SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549
CURRENT REPORT
on
FORM 8-K
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: February 9, 1995
NATIONAL MEDICAL ENTERPRISES, INC.
(Exact name of registrant as specified in charter)
NEVADA
(State or other jurisdiction of incorporation)
1-7293 95-2557091
(Commission (IRS Employer
File Number) Identification No.)
2700 COLORADO AVENUE, SANTA MONICA, CA 90404
(Address of principal executive offices) (Zip Code)
(310) 998-8000
(Registrant's telephone number, including area code)
(Former name or former address, if changed since last report)
ITEM 5. OTHER EVENTS
On October 10, 1994, National Medical Enterprises, Inc. ("NME" or the
"Company"), AMH Acquisition Co., a Delaware corporation and a newly formed,
wholly owned subsidiary of NME ("Merger Sub"), and American Medical Holdings,
Inc. entered into an Agreement and Plan of Merger (the "Merger Agreement")
pursuant to which Merger Sub will be merged with and into AMH and AMH will
become a wholly owned subsidiary of NME. At the time the Merger becomes
effective (the "Effective Time"), each outstanding share of common stock, par
value $0.01 per share, of AMH (the "AMH Common Stock"), other than shares
held by AMH stockholders who have elected appraisal rights and shares held
by NME and its subsidiaries, will be converted into the right to receive
(i) 0.42 of a share of common stock, par value $0.075 per share, of NME (the
"NME Common Stock") and (ii) $19.00 in cash ($19.25 in cash if the Merger
is consummated after March 31, 1995) (collectively, the "Merger
Consideration").
Set forth herein is (i) certain unaudited pro forma financial information
of NME for the fiscal year ended May 31, 1994 and for the six months ended
November 30, 1993 and 1994, together with the Notes thereto and
(ii) consolidated balance sheets of AMH for the fiscal years ended August 31,
1994 and 1993, and the related consolidated statements of income, of cash flows
and of shareholders' equity for the fiscal years ended August 31, 1994, 1993
and 1992. The pro forma financial information does not purport to present the
results of operations of NME had the Merger occurred on the date specified, nor
are they necessarily indicative of the results of operations that may be
achieved in the future. All of the following information is qualified in its
entirety by, and should be read in conjunction with (i) NME's Annual Report
on Form 10-K for the fiscal year ended May 31, 1994 (the "NME 10-K"),
(ii) NME's Form 10K/A filed with the Commission on January 18, 1995 which
amends the aforesaid Annual Report on Form 10-K, (iii) NME's Quarterly
Reports on Form 10-Q for the quarterly periods ended August 31, 1994 and
November 30, 1994, (iv) the portions of NME's 1994 Annual Report to
Shareholders for the fiscal year ended May 31, 1994 that have been incorporated
by reference into the NME 10-K, (v) AMH'S Annual Report on Form 10-K for the
fiscal year ended August 31, 1994, (vi) AMH's Form 10-K/A filed with the
Commission on December 19, 1994, which amends the aforesaid Annual Report
on Form 10-K, (vii) AMH's Form 10-K/A filed with the Commission on January 4,
1995, which amends the aforesaid Annual Report on Form 10-K; and
(viii) AMH's Quarterly Report on Form 10-Q for the quarterly period ended
November 30, 1994.
1
PRO FORMA FINANCIAL INFORMATION
The Unaudited Pro Forma Condensed Combined Financial Statements give effect
to the following transactions and events as if they had occurred at the
beginning of each period presented for purposes of the pro forma statements of
operations and other operating information and on November 30, 1994 for purposes
of the pro forma balance sheet data: (i) the August 1994 sale of approximately
75% of the common stock of Total Renal Care, Inc. ("TRC"); (ii) the March 1994
sale of one inpatient rehabilitation hospital and the January 1994 sale of 28
inpatient rehabilitation hospitals and 45 related satellite outpatient clinics;
(iii) the February 1994 sale of four long-term care facilities and the September
1993 sale of 19 long-term care facilities to The Hillhaven Corporation
("Hillhaven") (all of which properties previously had been leased to Hillhaven);
(iv) the elimination of restructuring charges recorded by NME of $77.0 million
in fiscal 1994; (v) the elimination of certain non-recurring gains recorded by
NME and AMH; (vi) the Merger, applying the purchase method of accounting; and
(vii) consummation of the Public Offering and the Refinancing.
The Unaudited Pro Forma Condensed Combined Financial Statements do not
purport to present the financial position or results of operations of NME had
the transactions and events assumed therein occurred on the dates specified, nor
are they necessarily indicative of the results of operations that may be
achieved in the future. The Unaudited Pro Forma Condensed Combined Financial
Statements do not reflect certain cost savings that management believes may be
realized following the Merger, currently estimated to be approximately $60.0
million annually beginning in fiscal 1996 (before any severance or other costs
of implementing certain efficiencies). These savings are expected to be realized
primarily through the elimination of duplicative corporate overhead, reduced
supplies expense through the incorporation of AMH into NME's group purchasing
program and improved collection of AMH accounts receivable by Syndicated Office
Systems, Inc., NME's wholly owned debt collection business. No assurances can be
made as to the amount of cost savings, if any, that actually will be realized.
The Unaudited Pro Forma Condensed Combined Financial Statements are based on
certain assumptions and adjustments described in the Notes to Unaudited Pro
Forma Condensed Combined Financial Statements and should be read in conjunction
therewith and with "The Merger," "Financing for the Merger and the Related
Transactions," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the consolidated financial statements and related
notes of NME and AMH included or incorporated by reference in this Information
Statement/ Prospectus.
NME reports its financial information on the basis of a May 31 fiscal year.
AMH reports its financial information on the basis of an August 31 fiscal year.
The Unaudited Pro Forma Condensed Combined Statement of Operations combines
NME's Consolidated Statements of Operations for the fiscal year ended May 31,
1994 with AMH's Consolidated Statements of Operations for the fiscal year ended
August 31, 1994. The Unaudited Pro Forma Combined Statements of Operations for
the six months ended November 30, 1993 and 1994 combine the Consolidated
Statements of Operations of NME and AMH for these same six-month periods.
2
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
(DOLLARS IN MILLIONS)
AS OF NOVEMBER 30, 1994
---------------------------------------------------
HISTORICAL HISTORICAL PRO FORMA PRO FORMA
NME AMH ADJUSTMENTS COMBINED
---------- ---------- ------------- ---------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 131.8 $ 21.3 $(1,527.4)(a) $ 38.5
1,563.5(b)
(165.6)(c)
14.9(d)
Short-term investments, at cost which
approximates market............................ 51.4 51.4
Accounts and notes receivable, less allowance
for doubtful accounts.......................... 411.4 167.5 19.5(d) 598.4
Inventories of supplies, at cost................ 54.8 64.2 119.0
Deferred income taxes........................... 304.0 15.5 21.9(e) 341.4
Assets held for sale............................ 26.5 26.5
Prepaid expenses and other current assets....... 56.5 19.2 75.7
---------- ---------- ------------- ---------
Total current assets........................ 1,036.4 287.7 (73.2) 1,250.9
Long-term receivables............................. 67.7 16.3 84.0
Investments and other assets...................... 306.2 84.7 60.2(d) 451.1
Property, plant and equipment, net................ 1,780.9 1,482.2 275.0(f) 3,538.1
Intangible assets, at cost less accumulated
amortization..................................... 112.2 1,153.9 1,109.9(g) 2,376.0
---------- ---------- ------------- ---------
$ 3,303.4 $ 3,024.8 $ 1,371.9 $ 7,700.1
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Short-term borrowings and notes................. $ 112.9 $ $ $ 112.9
Accounts payable................................ 139.0 98.2 1.8(d) 239.0
Employee compensation and benefits.............. 82.5 106.2 188.7
Reserve related to discontinued operations...... 76.5 76.5
Income taxes payable............................ 22.5 1.6(d) --
(24.1)(e)
Other current liabilities......................... 203.9 118.8 25.8(d) 348.5
Current portion of long-term debt................. 495.1 156.2 (608.1)(b) 43.2
---------- ---------- ------------- ---------
Total current liabilities................... 1,132.4 479.4 (603.0) 1,008.8
---------- ---------- ------------- ---------
Long-term debt, net of current portion............ 236.3 1,146.9 2,171.6(b) 3,581.8
(3.0)(h)
30.0(f)
Other long-term liabilities and minority
interests........................................ 374.1 306.2 65.4(d) 745.7
Deferred income taxes............................. 126.0 218.7 95.0(e) 439.7
Shareholders' equity:
Common stock.................................... 13.9 0.8 2.4(i) 16.3
(0.8)(j)
Other shareholders' equity...................... 1,698.8 872.8 478.5(i) 2,184.8
(41.3)(k)
(7.8)(k)
3.0(h)
(819.2)(j)
Less: Common stock in treasury, at cost......... (278.1) 1.1(i) (277.0)
---------- ---------- ------------- ---------
Total shareholders' equity.................. 1,434.6 873.6 (384.1) 1,924.1
---------- ---------- ------------- ---------
$ 3,303.4 $ 3,024.8 $ 1,371.9 $ 7,700.1
---------- ---------- ------------- ---------
---------- ---------- ------------- ---------
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
3
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
HISTORICAL
HISTORICAL AMH YEAR
NME YEAR NME ENDED AMH PRO
ENDED MAY ADJUSTMENTS NME AS AUGUST 31, ADJUSTMENTS AMH AS PRO FORMA FORMA
31, 1994 (L) ADJUSTED 1994 (M) ADJUSTED ADJUSTMENTS COMBINED
---------- ----------- -------- ---------- ----------- -------- ----------- --------
Net operating
revenues..................... $2,943.2 $(359.2) $2,584.0 $2,381.7 $-- $2,381.7 $ -- $4,965.7
Operating expenses:
Salaries and benefits....... 1,293.4 (176.0) 1,117.4 869.0 869.0 1,986.4
Supplies.................... 339.4 (14.8) 324.6 340.0 340.0 664.6
Provision for doubtful
accounts................... 107.0 (5.2) 101.8 165.5 165.5 267.3
Other operating expenses.... 666.5 (113.8) 552.7 524.3 524.3 1,077.0
Depreciation................ 142.7 (11.9) 130.8 118.1 118.1 (10.6)(n) 238.3
Amortization................ 18.1 (2.3) 15.8 38.6 38.6 17.0(o) 71.4
Restructuring charges....... 77.0 (77.0) -- -- -- --
---------- ----------- -------- ---------- ----------- -------- ----------- --------
Operating income.............. 299.1 41.8 340.9 326.2 326.2 (6.4) 660.7
Interest expense, net of
capitalized portion.......... (70.0) 5.0 (65.0) (157.2) (157.2) (102.2)(p) (324.4)
Investment earnings........... 27.7 1.9 29.6 2.7 2.7 (4.3)(q) 28.0
Equity in earnings of
unconsolidated affiliates.... 23.8 0.5 24.3 -- -- 24.3
Minority interest expense..... (8.2) 3.0 (5.2) (5.9) (5.9) (11.1)
Net gain on disposals of
facilities and long-term
investments.................. 87.5 (87.5) -- 69.3 (69.3) -- --
---------- ----------- -------- ---------- ----------- -------- ----------- --------
Income from continuing
operations before income
taxes........................ 359.9 (35.3) 324.6 235.1 (69.3) 165.8 (112.9) 377.5
Taxes on income............... (144.0) 13.8 (130.2) (96.1) 25.9 (70.2) 37.4(r) (163.0)
---------- ----------- -------- ---------- ----------- -------- ----------- --------
Income from continuing
operations................... $ 215.9(s) $ (21.5) $ 194.4 $ 139.0(t) $(43.4) $ 95.6 $ (75.5) $ 214.5
---------- ----------- -------- ---------- ----------- -------- ----------- --------
---------- ----------- -------- ---------- ----------- -------- ----------- --------
Earnings per common share from
continuing operations,
fully-diluted................ $1.23 $1.11 $1.73 $1.19 $1.03
---------- -------- ---------- -------- --------
---------- -------- ---------- -------- --------
Weighted average number of
shares outstanding,
fully-diluted
(in 000's)................... 181,087 181,087 33,190(u) 214,277
---------- -------- ----------- --------
---------- -------- ----------- --------
Ratio of earnings to fixed
charges...................... 4.2x 4.2x 2.4x 1.9x 1.9x
---------- -------- ---------- -------- --------
---------- -------- ---------- -------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
4
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1994
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NME PRO
HISTORICAL ADJUSTMENTS NME AS HISTORICAL PRO FORMA FORMA
NME (V) ADJUSTED AMH ADJUSTMENTS COMBINED
---------- ----------- ----------- ------------ ----------- --------
Net operating revenues........ $ 1,301.6 $ (16.6) $1,285.0 $1,270.4 $ -- $2,555.4
Operating expenses:
Salaries and benefits....... 556.2 (5.9) 550.3 470.9 1,021.2
Supplies.................... 159.1 -- 159.1 183.9 343.0
Provision for doubtful
accounts................... 46.8 (0.4) 46.4 89.5 135.9
Other operating expenses.... 294.7 (6.8) 287.9 278.0 565.9
Depreciation................ 67.4 (0.6) 66.8 62.4 (5.3)(n) 123.9
Amortization 7.7 (0.2) 7.5 19.6 8.2(o) 35.3
---------- ----------- ----------- ------------ ----------- --------
Operating income.............. 169.7 (2.7) 167.0 166.1 (2.9) 330.2
Interest expense, net of
capitalized portion.......... (35.0) -- (35.0) (79.7) (51.1)(p) (165.8)
Investment earnings........... 10.4 -- 10.4 1.2 (2.2)(q) 9.4
Equity in earnings of
unconsolidated affiliates.... 12.4 (0.1) 12.3 12.3
Minority interest expense..... (3.8) 0.4 (3.4) (2.0) (5.4)
Net gain on disposals of
facilities and long-term
investments.................. 29.5 (29.5) -- -- -- --
---------- ----------- ----------- ------------ ----------- --------
Income from continuing
operations before income
taxes........................ 183.2 (31.9) 151.3 85.6 (56.2) 180.7
Taxes on income............... (73.0) 12.4 (60.6) (35.7) 18.7(r) (77.6)
---------- ----------- ----------- ------------ ----------- --------
Income from continuing
operations................... $ 110.2 $ (19.5) $ 90.7 $ 49.9(t) $(37.5) $ 103.1
---------- ----------- ----------- ------------ ----------- --------
---------- ----------- ----------- ------------ ----------- --------
Earnings per common share from
continuing operations,
fully-diluted................ $ 0.63 $ 0.52 $ 0.63 $ 0.50
---------- ----------- ------------ --------
---------- ----------- ------------ --------
Weighted average number of
shares outstanding,
fully-diluted (in 000's)..... 181,467 181,467 33,190(u) 214,657
---------- ----------- ----------- --------
---------- ----------- ----------- --------
Ratio of earnings to fixed
charges...................... 4.4x 3.8x 1.9x 1.9x
---------- ----------- ------------ --------
---------- ----------- ------------ --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
5
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED NOVEMBER 30, 1993
(DOLLARS IN MILLIONS EXCEPT PER SHARE AMOUNTS)
NME PRO
HISTORICAL ADJUSTMENTS NME AS HISTORICAL PRO FORMA FORMA
NME (L) ADJUSTED AMH ADJUSTMENTS COMBINED
----------- ----------- ----------- ---------- ----------- --------
Net operating revenues............. $1,530.3 $(278.6) $1,251.7 $ 1,123.2 $-- $2,374.9
Operating expenses:
Salaries and benefits............ 698.1 (141.5) 556.6 405.5 962.1
Supplies......................... 167.9 (12.5) 155.4 155.7 311.1
Provision for doubtful
accounts........................ 58.5 (5.6) 52.9 76.1 129.0
Other operating expenses......... 342.5 (74.2) 268.3 266.0 534.3
Depreciation..................... 75.0 (9.3) 65.7 57.8 (5.3)(n) 118.2
Amortization..................... 9.5 (2.0) 7.5 18.5 9.3(o) 35.3
----------- ----------- ----------- ---------- ----------- --------
Operating income................... 178.8 (33.5) 145.3 143.6 (4.0) 284.9
Interest, net of capitalized
portion........................... (37.7) 3.9 (33.8) (82.9) (51.1)(p) (167.8)
Investment earnings................ 14.1 1.9 16.0 10.3 (2.2)(q) 24.1
Equity in earnings of
unconsolidated affiliates......... 14.7 -- 14.7 -- 14.7
Minority interest expense.......... (5.0) 2.3 (2.7) (3.8) (6.5)
Net gain on disposals of facilities
and long-term investments......... 29.0 (29.0) -- -- --
----------- ----------- ----------- ---------- ----------- --------
Income from continuing
operations before income taxes.... 193.9 (54.4) 139.5 67.2 (57.3) 149.4
Taxes on income.................... (80.0) 21.2 (58.8) (34.3) 18.7(r) (74.4)
----------- ----------- ----------- ---------- ----------- --------
Income from continuing
operations........................ $ 113.9(s) $ 33.2 $ 80.7 $ 32.9(t) $ (38.6) $ 75.0
----------- ----------- ----------- ---------- ----------- --------
----------- ----------- ----------- ---------- ----------- --------
Earnings per common share from
continuing operations,
fully-diluted..................... $ 0.65 $ 0.46 $ 0.42 $ 0.36
----------- ----------- ---------- --------
----------- ----------- ---------- --------
Weighted average number of shares
outstanding, fully-diluted (in
000's)............................ 180,115 180,115 33,190(u) 213,305
----------- ----------- ----------- --------
----------- ----------- ----------- --------
See Notes to Unaudited Pro Forma Condensed Combined Financial Statements.
6
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS
The Unaudited Pro Forma Condensed Combined Statements of Operations do not
give effect to any cost savings which may be realized after the consummation of
the Merger, estimated by NME management to be approximately $60 million annually
beginning in fiscal 1996 (before any severance or other costs of implementing
such efficiencies). The anticipated savings are based on estimates and
assumptions made by NME that are inherently uncertain, though considered
reasonable by NME, and are subject to significant business, economic and
competitive uncertainties and contingencies, all of which are difficult to
predict and many of which are beyond the control of management. There can be no
assurance that such savings, if any, will be achieved.
The adjustments to arrive at the Unaudited Pro Forma Condensed Combined
Financial Statements are as follows:
(a) To record cash paid in connection with the Merger (in millions):
Cash portion of the Merger Consideration.......................... $ 1,478.3
Cash portion of the AMH Option Cancellation (representing
3,280,567 options cancelled)..................................... 41.3
AMH Special Dividend.............................................. 7.8
---------
Total cash paid in connection with the Merger................... $ 1,527.4
---------
---------
(b) To reflect borrowings under the New Credit Facility and the proceeds
from the Public Offering and the application of such amounts as follows (in
millions):
New Credit Facility
Term loan...................................................... $ 2,000.0
Revolver....................................................... 265.4
New Senior Notes................................................. 300.0
New Subordinated Notes........................................... 700.0
---------
Total sources................................................ 3,265.4
Repayment of certain AMI debt (including current portion
with a carrying value of $150.5)................................ (1,090.5)
Repayment of certain NME debt (including current portion
with a carrying value of $457.6)................................ (611.4)
---------
Net increase in cash......................................... $ 1,563.5
---------
---------
(c) To reflect estimated fees, costs and expenses of NME and AMH of
approximately $165.6 million in the aggregate. The $165.6 million estimate
includes the following: (i) an estimated $28.4 million of transaction fees,
costs and expenses; (ii) $64.7 million of deferred financing costs; and
(iii) an estimated $72.5 million, substantially all of which represents the
write-up of the debt to be refinanced to its fair value at November 30,
1994. See Note (g) below. These amounts are based on actual agreements,
estimates provided by outside advisors and estimated payments in connection
with the Refinancing, as determined by NME's financial advisors.
(d) To consolidate the assets, liabilities and stockholders' equity of
HUG, currently accounted for as investments by both NME and AMH under the
equity method. Upon completion of the Merger, NME will own approximately 81%
of HUG.
(e) To record deferred income taxes in connection with the increase in
the carrying values of AMH buildings and equipment and the balance of AMH
indebtedness not expected to be refinanced in connection with the Merger and
to reduce income taxes payable related to the redemption of certain
indebtedness of AMI and the AMH Option Cancellation.
(f) To increase by $275.0 million the carrying value of AMH's buildings
and equipment to the estimated fair values thereof and to increase by $30.0
million the carrying value of the balance
7
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
of AMH's indebtedness not expected to be refinanced to the preliminary
estimate of the fair value thereof, both as required by the purchase
accounting treatment of the Merger. NME expects to obtain and record final
valuations based upon independent appraisals following the consummation of
the Merger. It is not expected that the final valuations will result in any
significant reclassification between goodwill and buildings and equipment or
long-term debt. For purposes of these Unaudited Pro Forma Condensed Combined
Financial Statements, NME has assumed that the fair value of the remaining
net assets of AMH approximates the existing net book value of such assets.
(g) To record the increase in intangible assets representing deferred
financing costs and the excess of the purchase price of the AMH Common Stock
over the fair value of the net assets acquired (in millions):
Cash portion of the Merger Consideration.................. $ 1,478.3
Value of stock portion of the Merger Consideration........ 482.0
Stockholders' equity of AMH at November 30, 1994.......... (873.6)
Conversion of AMI 9 1/2% Convertible Debentures........... (3.0)
Cash portion of AMH Option Cancellation................... 41.3
Value of stock portion of AMH Option Cancellation......... 7.5
AMH Special Dividend...................................... 7.8
---------
Adjusted AMH stockholders' equity....................... (820.0)
Adjustment to fair value of AMH buildings and equipment... (275.0)
Adjustment to fair value of AMH indebtedness not
refinanced............................................... 30.0
Estimated fees and expenses ($64.7 million of which
represent deferred financing costs)...................... 165.6
Net adjustment to income taxes payable and deferred income
taxes.................................................... 49.0
---------
Net increase in intangible assets....................... $ 1,109.9
---------
---------
(h) To give effect to the assumed conversion of the AMI 9 1/2%
Convertible Debentures which had a carrying value of $3.0 million at
November 30, 1994.
(i) To record the issuance of (i) 32,601,338 shares of NME Common Stock
(which reflects 0.42 shares of NME Common Stock to be exchanged per share of
AMH Common Stock) to be issued in connection with the Merger for all of the
outstanding AMH Common Stock; (ii) 78,143 shares of NME Common Stock held in
treasury in exchange for AMH Common Stock issuable upon conversion of the
AMI 9 1/2% Convertible Debentures; and (iii) 512,484 shares of NME Common
Stock issuable to AMH in exchange for a note, with an estimated principal
amount of $7.6 million, which shares will constitute the stock portion of
the AMH Option Cancellation, assuming in each case a value of $14.75 per
share of NME Common Stock (representing the average closing price as
reported on the NYSE on the 10 trading days immediately following the
announcement of the Merger). AMH will transfer the shares of NME Common
Stock received from NME in exchange for the note to cancel 1,220,200 stock
options held by certain executives of AMH. See "Financing for the Merger and
the Related Transactions."
(j) To give effect to the elimination of the AMH Common Stock and other
stockholders' equity, as adjusted in note (g) above.
(k) To give effect to the AMH Option Cancellation and to the AMH Special
Dividend. See "Financing for the Merger and the Related Transactions."
(l) To adjust the results of operations of NME to reflect (i) the August
1994 sale of approximately 75% of the common stock of TRC; (ii) the March
1994 sale of one inpatient rehabilitation
8
NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
hospital; (iii) the February 1994 sale of four long-term care facilities and
the September 1993 sale of 19 long-term care facilities to Hillhaven (all of
which properties previously had been leased to Hillhaven); (iv) the January
1994 sale of 28 inpatient rehabilitation hospitals and 45 related satellite
outpatient clinics; (v) the elimination of restructuring charges recorded by
NME of $77.0 million in fiscal 1994; and (vi) the elimination of certain
non-recurring gains on disposals of facilities and long-term investments
recorded by NME.
(m) To eliminate non-recurring gains on disposals of facilities and
long-term investments relating to the sale of AMH's interest in EPIC
Healthcare Group, Inc. and to reflect the effect on income taxes of these
adjustments.
(n) To adjust depreciation expense for the year ended May 31, 1994 as
follows (in millions):
To reflect additional depreciation on the stepped-up values of AMH's
buildings and equipment............................................ $ 9.0
To conform the estimated useful lives of the acquired buildings and
equipment to those used by NME..................................... (19.6)
---------
Net decrease in depreciation expense.............................. $ (10.6)
---------
---------
The adjustments made for the six months ended November 30, 1993 and 1994 are
equal to one half of the amount above.
(o) To reflect amortization of the excess of the purchase price of AMH
over the preliminary estimate of the fair value of the net assets acquired
using the straight-line method over 40 years.
(p) To adjust interest expense, including the amortization of deferred
financing costs over the term of the related indebtedness, for the year
ended May 31, 1994 as follows (in millions):
To reflect pro forma interest expense related to the New Credit
Facility and the New Debt Securities.............................. $ 270.8
To reduce interest expense to give effect to the Refinancing and
the repayment of certain indebtedness............................. (165.8)
To reduce interest expense to reflect the amortization of the
adjustment to fair value of AMH indebtedness not refinanced....... (2.8)
---------
Net increase in interest expense................................. $ 102.2
---------
---------
The adjustments made for the six months ended November 30, 1993 and 1994 are
equal to one half of the amount above.
(q) To reflect an estimated reduction of interest income related to a
lower balance of cash and cash equivalents available for investment.
(r) To reflect income taxes at an assumed marginal rate of 39% on the
pro forma adjustments described in (n), (p) and (q) above. Amortization of
goodwill is not deductible for tax purposes.
(s) Does not reflect the cumulative effect of NME's change in the method
of accounting for income taxes.
(t) Does not reflect the extraordinary loss on early extinguishment of
AMH debt.
(u) Represents the additional weighted average common shares that would
have been outstanding upon consummation of the Merger.
(v) To reflect the August 1994 sale of approximately 75% of the common
stock of TRC; to eliminate non-recurring gains on disposals of facilities
and long-term investments; and to reflect income taxes on these adjustments.
9
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
10
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.
11
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.
12
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.
13
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............................ (69,328) (69,328) -- -- (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................... 243,731 243,731 257,280 257,280 255,447 255,447
--------- --------- --------- --------- --------- ---------
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....................................... 72,437 72,437 -- -- 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................................................. (179,280) (179,280) (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.
14
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
15
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.
16
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
17
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.
18
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.
19
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.
20
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......................................................................... $ 191,000 $ 155,100
------------ ------------
------------ ------------
Projected benefit obligation.......................................................... $ 209,600 $ 170,500
Plan assets at fair value, primarily listed stock and corporate bonds................. (204,600) (133,000)
------------ ------------
Projected benefit obligation in excess of plan assets................................. 5,000 37,500
Unrecognized net loss................................................................. (24,700) (25,900)
Adjustment for minimum pension liability.............................................. 6,500 10,500
------------ ------------
Pension (asset) 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
--------- ---------
--------- ---------
21
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.
22
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
23
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
24
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.
25
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%.
26
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
27
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,
28
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.
29
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
NOVEMBER 30, 1994 AUGUST 31, 1994
-------------------------- --------------------------
HOLDINGS AMI HOLDINGS AMI
------------- ------------ ------------- ------------
(UNAUDITED)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 21,377 $ 21,377 $ 31,941 $ 31,941
Accounts receivable, net 167,444 167,444 147,415 147,415
Income taxes, net (including current portion of
deferred income taxes) 15,461 15,461 30,876 30,876
Other current assets 83,411 83,411 78,577 78,577
----------- ----------- ----------- -----------
Total current assets 287,693 287,693 288,809 288,809
----------- ----------- ----------- -----------
PROPERTY AND EQUIPMENT 2,022,574 2,022,574 1,971,396 1,971,396
Less - accumulated depreciation 540,338 540,338 507,653 507,653
----------- ----------- ----------- -----------
Net property and equipment 1,482,236 1,482,236 1,463,743 1,463,743
----------- ----------- ----------- -----------
NOTES RECEIVABLE AND INVESTMENTS 39,978 39,978 40,082 40,082
COST IN EXCESS OF NET ASSETS ACQUIRED, NET 1,153,928 1,153,928 1,153,887 1,153,887
OTHER ASSETS 60,983 60,983 30,026 30,026
----------- ----------- ----------- -----------
$ 3,024,818 $ 3,024,818 $ 2,976,547 $ 2,976,547
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES $ 479,393 $ 479,393 $ 476,464 $ 476,464
LONG-TERM DEBT 1,136,545 1,136,545 1,130,967 1,130,967
CONVERTIBLE SUBORDINATED DEBT 10,383 10,383 10,707 10,707
DEFERRED INCOME TAXES 218,651 218,651 218,651 218,651
OTHER DEFERRED CREDITS AND LIABILITIES 306,290 306,290 291,040 291,040
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock 776 725 775 725
Additional paid-in capital 609,887 594,286 608,096 592,494
Retained earnings 268,593 284,245 245,547 261,199
Adjustment for minimum pension liability (5,700) (5,700) (5,700) (5,700)
----------- ----------- ----------- -----------
Total shareholders' equity 873,556 873,556 848,718 848,718
----------- ----------- ----------- -----------
$ 3,024,818 $ 3,024,818 $ 2,976,547 $ 2,976,547
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
30
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30,
------------------------------------------------------------------
1994 1993
-------------------------- --------------------------
HOLDINGS AMI HOLDINGS AMI
------------- ------------ ------------- ------------
NET REVENUES $ 632,211 $ 632,211 $ 558,217 $ 558,217
OPERATING COSTS AND EXPENSES:
Salaries and benefits 236,925 236,925 205,414 205,414
Supplies 91,791 91,791 79,482 79,482
Provision for uncollectible accounts 42,122 42,122 39,036 39,036
Depreciation and amortization 41,090 41,090 38,273 38,273
Other operating costs 140,200 140,200 126,654 126,654
----------- ----------- ----------- -----------
Total operating costs and expenses 552,128 552,128 488,859 488,859
----------- ----------- ----------- -----------
OPERATING INCOME 80,083 80,083 69,358 69,358
Interest expense, net (39,275) (39,275) (38,848) (38,848)
----------- ----------- ----------- -----------
INCOME BEFORE TAXES AND MINORITY EQUITY
INTEREST 40,808 40,808 30,510 30,510
Provision for income taxes (17,100) (17,100) (12,900) (12,900)
----------- ----------- ----------- -----------
NET INCOME BEFORE MINORITY EQUITY INTEREST 23,708 23,708 17,610 17,610
Minority equity interest (662) (662) (1,097) (1,097)
----------- ----------- ----------- -----------
NET INCOME $ 23,046 $ 23,046 $ 16,513 $ 16,513
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
PER SHARE DATA:
Net income per common and
common equivalent share $ 0.30 N/A $ 0.21 N/A
----------- -----------
----------- -----------
Shares used for computation of
net income per share 77,567 N/A 76,938 N/A
----------- -----------
----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
31
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
THREE MONTHS ENDED NOVEMBER 30,
------------------------------------------------------------------
1994 1993
-------------------------- --------------------------
HOLDINGS AMI HOLDINGS AMI
------------- ------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 23,046 $ 23,046 $ 16,513 $ 16,513
Adjustments to reconcile to net cash
provided by operating activities:
Depreciation and amortization 41,090 41,090 38,273 38,273
Amortization of debt discount, deferred
financing costs and non-cash interest 12,348 12,348 12,481 12,481
Change in working capital (21,843) (21,843) (11,925) (11,925)
Other 1,090 1,090 129 129
----------- ----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 55,731 55,731 55,471 55,471
----------- ----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (3,748) (3,748) (31,507) (31,507)
Revolving credit facility (4,000) (4,000) (28,000) (28,000)
Other 1,240 1,240 1,008 1,008
----------- ----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (6,508) (6,508) (58,499) (58,499)
----------- ----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property and equipment additions (30,662) (30,662) (27,093) (27,093)
Acquisitions (18,209) (18,209) - -
Decrease (increase) in other assets (14,054) (14,054) 1,251 1,251
Additions in notes receivable and
investments (2,023) (2,023) (1,773) (1,773)
Decrease in notes receivable and
investments 4,524 4,524 1,453 1,453
Other 637 637 (1,506) (1,506)
----------- ----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (59,787) (59,787) (27,668) (27,668)
----------- ----------- ----------- -----------
DECREASE IN CASH AND CASH EQUIVALENTS (10,564) (10,564) (30,696) (30,696)
Cash and cash equivalents, beginning of period 31,941 31,941 44,335 44,335
----------- ----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,377 $ 21,377 $ 13,639 $ 13,639
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
32
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. 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 acquisition, Holdings is the owner of all
of the outstanding shares of common stock of AMI.
The accompanying unaudited condensed 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 for interim financial information. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments
necessary for a fair presentation, have been included in the accompanying
interim financial statements. The condensed consolidated balance sheet as of
August 31, 1994, was derived from the audited financial statements, but does not
include all disclosures required by generally accepted accounting principles.
All significant intercompany accounts and transactions have been eliminated.
Certain reclassifications have been made to the prior period's financial
statements to be consistent with the current year presentation. For additional
disclosure, refer to Holdings' and AMI's Annual Report on Form 10-K for the year
ended August 31, 1994.
2. PLAN OF MERGER
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
outstanding share of common stock of Holdings, par value $0.01 per share, will
be converted into the right to receive (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.
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 is currently anticipated to close in the first quarter of calendar
1995.
3. ACQUISITIONS
On September 1, 1994, a limited partnership, of which a wholly-owned
subsidiary of AMI is general partner, acquired Hilton Head Hospital in Hilton
Head, South Carolina containing 68 licensed beds. In connection with the
Company's efforts to re-establish a presence in Europe, in September 1994, the
Company entered into a joint venture agreement with a community organization
(the "Burgergemeinde") located in Cham, Canton Zug, Switzerland. The joint
venture is owned 90% by the Company and 10% by the Burgergemeinde. Under the
terms of the transaction, the Company has entered into a long term lease for the
land where the existing hospital is located and will renovate and remodel the
existing acute care facility, construct a new 56 bed acute care wing and convert
an existing structure into a medical office building. 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.
33
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. ACCOUNTS RECEIVABLE
As of November 30, 1994, and August 31, 1994, Holdings and AMI had reserves
for uncollectible receivables of $100.0 million and $98.6 million, respectively.
5. COST IN EXCESS OF NET ASSETS ACQUIRED
Cost in excess of net assets acquired is amortized over 40 years.
Holdings' and AMI's cumulative amortization of cost in excess of net assets
acquired as of November 30, 1994 and August 31, 1994, was $165.3 million and
$157.2 million, respectively. Amortization of cost in excess of net assets
acquired for Holdings and AMI was $8.1 million and $8.0 million for the three
months ended November 30, 1994 and 1993, respectively.
6. LONG-TERM DEBT
As of November 30, 1994, $262.0 million was outstanding under the Company's
$600 million revolving credit facility which expires in September 1999 and
presently accrues interest at 6.5%. In addition, as of November 30, 1994
$34.8 million in letters of credit were issued thereunder.
AMI has entered into swap agreements which hedge any foreign currency gains
or losses on the Company's L37 million senior notes due February 1995, face
amount $62.7 million at an interest rate of 8.0%, and the SFr.78 million bonds
due March 1996, face amount $52.4 million at an interest rate of 5.15%. Such
swap agreements are through the date of maturity of such debt and include the
face amount of each such debt and the fixed interest rate thereof stated. At
November 30, 1994 no loss would be recognized if the counter parties to these
swap agreements failed to perform their obligations.
7. COMMITMENTS AND CONTINGENCIES
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, cash flows or financial condition of Holdings
or AMI.
8. CAPITAL STOCK
As of November 30, 1994, Holdings had 200 million shares of $0.01 par value
common stock authorized. Of such shares, 77,622,233 and 77,491,000 were
outstanding as of November 30, 1994, and August 31, 1994, respectively. As of
November 30, 1994, Holdings had five million shares of $0.01 par value of
Preferred Stock authorized, of which none were outstanding.
Holdings is the owner of all outstanding shares of common stock of AMI. As
of November 30, 1994, and August 31, 1994, AMI had 200 million shares of $0.01
par value common stock authorized of which 72,481,000 shares were outstanding.
34
AMERICAN MEDICAL HOLDINGS, INC. AND SUBSIDIARIES
AMERICAN MEDICAL INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
9. 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 amount
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 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 three months ended November 30, 1994
and 1993 of $576.3 million, and $490.6 million, respectively. In management's
opinion, the reserves established are adequate to cover the ultimate liabilities
that may result from final settlements.
Net revenues from Medicare/Medicaid programs represented 44% and 40% of
total net revenues for the three months ended November 30, 1994 and 1993,
respectively. The Company's net revenues from contracted business represented
25% and 26% of total net revenues for the three months ended November 30, 1994
and 1993, respectively.
10. MINORITY EQUITY INTEREST
Minority equity interest expense of $1.1 million and $1.8 million
for the three months ended November 30, 1994 and 1993, respectively, is
presented net of income taxes in the accompanying condensed consolidated
statements of income.
11. SUPPLEMENTAL CASH FLOW INFORMATION
The Company paid income taxes (net of refunds) of $1.3 million and $0.6
million for the three months ended November 30, 1994 and 1993, respectively.
The Company paid interest (net of capitalized costs) for the three months ended
November 30, 1994 and 1993 of $19.9 million and $19.3 million, respectively.
Capitalized interest costs were $0.4 million and $0.6 million for the three
months ended November 30, 1994 and 1993, respectively. Interest income was $0.6
million and $0.8 million for the three months ended November 30, 1994 and 1993.
In conjunction with the acquisition of Hilton Head Hospital in September
1994 by a limited partnership, of which a wholly-owned subsidiary of AMI is
general partner, the Company recorded net assets of $14.6 million.
35
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Monica, State of
California, on February 9, 1995.
NATIONAL MEDICAL ENTERPRISES, INC.
By: /s/ SCOTT M. BROWN
-----------------------------------
Scott M. Brown
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL