American Medical International, Inc.

8201 Preston Road, Suite 300
Dallas, Texas 75225
U.S.A.
(214) 360-6300
Fax: (214) 987-0632

Wholly Owned Subsidiary of American Medical Holdings, Inc.
Incorporated: 1956 as Medlabs Inc.
Employees: 25,000
Sales: $2.75 billion

American Medical International was the first investor-owned hospital company in the world. It is currently among the largest hospital-management companies in the United States. American Medical International (AMI) experienced difficulties during the 1980s, largely due to over-expansion and over-diversification, as well as the industry’s volatility. After suffering large losses in 1986 the company retreated in order to strengthen its position in an increasingly competitive hospital environment. At one time busily branching into other countries, AMI now pays closer attention to its domestic operations. AMI was bought out by IMA Holdings Corporation in late 1989 and has since undergone major restructuring, including continued down-sizing. Its focus has shifted from bouts of expansion to the management of solidly profitable ventures such as acute-care and psychiatric hospitals.

American Medical International was founded in 1956 by 39-year-old bacteriologist and bioanalyst Uranus “Bob” J. Appel. Originally called Medlabs, AMI began as an independent medical reference laboratory contracting with Los Angeles-area hospitals. In June 1960, when a 26-bed client hospital was about to close its doors, Medlabs bought it. With this acquisition, and another hospital purchase a year later, AMI initiated the investor-owned hospital industry.

In 1960 Appel also took Medlabs public and changed its name to American Laboratories. After a rash of acquisitions and a resultant financial squeeze, AMI diversified in 1963, forming its first subsidiary: American RX Pharmacy. The subsidiary and the 1964 sale of some valuable commercial real estate helped the young company strengthen its shaky finances. In January 1965, because of its diversification, the company’s name was changed again—to American Medical Enterprises.

In the late 1960s the company acquired two wholly owned subsidiaries: Professional Research, which produced health-interest films and videos, and a cardio-pulminary management company called Inhalation Therapy Services. Two more hospital purchases in 1967 doubled the company’s bed capacity. AMI then sought to expand beyond southern California with the 1969 purchase of three facilities in Texas.

The company made its first foreign acquisition with the purchase of the prestigious Harley Street Clinic in London during the late 1960s. Six months after the purchase, the Harley Street Clinic was performing more open-heart surgery than any other British hospital. The clinic was an excellent marketing tool because of its visibility. It also fulfilled a commitment to invest in Europe that AMI made to investors when the company issued its first Eurodollar note that year. Also, because AMI was the first hospital-management company to arrive in Europe, it held a strategic advantage over its competitors in the international health-care marketplace.

In 1970 the company, in the fastest growing industry in the United States, had most of its operations based in the most rapidly developing parts of the country. AMI acquired its first hospital in Florida and two more in Texas. AMI doubled its size in late 1971 with the purchase of Chanco Medical Industries. Chanco owned 24 hospitals in eight states. In 1972 the company adopted its current name, American Medical International, to reflect its growing activities overseas, including a recent acquisition in Switzerland. Experiencing a dip in earnings in 1974 due to rapid expansion, massive construction costs, and inflation, AMI instituted severe cost-containment policies and restructured.

During this time AMI put a three-year halt on growth while it assimilated these changes. The sacrifice of short-term profits for long-term growth began to bear fruit in 1976, when profits rose by 65%. In the meantime, Royce Diener, a former investment banker, had succeeded Appel as company president. Appel became chairman and CEO. Diener set out to build up AMI’s international operations in Europe, South America, and Saudi Arabia: in 1976 AMI signed a management contract with Ecuador; the following year an AMI regional office and the Princess Grace Hospital were opened in London.

Throughout the late 1970s, AMI focused on broadening its reach, acquiring an international consulting firm called Gordon A. Freisen, International. The consulting subsidiary brought AMI’s activities into ten countries; there were more construction projects in England and Australia, as well as new projects in Spain and Singapore. By the end of the decade, AMI’s revenues were over $500 million. Founder Appel retired as chairman in 1979, and Diener succeeded him. Walter L. Weisman took over as president. Formerly a corporate lawyer, Weisman had joined the company after orchestrating its merger with Chanco seven years earlier. Diener and Weisman ran a company that had grown more than 500% in the previous decade.

Growth continued during the 1980s. In September 1980 AMI bought Hyatt Medical Enterprises, owner of eight hospitals. The purchase price was $66 million cash. AMI then acquired Brookwood Health Services in June 1981 and with it 11 more hospitals and 3 substance-abuse facilities for $156 million. The following month AMI’s growth was challenged when the Federal Trade Commission charged, and later ruled, that the company’s 1979 purchase of a Luis Obispo, California, hospital created a monopoly of the hospital market in that county. The purchase had given AMI control of three of the county’s five hospitals, or 68% of the hospital beds, and American Medical was forced to divest French Hospital, for which it had paid twice the asking price.

American Medical’s stated aim throughout the early 1980s was to acquire small hospitals and related medical facilities approximately every six weeks. To this end, AMI invested more than $750 million over a three-year period ending in fiscal 1983 to expand, modernize, and diversify its operations.

International growth boomed in 1982 and 1983, with management contracts signed in Saudi Arabia, Greece, and Canada and the opening of more hospitals in England, Switzerland, and Scotland. Domestically, AMI’s outpatient surgical and industrial medical centers were the largest providers in their respective fields, as were AMI’s physical-therapy and respiratory-therapy subsidiaries.

During this time, the industry was changing. In 1981 the health-care industry was the second-largest in the United States. By 1984, however, the hospital business was experiencing a decline. In 1983 the federal government had initiated major changes in the industry with a new Medicare and Medicaid reimbursement system. These cost-cutting measures sparked industrywide streamlining. In a short time, empty hospital beds began to plague hospital chains.

Nonetheless, AMI made one of the largest acquisitions in investor-owned hospital history in 1984. Lifemark Corporation was an oil belt-based chain of 25 hospitals and 3 substance-abuse facilities. The purchase was made just as the industry had begun to cut costs and slow down. The merger was expected to boost AMI’s earnings by improving the company’s economies of scale. Instead, AMI almost toppled under its own weight.

Between merger costs and dropping occupancy rates— along with other results of industry decline—AMI saw depressed earnings in 1984. By 1986, AMI was widely considered to be the poorest-performing of the big hospital chains. Steadily profitable until 1986, AMI lost more than $97 million that year. Those losses and the threat of takeover forced the company into an austerity program: the operating budget was slashed by one-third, corporate overhead was reduced by $30 million, and lay-offs were extensive. Ten underperforming hospitals were put up for sale, as well as most of the alcohol rehabilitation centers and the entire physical-therapy operation.

The remainder of the 1980s was spent dismantling the expansion that had taken place under Diener, whose earnings projections had been unrealistic to start, but became impossible when AMI’s hospital occupancy rate fell below 50%. The Lifemark acquisition was failing to pay for itself; the industry was still slowing, and regulations were increasing; revenues from psychiatric and alcohol rehabilitation acquisitions that Diener calculated would generate 40% of AMI’s profits brought in less than 10%.

In 1987 Diener resigned as chairman and was replaced by Weisman. Facing takeover rumors, Weisman stepped up the cost-cutting and streamlining of the company. Underproducing assets were sold, including the nation’s first AIDS facility in Houston, Texas. Only open for one year, the hospital had lost $8 million.

These changes helped AMI see a slight increase in revenues for 1987; the same year the company fought off a $1.9 billion takeover bid by Chicago physician LeRoy Pesch. Selling money-losing hospitals in a troubled industry was a challenge, and AMI faced more takeover threats. In 1988, the company sold 104 hospitals and continued to cut back on corporate overhead and concentrate on dependable specialities such as obstetrics.

In March 1989, when the AMI board announced that it would entertain takeover bids, there were several offers. Shortly before the June 29 deadline for offers, AMI received a $3.3 billion bid from IMA Holdings Corporation. In October AMI agreed to be bought out by IMA, a group controlled by Corpus Christi, Texas–based merchant banker Harry Gray and Mel Klein and Partners. IMA was subsequently renamed American Medical Holdings. On April 3, 1990, AMI’s shareholders approved the merger, and on April 12 AMI was merged into American Medical Holdings. Harry Gray, former United Technologies Corporation chairman, then became AMI’s chairman and CEO. AMI’s new owners launched a divestiture program, selling 12 acute-care and psychiatric hospitals, as well as 65% of AMI’s stake in its British subsidiary. Corporate overhead was cut by the elimination of regional offices and the decision to relocate headquarters from its expensive Beverly Hills, California, location to Dallas, Texas.

With the help of these measures AMI reported an increase in revenues and cash flow for their first fiscal quarter in 1990. AMI must continue to trim its unwieldy assets. No longer threatened by takeover bids, the company can now concentrate on adjusting to the changing health-care industry.

Principal Subsidiaries

A.M.E. Leasing Corp; American Medical (Central), Inc.; American Medical Home Care, Inc.; AMI Ambulatory Centres, Inc.; AMI Diagnostic Services, Inc.; AMI Family Health Care Centers, Inc.; AMI Group Health Services, Inc.; AMI Healthcare Centers–Houston, Inc.; AMI Information Systems Group, Inc.; AMI Purchasing Services, Inc.; Amisub (American Hospital), Inc.; Amisub (Anclote), Inc.; Amisub (Comprecare), Inc.; Amisub (Culver Union Hospital), Inc.; Amisub (Del Amo), Inc.; Amisub (FPC), Inc.; Amisub (Irvine Medical Center), Inc.; Amisub (Lanham), Inc.; Amisub (Mclntosh Trail Regional Medical Center), Inc.; Amisub (North Ridge Hospital), Inc.; Amisub of California; Amisub of Florida, Inc.; Amisub of North Carolina, Inc.; Amisub of Orlando, Inc.; Amisub of South Carolina, Inc.; Amisub (Prince George’s), Inc.; Amisub (PSL), Inc.; Amisub (Saint Joseph Hospital), Inc.; Amisub (Sierra Vista), Inc.; Amisub (South Bay), Inc.; Amisub (The Retreat), Inc.; Amiwoodbroke, Inc.; Arroyo Grande Community Hospital; Atlanta Medical Ventures, Inc.; Brookwood Health Services, Inc.; Brookwood Primary Care Centers, Inc.; Central Arkansas General Hospital, Inc.; Circle City Hospital; Clairemont General Hospital, Inc.; Community Hospital of Santa Cruz, Inc.; Cumming Medical Ventures, Inc.; East Cooper Community Hospital, Inc.; Eastern Professional Properties, Inc.; Fayette Medical Venture, Inc.; Frye Regional Medical Center, Inc.; GCH, Inc.; Green-way Insurance Company (75%); Hamilton Credit Corporation, Inc.; Heartland Corporation; Inhalation Therapy Services, Inc.; Lanham Medical Ventures, Inc.; LifeCare Management Systems, Inc.; Lifemark International Health Care, Ltd. (Cayman Islands); Lucy Lee Hospital, Inc.; Medical Center of Garden Grove; Mid-Continent Medical Practices, Inc.; North Fulton Medical Center, Inc; North Fulton MOB Ventures, Inc.; Orlando Medical Ventures, Inc.; Palm Beach Gardens Community Hospital, Inc.; Parkway Regional Medical Center, Inc.; Physicians Development, Inc.; Professional Medical Advisors, Inc.; Roswell Medical Ventures, Inc.; San Dimas Community Hospital; Sierra Vista Hospital, Inc.; St. Mary’s Hospital, Inc.; Stewart Design Group, Inc.; Tampa Health Ventures, Inc.; Texas Professional Properties, Inc.; West Alabama General Hospital, Inc.

—Carol I. Keeley