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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
(MARK ONE)
[X]
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR THE FISCAL YEAR ENDED MAY 31, 1994. [FEE REQUIRED]
OR
[_]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO . [NO FEE REQUIRED]
COMMISSION FILE NUMBER: I-7293
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NATIONAL MEDICAL ENTERPRISES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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NEVADA 95-2557091
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2700 COLORADO AVENUE 90404
SANTA MONICA, CALIFORNIA (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICE)
AREA CODE (310) 998-8000
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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Common Stock New York Stock Exchange
Pacific Stock Exchange
12 1/8% Notes Due April 1, 1995 New York Stock Exchange
Preferred Stock Purchase Rights New York Stock Exchange
Pacific Stock Exchange
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K ((S)229.405 of this chapter) is not contained herein, and
will not be contained, to the best of the Registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendments to this Form 10-K. [_]
As of July 29, 1994 (the last business day of July) there were 166,194,728
shares of Common Stock outstanding. The aggregate market value of the shares of
Common Stock held by non-affiliates of the Registrant, based on the closing
price of these shares on the New York Stock Exchange, was approximately
$2,802,198,043. For the purposes of the foregoing calculation only, all
directors and executive officers of the Registrant have been deemed affiliates.
Portions of the Registrant's Annual Report to Shareholders for the fiscal
year ended May 31, 1994, have been incorporated by reference into Parts I, II
and IV of this Report. Portions of the definitive Proxy Statement for the
Registrant's 1994 Annual Meeting of the Shareholders have been incorporated by
reference into Part III of this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT--1994
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
PAGE
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Part I
Item 1. Business................................................... 1
Item 2. Properties................................................. 14
Item 3. Legal Proceedings.......................................... 14
Item 4. Submission of Matters to a Vote of Security Holders........ 18
Part II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters........................................ 19
Item 6. Selected Financial Data.................................... 19
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. 19
Item 8. Financial Statements and Supplementary Data................ 19
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... 19
Part III
Item 10. Directors and Executive Officers of the Registrant......... 19
Item 11. Executive Compensation..................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................. 19
Item 13. Certain Relationships and Related Transactions............. 19
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on
Form 8-K................................................... 20
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Note: The responses to Items 5 through 8, Items 11 through 13 and portions of
Items 1, 3, 10 and 14 are included in the Registrant's Annual Report to
Shareholders for the year ended May 31, 1994, or the definitive Proxy
Statement for the Registrant's 1994 Annual Meeting of Shareholders. The
required information is incorporated into this Report by reference to
those documents and is not repeated herein.
PART I
ITEM 1. BUSINESS
GENERAL
National Medical Enterprises, Inc. ("NME" or the "Company") is a leading
investor-owned health care company, engaged primarily in the operation of
domestic and international general hospitals. For all or a portion of fiscal
year 1994, NME's operations were conducted through its Hospital Division (which
includes the Company's general and rehabilitation hospitals), Psychiatric
Division, Management Services Division, International Hospital Division and
Other Businesses. NME's continuing operations are conducted through its
Hospital Division, International Hospital Division, Management Services
Division and Other Businesses.
Fiscal year 1994 was a period of tremendous change for NME. For the first
time in NME's history, it had a new management team. The year started with
Jeffrey C. Barbakow becoming Chairman and Chief Executive Officer and Michael
H. Focht becoming President and Chief Operating Officer. During the year the
Company also appointed a new General Counsel and a new Chief Financial Officer.
The Company determined that its top priority would be to resolve the unusual
legal proceedings then facing NME.
As fiscal year 1994 began, NME faced significant litigation with various
insurers concerning NME's Psychiatric Division Facilities (as defined below),
class-action lawsuits by certain shareholders, psychiatric patient litigation
alleging fraud and conspiracy and investigations by various state and federal
agencies aimed principally at NME's freestanding psychiatric hospitals,
residential treatment centers and substance abuse recovery facilities
(collectively, the "Psychiatric Division Facilities"). The legal challenges
facing NME reached their peak in August 1993, when federal agents served NME's
Psychiatric Division headquarters in Santa Monica, California as well as
various regional offices and facilities with search warrants and subpoenas in
connection with the government investigations. By the end of the year, NME had
resolved the litigation between NME and the insurers, had resolved 90 of the
cases brought by psychiatric patients alleging fraud and conspiracy
(approximately two-thirds of such cases that had been filed to date) and had
reached an agreement in principle to resolve claims by federal and state
agencies. In the first quarter of fiscal year 1995, NME entered into definitive
agreements that brought a close to all federal investigations and substantially
all state claims pending against NME and its subsidiaries. These matters and
other legal proceedings are discussed in more detail under Legal Proceedings on
page 14.
During the year NME's management also concluded that it would be in the best
interest of the shareholders for NME to focus on its core business, operating
domestic and international general hospitals. During fiscal year 1994, NME sold
29 of its 35 rehabilitation hospitals, retaining six rehabilitation hospitals
located on the same campus as or nearby certain of its general hospitals (the
"Campus Rehabilitation Hospitals").
1
On November 30, 1993, the Company decided to discontinue its Psychiatric
Division Facilities business and adopted a plan to dispose of those Facilities.
Beginning as of November 30, 1993, the financial results of the Psychiatric
Division Facilities have been treated as discontinued operations for accounting
purposes. During fiscal year 1994, NME sold 15 Psychiatric Division Facilities.
In addition, on March 29, 1994, NME entered into agreements to sell 47 of the
remaining Psychiatric Division Facilities to Charter Medical Corporation
("Charter"). On June 30, 1994, NME sold 27 of those 47 facilities. The sale of
17 of the remaining 20 facilities to be sold to Charter is subject to approval
by the Federal Trade Commission ("FTC"), which has requested additional
information concerning such sales. The Company and Charter are responding to
the FTC's request. No specific date has been set to close these sales, except
that if such closings do not occur prior to September 30, 1994, and the parties
do not extend that date, the agreement will terminate on September 30. Based on
discussions to date with the FTC, the Company believes it may not be able to
sell at least five facilities to Charter. However, it believes it will receive
similar proceeds upon their sale to other parties. The other three facilities
being sold to Charter have FTC approval and are expected to be sold at a later
date. NME plans to sell or close all but four of the 15 Psychiatric Division
Facilities remaining at May 31, 1994, and not being sold to Charter. During the
first quarter of fiscal year 1995, NME sold four of those Psychiatric Division
Facilities to other parties. The four Psychiatric Division Facilities being
retained are located on the same campus as or nearby certain of its general
hospitals (the "Campus Psychiatric Facilities").
At May 31, 1994, NME operated, domestically, 35 general hospitals (two of
which were sold during the first quarter of fiscal year 1995) and six
rehabilitation hospitals. In addition, NME continued to operate as a
discontinued business 54 Psychiatric Division Facilities. The financial results
of the general hospitals and the rehabilitation hospitals are included in the
financial results of the Hospital Division. NME's Management Services Division
manages 20 psychiatric units and 10 rehabilitation units within general
hospitals owned by others and manages one freestanding psychiatric hospital for
a third party. In addition, NME's Management Services Division manages eight
psychiatric units, three substance abuse recovery facilities and seven
rehabilitation units within NME's general hospitals. Beginning as of November
30, 1993, the financial results of the management of the psychiatric units and
psychiatric hospital were reported in the financial results of the Hospital
Division and prior to that were reported in the financial results of the
Psychiatric Division. The financial results of the management of the
rehabilitation units were reported in the financial results of the Hospital
Division for all of fiscal year 1994.
The financial results of NME's International Hospital Division, which
operates and manages general hospitals and other health care businesses located
outside the United States, are included in the financial results of the
Hospital Division. NME's international operations continued to grow during
fiscal year 1994. During the year NME entered into an agreement with Bumrungrad
Hospital Corporation, a Thai company listed on the Stock Exchange of Thailand,
to develop the 554-bed tertiary care Bumrungrad Medical Center in Bangkok,
Thailand. That hospital is expected to open during the first quarter of fiscal
year 1997. NME's 184-bed tertiary care hospital, Centro Medico Teknon, opened
in Barcelona, Spain, in February 1994. In the first quarter of fiscal 1994, NME
purchased the 50% interest of its joint venture partner in that hospital and
now is the sole owner of the hospital. NME continues to operate and manage two
general hospitals in Singapore and owns a minority interest in a 17-story
medical office building adjacent to one of those hospitals. NME also provides
management services for the Subang Jaya Medical Centre (in which it owns a 30%
interest) in Kuala Lumpur, Malaysia. The Subang Jaya Medical Centre is expected
to open a new 150-bed tower during the second quarter of fiscal 1995. NME also
owns a 52% interest in Australian Medical Enterprises Limited ("AME"), an
Australian hospital management company that operates four hospitals in the
Perth area, five hospitals in the Sydney area and a large pathology laboratory
in Western Australia. In fiscal year 1994, AME began building the new 202-bed
St. George Hospital outside of Sydney.
NME continues to own a 42% equity interest in Westminster Health Care
Holdings PLC ("Westminster"). Westminster, formerly NME's 90% owned United
Kingdom nursing home subsidiary, completed its initial public offering of
common stock in fiscal year 1993. NME's share of Westminster's earnings are
included in the financial results of NME's Other Businesses.
2
NME restructured its relationship with its former subsidiary, The Hillhaven
Corporation ("Hillhaven"), in fiscal year 1994. Following Hillhaven's spinoff
in fiscal year 1990, NME continued to lease facilities to, lend money (in
connection with the sale of facilities) to and guaranty substantial obligations
of, Hillhaven. As described in more detail on page 5, in fiscal year 1994 NME
sold to Hillhaven all of the facilities previously leased by NME to Hillhaven,
Hillhaven repaid to NME all amounts previously loaned by NME to Hillhaven and
Hillhaven caused NME to be released from approximately $370,000,000 of the
$706,000,000 of Hillhaven debt and lease obligations for which NME had been
contingently liable. NME also exercised all of its Warrants to purchase
6,000,000 shares of Hillhaven Common Stock, following which NME owned at May
31, 1994, 8,878,147 shares (approximately 32.9%) of Hillhaven Common Stock,
35,000 shares of Hillhaven's cumulative non-voting 8 1/4% Series C Preferred
Stock and 60,546 shares of Hillhaven's cumulative non-voting 6 1/2% payable-in-
kind Series D Preferred Stock. NME did not transfer as part of the spinoff, and
continued to operate through fiscal year 1994, freestanding and mobile kidney
dialysis units (which were operated by NME's Medical Ambulatory Care ("MAC")
subsidiary), and seven domestic long term care facilities (which are managed by
Hillhaven) adjacent to NME hospitals. NME's share of Hillhaven's earnings,
NME's lease income from Hillhaven prior to restructuring its relationship with
Hillhaven, NME's guaranty fee income from Hillhaven, the financial results of
MAC's operations and the financial results of NME's long term care facilities
are included in the financial results of NME's Other Businesses. In September
1993, Hillhaven effected a one-for-five reverse stock split of its common
stock. All of the numbers above have been adjusted to reflect that reverse
stock split.
In the first quarter of fiscal year 1995, MAC sold units (consisting
primarily of debt but including some non-voting common stock) to the public and
then sold shares constituting a majority interest in MAC to an affiliate of an
investment banking firm and MAC's management, reducing NME's equity interest in
MAC to approximately 25%. MAC paid NME a $75,500,000 dividend with the proceeds
of MAC's public sale of the units and the proceeds of a loan to MAC from a
group of banks.
The health care industry in the United States is going through a period of
great uncertainty. The federal government and various states have set the
reform of the health care system as one of their primary goals. It is not clear
at this time what form any such reforms may take or what impact such reforms
will have on NME's financial performance, but NME believes that some of the
pressures leading to the call for reform and the uncertainty concerning the
scope and substance of any changes to the health care system have affected its
operations. Furthermore, restrictions imposed by government and third party
payors, including what commonly is referred to as "utilization review" and
"managed care," have resulted in a reduction of payments for, or limited the
availability of, certain treatments and procedures. These matters are discussed
in more detail under Health Care Reform, Regulation, Licensing and Insurance on
page 11.
NME's fiscal year 1994 net operating revenues from continuing operations were
derived 94.6% from its Hospital Division and 5.4% from its Other Businesses.
Under segment reporting criteria, NME believes its only material business
segment is "health care," which contributed substantially all of the Company's
net operating revenues and operating profits in fiscal year 1994. See the
discussion of NME's revenues and operations in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" contained in NME's
1994 Annual Report to Shareholders.
3
HOSPITAL DIVISION
NME's general hospitals offer acute care services with fully equipped
operating and recovery rooms, radiology services, intensive care and coronary
care nursing units, pharmacies, clinical laboratories, respiratory therapy
services, physical therapy services and outpatient facilities. At May 31, 1994,
NME's Hospital Division operated domestically 35 general hospitals (two of
which were sold in the first quarter of fiscal year 1995), 27 of which are
owned by NME's wholly-owned subsidiary, NME Hospitals, Inc., one of which is on
leased land and eight of which are owned by and leased from others (including
two leased from general partnerships in which NME owns interests). The Hospital
Division also operates the Campus Psychiatric Facilities and Campus
Rehabilitation Hospitals.
At May 31, 1994, the Company's International Hospital Division (the
operations of which are included in the financial results of the Hospital
Division) operated two hospitals in Singapore (650 beds), operated 10 hospitals
(689 beds) (the operations of one of which have been suspended pending their
merger into the operations of a new hospital for which a license was granted in
fiscal year 1994) and a laboratory business in Australia, a hospital (184 beds)
in Barcelona, Spain (which now is wholly-owned by NME following its purchase in
the first quarter of fiscal 1994 of its joint venture partner's 50% interest),
and managed one hospital (225 beds) (in which it owns a 30% interest) in Kuala
Lumpur, Malaysia. During the year NME also entered into a joint venture to
develop a new 554-bed tertiary care hospital in Bangkok, Thailand. That
hospital is expected to be completed during the first quarter of fiscal year
1997.
During fiscal year 1994, the Company entered into a long-term lease of one
general hospital (138 beds). In addition, the Company added a total of 67 beds
to three existing general hospitals and eliminated 30 beds from four other
existing general hospitals, all in the United States. The Company sold one
domestic general hospital (120 beds) during fiscal year 1994 and two general
hospitals (202 beds) during the first quarter of fiscal year 1995.
The following table lists, by state, the number of general hospitals owned or
leased by NME and operated domestically as of May 31, 1994 (including the two
general hospitals sold in the first quarter of fiscal year 1995):
OWNED OR LEASED GENERAL HOSPITALS
LICENSED
STATE NO. BEDS
----- --- --------
California.......................... 17 2,943
Florida............................. 5 1,168
Louisiana........................... 5 849
Missouri............................ 2 527
Tennessee........................... 2 421
Texas............................... 4 965
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Totals.......................... 35 6,873
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The above table does not include the Campus Rehabilitation Hospitals or the
Campus Psychiatric Facilities.
The following table shows certain information about the general hospitals
owned or leased domestically by NME, for the fiscal years ended May 31:
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
Total number of facilities................ 35 35 35 35 37
Total number of licensed beds............. 6,873 6,818 6,559 6,591 6,731
Average occupancy during the period....... 47% 48% 51% 52% 51%
4
NME sold 28 of its 35 rehabilitation hospitals to HEALTHSOUTH Rehabilitation
Corporation for approximately $350,000,000 and one rehabilitation hospital to a
third party for approximately $14,000,000 in fiscal year 1994, retaining the
six Campus Rehabilitation Hospitals. The financial results of the
rehabilitation hospitals were included in the financial results of the Hospital
Division in fiscal year 1994.
OTHER BUSINESSES
NME continues to own a 42% equity interest in Westminster. Westminster,
formerly NME's 90% owned United Kingdom nursing home subsidiary, completed its
initial public offering of common stock on April 15, 1993 (the "Offering"). At
May 31, 1994, Westminster owned and operated 56 nursing homes in the United
Kingdom. NME recognizes its share of Westminster's earnings using the equity
method of accounting. Those earnings are included in the financial results of
NME's Other Businesses. In connection with the Offering, NME and Westminster
entered into an agreement governing their future relationship. That agreement
provides that: (1) NME will be entitled to nominate three, two or one
representative(s) to Westminster's nine-member board of directors so long as
NME owns 30%, 20% or 10% or more, respectively, of Westminster's shares; (2)
NME may not purchase or sell shares in Westminster prior to April 15, 1995,
without the consent of Westminster's directors not nominated by NME; (3) NME
may purchase or sell Westminster's shares during the third year following the
Offering so long as it notifies Westminster before doing so and may purchase or
sell shares without restriction after the third year following the Offering so
long as it does not acquire 50% or more of Westminster's stock prior to the
sixth anniversary of the Offering; and (4) as long as NME holds 30% or more of
Westminster's stock (a) both companies have agreed not to operate facilities
within 30 miles of each other and to seek to avoid conflicts of interest and
minimize the extent of competition between their operations and (b) NME has
agreed not to compete with Westminster in the business of nursing home care in
the United Kingdom and Westminster has agreed not to compete with NME in the
business of nursing home care in the United States or Australia.
NME restructured its relationship with Hillhaven in fiscal year 1994.
Following Hillhaven's spinoff in fiscal year 1990, NME continued to lease
facilities to, lend money (in connection with the sale of facilities) to and
guaranty substantial obligations of, Hillhaven. During fiscal year 1994 (1) NME
sold to Hillhaven, for $111,800,000, the 23 remaining long term care facilities
previously leased by NME to Hillhaven, (2) Hillhaven repaid to NME $149,000,000
previously loaned to Hillhaven, (3) Hillhaven caused NME to be released from
approximately $370,000,000 of the $706,000,000 of Hillhaven debt and lease
obligations for which NME had been contingently liable and (4) NME purchased
120,000 shares of Hillhaven non-voting Series D Preferred Stock for
$120,000,000. Hillhaven continues to pay a guaranty fee to NME, calculated as a
percentage of the debt and lease obligations on which NME remains contingently
liable. On February 28, 1994, NME exercised all of its Warrants to purchase
6,000,000 shares of Hillhaven Common Stock. NME paid the $63,300,000 exercise
price by tendering 63,300 shares of Hillhaven cumulative non-voting Series D
Preferred Stock previously acquired by NME. The terms of the Series D Preferred
Stock expressly provided that it could be tendered to pay the exercise price of
the Warrants. Following NME's exercise of the Warrants, it owned at May 31,
1994, 8,878,147 shares of Hillhaven Common Stock, which constitutes
approximately 32.9% of Hillhaven's outstanding Common Stock, 35,000 shares of
Hillhaven's cumulative non-voting 8 1/4% Series C Preferred Stock and 60,546
shares of Hillhaven's cumulative non-voting 6 1/2% payable-in-kind Series D
Preferred Stock. NME did not transfer as part of the spinoff, and continued to
operate through fiscal year 1994, freestanding and mobile kidney dialysis units
(which are operated by NME's MAC subsidiary), and seven domestic long term care
facilities (all of which are managed by Hillhaven and are adjacent to NME
hospitals and one of which, The John Douglas French Center, is a special care
facility for victims of Alzheimer's disease). During fiscal year 1994, NME paid
Hillhaven approximately $2,334,000 for managing those seven long term care
facilities. NME's share of Hillhaven's earnings, NME's lease and guaranty fee
income from Hillhaven, the financial results of MAC's operations and the
financial results of NME's long term care facilities are included in the
financial results of NME's Other Businesses. In September 1993, Hillhaven
effected a one-for-five reverse stock split of its common stock. All of the
numbers above have been adjusted to reflect that reverse stock split.
5
In the first quarter of fiscal year 1995, MAC sold units (consisting
primarily of debt but including some non-voting common stock) to the public and
then sold shares constituting a majority interest in MAC to an affiliate of an
investment banking firm and MAC's management, reducing NME's equity interest in
MAC to approximately 25%. MAC paid NME a $75,500,000 dividend with the proceeds
of MAC's public sale of the units and the proceeds of a loan to MAC from a
group of banks.
PSYCHIATRIC DIVISION
On November 30, 1993, the Company decided to discontinue its Psychiatric
Division Facilities business and adopted a plan to dispose of those Facilities.
Beginning as of November 30, 1993, the financial results of the Psychiatric
Division Facilities have been treated as discontinued operations for accounting
purposes.
During fiscal year 1994, NME sold 15 Psychiatric Division Facilities. In
addition, on March 29, 1994, NME entered into agreements to sell 47 of the
remaining Psychiatric Division Facilities to Charter for a total purchase price
of approximately $200,000,000. On June 30, 1994, NME sold 27 of those 47
facilities to Charter for a total purchase price of approximately $129,000,000.
The sale to Charter of 17 other facilities is subject to approval by the FTC,
which has requested additional information concerning such sales. The Company
and Charter are responding to the FTC's request. No specific date has been set
to close these sales, except that if such closings do not occur prior to
September 30, 1994, and the parties do not extend that date, the agreement will
terminate on September 30. Based on discussions to date with the FTC, the
Company believes it may not be able to sell at least five facilities to
Charter. However, it believes it will receive similar proceeds upon their sale
to other parties. The other three facilities being sold to Charter have FTC
approval and are expected to be sold at a later date. Except for the four
Campus Psychiatric Facilities that are being retained, NME plans to sell or
close all of the 62 Psychiatric Division Facilities that were remaining at May
31, 1994 (including the 47 facilities being sold to Charter). During the first
quarter of fiscal year 1995, in addition to the 27 facilities sold to Charter,
NME sold four of those Psychiatric Division Facilities to other parties.
PROPERTIES
The corporate headquarters of NME and of its operating divisions are located
in an approximately 310,000 square foot office building owned by NME and
located in Santa Monica, California. At May 31, 1994, NME and its operating
subsidiaries also were leasing other office space in Fairfax, Virginia; Tampa,
Florida; Irving, Texas; and Los Angeles, Modesto, Santa Ana and Santa Monica,
California.
As of May 31, 1994, NME operated domestically 28 medical office buildings,
including 24 that are leased from others, most of which are adjacent to general
hospitals. These buildings are occupied by approximately 700 physicians.
The number of licensed beds and locations of the Company's general hospitals
are described onpage 4. As of May 31, 1994, NME had approximately $171,000,000
of outstanding loans secured by real property and approximately $49,000,000 of
capitalized lease obligations. The Company believes that all of these
properties, as well as the administrative and medical office buildings
described above, are suitable for their intended purposes.
The Company has announced that it intends to sell its corporate headquarters
building in Santa Monica, California, and established a reserve at May 31,
1994, to cover the loss that the Company expects to incur. The Company intends
to announce whether it will be leasing back a portion of the building or moving
to new space in southern California once a decision has been made.
6
MEDICAL STAFF AND EMPLOYEES
NME's hospitals are staffed by licensed physicians who have been admitted to
the medical staff of individual hospitals. Members of the medical staffs of
NME's hospitals often serve on the medical staffs of hospitals not owned by the
Company and may terminate their affiliation with the NME hospital or shift
their admissions to competing hospitals at any time. With minor exceptions,
physicians are not employees of the Company. Nurses, therapists, lab
technicians, facility maintenance staff and the administrative staff of
hospitals, however, normally are employees of the Company.
The number of NME employees (of which approximately 31% were part-time
employees) at May 31, 1994, was approximately as follows:
Hospital Division (1).............................................. 28,500
International Hospital Division.................................... 4,800
Psychiatric Division (2)........................................... 4,400
Management Services Division....................................... 400
Other Businesses................................................... 200
Corporate Office................................................... 500
------
Total.......................................................... 38,800
======
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(1) Includes employees whose employment relates to the operations of the Campus
Psychiatric Facilities and the Campus Rehabilitation Hospitals.
(2) Does not include employees whose employment relates to the operations of
the Campus Psychiatric Facilities. The operations of the Psychiatric
Division are treated as discontinued operations. This data is included for
informational purposes only.
NME is subject to the federal minimum wage and hour laws and maintains
various employee benefit plans. Labor relations at NME's facilities have been
satisfactory. A small percentage of NME's employees are represented by labor
unions. Although the Company currently is not experiencing a shortage of
nursing personnel, the availability of nursing personnel fluctuates from year
to year, and the Company cannot predict the degree to which it will be affected
by the future availability and cost of nursing personnel.
During the fourth quarter of fiscal year 1994, NME hired a management
consulting firm to conduct a study analyzing the functions being performed at
NME's corporate and regional offices. The goal was to reduce overhead costs. As
a result of that study, which is expected to result in projected annual savings
for NME of approximately $32,000,000, 240 positions from NME's corporate office
and the Hospital Division's district and regional offices have been or will be
eliminated prior to the end of fiscal year 1995. NME established a reserve at
May 31, 1994, to cover the cost of severance packages and other costs related
to the reduction in force.
7
COMPETITION
NME's general hospitals, Campus Psychiatric Facilities and Campus
Rehabilitation Hospitals (collectively, "Health Care Facilities") operate in
competitive environments. A Health Care Facility's competitive position within
its "Primary Service Area" (the geographic area in which a facility is located
and from which it receives the majority of its patients) is affected by such
competitive factors as the quality of care provided, including the number,
quality and specialties of the physicians, nurses and other health care
professionals on staff, its reputation, the number of competitive facilities,
the state of its physical plant, the quality and the state of the art of its
medical equipment, its location and, in the case of private patients, its
charges for services. Non-profit or government-owned competitors may have
certain financial advantages such as endowments, charitable contributions and
tax-exempt financing not available to NME facilities. The length of time a
facility has been a part of the community and the availability of other health
care alternatives are also competitive factors.
An emerging factor in the competitive position of NME's facilities is the
ability of NME to obtain managed care contracts with purchasers of group health
care services such as health maintenance organizations ("HMO's"), preferred
provider organizations ("PPO's"), employers and traditional health insurers
(collectively, "Group Purchasers"). Group Purchasers contract with health care
providers for discounted or per capita rates in exchange for sending some or
all of their members/employees to those providers. The importance of obtaining
managed care contracts has increased over the years as employers and others
attempt to control rising health care costs. NME, as a national healthcare
provider with 33 general hospitals, four Campus Psychiatric Facilities and six
Campus Rehabilitation Facilities in six states, is well positioned to compete
in the managed care market, and its Health Care Facilities have been actively
pursuing and entering into such contracts both on a local and national level.
To facilitate its managed care contracting, NME's facilities are exploring and
entering into various physician-hospital alliances, which are expected to
enable NME's facilities to offer an integrated delivery system of healthcare
that will appeal to payors.
The Company, and the health care industry as a whole, face the challenge of
continuing to provide quality patient care while dealing with rising costs,
strong competition for patients and a general reduction of reimbursement rates
by both private and government payors. As both private and government payors
reduce the scope of what may be reimbursed and reduce reimbursement levels for
what is covered, national and state efforts to reform the United States health
care system may further impact reimbursement rates. Changes in medical
technology, existing and future legislation, regulations and interpretations
and competitive contracting for provider services by private and government
payors may require changes in the Company's facilities, equipment, personnel,
rates and/or services in the future.
The general hospital industry and the Company's general hospitals continue to
have significant unused capacity, and thus there is substantial competition for
patients. Inpatient utilization, average lengths of stay and average occupancy
continue to be negatively affected by payor-required pre-admission
authorization, utilization review and by payor pressure to maximize outpatient
and alternative health care delivery services for less acutely ill patients.
Increased competition, admissions constraints and payor pressures are expected
to continue. There continue to be increases in inpatient acuity and intensity
of services as less intensive services shift from an inpatient to an outpatient
basis or to alternative health care delivery services because of technology
improvements and as cost controls by payors become greater. Allowances and
discounts are expected to continue to rise, and to cause decreases in revenues,
because of increasing cost controls by government and Group Purchasers and
because of the increasing percentage of business (and related discounts) from
Group Purchasers. To meet these challenges, the Company has expanded many of
its general hospitals' facilities to include outpatient centers, offers
discounts to private payor groups, enters into capitation contracts in some
service areas, upgrades facilities and equipment and offers new programs and
services.
In most cases, hospital revenues depend on the physicians on staff who admit
or refer patients to the hospital. Physicians refer patients to hospitals on
the basis of the quality of services provided by the hospital to patients and
their physicians, the hospital's location, the quality of the medical staff
affiliated with the hospital and the quality of the hospital's facilities,
equipment and employees. While a physician may
8
terminate his or her association with a hospital at any time, NME believes that
by striving to maintain and improve the excellence of care of its hospitals and
by maintaining high ethical and professional standards, it will retain
qualified physicians with a variety of specialties and attract other qualified
physicians to its hospitals' medical staffs. A hospital's revenues also may be
affected by the ability of its management to negotiate favorable group health
service contracts with Group Purchasers. The number of persons and the patient
mix represented by such group contracts affect the impact such contracts have
on hospital operating results.
NME's Campus Rehabilitation Hospitals, whose patients primarily are referred
from general hospitals by neurologists, neurosurgeons, orthopedists, internists
and physiatrists, typically benefit from a broader geographic and other
referral base than general hospitals. Because they must compete in both the
Primary Service Area and a broader regional service area, they engage in
comprehensive outreach programs.
NME's Campus Rehabilitation Hospitals compete for patients and to attract
qualified physicians and other health care professionals primarily with
freestanding rehabilitation hospitals, rehabilitation units within general
hospitals, freestanding sub-acute centers, sub-acute units within general
hospitals and skilled nursing facilities.
Each of NME's Campus Rehabilitation Hospitals and managed units offers highly
specialized programs, such as treatment for closed head injuries, spinal cord
injuries and neurological diseases and return to work programs. Some of those
hospitals and managed units also provide less intensive services such as a
transitional living program to help patients prepare for a return to their
lives outside of the facility, skilled nursing care and outpatient care.
OTHER BUSINESSES
The value of NME's investments in Hillhaven, Westminster and MAC is affected
by many factors. One important factor is the competitive position of Hillhaven,
Westminster and MAC. NME believes that these companies are well positioned to
take advantage of their relative competitive strengths within the long term
care business in the United States and the United Kingdom, respectively, and
the dialysis business in the United States.
MEDICARE, MEDICAID AND OTHER REVENUES
NME-operated facilities receive payments for patient care from private
insurance carriers, federal Medicare programs for elderly and disabled
patients, health maintenance organizations, preferred provider organizations,
state Medicaid programs for indigent and cash grant patients, Civilian Health
and Medical Program of Uniformed Services ("CHAMPUS"), employers and patients
directly. In general, Medicare payments for general hospital outpatient
services, psychiatric care and physical rehabilitation are based on allowable
costs subject to certain limits. General hospital inpatient services are
reimbursed under Medicare based on a prospective payment system ("PPS"),
discussed below. Payments from state Medicaid programs are based on reasonable
costs or are at fixed rates. Substantially all Medicare and Medicaid payments
are below retail rates for NME-operated facilities. Payments from other sources
usually are based on the hospital's established charges, a percentage discount
or all-inclusive per diem rates.
Medicare payments for general hospital inpatient care are based on a PPS that
generally has been applicable to NME facilities since June, 1984. Under the
PPS, a general hospital receives for each Medicare patient a fixed amount for
operating costs based on each Medicare patient's assigned diagnostic related
group ("DRG"). The DRG payments do not consider a specific hospital's costs,
but are adjusted for area wage differentials. DRG payments exclude the
reimbursement of (a) capital costs, including depreciation, interest relating
to capital expenditures, property tax and lease expenses ("Capital Costs"), and
(b) outpatient services. These exclusions are discussed below.
9
Medicare reimburses general hospitals' Capital Costs separately from DRG
payments. Beginning June 1, 1992, a prospective payment system for Medicare
reimbursement of general hospitals' inpatient Capital Costs ("PPS-CC"),
described in the following paragraph, generally became effective with respect
to the Company's general hospitals. The Omnibus Budget Reconciliation Act of
1990 ("OBRA '90") provides that through September 30, 1995, the total annual
estimated aggregate payment to all PPS hospitals for Capital Costs under the
PPS-CC is to be 10% less than the estimated aggregate amount that would be paid
if all such hospitals were to be reimbursed for 100% of their actual Capital
Costs.
The PPS-CC applies an estimated national average of Medicare Capital Costs
per patient discharge (the "Federal Rate") in making payments to each
individual hospital based on its actual number of patient discharges. The
Federal Rate is based on national 1989 Capital Costs and patient discharges and
has been and will be updated annually to reflect estimated increases in Capital
Costs per patient discharge. In addition, the Federal Rate actually applied to
each hospital is adjusted based on various factors such as that hospital's case
mix and geographic location. The Company expects PPS-CC payments for the 12
months beginning October 1, 1994, to be lower than the payments for the prior
12-month period.
Rules adopted by the Health Care Financing Administration ("HCFA") provide
that the PPS-CC will be phased in over a 10-year transition period, during
which many hospitals' actual Capital Costs will be given less consideration,
and the Federal Rate will be given more consideration, each year. The Company's
general hospitals will receive a major portion of their reimbursement in the
early years of the transition period based on their own Capital Costs. The
impact in later years will depend on the Company's need for new capital as
compared to the updated Federal Rate.
Outpatient services provided at general hospitals, physical rehabilitation
facilities and psychiatric facilities generally are reimbursed by Medicare at
the lower of customary charges or 94.2% of actual cost. Notwithstanding the
foregoing, Congress has established additional limits on the reimbursement of
the following outpatient services: (i) clinical laboratory services, which are
reimbursed based on a fee schedule, and (ii) ambulatory surgery procedures and
certain imaging and other diagnostic procedures, which are reimbursed based on
a blend of the hospital's specific cost and the rate paid by Medicare to non-
hospital providers for such services.
For several years the percentage increases to the DRG rates have been lower
than the percentage increases in the cost of goods and services purchased by
general hospitals. The index used by HCFA to adjust the DRG rates gives
consideration to the cost of goods and services purchased by hospitals as well
as non-hospitals (the "Market Basket"). The increase in the Market Basket for
the year beginning October 1, 1994, has been estimated by HCFA to be 3.6%, but
is subject to change. Based on the Omnibus Budget Reconciliation Act of 1993
("OBRA '93"), the DRG rates for urban hospitals will be adjusted by the annual
Market Basket percentage change: (1) minus 2.5%, effective October 1, 1994, (2)
minus 2.0%, effective October 1, 1995, (3) minus .5%, effective October 1,
1996, and (4) without reduction, effective October 1, 1997 and each year
thereafter, unless altered by subsequent legislation. Substantially all NME
hospitals are urban hospitals.
Hospitals exempt from the PPS, such as qualified psychiatric and physical
rehabilitation facilities, are reimbursed by Medicare on a cost-based system
wherein target rates for each facility are used in applying various limitations
and incentives. Based on the provisions of OBRA '90, such NME facilities
received a Market Basket increase of 3.3% in target rates effective June 1,
1994. Based on OBRA '93, the target rates for NME's hospitals exempt from the
PPS are scheduled to be adjusted on June 1, 1995, 1996 and 1997 by the
applicable annual Market Basket percentage change minus 1%. Proposals have been
made that would change the method of payment for services provided at these
facilities to a prospective payment system. OBRA '90 requires the Department of
Health and Human Services to develop a proposal to modify the current target
rate system or to replace it with a prospective payment system. It is not known
if any such proposals will be implemented.
10
OBRA '93 provides for certain budget targets for the next four years which,
if not met, may result in adjustments in payment rates. The Company is unable
to predict whether there will be any future reductions in hospital payments due
to existing or future legislation.
The Medicare, Medicaid and CHAMPUS programs are subject to statutory and
regulatory changes, administrative rulings, interpretations and determinations,
requirements for utilization review and governmental funding restrictions, all
of which may materially increase or decrease program payments as well as affect
the cost of providing services and the timing of payments to facilities. The
final determination of amounts earned under the programs often requires many
years, because of audits by the program representatives, providers' rights of
appeal and the application of numerous technical reimbursement provisions.
Management believes that adequate provision has been made for such adjustments.
Until final adjustment, however, significant issues remain unresolved and
previously determined allowances could become either inadequate or more than
ultimately required.
The approximate percentages of NME's net patient revenue by payment sources
for NME's general hospitals are as follows for the fiscal years ended May 31:
1994 1993 1992 1991 1990
---- ---- ---- ---- ----
Medicare....................................... 35.9% 33.9% 32.1% 31.8% 33.4%
Medicaid....................................... 8.5% 7.5 6.4 6.0 5.9
Private and Other.............................. 55.6% 58.6 61.5 62.2 60.7
---- ---- ---- ---- ----
Totals..................................... 100% 100% 100% 100% 100%
---- ---- ---- ---- ----
HEALTH CARE REFORM, REGULATION, LICENSING AND INSURANCE
CERTAIN BACKGROUND INFORMATION
Health care, as one of the largest industries in the United States, continues
to attract much legislative interest and public attention. Medicare, Medicaid,
mandatory and other public and private hospital cost-containment programs,
proposals to limit health care spending, proposals to limit prices and industry
competitive factors are highly significant to the health care industry.
There continue to be federal and state proposals that would, and actions that
do, impose more limitations on government and private payments to providers
such as NME and proposals to increase co-payments and deductibles from program
and private patients. NME's facilities also are affected by controls imposed by
government and private payors designed to reduce admissions and lengths of
stay. Such controls, including what is commonly referred to as "utilization
review," have resulted in a reduction of patient access to certain treatments
and procedures. Utilization review by third party peer review organizations
("PRO's") is required in connection with the provision of care paid for by
Medicare and Medicaid. Utilization review by third parties also is a
requirement of many managed care arrangements. Utilization review entails the
review of the admission and course of treatment of a patient by a third party.
Florida and Tennessee have adopted, and other states are considering
adopting, legislation imposing a tax on revenues of hospitals to help finance
or expand those States' Medicaid systems. The Company currently operates as
part of its ongoing operations five general hospitals, two domestic long term
care facilities (which are managed by Hillhaven), one Campus Psychiatric
Facility and one Campus Rehabilitation Hospital in Florida and two general
hospitals in Tennessee.
Some states require state approval for construction and expansion of health
care facilities, including findings of need for additional or expanded health
care facilities or services. Certificates of Need, which are issued by
governmental agencies with jurisdiction over health care facilities, are at
times required for capital expenditures exceeding a prescribed amount, changes
in bed capacity or services and certain other matters. Following a number of
years of decline, the number of states requiring Certificates of Need is once
again on the rise. State legislators once again are looking at the certificate-
of-need process as a way to contain rising health care costs.
11
Participation in the Medicare program is regulated by federal statute. The
fraud and abuse anti-kickback provisions contained in Section 1128B(b) of the
Social Security Act (the "Act") essentially prohibit the payment or receipt of
remuneration for the referral of patients whose care will be paid for by
Medicare. As written, the statute technically prohibits many common
arrangements between health care providers and their physicians. As guidance,
however, the Office of the Inspector General of the Department of Health and
Human Services has issued regulations which detail certain conduct and business
arrangements permissible under Section 1128B(b) of the Act (the "Safe
Harbors"). The fact that a given business arrangement does not fall within a
Safe Harbor does not render the arrangement per se illegal, but the Company
believes that the government intends to increase its scrutiny of arrangements
that do not fall within the safe harbor. In addition, many states have adopted
statutes similar to the federal antifraud statute. The state statutes, however,
are broader because they prohibit the payment or receipt of remuneration for
the referral of patients regardless of the source of the payment for the care.
The Company systematically reviews all of its operations to ensure that it
complies with the Act and similar state statutes.
The Company's health care operations generate medical waste that must be
disposed of in compliance with federal, state and local environmental laws,
rules and regulations. The Company's operations also are subject to compliance
with various other environmental laws, rules and regulations. Such compliance
does not, and the Company anticipates that such compliance will not, materially
affect the Company's capital expenditures, earnings or competitive position.
See Note 7A of the Notes to Consolidated Financial Statements in the
Company's Annual Report to Shareholders for the year ended May 31, 1994, for a
description of NME's professional and general liability insurance.
NME'S HEALTH CARE FACILITIES
NME's Health Care Facilities are subject to extensive federal, state and
local legislation and regulation. In order to maintain their operating
licenses, Health Care Facilities must comply with strict standards concerning
medical care, equipment and hygiene. Various licenses and permits also are
required in order to dispense narcotics, operate pharmacies, handle radioactive
materials and operate certain equipment. NME's Health Care Facilities hold all
required governmental approvals, licenses and permits. Each operated Health
Care Facility eligible for accreditation is fully accredited by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO"), the
Commission on Accreditation of Rehabilitation Facilities (in the case of the
Campus Rehabilitation Hospitals) or another appropriate accreditation agency,
which accreditation generally is required for participation in government-
sponsored provider programs.
NME's Health Care Facilities are subject to and comply with various forms of
utilization review. In addition, under the Medicare PPS, each state must have a
PRO to carry out a federally mandated system of review of Medicare patient
admissions, treatments and discharges in general hospitals. Medical and
surgical services and practices are extensively supervised by committees of
staff doctors at each Health Care Facility, are reviewed by each Health Care
Facility's local governing board, comprised of health care professionals,
community members and hospital representatives, and are reviewed by NME's
quality assurance personnel. The local governing boards also help maintain
standards for quality care, develop long range plans, establish, review and
enforce practices and procedures and approve the credentials of medical staff.
COMPLIANCE PROGRAM
One component of the Company's settlement with federal agencies executed in
June 1994 is the adoption of a corporate compliance program under which the
Company has agreed, among other things, to: complete the disposition of its
Psychiatric Division Facilities (with the exception of the Campus Psychiatric
Facilities)
12
no later than November 30, 1995; not own or operate other psychiatric
facilities (defined for the purposes of the agreement to include residential
treatment centers and substance abuse facilities) for five years from the date
of completion of the disposition of its Psychiatric Division Facilities; and
divest any psychiatric facilities acquired incidental to a corporate
transaction within 180 days of such acquisition. In addition, the Company has
agreed to implement certain oversight procedures pertaining to the matters that
were the subject of the government investigations and to continue its ethics
training program and ethics telephone hotline. Should the oversight procedures
or hotline reveal, after investigation by the Company, violations of criminal,
or potential material violations of civil laws, rules or regulations governing
federally-funded programs, the Company will report any such violation to the
Departments of Justice and Health and Human Services.
HEALTH CARE REFORM
In the past several years, there have been proposals at both the federal and
state levels calling for significant reforms in the United States health care
system. President Clinton has introduced to Congress a comprehensive reform
plan, the primary goals of which are universal access to medical care and
containment of escalating health care costs. President Clinton has proposed
achieving these goals by requiring businesses to provide health insurance to
all full-time and part-time employees and imposing government cost controls
designed to reduce insurance premiums and the fees charged by health care
providers. In addition, President Clinton has proposed significant reductions
in the Medicare/Medicaid payments made by the government. At this time the
focus on health care reform has shifted from the President's proposals to
various bills being proposed in the United States House of Representatives and
Senate. Prominent features of the leading health care reform proposals at this
time would require employers to pay either 50% or 80% of their employees'
health insurance premiums, subsidize the purchase of health care coverage for
low income people and create a new category of Medicare to cover certain
uninsured people. The Company anticipates that essential portions of these
proposals will be revised before any final bill is voted on. Other bills
include limits on malpractice liability, further restrictions on self-referrals
by physicians, the establishment of price controls in conjunction with a global
budget for United States health care in order to cap health care costs and a
single-payor government health plan. The Company cannot predict whether any
such proposals will be adopted or, if adopted, what effect, if any, such
proposals would have on the Company's business.
In addition to federal health reform efforts, several states have adopted or
are considering health care reform legislation. Tennessee has enacted a
revision to their Medicaid program intended to cover their Medicaid and
uninsured population through a managed care program. California has created a
voluntary health insurance purchasing cooperative that seeks to make health
care coverage more affordable for businesses with five to 50 employees. In
November, 1994, California voters will vote on a ballot initiative intended to
create a single-payor government health plan. Florida has enacted a program
creating a system of local purchasing cooperatives and has proposed other
changes that have not yet been enacted. Louisiana and Texas are planning to
consider wider use of managed care for their Medicaid populations. These
proposals also may attempt to include coverage for some people who presently
are uninsured. A number of other states are considering the enactment of
managed care initiatives designed to provide universal low-cost coverage.
13
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company as of August 22, 1994, who also are not
Directors are:
NAME POSITION AGE
---- -------- ---
Barry P. Schochet Executive Vice President of NME
and President--Hospital Division 43
Maris Andersons Executive Vice President and Treasurer 57
William S. Banowsky Executive Vice President 58
Vincent J. Lico Executive Vice President 60
Raymond L. Mathiasen Senior Vice President and Chief Financial Officer 51
Scott M. Brown Senior Vice President, General Counsel and Secretary 49
Mr. Schochet has been the President and Chief Operating Officer of NME's
Hospital Division since March 1992. Prior to that he served as Assistant Vice
President of hospital operations, Senior Vice President and then Executive Vice
President of NME's Eastern region and most recently as Executive Vice President
and Chief Operating Officer of the Hospital Division. Mr. Schochet began his
service to NME as an Assistant Vice President of NME's Eastern region in 1979,
prior to which he served as the Executive Director of a hospital in Florida.
Mr. Andersons joined NME in 1976, as Senior Vice President, from Bank of
America, where he was a Vice President. Mr. Andersons was elected Treasurer in
1981 and Executive Vice President in 1992.
Mr. Banowsky has been an Executive Vice President of NME since October, 1988.
Mr. Banowsky, also served as a director from 1977 to 1993. Mr. Banowsky's
duties will be consolidated into the duties of other positions and Mr. Banowsky
will no longer be an employee of NME after August 31, 1994.
Mr. Lico, who is a certified public accountant, joined NME in 1979 with NME's
acquisition of Medfield Corporation. Prior to becoming Executive Vice President
in September, 1993, Mr. Lico served as Senior Executive Vice President and
Chief Financial Officer of the Hospital Division from June, 1990 through
August, 1993, and Executive Vice President and Chief Financial Officer of NME's
Hospital Division from June, 1986 through May, 1990. Mr. Lico's duties will be
consolidated into the duties of other positions and Mr. Lico will no longer be
an employee of NME after October 31, 1994.
Mr. Mathiasen is Senior Vice President and, since February 1994, Chief
Financial Officer of the Company. From September 1993 to February 1994, Mr.
Mathiasen was Senior Vice President and acting Chief Financial Officer. Prior
to joining NME as a Vice President in 1985, he was a partner with Arthur Young
& Company (now known as Ernst & Young). Mr. Mathiasen was elected to the
position of Senior Vice President in 1990 and Chief Operating Financial Officer
in 1991.
Mr. Brown is Senior Vice President, Secretary and, since February, 1994,
General Counsel of the Company. He joined NME in 1981. Mr. Brown was elected
Secretary in 1984 and Senior Vice President in 1990. Mr. Brown was appointed
acting General Counsel in July 1993 and General Counsel in February 1994.
ITEM 2. PROPERTIES.
The response to this item is included in Item 1.
ITEM 3. LEGAL PROCEEDINGS.
As previously reported in the Company's Annual Report on Form 10-K for the
fiscal year ended May 31, 1993, various government agencies have conducted
investigations concerning whether NME and certain of its subsidiaries engaged
in improper practices. As a result of negotiations between the Company and the
Civil and Criminal Divisions of the Department of Justice, and the Department
of Health and Human
14
Services, the Company entered into various agreements on June 29, 1994, which
brought to a close all open investigations of the Company, its subsidiaries and
its facilities by the federal government and its agencies. As a result of those
agreements, on July 12, 1994, the United States District Court for the District
of Columbia accepted a plea by a subsidiary operating the Company's psychiatric
hospitals, to an information charging a six-count violation of 42 U.S.C.
(S)1320-7(b)(2)(A) (paying remuneration to induce referrals) and a one-count
violation of 18 U.S.C. (S)371 (conspiracy to make such payments). In addition,
the Company agreed to pay $362,700,000 to the federal government. The court
also accepted a plea agreement pursuant to which another subsidiary pled guilty
to an information charging a one-count violation of 18 U.S.C. (S)666 (making
illegal payments concerning programs receiving federal funds), which related to
a single general hospital. The count relates to activities that occurred while
an individual convicted of defrauding the hospital was its chief executive. On
July 12, 1994, the Company, without admitting or denying liability, consented
to the entry, by the United States District Court for the District of Columbia,
of a civil injunctive order in response to a complaint by the Securities and
Exchange Commission. The complaint alleged that the Company failed to comply
with anti-fraud and recordkeeping requirements of the federal securities laws
concerning the manner in which the Company recorded the revenues from the
activities that were the subject of the federal government settlement referred
to above. In the order, the Company is directed to comply with such
requirements of the federal securities laws. In May, 1994, the Company also
reached agreements in principle with 27 states and the District of Columbia to
pay an additional $16.3 million to settle potential claims arising from matters
involved in the federal investigations. The Company has signed agreements with
26 of those states and the District of Columbia, five of which contain errors
or changes that the Company is attempting to resolve. The 27 states and the
District of Columbia are all of the areas in which the Company's subsidiaries
operated psychiatric facilities.
The shareholder derivative actions filed in the Los Angeles Superior Court in
October and November of 1991 were consolidated into one shareholder derivative
action entitled Harry Polikoff, Harry Ackerman, and Bette Rita Grayson,
Derivatively on Behalf of Nominal Defendant National Medical Enterprises, Inc.
v. Richard K. Eamer, Leonard Cohen, John C. Bedrosian, William S. Banowsky,
Ph.D., Jeffrey C. Barbakow, Bernice B. Bratter, Maurice J. DeWald, Peter de
Wetter, Edward Egbert, M.D., Michael H. Focht, Sr., Raymond A. Hay, Nita P.
Heckendorn, Taylor R. Jenson, Lloyd R. Johnson, James P. Livingston, A.J.
Martinson, M.D., Howard F. Nachtman, M.D., Richard S. Schweiker, Richard L.
Stever, Norman A. Zober, Maris Andersons, Scott M. Brown, Raymond L. Mathiasen
and Marcus E. Powers, Defendants. Plaintiffs' suit was based primarily on
alleged breaches of fiduciary duties and constructive fraud on the part of the
individual defendants. The plaintiffs alleged that, among other things, the
individual defendants knew or should have known of allegedly improper
marketing, billing and other practices within what formerly was known as the
Company's Specialty Hospital Group and failed to take appropriate action as
required by their fiduciary responsibilities. Based on these claims, plaintiffs
sought compensatory damages on behalf of the Company, punitive damages,
injunctive relief, attorneys' fees, interest and costs. Defendants filed three
separate demurrers that were sustained and resulted in dismissal of the action
with prejudice on May 21, 1993. The derivative action was dismissed by the
Court in May, 1993, but the dismissal is being appealed by the plaintiffs. The
parties have been participating in a voluntary mediation process, which
commenced in February 1994 and has included directors and officers liability
insurance carriers. As a result of the voluntary mediation process, the
Company, the other parties to this action and the Company's directors' and
officers' liability insurance carriers have reached an agreement in principle
to settle this matter, subject to agreement to contractual terms and court
approval.
The federal class action lawsuits filed in October and November of 1991 were
consolidated into one action now pending in the U.S. District Court in the
Central District of California entitled In Re National Medical Enterprises,
Inc. Securities Litigation I. The defendants in this action are National
Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen, John C. Bedrosian,
William S. Banowsky, Michael H. Focht, Norman A. Zober, Marcus E. Powers and
Maris Andersons. The action is a consolidated class action against each of the
named defendants for alleged violations of Section 10(b) of the Securities
Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew
or recklessly disregarded that the public statements made by the Company and
several of its officers and directors in reports to the Securities and
15
Exchange Commission, in press releases, communications with shareholders, and
communications with the financial community were false and misleading because
the financial data and projections were based upon a number of alleged illegal
practices at many of NME's psychiatric facilities. Plaintiffs claim that each
of the defendants was a direct participant in this wrongdoing and conspired
with and aided and abetted each of the other defendants in perpetrating the
alleged fraudulent scheme. Plaintiffs also challenge various transactions in
which each of the defendants sold shares of NME stock. Based on these claims,
plaintiffs seek compensatory damages, injunctive relief, attorneys' fees,
interest and costs. Currently, this action is in the discovery stage and no
trial date has been set. As a result of a voluntary mediation process commenced
in February 1994, the Company, the other parties to this action and the
Company's directors' and officers' liability insurance carriers have reached an
agreement in principle to settle this matter, subject to agreement to
contractual terms and court approval.
On August 27, 1993, a federal lawsuit entitled Jerrold Schaffer and Jayne M.
Furman v. National Medical Enterprises, Inc., Richard K. Eamer, Leonard Cohen,
Jeffrey Barbakow and Michael H. Focht, Sr. was filed in the U.S District Court
in the Central District of California. On August 31, 1993, a federal lawsuit
entitled Bernard Weisfeld v. National Medical Enterprises, Inc., Richard K.
Eamer, Leonard Cohen, Jeffrey Barbakow and Michael H. Focht, Sr. was filed in
the U.S District Court in the Central District of California. On December 20,
1993, the United States District Court for the Central District of California
ordered that these cases be consolidated into one action, captioned In re:
National Medical Enterprises Securities Litigation II. These consolidated
actions are on behalf of a purported class of shareholders who purchased or
sold stock of the Company between January 14, 1993 and August 26, 1993, and
allege that each of the defendants violated Section 10(b) of the Securities
Exchange Act of 1934. Specifically, plaintiffs allege that each defendant knew
or recklessly disregarded that the public statements made by the Company and
several of its officers and directors in reports to the Securities and Exchange
Commission, in press releases, communications with shareholders, and
communications with the financial community were false and misleading because
the financial data and projections were based upon a number of alleged illegal
practices at many of NME's psychiatric facilities. Plaintiffs claim that each
of the defendants was a direct participant in this wrongdoing and conspired
with and aided and abetted each of the other defendants in perpetrating the
alleged fraudulent scheme. Based on these claims, plaintiffs seek compensatory
damages, injunctive relief, attorneys' fees, interest and costs. The parties
commenced a voluntary mediation in July, 1994. If the mediation is not
successful, plaintiffs will be required to file an amended and consolidated
complaint in the action. The Company believes it has meritorious defenses to
this action and, if the mediation is not successful, will defend this
litigation vigorously.
During the last fiscal year, the Company settled three lawsuits brought
against it by the following insurance carriers: (1) The Travelers Insurance
Company, Prudential Insurance Company, United of Omaha Life Insurance Company,
Massachusetts Mutual Life Insurance Company, Northwestern National Life
Insurance Company, Mutual of Omaha Insurance Companies, Time Insurance Company,
Phoenix Home Life Mutual Insurance Company, Benefit Trust Life Insurance
Company, Golden Rule Insurance Company, Hartford Life and Accident Insurance
Company, Great Western Life and Annuity Insurance Company, and The New England
Mutual Life Insurance Company filed in the United States District Court for the
District of Columbia (referred herein as "Travelers lawsuits"); (2) Aetna Life
Insurance Company and Metropolitan Life Insurance Company (referred herein as
"Aetna lawsuit") filed in the U.S. District Court for the Northern District of
Texas, Dallas Division; and (3) Connecticut General Life Insurance Company,
Equitable Life Assurance Society of the United States, First Equicor Life
Insurance Company and Equicor Inc. (referred herein collectively as "CIGNA
lawsuit"), filed in the United States District Court for the Northern District
of Texas, Dallas Division. Each of these cases alleged that psychiatric
hospitals owned by NME subsidiaries engaged in fraudulent practices. On
November 4, 1993 the Company signed a definitive settlement agreement with the
insurers that are parties to the Aetna and CIGNA lawsuits. Under the terms of
the settlement the Company paid $125,000,000. In return, the insurers agreed on
an individual basis to resume standard business relations with the Company,
including the opportunity to participate in managed care contracts and to
16
participate in other provider networks. The parties also have dismissed their
respective lawsuits against each other. On February 18, 1994, the Company
signed a definitive settlement agreement to settle the Travelers lawsuits.
Under the settlement the Company paid $89,900,000. All claims between the
parties, including the Company's claims in NME Psychiatric Properties, Inc. vs.
Travelers Insurance Co., et al., have been dismissed with prejudice. In
addition, under the terms of the settlement agreements, the insurers agreed to
expeditiously process all outstanding claims for payment and agreed to meet
with the Company, on an individual basis, with the express goal of
strengthening the respective business relations with the Company, including,
for example, allowing the Company to compete for managed care contracts and
participate in provider networks. The Company has received inquiries from
various other insurance companies and health benefit providers regarding the
possible filing of claims with similar allegations. To date, the amounts
involved are not significant.
The Company and certain of its officers and directors also are subject to
various lawsuits related to alleged malpractice occurring at individual
psychiatric hospitals. Included are numerous cases that allege the existence of
a corporate-wide conspiracy to commit wrongful acts. The underlying allegations
in those cases are substantially similar to the allegations in the insurance
litigation discussed above. NME has settled 90 of these lawsuits (more than
two-thirds of the lawsuits of this type that have been filed to date). The
Company expects that additional similar lawsuits will be filed from time to
time.
On August 16, 1993, the Company was served with a lawsuit in the matter of
Nita P. Heckendorn vs. National Medical Enterprises, Inc., Jeffrey C. Barbakow,
Raymond A. Hay, Maurice J. DeWald and Peter de Wetter. Ms. Heckendorn is a
director and former officer of the Company. Ms. Heckendorn, who joined the
Company in 1982, alleges sex discrimination in employment and retaliation;
sexual harassment; breach of implied employment contract; constructive
discharge in violation of public policy and the California Fair Employment and
Housing Act; tortious interference with prospective economic advantage;
defamation; and intentional infliction of emotional distress. The suit seeks
damages in excess of $15,000,000 for wages, earnings and other benefits,
punitive damages, attorneys fees and costs of suit and other equitable relief.
The plaintiff filed an amended complaint on November 4, 1993. Defendants filed
a demurrer to plaintiff's amended complaint. On January 6, 1994, the Court
sustained defendants' demurrer in part, dismissing certain claims, and denied
defendants' demurrer in part. The remaining claims are pending and the parties
have engaged in discovery. In March, 1994, plaintiff filed a motion for summary
judgment seeking judgment on her claim for retaliatory discharge. After taking
plaintiff's deposition in the Spring of 1994, Defendants filed a cross-motion
for Summary Judgment seeking dismissal of several of plaintiff's claims. In
August, 1994, defendants filed an additional motion for summary judgment on
plaintiff's remaining claims. All three of those motions are set for hearing on
September 19, 1994, and the case is set for trial in mid-December, 1994. The
Company believes that Ms. Heckendorn's claims are without merit.
On October 5, 1993, John Bedrosian filed the lawsuit John C. Bedrosian vs.
National Medical Enterprises, Inc., Jeffrey C. Barbakow, Michael H. Focht, Sr.,
Bernice B. Bratter, Maurice J. DeWald, Peter de Wetter and Lester B. Korn in
the Los Angeles Superior Court. Mr. Bedrosian, who is a director of the Company
and served as its Senior Executive Vice President until September 24, 1993,
when his employment with the Company was terminated without cause pursuant to
the terms of his employment agreement, alleged: breach of oral agreement;
breach of implied in fact contract; breach of the covenant of good faith and
fair dealing; negligent misrepresentation of material fact; bad faith denial of
existence of a contract; breach of written agreement; age discrimination in
employment; libel; tortious interference with contractual relations; conspiracy
to interfere with contractual relations; and intentional infliction of
emotional distress. The suit seeks damages in excess of $20,000,000, exemplary
and punitive damages, declaratory relief, including relief from six loans he
obtained from the Company totaling $3,730,251.27, attorneys fees and costs of
suit and other equitable relief. The Company has filed a cross-complaint
against him for his refusal to make repayment on his six loans. The Company
also filed a motion to have the portion of Mr. Bedrosian's lawsuit that
pertains to his employment agreement with the Company referred to a Superior
Court Referee as provided in the employment agreement. The Company's motion was
granted and Mr. Bedrosian's employment claims against the Company were referred
to a Superior Court Referee for trial. Before that trial began, the Company
filed
17
motions for summary judgment on several of Mr. Bedrosian's claims and on its
cross-complaint against Mr. Bedrosian for his failure to repay his loans. The
Company's motions for summary judgment were granted as to several of Mr.
Bedrosian's claims against the Company, and also as to its claims against Mr.
Bedrosian on three of his six loans totalling approximately $1,997,500. The
Court declined to grant the Company's motion regarding Mr. Bedrosian's three
remaining loans but allowed the Company to supplement its cross-complaint to
reflect that those loans had since become due and payable. The Company has
supplemented its cross-complaint and intends to renew its motion for summary
judgment on Mr. Bedrosian's three remaining loans. The trial of Mr. Bedrosian's
employment-related claims took place in June and July, 1994 before a retired
California Superior Court Judge. During that trial, the Court granted
defendants' motion to have certain other of Mr. Bedrosian's employment claims
dismissed. The trial on Mr. Bedrosian's two remaining claims was concluded on
July 29, 1994. A decision on those claims is expected in August 1994.
In its normal course of business the Company also is subject to claims and
lawsuits relating to injuries arising from patient treatment. The Company
believes that its liability for damages resulting from such claims and lawsuits
is adequately covered by insurance or is adequately provided for in its
financial statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
18
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The response to this item is included on page 33 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1994. The required
information hereby is incorporated by reference.
ITEM 6. SELECTED FINANCIAL DATA.
The response to this item is included on page 8 of the Registrant's Annual
Report to Shareholders for the year ended May 31, 1994. The required
information hereby is incorporated by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The response to this item is included on pages 9 through 13 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The
required information hereby is incorporated by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The response to this item is included on pages 14 through 30 of the
Registrant's Annual Report to Shareholders for the year ended May 31, 1994. The
required information hereby is incorporated by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEMS 10 AND 11. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT; EXECUTIVE
COMPENSATION.
Information concerning the Directors of the Registrant, including executive
officers of the Registrant who also are Directors, and other information
required by Items 10 and 11, is included on pages 2 through 5 of the definitive
Proxy Statement for Registrant's 1994 Annual Meeting of Shareholders and hereby
is incorporated by reference. Similar information regarding executive officers
of the Registrant who, except as noted therein, are not Directors is set forth
on page 14 above. Information regarding compensation of executive officers and
Directors of the Registrant is included on pages 9 through 18 and pages 26
through 29 of the definitive Proxy Statement for the Registrant's 1994 Annual
Meeting of Shareholders and hereby is incorporated by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The response to this item is included on pages 6, 7 and 33 of the definitive
Proxy Statement for the Registrant's 1994 Annual Meeting of Shareholders. The
required information hereby is incorporated by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The response to this item is included on pages 29 through 31 of the
definitive Proxy Statement for the Registrant's 1994 Annual Meeting of
Shareholders. The required information hereby is incorporated by reference.
19
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K.
(a) 1. FINANCIAL STATEMENTS.
The consolidated financial statements to be included in Part II, Item
8, are incorporated by reference to the Registrant's 1994 Annual Report
to Shareholders. (See exhibit (13)).
2. FINANCIAL STATEMENT SCHEDULES.
Schedule I Marketable Securities-Other Investments (included on page F-
1).
Schedule II Amounts Receivable From Directors, Officers and Employees
(included on pages F-2 and F-3)
Schedule V Property, Plant and Equipment (included on page F-4)
Schedule VI Accumulated Depreciation and Amortization of Property, Plant
and Equipment (included on page F-5)
Schedule VIII Valuation and Qualifying Accounts and Reserves (included on
page F-6)
Schedule IX Short-Term Borrowings (included on page F-7)
Schedule X Supplementary Income Statement Information (included on page
F-8)
All other schedules and Condensed Financial Statements of Registrant
are omitted because they are not applicable or not required or because
the required information is included in the financial statements or
notes thereto.
3. EXHIBITS.
(3) Articles of Incorporation and Bylaws
(a) Restated Articles of Incorporation of Registrant, as amended
October 13, 1987 (Incorporated by reference to Exhibit 3(a)
to Registrant's Annual Report on Form 10-K dated August 30,
1993)
(b) Restated Bylaws of Registrant, as amended July 27, 1994
(4) Instruments Defining the Rights of Security Holders, Including
Indentures
(a) Form of Indenture for the Registrant's Convertible Floating
Rate Debentures, dated as of February 1, 1992, among NME PIP
Funding I, Inc., the Registrant and Bankers Trust Company,
as Trustee (Incorporated by reference to Exhibit 4(a) to
Registration Statement on Form S-3, Registration No. 33-
45689, dated February 14, 1992)
(b) Form of Convertible Floating Rate Debenture due April 3,
1996 (Incorporated by reference to Exhibit (e) to
Registrant's Registration Statement on Form S-3,
Registration No. 33-45689, dated February 14, 1992)
(c) Agreement Providing for First Amendment to Convertible
Floating Rate Debentures due April 3, 1996, dated as of
December 11, 1991, between the Registrant and NME PIP
Funding I, Inc. (Incorporated by reference to Exhibit (f) to
Registrant's Registration Statement on Form S-3,
Registration No. 33-45689, dated February 14, 1992)
20
(d) Certificate of Designation, Preferences and Rights of Series
B Convertible Preferred Stock (Incorporated by reference to
Exhibit 4(d) to Registrant's Annual Report on Form 10-K
dated August 23, 1991)
(e) Form of Investment Option Agreement (Incorporated by
reference to Exhibit 10(e) to Registrant's Annual Report on
Form 10-K dated August 28, 1989)
(f) Indenture, dated as of March 1, 1991, between the Registrant
and The Bank of New York, as Trustee (Incorporated by
reference to Exhibit 4(a) to Registrant's Annual Report on
Form 10-K dated August 23, 1991)
(g) Indenture, dated as of April 1, 1985, between the Registrant
and The Bank of New York, as Trustee (Incorporated by
reference to Exhibit 4.1 to Amendment No. 1 to the
Registrant's Registration Statement on Form S-3, File No. 2-
96780, filed with the Securities and Exchange Commission on
April 3, 1985)
(h) Certificate of Designation, Preference and Rights of Series
A Junior Participating Preferred Stock (Incorporated by
reference to Exhibit 4(h) to Registrant's Annual Report on
Form 10-K dated August 30, 1993)
(10) Material Contracts
(a) Guaranty Reimbursement Agreement, dated as of January 31,
1990, by and between the Registrant and The Hillhaven
Corporation (Incorporated by reference to Exhibit 10(e) to
Registrant's Annual Report on Form 10-K dated August 21,
1992)
(b) First Amendment to Guarantee Reimbursement Agreement, dated
as of May 30, 1991, by and between the Registrant and The
Hillhaven Corporation (Incorporated by reference to Exhibit
10(g) to Registrant's Annual Report on Form 10-K dated
August 23, 1991)
(c) Second Amendment to Guarantee Reimbursement Agreement, dated
as of October 2, 1991, between the Registrant and The
Hillhaven Corporation (Incorporated by reference to Exhibit
10(w) to Registrant's Annual Report on Form 10-K dated
August 21, 1992)
(d) Third Amendment to Guarantee Reimbursement Agreement, dated
as of April 1, 1992, between the Registrant and The
Hillhaven Corporation (Incorporated by reference to Exhibit
10(dd) to Registrant's Annual Report on Form 10-K dated
August 21, 1992)
(e) Fourth Amendment to Guarantee Reimbursement Agreement, dated
as of November 12, 1992, between the Registrant and
Hillhaven (Incorporated by reference to Exhibit 10(pp) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(f) Fifth Amendment to Guarantee Reimbursement Agreement, dated
as ofFebruary 19, 1993, between the Registrant and Hillhaven
(Incorporated by reference to Exhibit 10(qq) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(g) Sixth Amendment to Guarantee Reimbursement Agreement, dated
as of May 28, 1993, between the Registrant and Hillhaven
(Incorporated by reference to Exhibit 10(rr) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(h) Seventh Amendment to Guarantee Reimbursement Agreement,
dated as ofMay 28, 1993, between the Registrant and The
Hillhaven Corporation
21
(i) Eighth Amendment to Guarantee Reimbursement Agreement,
dated September 2, 1993, between the Registrant and The
Hillhaven Corporation
(j) Letter dated October 14, 1992 addressed to Robert F. Pacquer
of Hillhaven from the Registrant and certain of its
subsidiaries (Incorporated by reference to Exhibit 10(ll) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(k) Second Omnibus Amendment to Leases dated as of November 12,
1992 among NME Properties Corp., and certain subsidiaries of
NME Properties Corp. and First Healthcare Corporation
(Incorporated by reference to Exhibit 10(mm) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(l) Letter dated June 22, 1993 between the Registrant and
Hillhaven (Incorporated by reference to Exhibit 10(ss) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(m) Agreement Concerning Purchase by NME Properties Corp. and
Certain Sub-sidiaries of Series D Preferred Stock of The
Hillhaven Corporation, dated September 1, 1993, among the
Registrant, NME Properties Corp., NME Properties, Inc., NME
Properties West, Inc., The Hillhaven Corporation and First
Healthcare Corporation
(n) Agreement and Waiver, dated September 2, 1993, among the
Registrant, the subsidiaries of NME signatories thereto,
The Hillhaven Corporation and First Healthcare Corporation
(o) Shareholding Agreement, dated 30 March 1993, among the
Registrant, Westminster Health Care Holdings PLC and P.R.
Carter and Others (Incorporated by reference to Exhibit
10(tt) to Registrant's Annual Report on Form 10-K dated
August 30, 1993)
(p) Agreement for Warranties and Indemnities, dated 31 March
1993, among the Registrant, the Executive Directors of
Westminster Health Care Holdings PLC, the Non-Executive
Directors of Westminster Health Care Holdings PLC, Ernst &
Young Trustees Limited and Others and Westminster Health
Care Holdings PLC (Incorporated by reference to Exhibit
10(uu) to Registrant's Annual Report on Form 10-K dated
August 30, 1993)
(q) Agreement relating to the Placing and Offer of Ordinary
Shares in Westminster Health Care Holdings PLC, dated 31
March 1993, among Westminster Health Care Holdings PLC, the
Executive Directors, the Non-Executive Directors, the
Registrant, Ernst & Young Trustees Limited and Others and
Barclays de Zoete Wedd Limited (Incorporated by reference to
Exhibit 10(vv) to Registrant's Annual Report on Form 10-K
dated August 30, 1993)
(r) Subordinated Loan Note, dated 30 March 1993, in the amount
of 10,000,000 Pounds Sterling payable by Westminster Health
Care Limited, Westminster Health Care (Properties) Limited
and Westminster Health Care Holdings to the Registrant
(Incorporated by reference to Exhibit 10(ww) to Registrant's
Annual Report on Form 10-K dated August 30, 1993)
(s) First Amended and Restated Letter of Credit and
Reimbursement Agreement, dated as of October 1, 1993,
between the Registrant and The Sanwa Bank Limited, Dallas
Agency (Incorporated by reference to Exhibit 10(5) to
Registrant's Quarterly Report on Form 10-Q dated October 15,
1993)
22
(t) Limited Waiver and Consent to First Amended and Restated
Letter of Credit and Reimbursement Agreement, dated as of
April 13, 1994, between the Registrant and The Sanwa Bank
Limited, Dallas Agency (Incorporated by reference to Exhibit
10(f) to Registrant's Quarterly Report on Form 10-Q dated
April 14, 1994)
(u) First Amended and Restated Master Loan Agreement, dated as
of November 30, 1988, as further Amended and Restated as of
January 25, 1990 among MP Funding Corporation, the
Registrant, various NME subsidiaries and various Hillhaven
subsidiaries (Incorporated by reference to Exhibit 10(a) to
Registrant's Annual Report on Form 10-K dated August 23,
1990)
(v) Consent and Waiver Agreement, dated October 13, 1993, with
respect to that certain First Amended and Restated Credit
Agreement, dated as of January 25, 1990, among Credit
Suisse, as letter of credit bank, the banks parties thereto,
Credit Suisse as agent for the banks and MP Funding
Corporation, and that certain First Amended and Restated
Master Loan Agreement, dated as of January 25, 1990, among
the Registrant, certain subsidiaries and affiliates of the
Registrant and MP Funding Corporation (Incorporated by
reference to Exhibit 10(3) to Registrant's Quarterly Report
on Form 10-Q dated October 15, 1993)
(w) Amendment No. 1 to Master Loan Agreement, dated as of
November 2, 1993, between MP Funding Corporation and the
Borrowers thereto (Incorporated by reference to Exhibit
10(c) to Registrant's Quarterly Report on Form 10-Q dated
January 13, 1994)
(x) Waiver and Amendment No. 2, dated as of April 13, 1994,
between MP Funding Corporation and the Borrowers parties
thereto (Incorporated by reference to Exhibit 10(c) to
Registrant's Quarterly Report on Form 10-Q dated April 14,
1994)
(y) Waiver Letter, dated October 14, 1993, from Bank of America
to the Registrant, concerning Overdraft Financing Facility
Agreement, dated December 16, 1992, between the Registrant
and Bank of America, and Advance Account Agreement, dated
December 17, 1992, between the Registrant and Bank of
America (Incorporated by reference to Exhibit 10(4) to
Registrant's Quarterly Report on Form 10-Q dated October 15,
1993)
(z) Second Amendment to Overdraft Financing Facility Agreement,
dated as ofApril 13, 1994, by and among Bank of America
National Trust and Savings Association, the Registrant, and
the corporations listed on Exhibit A to the Agreement
(Incorporated by reference to Exhibit 10(g) to Registrant's
Quarterly Report on Form 10-Q dated April 14, 1994)
(aa) First Amendment to Advance Account Agreement, dated as of
April 13, 1994, by and between the Registrant and Bank of
America National Trust and Savings Association
(Incorporated by reference to Exhibit 10(h) to Registrant's
Quarterly Report on Form 10-Q dated April 14, 1994)
(bb) Credit Agreement, dated as of April 13, 1994, among the
Registrant, the Banks parties thereto, the Issuing Bank and
Morgan Guaranty Trust Company of New York, as Administrative
Agent (Incorporated by reference to Exhibit 10(b) to
Registrant's Quarterly Report on Form 10-Q dated April 14,
1994)
(cc) Asset Sale Agreement, dated December 3, 1993, by and between
the Registrant, as Seller, and HEALTHSOUTH Rehabilitation
Corporation, as Buyer (Incorporated by reference to Exhibit
10(a) to Registrant's Quarterly Report on Form 10-Q dated
January 13, 1994)
23
(dd) Amendment No. 1 to Asset Sale Agreement, dated as of January
3, 1994, by and between the Registrant, as Seller, and
HEALTHSOUTH Rehabilitation Corporation (Incorporated by
reference to Exhibit 10(b) to Registrant's Quarterly Report
on Form 10-Q dated January 13, 1994)
(ee) Asset Sale Agreement (First Facilities), dated March 29,
1994, by and between the Registrant, as Seller, and Charter
Medical Corporation, as Buyer
(ff) Asset Sale Agreement (Subsequent Facilities), dated March
29, 1994, by and between the Registrant, as Seller, and
Charter Medical Corporation, as Buyer
(gg) Employment Agreement, dated as of December 5, 1990, between
the Registrant and John C. Bedrosian (Incorporated by
reference to Exhibit 10(m) to Registrant's Annual Report on
Form 10-K dated August 23, 1991)
(hh) Consulting, Severance, Noncompetition and Confidentiality
Agreement made by and between Richard K. Eamer and the
Registrant, effective July 20, 1993 (Incorporated by
reference to Exhibit 10(h) to Registrant's Annual Report on
Form 10-K dated August 30, 1993)
(ii) Consulting, Severance, Noncompetition and Confidentiality
Agreement made by and between Leonard Cohen and the
Registrant, effective July 20, 1993 (Incorporated by
reference to Exhibit 10(j) to Registrant's Annual Report
on Form 10-K dated August 30, 1993)
(jj) Letter from the Registrant to Jeffrey C. Barbakow, dated
May 26, 1993 (Incorporated by reference to Exhibit 10(l) to
Registrant's Annual Report onForm 10-K dated August 30,
1993)
(kk) Letter from the Registrant to Jeffrey C. Barbakow, dated
June 1, 1993 (Incorporated by reference to Exhibit 10(m) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(ll) Memorandum from the Registrant to Jeffrey C. Barbakow, dated
June 14, 1993 (Incorporated by reference to Exhibit 10(n) to
Registrant's Annual Report on Form 10-K dated August 30,
1993)
(mm) Board of Directors Retirement Plan, effective January 1,
1985 (Incorporated by reference to Exhibit 10(n) to
Registrant's Annual Report on Form 10-K dated August 23,
1991)
(nn) First Amendment to Board of Directors Retirement Plan,
effective as of August 18, 1993 (Incorporated by reference
to Exhibit 10(xx) to Registrant's Annual Report on Form 10-K
dated August 30, 1993)
(oo) Amendment to Directors Retirement Plan, dated as of April
25, 1994
(pp) Supplemental SHERT Plan and Trust, dated June 30, 1991
(Incorporated by reference to Exhibit 10(q) to Registrant's
Annual Report on Form 10-K dated August 23, 1991)
(qq) First Amendment to Supplemental SHERT, dated as of August
15, 1994
(rr) Supplemental Executive Retirement Plan, as amended May 31,
1986 (Incorporated by reference to Exhibit 10(o) to
Registrant's Annual Report on Form 10-K datedAugust 21,
1992)
(ss) Amendment to Supplemental Executive Retirement Plan, dated
as of April 25, 1994
24
(tt) Amendment to Supplemental Executive Retirement Plan, dated
as of July 25, 1994
(uu) 1994 NME Supplemental Executive Retirement Plan Trust
Agreement, dated as of May 25, 1994, as amended July 25,
1994, between the Registrant, and United States Trust
Company of New York
(vv) Long Term Incentive Plan (Incorporated by reference to
Exhibit 10(p) to Registrant's Annual Report on Form 10-K
dated August 21, 1992)
(ww) Annual Incentive Plan (Incorporated by reference to Exhibit
10(q) to Registrant's Annual Report on Form 10-K dated
August 21, 1992)
(xx) 1994 Annual Incentive Plan (Incorporated by reference to
Exhibit B to the Definitive Proxy Statement for the
Registrant's 1994 Annual Meeting of Shareholders)
(yy) Deferred Compensation Plan, effective March 23, 1983
(Incorporated by reference to Exhibit 10(v) to Registrant's
Annual Report on Form 10-K dated August 23, 1991)
(zz) First Amendment to Deferred Compensation Plan, dated as of
August 15, 1994
(aaa) 1994 NME Deferred Compensation Plan Trust Agreement, dated
as of May 25, 1994, as amended July 25, 1994, between the
Registrant and United States Trust Company of New York
(bbb) Performance Investment Plan (Incorporated by reference to
Exhibit 10(d) to Registrant's Annual Report on Form 10-K
dated August 23, 1991)
(ccc) Revolving Credit and Term Loan Agreement, dated as of
December 11, 1991, between the Registrant and NME PIP
Funding I, Inc. (Incorporated by reference to Exhibit 10(g)
to Registrant's Registration Statement on Form S-3,
Registration No. 33-45689, dated February 14, 1992)
(ddd) Director Restricted Share Plan (Incorporated by reference to
Exhibit A to the definitive Proxy Statement for the
Registrant's 1991 Annual Meeting of Shareholders)
(eee) 1994 Directors Stock Option Plan (Incorporated by reference
to Exhibit A to the Definitive Proxy Statement for the
Registrant's 1994 Annual Meeting of Shareholders)
(fff) 1991 Stock Incentive Plan (Incorporated by reference to
Exhibit B to the definitive Proxy Statement for the
Registrant's 1991 Annual Meeting of Shareholders)
(ggg) Severance Protection Agreement, dated June 28, 1994,
between the Registrant and Barry P. Schochet
(11) Statement Re: Computation of Per Share Earnings, page 26
(13) 1994 Annual Report to Shareholders of Registrant
(21) Subsidiaries of the Registrant
(23) Consent of Experts
(a) Accountants' Consent and Report on Consolidated Schedules (KPMG
Peat Marwick LLP)
(b) REPORTS ON FORM 8-K
NME filed no reports on Form 8-K during the last quarter of the 1994 fiscal
year
25
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
(1) STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
(EXHIBIT 11)
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FOR PRIMARY EARNINGS PER SHARE
Shares outstanding at
beginning of period.......... 165,898 166,963 174,765 157,782 148,736
Shares issued upon conversion
of notes and debentures...... -- -- 529 348 9,276
Shares issued upon exercise of
stock options................ 60 27 299 722 936
Dilutive effect of outstanding
stock options................ 1,114 172 495 1,156 1,462
Shares issued as grants of
restricted stock, net of
cancellations................ (48) (52) 75 2 (92)
Shares repurchased as treasury
stock........................ -- (999) (4,295) -- (1,502)
Dilutive effect of 9%
Convertible Subordinated
Debentures(2)................ -- -- -- -- 1,402
Other......................... -- -- (15) -- --
-------- -------- -------- -------- --------
Weighted average number of
shares and share equivalents
outstanding.................. 167,024 166,111 171,853 160,010 160,218
======== ======== ======== ======== ========
Income from continuing
operations................... $215,901 $263,644 $218,199 $145,142 $123,486
Adjustments related to 9%
Convertible Subordinated
Debentures(2)................ -- -- -- -- 1,151
-------- -------- -------- -------- --------
Adjusted income from
continuing operations........ $215,901 $263,644 $218,199 $145,142 $124,637
Earnings per share from
continuing operations........ $ 1.29 $ 1.59 $ 1.27 $ 0.91 $ 0.78
======== ======== ======== ======== ========
FOR FULLY DILUTED EARNINGS PER
SHARE
Weighted average number of
shares used in primary
calculation.................. 167,024 166,111 171,853 160,010 160,218
Additional dilutive effect of
stock options................ 97 23 1 64 76
Assumed conversion of dilutive
convertible notes and
debentures................... 13,966 14,356 20,990 37,118 44,154
-------- -------- -------- -------- --------
Fully diluted weighted average
number of shares............. 181,087 180,490 192,844 197,192 204,448
======== ======== ======== ======== ========
Adjusted income from
continuing operations used in
primary calculation.......... $215,901 $263,644 $218,199 $145,142 $124,637
Adjustments for interest
expense, contractual
allowances and income taxes.. 5,981 4,628 12,207 25,991 30,070
-------- -------- -------- -------- --------
Adjusted income from
continuing operations........ $221,882 $268,272 $230,406 $171,133 $154,707
Earnings per share from
continuing operations........ $ 1.23 $ 1.49 $ 1.19 $ 0.87 $ 0.76
======== ======== ======== ======== ========
- --------
(1) All numbers of shares in these tables are weighted on the basis of the
number of days the shares were outstanding or assumed to be outstanding
during each period.
(2) During the quarter ended August 31, 1989 the 9% debentures were reflected
as a common stock equivalent until they were all redeemed or converted on
or before August 31, 1989. The income adjustments are for calculation
purposes only and do not affect income from continuing operations as
reported.
26
SIGNATURE
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, ON AUGUST 25,
1994.
National Medical Enterprises, Inc.
/s/ RAYMOND L. MATHIASEN /s/ SCOTT M. BROWN
By: _____________________________ By: _________________________________
Raymond L. Mathiasen Scott M. Brown
Senior Vice President Senior Vice President
Chief Financial Officer and
Chief Accounting Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW ON AUGUST 25, 1994, BY THE FOLLOWING PERSONS ON
BEHALF OF THE REGISTRANT AND IN THE CAPACITIES INDICATED:
SIGNATURE TITLE
--------- -----
/s/ JEFFREY C. BARBAKOW
- -------------------------------------------
Jeffrey C. Barbakow Chairman, Chief Executive Officer and
Director (Principal Executive Officer)
/s/ MICHAEL H. FOCHT, SR.
- -------------------------------------------
Michael H. Focht, Sr. President, Chief Operating Officer and
Director
- -------------------------------------------
John C. Bedrosian Director
/s/ BERNICE BRATTER
- -------------------------------------------
Bernice Bratter Director
/s/ MAURICE J. DEWALD
- -------------------------------------------
Maurice J. DeWald Director
/s/ PETER DE WETTER
- -------------------------------------------
Peter de Wetter Director
/s/ EDWARD EGBERT, M.D.
- -------------------------------------------
Edward Egbert, M.D. Director
/s/ RAYMOND A. HAY
- -------------------------------------------
Raymond A. Hay Director
27
SIGNATURE TITLE
--------- -----
Director
- -----------------------------------------
Nita P. Heckendorn
/s/ LESTER B. KORN Director
- -----------------------------------------
Lester B. Korn
/s/ JAMES P. LIVINGSTON Director
- -----------------------------------------
James P. Livingston
/s/ RICHARD S. SCHWEIKER Director
- -----------------------------------------
Richard S. Schweiker
28
NATIONAL MEDICAL ENTERPRISES, INC., AND SUBSIDIARIES
SCHEDULE I--MARKETABLE SECURITIES--OTHER INVESTMENTS
AT MAY 31, 1994
(DOLLARS IN MILLIONS)
NUMBER OF MARKET AMOUNT
SHARES OR VALUE AT AT WHICH
PRINCIPAL BALANCE CARRIED IN
AMOUNT OF COST OF SHEET BALANCE
NAME OF ISSUER AND TITLE OF EACH ISSUE BONDS AND NOTES EACH ISSUE DATE SHEET
- -------------------------------------- --------------- ---------- -------- ----------
The United States Government and
its agencies................... $8 $ 8 $ 8 $ 8
Any state of the United States
and its agencies............... 3 3 3 3
Corporations:
American Express Credit
Corporation................... 2 2 2 2
General Electric Capital
Corporation................... 3 3 3 3
Morgan Guaranty Trust Company
New York...................... 2 2 2 2
Various other issuers of short-
term commercial paper (each
less than $2 million)......... 41 41 42
----
BALANCE SHEET CAPTION: SHORT-
TERM INVESTMENTS............... $ 60
====
Westminster Health Care
Holdings, PLC common stock..... 21,500,000 $ 49 $105 $ 50
The Hillhaven Corporation common
stock.......................... 8,878,147 89 170 69*
The Hillhaven Corporation Series
C preferred stock.............. 35,000 35 35 35
The Hillhaven Corporation Series
D preferred stock.............. 60,546 120 n.a. 28**
Health Care Property Partners... 23.0% 18 31 17
Other investments in common
stock or corporate joint
ventures, substantially all of
which are accounted for by the
equity method.................. 57 n.a. 77**
Land held for expansion......... 33 n.a. 33**
----
BALANCE SHEET CAPTION:
INVESTMENTS AND OTHER ASSETS... $309
====
- --------
* Because of the Company's minority interest in Hillhaven, portions of the
gains from sales of certain NME facilities to Hillhaven have been deferred
and are offset against the cost of the Company's investment above.
** Market values are not available for the Company's Hillhaven Series D
preferred stock, other investments and land held for expansion shown above.
F-1
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS AND EMPLOYEES
YEARS ENDED MAY 31, 1992, 1993, 1994
BALANCE AT BALANCE AT BALANCE AT
MAY 31, AMOUNTS MAY 31, AMOUNTS AMOUNTS MAY 31,
NAME OF DEBTOR 1991 ADDITIONS COLLECTED 1992 ADDITIONS COLLECTED WRITTEN OFF 1993
-------------- ----------- ---------- ----------- ---------- ----------- ----------- ----------- -----------
Maris Andersons..... $ 96,479 $100,903 $ -- $ 197,382 $ 957,773 $ (111,467) $ -- $ 1,043,688
William Banowsky.... -- 80,205 -- 80,205 53,641 (133,846) -- --
John C. Bedrosian... 1,928,349 683,918 (115,085) 2,497,182 2,089,043 (747,334) -- 3,838,891
Leonard Cohen....... -- -- -- -- 1,063,140 (1,063,140) -- --
Kenneth Courage..... 100,000 -- (39,196) 60,804 -- (60,804) -- --
Steven Dominguez.... -- 84,053 -- 84,053 158,991 -- -- 243,044
Richard K. Eamer.... 3,919,092 285,658 (4,204,750) -- 3,473,375 (350,958) -- 3,122,417
Alan Ewalt.......... 227,945 154,647 (114,480) 268,112 115,858 (42,854) -- 341,116
Michael H. Focht,
Sr................. -- 346,850 -- 346,850 381,045 -- -- 727,895
Nita Heckendorn..... 21,048 93,246 (21,048) 93,246 133,817 (980) -- 226,083
Walter C. Kraujalis. 109,981 21,391 -- 131,372 21,683 -- (30,334)(3) 122,721
Vincent J. Lico..... -- 136,440 -- 136,440 95,641 (142,521) -- 89,560
Raymond L.
Mathiason.......... -- 84,053 -- 84,053 104,875 (88,446) -- 100,482
Marcus E. Powers.... -- 163,323 -- 163,323 586,592 (1,873) -- 748,042
Joseph Roche........ 152,000 -- (36,000) 116,000 -- -- (116,000)(5) --
Michael Safran...... 370,000 74,000 (444,000) -- 196,150 -- -- 196,150
Sherwin Small....... 16,876 86,367 (16,234) 87,009 141,710 (228,719) -- --
Neil Sorrentino..... -- 90,338 -- 90,338 89,872 (180,210) -- --
David Spahr......... -- -- -- -- 170,000 (170,000) -- --
Richard L. Stever... 657,310 54,034 (53,976) 657,368 53,976 (53,976) -- 657,368
Barry G. Weinbaum... -- 125,000 (125,000) -- -- -- -- --
----------- ---------- ----------- ---------- ---------- ----------- --------- -----------
$7,599,080 $2,664,426 $(5,169,769) $5,093,737 $9,887,182 $(3,377,128) $(146,334) $11,457,457
=========== ========== =========== ========== ========== =========== ========= ===========
BALANCE AT MAY 31,
1994
-------------------------
BALANCE AT
MAY 31, AMOUNTS CURRENT NOT CURRENT
NAME OF DEBTOR 1993 ADDITIONS COLLECTED (1) (1)
-------------- ----------- ---------- ----------- ---------- -----------
Maris Andersons..... $ 1,043,688 $ 132,990 $ (101,889) $1,074,789(2) $ --
William Banowsky.... -- 62,183 (62,183) 0.00 --
John C. Bedrosian... 3,838,891 262,793 -- 4,101,684(2) --
Steven Dominguez.... 243,044 93,336 (253,894) 82,486 --
Richard K. Eamer.... 3,122,417 120,707 (1,611,135) 231,989(2) 1,400,000(2)
Alan Ewalt.......... 341,116 74,231 (350,070) 65,277 --
Michael H. Focht,
Sr................. 727,895 226,474 (759,786) 194,583 --
Nita Heckendorn..... 226,083 6,649 (232,732) 0.00 --
Walter C. Kraujalis. 122,721 8,398 -- 131,119(4) --
Vincent J. Lico..... 89,560 87,632 (177,192) 0.00 --
Raymond L.
Mathiason.......... 100,482 70,397 (105,602) 65,277 --
Marcus E. Powers.... 748,042 134,617 (381,884) 462,934(2) 37,841(2)
Michael Safran...... 196,150 -- (196,150) 0.00 --
Neil Sorrentino..... -- 72,160 -- 72,160 --
Richard L. Stever... 657,368 53,976 (53,976) 657,368 --
----------- ---------- ----------- ---------- ----------
$11,457,457 $1,406,543 $(4,286,493) $7,139,666 $1,437,841
=========== ========== =========== ========== ==========
F-2
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE II--AMOUNTS RECEIVABLE FROM DIRECTORS, OFFICERS AND EMPLOYEES--
(CONTINUED)
YEARS ENDED MAY 31, 1992, 1993 AND 1994
- --------
(1) Except for Items (2) through (5) below, these loans consist of principal
and interest on (a) full recourse five-year promissory notes bearing
interest at rates of 6.5%, 8% and 9% given to purchase NME common stock
under the Company's stock option plans, and (b) promissory notes given to
NME upon its deposit of federal and state income taxes under withholding
requirements. Shares purchased or vested are pledged as security for these
notes. The tax notes bear interest at rates ranging from 6.5% to 8% and
normally are payable on or before April 15 of the succeeding calendar year,
unless such date otherwise is extended by the Company. Certain tax notes
that were due on April 15, 1993, were extended to October 15, 1993. The tax
benefit to the Company resulting from the exercise of nonstatutory stock
options is reflected in the Company's financial statements as an increase
in stockholder's equity. The current column represents demand loans and
balances due on or before May 31, 1995.
(2) On September 23, 1992, the Executive Committee of the Board authorized
special loans in the aggregate principal amount of $3,000,000 from the
Company to Mr. Richard K. Eamer, who was then the Chief Executive Officer
of the Company. Pursuant to that authorization, an aggregate principal
amount of $3,000,000 was loaned to Mr. Eamer. The loans initially were made
on a demand basis with interest at the rate of 7% per annum. The Company
did not obtain from Mr. Eamer either a promissory note or a pledge
agreement with respect to such loans until the termination of Mr. Eamer's
full-time employment with the Company. In connection with the termination
of Mr. Eamer's full-time employment with the Company, the Company caused
Mr. Eamer to execute a promissory note and a pledge agreement, accepted by
the full Board of Directors, pursuant to which Mr. Eamer paid down the
then-existing balance of his loans from $3,000,000 to $2,200,000 and such
loans were converted into a term loan bearing interest at 7% per annum,
payable through May 31, 1998. Among other rights that the Company has upon
any default, the term loan is secured by (a) Mr. Eamer's investment options
and other rights under the Company's Performance Investment Plan ("PIP"),
including the Company's obligation to repurchase Mr. Eamer's investment
options in April, 1996, for the approximately $2,200,000 he paid for them
in April, 1989, if such investment options have not been exercised, and (b)
all the proceeds thereof. During fiscal year 1993, the Company also made
special loans to three other executive officers: $850,000 to Mr. Andersons,
Executive Vice President and Treasurer, $450,000 to Mr. Powers, former
General Counsel, and $1,300,000 to Mr. Bedrosian, former Senior Executive
Vice President. These loans were made on a demand basis with interest at a
fluctuating rate equal to at least the prime rate (which was 6% at that
time). Although no notes or security agreements were signed at the time the
loans were made, each of Messrs. Andersons, Powers and Bedrosian provided
memoranda to the Company confirming that they understood that their loans
would bear interest and were made on a demand basis. Since such time,
Messrs. Andersons and Powers executed demand promissory notes, bearing
interest at a fluctuating interest rate equal to at least the prime rate
(which was 6% at that time), secured by their investment options and other
rights under the PIP and, in the case of Mr. Andersons, certain additional
collateral, including various other securities of the Company. Mr.
Andersons' note was repaid in July 1994. On May 31, 1994, in a lawsuit
brought by Mr. Bedrosian against the Company, the California Superior Court
for the County of Los Angeles granted the Company's motions with respect to
Mr. Bedrosian's repayment to NME of all of the principal and interest due
with respect to the $1,300,000 and another $504,406 loan. The Company
intends to ask the court to also order Mr. Bedrosian to repay all principal
and interest owing on three other loans to Mr. Bedrosian that are
outstanding.
The Company does not intend to make any similar loans in the future. No
similar loans may be made in the future without the prior approval of the
Compensation Committee.
(3) This loan was forgiven in consideration of services rendered.
(4) Loan made to assist in job transfer at NME's request. The note is secured
by real property and bears interest at 8%.
(5) This amount was written off in lieu of severance compensation upon the
termination of Mr. Roche's employment with the Company.
F-3
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE V--PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
BALANCE AT ADDITIONS RETIREMENTS OTHER BALANCE AT
BEGINNING OF AT COST OR SALES CHANGES END OF
PERIOD (1) (2) (3) PERIOD
------------ --------- ----------- ------- ----------
1992:
Land.................... $ 261 $ 20 $ (12) $ 2 $ 271
Buildings and
improvements........... 1,896 119 (195) 133 1,953
Construction in
progress............... 156 205 (6) (178) 177
Equipment............... 870 160 (75) 45 1,000
------ ---- ----- ----- ------
3,183 504 (288) 2 3,401
Land held for expansion. 28 5 -- (2) 31
------ ---- ----- ----- ------
$3,211 $509 $(288) $ 0 $3,432
====== ==== ===== ===== ======
1993:
Land.................... $ 271 $ 5 $ (20) $ (7) $ 249
Buildings and
improvements........... 1,953 77 (148) 75 1,957
Construction in
progress............... 177 82 -- (212) 47
Equipment............... 1,000 128 (88) 21 1,061
------ ---- ----- ----- ------
3,401 292 (256) (123) 3,314
Land held for expansion. 31 14 (2) (10) 33
------ ---- ----- ----- ------
$3,432 $306 $(258) $(133) $3,347
====== ==== ===== ===== ======
1994:
Land.................... $ 249 $ 2 $ (81) $ 3 $ 173
Buildings and
improvements........... 1,957 22 (610) 19 1,388
Construction in
progress............... 47 61 (3) (46) 59
Equipment............... 1,061 94 (262) 23 916
------ ---- ----- ----- ------
3,314 179 (956) (1) 2,536
Land held for expansion. 33 6 (8) 1 32
------ ---- ----- ----- ------
$3,347 $185 $(964) $ 0 $2,568
====== ==== ===== ===== ======
- --------
(1) Includes amounts from purchased businesses of $13 in 1992 and $2 in 1993.
(2) The retirement or sales column also includes the reclassification of
property, plant and equipment accounts of facilities held for sale.
(3) Other changes reflect transfers upon construction completion and in 1993,
also include the property, plant and equipment accounts of the Company's
United Kingdom nursing home subsidiary, which, as a result of an initial
public offering of common stock in April, 1993, are no longer consolidated
with the Company's financial statements.
The annual provision for depreciation is computed principally using the
straight-line method over the following estimated useful lives: generally 25 to
50 years for buildings and improvements, 3 to 15 years for equipment.
F-4
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE VI--ACCUMULATED DEPRECIATION AND AMORTIZATION OF
PROPERTY, PLANT AND EQUIPMENT
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
ADDITIONS CHARGED TO:
BALANCE AT ----------------------- RETIREMENTS OTHER BALANCE AT
BEGINNING OF CONTINUING DISCONTINUED OR SALES CHANGES END OF
PERIOD OPERATIONS OPERATIONS (1) (2) PERIOD
------------ ---------- ------------ ----------- ------- ----------
1992:
Buildings and
improvements.......... $312 $ 48 $24 $ (48) $ 0 $336
Equipment.............. 356 74 10 (20) 0 420
---- ---- --- ----- --- ----
$668 $122 $34 $ (68) $ 0 $756
==== ==== === ===== === ====
1993:
Buildings and
improvements.......... $336 $ 49 $14 $ (66) $(3) $330
Equipment.............. 420 92 13 (29) (4) 492
---- ---- --- ----- --- ----
$756 $141 $27 $ (95) $(7) $822
==== ==== === ===== === ====
1994:
Buildings and
improvements.......... $330 $ 48 $10 $(127) $50 $311
Equipment.............. 492 95 14 (144) 4 461
---- ---- --- ----- --- ----
$822 $143 $24 $(271) $54 $772
==== ==== === ===== === ====
- --------
(1) The retirement or sales column also includes the reclassification of
property, plant and equipment accounts of facilities held for sale.
(2) Other changes reflect transfers upon construction completion, translation
adjustments and in 1993, also include the property, plant and equipment
accounts of the Company's United Kingdom nursing home subsidiary, which as
a result of an initial public offering of common stock in April, 1993, are
no longer consolidated with the Company's financial statements. 1994 also
includes a write-down of the Corporate headquarters building.
F-5
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
ADDITIONS CHARGED TO:
---------------------------
BALANCE AT BALANCE AT
BEGINNING OF CONTINUING DISCONTINUED END OF
PERIOD OPERATIONS(1) OPERATIONS(1) DEDUCTIONS(2) PERIOD
------------ ------------- ------------- ------------- ----------
Allowance for doubtful
accounts
1992................... $153 $132 $88 $221 $152
1993................... $152 $122 $40 $199 $115
1994................... $115 $111 $35 $184 $77
- --------
(1) Before considering recoveries on doubtful accounts or notes previously
written off.
(2) Accounts written off, net of beginning balances from purchased businesses.
BALANCE AT BALANCE AT
BEGINNING OF ADDITIONS (CHARGED TO END OF
PERIOD DISCONTINUED OPERATIONS) DEDUCTIONS(1) PERIOD
------------ ------------------------ ------------- ----------
Reserve for discontinued
operations
1992................... -- $129 $16 $113
1993................... $113 $160 $172 $101
1994................... $101 $1,113 $749 $465
- --------
(1) Primarily cash disbursements and, in 1994, write-down of assets to net
realizable value and reclassifications to other long-term liabilities.
F-6
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE IX--SHORT-TERM BORROWINGS
YEARS ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
MAXIMUM AVERAGE WEIGHTED
WEIGHTED AMOUNT AMOUNT AVERAGE
BALANCE AVERAGE OUTSTANDING OUTSTANDING INTEREST RATE
CATEGORY OF AGGREGATE AT END OF INTEREST DURING THE DURING THE DURING THE
SHORT-TERM BORROWINGS PERIOD RATE PERIOD PERIOD PERIOD
--------------------- --------- -------- ----------- ----------- -------------
Amounts payable to banks
for borrowings:
1992................... $148 4.7% $233 $109 5.3%
1993................... $133 3.7% $179 $119 4.0%
1994................... $ 66 4.2% $132 $ 87 4.1%
Amounts payable to other
financial institutions:
1992................... $ 20 4.1% $34 $ 7 4.2%
1993................... $ 30 3.1% $54 $ 21 3.0%
1994................... $ 1 3.1% $25 $ 4 3.1%
F-7
NATIONAL MEDICAL ENTERPRISES, INC. AND SUBSIDIARIES
SCHEDULE X--SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEAR ENDED MAY 31, 1992, 1993 AND 1994
(IN MILLIONS)
1992:
Maintenance and repairs................................................. $ 39
Depreciation............................................................ $122
Advertising............................................................. $ 20
1993:
Maintenance and repairs................................................. $ 45
Depreciation............................................................ $142
Taxes other than payroll and income taxes............................... $ 35
1994:
Maintenance and repairs................................................. $ 46
Depreciation............................................................ $143
Taxes other than payroll and income taxes............................... $ 31
- --------
Amortization of intangible assets for all years, taxes other than payroll and
income taxes for 1992, advertising for 1993 and 1994, and royalties for all
years are not presented because such amounts are less than one percent of
operating revenues.
F-8