, states and insurance companies continue
to actively negotiate the amounts they will pay for services performed, rather
than simply paying healthcare providers their established billing rates. The
maturity of managed care environments varies in the markets in which the Company
operates. The Company's hospitals that operate in mature managed care markets
typically have contributed smaller profit margins than some of the Company's
hospitals which operate in less mature markets. Management believes that through
cost-containment efforts, the Company is positioned to have a competitive edge
in pursuing market share in the managed care environment.
17
Competition among hospitals and other healthcare providers in the United
States has increased over the past several years due to changes in government
regulation and reimbursement, various other third party payer cost containment
pressures and medical technology. As these factors continue to affect healthcare
providers, along with the pending proposals for healthcare reform, the
healthcare industry continues to experience a significant increase in the number
of mergers and acquisitions occurring between both investor-owned and non-profit
hospitals in an effort to further reduce the cost of delivering high quality
care.
To offset these factors which may limit net revenue growth, the Company
continues to look at providing an increasing array of healthcare services by
expanding the Company's operations and by integrating broad healthcare networks.
As a result, the Company is developing physician networks and alliances with
other healthcare providers to create fully integrated healthcare delivery
systems. In addition to expanding services, management believes that its cost
containment efforts have been critical in improving and maintaining operating
margins while providing a high level of patient care.
A significant portion of the Company's operating costs and expenses are
subject to inflationary increases. Since the healthcare industry is labor
intensive, salaries and benefits are continually affected by inflation. To
control labor costs, the Company has and will continue to monitor, at the
hospital level, the daily staff coverage. To control increases in supply costs,
management continues to focus on managing such utilization through various
mechanisms including (i) improved contract compliance, (ii) development of
pharmaceutical formularies to control the usage of new drugs and (iii)
aggressive negotiation of supply purchase contracts. To further control costs,
the Company continues to expand its case management (i.e. review of associated
costs for patient care for specific treatment) in its hospitals. The Company's
ability to pass on a certain portion of the increased costs associated with
providing healthcare to Medicare/Medicaid patients may be limited by existing
government reimbursement programs for healthcare services unless the federal and
state governments correspondingly increase the rates of payments under these
programs. Although the Company cannot predict its ability to continue to cover
future cost increases, management believes that through the continued adherence
to the cost containment programs, labor management and reasonable price
increases, inflation is not expected to have a material adverse effect on
operating margins.
HEALTHCARE REFORM
Although substantive federal healthcare reform has not been legislated, the
healthcare industry will continue to be faced with federal and state efforts to
reform the delivery system. Any substantive reform is likely to encompass
healthcare coverage for an increasing percentage of the U.S. population and
could contain provisions which would impose among other things, cost controls on
healthcare providers, insurance market reforms to increase the availability of
group health insurance to small businesses, requirements that all businesses
offer health insurance coverage to their employees, and the creation of a single
government health insurance plan (to reduce administrative costs) that would
cover all citizens. Reform proposals may also contain significant reductions in
the amount of reimbursement received under the Medicare/Medicaid programs. In
addition to the proposed healthcare reform, some states, including Florida, have
already enacted reforms and continue to consider additional reforms. The type
and impact of such reform continues to be debated at both the federal and state
levels.
Management believes that some form of federal healthcare reform may occur;
however, until such reform is finalized, management cannot predict which
proposals will be adopted, if any, and until adopted the impact of any such
proposals on the Company's business, results of operations or financial
condition.
18
YEARS ENDED AUGUST 31, 1994, 1993 AND 1992
The following table summarizes certain consolidated results of the Company.
AMI's results of operations are the same as that of the Company's; therefore,
separate results of operations and a discussion and analysis for AMI are not
presented.
FOR THE YEAR ENDED AUGUST 31,
------------------------------------------------------
1994 1993 1992
---------------- ---------------- ----------------
% OF NET % OF NET % OF NET
REVENUE REVENUE REVENUE
-------- -------- --------
Net Revenues
Medicare/Medicaid............................... $1,021 42.9% $ 857 38.3% $ 819 36.6%
Contracted services............................. 597 25.1 577 25.8 533 23.8
Non-contracted services......................... 679 28.5 732 32.7 823 36.8
Other sources................................... 85 3.5 72 3.2 63 2.8
------ -------- ------ -------- ------ --------
Total Net Revenues............................ 2,382 100.0 2,238 100.0 2,238 100.0
------ -------- ------ -------- ------ --------
Operating Costs and Expenses:
Salaries and benefits........................... 869 36.5 815 36.4 839 37.5
Supplies........................................ 340 14.3 316 14.1 317 14.2
Provision for uncollectible accounts............ 166 6.9 148 6.6 164 7.3
Depreciation and amortization................... 157 6.6 147 6.6 149 6.7
Other operating costs........................... 524 22.0 506 22.6 496 22.2
------ -------- ------ -------- ------ --------
Total Operating Costs and Expenses............ 2,056 86.3 1,932 86.3 1,965 87.9
------ -------- ------ -------- ------ --------
Operating Income.................................. 326 13.7 306 13.7 273 12.1
Gains on sales of securities.................... 69 2.9 -- -- 120 5.4
Interest expense, net........................... (154) (6.5) (166) (7.4) (204) (9.1)
------ -------- ------ -------- ------ --------
Income Before Taxes, Minority Equity Interest and
Extraordinary Loss............................... 241 10.1 140 6.3 189 8.4
Provision for income taxes...................... (98) (4.1) (69) (3.1) (78) (3.5)
------ -------- ------ -------- ------ --------
Income Before Minority Equity Interest and
Extraordinary Loss............................... 143 6.0 71 3.2 111 4.9
Minority equity interest........................ (4) (0.2) (4) (0.2) (1) --
------ -------- ------ -------- ------ --------
Net Income Before Extraordinary Loss.............. 139 5.8 67 3.0 110 4.9
Extraordinary loss on early extinguishment of
debt........................................... (2) -- (25) (1.1) (10) (0.4)
------ -------- ------ -------- ------ --------
Net Income........................................ $ 137 5.8% $ 42 1.9% $ 100 4.5%
------ -------- ------ -------- ------ --------
------ -------- ------ -------- ------ --------
19
The following table sets forth certain operating statistics of the Company's
hospitals for the three years ended August 31, 1994.
FOR THE YEAR ENDED AUGUUST 31,
-------------------------------------
1994 1993 1992
----------- ----------- -----------
HISTORICAL OPERATING DATA (1):
Number of Hospitals (at year end)........................................ 37 36 35
Admissions
Medicare/Medicaid...................................................... 131,216 117,570 113,070
Contracted............................................................. 62,527 56,269 52,812
Non-contracted......................................................... 45,645 52,839 63,947
Other.................................................................. 2,831 2,918 3,261
----------- ----------- -----------
Total................................................................ 242,219 229,596 233,090
----------- ----------- -----------
----------- ----------- -----------
Equivalent Admissions (2)................................................ 333,071 309,972 308,722
Outpatient
Visits................................................................. 2,255,498 1,660,015 1,618,068
Surgeries.............................................................. 123,867 120,854 120,008
Patient Days............................................................. 1,435,487 1,372,232 1,456,542
Equivalent Patient Days (2).............................................. 1,943,842 1,830,169 1,906,304
Licensed Beds Occupancy Rate............................................. 46.6% 46.8% 47.9%
Licensed Beds (at year end).............................................. 9,021 8,003 7,822
<FN>
- ------------------------
(1) Represents statistics for hospitals only and has not been adjusted to
include statistics for related healthcare entities.
(2) Represents actual admissions/patient days as adjusted to include outpatient
and emergency room services by adding to actual admissions/patient days an
amount derived by dividing outpatient and emergency room revenue by
inpatient revenue per admission/patient days.
Net revenues for the year ended August 31, 1994 increased 6.4% to $2,382
million from $2,238 million for the year ended August 31, 1993 as a result of
new patient care services, higher utilization of outpatient and ancillary
services and higher third party reimbursement rates. Net revenues for the year
ended August 31, 1992 of $2,238 million included a benefit of approximately $10
million relating to a Medicare settlement and $69 million relating to facilities
sold during fiscal 1992.
A shift in volume from inpatient services to outpatient services over the
past three years, the development of home health services and the addition of
ancillary facilities at certain of the Company's hospitals have contributed to
net revenues from outpatient services accounting for a larger percent of total
net patient revenues in recent years. Net revenues from outpatient services
accounted for 29.6%, 29.4% and 27.6% of total net patient revenues for the years
ended August 31, 1994, 1993 and 1992, respectively. For the year ended August
31, 1994, the Company experienced a greater increase in admissions (5.5% as
compared to the year ended August 31, 1993) than seen in prior years, due
primarily to the addition of Saint Francis Hospital. Admissions, which were
impacted by the addition of Encino Hospital in fiscal 1993 and the disposition
of hospitals during fiscal 1992, decreased 1.5% for the year ended August 31,
1993 when compared to the year ended August 31, 1992. Net revenues from
inpatient services accounted for 70.4%, 70.6% and 72.4% of total net patient
revenues for the years ended August 31, 1994, 1993, and 1992, respectively.
Net revenues derived from Medicare/Medicaid programs for the year ended
August 31, 1994, increased 19.1% as compared to the year ended August 31, 1993
as a greater portion of the population continues to qualify for such coverage.
Saint Francis Hospital, which derives a large portion of its business from
Medicare patients, contributed to the increase in net revenues derived from
Medicare/ Medicaid programs. An increasing number of various third party payers,
including states, insurance
20
companies and employers' networks, are negotiating contracted amounts paid for
services rendered, accounting for the increase in contracted business and a
corresponding decline in non-contracted business.
Expense management continues to be a significant factor in maintaining the
operating margin experienced by the Company (13.7% for the years ended August
31, 1994 and 1993 and 12.1% for the year ended August 31, 1992). The sale of
facilities during fiscal 1992, which operated at a slightly lower margin, also
contributed to the increase in the Company's operating margin for the year ended
August 31, 1993. The Company's adherence to the cost control program implemented
by management in fiscal 1992 has continued to stabilize operating costs and
expenses as a percent of net revenues. Labor management (i.e. hospital staffing
monitored with volume) and the decline in benefit costs as a result of changes
implemented in the employee benefits program has decreased labor costs for the
years ended August 31, 1994 and 1993 as a percent of net revenues compared to
the year ended August 31, 1992.
For the year ended August 31, 1994 operating expenses (excluding
depreciation and amortization) increased 6.4% over the year ended August 31,
1993. Approximately one-third of the overall increase is due to operating
expenses associated with Saint Francis Hospital. As a percent of net revenues,
operating expenses for the year ended August 31, 1994 remained flat as compared
to the year ended August 31, 1993. The decrease in total operating costs and
expenses for the year ended August 31, 1993 as compared to the year ended August
31, 1992 was primarily due to the following adjustments recognized during fiscal
1992: (i) the disposition of hospitals during fiscal 1992, (ii) an $11.0 million
adjustment to salaries and benefits to increase reserves associated with
workers' compensation liabilities as a result of adverse development on claims
arising from prior periods, (iii) the impact of an adverse adjustment to the
provision for uncollectible accounts for the refinement in procedures used to
estimate bad debts and (iv) a foreign currency translation loss of $7.8 million.
Foreign currency translation was immaterial for the years ended August 31, 1994
and 1993.
The gains on the sales of securities for the years ended August 31, 1994 and
1992 are the result of the sale of various securities of EPIC Holdings, Inc. and
EPIC Healthcare Group, Inc.
Interest expense, net decreased to $154 million for the year ended August
31, 1994 from $166 million for the year ended August 31, 1993 and $204 million
for the year ended August 31, 1992 as a result of debt refinancings in fiscal
1994 and 1993 and the use of cash from operations and the proceeds from the sale
of facilities in fiscal 1992 to reduce outstanding indebtedness. The year ended
August 31, 1993 includes a refund of $8.6 million for excess interest paid to
the Internal Revenue Service in prior periods.
The tax provision for each of the years ended August 31, 1994, 1993 and 1992
is greater than that which would occur using the Company's marginal tax rate
against its income before taxes, minority equity interest and extraordinary
loss, due in large part to the amortization of cost in excess of net assets
acquired not being deductible for tax provision purposes. In August 1993, the
Revenue Reconciliation Act of 1993 was enacted increasing the corporate income
tax rate to 35% from 34% effective January 1, 1993.
The extraordinary loss on early extinguishment of debt is a result of the
redemption or repurchase of debt prior to its stated maturity.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data set forth in the Index to
Financial Statements and Financial Statement Schedules on page F-1 are filed as
part of this Annual Report on Form 10-K.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF HOLDINGS AND AMI
DIRECTORS OF HOLDINGS AND AMI
Certain information concerning each director of Holdings and AMI is set
forth below:
YEAR
FIRST
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS (1) ELECTED
- ---------------------------------------------------------------------- ----------
J. Robert Buchanan, M.D., 66 1991
Director of European Operations of Holdings since July 1994;
Chairman of the Board and Chief Executive Officer of RSTAR, Inc. a
subsidiary of Massachusetts General Hospital, since July 1994;
General Director and Chief Executive Officer, Massachusetts General
Hospital from prior to 1988 to July 1994; Professor of Medicine,
Harvard Medical School; President, Chief Executive Officer and
General Director of The General Hospital Corporation from prior to
1988 to the present.
Robert B. Calhoun, Jr., 52 1991
President since March 1991 of, and the major stockholder in, Clipper
Asset Management Corporation, the sole general partner of The
Clipper Group L.P., a Delaware limited partnership ("Clipper")
which, pursuant to an asset management agreement, manages certain
investments for CS First Boston Corporation ("First Boston") and
certain of its affiliates, including the shares of common stock
owned by 1987 Merchant Investment Partnership, a New York limited
partnership ("MIP") and MB L.P. I, a Delaware limited partnership
("MBLP"); Managing Director of CS First Boston Corporation from
prior to 1988 to 1991; Director of Interstate Bakeries Corporation,
a baker and distributor of fresh bakery products.
John T. Casey, 49 1992
President and Chief Operating Officer of each of Holdings and AMI
since November 1991; President and Chief Executive Officer of The
Samaritan Foundation, the then ninth largest private healthcare
system in the United States from March 1990 to November 1991;
President and Chief Executive Officer, Methodist Health Systems, a
regional healthcare system from 1987 to 1990.
Harry J. Gray, 75 1989
Chairman and Chief Executive Officer of Mott Metallurgical
Corporation, a manufacturer of high technology filters since
November 1993; Chairman, PDS Worldwide Inc., a distribution and
fulfillment company since September 1992; Chairman and Chief
Executive Officer of Holdings from July 1989 to July 1991; Chairman
and Chief Executive Officer of AMI from November 1989 to July 1991;
General Partner of GKH Partners, L.P. ("GKH") from January 1988 to
December 1989 and sole stockholder of a corporation which was a
general partner of GKH from December 1989 to September 1991.
Harold S. Handelsman, 48 1989
Vice President and Secretary of HGM Corporation, the general partner
of a limited partnership which is a general partner of GKH, from
prior to 1988; Senior Vice President, Secretary and General Counsel
since 1983 of Hyatt Corporation, a diversified company engaged
primarily in real estate and hotel management activities.
22
YEAR
FIRST
NAME, AGE, PRINCIPAL OCCUPATION AND OTHER DIRECTORSHIPS (1) ELECTED
- ---------------------------------------------------------------------- ----------
Sheldon S. King, 63 1992
Executive Vice President of Salick Health Care, Inc. since February
1994; President and Chief Executive Officer of Cedars Sinai Medical
Center from May 1989 to January 1994; President and Chief Executive
Officer of Stanford University Hospital from prior to 1988 to April
1989; Director of American Health Properties, a real estate
investment trust.
Melvyn N. Klein, 52 1989
General Partner of GKH from February 1988 to December 1989 and sole
stockholder of a corporation which is a general partner of GKH
since that date; prior thereto, attorney and private investor since
1968; Director of Bayou Steel Corporation, the owner and operator
of a steel minimill, Itel Corporation, a supplier of wiring systems
for data, voice, video and energy, Savoy Pictures Entertainment,
Inc., a major motion picture financing, marketing and distribution
company, and Santa Fe Energy Resources, Inc., an oil and gas
exploration and production company.
Dan W. Lufkin, 63 1991
Co-founder of Donaldson, Lufkin, Jenrette Securities Corporation;
private investor prior to 1988; sole shareholder of a corporation
which is a general partner of GKH since September 1991; Director of
Culbro, Inc., a distributor of consumer products, Allen & Co., a
registered broker-dealer, and Savoy Pictures Entertainment, Inc., a
major motion picture financing, marketing and distribution company.
William E. Mayer, 54 1989
Dean of the College of Business and Management, University of
Maryland, since October 1992; Dean of the William E. Simon Graduate
School of Business Administration, University of Rochester from
September 1991 to July 1992; Chairman and Chief Executive Officer
of CS First Boston Merchant Bank from January 1990 to January 1991;
President and Chief Executive Officer of First Boston, an
investment banking firm, from December 1988 to January 1990;
Managing Director of First Boston from June 1977 to December 1988;
Director of Chart House Enterprises, Inc., a restaurant company,
Riverwood International Corporation, a manufacturer of paper,
paperboard and plywood products and Hambrecht & Quist, Inc., a
registered broker-dealer.
Robert W. O'Leary, 50 1991
Chairman of the Board and Chief Executive Officer of each Holdings
and AMI since July 1991; President and Chief Executive Officer of
Voluntary Hospitals of America, Inc., a hospital alliance
representing approximately 850 domestic hospitals from 1989 to June
1991; President and Chief Executive Officer of St. Joseph Health
System, a multi-hospital, multi-purpose health services
organization from 1983 to 1989.
Harold M. Williams, 66 1989(2)
President and Chief Executive Officer of the J. Paul Getty Trust, a
charitable trust in the Arts & Humanities, since May 1981; Director
of Times Mirror Corporation, a publishing and communications
company, and Sunamerica Inc., a life insurance company.
<FN>
- --------------------------
(1) Only directorships of issuers with a class of securities registered
pursuant to Section 12 of the Exchange Act, or subject to the requirements
of Section 15(d) of that Act or directorships of issuers registered as
investment companies under the Investment Company Act of 1940, as amended,
are listed in the above table.
(2) Mr. Williams has been a director of AMI since 1985 and of Holdings since
1989.
23
ARRANGEMENTS WITH RESPECT TO THE ELECTION OF DIRECTORS
Pursuant to the amended and restated stockholders agreement (the
"Stockholders Agreement") as currently in effect, by and among Holdings, the GKH
Investments, L.P., a Delaware limited partnership (the "Fund"), GKH Private
Limited ("GKHPL"), Mellon Bank, N.A., as trustee of First Plaza Group Trust, a
trust organized under New York law ("First Plaza"), MBLP, MIP, certain
management investors as defined in the Stockholders Agreement the ("Management
Investors") and others, the Fund, together with GKHPL, has the power to
designate a majority of the nominees for Holdings' board of directors (the
"Board") and thereby effectively control the selection of executive officers and
other key employees and the establishment of Holdings' and AMI's operating
policies. MBLP and MIP are entitled to designate up to two nominees for
Holdings' Board and the Management Investors are entitled to designate at least
one (but not more than two) of the nominees for Holdings' Board. The
Stockholders Agreement also requires each of the parties to vote all shares of
common stock held thereby for all of the persons nominated pursuant to the
Stockholders Agreement. The rights and obligations of the parties to designate
and vote for nominees for Holdings' Board terminate as to a party under certain
circumstances, including the failure to maintain its ownership of Holdings'
common stock at specified levels.
ARRANGEMENTS WITH RESPECT TO OTHER MATTERS
In addition to the provisions with respect to the election of directors
discussed above, the Stockholders Agreement also restricts the ability of
Holdings and AMI to take certain corporate actions, including amending their
respective charter documents without the consent of certain of the parties
thereto. The Stockholders Agreement also provides for certain
rights-of-first-refusal, contains restrictions on dispositions of common stock
and requires the parties thereto to sell their shares of common stock in certain
circumstances if the Fund proposes to sell all of its shares of common stock by
way of merger or similar transaction. By maintaining their percentage ownership
of common stock, the Fund and its permitted transferees as defined in the
Stockholders Agreement ("Permitted Transferees") and MBLP and its Permitted
Transferees may effectively have the power to determine the policies of Holdings
and AMI, the persons constituting their management and the outcome of corporate
actions requiring stockholder approval by majority action. Certain benefits to
each party under the Stockholders Agreement terminate if such party no longer
owns specified minimum amounts of common stock.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
The compensation and stock option committee of the Board currently is
comprised of Messrs. Williams, King and Mayer. None of the individuals who were
members of the compensation and stock option committees of the Board during
fiscal 1994 are present or former officers or employees of Holdings or AMI. See
"Directors and Executive Officers of Holdings and AMI." Corporations wholly
owned by two members of the compensation and stock option committee, Messrs.
Klein and Lufkin, serve as general partners of GKH. A corporation wholly owned
by another member of the compensation and stock option committee, Mr. Gray, is a
limited partner of GKH.
GKH rendered certain consulting services to Holdings during fiscal 1994 in
connection with the sale of AMI's interest in EPIC Holdings, Inc. for which GKH
received compensation of approximately $2.3 million. The Company believes that
the amount of fees it paid to GKH is equivalent to or less than customary fees
paid or that would have been by the Company to unaffiliated third parties for
comparable services. See "Certain Relationships and Related Transactions -- Sale
of a Business." In years prior to fiscal 1993, GKH rendered certain management
and financial services to Holdings for which it received compensation on terms
customary in the investment banking business. Holdings is not presently under
any obligation to retain GKH in the future although it may choose to do so at
any time and from time to time. As of November 9, 1994, the Fund and GKHPL owned
an aggregate of 25,653,764 shares of common stock, or approximately 32%, of the
outstanding common stock. See "Security Ownership of Certain Beneficial Owners
and Management;" "Arrangements with Respect to the Election of Directors;" and
"Arrangements with Respect to Other Matters."
24
Holdings, the Fund, GKHPL, MBLP, MIP and First Plaza, among others, entered
into a registration rights agreement dated as of October 26, 1989 and as
subsequently amended (the "Registration Rights Agreement"), pursuant to which
the Fund, together with GKHPL, MBLP, MIP and/or First Plaza and their respective
Permitted Transferees, have, at specified times, certain rights to demand that
Holdings register all or part of their shares of common stock under the
Securities Act of 1933, as amended (the "Securities Act"). Upon exercise of
these rights, Holdings will generally be obligated to register such shares at
its own expense. In addition, if Holdings proposes to register any of its equity
securities under the Securities Act (except for, among other things, equity
securities registered for issuance pursuant to employee benefit plans), the
parties to the Registration Rights Agreement may include shares of common stock
in such registration, subject, however, to pro rata reduction to the extent
Holdings determines it is necessary.
EXECUTIVE OFFICERS OF HOLDINGS AND AMI
Certain information concerning the executive officers of Holdings and AMI is
set forth below:
YEAR FIRST
NAME AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS ELECTED
- ---------------------------- --- --------------------------------------------------------------------- -----------
Robert W. O'Leary 50 Chairman and Chief Executive Officer since July 1991; President and 1991
Chief Executive Officer of Voluntary Hospitals of America, Inc.
("VHA"), a hospital alliance representing approximately 850 domestic
hospitals from 1989 to June 1991; President and Chief Executive
Officer of St. Joseph Health System ("SJHS"), a multi-hospital,
multi-purpose health services organization from 1983 to 1989.
John T. Casey 49 President and Chief Operating Officer since November 1991; President 1991
and Chief Executive Officer of The Samaritan Foundation
("Samaritan"), the then ninth largest private healthcare system in
the United States from March 1990 to November 1991; President and
Chief Executive Officer, Methodist Health Systems ("MHS"), a regional
healthcare system from 1985 to 1990.
Alan J. Chamison 54 Executive Vice President since September 1991 and Chief Financial 1991
Officer since February 1992; Chief Administrative Officer of VHA from
January 1990 to September 1991 and a Director and the Interim
President and Chief Executive Officer of VHA Enterprises, Inc., an
affiliate of VHA, from September 1989 to September 1991; Senior Vice
President of SJHS from May 1983 to September 1989.
25
YEAR FIRST
NAME AGE PRINCIPAL OCCUPATION DURING THE PAST FIVE YEARS ELECTED
- ---------------------------- --- --------------------------------------------------------------------- -----------
O. Edwin French 48 Senior Vice President since January 1992; Executive Vice President of 1992
Samaritan from March 1991 to December 1991; Senior Vice President of
MHS from July 1985 to March 1991.
W. Randolph Smith 46 Executive Vice President, Operations since September 1990; Senior 1990
Vice President, Chief Administrative Officer from February 1990 to
August 1990; Senior Vice President and Acting Chief Financial Officer
from November 1989 to January 1990; Corporate Vice President and
Acting Chief Financial Officer from July 1989 to November 1989;
Corporate Vice President and Director, Operations from 1987 to 1989;
Vice President and Assistant Regional Director, Southern Region from
1986 to 1987; Vice President and Regional Director, Mid-Atlantic
Region from 1985 to 1986; Executive Director, Brookwood Medical
Center from 1983 to 1985.
Lawrence N. Kugelman 52 Executive Vice President and California Regional Director since 1993
January 1993; Executive Director of Sisters of St. Joseph Foundation
from July 1992 to December 1992; President and CEO of The Health Plan
of America from September 1986 to June 1992.
Terry H. Linn 46 Vice President, Development since June 1993; Partner of Ernst & Young 1993
(previously Ernst & Ernst) a public accounting firm, from 1980 to
1993.
Thomas J. Sabatino, Jr. 35 Vice President and General Counsel since April 1994; Associate 1994
General Counsel from November 1992 to April 1994; President and Chief
Executive Officer of Secure Medical, Inc., a medical device
manufacturer from December 1990 to November 1992; Corporate Counsel
for Baxter Healthcare Corporation, a medical supply manufacturer and
distributor from August 1986 to December 1990.
Michael N. Murdock 40 Treasurer and Vice President since 1990; Assistant Treasurer from 1990
1988 to 1990; Vice President, Corporate Controller and Treasurer at
TPA of America, Inc. from 1986 to 1988; Assistant Corporate
Controller of AMI from 1982 to 1986.
Bary G. Bailey 36 Controller and Vice President since 1990; Assistant Corporate 1991
Controller from 1987 to 1990.
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires Holdings' executive officers and directors and persons
who beneficially own more than 10% of the common stock to file reports of
initial ownership and changes in ownership of common stock with the Commission.
Based solely on a review of such reports furnished to Holdings, Holdings
believes that during fiscal 1994, its executive officers, directors and
beneficial owners of more than 10% of the common stock complied with all Section
16(a) filing requirements.
26
ITEM 11. EXECUTIVE COMPENSATION
Holdings is a holding company, all of whose business activities are
conducted by its operating subsidiaries. Accordingly, executive officers of
Holdings hold identical positions with AMI.
The following table sets forth certain information with respect to the
compensation paid by Holdings during the last three fiscal years ended August
31, 1994 to its Chief Executive Officer and to each of its four other most
highly compensated executive officers (collectively with the Chief Executive
Officer, the "named executive officers"):
SUMMARY COMPENSATION TABLE
LONG TERM
COMPENSATION
-------------------
ANNUAL COMPENSATION PAYOUTS
-------------------------------------- AWARDS --------
OTHER ANNUAL -------- LTIP ALL OTHER
NAME AND SALARY BONUS COMPENSATION OPTIONS PAYOUTS COMPENSATION
PRINCIPAL POSITION YEAR ($)(1) ($)(2) ($)(3)(4) #(5) ($)(6) ($)(3)(7)
- ---------------------------------------------- ---- -------- -------- ------------ -------- -------- ------------
Robert W. O'Leary ............................ 1994 $777,836 $503,155 $ 207,608 -- $286,391 $ 45,947
Chairman of the Board and 1993 750,000 685,146(8) 218,362 -- 155,850 16,454
Chief Executive Officer 1992 750,000 873,494 -- 200,000 -- --
John T. Casey ................................ 1994 $414,846 $357,534(9) $ 156,850 -- $144,770 $ 23,261
President and Chief 1993 390,354 243,894 34,930 200 73,657 7,806
Operating Officer 1992 285,423 492,004(10) -- 200,000 -- --
Alan J. Chamison ............................. 1994 $414,846 $277,534 $ 141,392 -- $161,295 $ 25,740
Executive Vice President and 1993 390,354 243,894 146,087 -- 88,027 9,047
Chief Financial Officer (11) 1992 341,115 352,160 -- 200,000 -- --
O. Edwin French .............................. 1994 $285,392 $241,679(9) $ 13,200 40,000 $ 71,572 $ 11,768
Senior Vice President (12) 1993 262,308 130,840 5,886 -- 34,217 3,853
1992 148,846 254,639(10) -- 60,000 -- --
W. Randolph Smith ............................ 1994 $304,846 $130,027 $ 13,200 -- $116,746 $ 18,651
Executive Vice President 1993 289,945 157,627 -- -- 67,257 6,911
1992 275,625 269,025 -- -- -- --
<FN>
- ------------------------------
(1) Includes amounts deferred at the election of each named executive officer
pursuant to AMI's Tax Deferred Savings Plan.
(2) The amounts shown in this column include bonuses paid pursuant to either
AMI's Executive Incentive Compensation Plan (the "Incentive Plan") or, in
the case of Mr. Smith, AMI's Regional Director Incentive Compensation Plan
(the "Directors Plan," and collectively with the Incentive Plan, the
"Incentive Plans") for services rendered during the fiscal year by each of
the named executive officers. See Note 6 below and the table of "Long-Term
Incentive Plan -- Awards in Last Fiscal Year" on page 29 for amounts
awarded during fiscal 1994 but mandatorily deferred pursuant to the
Incentive Plans.
(3) Pursuant to the rules promulgated by the Securities and Exchange Commission
(the "Commission"), no disclosure is required for these items for fiscal
1992.
(4) In prior fiscal years the Company has made interest-free loans of $600,000,
$375,000 and $375,000 to Messrs. O'Leary, Casey and Chamison, respectively,
which loans are forgiven in equal monthly increments. See "Employment
Agreements". With respect to fiscal 1994 includes loan forgiveness of
$199,992, $125,004 and $125,004 for Messrs. O'Leary, Casey and Chamison,
respectively, and compensation of $4,366, $13,437 and $3,188 for imputed
interest on interest-free loans for Messrs. O'Leary, Casey and Chamison,
respectively, calculated using the monthly applicable federal long-term
rate. Also includes tax payment reimbursements and car allowances. To the
extent the cost of personal benefits furnished to any of the named
executive officers is less than the required reporting level established by
the Commission, such benefits are not included in the Summary Compensation
Table.
(5) Mr. French was the only named executive officer to be granted options in
fiscal 1994.
27
(6) The amounts shown in the table consist of bonuses paid pursuant to the
Incentive Plans for services rendered in prior fiscal years, which bonuses
had been deferred in accordance with, and were payable subject to, the
terms of the Incentive Plans. See "Long-Term Incentive Plan -- Awards in
Last Fiscal Year."
(7) The amounts shown in the table include insurance premiums paid by the
Company with respect to term life insurance and amounts earned on deferred
compensation paid pursuant to the Incentive Plans to each of the named
executive officers during the fiscal year. With respect to fiscal 1994 the
insurance premiums paid by the Company with respect to term life insurance
were $2,988, $1,546, $1,546, $1,032 and $1,139 for the benefit of each of
Messrs. O'Leary, Casey, Chamison, French and Smith, respectively. Amounts
earned on deferred compensation were $42,959, $21,715, $24,194, $10,736 and
$17,512 for Messrs. O'Leary, Casey, Chamison, French and Smith,
respectively. All deferred funds accrue interest at the greater of two
rates: 1) the Company's average short-term borrowing rate during the
deferral period, or 2) 50% of the percentage increase in the price of
Holdings' common stock, up to an annual maximum of 15%. (The percentage
increase in the price of Holdings' common stock is measured as the
difference between its 90 day trading average (closing prices) at the end
of the fiscal year in which the deferral occurred against its average
closing price for the last 90 days of the current award fiscal year.)
However, if an executive reaches the "maximum" goals for both his operating
expense and operating income goals in two consecutive years, all deferred
funds pursuant to the Incentive Plans will be adjusted to accrue interest
at 100% of the percentage increase in the price of Holdings' common stock,
or the average short term borrowing rate during the deferral period,
whichever is greater. For any deferred funds which carry forward beyond the
intended earning period (i.e., the first or the second of the two
subsequent years), the interest rate from that point forward will be the
Company's short-term borrowing rate irrespective of future performance.
(8) For fiscal 1993, includes a special bonus of $250,000 awarded by the
Compensation Committee and Stock Option Committee of the Board.
(9) For fiscal 1994, includes a bonus of $80,000 and $100,000 for Messrs. Casey
and French, respectively awarded by the Compensation Committee and Stock
Option Committee of the Board for their respective roles in certain
acquisitions.
(10) The amounts shown in the table include $197,332 and $117,750 paid to
Messrs. Casey and French, respectively, during fiscal 1992 as reimbursement
for certain relocation and related expenses pursuant to their respective
employment agreements with Holdings and AMI.
(11) Mr. Chamison became Chief Financial Officer of Holdings and AMI in February
1992.
(12) Mr. French became a Senior Vice President of Holdings and AMI in January
1992.
OPTIONS GRANTS IN LAST FISCAL YEAR
INDIVIDUAL GRANTS (1) POTENTIAL REALIZABLE
- --------------------------------------------------------------------------------------- VALUE AT ASSUMED
% OF TOTAL ANNUAL RATES OF
NUMBER OPTIONS STOCK PRICE
OF SECURITIES GRANTED TO EXERCISE APPRECIATION FOR
UNDERLYING EMPLOYEES OR BASE MARKET OPTION TERM (2)
OPTIONS IN FISCAL PRICE PRICE ON EXPIRATION --------------------
NAME GRANTED YEAR ($/SH) GRANT DATE DATE 5% 10%
- ------------------------------ ------------- ---------- -------- --------------- ---------- -------- ----------
Robert W. O'Leary............. -- -- -- -- -- -- --
John T. Casey................. -- -- -- -- -- -- --
Alan J. Chamison.............. -- -- -- -- -- -- --
O. Edwin French............... 40,000 9% $19.21 $19.38 June 2004 $499,135 $1,257,988
W. Randolph Smith............. -- -- -- -- -- -- --
<FN>
- ------------------------
(1) Grant vests and becomes exercisable in installments of 20% per year on each
of the first five anniversaries of the grant date.
28
(2) The dollar amounts under these columns assume that the market price per
share of Holdings' common stock appreciates in value from the date of grant
to the expiration date of the option at the annualized rates indicated.
These rates are set by the Commission and are not intended to forecast
possible future appreciation, if any, of the price of the common stock.
Holdings did not use an alternative formula for a grant date valuation, as
Holdings is not aware of any formula which will determine with reasonable
accuracy a present value based on future unknown or volatile factors.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
The following table provides information on the value of unexercised options
held by each of the named executive officers at August 31, 1994. None of the
named executive officers exercised any options during fiscal 1994.
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED
OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END (1) AT FISCAL YEAR END (2)
-------------------------- ----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------- ----------- ------------- ------------- -------------
Robert W. O'Leary (3)................................... 206,600 193,400 $ 2,995,700 $ 2,804,300
John T. Casey (3)....................................... 80,040 120,160 $ 1,160,580 $ 1,742,320
Alan J. Chamison (3).................................... 80,000 120,000 $ 1,160,000 $ 1,740,000
O. Edwin French (3)..................................... 22,500 77,500 $ 326,250 $ 745,250
W. Randolph Smith....................................... 68,254 17,064 $ 1,175,112 $ 293,787
<FN>
- ------------------------
(1) Pursuant to the terms and conditions of the Option Plans, all options
granted thereunder will become fully exercisable upon the occurrence of a
"Change of Control," as defined therein, regardless of whether such options
otherwise would be exercisable. Consummation of the Merger would constitute
a "Change in Control."
(2) The value of unexercised in-the-money options is calculated as the
difference between the closing sale price on August 31, 1994 and the
applicable exercise price. The closing sale price of the common stock on
August 31, 1994 as reported by the New York Stock Exchange was $24.25.
Actual values realized on stock options are dependent upon actual future
performance of Holdings' common stock, among other factors. Accordingly,
the amounts shown may not necessarily be realized.
(3) Each of Messrs. O'Leary, Casey, Chamison and French have agreed to
exchange, at the effective time of the Merger, each of his outstanding
options (whether or not otherwise then exercisable) for (a) .42 of a share
of NME common stock plus (b) an amount of cash equal to the difference
between $19.00 ($19.25 if the Merger is consummated after March 31, 1995)
less the exercise price of such option. See "Certain Relationships and
Related Transactions -- Actions Taken in Connection with the Merger."
29
LONG-TERM INCENTIVE PLAN -- AWARDS IN LAST FISCAL YEAR
The following table provides information on long-term incentive plan awards
to each of the named executive officers in fiscal 1994.
NUMBER OF PERFORMANCE OR ESTIMATED FUTURE
SHARES, UNITS OTHER PERIOD PAYOUTS UNDER
OR OTHER UNTIL MATURATION NON-STOCK PRICE-
NAME RIGHTS (1) OR PAYOUT (2) BASED PLANS (3)
- ------------------------------------------------------------------- ------------- ----------------- ----------------
Robert W. O'Leary (4).............................................. N/A N/A $ 251,577
John T. Casey (4).................................................. N/A N/A $ 138,767
Alan J. Chamison (4)............................................... N/A N/A $ 138,767
O. Edwin French (4)................................................ N/A N/A $ 70,839
W. Randolph Smith.................................................. N/A N/A $ 65,154
<FN>
- ------------------------
(1) The Company does not have a long-term incentive stock award plan.
(2) Pursuant to the Incentive Plans, two-thirds of an individual's award is
paid in the November following the fiscal year in which the award is made.
The remaining one-third of the award is subject to mandatory deferral and
is generally earned in two equal portions over the two succeeding years
following the year of the award only if the specified performance goals
pursuant to the Incentive Plans are achieved during each of the such
subsequent years. If such award is not so earned during each of such
subsequent years, the award will remain subject to deferral until such time
as the established performance goals pursuant to the Incentive Plans are
met or at the time of retirement from Holdings or upon the individual's
death. Forfeiture of the remaining one-third will occur upon termination of
employment.
(3) Awards made pursuant to the Incentive Plans are dollar amounts which are
based upon (i) the extent to which predetermined financial performance
objectives during the year are achieved and (ii) the extent to which the
individual executive officer meets personal performance objectives.
One-third of a named executive officer's award pursuant to the Incentive
Plans is determined by whether income as defined for the fiscal year
achieves the threshold, target or maximum amounts therefore specified by
the Compensation Committee of the Company's Board. Another third of a named
executive officer's award pursuant to the Incentive Plans is determined by
cost containment. This component generally reflects the ability of the
Company's 37 hospitals to control their costs and the Company's ability to
contain costs at the corporate office level. The remaining third of a named
executive officer's award pursuant to the Incentive Plans is based on
certain subjective factors established by the Compensation Committee, and
is earned only if the threshold income level is achieved and specified
costs are kept within budget. Aggregate awards pursuant to the Incentive
Plans are expressed as a percentage of an individual's salary. Different
bonus levels are established by category of employee, and range from 60% to
90% of salary for the named executive officers. These amounts are included
in this table solely in accordance with the requirements of the Commission
and should not be deemed, in any manner, to be indicative of management's
projection of future performance.
(4) Holdings has entered into an agreement with each of Messrs. O'Leary, Casey,
Chamison and French pursuant to which each such individual, upon a change
in control (which term is defined to include consummation of the Merger),
will be fully vested in all amounts payable under the Incentive Plans,
including all deferred amounts. Additionally, these individuals will be
deemed to have satisfied the fiscal 1995 maximum target performance goals
pursuant to the Incentive Plans entitling each of them to 100% of their
respective fiscal 1995 awards. The maximum award for which each of Messrs.
O'Leary, Casey, Chamison and French may be entitled under the Incentive
Plans for fiscal 1995 is $479,115, $227,136, $227,136 and $117,219,
respectively, and the amount
30
currently deferred for each of such individuals is $374,815, $207,840,
$207,840 and $107,894. See "Certain Relationships and Related Transactions
-- Actions Taken in Connection with the Merger."
PENSION PLAN
The following table shows the estimated annual benefits payable upon normal
retirement to participating employees, including, without limitation, the named
executive officers, pursuant to AMI's basic Pension Plan (the "Pension Plan") as
augmented by either the Supplemental Executive Retirement Plan, with respect to
employees who become eligible collectively to participate prior to July 1989 or
the Supplemental Benefit Plan, which is substantially identical with respect to
employees who become eligible to participate in or after July 1989 (collectively
"SERP") and Social Security for persons in specified remuneration and years of
service classifications.
ANNUAL BENEFITS FOR YEARS OF SERVICE INDICATED
FINAL
AVERAGE
EARNINGS 10 YEARS 15 YEARS 20 YEARS 25 YEARS 30 YEARS 35 YEARS
- ----------- ----------- ----------- ----------- ----------- ----------- -----------
$200,000 $ 50,000 $ 75,000 $ 100,000 $ 100,000 $ 100,000 $ 100,000
300,000 75,000 112,000 150,000 150,000 150,000 150,000
400,000 100,000 150,000 200,000 200,000 200,000 200,000
500,000 125,000 187,500 250,000 250,000 250,000 250,000
600,000 150,000 225,000 300,000 300,000 300,000 300,000
700,000 175,000 262,500 350,000 350,000 350,000 350,000
800,000 200,000 300,000 400,000 400,000 400,000 400,000
Under the Pension Plan, a retiring participant receives a percentage of his
"earnings" (as defined under the Pension Plan) at the time of his last day of
active employment with Holdings and AMI which, if calculated as of the date
hereof for the named executive officers, would equal the rate used to determine
the amount shown for each such person in the 1994 "Salary" column of Holdings
Summary Compensation Table. Benefits are computed on a straight life annuity,
contingent annuitant basis or years certain in life, at the election of the
named executive officer, and are not subject to any deduction for Social
Security amounts.
Certain key executives of AMI, including all of the named executive
officers, are eligible under SERP for supplemental annual retirement benefits
upon retirement at age 65 generally after at least 10 years of service. The
amount of a covered executive's benefit is computed in accordance with a formula
based on such individual's final average earnings and his years of service up to
20 years. The benefits are subject to deduction for estimated primary Social
Security benefits payable at age 65 and further reduction for benefits vested
under the AMI Pension Plan.
Participants are generally 100% vested after they have reached 10 years of
service. SERP provides for early retirement for terminated participants with 10
to 15 years of service at age 55 with reduced benefits. Those with 16 or more
years of service retire at age 55 with unreduced benefits.
As of August 31, 1994, Messrs. O'Leary, Casey, Chamison, French and Smith,
have 4, 3, 3, 2, 16 credited years, respectively, of service under the basic
Pension Plan, and 8,8,8,3 and 20 credited years, respectively, of service under
SERP. In connection with the Merger, Holdings has entered into an agreement with
each of the named executive officers that provides each of such executive
officers, full vesting in and 20 years of service under the SERP upon a change
of control (which term would include consummation of the Merger). As a result of
the Merger, each of such individuals will be entitled to maximum benefits under
the SERP. See "Certain Relationships and Related Transactions -- Actions Taken
in Connection with the Merger."
31
DIRECTORS' COMPENSATION
During fiscal 1994, all directors of Holdings who were not employees of
Holdings or any of its subsidiaries received compensation for serving on the
Board or on a committee thereof. Such directors received $25,000 for serving on
the Board. In addition, such directors received $1,000 for each meeting they
attended and $500 for each telephonic meeting in which they participated. Mr.
Williams received $10,000 for his services as the Chairman of the Audit
Committee.
Under Holdings' Directors' Retirement Plan, an outside director who has
served on the Board for at least five full years, or an employee director
(regardless of whether he later becomes an outside director) who has served on
the Board for at least ten full years is entitled, after reaching the age of 65
and upon retirement from the Board, to receive an annual retirement benefit in
an amount equal to the annual director's fee in effect at the time of
retirement. For purposes of this plan, an outside director is one who is not, at
the time of his retirement from the Board, an employee of Holdings or any of its
subsidiaries or affiliates. In fiscal 1994, the Directors' Retirement Plan was
amended to provide that all individuals who were outside directors on September
1, 1994 (specifically, Messrs. Buchanan, Calhoun, Gray, Handelsman, King, Klein,
Lufkin, Mayer and Williams) were eligible to participate in the Directors'
Retirement Plan regardless of their respective years of service as a member of
the Board of Directors. Outside directors, including retired directors, may be
covered by AMI's basic health insurance plan. AMI also maintains a Directors'
Deferred Compensation Plan pursuant to which directors are permitted to defer a
portion of their directors' fees. Amounts deferred accrue interest at stipulated
rates and are payable upon retirement from the Board.
EMPLOYMENT AGREEMENTS
Holdings has entered into a letter of understanding, as amended to date,
with Robert W. O'Leary pursuant to which Mr. O'Leary serves as a director and
Chairman of the Board and Chief Executive Officer of each of Holdings and AMI.
Under this agreement, Mr. O'Leary receives an annual base salary of $750,000,
which may be increased from time to time, and participates in the Incentive
Plan. Pursuant to this agreement, Holdings made a $600,000 interest-free loan to
Mr. O'Leary during fiscal 1992. The loan is forgiven by Holdings in monthly
increments of $16,667 commencing September 30, 1991 and as of August 31, 1994
the total amount of the loan was forgiven. Holdings has agreed to pay to Mr.
O'Leary, in the event his employment as Chairman and Chief Executive Officer is
terminated for any reason other than "cause," an amount equal to 15 months base
compensation (excluding bonus) determined on the basis of his annual salary for
the fiscal year then most recently commenced. Additionally, pursuant to his
agreement with Holdings, Mr. O'Leary is entitled to receive, in the event of a
"Change of Control" (as defined therein), the above-referenced severance
payment, acceleration of all benefits payable to him pursuant to the Incentive
Plan and certain specified payments in respect of all unexercised options then
held by him. Consummation of the Merger will constitute a Change of Control
under this Agreement.
Holdings has entered into a letter of understanding, as amended to date,
with John T. Casey pursuant to which Mr. Casey serves as the President and Chief
Operating Officer of each of Holdings and AMI. Under this agreement, Mr. Casey
receives an annual base salary of $362,000, which may be increased from time to
time, and participates in the Incentive Plan. During fiscal 1993, Holdings made
a $375,000 interest-free loan to Mr. Casey. The loan, which is due and payable
10 days after the termination of Mr. Casey's employment, is forgiven by the
Company in monthly increments of $10,417 commencing August 31, 1993 and
continuing for so long as Mr. Casey serves as President and Chief Operating
Officer of Holdings. See the Summary Compensation Table on page 27 for the
amount forgiven during fiscal 1994. Holdings has agreed to pay to Mr. Casey, in
the event his employment as the President and Chief Operating Officer of the
Company is terminated for any reason other than "cause," an amount equal to 12
months base compensation (excluding bonus) determined on the basis of his annual
salary for the fiscal year then most recently commenced. Additionally, pursuant
to his agreement with Holdings, Mr. Casey is entitled to receive, in the event
of a "Change of Control" (as defined therein), the above-referenced severance
payment, acceleration of all benefits payable to him pursuant to the Incentive
Plan and certain specified payments in respect of all unexercised options
32
then held by him and forgiveness of any then outstanding balance under the
above-referenced loan. Consummation of the Merger will constitute a Change of
Control under this Agreement. Mr. Casey's Management Stock Agreement generally
provides certain "Put" and "Call" rights to him and Holdings, respectively, with
respect to certain shares of his common stock upon termination of his employment
with Holdings. See "Certain Relationships and Other Transactions -- Management
Investors."
Holdings has entered into a letter of understanding, as amended to date,
with Alan J. Chamison pursuant to which Mr. Chamison serves as an Executive Vice
President of each of Holdings and AMI. Under this agreement, Mr. Chamison
receives an annual base salary of $362,000, which may be increased from time to
time, and participates in the Incentive Plan. Pursuant to this agreement,
Holdings made a $375,000 interest-free loan to Mr. Chamison during 1991. This
loan, which is due and payable 10 days after the termination of Mr. Chamison's
employment, is forgiven by Holdings in monthly increments of $10,417 commencing
October 31, 1991, and as of August 31, 1994, the total amount of the loan was
forgiven. Holdings has agreed to pay to Mr. Chamison, in the event his
employment as an Executive Vice President of the Company is terminated for any
reason other than "cause," an amount equal to 12 months base compensation
(excluding bonus) determined on the basis of his annual salary for the fiscal
year then most recently commenced. Additionally, pursuant to his agreement with
Holdings, Mr. Chamison is entitled to receive, in the event of a "Change of
Control" (as defined therein), the above-referenced severance payment,
acceleration of all benefits payable to him pursuant to the Incentive Plan and
certain specified payments in respect of all unexercised options then held by
him. Consummation of the Merger will constitute a Change of Control under this
Agreement.
Holdings has entered into a letter of understanding, as amended, with O.
Edwin French pursuant to which Mr. French serves as a Senior Vice President of
each of Holdings and AMI. Under this Agreement, Mr. French receives an annual
base salary of $225,000, which may be increased from time to time, and
participates in the Incentive Plan. Holdings has agreed to pay to Mr. French, in
the event his employment as Senior Vice President of Holdings is terminated for
any reason other than "cause," an amount equal to 12 months base compensation
(excluding bonus) determined on the basis of his annual salary for the fiscal
year then most recently commenced. Additionally, pursuant to his agreement with
Holdings, Mr. French is entitled to receive, in the event of the occurrence of a
"Change of Control" (as defined therein), the above-referenced severance
payment, acceleration of all benefits payable to him pursuant to the Incentive
Plan and certain specified payments in respect of all unexercised options then
held by him. Consummation of the Merger will constitute a Change of Control
under this Agreement.
AMI has also entered into an agreement with Mr. W. Randolph Smith. The terms
of such agreement provide that under certain circumstances, upon termination,
Mr. Smith will be entitled to receive one year's salary and benefits. Mr.
Smith's agreement does not provide for any change of control payments. Mr.
Smith's Management Stock Agreement generally provides certain "Put" and "Call"
rights to him and Holdings, respectively, with respect to certain shares of his
common stock upon termination of his employment with Holdings. See "Certain
Relationships and Other Transactions -- Management Investors."
33
CHANGE OF CONTROL ARRANGEMENTS
On October 10, 1994, Holdings and NME jointly announced the signing of a
definitive merger agreement pursuant to which a wholly-owned subsidiary of NME
will be merged with and into Holdings, with Holdings continuing as the surviving
corporation. As a result of the Merger, each share of common stock of Holdings
will be converted into the right to receive $19.00 (if the closing occurs on or
before March 31, 1995, otherwise $19.25) and 0.42 of a share of common stock of
NME. Under the terms of the merger agreement, Holdings will pay a dividend of
$0.10 per share prior to consummation of the Merger and Holdings will be
entitled to nominate three individuals to be elected to the 13 member board of
directors of the surviving corporation. In connection with the Merger, the
Company has entered into certain agreements with members of the Company's
management. In addition, certain existing arrangements and agreements between
the Company and members of its management and Board of Directors will be
affected by the Merger. See "Certain Relationships and Related Transactions --
Actions Taken in Connection with the Merger."
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of November 9, 1994,
regarding the beneficial ownership of Common Stock by (i) each stockholder known
by the Company to be the beneficial owner of more than 5% of the Common Stock,
(ii) all directors, (iii) each of the named executive officers and (iv) all
directors and executive officers as a group. Unless otherwise noted, the persons
named in the table have sole voting and investment power with respect to all
shares shown as beneficially owned by them.
APPROXIMATE
NUMBER OF SHARES PERCENT OF CLASS
NAME AND ADDRESS BENEFICIALLY OWNED (IF MORE THAN 1%)
- ------------------------------------------------------------ ------------------- ------------------
GKH Investments, L.P. ...................................... 24,719,168(1)(2) 32%
Suite 2710
200 West Madison Street
Chicago, IL 60606
Mellon Bank, N.A., as trustee of ........................... 10,663,636 14%
First Plaza Group Trust
One Mellon Bank Center
Pittsburgh, PA 15258
MB L.P. I .................................................. 10,595,282(3) 14%
c/o of The Clipper Group, L.P.
Park Avenue Plaza
55 East 52nd Street,
27th Floor
New York, New York 10055
J. Robert Buchanan, M.D..................................... 8,400(4) *
Robert B. Calhoun, Jr....................................... -0- (3)
John T. Casey............................................... 132,680(5)(6) *
Harry J. Gray............................................... -0- (7)
Harold S. Handelsman........................................ -0- (1)(2)
Sheldon S. King............................................. 1,000 *
Melvyn N. Klein............................................. 1,000(1)(2)(8) *
Dan W. Lufkin............................................... -0- (1)(2)
William E. Mayer............................................ 25,000 *
Robert W. O'Leary........................................... 287,943(6)(9) *
Harold M. Williams.......................................... 2,057 *
34
APPROXIMATE
NUMBER OF SHARES PERCENT OF CLASS
NAME AND ADDRESS BENEFICIALLY OWNED (IF MORE THAN 1%)
- ------------------------------------------------------------ ------------------- ------------------
Alan J. Chamison............................................ 152,499(6)(10) *
O. Edwin French............................................. 37,710(6)(11) *
W. Randolph Smith........................................... 128,236(12) *
All Directors and Executive Officers as a group
(19 persons).............................................. 935,747(13) 1%
<FN>
- ------------------------
* Less than 1% beneficially owned.
(1) Does not include 934,596 shares of Common Stock owned by GKHPL, a
corporation the assets of which are managed by GKH.
(2) A corporation wholly owned by Melvyn N. Klein, a director of the Company,
serves as a general partner of GKH. A corporation wholly owned by Dan W.
Lufkin, a director of Holdings, serves as a general partner of GKH. Harold
S. Handelsman, a director of Holdings, is an officer of a corporation which
is the general partner of a limited partnership which is a general partner
of GKH. By virtue of their relationships to the Fund and GKH's relationship
to GKHPL, Messrs. Klein, Lufkin and Handelsman may be deemed to share
beneficial ownership of the shares of common stock beneficially owned by
the Fund and GKHPL. Messrs. Klein, Lufkin and Handelsman disclaim
beneficial ownership of such shares. See footnote 6 and "Directors and
Executive Officers of Holdings and AMI" for information regarding Harry J.
Gray's former and existing relationships with GKH.
(3) Robert B. Calhoun, Jr., a director of Holdings, is a major stockholder in
and President of Clipper Asset Management Corporation, the sole general
partner of Clipper. Pursuant to an Asset Management Agreement with First
Boston and certain of its affiliates, Clipper manages certain investments
for such persons, including the 10,595,282 shares of common stock indicated
in the above table which are held in the name of MBLP and an additional
710,168 shares of common stock held in the name of MIP, which are not
included in the above table. Under the Asset Management Agreement, Clipper
has sole power to vote the shares of Holdings' common stock, but does not
have the power (sole or shared) to dispose of any such shares. Clipper is
not an affiliate of First Boston. Mr. Calhoun disclaims beneficial
ownership of such shares. See "Directors and Executive Officers of Holdings
and AMI" for information regarding William E. Mayer's former relationship
with First Boston and one of its affiliates.
(4) Includes an aggregate of 8,400 shares subject to options granted under the
Nonqualified Employee Stock Option Plan (the "Option Plan") which are
exercisable as of August 31, 1994 or within 60 days thereof.
(5) Includes an aggregate of 100,080 shares subject to options granted under
the Option Plan and the Nonqualified Performance Stock Option Plan for Key
Employees (the "Key Plan" and collectively with the Option Plan, the
"Option Plans") which are exercisable as of August 31, 1994 or within 60
days thereof.
(6) At the effective time of the Merger, each of Messrs. O'Leary, Casey,
Chamison and French have agreed to exchange each of his outstanding options
granted under the Option Plans for (a) .42 of a share of NME common stock
and (b) cash equal to $19.00 ($19.25 if the Merger is consummated after
March 31, 1995) less the exercise price of such option.
(7) Harry J. Gray, a director of Holdings, previously served as a general
partner of GKH. On September 30, 1991, Mr. Gray's interest as a general
partner of GKH was converted into a limited partnership interest. Mr. Gray
disclaims beneficial ownership of the shares of common stock beneficially
owned by the Fund and GKHPL. See "Directors and Executive Officers of
Holdings and AMI" for information regarding Mr. Gray's former relationship
with GKH.
35
(8) Mr. Klein is a co-trustee of two trusts, each of which beneficially owns
500 shares of Common Stock.
(9) Includes an aggregate of 206,600 shares subject to options granted under
the Option Plans which are exercisable as of August 31, 1994 or within 60
days thereof.
(10) Includes an aggregate of 80,000 shares subject to options granted under the
Option Plans which are exercisable as of August 31, 1994 or within 60 days
thereof.
(11) Includes an aggregate of 22,500 shares subject to options granted under the
Option Plans which are exercisable as of August 31, 1994 or within 60 days
thereof.
(12) Includes an aggregate of 68,254 shares subject to options granted under the
Option Plans which are exercisable as of August 31, 1994 or within 60 days
thereof.
(13) See notes (1), (2) and (3) above. Also includes an aggregate of 744,498
shares subject to options granted under the Option Plans which are
exercisable as of August 31, 1994 or within 60 days thereof.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ACTIONS TAKEN IN CONNECTION WITH THE MERGER
Upon the occurrence of the Merger, certain executive officers of Holdings,
including the named executive officers may be subject to the potential
imposition of excise tax under Section 4999 of the Code to the extent that
payments received by such executive officers as the result of the Merger are
deemed to constitute excess parachute payments under Section 280G of the Code.
Holdings has agreed to make payments to such affected executive officers in an
amount equal to all excise taxes payable by each such executive officer on such
deemed excess parachute payments (the "Gross-Up Payment"), including any excise
tax payable by reason of the Gross Up Payment; provided however, that the
maximum aggregate Gross-Up Payments which Holdings may be obligated to pay shall
in no event exceed $8 million, which, if necessary, will be divided pro rata
among the affected executive officers. In order for an executive officer to be
eligible to receive Gross-Up Payments, such affected executive officer must
agree in writing to accept the merger consideration (including the mix of cash
and securities, if applicable) payable to Holdings' stockholders in general upon
consummation of the Merger, with respect to any Holdings' stock options then
held by the affected executive officer, nothwithstanding any provision in the
executive's employment or stock option agreement or the Holdings Stock Option
Plans to the contrary regarding payment in cash.
Holdings has agreed that if, in connection with or subsequent to a change of
control (which term would include the consummation of the Merger), the
employment of certain executive officers of Holdings is terminated for any
reason, or the membership of a current director on the Company's Board of
Directors is terminated for any reason, then such affected individual shall be
entitled to continue coverage under the terms of Holdings' group health
insurance plan until the earlier of the date such affected individual (a)
becomes eligible for Medicare, or (b) otherwise fails to pay any applicable
premium. This coverage is in addition to any continuation coverage that may
otherwise be required by law.
Holdings has entered into an agreement with each of Messrs. O'Leary, Casey,
Chamison, French, Kugelman, Sabatino, Bailey and Murdock pursuant to which such
individuals, upon a change in control (which term has been defined to include
consummation of the Merger), will be fully vested in all amounts payable under
the Incentive Plans, including all deferred amounts. Additionally, each of these
individuals will be deemed to have satisfied their respective maximum fiscal
1995 target performance goals under the Incentive Plans entitling each of them
to 100% of their fiscal 1995 awards. The maximum award for which each of Messrs.
O'Leary, Casey, Chamison, French, Kugelman, Sabatino, Bailey and Murdock may be
entitled under the Incentive Plans for fiscal 1995 is $479,115, $227,136,
$227,136, $117,219, $219,625, $81,120, $65,572 and $65,572, respectively, and
the amount
36
currently deferred for each of such individuals is $374,815, $207,840, $207,840,
$107,894, $35,607, $56,390, $57,832, and $57,832, respectively. See "Executive
Compensation -- Long-Term Incentive Plan -- Awards in Last Fiscal Year."
First Boston and GKH rendered consulting services to Holdings in relation to
the Merger for which First Boston and GKH each will receive compensation of $5.0
million plus reasonable out-of-pocket costs. The Company believes that the
amount of fees to be paid to First Boston and GKH is equivalent to or less than
customary fees that would be paid by the Company to unaffiliated third parties
for comparable services.
SALE OF BUSINESS
In May 1994, the Company sold AMI's interest in EPIC Holdings, Inc. pursuant
to a merger of EPIC Holdings, Inc. with HealthTrust, Inc -- the Hospital
Company. As a result of this disposition, the Company received $72.4 million and
paid $2.3 million in compensation to GKH, for representing the Company in
connection with the transaction. See "Security Ownership of Certain Beneficial
Owners and Management."
LETTERS OF CREDIT
Dalfort Corporation, an entity associated with HGM Associates, a Nevada
limited partnership and a general partner of GKH ("Dalfort"), agreed to provide
credit support (the "L/C Commitment") to domestic hospital subsidiaries of AMI
in the form of guaranties by Dalfort to issuers of standby letters of credit,
bonds and other surety type instruments for the account of any domestic hospital
subsidiary of AMI (the "L/C Guarantees"). The L/C Commitment extended only to
L/C Guarantees with a term not exceeding twelve months and in an aggregate face
amount not exceeding $30 million outstanding at any time. Holdings and its
subsidiaries were jointly and severally liable to reimburse Dalfort for any
amounts paid pursuant to the L/C Commitment. The L/C Commitment was replaced on
August 18, 1993 with other financing extended by an unaffiliated third party.
AMI paid Dalfort a fee of $750,000 during fiscal 1993.
FIRST BOSTON AND AFFILIATES
The Company is not presently under any obligation to retain First Boston for
advisory or other services although it may choose to do so at any time and from
time to time. As of November 9, 1994, certain affiliates of First Boston owned
an aggregate of 11,305,450 shares of Common Stock, or approximately 15%, of the
outstanding Common Stock. See "Security Ownership of Certain Beneficial Owners
and Management;" "Arrangements with Respect to the Election of Directors;" and
"Arrangements with Respect to Other Matters."
MANAGEMENT INVESTORS
Pursuant to certain Management Stock Subscription Agreements (the
"Management Stock Agreements") entered into in connection with and subsequent to
the acquisition of AMI by Holdings (the "Acquisition"), certain current and
former officers and key employees of AMI and its subsidiaries (collectively, the
"Management Investors") purchased shares of common stock and, in most cases,
were granted options pursuant to the Key Plan. The Management Investors, except
for John T. Casey and a former officer of Holdings, used, among other funds,
amounts received in consideration of the cancellation of options to purchase
shares of AMI common stock ("AMI Shares") in connection with the Acquisition, to
purchase the shares of common stock.
Pursuant to the Management Stock Agreements, upon termination of a
Management Investor's employment with AMI or its subsidiaries prior to the fifth
anniversary of the Acquisition, Holdings had the right to require such
Management Investor to sell his shares of common stock to Holdings (the "Call"),
and, upon certain events resulting in the termination of a Management Investor's
employment with Holdings or its subsidiaries, the Management Investor had the
right to require Holdings to
37
repurchase his shares of Common Stock (the "Put"), in each case at a price
determined by a formula generally based on fair value and the factual
circumstances giving rise to the exercise of either the Put or Call. The fifth
anniversary of the Acquisition was October 26, 1994. The Put right will not be
available to any Management Investor whose employment is terminated for "cause"
(as defined in the Management Stock Agreements). In addition, Holdings may defer
its obligation to purchase Common Stock pursuant to the exercise of a Call or a
Put if the consummation of such purchase would violate any law or regulation or
would cause Holdings to be in default under the terms of any of its
indebtedness. Upon exercise of a Call or Put, any unexercised options held by
the Management Investor will be terminated upon payment by Holdings to the
Management Investor of the price specified in such Management Investor's
Management Stock Agreement.
Pursuant to the Management Stock Agreements, the Management Investors have
agreed not to transfer their common stock, except for certain permitted
transfers, for five years after their purchase thereof, and, in addition, have
granted Holdings, first, and the other parties to the Stockholders Agreement,
second, a right of first refusal in respect of third party offers to purchase
the common stock received by the Management Investors after the expiration of
such five year period.
During fiscal 1994, Holdings paid an aggregate of $19,996 to one Management
Investor in satisfaction of its obligations upon exercise of Put rights under
such person's Management Stock Agreement.
LOANS TO EXECUTIVE OFFICERS
In prior fiscal years, Holdings made interest-free loans of $600,000,
$375,000 and $375,000 to Messrs. O'Leary, Casey and Chamison, respectively,
which loans are forgiven in equal monthly increments. As of November 9, 1994,
the remaining balances of $199,992 and $135,409 on interest-free loans made by
Holdings to Messrs. O'Leary and Chamison, respectively, where forgiven in full.
As of November 9, 1994, the interest-free loan to Mr. Casey had an outstanding
principal balance of $213,536 and is being forgiven by Holdings in equal monthly
increments of $10,417. In the event of the occurrence of a "Change of Control"
(as defined in the letter of understanding between Holdings and Mr. Casey),
which includes consummation of the Merger, the remaining balance of the loan
will be forgiven. The largest aggregate amount outstanding during fiscal 1994 to
each of Messrs. O'Leary, Casey and Chamison pursuant to such loans were
$199,992, $135,409 and $364,583, respectively. See "Executive Compensation --
Employment Agreements."
38
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1 and 2 Financial Statements and Financial Statement Schedules.
The financial statements and financial statement schedules set forth in the
Index to Financial Statements and Financial Statement Schedules on page F-1 are
filed as part of this Annual Report on Form 10-K.
(b) Reports on Form 8-K.
No reports on Form 8-K have been filed during the last quarter of fiscal
1994.
(c) List of Exhibits.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------
2.1 -- Agreement and Plan of Merger dated as of July 6, 1989, among AMI, Holdings and IMA Acquisition
Corp., a Delaware corporation and a wholly owned subsidiary of Holdings ("Acquisition"), filed as
Exhibit 2(a) to Holdings' Registration Statement on Form S-4, Registration No. 33-33674, filed on
March 6, 1990 (the "1990 Form S-4") and incorporated herein by reference.
2.2 -- Amendment No. 1 to Agreement and Plan of Merger dated as of October 7, 1989, among AMI, Holdings
and Acquisition, filed as Exhibit 18 to the 1990 Form S-4 and incorporated herein by reference.
2.3 -- Amendment No. 2 to Agreement and Plan of Merger dated as of December 1, 1989, among AMI, Holdings
and Acquisition, filed as Exhibit 2(c) to the 1990 Form S-4 and incorporated herein by reference.
2.4 -- Agreement and Plan of Merger dated as of April 23, 1990 among AMI, Holdings and Amigo Holdings
Corp. ("Amigo"), filed as Exhibit 3 to AMI's Quarterly Report on Form 10-Q for the quarter ended
May 31, 1990 and incorporated herein by reference.
2.5 -- Agreement and Plan of Merger, dated as of October 10, 1994, by and among NME, AMH Acquisition Co.
and Holdings.
3.1 -- Restated Certificate of Incorporation of Holdings as amended to date, filed as Exhibit 3 (a) to
the 1990 Form S-4 and incorporated herein by reference.
3.2 -- Bylaws of Holdings as amended to date filed as Exhibit 3.2 to Holdings' Registration Statement on
Form S-1 filed on June 17, 1991 and incorporated herein by reference.
3.3 -- Restated Certificate of Incorporation of AMI as amended to date, filed as Exhibit 3 to AMI's
Quarterly Report on Form 10-Q for the quarter ended May 31, 1990 and incorporated herein by
reference.
3.4 -- Bylaws of AMI as amended to date, filed as Exhibit 3.2 to AMI's Registration Statement on Form S-1
filed on August 14, 1991 (the "AMI Form S-1") and incorporated herein by reference.
4.1 -- Amended and Restated Note Purchase Agreement dated as of June 11, 1993 among AMI and the
purchasers listed therein, filed as Exhibit 4.1 to AMI's Registration Statement on Form S-4
Registration No. 33-50239 filed on September 20, 1993 (the "1993 Form S-4") and incorporated
herein by reference.
4.2 -- Indenture dated as of April 21, 1993 between AMI and NationsBank of Texas, N.A., as trustee (the
"Trustee"), filed as Exhibit 4.2 to the 1993 Form S-4 and incorporated herein by reference.
4.3 -- Supplemental Indenture dated as of October 25, 1993 between AMI and the Trustee, filed as Exhibit
4.3 to Amendment No. 1 to the 1993 Form S-4 and incorporated herein by reference.
39
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------
4.6 -- Indenture dated as of October 1, 1991 between AMI, as issuer, and The Citizens and Southern
National Bank, as trustee, relating to the 11% Senior Notes Due October 2001, filed as Exhibit 4.1
to AMI's Registration Statement on Form S-1 filed on October 8, 1991 and incorporated herein by
reference.
4.7 -- Indenture between AMI, as issuer, and The Connecticut National Bank, as trustee, relating to the
13 1/2% Senior Subordinated Notes Due August 2001 filed as Exhibit 4.1 to AMI's Registration
Statement on Form S-1, Registration No. 33-41416, filed on January 24, 1992 and incorporated
herein by reference.
4.8 -- Indenture dated as of August 1, 1991 between AMI, as issuer, and United States Trust Company of
New York, as trustee, relating to the 15% Junior Discount Debentures Due November 2005, filed as
Exhibit 4.1 to AMI's Registration Statement on Form S-2, Registration No. 33-45292, filed on
January 24, 1992 and incorporated herein by reference.
4.9 -- First Supplemental Indenture dated as of February 15, 1992 between AMI, as issuer, and United
States Trust Company of New York, as trustee, relating to AMI's 15% Junior Subordinated Discount
Debentures Due November 2005, filed as Exhibit 4.1 to Amendment No. 2 to AMI's registration
Statement, Registration No. 33-45292, on Form S-2, filed on March 4, 1992 and incorporated herein
by reference.
4.10 -- Amendment No. 1 dated as of April 25, 1994 to the Credit Agreement among AMI, Holdings, the
Lenders, the Agent and the Bank of Nova Scotia, as Co-Agent and the Long Term Credit Bank of
Japan, Ltd., Los Angeles Agency, as Co-Agent (collectively, the "Co-Agents").
4.11 -- Amendment No. 2 dated as of June 20, 1994 to the Credit Agreement among AMI, Holdings, the
Lenders, the Agent and the Co-Agents.
4.12 -- Amendment No. 3 dated as of June 20, 1994 to the Credit Agreement among AMI, Holdings, the
Lenders, the Agent and the Co-Agents.
Instruments with respect to certain long-term debt of AMI have not been filed since the amount of
securities authorized thereunder does not exceed 10% of the total assets of AMI and its
subsidiaries on a consolidated basis. AMI hereby agrees to furnish copies of such instruments to
the Securities and Exchange Commission upon request.
10.1 -- Credit and Guaranty Agreement dated as of August 18, 1993 (the "Credit Agreement") among AMI,
American Medical Holdings, Inc., a Delaware corporation, the lenders referred to therein (the
"Lenders"), Chemical Bank, as Agent (the "Agent"), The Bank of Nova Scotia, as Co-Agent, and The
Long Term Credit Bank of Japan, Ltd., Los Angeles Agency, as Co-Agent filed as Exhibit 10.1 to the
1993 Form S-4 and incorporated herein by reference.
10.2 -- Holdings Pledge Agreement dated as of August 18, 1993 between AMI and the Agent on behalf of the
Lenders filed as Exhibit 10.2 to the 1993 Form S-4 and incorporated herein by reference.
10.3 -- Collateral Trust Agreement dated as of August 18, 1993 between AMI and IBJ Schroder Bank & Trust
Company, a New York banking corporation, as trustee ("IBJ") filed as Exhibit 10.3 to the 1993 Form
S-4 and incorporated herein by reference.
10.4 -- Collateral Trust Pledge Agreement dated as of August 18, 1993 between AMI and IBJ filed as Exhibit
10.4 to the 1993 Form S-4 and incorporated herein by reference.
10.5 -- Pledge and Security Agreement dated as of August 18, 1993 between AMI and the Agent on behalf of
the Lenders filed as Exhibit 10.5 to the 1993 Form S-4 and incorporated herein by reference.
10.6 -- Guaranty and Security Agreement dated as of August 18, 1993 between American Medical Finance
Company, a Delaware corporation, and the Agent on behalf of the Lenders filed as Exhibit 10.6 to
the 1993 Form S-4 and incorporated herein by reference.
40
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------
10.7 -- Agreement for Purchase of Stock dated as of September 26, 1988 by and among AMI, EPIC and various
subsidiaries of AMI, filed as Exhibit 2(a) to AMI's Current Report on Form 8-K dated October 14,
1988 and incorporated herein by reference.
10.8 -- Amended and Restated Stockholders' Agreement dated as of July 30, 1991 by and among the Fund,
GKHPL, First Plaza, MBLP, MIP and the other parties thereto, filed as Exhibit 10.39 to Amendment
No. 3 to Holdings' Registration Statement on Form S-1, Registration No. 33-41206, on July 26, 1991
and incorporated herein by reference.
10.9 -- Amended and Restated Registration Rights Agreement dated as of July 30, 1991 by and among
Holdings, the Fund, GKHPL, MBLP, MIP, the Bank Investor and the Management Purchasers, filed as
Exhibit 10.40 to Amendment No. 3 to Holdings' Registration Statement on Form S-1, Registration No.
33-41206, on July 26, 1991 and incorporated herein by reference.
10.10 -- American Medical Holdings, Inc. 1993 Employee Stock Purchase Plan, filed as Exhibit A to Holdings'
Proxy Statement dated January 13, 1993 (the "1993 Proxy") and incorporated herein by reference.
10.11 -- Amendments to Each of the Nonqualified Employee Stock Option Plan and the Nonqualified Performance
Stock Option Plan for Key Employees (Exhibits 10.12 and 10.13 below) filed as Exhibit D to AMI's
1993 Proxy and incorporated herein by reference.
10.12 -- Nonqualified Employee Stock Option Plan, filed as Exhibit A to Holdings' Proxy Statement dated as
of January 8, 1991 and incorporated herein by reference.
10.13 -- Nonqualified Performance Stock Option Plan for Key Employees, filed as Exhibit B to Holdings'
Proxy Statement dated as of January 8, 1991 and incorporated herein by reference.
10.14 -- Executive Deferred Compensation Plan filed as Exhibit 10.27 to Holdings' Registration Statement on
Form S-1 filed on June 17, 1991, Registration No. 33-41206, and incorporated herein by reference.
10.15 -- Supplemental Executive Retirement Plan filed as Exhibit 10.28 to Holdings' Registration Statement
on Form S-1 filed on June 17, 1991, Registration No. 33-41206, and incorporated herein by
reference.
10.16 -- Senior Executive Deferred Compensation Plan filed as Exhibit 10.29 to Holdings' Registration
Statement on Form S-1 filed on June 17, 1991, Registration No. 33-41206, and incorporated herein
by reference.
10.17 -- Letter of Understanding, between Holdings and Robert W. O'Leary, filed as Exhibit 10.30 to
Amendment No. 3 to Holdings' Registration Statement on Form S-1, filed on July 26, 1991,
Registration No. 33-41206, and incorporated herein by reference.
10.18 -- Letter of Understanding dated as of August 4, 1991 between AMI and Alan J. Chamison filed as
Exhibit 10.36 to AMI's Registration Statement on Form S-1, Registration No. 33-41206, filed
September 25, 1991 and incorporated herein by reference.
10.19 -- Agreement, dated as of March 7, 1990, among American Medical International, Inc. Healthcare
Holding Company and Generale De Sante International PLC, filed as Exhibit 10.36 to Amendment No. 3
to Holdings' Registration Statement on Form S-1, Registration No. 33-41206, filed on July 26, 1991
and incorporated herein by reference.
10.20 -- Acquisition Agreement, among AMI Information Systems Group, Inc., A.M. International and Klinik
Hirslanden AG, filed as Exhibit 10.37 to Amendment No. 3 to Holdings' Registration Statement on
Form S-1, Registration No. 33-41206, filed on July 26, 1991 and incorporated herein by reference.
41
EXHIBIT NO. DESCRIPTION OF EXHIBIT
- ----------- --------------------------------------------------------------------------------------------------
10.21 -- Asset Purchase and Sale Agreement, by and among Holdings, AMI, AMISUB (PSL), Inc., New H Acute,
Inc. New H PSL, Inc. and PSL HealthCare System, dated as of November 15, 1990, as amended, filed
as Exhibit 10.38 to Amendment No. 3 to Holdings' Registration Statement on Form S-1 filed on July
26, 1991 and incorporated herein by reference.
10.22 -- Exchange Agreement dated as of January 27, 1992 by and among EPIC Healthcare Group, Inc., EPIC
Holdings, Inc., EPIC Transaction Co., American Medical International, Inc., American Medical
(Central), Inc., American Information Systems Group, Inc., Brookwood Health Services, Inc., and
Lifemark Hospitals, Inc. filed as Exhibit 10.1 to Form 8-K filed on March 25, 1992 and
incorporated herein by reference.
10.23 -- Letter of Understanding between the Company and AMI and John T. Casey filed as Exhibit 10.31 to
Holdings' and AMI's Annual Report on Form 10-K for the fiscal year ended August 31, 1992 (the
"Annual Report") and incorporated herein by reference.
10.24 -- Letter of Understanding between the Company and AMI and O. Edwin French filed as Exhibit 10.32 to
the Annual Report and incorporated herein by reference.
10.25 -- Amendment to Letters of Understanding between the Company and AMI and each of Robert W. O'Leary,
Alan J. Chamison, John T. Casey, and O. Edwin French, filed as Exhibit 10.34 to the Annual Report
and incorporated herein by reference.
10.26 -- Letter of Understanding dated as of August 19, 1994, from Holdings to Terry Linn.
10.27 -- Letter of Understanding dated as of October 30, 1992 from AMI to Lawrence N. Kugelman.
10.28 -- Letter of Understanding dated as of June 1, 1990 from AMI to W. Randolph Smith.
10.29 -- Employment Agreement dated as of November 1, 1992 between AMI and Thomas J. Sabatino, Jr.
10.30 -- Amendment dated as of October 10, 1994 to Employment Agreement dated as of November 1, 1992
between AMI and Thomas J. Sabatino, Jr.
10.31 -- Letter of Understanding dated as of June 1, 1990 from Holdings to Michael N. Murdock.
10.32 -- Amendment dated as of October 10, 1994 to Employment Agreement dated as of June 1, 1990 from
Holdings' to Michael N. Murdock.
10.33 -- Letter of Understanding dated as of June 1, 1990 from Holdings to Bary G. Bailey.
10.34 -- Amendment dated October 10, 1994 to Employment Agreement dated as of June 1, 1990 from Holdings'
to Bary G. Bailey.
10.35 -- Loan Agreement dated as of July 14, 1993 between Holdings and John T. Casey.
10.36 -- Directors Retirement Plan.
10.37 -- Amendment dated as of October 10, 1994 to Directors Retirement Plan.
10.38 -- Supplemental Benefit Plan.
10.39 -- 1990 Supplemental Benefit Plan Amended and Restated Effective January 1, 1992.
10.40 -- Amendment dated as of December, 1992 to Employment Agreement dated as of October 30, 1992 between
Holdings and Lawrence N. Kugelman.
11 -- Statement re computations of per share earnings for the period ended August 31, 1994.
21.1 -- List of subsidiaries of Holdings filed as Exhibit 22 to Holdings' Registration Statement on Form
S-1 filed on June 17, 1991 and incorporated herein by reference.
21.2 -- List of subsidiaries of AMI filed as Exhibit 22 to the AMI Form S-1 and incorporated herein by
reference.
24 -- Powers of Attorney.
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934 the registrants have duly caused this report to be signed
on their behalf by the undersigned, thereunto duly authorized, in the City of
Dallas, State of Texas, on the day of November, 1994. The following officers and
directors have executed this report as of November 16, 1994.
AMERICAN MEDICAL HOLDINGS, INC.
AMERICAN MEDICAL INTERNATIONAL, INC.
By /s/ ALAN J. CHAMISON
--------------------------------------
Alan J. Chamison
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below, by the following persons in the capacities
indicated:
SIGNATURE TITLE
- ----------------------------------- -----------------------------------------
/s/ ROBERT W. O'LEARY*
- ----------------------------------- Chairman and Chief Executive Officer
Robert W. O'Leary (Principal Executive Officer)
/s/ ALAN J. CHAMISON Executive Vice President and
- ----------------------------------- Chief Financial Officer
Alan J. Chamison (Principal Financial Officer)
/s/ BARY G. BAILEY
- ----------------------------------- Vice President, Controller
Bary G. Bailey (Principal Accounting Officer)
/s/ J. ROBERT BUCHANAN, M.D.*
- ----------------------------------- Director
J. Robert Buchanan, M.D.
/s/ ROBERT B. CALHOUN, JR.*
- ----------------------------------- Director
Robert B. Calhoun, Jr.
/s/ JOHN T. CASEY*
- ----------------------------------- Director
John T. Casey
/s/ HARRY J. GRAY*
- ----------------------------------- Director
Harry J. Gray
43
SIGNATURE TITLE
- ----------------------------------- -----------------------------------------
/s/ HAROLD S. HANDELSMAN*
- ----------------------------------- Director
Harold S. Handelsman
/s/ SHELDON S. KING*
- ----------------------------------- Director
Sheldon S. King
/s/ MELVYN N. KLEIN*
- ----------------------------------- Director
Melvyn N. Klein
/s/ DAN W. LUFKIN*
- ----------------------------------- Director
Dan W. Lufkin
/s/ WILLIAM E. MAYER*
- ----------------------------------- Director
William E. Mayer
/s/ ROBERT W. O'LEARY*
- ----------------------------------- Director
Robert W. O'Leary
/s/ HAROLD M. WILLIAMS*
- ----------------------------------- Director
Harold M. Williams
*By: /s/ BARY G. BAILEY
- -----------------------------------
Bary G. Bailey
As Attorney-In-Fact
44
INDEX TO FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEM 14(A).
PAGE
REFERENCE
-------------
Financial Statements:
Report of Independent Accountants................................................................. F-2
Consolidated Balance Sheets as of August 31, 1994 and 1993........................................ F-4
Consolidated Statements of Income
for the Years Ended August 31, 1994, 1993 and 1992............................................... F-6
Consolidated Statements of Cash Flows
for the Years Ended August 31, 1994, 1993 and 1992............................................... F-7
Consolidated Statements of Shareholders' Equity
for the Years Ended August 31, 1994, 1993 and 1992............................................... F-8
Notes to Consolidated Financial Statements........................................................ F-9
Financial Statement Schedules:
Report of Independent Accountants on Financial Statement Schedules................................ S-1
Schedule II -- Amounts Receivable from Directors, Officers and Employees.......................... S-2
Schedule V -- Property and Equipment.............................................................. S-3
Schedule VI -- Accumulated Depreciation of Property and Equipment................................. S-4
Schedule VIII -- Reserves for Uncollectible Accounts.............................................. S-5
Schedule X -- Supplementary Income Statement Information.......................................... S-6
All other schedules are not submitted because they are not applicable, not
required, or the information is included in the consolidated financial
statements or notes thereto.
Separate financial statements of the parent company have been omitted since
restricted net assets of consolidated subsidiaries are less than 25% of
consolidated net assets.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To The Boards of Directors and
Shareholders of American Medical Holdings, Inc.
and American Medical International, Inc.
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, of cash flows and of shareholders' equity
present fairly, in all material respects, the financial position of American
Medical Holdings, Inc. and subsidiaries and American Medical International, Inc.
and subsidiaries at August 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
August 31, 1994, in conformity with generally accepted accounting principles.
These financial statements are the responsibility of the Companies' management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
Dallas, Texas
October 20, 1994
F-2
[This page has been intentionally left blank]
F-3
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
ASSETS
AS OF AUGUST 31,
----------------------------------------------------------
1994 1993
---------------------------- ----------------------------
HOLDINGS AMI HOLDINGS AMI
------------- ------------- ------------- -------------
CURRENT ASSETS:
Cash and cash equivalents............................ $ 31,941 $ 31,941 $ 44,335 $ 44,335
Accounts receivable, less reserves for uncollectible
accounts of $98,622 in 1994 and $98,143 in 1993..... 147,415 147,415 90,596 90,596
Inventory of supplies................................ 63,444 63,444 59,516 59,516
Income taxes, net (including current portion of
deferred income taxes).............................. 30,876 30,876 24,641 24,641
Prepaid expenses..................................... 15,133 15,133 11,617 11,617
------------- ------------- ------------- -------------
288,809 288,809 230,705 230,705
------------- ------------- ------------- -------------
PROPERTY AND EQUIPMENT:
Land................................................. 117,841 117,841 104,723 104,723
Buildings and improvements........................... 1,253,411 1,253,411 1,151,890 1,151,890
Equipment............................................ 577,687 577,687 507,505 507,505
Construction in progress............................. 22,457 22,457 35,827 35,827
------------- ------------- ------------- -------------
1,971,396 1,971,396 1,799,945 1,799,945
Less -- Accumulated depreciation..................... 507,653 507,653 395,736 395,736
------------- ------------- ------------- -------------
1,463,743 1,463,743 1,404,209 1,404,209
------------- ------------- ------------- -------------
OTHER ASSETS:
Notes receivable..................................... 15,559 15,559 10,791 10,791
Investments.......................................... 24,523 24,523 27,982 27,982
Cost in excess of net assets acquired, net........... 1,153,887 1,153,887 1,165,435 1,165,435
Deferred costs....................................... 30,026 30,026 29,248 29,248
------------- ------------- ------------- -------------
1,223,995 1,223,995 1,233,456 1,233,456
------------- ------------- ------------- -------------
$ 2,976,547 $ 2,976,547 $ 2,868,370 $ 2,868,370
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See Notes to Consolidated Financial Statements.
F-4
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
AS OF AUGUST 31,
----------------------------------------------------------
1994 1993
---------------------------- ----------------------------
HOLDINGS AMI HOLDINGS AMI
------------- ------------- ------------- -------------
CURRENT LIABILITIES:
Current maturities of long-term debt................. $ 156,028 $ 156,028 $ 40,831 $ 40,831
Accounts payable..................................... 86,898 86,898 84,513 84,513
Accrued liabilities:
Payroll and benefits............................... 116,961 116,961 131,170 131,170
Interest........................................... 20,563 20,563 20,641 20,641
Taxes, other than income........................... 26,322 26,322 26,353 26,353
Other.............................................. 69,692 69,692 67,147 67,147
------------- ------------- ------------- -------------
476,464 476,464 370,655 370,655
------------- ------------- ------------- -------------
LONG-TERM DEBT....................................... 1,130,967 1,130,967 1,283,665 1,283,665
------------- ------------- ------------- -------------
CONVERTIBLE SUBORDINATED DEBT........................ 10,707 10,707 10,487 10,487
------------- ------------- ------------- -------------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes................................ 218,651 218,651 211,451 211,451
Reserve for professional liability risks............. 103,099 103,099 100,496 100,496
Other deferred credits and liabilities............... 187,941 187,941 187,743 187,743
------------- ------------- ------------- -------------
509,691 509,691 499,690 499,690
------------- ------------- ------------- -------------
COMMITMENTS AND CONTINGENCIES
COMMON STOCK SUBJECT TO REPURCHASE OBLIGATIONS....... -- -- 6,046 --
------------- ------------- ------------- -------------
SHAREHOLDERS' EQUITY:
AMI common stock, $0.01 par value -- 200,000 shares
authorized 72,481 shares issued and outstanding in
1994 and 1993....................................... -- 725 -- 725
Holdings preferred stock, $0.01 par value --
5,000 shares authorized No shares outstanding....... -- -- -- --
Holdings common stock, $0.01 par value -- 200,000
shares authorized 77,491 shares issued and
outstanding in 1994 and 76,873 in 1993.............. 775 -- 768 --
Additional paid-in capital........................... 608,096 592,494 596,623 587,060
Retained earnings.................................... 245,547 261,199 108,436 124,088
Adjustment for minimum pension liability............. (5,700) (5,700) (8,000) (8,000)
------------- ------------- ------------- -------------
848,718 848,718 697,827 703,873
------------- ------------- ------------- -------------
$ 2,976,547 $ 2,976,547 $ 2,868,370 $ 2,868,370
------------- ------------- ------------- -------------
------------- ------------- ------------- -------------
See Notes to Consolidated Financial Statements.
F-5
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR THE YEAR ENDED AUGUST 31,
----------------------------------------------------------------------------------------
1994 1993 1992
---------------------------- ---------------------------- ----------------------------
HOLDINGS AMI HOLDINGS AMI HOLDINGS AMI
------------- ------------- ------------- ------------- ------------- -------------
NET REVENUES............................. $ 2,381,689 $ 2,381,689 $ 2,238,525 $ 2,238,525 $ 2,237,912 $ 2,237,912
OPERATING COSTS AND EXPENSES:
Salaries and benefits.................. 869,020 869,020 815,323 815,323 838,727 838,727
Supplies............................... 339,985 339,985 315,935 315,935 316,541 316,541
Provision for uncollectible accounts... 165,539 165,539 148,135 148,135 163,824 163,824
Depreciation and amortization.......... 156,718 156,718 147,397 147,397 149,051 149,051
Other operating costs.................. 524,221 524,221 505,614 505,614 496,180 496,180
------------- ------------- ------------- ------------- ------------- -------------
Total operating costs and expenses... 2,055,483 2,055,483 1,932,404 1,932,404 1,964,323 1,964,323
------------- ------------- ------------- ------------- ------------- -------------
OPERATING INCOME......................... 326,206 326,206 306,121 306,121 273,589 273,589
Gains on sales of securities........... 69,328 69,328 -- -- 119,803 119,803
Interest expense, net.................. (154,507) (154,507) (166,582) (166,582) (204,556) (204,556)
------------- ------------- ------------- ------------- ------------- -------------
INCOME BEFORE TAXES, MINORITY EQUITY
INTEREST AND EXTRAORDINARY LOSS......... 241,027 241,027 139,539 139,539 188,836 188,836
Provision for income taxes............. (98,300) (98,300) (68,800) (68,800) (77,900) (77,900)
------------- ------------- ------------- ------------- ------------- -------------
NET INCOME BEFORE MINORITY EQUITY
INTEREST AND EXTRAORDINARY LOSS......... 142,727 142,727 70,739 70,739 110,936 110,936
Minority equity interest............... (3,707) (3,707) (3,770) (3,770) (1,318) (1,318)
------------- ------------- ------------- ------------- ------------- -------------
NET INCOME BEFORE EXTRAORDINARY LOSS..... 139,020 139,020 66,969 66,969 109,618 109,618
Extraordinary loss on early
extinguishment of debt................ (1,909) (1,909) (25,431) (25,431) (9,997) (9,997)
------------- ------------- ------------- ------------- ------------- -------------
NET INCOME............................... $ 137,111 $ 137,111 $ 41,538 $ 41,538 $ 99,621 $ 99,621
------------- ------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- ------------- -------------
PER SHARE DATA:
Net income before extraordinary loss..... $1.80 N/A $0.87 N/A $1.43 N/A
Extraordinary loss on early
extinguishment of debt................ (0.02) N/A (0.33) N/A (0.13) N/A
---- ---- ----
NET INCOME PER COMMON AND COMMON
EQUIVALENT SHARE........................ $1.78 N/A $0.54 N/A $1.30 N/A
---- ---- ----
---- ---- ----
SHARES USED FOR COMPUTATION OF NET INCOME
PER SHARE............................... 77,143 N/A 76,760 N/A 76,645 N/A
See Notes to Consolidated Financial Statements.
F-6
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEAR ENDED AUGUST 31,
----------------------------------------------------------------
1994 1993 1992
-------------------- -------------------- --------------------
HOLDINGS AMI HOLDINGS AMI HOLDINGS AMI
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before extraordinary loss.......................... $ 139,020 $ 139,020 $ 66,969 $ 66,969 $ 109,618 $ 109,618
Adjustments to reconcile to net cash provided by operating
activities:
Depreciation and amortization........................... 156,718 156,718 147,397 147,397 149,051 149,051
Deferred income taxes................................... (8,100) (8,100) 300 300 19,600 19,600
Amortization of debt discount, deferred financing costs
and non-cash interest.................................. 49,021 49,021 60,617 60,617 62,396 62,396
Gains on sales of securities............................ (43,428) (43,428) -- -- (119,803) (119,803)
Financing fees paid..................................... (1,630) (1,630) (5,515) (5,515) (3,297) (3,297)
Foreign exchange translation (income) loss.............. 215 215 (613) (613) 7,761 7,761
Decrease (increase) in accounts receivable, net......... (18,745) (18,745) 25,512 25,512 36,859 36,859
Increase in inventory of supplies and prepaid
expenses............................................... (1,206) (1,206) (515) (515) (4,980) (4,980)
Decrease in accounts payable and accrued liabilities.... (10,086) (10,086) (9,671) (9,671) (54,064) (54,064)
Decrease in accrued interest............................ (664) (664) (1,409) (1,409) (1,553) (1,553)
Income taxes, net....................................... 18,283 18,283 (17,983) (17,983) 81,687 81,687
Decrease in other liabilities........................... (14,273) (14,273) (6,751) (6,751) (27,527) (27,527)
Other non-cash items, net............................... 4,506 4,506 (1,058) (1,058) (301) (301)
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES................... 269,631 269,631 257,280 257,280 255,447 255,447
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt.......................................... (62,169) (62,169) (653,884) (653,884) (506,406) (506,406)
Reducing Revolving Credit Facility........................ (21,000) (21,000) 287,000 287,000 -- --
Borrowing Base Facility................................... -- -- -- -- (39,495) (39,495)
Borrowings................................................ 890 890 152,047 152,047 185,794 185,794
Contribution to AMI by Holdings........................... -- 5,434 -- 2,381 -- 9,988
Stock repurchases......................................... (20) -- (118) -- (3,170) --
Issuance of Holdings common stock......................... 5,454 -- 2,499 -- 11,927 --
--------- --------- --------- --------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES....................... (76,845) (76,845) (212,456) (212,456) (351,350) (350,119)
--------- --------- --------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions.......................... (112,214) (112,214) (116,322) (116,322) (96,816) (96,816)
Acquisitions.............................................. (111,606) (111,606) -- -- -- --
Disposition of assets..................................... -- -- -- -- 100,089 100,089
Sales of securities....................................... 46,537 46,537 -- -- 153,371 153,371
Decrease (increase) in deferred costs..................... (7,279) (7,279) (3,956) (3,956) 4,107 4,107
Additions to notes receivable and investments............. (15,536) (15,536) (4,969) (4,969) (43,531) (43,531)
Decrease in notes receivable and investments.............. 7,270 7,270 63,758 63,758 33,204 33,204
Other, net................................................ (12,352) (12,352) (9,536) (9,536) (14,848) (14,848)
--------- --------- --------- --------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING
ACTIVITIES................................................. (205,180) (205,180) (71,025) (71,025) 135,576 135,576
--------- --------- --------- --------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (12,394) (12,394) (26,201) (26,201) 39,673 40,904
Cash and cash equivalents, beginning of period.............. 44,335 44,335 70,536 70,536 30,863 29,632
--------- --------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 31,941 $ 31,941 $ 44,335 $ 44,335 $ 70,536 $ 70,536
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
See Notes to Consolidated Financial Statements.
F-7
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE THREE YEARS ENDED AUGUST 31, 1994
ADJUSTMENT FOR
ADDITIONAL RETAINED MINIMUM
PAID-IN EARNINGS PENSION
SHARES AMOUNT CAPITAL (DEFICIT) LIABILITY
--------- ----------- ----------- ----------- ---------------
HOLDINGS
Balance, August 31, 1991...................................... 75,615 $ 756 $ 584,145 $ (32,723) $ --
--------- ----- ----------- ----------- -------
Issuance of stock........................................... 1,315 13 11,914 -- --
Stock repurchases........................................... (290) (3) (3,167) -- --
Common Stock Subject to Repurchase
Obligations................................................ -- -- 3,105 -- --
Net income.................................................. -- -- -- 99,621 --
--------- ----- ----------- ----------- -------
Balance, August 31, 1992...................................... 76,640 766 595,997 66,898 --
--------- ----- ----------- ----------- -------
Issuance of stock........................................... 247 2 2,497 -- --
Stock repurchases........................................... (14) -- (118) -- --
Common Stock Subject to Repurchase
Obligations................................................ -- -- (1,753) -- --
Net income.................................................. -- -- -- 41,538 --
Adjustment for minimum pension liability.................... -- -- -- -- (8,000)
--------- ----- ----------- ----------- -------
Balance, August 31, 1993...................................... 76,873 768 596,623 108,436 (8,000)
--------- ----- ----------- ----------- -------
Issuance of stock........................................... 621 7 5,447 -- --
Stock repurchases........................................... (3) -- (20) -- --
Common Stock Subject to Repurchase
Obligations................................................ -- -- 6,046 -- --
Net income.................................................. -- -- -- 137,111 --
Adjustment for minimum pension liability.................... -- -- -- -- 2,300
--------- ----- ----------- ----------- -------
Balance, August 31, 1994...................................... 77,491 $ 775 $ 608,096 $ 245,547 $ (5,700)
--------- ----- ----------- ----------- -------
--------- ----- ----------- ----------- -------
AMI
Balance, August 31, 1991...................................... 72,481 $ 725 $ 567,444 $ (17,071) $ --
--------- ----- ----------- ----------- -------
Contributions from Holdings................................. -- -- 17,235 -- --
Net income.................................................. -- -- -- 99,621 --
--------- ----- ----------- ----------- -------
Balance, August 31, 1992...................................... 72,481 725 584,679 82,550 --
--------- ----- ----------- ----------- -------
Contributions from Holdings................................. -- -- 2,381 -- --
Net income.................................................. -- -- -- 41,538 --
Adjustment for minimum pension liability.................... -- -- -- -- (8,000)
--------- ----- ----------- ----------- -------
Balance, August 31, 1993...................................... 72,481 725 587,060 124,088 (8,000)
--------- ----- ----------- ----------- -------
Contributions from Holdings................................. -- -- 5,434 -- --
Net income.................................................. -- -- -- 137,111 --
Adjustment for minimum pension liability.................... -- -- -- -- 2,300
--------- ----- ----------- ----------- -------
Balance, August 31, 1994...................................... 72,481 $ 725 $ 592,494 $ 261,199 $ (5,700)
--------- ----- ----------- ----------- -------
--------- ----- ----------- ----------- -------
See Notes to Consolidated Financial Statements
F-8
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
American Medical Holdings, Inc. ("Holdings") was organized in July 1989 to
acquire American Medical International, Inc. ("AMI" and, together with Holdings,
the "Company"). As a result of this transaction, Holdings is the owner of all of
the outstanding shares of common stock of AMI.
The accompanying consolidated financial statements include the accounts of
Holdings, AMI and all majority owned subsidiary companies and have been prepared
in accordance with generally accepted accounting principles. All significant
intercompany accounts and transactions have been eliminated. Certain
reclassifications have been made to prior years' financial statements to be
consistent with the fiscal 1994 presentation.
AMI's financial statements are the same as Holdings' financial statements,
except for the components of shareholders' equity, and for the years ended
August 31, 1993 and 1992 the impact of Holdings' common stock subject to
repurchase obligations (See Note 9 Capital Stock).
CASH AND CASH EQUIVALENTS
All highly liquid debt instruments purchased with an original maturity of
three months or less are considered to be cash equivalents.
ACCOUNTS RECEIVABLE
The Company receives payment for services rendered to patients from (i) the
federal and state governments under the Medicare, Medicaid and CHAMPUS programs,
(ii) privately sponsored managed care programs for which payment is made based
on terms defined under contracts and (iii) other payers. As of August 31, 1994
and 1993, government patient receivables represented approximately 37% and 30%,
respectively, contracted patient receivables represented approximately 32% and
35%, respectively, and other third party payer receivables represented
approximately 31% and 35%, respectively of net patient receivables.
Receivables from government agencies represent a concentrated group of
credit for the Company; however, management does not believe that there are any
credit risks associated with these governmental agencies. The only other
significant credit concentration is with various Blue Cross affiliates. The
remaining balance of payers including entities and individuals involved in
diverse activities, and subject to differing economic conditions, do not
represent any known concentrated credit risks to the Company. Furthermore,
management continually monitors and adjusts its reserves and allowances
associated with these receivables.
INVENTORY OF SUPPLIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Amounts capitalized as part of property and equipment, including additions
and improvements to existing facilities, are recorded at cost, including
interest capitalized during construction which is computed at the cost of funds
borrowed. Maintenance costs and repairs are expensed as incurred. Buildings and
improvements and equipment are depreciated using the straight-line method of
depreciation over their estimated useful lives. The estimated lives of buildings
and improvements are generally 20 to 25 years and equipment is 3 to 15 years.
F-9
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVESTMENTS
Investments are accounted for under either the equity method or the cost
method. Investments accounted for under the cost method are stated at the lower
of cost or market in the accompanying financial statements.
COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is being amortized over 40 years from
the original acquisition date of AMI resulting in an annual amortization of
approximately $32.0 million. The cumulative amortization of cost in excess of
net assets acquired as of August 31, 1994 and 1993 is $157.2 million and $125.2
million, respectively.
DEFERRED COSTS
Deferred financing costs are amortized under the interest method over the
term of the expected life of the debt. Costs incurred prior to the opening of
new facilities and costs incurred in the development of data processing systems
are deferred and amortized on a straight-line basis over a two to five-year
period.
INCOME TAXES
Income taxes are computed in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes," which
requires deferred tax liabilities or assets be recognized for the anticipated
tax effects of temporary differences that arise as a result of differences in
the book basis and tax basis of assets and liabilities.
NET REVENUES
The Company's sources of revenues are primarily provided from patient
services and are presented net of reserves to recognize the difference between
the hospitals' established billing rates for covered services and the amounts
paid by third party or private payers. Patient revenues received under
government and privately sponsored insurance programs are based on cost as
defined under the programs or at predetermined rates based upon the diagnosis,
plus capital costs, return on equity and other adjustments rather than customary
charges. Adjustments are recorded in the period the services are rendered based
on estimated amounts to be reimbursed and contract interpretations, however,
such adjustments are generally subject to final audit and settlement. Net
revenues include adjustments for the years ended August 31, 1994, 1993 and 1992
of $2.1 billion, $1.9 billion and $1.8 billion, respectively. In management's
opinion, the reserves established are adequate to cover the ultimate liabilities
that may result from final settlements.
The Company provides healthcare services free of charge to individuals who
meet certain financial or economic criteria (i.e. charity care). The billings
for such services have not been recognized as receivables or revenues in the
financial statements since they are not expected to result in cash flows.
TRANSLATION OF FOREIGN CURRENCIES
Revaluation gains or losses on assets and liabilities denominated in
currencies other than the functional currency are included in the determination
of income. Revaluation gains or losses for debt denominated in foreign
currencies for the years ended August 31, 1994 and 1993 were immaterial.
Revaluation losses for debt denominated in foreign currencies for the year ended
August 31, 1992 totaled $7.8 million. As of September 1, 1992, substantially all
of the Company's foreign denominated debt obligations have been redeemed or the
Company has entered into swap agreements that hedge
F-10
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
against any future fluctuations and, therefore, eliminated any future material
revaluation gains or losses associated with the applicable debt obligations (See
Note 5 Long Term Debt -- Swap Agreements).
2. FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company uses the following methods and assumptions to estimate the fair
value of its financial instruments at August 31, 1994:
CASH AND CASH EQUIVALENTS
The carrying value of cash and cash equivalents approximates fair value due
to the short-term nature of these instruments.
INVESTMENTS
The Company has various investments for which the determination of the fair
value is not practicable.
LONG-TERM DEBT
Fair values of publicly traded notes have been determined using the quoted
market prices at August 31, 1994. The fair value of certain non-publicly traded
notes is based on cash flows discounted using interest rates found on comparable
traded securities. The aggregate carrying value of long-term debt at August 31,
1994, of $1,297.7 million had an estimated fair value of $1,392.3 million.
3. ACQUISITIONS
Effective May 1, 1994, the Company completed the purchase of Saint Francis
Hospital located in Memphis, Tennessee. In conjunction with this purchase, in
June 1994 the Company completed the acquisition of a management services
organization in the Memphis area. During fiscal 1994, the Company also acquired
additional outpatient businesses, including home health, diagnostic centers and
physician practices.
During fiscal 1993, the Company merged the operations of AMI's Tarzana
Regional Medical Center with the operations of HealthTrust, Inc. -- The Hospital
Company's ("HealthTrust") Encino Hospital. AMI owns 75% of the combined hospital
operations and therefore the results of operations for the hospitals are fully
consolidated with the results of operations of the Company for periods
subsequent to January 1, 1993.
4. DISPOSITIONS
During 1994, AMI recognized a $69.3 million pre-tax gain ($43.4 million net
of tax), related to the sale of the Company's interest in EPIC Holdings, Inc.
During fiscal 1992, the Company completed the sale of $89.3 million principal
amount of Zero Coupon Notes Due 2001, issued by EPIC Healthcare Group, Inc. in
September 1988 as partial consideration for AMI's sale of certain hospitals. AMI
also completed the sale of its investment in EPIC Holdings, Inc. Class A and
Class B Preferred Stock for aggregate cash proceeds of $130 million. The total
pre-tax gain recorded in fiscal 1992 from these transactions was $119.8 million
($80.7 million, net of tax). The gains on the sale of the EPIC securities in
fiscal 1994 and 1992 is presented in the accompanying financial statements as
"Gains on sales of securities."
During fiscal 1992, the Company sold four domestic acute care hospitals for
aggregate cash proceeds of approximately $100.1 million. These assets were
valued at their respective sales prices, and therefore, no gains or losses were
recognized from these sales in fiscal 1992.
F-11
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT
The components of Holding's and AMI's long-term debt at August 31, 1994 and
1993 are summarized as follows (in thousands):
1994 1993
------------- -------------
Reducing Revolving Credit Facility, 5.7% at August 31, 1994......................... $ 266,000 $ 287,000
Senior debt, 11 1/4% to 11 3/8% at August 31, 1994, net of unamortized discount at
August 31, 1994 of $9.4 million and due from 1995 through 2015..................... 127,179 125,854
11% Senior Notes, due 2000.......................................................... 100,000 100,000
6 1/2% Swiss franc/dollar dual currency senior notes due 1997, $74.9 million face
value, net of $11.2 million unamortized discount at August 31, 1994................ 63,760 60,526
11 1/4% Senior notes due 1995, L37 million face value, net of $0.9 million
unamortized discount at August 31, 1994............................................ 61,793 60,084
5% Swiss franc bonds due 1996, SFr.78 million face value, net of $5.1 million
unamortized discount at August 31, 1994............................................ 47,379 44,537
Zero Coupon Guaranteed Bonds due 1997 and 2002, $179.3 million face value, net of
$83.6 million unamortized discount at August 31, 1994.............................. 95,714 84,577
9 1/2% Senior Subordinated Notes, due 2006.......................................... 150,000 150,000
13 1/2% Senior Subordinated Notes, due 2001......................................... 193,790 193,790
15% Junior Subordinated Discount Debentures, due 2005............................... 104,473 104,485
Notes, and capital lease obligations (notes secured by trust deeds on real property
with an aggregate net book value of approximately $96.8 million at August 31, 1994)
with varying maturities through 2014 with interest at an average rate of 9.6%...... 76,907 113,643
------------- -------------
1,286,995 1,324,496
Less -- current maturities.......................................................... 156,028 40,831
------------- -------------
$ 1,130,967 $ 1,283,665
------------- -------------
------------- -------------
REVOLVING CREDIT FACILITY
The Company's $600 million revolving credit facility ("Reducing Revolving
Credit Facility") was amended in June 1994 extending the term to September 1999
and reducing the rate at which interest accrues. Amounts outstanding under the
Reducing Revolving Credit Facility will accrue interest, at the option of AMI,
at (i) adjusted LIBOR plus .875% (subject to reduction upon the satisfaction of
certain conditions) or (ii) at the alternative base rate specified for the
Reducing Revolving Credit Facility. Upon completion of the fiscal 1994 loan
compliance report, anticipated to be prior to the end of the first quarter of
fiscal 1995, the rate at which interest accrues based on LIBOR will be reduced
to LIBOR plus .75%. Under the Reducing Revolving Credit Facility, $31.3 million
in letters of credit were outstanding as of August 31, 1994.
SWAP AGREEMENTS
AMI has entered into swap agreements which hedge any foreign currency gains
or losses on the L37 million senior notes, face amount $62.7 million, and the
SFr.78 million bonds, face amount $52.4 million. At August 31, 1994 no loss
would be recognized if the counter parties to these swap agreements failed to
perform their obligations.
F-12
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. LONG-TERM DEBT (CONTINUED)
DEBT COVENANTS
The terms of certain of the Company's indebtedness impose operating and
financial restrictions requiring the Company to maintain certain financial
ratios and restrict the Company's ability to incur additional indebtedness and
enter into leases and guarantees of debt; to make capital expenditures; to make
loans and investments; to pay dividends or repurchase shares of stock; to
repurchase, retire or refinance indebtedness prior to maturity, and to purchase
or sell assets. The Company has pledged the capital stock of certain direct
(first tier) subsidiaries as security its obligations under the Reducing
Revolving Credit Facility and certain other senior indebtedness. In addition,
the Company has granted a security interest in its accounts receivable as
security for its obligations under the Reducing Revolving Credit Facility.
Management believes that the Company is currently in compliance with all
covenants and restrictions contained in all financing agreements.
MATURITIES OF LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS
As of August 31, 1994 the maturities of long-term debt, including capital
lease obligations, for the five years ending August 31, 1999 are $156.0 million
in fiscal 1995, $57.0 million in fiscal 1996, $182.1 million in fiscal 1997,
$2.3 million in fiscal 1998 and $2.3 million in fiscal 1999.
CONVERTIBLE SUBORDINATED DEBT
Convertible subordinated debentures are unsecured obligations of the Company
and are redeemable at declining premiums prior to their respective payment
dates. The 9 1/2% Convertible Subordinated Debentures Due 2001, of which $3.4
million and $3.3 million was outstanding at August 31, 1994 and 1993,
respectively, are convertible at $24.38 per share into 209,639 shares of
Holdings' common stock at August 31, 1994, net of unamortized discount of $1.7
million. The 8 1/4% Convertible Subordinated Debentures Due 2008 of which $7.3
million and $7.2 million was outstanding at August 31, 1994 and 1993,
respectively, are convertible at $40.00 per share into 361,400 shares of
Holdings' common stock at August 31, 1994 net of unamortized discount of $7.1
million.
6. BENEFIT PLANS
PENSION PLANS
The Company has defined benefit pension plans (the "Plans") covering
substantially all of the Company's employees. The benefits are based on years of
service and the employee's base compensation as defined in the Plans. The
Company's policy is to fund pension costs accrued within the limits allowed
under federal income tax regulations. Contributions are intended to provide not
only for benefits attributed to credited service to date, but also for those
expected to be earned in the future.
F-13
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
In accordance with SFAS No. 87 Holdings and AMI have recorded an adjustment
to recognize a minimum pension liability. The following table sets forth the
funded status of the Plans and amounts recognized in the consolidated financial
statements as of August 31, 1994 and 1993 (in thousands):
1994 1993
------------ ------------
Actuarial present value of accumulated benefit obligation:
Vested.............................................................................. $ 182,600 $ 147,600
------------ ------------
------------ ------------
Accumulated......................................................................... $ 167,900 $ 155,100
------------ ------------
------------ ------------
Projected benefit obligation.......................................................... $ 209,600 $ 170,500
Plan assets at fair value, primarily listed stock and corporate bonds................. (204,600) (133,000)
------------ ------------
Projected benefit obligation in excess of plan assets................................. 5,000 37,500
Unrecognized net loss................................................................. (24,700) (25,900)
Adjustment for minimum pension liability.............................................. 6,500 10,500
------------ ------------
Pension liability..................................................................... $ (13,200) $ 22,100
------------ ------------
------------ ------------
Holdings' and AMI's net pension cost for the years ended August 31, 1994,
1993 and 1992 includes the following components (in thousands):
1994 1993 1992
---------- ---------- ----------
Service cost -- benefits earned during the period........................... $ 8,300 $ 6,800 $ 7,600
Interest cost on projected benefit obligation............................... 14,200 12,200 10,000
Actual return on plan assets................................................ (14,400) (18,500) (4,500)
Net amortization and deferral............................................... 1,100 7,000 (7,100)
---------- ---------- ----------
Net periodic pension cost................................................... $ 9,200 $ 7,500 $ 6,000
---------- ---------- ----------
---------- ---------- ----------
In addition, Holdings and AMI have a unfunded supplemental defined benefit
retirement plan for Company executives ("SERP"). The following table sets forth
the amounts recognized for the unfunded SERP in the consolidated financial
statements as of August 31, 1994 and 1993 (in thousands):
1994 1993
--------- ---------
Actuarial present value of accumulated benefit obligation:
Vested................................................................................... $ 43,500 $ 43,000
--------- ---------
--------- ---------
Accumulated.............................................................................. $ 45,100 $ 43,900
--------- ---------
--------- ---------
Projected benefit obligation (unfunded).................................................... $ 52,200 $ 49,700
Unrecognized net gain (loss)............................................................... 700 (900)
Unrecognized transition costs.............................................................. (200) (300)
Unrecognized prior service costs........................................................... 200 200
Adjustment for minimum pension liability................................................... 3,100 2,900
--------- ---------
SERP liability............................................................................. $ 56,000 $ 51,600
--------- ---------
--------- ---------
F-14
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BENEFIT PLANS (CONTINUED)
Holdings' and AMI's net cost of the SERP plan for the years ended August 31,
1994, 1993 and 1992 includes the following components (in thousands):
1994 1993 1992
--------- --------- ---------
Service cost -- benefits earned during the period.................................. $ 1,400 $ 900 $ 100
Interest cost on projected benefit obligation...................................... 3,800 3,600 3,700
Net amortization and deferral...................................................... 600 (300) (100)
--------- --------- ---------
Net periodic SERP cost............................................................. $ 5,800 $ 4,200 $ 3,700
--------- --------- ---------
--------- --------- ---------
The weighted-average discount rate used in determining the actuarial present
value of the projected benefit obligation for the SERP and the pension plan
approximated 8.75% and 7.5% as of August 31, 1994 and 1993, respectively. The
rate of increase in future compensation levels for the pension plan was 5.0%,
3.5% and 5.0% for the years ended August 31, 1994, 1993 and 1992, respectively.
The rate of increase in future compensation levels for the SERP was 6.0%, 5.0%
and 8.0% for the years ended August 31, 1994, 1993 and 1992, respectively. The
expected long-term rate of return on assets was 10.0% for the years ended August
31, 1994 and 1993, for the pension plan.
DEFERRED SAVINGS PLAN
The Company also has a tax deferred savings plan. Expenses relating to this
plan were $8.8 million, $7.3 million and $5.6 million for the years ended August
31, 1994, 1993 and 1992, respectively, for Holdings and AMI.
OTHER
The Company does not provide any post-retirement or post-employment
healthcare or life insurance benefits to retired or former employees.
Disclosures for the Company's Options Plans and the Employee Stock Purchase
Plan are included in Note 9 Capital Stock.
7. PROFESSIONAL LIABILITY RISKS
As is typical in the healthcare industry, the Company is subject to claims
and legal actions by patients in the ordinary course of business. The Company
self-insures the professional and general liability claims for nine of its
hospitals up to $500,000 per occurrence and for 26 of its hospitals up to $3
million per occurrence. Prior to June 1993, the self-insured retention was $5
million per occurrence. Coverage for professional and general liability claims
for the Company's two remaining hospitals is maintained with outside insurance
carriers.
The Company owns a 35% equity interest in an insurance company which insures
excess professional and general liability risks for those hospitals which are
self-insured. The excess coverage provided by this insurance company is limited
to $25 million per claim. The Company purchases additional excess insurance from
a commercial carrier. For the period from January 1986 to February 1991, the
Company had no excess coverage for the majority of its hospitals. However, in
March 1991 the Company purchased prior acts coverage which substantially reduces
the uninsured liability for claims during this period. For the years ended
August 31, 1994, 1993 and 1992, the Company paid $4.3 million, $5.0 million and
$4.6 million, respectively, in premiums to this insurance company. In fiscal
1993 and 1992, the Company received distributions of prior year premiums of $2.4
million and $3.8 million, respectively, from this insurance company. In fiscal
1994, the Company received no distributions of prior years premiums. The Company
also received dividends of $3.5 million, $2.7 million and $4.7 million from this
insurance company in fiscal 1994, 1993 and 1992, respectively.
F-15
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PROFESSIONAL LIABILITY RISKS (CONTINUED)
The Company maintains an unfunded reserve for its professional liability
risks which is based, in part, on actuarial estimates calculated and evaluated
by an independent actuary. Actual hospital professional and general liability
costs for a particular period are not normally known for several years after the
period has ended. The delay in determining the actual cost associated with a
particular period is due to the amount of lapsed time between the occurrence of
an incident, the reporting thereof and the settlement of related claims. As a
result, reserves for losses and related expenses are estimated using expected
loss reporting patterns determined in conjunction with the actuary and are
discounted using a rate of 9% to their present value. Adjustments to the total
reserves are determined in conjunction with the actuary and on an annual basis
are recorded by the Company as an increase or decrease in the current year's
earnings.
As of August 31, 1994 and 1993, the unfunded reserve for self insurance was
$118.8 million and $117.6 million, respectively, of which $15.7 and $17.0
million in fiscal 1994 and 1993, respectively is included in current
liabilities. For the fiscal years ended August 31, 1994, 1993 and 1992, payments
for claims and expenses totaled $15.7 million, $19.3 million and $17.1 million,
respectively. For the fiscal years ended August 31, 1994, 1993 and 1992, the
Company recorded self insurance expense of $16.9 million, $19.7 million and
$13.5 million, respectively.
8. COMMITMENTS AND CONTINGENCIES
LEASES
The Company leases certain office space, office equipment and medical
equipment. Future minimum payments under these operating leases for fiscal 1995,
1996, 1997, 1998, 1999 and thereafter are $35.3 million, $22.2 million, $17.4
million, $13.9 million, $10.0 million and $38.2 million, respectively. Future
minimum payments for six acute care hospitals leased under a REIT agreement are
$36.9 million for each of the years ended fiscal 1995, 1996, 1997, and 1998,
$23.3 million for fiscal 1999 and $43.5 million for the remaining years
thereafter. In addition, the Company incurs certain additional rents
(contingency rents), in relation to the REIT agreements, based on a percentage
of the increase in net revenues. These additional rents were $6.7 million, $6.4
million and $5.7 million for the years ended August 31, 1994, 1993 and 1992,
respectively.
CONSTRUCTION COMMITMENTS
The Company has approximately $19.5 million of construction commitments
outstanding for new construction and renovations as of August 31, 1994.
GUARANTEES
The Company has guaranteed long-term debt and lease obligations of
unconsolidated subsidiaries and affiliates aggregating $30.8 million at August
31, 1994.
LEGAL PROCEEDINGS
LITIGATION RELATING TO THE MERGER (SEE NOTE 17 SUBSEQUENT EVENTS). To date,
a total of nine purported class action suits (the "Class Actions") have been
filed against Holdings and the directors of Holdings (and in two cases against
NME). Seven of such Class Actions have been filed in the Delaware Court of
Chancery and are entitled (i) JEFFREY STARK AND GARY PLOTKIN V. ROBERT W.
O'LEARY, ROBERT J. BUCHANAN, JOHN T. CASEY, ROBERT B. CALHOUN, HARRY J. GRAY,
HAROLD J. [SIC] HANDELSMAN, SHELDON S. KING, MELVYN N. KLEIN, DAN W. LUFKIN,
WILLIAM E. MAYER AND HAROLD S. WILLIAMS (THE "HOLDINGS DIRECTORS") AND HOLDINGS,
C.A. NO. 13792, (ii)7457 Partners v. the Holdings Directors and Holdings, C.A.
No. 13793, (iii) MOISE KATZ V. THE HOLDINGS DIRECTORS AND HOLDINGS, C.A. NO.
13794, (iv) CONSTANTINOS KAFALAS V. THE HOLDINGS DIRECTORS AND HOLDINGS, C.A.
NO. 13795, (v) F. RICHARD MANSON V. THE HOLDINGS DIRECTORS, NME AND HOLDINGS,
C.A. NO. 13797, (vi) LISBETH GREENFELD V. THE
F-16
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. COMMITMENTS AND CONTINGENCIES (CONTINUED)
HOLDINGS DIRECTORS AND HOLDINGS, C.A. NO. 13799 and (vii) JOSEPH FRANKEL V. THE
HOLDINGS DIRECTORS AND HOLDINGS, C.A. NO. 13800 and two purported Class Actions
have been filed in the Superior Court of the State of California, County of Los
Angeles, entitled RUTH LEWINTER AND RAYMOND CAYUSO V. THE HOLDINGS DIRECTORS
(WITH THE EXCEPTION OF HAROLD S. WILLIAMS), NME AND HOLDINGS, CASE NO. BC115206
AND DAVID F. AND SYLVIA GOLDSTEIN V. O'LEARY, NME, AMI, ET AL., CASE NO.
BC116104. The complaints filed in each of the Class Actions are substantially
similar, are brought by purported stockholders of Holdings and, in general,
allege that the defendants breached their fiduciary duties to the plaintiffs and
other members of the purported class. One of the Class Actions alleges that the
defendants have committed or aided and abetted a gross abuse of trust. The
complaints further allege that the directors of Holdings wrongfully failed to
hold an open auction and encourage bona fide bids for Holdings and failed to
take action to maximize value for Holdings stockholders. The complaints seek
preliminary and permanent injunctions against the proposed transaction until
such time as a transaction to be entered into between Holdings and NME results
from bona fide arms' length negotiation and/or requiring a fair auction for
Holdings. In addition, if the Merger is consummated, the complaints seek
recision or recessionary damages and two of the Class Actions seek an accounting
of all profits realized and to be realized by the defendants in connection with
the Merger and the imposition of a constructive trust for the benefit of the
plaintiffs and other members of the purported classes pending such an
accounting. The complaints also seek monetary damages of an unspecified amount
together with prejudgment interest and attorneys' and experts' fees. Holdings
and NME believe that the complaints are without merit and intend to defend them
vigorously.
In addition, Holdings and AMI are subject to claims and suits arising in the
ordinary course of business. In the opinion of management, the ultimate
resolution of all pending legal proceedings will not have a material adverse
effect on the business, results of operations or financial condition of Holdings
and AMI.
9. CAPITAL STOCK
OPTION PLANS
The Company maintains two stock option plans, the Nonqualified Employee
Stock Option Plan (the "Option Plan") and the Nonqualified Performance Stock
Option Plan for Key Employees (the "Key Employees Plan"), pursuant to which
employees of Holdings and its subsidiaries are eligible to receive stock options
to purchase shares of common stock.
The table below summarizes the transactions in the Company's stock option
plans for the years ended August 31, 1994, 1993 and 1992 (shares of common
stock):
1994 1993 1992
----------- ----------- -----------
Outstanding at beginning of period................... 3,342,683 3,179,317 3,450,246
Granted.............................................. 437,862 525,696 565,000
Exercised............................................ (471,549) (192,548) (114,849)
Cancelled or expired................................. (175,311) (169,782) (721,080)
----------- ----------- -----------
Outstanding at end of period......................... 3,133,685 3,342,683 3,179,317
----------- ----------- -----------
----------- ----------- -----------
Exercisable at end of period......................... 1,402,780 1,280,513 908,999
----------- ----------- -----------
----------- ----------- -----------
The Option Plan generally provides options that are exercisable at prices
ranging from $7.03 to $19.21 per share, vest over a period of five years and
expire ten years from the date of grant. The Key
F-17
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. CAPITAL STOCK (CONTINUED)
Employees Plan generally provides options that are exercisable at prices ranging
from $7.03 to $22.17 per share, vest over a period of five to ten years based on
the attainment of specified performance goals and expire ten years from the date
of grant.
EMPLOYEE STOCK PURCHASE PLAN
In January 1993 the Company adopted an Employee Stock Purchase Plan (the
"Plan"). The purpose of the Plan is to provide an incentive for employees of the
Company to own Holdings' common stock. The plan allows eligible employees to
contribute up to 10% of their base earnings to purchase Holdings' common stock
quarterly, through payroll deductions, at 85% of the lower of the closing price
on the first or last day of the Plan quarter. The Company has reserved 2,300,000
shares of Holdings' common stock for the Plan.
COMMON STOCK SUBJECT TO REPURCHASE OBLIGATIONS
The Company's obligation to repurchase shares of Holdings' common stock held
by certain executive officers no longer exists. Accordingly, the amount related
to common stock subject to repurchase obligations was recognized as
shareholders' equity as of August 31, 1994. As of August 31, 1993 and 1992,
shares of Holdings' common stock subject to repurchase obligations were 431,858
and 445,976, respectively.
10. RELATED PARTY TRANSACTIONS
In connection with the sale of the Company's interest in EPIC Holdings,
Inc., during fiscal 1994 the Company was represented by and paid a fee of
approximately $2.3 million to a major shareholder.
In fiscal 1992, an affiliate of a major shareholder served as the lead
managing underwriter of the public offering of 16.2 million shares of Holdings
common stock, the issuance of the 13 1/2% Senior Subordinated Notes Due 2001 and
the 11% Senior Notes Due 2000. This related party received underwriting fees of
$.9 million and in addition received advisory fees of $1.3 million in connection
with divestitures during fiscal 1992.
An entity associated with a general partner of a major shareholder agreed to
provide credit support to domestic hospital subsidiaries of AMI for which such
entity received an annual fee in fiscal 1993 and 1992 of $750,000. The credit
support commitment was replaced with the fiscal 1993 refinancing of the bank
credit facility.
11. EARNINGS PER SHARE
Holdings' earnings per share for the years ended August 31, 1994, 1993 and
1992 is based upon the weighted average number of shares of Holdings' common
stock outstanding. The impact of common stock equivalents is not considered
since they either have an anti-dilutive effect or the effect on dilution is less
than three percent.
F-18
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES
(Provision) benefit for income taxes, excluding the tax effect of minority
equity interest and the extraordinary loss, for the years ended August 31, 1994,
1993 and 1992 for Holdings and AMI consists of the following (in thousands):
1994 1993 1992
------------ ---------- ----------
Current (including current portion of deferred)
Federal.............................................. $ (95,500) $ (58,600) $ (50,100)
State................................................ (10,900) (9,900) (8,200)
------------ ---------- ----------
(106,400) (68,500) (58,300)
------------ ---------- ----------
Deferred
Federal.............................................. 10,400 (400) (18,700)
State................................................ (2,300) 100 (900)
------------ ---------- ----------
8,100 (300) (19,600)
------------ ---------- ----------
Total provision for income taxes................... $ (98,300) $ (68,800) $ (77,900)
------------ ---------- ----------
------------ ---------- ----------
The net tax effects of temporary differences and carryforwards that give
rise to deferred tax assets and liabilities as of August 31, 1994 and 1993 are
as follows (in thousands):
1994 1993
----------- -----------
Deferred tax liabilities:
Property and equipment............................................ $ 294,000 $ 278,700
Change in accounting method....................................... 18,800 20,000
Debt discounts and deferred loan costs............................ 9,900 10,400
Other, net........................................................ 45,169 59,951
----------- -----------
Total deferred tax liabilities................................ 367,869 369,051
----------- -----------
Deferred tax assets:
Self-insurance reserves........................................... 55,700 54,300
Other deferred expenses........................................... 20,100 20,900
Deferred gains and losses......................................... 16,000 26,400
Bad debt reserves................................................. 5,400 4,600
Deferred compensation............................................. 36,300 46,800
Other, net........................................................ 76,100 43,000
----------- -----------
Total deferred tax assets..................................... 209,600 196,000
----------- -----------
Net deferred tax lability........................................... $ 158,269 $ 173,051
----------- -----------
----------- -----------
The net deferred tax liability of $158.3 million and $173.1 million as of
August 31, 1994 and 1993, respectively, includes a current asset of $60.3
million and $38.4 million, respectively, and a noncurrent liability of $218.6
million and $211.5 million, respectively. No valuation allowance has been
recorded against any deferred tax asset.
In August 1993, the Revenue Reconciliation Act of 1993 was enacted. Among
other tax law changes, such law increased the corporate income tax rate from 34%
to 35% effective for the period beginning on or after January 1, 1993. For the
year ended August 31, 1994, the U.S. statutory tax rate for the Company is 35%.
F-19
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. INCOME TAXES (CONTINUED)
Holdings' and AMI's income tax provision differed from the amount computed
using the U.S. statutory rate for the years ended August 31, 1994, 1993 and 1992
for the following reasons (in thousands):
1994 1993 1992
---------- ---------- ----------
Tax at U.S. statutory rate.............................. $ (84,400) $ (48,400) $ (64,200)
Amortization of goodwill................................ (11,200) (11,100) (11,000)
State income tax, net of federal benefit................ (8,600) (5,500) (6,000)
Impact on deferred taxes of change in federal tax
rate................................................... -- (4,000) --
Other, net.............................................. 5,900 200 3,300
---------- ---------- ----------
Provision for income taxes.............................. $ (98,300) $ (68,800) $ (77,900)
---------- ---------- ----------
---------- ---------- ----------
Prior to fiscal 1992, Holdings had operating loss and capital loss
carryforwards for tax purposes of $42 million and $9 million, respectively,
which were fully utilized against net income and capital gains arising in fiscal
1992 and against capital gains on assets sold prior to the acquisition of AMI.
13. EXTRAORDINARY LOSSES ON EARLY EXTINGUISHMENT OF DEBT
The Company has recognized extraordinary losses on early extinguishment of
debt in fiscal 1994, 1993, and 1992. Fiscal 1994 includes an extraordinary loss
of $1.9 million ($3.0 million pre-tax) from the repurchase of $15.4 million
principal amount of the 15% Junior Subordinated Discount Debentures Due 2005.
Fiscal 1993 includes an extraordinary loss of $25.4 million ($41.0 million pre-
tax) from the repurchase or redemption of $146.8 million principal amount of
outstanding indebtedness. Fiscal 1992 includes an extraordinary loss of $10.0
million ($15.6 million pre-tax) from the repurchase or redemption of $159.0
million of senior indebtedness and $55.4 million of the 9 7/8% unsecured loan
stock due 2011.
14. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes (net of refunds) of $86.0 million and $83.6
million for the years ended August 31, 1994 and 1993, respectively, and received
income tax refunds (net of payments) of $22.5 million for the year ended August
31, 1992. The Company paid interest (net of capitalized costs) for the years
ended August 31, 1994, 1993 and 1992 of $108.3 million, $120.5 million and
$154.1 million, respectively. Capitalized interest costs were $3.5 million, $1.4
million and $2.6 million for August 31, 1994, 1993 and 1992. Interest income was
$2.7 million, $13.9 million and $10.0 million for the years ended August 31,
1994, 1993 and 1992.
NON-CASH TRANSACTIONS
During fiscal 1994, the Company assumed net assets of approximately $92.0
million related to the purchase of Saint Francis Hospital and during fiscal
1993, the Company assumed net assets of approximately $8.0 million as a result
of the merger of AMI's Tarzana Regional Medical Center and HealthTrust's Encino
Hospital.
For the years ended August 31, 1993 and 1992 an $8.2 million and $9.3
million loss, net of tax, respectively, was recognized as a result of the
write-off of the discounts and deferred financing costs associated with the
early extinguishment of debt.
For the year ended August 31, 1994 approximately $6.0 million was recognized
as an increase in shareholders' equity of Holdings due to the elimination of
common stock subject to repurchase
F-20
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. SUPPLEMENTAL CASH FLOW INFORMATION (CONTINUED)
obligations. For the year ended August 31, 1993 $1.8 million was recognized as a
decrease in shareholders' equity of Holdings for the common stock subject to
repurchase obligations due to market price changes. For the year ended August
31, 1992, there was no market price change and, therefore, no effect on the
value of the common stock subject to repurchase obligations.
In fiscal 1992, the Company recognized $27.1 million of debt as a result of
the acquisition of the remaining interest in an entity that was previously
unconsolidated.
15. SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)
Quarterly financial information for Holdings and AMI for the two years ended
August 31, 1994 is summarized below (in millions, except per share amounts):
FISCAL 1994 FISCAL 1993
-------------------------------------------- --------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
--------- ----------- --------- --------- --------- ----------- --------- ---------
Net revenues......................... $ 558 $ 583 $ 602 $ 638 $ 542 $ 566 $ 565 $ 565
Income before extraordinary loss..... 17 24 71 27 11 18 22 16
Extraordinary loss................... -- -- (2) -- -- -- (7) (18)
Net income (loss).................... $ 17 $ 24 $ 69 $ 27 $ 11 $ 18 $ 15 $ (2)
Holdings' income (loss) per share:
Income before extraordinary loss... $ 0.21 $ 0.32 $ 0.92 $ 0.35 $ 0.14 $ 0.24 $ 0.28 $ 0.21
Extraordinary loss................. -- -- (0.02) -- -- -- (0.09) (0.24)
Net income (loss).................. $ 0.21 $ 0.32 $ 0.90 $ 0.35 $ 0.14 $ 0.24 $ 0.19 $ (0.03)
The third quarter of fiscal 1994 includes the gain on sale of securities of
$43.4 million, net of tax, (See Note 4 Dispositions). The results of operations
of Saint Francis Hospital were consolidated with the Company's results of
operations effective May 1, 1994.
The fourth quarter of fiscal 1993 reflects a charge of $3.5 million for
costs incurred related to the relocation of the Houston regional office to the
Dallas headquarters. Additional charges totaling $3.0 million were recognized in
previous quarters offset by benefits. Income before extraordinary loss includes
an $8.6 million refund of interest paid to the Internal Revenue Service in prior
periods. Additionally in the fourth quarter of fiscal 1993, the provision for
income taxes includes the impact of a $5.1 million increase in the provision for
income taxes due to the enactment of the Revenue Reconciliation Act of 1993
which increased the corporate income tax rate.
16. BUSINESS SEGMENT
The Company's only material business segment is "healthcare" which accounted
for substantially all of its revenues and operating results for each of the
periods presented.
17. SUBSEQUENT EVENTS
On October 10, 1994, Holdings, National Medical Enterprises, Inc, a Nevada
corporation ("NME") and a wholly-owned subsidiary of NME ("Merger Sub"),
executed an Agreement and Plan of Merger (the "Merger Agreement"). Pursuant to
the Merger Agreement, Merger Sub will merge with and into Holdings (the
"Merger"). As a result of the Merger, Holdings will become a wholly-owned
subsidiary of NME and the resulting company will be the second-largest
healthcare services company in the nation. Under terms of the Merger Agreement
each share of common stock of Holdings will be converted into (i) $19.00 in
cash, if the closing occurs on or before March 31, 1995,
F-21
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SUBSEQUENT EVENTS (CONTINUED)
and $19.25 thereafter and (ii) 0.42 of a newly issued share of NME common stock.
Under the Merger Agreement, Holdings will pay a special dividend of $0.10 per
share before the effective date of the Merger. Following the Merger, Holdings
will have the right to nominate three members to the 13 member board of the
combined company. Approximately 50% of the Company's indebtedness contains put
provisions whereby the holders of such debt have the right to require repayment
following a change of control of the Company. The transaction has been approved
by shareholders of approximately 61.4% of Holdings' outstanding shares of common
stock and, therefore, further action by Holdings' shareholders is not required.
The transaction, which is currently anticipated to close in the first quarter of
calendar 1995, is subject to certain conditions including, among other things,
expiration of any applicable waiting period under the Hart-Scott-Rodino
Antitrust Improvements Act of 1976, as amended.
On September 1, 1994, a limited partnership, of which AMI is the general
partner, acquired Hilton Head Hospital in Hilton Head, South Carolina containing
68 beds. In connection with the Company's efforts to re-establish a presence in
Europe, the Company has entered into a joint venture agreement with a community
organization (the "Burgergemeinde") located in Cham, Canton Zug, Switzerland.
The joint venture will be owned 90% by the Company and 10% by the
Burgergemeinde. Under the terms of the proposed transaction, the Company has
entered into a long term lease for the land where the existing hospital is
located and will then construct a new 56 bed acute care wing, convert an
existing structure into a medical office building and renovate and remodel the
existing acute care facility. In addition, the Company plans to contract to
provide management, food, physical therapy and rehabilitation services to the
hospital, an on-site nursing home and an affiliated retirement community.
F-22
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors
of American Medical Holdings, Inc. and
American Medical International, Inc.
Our audits of the consolidated financial statements referred to in our
report dated October 20, 1994 appearing on page F-2 of this Annual Report on
Form 10-K also included an audit of the Financial Statement Schedules of
American Medical Holdings, Inc. (Holdings) and American Medical International,
Inc. (AMI) as of and for the years ended August 31, 1994, August 31, 1993 and
August 31, 1992 as listed in Item 14(a) of the Form 10-K. In our opinion, these
Financial Statement Schedules present fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements.
PRICE WATERHOUSE LLP
Dallas, Texas
October 20, 1994
S-1
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE II -- AMOUNTS RECEIVABLE FROM DIRECTORS,
OFFICERS AND EMPLOYEES
FOR THE THREE YEARS ENDED AUGUST 31, 1994
BALANCE AT COLLEC- BALANCE AT COLLEC- BALANCE AT COLLEC-
AUGUST 31, TIONS/ AUGUST 31, TIONS/ AUGUST 31, TIONS/
NAME OF DEBTOR 1991 (1) ADVANCES OTHER 1992 (1) ADVANCES OTHER 1993 (1) OTHER
- ------------------------------- ----------- ----------- --------- ----------- ----------- --------- ----------- ---------
Robert W. O'Leary.............. $ 600,000(2) $ -- $(200,000) $ 400,000 $ -- $(200,000) $ 200,000 $(200,000)
John T. Casey.................. -- 150,000(3) (150,000) -- 375,000(2) (15,626) 359,374 (125,000)
Alan J. Chamison............... -- 375,000(2) (115,000) 260,000 -- (125,000) 135,000 (125,000)
Marshall I. Smith.............. -- 150,000(4) -- 150,000 -- -- 150,000 (150,000)
----------- ----------- --------- ----------- ----------- --------- ----------- ---------
$ 600,000 $ 675,000 $(465,000) $ 810,000 $ 375,000 $(340,626) $ 844,374 $(600,000)
----------- ----------- --------- ----------- ----------- --------- ----------- ---------
----------- ----------- --------- ----------- ----------- --------- ----------- ---------
BALANCE AT
AUGUST 31,
NAME OF DEBTOR 1994 (1)
- ------------------------------- -----------
Robert W. O'Leary.............. $ --
John T. Casey.................. 234,374
Alan J. Chamison............... 10,000
Marshall I. Smith.............. --
-----------
$ 244,374
-----------
-----------
<FN>
- ------------------------------
(1) The balances outstanding for each of the years presented have been
reflected as long term receivables in the consolidated financial
statements.
(2) These interest free loans were made to the borrowers for the purchase of
common stock. These loans are due and payable 10 days after the termination
of the borrower's employment. The loans will be forgiven by the Company in
equal monthly increments for 36 months continuing from the original date of
grant until fully amortized for so long as the borrower serves as an
officer of the Company. In the event of termination prior to 36 months of
service, these loans become due and payable 10 days after the termination
date.
(3) This interest free loan was made to the borrower for the purchase of his
principal place of residence and is repaid upon the sale of his previous
residence.
(4) This interest free loan was made to the borrower for the purchase of his
principal place of residence and was to be repaid upon the sale of his
previous residence. As of August 31, 1993, such employee was terminated and
based on the terms of the severance agreement set therewith, the loan was
repaid during fiscal 1994.
S-2
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE V -- PROPERTY AND EQUIPMENT
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
ADDITIONS
BALANCE AT AT
BEGINNING COST AND SALES AND BALANCE AT
OF PERIOD TRANSFERS RETIREMENTS OTHER END OF PERIOD
------------- ----------- ------------ ------------- -------------
HOLDINGS AND AMI:
YEAR ENDED AUGUST 31, 1994
Land..................................... $ 104,723 $ 13,088 $ (139) $ 169(1) $ 117,841
Buildings and improvements............... 1,151,890 103,900 (2,736) 357(1) 1,253,411
Equipment................................ 507,505 76,718 (8,166) 1,630(1) 577,687
Construction in progress................. 35,827 (13,293) (77) -- 22,457
------------- ----------- ------------ ------------- -------------
$ 1,799,945 $ 180,413 $ (11,118) $ 2,156 $ 1,971,396
------------- ----------- ------------ ------------- -------------
------------- ----------- ------------ ------------- -------------
YEAR ENDED AUGUST 31, 1993
Land..................................... $ 105,241 $ -- $ (518) $ -- $ 104,723
Buildings and improvements............... 1,111,163 39,547 -- 1,180(2) 1,151,890
Equipment................................ 443,561 63,667 (6,464) 6,741(2) 507,505
Construction in progress................. 24,419 9,470 (162) 2,100(2) 35,827
------------- ----------- ------------ ------------- -------------
$ 1,684,384 $ 112,684 $ (7,144) $ 10,021 $ 1,799,945
------------- ----------- ------------ ------------- -------------
------------- ----------- ------------ ------------- -------------
HOLDINGS:
YEAR ENDED AUGUST 31, 1992
Land..................................... $ 113,417 $ 490 $ (9,677) $ 1,011(3) $ 105,241
Buildings and improvements............... 1,099,312 51,546 (65,743) 26,048(3) 1,111,163
Equipment................................ 415,747 55,251 (27,437) -- 443,561
Construction in progress................. 28,507 (3,951) (137) -- 24,419
------------- ----------- ------------ ------------- -------------
$ 1,656,983 $ 103,336 $ (102,994) $ 27,059 $ 1,684,384
------------- ----------- ------------ ------------- -------------
------------- ----------- ------------ ------------- -------------
AMI:
YEAR ENDED AUGUST 31, 1992
Land..................................... $ 112,632 $ 490 $ (9,677) $ 1,796(4) $ 105,241
Buildings and improvements............... 1,064,919 51,546 (65,743) 60,441(4) 1,111,163
Equipment................................ 402,831 55,251 (27,437) 12,916(4) 443,561
Construction in progress................. 26,607 (3,951) (137) 1,900(4) 24,419
------------- ----------- ------------ ------------- -------------
$ 1,606,989 $ 103,336 $ (102,994) $ 77,053(4) $ 1,684,384
------------- ----------- ------------ ------------- -------------
------------- ----------- ------------ ------------- -------------
<FN>
- ------------------------
(1) Recognition of the consolidation of investments previously recorded on the
equity method.
(2) Represents the assumption of net assets as a result of (a) the merger of
AMI's Tarzana Regional Medical Center and HealthTrust's Encino Hospital and
(b) the recognition of the consolidation of investments previously recorded
on the equity method.
(3) Recognition of the consolidation of a joint venture previously recorded on
the equity method.
(4) Reflects the effect of Holdings' contribution of all the common stock of
New H, a wholly owned subsidiary of Holdings, to AMI as well as the
recognition of the consolidation of a joint venture previously recorded on
the equity method.
S-3
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE VI -- ACCUMULATED DEPRECIATION OF PROPERTY AND EQUIPMENT
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
BALANCE AT
BEGINNING SALES AND BALANCE AT
OF PERIOD PROVISION RETIREMENTS OTHER END OF PERIOD
----------- ----------- ----------- ------------ -------------
HOLDINGS AND AMI:
YEAR ENDED AUGUST 31, 1994
Buildings and improvements.................... $ 176,317 $ 55,025 $ (645) $ -- $ 230,697
Equipment..................................... 219,419 63,107 (6,346) 776(1) 276,956
----------- ----------- ----------- ------------ -------------
$ 395,736 $ 118,132 $ (6,991) $ 776 $ 507,653
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
YEAR ENDED AUGUST 31, 1993
Buildings and improvements.................... $ 125,551 $ 50,787 $ (21) $ -- $ 176,317
Equipment..................................... 164,485 59,481 (4,547) -- 219,419
----------- ----------- ----------- ------------ -------------
$ 290,036 $ 110,268 $ (4,568) $ -- $ 395,736
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
HOLDINGS:
YEAR ENDED AUGUST 31, 1992
Buildings and improvements.................... $ 85,416 $ 50,497 $ (10,362) $ -- $ 125,551
Equipment..................................... 116,981 59,120 (11,616) -- 164,485
----------- ----------- ----------- ------------ -------------
$ 202,397 $ 109,617 $ (21,978) $ -- $ 290,036
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
AMI:
YEAR ENDED AUGUST 31, 1992
Buildings and improvements.................... $ 80,067 $ 50,497 $ (10,362) $ 5,349(2) $ 125,551
Equipment..................................... 113,121 59,120 (11,616) 3,860(2) 164,485
----------- ----------- ----------- ------------ -------------
$ 193,188 $ 109,617 $ (21,978) $ 9,209 $ 290,036
----------- ----------- ----------- ------------ -------------
----------- ----------- ----------- ------------ -------------
<FN>
- ------------------------
(1) Recognition of the consolidation of investments previously recorded on the
equity method.
(2) Reflects the effect of Holdings' contribution of all the common stock of
New H, a wholly owned subsidiary of Holdings, to AMI.
S-4
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE VIII -- RESERVES FOR UNCOLLECTIBLE ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
BALANCE AT
BEGINNING REDUCTIONS NET BALANCE AT
OF PERIOD PROVISIONS OF RECOVERIES OTHER END OF PERIOD
----------- ----------- -------------- ------------ -------------
HOLDINGS AND AMI:
YEAR ENDED AUGUST 31, 1994
Reserves for Uncollectible Accounts......... $ 98,143 $ 165,539 $ (165,060) $ -- $ 98,622
----------- ----------- -------------- ------------ -------------
----------- ----------- -------------- ------------ -------------
YEAR ENDED AUGUST 31, 1993
Reserves for Uncollectible Accounts......... $ 86,744 $ 148,135 $ (136,736) $ -- $ 98,143
----------- ----------- -------------- ------------ -------------
----------- ----------- -------------- ------------ -------------
HOLDINGS:
YEAR ENDED AUGUST 31, 1992
Reserves for Uncollectible Accounts......... $ 68,326 $ 163,824 $ (145,406) $ -- $ 86,744
----------- ----------- -------------- ------------ -------------
----------- ----------- -------------- ------------ -------------
AMI:
YEAR ENDED AUGUST 31, 1992
Reserves for Uncollectible Accounts......... $ 62,570 $ 163,824 $ (145,406) $ 5,756(1) $ 86,744
----------- ----------- -------------- ------------ -------------
----------- ----------- -------------- ------------ -------------
<FN>
- ------------------------
(1) Reflects the effect of Holdings' contribution of all the common stock of
New H, a wholly owned subsidiary of Holdings to AMI.
S-5
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
SCHEDULE X -- SUPPLEMENTARY INCOME STATEMENT INFORMATION
FOR THE YEARS ENDED AUGUST 31, 1994, 1993 AND 1992
(DOLLARS IN THOUSANDS)
YEAR ENDED YEAR ENDED YEAR ENDED
AUGUST 31, AUGUST 31, AUGUST 31,
1994 1993 1992
-------------- -------------- --------------
ITEM
HOLDINGS AND AMI:
Maintenance and repairs......................................... $ 37,168 $ 33,294 $ 30,716
Depreciation and amortization of intangibles and other assets... $ 38,586 $ 37,129 $ 39,434
Taxes, other than payroll and income taxes...................... $ 31,476 $ 29,677 $ 27,370
S-6