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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM ___________ TO __________
COMMISSION FILE NUMBER 1-7008
COMMUNITY PSYCHIATRIC CENTERS
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 94-1599386
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION NUMBER)
ORGANIZATION)
6600 W. CHARLESTON BOULEVARD SUITE 118, LAS VEGAS, NV 89102
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (702) 259-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, $1.00 Par Value New York Stock Exchange
Pacific Stock Exchange
</TABLE>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
(TITLE OF CLASS)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
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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 registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part
III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on February 8, 1996, based on the closing price on the New York
Stock Exchange was: $398,671,000
Number of shares outstanding on February 8, 1996: 46,856,000
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ITEM 1. BUSINESS
This Annual Report on Form 10-K contains certain forward looking statements
that are subject to risk and uncertainty. There can be no assurance that these
future results will be achieved. Readers are cautioned that a number of
factors, including those identified below, could adversely affect the
Company's ability to obtain these results: (a) increased payor pressures in
the domestic psychiatric industry with respect to negotiated rates and other
cost-containment measures, (b) uncertainties in the regulatory environment due
to proposed health care reform legislation, including changes in Medicare and
Medicaid reimbursement programs, and (c) increased competition among
hospitals, managed care providers and other health care providers.
The following discussion should be read in conjunction with the industry
segment information presented in the notes to the financial statements
appearing in Item 8.
OVERVIEW
The Company is a leading provider of psychiatric services for adults
adolescents and children with acute psychiatric, emotional, substance abuse
and behavioral disorders. The Company currently offers a broad spectrum of
inpatient, partial hospitalization, outpatient and residential treatment
programs through 28 hospitals in 15 states and Puerto Rico, and 15 hospitals
in the United Kingdom. The Company also offers long-term critical care
services in 12 states through 13 freestanding hospitals, a satellite hospital
and one hospital that shares a building with one of the Company's psychiatric
hospitals. The company operated 35 hospitals in the U.S. Psychiatric Division
until November 1995 when the Company discontinued psychiatric operations at
six of these facilities. One additional psychiatric hospital was closed in
January of 1996. Two of these facilities shared space with the long-term
critical care division. Long-term critical care services will continue to be
provided at these locations and will expand to use all of the previously
shared buildings.
RECENT DEVELOPMENTS
Hospital Closures and Restructuring. Since November 1995, the Company has
begun a restructuring by closing unprofitable hospitals and reducing regional
and corporate overhead. Six underperforming hospitals were closed in November
1995, two of which shared space with the Company's long-term critical care
division. These two previously shared facilities are now being completely
converted to THC long-term critical care facilities. A seventh psychiatric
facility was closed in January 1996. The Company's historic multi-regional
structure (which had been consolidated since 1993 from 9 regions to 2), was
further consolidated in November 1995 into one centralized organizational
structure under one management team to enhance cost-effectiveness and
corporate responsiveness to field operations. The Company also centralized
marketing operations. Further reductions in overhead costs were implemented in
January 1996, and poorly performing facilities will continue to be monitored
closely for potential closure or sale if their financial performance does not
improve on a timely basis.
New Management. In November 1995 the Company put in place a new management
team with extensive experience in psychiatric/behavioral health operations to
manage the U.S. psychiatric business and to improve profitability. William
Hale, who had joined Community Psychiatric Centers ("CPC") in May 1995 to
serve as chief operating officer of its Managed Care Services division, was
appointed president. Charles Smith, formerly senior vice president responsible
for Eastern Division operations, was promoted to a newly-created chief
operating officer position. The Company developed a wide variety of
initiatives and programs to strengthen operations for the new management team
to implement, including (i) expanding the psychiatric and behavioral health
services offered, (ii) placing a heavier emphasis on cost containment and
collections, (iii) establishing a centralized marketing function and expanding
marketing and business development efforts directed to managed care
organizations, (iv) enhancing account management services to clients and (v)
establishing and expanding creative forms of partnerships and other alliances
with medical/surgical hospitals and various payer organizations. However,
there can be no assurance that the new management team or the Company will be
successful in the short-term in significantly improving operating results. The
new management team also plans to move quickly on a hospital closure when
circumstances warrant such action.
Spin-off Transaction. On December 20, 1995, the Company announced that the
CPC Board of Directors had preliminarily approved a plan to spin-off the U.S.
psychiatric business in the form of a taxable dividend to
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the CPC shareholders. The plan calls for CPC to be split into two independent
publicly held corporations, one providing psychiatric services in the U.S. and
one operating THC, U.K. psychiatric operations and Puerto Rico psychiatric
operations. The spin-off is subject to a number of conditions, including
regulatory and other third party approvals, market conditions, final approval
of the Board of Directors and shareholder approval, accordingly, there can be
no assurance that the Company will be successful in consummating the spin-off.
However, it is anticipated that the spin-off and related matters will be
submitted to shareholders at the Annual Meeting to be scheduled at a later
date. The special dividend is expected to be distributed by mid 1996.
Indications of Interest Received for PHG. The Company has received a number
of unsolicited indications of interest to acquire its United Kingdom
subsidiary--the Priory Hospitals Group ("PHG"). There can be no assurance that
these inquiries and related discussions will result in a sale of PHG. The
Company is giving each indication of interest received to date careful
consideration, and does not intend to make further announcements until these
discussions are terminated or the Company enters into a definitive agreement.
PSYCHIATRIC SERVICES
The Company is a leading provider of psychiatric/behavioral services for
adults, adolescents and children with acute psychiatric, emotional, substance
abuse and behavioral disorders. The Company currently offers a broad spectrum
of inpatient, partial hospitalizations, outpatient and residential treatment
programs through 28 hospitals in 15 states and Puerto Rico and also provides
comprehensive managed care/case management services for payors throughout the
U.S.
The psychiatric/behavioral care industry in the United States continues to
undergo significant change due to the expanding influence of managed care and
cost-containment measures imposed by governmental and third party payors and
employers. Providers such as the Company continue to experience a significant
increase in the percentage of revenues from payors that reimburse on
negotiated per diem or case rates, episodes of care or length of stay rates,
or on a discounted basis. In addition, this same trend has resulted in higher
deductibles and co-insurance for patients. Negotiated rates with managed care,
government and other third parties have decreased, and the use of less
intensive settings of behavioral care in place of inpatient treatment has
increased. Providers such as the Company have also been affected by the
aggressive privatization of state and county psychiatric/behavioral services
which has generally resulted in lower rates. Payors also have adopted
increasingly stringent admission and length of stay criteria and other
treatment constraints. All of these factors adversely affect utilization and
reimbursement for psychiatric services. As a result, psychiatric care
providers in the U.S. have been forced to adapt their clinical practices,
business practices and operating strategies.
The Company's operating results for the periods presented have been
adversely affected by several factors, including: (i) expansion of managed
care and its penetration into new markets throughout the U.S.; (ii)
significant reduction in reimbursement from government, state and county
payors that are aggressively trying to reduce their costs for all forms of
health care; (iii) management in certain markets who have not changed rapidly
enough to meet the demands of a changing marketplace; and (iv) erosion of
length of stay due to the development of alternative services such as partial
programs, intensive outpatient services and behavioral home care, all of which
can be delivered in a more cost effective setting. Due in part to these
issues, the Company has gone through a major restructuring, as described above
in "Recent Developments" and is in the process of implementing the initiatives
discussed under "Business--Business Strategy," below.
LONG-TERM CRITICAL CARE
In November 1992, to diversify beyond psychiatric care, the Company, through
its wholly-owned subsidiary Transitional Hospitals Corporation ("THC"), began
to offer long-term critical care services in converted, previously
underutilized psychiatric hospitals and newly-acquired freestanding acute care
facilities. The Company incurs significant capital and start-up costs in
connection with the acquisition and conversion of each facility, and each of
the new facilities is expected to generate significant operating losses until
the facility is certified as a long-term critical care hospital at which time
it qualifies for cost-based reimbursement. Pending such certification, these
start-up hospitals are reimbursed under the Medicare Prospective Payment
System ("PPS") which does not pay the full cost of treating Medicare patients
with the severity of illness treated at
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THC facilities. Such certification typically occurs after the facility's first
six months of operations during which the facility establishes an average
length of stay in excess of 25 days.
Of the 14 THC hospitals in operation during fiscal year 1995, 13 were
certified as long-term care hospitals and therefore received cost-based
reimbursement under Medicare, whereas at the same time in 1994, 13 facilities
were in operation and eleven had been open long enough to receive their long-
term care hospital certification. In addition, 11 facilities completed their
"TEFRA" (Tax Equity and Fiscal Responsibility Act of 1982) rate setting period
during fiscal year 1995 and are now eligible for an additional incentive
payment if their costs are less than the targeted rate per discharge. See
"Business--Regulation and Reimbursement--Medicare and Medicaid".
BUSINESS STRATEGY
Psychiatric Hospitals--United States
The Company has refocused its business strategy to meet the needs of the
current U.S. psychiatric care industry by ensuring the most cost-effective
delivery of quality care in an environment of reduced reimbursement and
inpatient hospital stays. However, there can be no assurance that the Company
will be successful in achieving its business strategy objectives. The
Company's present operating strategy includes the following key elements:
Focus on Core Business
. Focus on Core Business Operation. Management has instituted an intense
refocusing on core business operations. As part of this action plan,
management is monitoring on a regular basis and holding all hospital
CEOs accountable for key operating indicators such as labor costs and
staffing levels, clinician compensation, purchased services and
ancillary costs. Management also continues to focus on cash collections
and reducing contractual and bad debt expenses by more closely
monitoring managed care contracts, collecting at time of patient
admission, scrutinizing in more detail all denials and appeals, and
establishing clear communication and coordination among all the hospital
departments and the hospital business office. Furthermore, management
has both expanded and increased its utilization of its national managed
care contract data base to ensure consistent contract negotiations and
coordinate account management among all the Company's operations and
payors across the country.
. Align Hospital Management Incentives. The Company maintains an emphasis
on ensuring that hospital CEO and management team compensation
incentives are aligned with corporate objectives. Accordingly, the
Company measures and rewards hospital CEOs and management teams for
their facility's quality of care, ability to meet payor and patient
needs and achievement of financial objectives. CEOs and their management
teams are encouraged to establish ventures that provide future avenues
of growth while still being rewarded for growth in their core
businesses.
. Reengineer the Organizational Structure to Establish a Result-oriented
Management Infrastructure. The Company has recently completed a
significant reduction in overhead, including the entire regional
management infrastructure. The Company believes that the elimination of
costly and redundant personnel as well as the cumbersome authorization
protocols inherent in that structure will result in an organizational
structure that is both effective and efficient. The Company has also
implemented a centralized management recruiting effort to improve the
standardization of quality and skills at senior levels, hospital CEOs,
CFOs, marketing directors and physicians. The Company plans to continue
monitoring its management infrastructure and will continue to reengineer
its control structure in order to maintain an efficiently managed
organization.
Focused Development
. Strengthen Alliances with General Medical/Surgical Hospitals. The
Company has targeted the top general medical/surgical hospitals in each
of its local markets to establish alliances including joint purchasing
arrangements of laboratory, pharmacy and ancillary services; packaged
bids to privatize the local community's public health care programs; and
joint ventures, partnerships or other entities that offer health care
services designed to address the specific needs of each particular local
market
3
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(including home health care, gero-psychiatric/behavioral services or
disease management of psychiatric/behavioral services within the general
medical/surgical hospital's emergency room or psychiatric care unit).
. Develop Integrated Delivery Systems. Management recognizes the need to
be a part of Integrated Delivery Systems, and as a result, is
establishing relationships with other health care providers in each of
its markets. As part of this strategy, the Company may consolidate
certain of its operations within the facilities of other health care
providers associated with the IDS, or the operations of such health care
provider may be consolidated within the Company's facilities.
. Pursue Government Contracts. The Company believes that the privatization
of health care represents a strong area of potential growth given the
current fiscal pressures faced by governments. Consequently, the Company
is actively pursuing opportunities to provide the psychiatric health
care services to state, county or municipal governments within the
markets that it serves. The Company's response to privatization efforts
are supported by other corporate initiatives including the establishment
of IDSs and its plan to affiliate with general medical/surgical
hospitals.
. Strengthen Relationships with Payors. The Company continually examines
and assesses the "user friendliness" and attractiveness of its programs
in meeting the needs of the Company's payors. Based on this analysis,
the Company refines its program offerings and business protocol.
Programs developed to better meet the needs of payors include length of
stay contracts, case rates and episodes of care rates. The Company's
efforts are directed at cultivating a cooperative environment with
payors. The Company has refined its management and clinical outcome
capabilities to further integrate them with these functions as performed
by payors and the other health care providers serving payors.
. Strengthen Youth Service Programs and Develop Other Alternative
Behavioral Health Care Regimens. Youth service programs represent one of
the fastest areas of growth in behavioral health care. The current short
supply of such programs is forcing many state and county governments to
send their young offenders to programs out of state. The Company will
continue to strengthen its position as a provider of youth services and
will also look to develop other forms of alternative behavioral care
that provide similar growth opportunities.
While the Company believes that implementing the above described programs and
strategies will enable the Company to improve operations, there can be no
assurance that the Company will be successful in doing so.
Psychiatric Hospitals and Dialysis Units--United Kingdom
Currently, the Company operates 12 psychiatric hospitals and two smaller
treatment units in the United Kingdom through which it provides primarily
inpatient treatment to patients covered by private health insurance. It also
operates a substance abuse clinic, a secure psychiatric facility and two
kidney dialysis facilities for Britain's National Health Service ("NHS").
Based on the number of licensed hospital beds, the Company is the leading
commercial provider of psychiatric services in the United Kingdom where
psychiatric services are generally available to residents without charge from
government-owned NHS hospitals. Approximately 12% of the British population is
covered by private health insurance.
The Company also operates two adolescent care units for children who have
been traumatized by abuse, or who have emotional and behavioral problems and
learning difficulties. These children are placed at the units by local
statutory authorities.
Management intends to continue to explore acquisitions and alliances to take
advantage of an increasing willingness on the part of the British government
to contract with private providers, and to expand the Company's dialysis
business in the United Kingdom.
THC Hospitals
Traditionally, patients suffering from long-term complex medical problems
have stayed in the intensive care unit of general acute care hospitals until
they were sufficiently well to be transferred to less intensive care settings.
Such stays are relatively expensive, reflecting the cost of intensive on-site
equipment and services that,
4
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while necessary for hospitals to accomplish their primary missions, are not
required for the ongoing treatment of these patients. Over the past ten years,
hospitals have come under increasing pressure to reduce the length of patient
stays as a means of containing costs. Managed care organizations have limited
hospitalization costs by controlling hospital utilization and negotiating
discounted rates for hospital services. Traditional third party indemnity
insurers have begun to limit reimbursement to pre-determined amounts of
"reasonable charges," regardless of actual costs, and to increase the co-
payments required to be paid by patients. In 1983, Congress sought to contain
Medicare hospital costs by adopting the Prospective Payment System ("PPS")
under which hospitals generally receive a specified reimbursement rate
regardless of how long the patient remains in the hospital or the volume of
ancillary services ordered by the attending physician. The effect of these
various cost-containment measures have provided hospitals with an incentive to
discharge patients more quickly.
THC has primarily targeted larger-population markets which have significant
populations of persons over the age of 65. The aging of the population,
advancements in medical care, the desire of payors and patients for lower cost
and more specialized alternatives to traditional acute care hospitals and the
disincentive for such hospitals to provide long-term care to critically ill
patients has led to a growing demand for long-term critical care services. The
Company believes that providers such as skilled nursing facilities and home
care providers are not in the best position to efficiently provide health care
services to these critically ill patients. Traditional skilled nursing
facilities have generally focused on providing long-term custodial care to
persons eligible for Medicaid. As a result of Medicaid "cost ceilings" on
reimbursement for each patient, nursing homes face an economic disincentive to
treat medically complex patients. Home health care is not a viable alternative
to inpatient care for such patients because of their continued need for (i)
intensive and specialized medical care and equipment, (ii) the availability of
physicians and 24-hour nursing care, and (iii) a comprehensive array of
rehabilitative therapy. As a result of its improved operating results in 1995,
the Company continues to believe that a market opportunity exists for
providers dedicated exclusively to providing long-term critical care. However,
there can be no assurance that the Company will be able to successfully
execute its expansion plans of THC operations or that health care reform will
not adversely affect THC's financial performance. See "Business--Regulation
and Reimbursement."
To capitalize on this opportunity, THC offers long-term critical care to
patients who are stabilized and do not require the complete spectrum of
intensive care services provided by traditional acute care hospitals, but who
are too ill to return home or be placed in a nursing home. THC provides care
to those suffering from pulmonary diseases, kidney failure and other complex
medical problems; such patients require a variety of intensive services
including life-support systems, post-surgical stabilization, intravenous
therapy, subacute rehabilitation and wound care. THC's strategy is to provide
a comprehensive range of long-term critical care that will enable it to treat
most types of critical care patients, regardless of their diagnosis or medical
condition, with the objectives of returning these patients to full activity.
THC offers managed care organizations and indemnity insurance payors a
single source from which to obtain long-term critical care services. The
Company believes THC addresses cost-containment pressures affecting the health
care industry by offering a high quality, cost-effective alternative to
traditional acute care hospitals.
THC's immediate expansion plan is to open two facilities in fiscal 1996. The
Company will expand THC's operations primarily by (i) leasing beds in acute
care facilities owned by others, (ii) acquiring and converting freestanding
acute care and psychiatric facilities and (iii) converting selective
previously underutilized psychiatric hospitals owned by the Company to long-
term critical care use.
PSYCHIATRIC CARE OPERATIONS
Services and Programs
Over the past several years, the Company has significantly expanded the
scope of its psychiatric treatment programs to create a continuum of care from
which the most appropriate and cost-effective treatments can be selected to
meet the needs of its payors and patients. In addition to offering traditional
inpatient treatment
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programs, the Company provides less costly treatment alternatives such as
partial hospitalization, residential treatment and intensive and non-intensive
outpatient programs. By offering such programs through a single organization,
the Company believes that patients receive the most appropriate treatment, and
that the transition among differing intensities of care occurs rapidly and
cost effectively from the perspective of the patient, clinical team (including
the medical director, the clinical or nursing director, the admissions
director and the program director) and payor. The Company's patient programs
include:
. Inpatient. Inpatient treatment is provided when the patient's disorder
prevents him or her from safely performing routine daily activities
without 24-hour supervision. Intensive individual or group therapy is
provided and the patient's daily activities are highly structured.
Treatment regimens are designed to enable transition to a less intensive
treatment program as soon as feasible.
. Residential. Residential treatment programs specialize in providing
treatment for adolescents who need more structured treatment than can be
provided through outpatient care. The Company also operates several
acute residential treatment programs for adults. The Company's 19
residential treatment centers typically have 10 to 30 beds and each are
staffed with a psychiatrist, 24-hour nursing and an on-site licensed
program therapist.
. Partial Hospitalization. Partial hospitalization (including outpatient
visits) is provided when the patient's disorder does not require 24-hour
supervision and is such that the patient may be treated while living at
home. Treatment regimens are generally for 6-12 hours per day, up to 7
days per week, and are structured to meet the patient's specific
clinical needs as well as the patient's work, school and home life
requirements.
. Intensive Outpatient. Intensive outpatient programs are provided when a
patient's disorder necessitates routine observation, supervision or
intervention but does not require inpatient or partial hospitalization
treatment. Treatment is generally provided for 3-4 hours per day,
typically 3-4 days per week, according to the patient's clinical needs
and daily routine.
. Outpatient. Outpatient treatment is offered when a patient's disorder
requires therapeutic intervention at a level that is less intensive than
the Company's other psychiatric services. This type of treatment
generally involves individual, family or group therapy of 45-90 minutes
per session on a scheduled basis. Typically, the Company will refer
these types of patients to community-based clinicians as appropriate to
the needs and location of the patient.
The Company also offers payor services for the above described programs
designed to be attractive, effective and efficient for payors:
. Managed Care/Case Management. The Company offers case management
services to payors such as health maintenance organizations ("HMOs"),
preferred provider organizations ("PPOs") and firms specializing in
psychiatric/behavioral health care managed care services. The managed
care/case management programs also include case reviews and claims
payment services. These services may be attractive to payors that no
longer wish to directly provide psychiatric/behavioral case management
services or that may desire access to a larger network of patient care
programs.
. Clinical Outcome Information. The Company's information system, "CPC-
INFO," is designed to gather and synthesize patient satisfaction data,
clinical outcomes data, clinical views of symptomology and demographic,
program, payor and resource data in a common data base. The consolidated
data provides useful information for the professional treatment team,
the payor and the regulatory agency. CPC-INFO better enables the Company
to demonstrate to payors effectiveness and quality of care, standardized
clinical operations, clinical outcomes, regulatory compliance, patient
satisfaction and overall value.
For the year ended November 30, 1995, the average length of stay for the 35
U.S. psychiatric hospitals' inpatient and residential treatment programs was
9.2 days and 94.5 days, respectively. Adjusted patient days for inpatient,
partial hospitalization (including outpatient visits), and residential
treatment programs were 332,649, 152,309 and 57,311, respectively, for the
same period.
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Psychiatric Hospitals
As of November 30, 1995, the Company operated the following psychiatric
hospitals:
<TABLE>
<CAPTION>
LICENSED YEAR OPENED/
HOSPITAL CITY BEDS ACQUIRED
- -------- ---- -------- ------------
<S> <C> <C> <C>
ARKANSAS
Pinnacle Point Hospital......... Little Rock 102 1991
CALIFORNIA
Alhambra Hospital............... Rosemead 98 1968
Belmont Hills Hospital.......... Belmont 84 1962
Fremont Hospital................ Fremont 78 1990
Heritage Oaks Hospital.......... Sacramento 76 1988
San Luis Rey Hospital........... Encinitas 123 1976
Sierra Vista Hospital........... Sacramento 72 1986
Vista Del Mar Hospital.......... Ventura 87 1985
Walnut Creek Hospital........... Walnut Creek 108 1972
FLORIDA
Fort Lauderdale Hospital........ Ft. Lauderdale 100 1978
Palm Bay Hospital............... Palm Bay 60 1986
St. Johns River Hospital........ Jacksonville 99 1973
IDAHO
Intermountain Hospital.......... Boise 75 1980
ILLINOIS
Streamwood Hospital............. Streamwood 100 1991
INDIANA
Valle Vista Hospital............ Greenwood (Indianapolis) 98 1983
KANSAS
College Meadows Hospital........ Lenexa 79 1986
LOUISIANA
Brentwood Hospital.............. Shreveport 174 1990
East Lake Hospital.............. New Orleans 80 1987
Meadow Wood Hospital............ Baton Rouge 85 1985
MISSISSIPPI
Sand Hill Hospital.............. Gulfport 90 1984
MISSOURI
Spirit of St. Louis Hospital.... St. Charles (St. Louis) 104 1980
NORTH CAROLINA
Cedar Spring Hospital........... Pineville (Charlotte) 70 1985
OKLAHOMA
Southwind Hospital.............. Oklahoma City 80 1989
TEXAS
Capital Hospital................ Austin 130 1987
Millwood Hospital............... Arlington 130 1981
CRC of San Antonio*............. San Antonio 18 1994
</TABLE>
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<TABLE>
<CAPTION>
LICENSED YEAR OPENED/
HOSPITAL CITY BEDS ACQUIRED
- -------- ---- -------- ------------
<S> <C> <C> <C>
UTAH
Olympus View Hospital............... Salt Lake City 102 1986
WASHINGTON
Fairfax Hospital.................... Kirkland (Seattle) 133 1971
PUERTO RICO
Hospital San Juan Capestrano........ Rio Piedras 88 1988
-----
2,723
Hospital closed subsequent to
November 30, 1995:
GEORGIA
Parkwood Hospital**................. Atlanta 152 1981
-----
TOTAL U.S. PSYCHIATRIC LICENSED BEDS. 2,875
</TABLE>
- --------
* Joint venture, Residential Treatment Center.
** Closed January 19, 1996.
UNITED KINGDOM
<TABLE>
<CAPTION>
YEAR OPENED/
FACILITY NAME AND LOCATION BEDS ACQUIRED
- -------------------------- ---- ------------
<S> <C> <C>
Altrincham Priory Hospital.................................... 54 1986
South Manchester
The Dukes Priory Hospital..................................... 50 1992
Chelmsford, Essex
Eden Grove School (adolescents)............................... 68 1995
Fulford Grange Medical Centre*................................ 42 1993
Leeds
Grovelands Priory Hospital.................................... 65 1986
Southgate, London
Hayes Grove Priory Hospital................................... 50 1983
Bromley, Kent
Heath House Priory Hospital................................... 42 1994
Bristol
Jacques Hall (adolescents).................................... 29 1993
Manningtree, Essex
Langside Priory Hospital...................................... 20 1995
Glasgow, Scotland
Marchwood Priory Hospital..................................... 59 1987
Southampton
Nottingham Clinic (chemical dependency)....................... 22 1993
Nottingham
The Priory Hospital........................................... 86 1980
Roehampton, London
Sturt Priory Hospital......................................... 25 1994
Walton-on-the-Hill, Surrey
</TABLE>
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<TABLE>
<CAPTION>
YEAR OPENED/
FACILITY NAME AND LOCATION BEDS ACQUIRED
- -------------------------- -------- ------------
<S> <C> <C>
Lynbrook Priory Hospital
Woking, Surrey............................................ 26 1994
The Woodbourne Clinic
Birmingham................................................ 60 1984
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TOTAL U.K. PSYCHIATRIC BEDS............................. 698
- --------
* 50% owned
MANAGED UNITS
Priory Suite, Beardwood Hospital
Blackburn................................................. 13 1993
Priory Suite, Nuffield Hospital
Leicester................................................. 8 1991
---
TOTAL U.K. MANAGED UNITS................................ 21
SECURE PSYCHIATRIC SERVICES
Longridge Clinic
Wandsworth, London........................................ 10 1995
---
TOTAL U.K. SECURE PSYCHIATRIC SERVICES.................. 10
---
TOTAL U.K. PSYCHIATRIC LICENSED BEDS....................... 729
<CAPTION>
U.K. DIALYSIS UNITS STATIONS
- ------------------- --------
<S> <C> <C>
Carmarthen, Wales.......................................... 13 1985
Rotherham, Yorkshire....................................... 13 1992
</TABLE>
Sources of Psychiatric Hospital Revenues--U.S.
Patients are typically referred to the Company by physicians and other
health care professionals, managed care organizations, employee assistance
programs, the clergy, law enforcement officials, schools, emergency rooms and
crisis intervention services. In some areas, the Company provides a community
outreach program called the Psychiatric Assessment Team which is able to
respond on a 24-hour basis to emergency calls for help in assessing people's
problems and making referrals to the appropriate mental health service or
setting. Psychiatrists and, in some states, psychologists are authorized to
admit patients to the Company's facilities. It is against Company policy, as
well as state and federal law, to pay referral sources for hospital
admissions. See "Business--Regulation and Reimbursement--Relationships With
Physicians and Clinicians". The Company believes it obtains referrals from
both physicians and secondary sources primarily as a result of its competitive
pricing and the quality and scope of its programs.
The Company receives payment for its psychiatric hospital services from
patients, private health insurers, managed care organizations, and from the
Medicare, Medicaid and CHAMPUS governmental programs. While variations or
hybrid programs may exist, the following five categories include all methods
by which the Company's hospitals receive payment for services:
. Medicare. Medicare is a federal program that provides certain hospital
and medical insurance benefits to persons age 65 and over and certain
disabled persons. Reimbursement is predicated on the allowable cost of
services, plus an incentive payment where costs fall below a target
rate.
. Medicaid. Medicaid is a medical assistance program under which benefits
are available to the indigent. Reimbursement received by the Company's
hospitals varies as each state has its own methodology for making
payment for services provided to Medicaid patients.
. CHAMPUS. CHAMPUS is a federal program which provides health insurance
for certain active and retired military personnel and their dependents.
CHAMPUS reimbursement is at either (i) regionally set rates, (ii) 1988
charges adjusted upward by the Medicare Market Basket Index, or (iii) a
fixed rate
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<PAGE>
per day at certain of the Company's California facilities where CHAMPUS
contracts with a benefit administration group.
. Managed Care. Reimbursement is at prices established in advance by
negotiation or competitive bidding for contracts with insurers and other
payors such as health maintenance organizations, preferred provider
organizations and other similar plans.
. Private Pay. Payment by patients and their private indemnity health
insurance plans is generally based on the Company's schedule of rates
for that location. The Company's general policy is to set rates for
services at amounts equal to or less than the average rates of its
competitors' comparable facilities in each hospital market.
The following table summarizes, as a percentage of net operating revenues for
all of the Company's United States psychiatric hospitals, the percentage of net
operating revenues from each reimbursement method for the periods presented.
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
NOVEMBER 30,
----------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Medicare..................................................... 19% 18% 18%
Medicaid..................................................... 19 18 18
CHAMPUS...................................................... 8 6 6
--- --- ---
Total Government........................................... 46 42 42
Managed Care................................................. 37 42 35
Private Pay.................................................. 17 16 23
--- --- ---
Total...................................................... 100% 100% 100%
=== === ===
</TABLE>
Sources of Psychiatric Hospital Revenues--U.K.
Approximately 12% of United Kingdom's population has private health insurance
which provides benefits for psychiatric and substance abuse treatment. There
are few private psychiatric hospitals in the United Kingdom because NHS
hospitals (British government-owned) are available to its residents without
charge. Approximately 59% (76% in 1994 and 85% in 1993) of the Company's 1995
revenues for services in its psychiatric hospitals and alcoholism treatment
facilities in the United Kingdom were derived from private sources not subject
to any governmental payment limitations, but which are being affected by
reimbursement restrictions imposed by private insurers.
LONG-TERM CRITICAL CARE
The Company, through THC, provides long-term critical care in converted
psychiatric facilities, freestanding acute care facilities and hospital space
shared with a psychiatric facility. Although THC's patients range in age from
pediatric to geriatric, a substantial portion of THC's patients are over 65
years of age. THC's long-term critical care facilities include the equipment
and physician and other professional staff necessary to care for most types of
critically ill patients regardless of their diagnosis or medical condition.
THC's professional staffs work in inter-disciplinary teams to evaluate patients
upon admission to determine a treatment plan with an appropriate level and
intensity of care. Where appropriate, the treatment programs may involve the
services of several disciplines, such as pulmonary and rehabilitation therapy.
Currently, THC offers a complex medical care program, ventilator management
program, wound care program and low tolerance rehabilitation program. Patients
who successfully complete treatment programs are discharged to skilled nursing
homes, rehabilitation hospitals or home care settings.
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<PAGE>
Long-Term Critical Care Hospitals
As of November 30, 1995, THC operated the following 14 long-term critical
care hospitals and one satellite hospital:
<TABLE>
<CAPTION>
LICENSED DATE
HOSPITAL CITY BEDS OPENED
- -------- ---- -------- ------
<S> <C> <C> <C>
CALIFORNIA
THC Orange County(3)...................... Brea 48 May 1995
FLORIDA
THC Hollywood............................. Hollywood 124 October 1993
Transitional Hospital of Tampa............ Tampa 102 March 1993
ILLINOIS
THC Chicago(4)............................ Chicago 134 December 1993
INDIANA
THC Indianapolis(1)....................... Greenwood 38 November 1993
LOUISIANA
THC New Orleans(2)........................ New Orleans 78 November 1992
MASSACHUSETTS
THC Boston................................ Peabody 48 November 1993
MINNESOTA
THC Minneapolis........................... Golden Valley 111 November 1994
NEVADA
THC Las Vegas............................. Las Vegas 52 December 1993
NEW MEXICO
THC Albuquerque........................... Albuquerque 61 December 1993
TEXAS
THC Arlington(3)(5)....................... Arlington 160 December 1992
THC Houston(3)............................ Houston 84 December 1993
WASHINGTON
THC Seattle............................... Seattle 80 May 1994
WISCONSIN
THC Milwaukee(2).......................... Greenfield 34 February 1994
-----
TOTAL THC LICENSED BEDS.................. 1,154
</TABLE>
- --------
(1) Shared facility with CPC.
(2) Shared facility with CPC through November 1995. Will be fully converted to
THC in fiscal year 1996.
(3) Fully converted from a CPC psychiatric hospital.
(4) Leased facility.
(5) In September of 1995, the Company opened an 80 bed satellite to this
facility in Fort Worth, Texas.
Note: Two additional facilities are under development in San Diego, CA (38
beds) and Chicago, IL (104 beds).
The Company conducts market research prior to opening a new facility to
determine (i) the need for placement of ventilator-dependent patients and
other classes of critically ill patients, (ii) the existing physician referral
patterns, (iii) the presence of competitors, (iv) the payor mix and (v) the
political and regulatory climate. The Company generally seeks to purchase or
lease hospitals with fewer than 100 beds in major metropolitan areas and also
considers hospitals in other markets where its research indicates the need for
such hospitals.
Patient Admission
Substantially all of the patient admissions to THC's hospitals are transfers
from other health care providers. Patients are referred from general acute
care hospitals, rehabilitation hospitals, skilled nursing facilities and home
11
<PAGE>
care settings. The majority of THC's admissions are directly from the
intensive care units of general acute care hospitals. Referral sources include
discharge planners, case managers of managed care plans, social workers,
physicians, third party administrators, HMOs and insurance companies.
THC has directors of patient referrals who educate health care professionals
from traditional acute care hospitals as to the unique nature of the services
provided by THC's hospitals. The directors of patient referrals develop an
annual admission plan for each hospital, with assistance from the hospital's
administrator. The admission plans involve ongoing education of local
physicians and the employees of managed care organizations and acute care
hospitals. THC anticipates that it will direct increased admission efforts
toward insurance company case managers and managed care organizations.
Sources of Long-Term Critical Care Revenues
For long-term critical care services rendered to patients, THC receives
payment from (i) the federal government under Medicare, (ii) certain states
under Medicaid, (iii) commercial insurers and patients and (iv) managed care
organizations. After certification of the THC facility as no longer subject to
PPS limitations, payments from Medicare and Medicaid are generally based upon
cost; payments from commercial insurers are generally based upon charges and
payments from managed care organizations are based on negotiated rates. Net
Medicare revenue for THC totalled 72% (69% and 77% for fiscal years 1994 and
1993) of total THC net operating revenues for fiscal year 1995. The Company
anticipates reimbursement from Medicare will continue to constitute a
significant portion of THC's revenues in the future. See "Business--Regulation
and Reimbursement."
SELECTED HOSPITAL OPERATING DATA
The following is a comparison of the quarterly and annual statistical data
for fiscal years 1995 and 1994 for the Company's 35 United States psychiatric
hospitals that were operated in 1995 (six facilities were closed in November
1995 and one facility was closed in January 1996), its 12 United Kingdom
psychiatric hospitals and its 13 THC hospitals which were open in both years.
In all periods presented, adjusted patient days include inpatient days and
equivalent days for partial hospitalization and outpatient programs.
<TABLE>
<CAPTION>
QUARTER ENDED
-------------------------------
FEB. 28 MAY 31 AUG. 31 NOV. 30
------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
UNITED STATES PSYCHIATRIC HOSPITALS
Adjusted patient days.................... 1994 146,991 167,531 149,979 148,524
1995 139,654 148,641 128,797 125,177
Admissions............................... 1994 8,909 10,599 9,846 9,924
1995 10,094 10,898 9,231 9,020
Average Length of Stay................... 1994 13.4 13.8 13.1 12.5
1995 12.0 12.7 12.9 11.9
UNITED KINGDOM PSYCHIATRIC HOSPITALS
Adjusted patient days.................... 1994 27,679 31,184 30,277 36,981
1995 36,040 37,383 32,924 39,428
Admissions............................... 1994 1,006 1,104 1,067 1,271
1995 1,210 1,222 1,123 1,303
Average Length of Stay................... 1994 23.0 22.8 22.4 23.2
1995 24.3 25.0 26.2 24.9
THC HOSPITALS
Adjusted patient days.................... 1994 18,961 23,800 25,147 32,586
1995 38,851 48,063 48,263 48,285
Admissions............................... 1994 495 538 635 732
1995 925 917 948 1,105
Average Length of Stay................... 1994 53.2 44.3 39.9 40.4
1995 42.0 44.8 48.9 42.3
</TABLE>
12
<PAGE>
COMPETITION
The Company's psychiatric hospitals compete with other free-standing
psychiatric hospitals, psychiatric units in medical/surgical hospitals as well
as with other specialty psychiatric hospitals. Some competing hospitals are
either owned or supported by government agencies. Others are owned by
nonprofit corporations and supported by endowments and charitable
contributions. Such governmental and nonprofit entities are substantially
exempt from income and property taxation. The competitive position of a
hospital is, to a significant degree, dependent upon the number and quality of
physicians practicing at the hospital and the members of its medical staff.
The Company also believes that the competitive position of a hospital is
dependent upon the variety of services offered by a facility, and the Company
strives to implement programs best suited to the needs of patients and payors
in each particular market.
THC's hospitals compete with medical/surgical hospitals, certain long-term
care hospitals, sub-acute facilities, rehabilitation hospitals and nursing
homes specializing in providing care to critically ill patients. Many of these
providers are larger and more established than THC. The Company believes that
to offer programs providing a cost-effective continuum of care, nursing homes
and other companies are converting their facilities and developing programs
that will be competitive with THC's hospitals. This trend is expected to
continue due to cost-containment pressures and the efforts of nursing homes to
expand their existing markets.
The competitive position of a hospital, including the Company's psychiatric
hospitals and THC's hospitals, is affected by the ability of its management to
negotiate service contracts with purchasers of group health care services,
including private employers, PPOs and HMOs. Such organizations attempt to
obtain discounts from established hospital charges. The importance of
obtaining contracts with PPOs, HMOs and other organizations which finance
health care, and its effect on a hospital's competitive position, vary from
market to market, depending on the number and market strength of such
organizations. It is the Company's policy to enter into these contracts
wherever feasible. Generally, hospitals holding major contracts with managed
care organizations are able to attract more doctors to their active medical
staffs than hospitals without such contracts.
EMPLOYEES
As of November 30, 1995, the Company had approximately 9,400 employees, of
which approximately half were employed full time and half were employed part
time. The employees at two of the Company's psychiatric hospitals and one THC
hospital are covered by union agreements. The Company considers its labor
relations to be satisfactory.
REGULATION AND REIMBURSEMENT
The health care environment in which the Company operates is highly
regulated and subject to frequent and substantial changes and proposals for
change. There can be no assurance that state or federal regulatory and
legislative bodies will not propose or enact rules or laws that could have a
material adverse effect on the Company.
The Company's hospitals are subject to substantial and continuous federal,
state and local government regulation. Such regulations provide for periodic
inspections and other reviews by state and local agencies, the United States
Department of Health and Human Services ("HHS") and CHAMPUS to determine
compliance with their respective standards pertaining to medical care,
staffing utilization, safety and equipment necessary for continued licensing
or participation in the Medicare, Medicaid or CHAMPUS programs. The admission
and treatment of patients at the Company's psychiatric hospitals are also
subject to state and federal regulation relating to confidentiality of medical
records.
Accreditation and State Licensing
State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in all federally-funded programs. Once a
hospital has been licensed, it must continue to comply with federal, state and
local licensing requirements in addition to local building and life safety
codes. All of the Company's hospitals have obtained the necessary licenses to
conduct business.
13
<PAGE>
Hospitals may seek an accreditation from The Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"), a nationwide commission
which establishes standards relating to the physical plant, administration,
quality of patient care and operation of medical staffs of hospitals.
Generally, hospitals and certain other health care facilities are required to
have been in operation at least six months in order to be eligible for
accreditation by JCAHO. After conducting on-site surveys, JCAHO awards
accreditation for up to three years to hospitals found to be in substantial
compliance with JCAHO standards. Accredited hospitals are periodically
resurveyed, including, at the option of JCAHO, upon a major change in
facilities or organization and after a merger or consolidation. All of the
Company's hospitals are accredited by JCAHO. The Company intends to seek and
obtain JCAHO accreditation for any additional hospitals it may purchase or
lease.
Certain states have certificate of need ("CON") laws which generally provide
that prior to the expansion of an existing facility, the construction of a new
facility, the addition of beds, the acquisition of existing facilities or
major items of equipment or certain changes in services, or the undertaking of
a capital expenditure on behalf of a facility, approval must be obtained from
the designated state health planning agency. The stated objective of the CON
process is to promote quality health care at the lowest possible cost and
avoid unnecessary duplication of services, equipment and facilities. If the
Company is unable to obtain the requisite CONs, the growth of its business and
especially that of THC could be adversely affected.
Medicare and Medicaid
During fiscal 1995, approximately 38% of the Company's United States
psychiatric operating revenues were derived from patients covered by Medicare
and Medicaid programs, and the Company anticipates that this participation
will increase in the future. Medicare is a federal program that provides
certain hospital and medical insurance benefits to persons age 65 and over and
certain disabled persons. Medicaid is a medical assistance program
administered by the states and partially funded by the federal government
under which health care benefits are available to the indigent. Within the
Medicare and Medicaid statutory framework, there are substantial areas subject
to administrative rulings, interpretations and discretion which may affect
payments made to providers.
In order to receive Medicare reimbursement, each hospital must meet the
applicable conditions of participation set forth by HHS relating to the type
of hospital, its equipment, personnel and standard of medical care, as well as
comply with state and local laws and regulations. Hospitals undergo periodic
on-site Medicare certification surveys. The Medicare survey is limited if the
hospital is JCAHO accredited. All but one of the U.S. psychiatric hospitals
and all of THC's operating hospitals are certified as Medicare providers. The
one U.S. psychiatric hospital that is not Medicare certified treats
adolescents only. All but two of the Company's operating hospitals are
certified by their respective state Medicaid programs. A loss of certification
could adversely affect a hospital's ability to receive payments from Medicare
and Medicaid.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect cost of the services provided to beneficiaries. The Social Security
Amendments of 1983 implemented PPS in an effort to reduce and control Medicare
costs. Under PPS, inpatient costs are reimbursed based upon a fixed payment
amount per discharge using diagnosis related groups ("DRGs"). The DRG payment
under PPS is based upon the national average cost of treating Medicare
patients with the same diagnosis. Although the average length of stay varies
for each DRG, the average stay for all Medicare patients subject to PPS is
approximately six days. An additional outlier payment is made for patients
with unusually long lengths of stay or higher treatment costs. Outlier
payments are designed to cover only marginal costs. Additionally, PPS payments
can only be made once every 60 days for each patient. Thus, PPS creates an
economic incentive for general acute care hospitals to discharge Medicare
patients as soon as clinically possible.
The Social Security Amendments of 1983 exempted psychiatric, rehabilitation,
cancer, children's and long-term care hospitals from PPS. A long-term care
hospital is defined as a hospital which has an average length of stay of
greater than 25 days. The Company's experience is that THC's facilities are
able to meet this definition. Under current law, inpatient operating costs for
long-term care and psychiatric hospitals are reimbursed under a cost-based
reimbursement system. The one exception to this rule is the initial six months
of operations of a long-term care hospital which is subject to PPS
reimbursement. As a result of the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"), reimbursement under the cost-based system is subject to a
computed target amount
14
<PAGE>
per discharge (the "Target") for inpatient operating costs. A hospital's
Target rate is the per discharge (case) limitation, derived from the
hospital's allowable net Medicare inpatient operating costs in the hospital's
base year, and updated for each subsequent hospital cost reporting period by
the appropriate annual rate-of-increase percentage. If allowable net inpatient
operating costs do not exceed the hospital's Target, payment to the hospital
will be determined on the basis of the lower of (i) Net inpatient operating
costs plus 50% of the difference between inpatient operating costs and the
Target; or (ii) Net inpatient operating costs plus 5% of the Target. Prior to
October 1, 1991, allowable Medicare operating costs per discharge in excess of
the Target were not reimbursed. Effective October 1, 1991, if a hospital's
allowable net inpatient operating costs exceed the Target, Medicare reimburses
the lower of (i) the hospital's target amount plus 50% of the allowable
Medicare operating costs per discharge in excess of the Target or (ii) 110% of
the Target. With regard to hospitals certified prior to October 1, 1992, the
TEFRA Target provisions do not apply with respect to hospitals that have been
in operation for less than three full years. For hospitals certified on or
after October 1, 1992, the TEFRA Target provisions do not apply with respect
to hospitals that have been in operation for less than two full years. Under
the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), increases in the
Target for fiscal years 1994 through 1997 are generally limited to the
hospital market basket increase minus one percentage point.
In October 1993, HHS, acting through the Health Care Financing
Administration, issued a memorandum to its regional offices directing them to
review carefully Medicare certification requests by long-term care hospitals
operating in space leased from another hospital. The memorandum mandated new
rules for long-term care hospitals to qualify for exclusion from PPS in a
"hospital within a hospital" setting. The new rules require a separate
governing body, separate medical and financial staffs, and 75% or more of the
admissions must be referred from sources other than the "host" hospital. THC
is currently in compliance with the new regulations with no exceptions.
Medicare and Medicaid reimbursement is generally determined from annual cost
reports filed by the Company. These cost reports are subject to audit by
Medicare and Medicaid. The Company has established reserves for possible
adjustments at levels which management believes to be adequate to cover any
downward adjustments resulting from audits of these cost reports.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by peer or utilization
review organizations ("PROs") in order to ensure efficient utilization of
hospitals and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments upon
admission or retrospectively for services provided to a patient. Such review
is subject to administrative and judicial appeal.
Rate Setting Laws
In recent years various forms of prospective reimbursement legislation have
been proposed or enacted in states in which the Company owns hospitals. For
example, the Company's Florida hospitals are governed by a prospective
reimbursement law which generally allows rate increases based on the Consumer
Price Index. There has been a trend this last fiscal year in many of the
states in which the Company operates psychiatric hospitals, to change to
prospective reimbursement systems based upon data from prior year cost
reports. These prospective rates have had positive and adverse effects on
operations based upon each facility's ability to control costs. As this trend
continues, even in states where the Company does not now have established
hospitals, the decision to acquire or establish psychiatric facilities in such
states will be impacted.
Health Care Reform
During 1995, the focus of health care legislation in Congress has been on
budgetary and related funding mechanism issues. A number of reports, including
the 1995 Annual Report of the Board of Trustees of the Federal Hospital
Insurance Program (Medicare) have projected that the Medicare "trust fund" is
likely to become insolvent by the year 2002 if the current growth rate of
approximately 10% per year in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
15
<PAGE>
increase significantly during the same seven-year period. In response to these
projected expenditure increases, and as part of an effort to balance the
federal budget, both the Congress and the Clinton Administration have made
proposals to reduce the rate of increase in projected Medicare and Medicaid
expenditures and to change funding mechanisms and other aspects of both
programs. Congress has passed legislation that would substantially reduce
payments to providers and would make significant changes in the Medicare and
the Medicaid programs. While President Clinton vetoed this bill, the Clinton
Administration has proposed alternate measures to reduce, to a lesser extent,
projected increases in Medicare and Medicaid expenditures. To date neither
proposal has become law.
The Medicare legislation that was adopted by Congress would have, among
other things reduced payments to providers (including the Company), and
created incentives for Medicare beneficiaries to enroll in managed care plans.
Earlier versions of this legislation also contained cost controls effecting
long-term care hospitals, and the Administration's proposal included a
moratorium on the designation of additional medicare long-term care hospitals.
Changes in the Medicaid program would have reduced the number and extent of
federal mandates concerning how state Medicaid programs operate (including
levels of benefits provided and levels of payments to providers) and would
have changed the funding mechanism from a sharing formula between the federal
government and a state to "block grant" funding. The Company cannot predict
the effect of any such legislation, if adopted, on its operations.
Reimbursement Limitations and Cost-Containment
Regardless of the outcome of any proposed health care reform bills, there
will likely continue to be vigorous efforts to effectuate cost savings in the
Medicare program. These efforts could include change in the reimbursement of
the Company's long-term critical care hospitals to the DRG method. In fact,
the conference report accompanying the 1993 OBRA urged prompt completion of a
study of methods to subject hospitals such as THC's to PPS, from which they
are currently exempt. Similar language was introduced in 1995 Legislation, but
not incorporated into the final bill adopted by Congress. Even if cost-based
reimbursement for the THC facilities continues, additional reimbursement
limits may be imposed. Such cost-containment initiatives may vary
substantially from the proposed structural reforms discussed above and may
impact the Company more quickly and directly. Similar changes in reimbursement
of psychiatric services could also adversely impact the Company's business and
results of operations.
Relationships With Physicans and Clinicians
The Company is subject to federal and state laws that regulate its
relationships with physicians and other providers of health care services.
These laws include the Medicare and Medicaid anti-kickback statute, under
which criminal penalties can be imposed upon persons who pay or receive any
remuneration in return for referrals of patients for items or services
reimbursed under the Medicare, Medicaid or certain state health care programs.
Violations of this law also result in automatic exclusion from these programs.
The Company is also subject to state and federal laws prohibiting false
claims.
The Department, courts and officials of the Office of Inspector General have
broadly construed the anti-kickback statute. "Safe harbor" regulations
promulgated by the Department define a narrow range of practices that will be
exempted from prosecution or other enforcement action under this statute. To
the extent that offers to pay or payments made are deemed to be for purposes
of inducing referrals and do not satisfy all the criteria for a safe harbor,
the arrangements could be found to violate the anti-kickback laws. Similarly,
state fraud and abuse laws, which vary from state to state, are often vague
and have infrequently been interpreted by courts or regulatory agencies. Given
the breadth of these laws and the dearth of court rulings dealing with
businesses like the Company's, there can be no assurance that the Company's
arrangements with its providers will not be challenged. However, the Company
has in place a compliance program, whereby all personnel including clinicians
are required to execute Certificates of Understanding of and compliance with
the CPC Mission and Standards of Business Conduct. Additionally, the evolving
Compliance Program includes the establishment of a "hotline" where all
employees are encouraged to call if they believe there is any illegal conduct
or wrongdoing.
16
<PAGE>
OBRA of 1993 contains provisions ("Stark Act") prohibiting physicians having
a financial relationship with the provider from making referrals for
"designated health services" rendered by the provider which are paid for by
the Medicare or Medicaid programs. These services include radiation therapy
services; durable medical equipment; parenteral and enteral nutrients,
equipment, and supplies; prosthetics, orthotics, and prosthetic devices; home
health services; outpatient prescription drugs; and inpatient and outpatient
hospital services. In addition, if such a financial relationship exists, the
entity is prohibited from billing for or receiving reimbursement on account of
such referral. These provisions took effect January 1, 1995.
Numerous exceptions are allowed under the Stark Act for financial
arrangements that would otherwise trigger the referral prohibitions. These
provide, under certain conditions, exceptions for relationships involving
rental of office space and equipment, employment relationships, personal
service arrangements, payments unrelated to designated services, physician
recruitment, and certain isolated transactions. While the Department has
issued regulations governing physician self-referrals of Medicare patients for
clinical laboratory services, the Department has not yet issued regulations
pertaining to referrals involving the other designated health services.
The Company has contracts with physicians to provide hospital services and
in some instances patient services. These contracts have been revised to meet
the requirements of the Stark Act. However, until final regulations are
promulgated or the contracts are otherwise tested, there can be no assurance
that the contracts, or other applicable policies of the Company, will be found
to be in compliance with the Stark Act.
ITEM 2. PROPERTIES
This item incorporates by reference the tables of psychiatric and long-term
critical care hospital and dialysis facility locations set forth in Item 1.
Ownership information is set forth in the text of this item.
U.S. Psychiatric Hospital Properties
The Company operated 35 hospitals in the U.S. psychiatric division until
November 1995 when the Company discontinued psychiatric operations at six of
these facilities. One additional psychiatric hospital was closed in January of
1996.
The Company owns, in fee simple, all of the real property on which its acute
psychiatric hospital facilities are located except for one facility where the
Company is a joint venture partner.
The Company's existing hospital facilities range in size from 36,000 to
100,000 square feet and each psychiatric facility has sufficient acreage to
allow space for outdoor recreation. All of the existing hospital buildings
meet all state and local requirements for licensing as hospitals to provide
the services indicated. Six facilities are being held for sale. The Company
has entered into an agreement to sell one additional facility in March of
1996.
As of November 30, 1995, one of the above-described facilities was shared
with THC. As of November 30, 1995, the Company was in the process of
converting two other previously shared facilities into dedicated long-term
critical care facilities.
The Company has four separate mortgage loans with lenders, each of which is
secured by one of the Company's hospitals.
Other Properties
The Company leases office space for its Corporate office in Las Vegas,
Nevada. The leases for this space aggregate approximately 22,000 square feet
of office space with lease terms that expire in August 1996. The Company is
currently building a new Corporate office which will be situated on the campus
of the THC Las Vegas Hospital in Las Vegas, Nevada. THC Las Vegas will utilize
a portion of this new building for administrative offices which will provide
space within the existing hospital to be converted to direct patient care
utilized space.
The Company also owns a three-story building completed in 1988 used for a
portion of its Corporate headquarters; medical office buildings adjacent to 13
of its hospital facilities; three parcels of land for potential
17
<PAGE>
hospital development or future sale, two parcels of land being developed for
sale for investment purposes (non-hospital related), and one apartment in a
location central to the Company's operations for use by employees whose duties
require them to travel.
United Kingdom Psychiatric Hospital Properties
The Company owns the real property for 12 of its psychiatric hospitals. The
real property of one hospital is owned as approximately one-half in fee simple
and one-half leasehold. The Company also owns, in fee simple, one clinic
specializing in the treatment of substance abuse. The Company leases one of
its psychiatric hospitals. The Company operates two dialysis centers and a
secure psychiatric facility from buildings located on National Health Service
properties. All of the Company's existing facilities range in size from one-
half acre to 24 acres.
THC Properties
The Company owns, in fee simple, the real property for 13 of its long-term
critical care facilities. The Company also leases one long-term critical care
facility. All of the Company's facilities are located on sites ranging from
one to forty-two acres. As of November 30, 1995, THC operated one unit within
one of the Company's psychiatric hospitals.
The Company currently occupies an unused medical office building on the
campus of a CPC psychiatric facility in Atlanta for its THC eastern regional
office in Atlanta, Georgia.
ITEM 3. LEGAL PROCEEDINGS
On September 28, 1995, the Company reached an agreement to settle certain
consolidated securities class action lawsuits and a related shareholder
derivative action. During the third and fourth quarter of 1995, the Company
recorded charges totalling $46.0 million ($28.9 million after tax) relating to
settlement of the lawsuits and associated legal fees and expenses. The suits,
filed in late 1991, alleged violations of the federal securities laws by the
Company and certain individuals between September 1990 and November 1991
arising from the activities of the U.S. Psychiatric Division.
The principal terms of the agreement call for a settlement amount of $42.5
million consisting of a cash settlement fund of $21.25 million and the
Company's common stock with an expected value of $21.25 million. The cash
amount, plus interest, was paid in November 1995. The shares to be issued to
the plaintiff class were previously repurchased by the Company pursuant to a
stock buyback program during late 1991 through early 1993. The number of
shares of common stock to be issued will be equal to $21.25 million divided by
the average market value of the common stock over a 10-day trading period
prior to the distribution of shares to settle claims, provided that in any
event the minimum number of shares that will be issued is 1,931,818 and the
maximum number of shares that will be issued is 3,035,714. The maximum limits
would be triggered if the average market value of the common stock is at $7
per share or below. Upon issuance, these shares will have a dilutive effect on
earnings per share. The agreement is subject to final court approval.
While these cases allege actions taken before present management was in
place, management continues to believe that the claims asserted in the
shareholder suits lack merit. Nevertheless, the Company believed that it was
prudent to settle these cases due to the continuing substantial costs of
defense, the distraction of management's attention and the risks associated
with litigation.
On August 17, 1995 the Company reported developments pertaining to CPC
Southwind Hospital in Oklahoma City, Oklahoma, which is operated by the
Company's subsidiary, CPC Oklahoma, Inc. The first was the filing of a
whistleblower suit against CPC Oklahoma, Inc. under the Federal False Claims
Act, and the second concerned the seizure of certain of Southwind's records
pursuant to a search warrant. On January 19, 1996, the Government filed an
amended complaint alleging that Southwind Hospital submitted false claims to
various federally-funded health care programs. The amended complaint contained
an attached schedule of claims covering periods from 1990 through mid-1992.
Since the service of the original complaint, Southwind Hospital has provided
information to the Government on numerous issues based on internal review. The
Company is currently in the process of reviewing the amended complaint.
Management is presently unable to evaluate the potential impact of the suit on
the Company.
18
<PAGE>
The Company is subject to ordinary and routine litigation incidental to its
business, including those arising from patient treatment, injuries or death
for which it is covered by liability insurance, and those arising from actions
involving employees. Management believes that the ultimate resolution of such
proceedings will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
(1) (i) The Common Stock of Community Psychiatric Centers is traded
on the New York and Pacific Stock Exchanges. Ticker symbol: CMY.
(ii) The information in response to this portion of Item 5 is
incorporated herein by reference from footnote 15 to the financial
statements in Item 8.
(b) Holders
(1) Approximate number of holders of the $1.00 Par Value Common Stock
of the Company at February 8, 1996: 1,913. The number of record holders
includes banks and brokerage houses which are holding shares of the
Company's Common Stock for an undetermined number of beneficial owners.
(c) Dividends
(1) The information in response to this portion of Item 5 is
incorporated by reference from footnote 15 to the financial statements
in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------------------------
1995 1994 1993 1992 1991
--------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Net operating revenues......... $ 506,663 $423,955 $335,578 $344,274 $392,873
Net income (loss)*............. (41,632) 10,220 (24,892) 23,137 45,289
Total assets................... 604,625 600,004 530,340 540,600 569,670
Long-term debt, exclusive of
current maturities............ 84,883 69,090 40,718 26,293 27,172
Earnings (loss) per common
share:*....................... (0.95) 0.24 (0.58) 0.52 0.98
Dividends per share............ 0.01 0.01 0.09 0.36 0.36
</TABLE>
- --------
* See "Management's Discussion and Analysis of Financial Condition and Results
of Operations"--"Restructuring Charges (Credits)" and "Recent Accounting
Pronouncements". See Note 14 to the Financial Statements regarding
settlement costs--"Commitments and Contingencies".
19
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data on the preceding page, the consolidated financial statements
and the notes to the consolidated financial statements appearing in Item 8.
Restructuring Charges (Credits)
Effective February 28, 1993, the Company recorded a pre-tax charge of $55.0
million ($35.0 million after tax) in connection with the decision to close
seven of its U.S. psychiatric hospitals. The charge comprised $35.3 million to
write down buildings and other fixed assets, $2.1 million to write off
intangibles, $14.4 million for future operating losses of the seven hospitals
and related corporate restructuring costs associated with terminating
employees, and $3.2 million for additional accounts receivable allowances at
the seven hospitals. Six of the restructured hospitals have ceased operations.
The seventh hospital returned to operating status effective March 1, 1994.
This facility was subsequently closed in November 1995 (see discussion below).
Of the six closed hospitals, five have been sold and one has been converted
into a long-term critical care hospital operated by the Company's wholly owned
subsidiary, THC. The Company received cash proceeds of approximately $5.0
million and $5.3 million, respectively, in the first quarter of 1994 and the
second and third quarters of 1995 from the sale of the five hospitals. The
Company continues to hold property for sale with a remaining book value of $.3
million that was part of the 1993 restructuring.
Effective February 28, 1994, the Company recorded a restructuring credit
totalling $7.2 million ($4.3 million after tax) from the resolution of the
previously restructured psychiatric assets. The restructuring credit resulted
from the Company's success in controlling hospital closure costs and in
divesting one of its restructured properties at a higher price than the 1993
writedown of the facility anticipated.
Effective February 28, 1994, the Company recorded a restructuring charge of
$6.3 million ($3.8 million after tax) in connection with the decision to close
three additional psychiatric facilities. The charge comprised $2.2 million for
future operating losses, $1.5 million for restructuring costs associated with
terminating employees and $2.6 million for additional accounts receivable
allowances and reserves for other assets at the three hospitals. Approximately
225 employees of the restructured hospitals were terminated. Amounts charged
against the reserve for estimated operating losses and termination benefits
paid approximated amounts originally accrued. Total revenue and net operating
income or (loss) for the three closed hospitals totalled $2.8 million and
($1.1 million) for the first quarter of 1994, $20 million and $.6 million for
fiscal year 1993, and $23.5 million and $2.3 million for fiscal year 1992. Of
the three closed hospitals, one is being held for sale, one was converted into
a THC facility after the restructuring, and one was converted into a satellite
hospital of a THC facility in September 1995.
Effective May 31, 1995, the Company recorded a restructuring credit
totalling $2.5 million ($1.5 million after tax) from the resolution of
previously restructured psychiatric assets. The restructuring credit resulted
from divesting two restructured properties at higher prices than the 1993
writedown of the facilities anticipated and the Company's success in
collecting accounts receivable balances that were reserved for as part of the
February 28, 1994 restructuring charge.
Effective November 30, 1995, the Company recorded a restructuring charge
totalling $4.6 million ($2.8 million after tax), determined in accordance with
the provisions of the January 1995 Financial Accounting Standards Board
Emerging Issues Task Force Consensus No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring)", ("EITF 94-3"), in
connection with the decision to close six psychiatric facilities and three
regional offices. EITF 94-3 requires the accrual of certain employee
termination costs and costs resulting from a plan to exit an activity that are
not associated with or that do not benefit activities that will continue and
prohibits accrual of expected future operating losses of the activity exited.
The charge comprised $3.4 million for employee termination benefits related to
hospital operations and overhead personnel and $1.2 million for non-cancelable
operating leases and other exit costs. Approximately 314 hospital employees
and 65 corporate and regional employees were
20
<PAGE>
terminated. To date, amounts charged against the reserve for employee
termination benefits paid approximated amounts accrued. Net operating revenue
and net operating income or (loss) for the six closed hospitals totalled $28.5
million and ($2.8 million) for fiscal year 1995, $40.9 million and $2.1
million for fiscal year 1994, and $38.3 million and $6.9 million for fiscal
year 1993. Of the six closed hospitals, three are being held for sale, two
will become fully converted THC hospitals, and one has been exchanged for a
similar building held by another health care provider and will be converted
into a THC facility.
Management continually reviews all facilities to evaluate potential
closures, divestitures or conversions. Management may elect to close
additional psychiatric facilities in the future which could result in
additional charges to income for the costs necessary to exit the hospital
operations.
Recent Accounting Pronouncements
In the fourth quarter of fiscal year 1995, the Company elected early
adoption of the provisions of Financial Accounting Standards No. 121 ("FAS
121"), "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". The statement requires impairment losses to be
recognized for long-lived assets used in operations when indicators of
impairment are present and the undiscounted cash flows are not sufficient to
recover the assets' carrying amount. The impairment loss is measured by
comparing the fair value of the asset to its carrying amount. The statement
also requires that assets to be disposed of should be written down to fair
value less selling costs. The adoption of FAS 121 resulted in the Company
recording impairment losses of $46.0 million (see Note 3 to the financial
statements for further discussion).
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation", which becomes
effective for fiscal years beginning after December 15, 1995. FAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense
for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Entities electing to remain with the
accounting in APB Opinion No. 25 will be required to make pro forma
disclosures of net income and earnings per share as if the provisions of FAS
123 had been applied. The Company is in the process of evaluating the
Statement. The potential impact on the Company of adopting the new standard
has not been quantified at this time. The Company must adopt FAS 123 no later
than December 1, 1996.
Sources of Revenue
For fiscal years 1995, 1994, and 1993, approximately 37%, 28%, and 19% of
the Company's net revenues were paid by Medicare which based reimbursement on
the Company's costs (except for THC hospitals in their first six months of
operations which are reimbursed based on DRG rates). Medicare reimbursement as
a percentage of total revenues has increased over the past three years as THC
has grown significantly over that period of time. Net Medicare revenue for THC
was 72%, 69%, and 77% of total THC net revenue during 1995, 1994, and 1993,
respectively.
For fiscal years 1995, 1994, and 1993, approximately 11%, 13%, and 16% of
the Company's net revenue was derived from Medicaid with varying rates from
state to state. Net revenue totalling 27%, 33%, and 30% was based upon
negotiated rates with payors such as managed care companies, health
maintenance organizations and preferred provider organizations. The Company
expects the number of patients enrolled in managed care plans to grow in the
future. Approximately 16%, 19%, and 30% of the Company's net revenues for
1995, 1994, and 1993 were derived from private sources and insurance companies
which based reimbursement on the Company's price schedule. The Company
believes that revenues form private sources will continue to decline in the
future as purchasers of health care services continue to shift coverage to
managed care plans.
For fiscal years 1995, 1994, and 1993, approximately 4%, 4%, and 5% of the
Company's revenues came from CHAMPUS, a federal government program which bases
reimbursement generally on a regional average rate. Approximately 5% (3% in
1994) of the Company's 1995 net revenue was derived from government sources in
the United Kingdom.
21
<PAGE>
Net revenues for the Psychiatric Division are subject to material seasonal
variations each year during the summer months of the third quarter and around
major holidays such as Christmas during the first quarter.
Liquidity and Capital Resources
At November 30, 1995, cash and cash equivalents were $17.3 million and total
working capital was $115.3 million. Net cash provided from operating
activities decreased from $16.4 million in 1994 to $6.0 million in 1995. The
decrease is primarily attributable to cash paid to settle the securities
lawsuit in fiscal year 1995 of $23.7 million offset by positive cash flows
from operating activities. Net accounts receivable balances increased $10.6
million in 1995 as compared to $23.1 million during 1994. The main reason for
the increase in accounts receivable during 1995 is the increased revenue
generated by THC. Consolidated days revenue in accounts receivable were 84,
79, and 84 days at November 30, 1995, 1994, and 1993, respectively.
The Company's current ratio in 1995, 1994, and 1993 was 2.4, 2.4, and 2.7,
respectively. The Company's ratio of long-term debt to total equity at
November 30, 1995, 1994, and 1993 was 21.3%, 15.7%, and 9.6%, respectively.
The increase in long-term debt is due to additional proceeds received from
revolving credit facilities in the amount of $39.2 million during fiscal year
1995.
Proceeds from revolving credit facilities were used to pay off $10.8 million
of 8 1/2% subordinated guaranteed debentures that were due on March 1, 1995. A
$.01 dividend ($.4 million) was paid to shareholders in redemption of all
preferred share rights outstanding under the Shareholder Rights Agreement
dated as of February 1, 1989.
Purchases of fixed assets totalled $40.1 million in 1995. This amount
included $5.8 million for a new office that the Company is building on the
campus of the THC Las Vegas Hospital in Las Vegas, Nevada. This building and
its parking structure will provide additional administrative offices, dining
facilities and parking for the hospital as well as be the new location for the
corporate office. In the second quarter of 1995, the Company acquired for $5.8
million, the land, building, and fixed assets for a THC facility that has been
managed by THC since May of 1994. The Company also acquired two facilities in
the United Kingdom for $3.3 million in 1995. Capital expenditures for 1996 are
estimated to be $20.3 million for THC, $15.1 million for the U.K. Psychiatric
Division, $11.0 million for the U.S. Psychiatric Division, and $6.1 million
for the new corporate office building.
During fiscal year 1995, proceeds totalling $5.3 million were received from
the sale of three hospitals that were closed in 1993. The Company received net
cash proceeds of approximately $5 million in January and February of 1994 from
the sale of two closed facilities. The Company also received approximately
$2.3 million in cash proceeds from three sales of vacant land during 1994.
In January 1992, the Board of Directors authorized the expenditure of up to
$50.0 million of cash on hand for the repurchase of the Company's common stock
from time-to-time in the open market. As of November 30, 1992, the Company had
purchased 2,890,000 shares for $31.1 million, including 451,000 at market
value from the former chairman, under that authorization. Through November 30,
1993, an additional 85,000 shares were repurchased for $0.8 million. No common
stock was repurchased in fiscal years 1995 or 1994.
The Company has a $25.0 million revolving credit facility with Bank of
America National Trust and Savings Association ("BofA"). At November 30, 1995,
$25.0 million has been borrowed under this facility. The Company was able to
borrow up to $25 million through November 30, 1995 (the revolving loan
period), at which time the amount outstanding was converted into a term loan
payable in equal quarterly installments through November 30, 1998. The
Company's subsidiary in the United Kingdom has a credit facility whereby the
Company is allowed to borrow up to $15 million. At November 30, 1995,
approximately $15 million was outstanding under this facility. On May 6, 1994,
the Company entered into an additional revolving credit facility with BofA for
$50 million. As of November 30, 1995, $50 million was outstanding under this
facility. Any amount outstanding under this facility is due and payable on
February 28, 1997. The Company believes that its current cash and cash
equivalent balances, its operating cash flow, and its ability to borrow
additional funds will be sufficient to fund the Company's operations and
capital expenditures through the end of fiscal 1996. The Company is presently
evaluating proposals for additional funding from other financing sources.
Additional
22
<PAGE>
funding sources will be needed to support further expansion of THC and the
United Kingdom psychiatric division and to repay outstanding borrowings under
the credit facilities.
Operating Results
The following table presents selected unaudited pro forma income statement
data for the years ended November 30, 1995, 1994 and 1993 and excludes the
restructuring charge and the operating results for the three hospitals
restructured in the first quarter of 1994, the restructuring charge and
credits recorded in both 1994 and 1995, as well as the impairment loss and
settlement costs that were recorded in 1995. The data presented below may not
be indicative of the results that would have been obtained had the
restructurings actually occurred on the date assumed. In the opinion of
management, this data includes all adjustments, consisting of normal recurring
adjustments, that the Company considers necessary for a fair presentation of
the data set forth therein.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
--------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net operating revenues.............................. $506,663 $422,363 $311,249
Other income........................................ 2,513 3,785 2,301
-------- -------- --------
509,176 426,148 313,550
Operating expense................................... 384,818 326,616 235,000
General and administrative expense.................. 39,444 33,775 26,806
Bad debt expense.................................... 28,732 26,503 19,316
Depreciation and amortization....................... 23,344 18,524 13,790
Interest expense.................................... 5,256 3,545 2,420
-------- -------- --------
481,594 408,963 297,332
Income before income taxes.......................... 27,582 17,185 16,218
Income taxes........................................ 10,536 6,960 6,325
-------- -------- --------
Net income.......................................... $ 17,046 $ 10,225 $ 9,893
======== ======== ========
</TABLE>
Fiscal Year 1995 Compared to Fiscal Year 1994
The following discussion excludes the restructuring charge and the operating
results for the three hospitals restructured in the first quarter of 1994, the
restructuring charge and credits recorded in both 1994 and 1995, as well as
the impairment loss and settlement costs that were recorded in 1995.
Net operating revenues increased by approximately 20% from $422.4 million
for the year ended November 30, 1994 to $506.7 million for the year ended
November 30, 1995, the highest amount in the Company's history. The largest
portion of this increase was a $93.9 million increase in THC revenue from
$101.0 million in fiscal year 1994 to $194.9 million in fiscal year 1995.
THC's same-store admissions and patient days increased 62.3% and 82.6%,
respectively.
Net operating revenues from the United States psychiatric hospitals
decreased by 9.7% or approximately $26.7 million as a result of a 11.5%
decrease in adjusted patient days offset by a 2.0% increase in net revenue per
patient day. Net revenue per patient day increased as favorable Medicare and
Medicaid cost report settlements exceeded prior year amounts by approximately
$2 million in the current year. Adjusted patient days declined primarily due
to the continuing decline in the average length of a patient's stay.
Net operating revenues from the Company's United Kingdom operations
increased by 37.0% or approximately $17.1 million as a result of an increase
in same-store patient days of 15.6% and a 5.6% increase in average net revenue
per patient day. The remaining portion of the increase in net operating
revenue relates to additional patient days generated by three new facilities
that started operations subsequent to the third quarter of 1994.
23
<PAGE>
Operating expenses decreased as a percentage of net operating revenues to
76.0% in the year ended November 30, 1995 from 77.3% in the year ended
November 30, 1994. A higher percentage of THC's total costs are now being
reimbursed because an increased number of THC hospitals have received
certification for cost-based reimbursement under Medicare during fiscal year
1995 compared to fiscal year 1994. THC hospitals incur significant start up
losses because they are not entitled to cost based reimbursement for Medicare
patients until they are certified as long-term care hospitals. Pending such
certification, these start up hospitals are reimbursed under the Medicare
Prospective Payment System which does not pay the full cost of treating
Medicare patients with the severity of illness treated at THC facilities. Of
the 14 hospitals in operation during fiscal year 1995, 13 were certified as
long-term care hospitals and therefore received cost-based reimbursement under
Medicare, whereas at the same time in 1994, 13 facilities were in operation
and 11 had been open long enough to receive their long-term care hospital
certification. In addition, 11 facilities completed their TEFRA (the Tax
Equity and Fiscal Responsibility Act of 1982) rate setting period during the
current year and are now eligible for an additional incentive payment if their
costs are less than the targeted rate per discharge.
General and administrative expenses increased $5.7 million and decreased as
a percentage of net operating revenues to 7.8% in 1995 from 8.0% in 1994. The
increase in general and administrative expenses relates primarily to the fact
that the Company has centralized functions at the corporate office such as
central billing offices for the U.S. psychiatric division and THC as well as
added increased reimbursement support. The Company also completed the
installation of its new computer system in early 1995 and began incurring
costs to support the new system beginning in the second quarter of 1995. All
of these functions support the daily operations of the Company's hospitals.
Also, additional Corporate administrative functions have been added to
specifically support the expanded THC and United Kingdom operations.
Bad debt expense as a percentage of net operating revenue was 5.7% for the
year ended November 30, 1995 compared to 6.3% for the year ended November 30,
1994. Bad debt expense as a percentage of net operating revenues for THC has
decreased from 5.6% in fiscal 1994 to 1.4% in fiscal 1995. Beginning in the
middle of fiscal year 1994, the Company strengthened controls over admissions,
insurance verification, and billing for THC revenues. The implementation of
these controls has resulted in a decrease in uncollectible accounts and bad
debt expense.
Bad debt expense as a percentage of net operating revenues for the U.S.
Psychiatric Division increased from 7.3% in 1994 to 10.3% in 1995. A portion
of the increase relates to the fact that collections have slowed from certain
State Medicaid programs that have converted to managed care initiatives in
1995. In addition the Company moved 11 psychiatric hospitals to a central
billing office late in the fourth quarter of 1994 and in the first quarter of
1995 which also contributed to the slowdown in billings and collections and
higher bad debt expense. The Company anticipates future increases in bad debt
expense due to decreased annual and lifetime psychiatric maximum payment
limits for individual patients and increased deductibles and co-insurance.
Depreciation and amortization expense increased from 4.4% of net operating
revenue in 1994 to 4.6% of net operating revenue in 1995 primarily due to an
increased number of facilities at THC and in the United Kingdom.
Other income decreased primarily due to the fact that the prior year
included $2.0 million of gains on the sale of land that did not occur in the
current year.
Interest expense, net of capitalized interest, increased due to an increase
in borrowings during fiscal year 1995.
The decrease in the effective tax rate from 40.5% to 38.2% is primarily due
to a reduction in the net operating loss valuation reserve for THC operating
loss carryforwards that have been realized in the current year and those that
are expected to be realized in future years.
For the reasons described above, earnings before depreciation, amortization,
interest, other income and income taxes for the year ended November 30, 1995
increased from $34.7 million in fiscal year 1994 to $53.7 million in fiscal
year 1995.
24
<PAGE>
Fiscal Year 1994 Compared to Fiscal Year 1993
The following discussion excludes the restructuring charges and operating
results of the hospitals that were closed in 1994 and 1993.
Net operating revenues for the year ended November 30, 1994 increased by
approximately 35.7% to $422.4 million from $311.2 million for the prior year.
This increase was due primarily to the addition of $82.9 million of THC revenue
in 1994 compared to 1993.
Net operating revenues from the United States psychiatric hospitals increased
by 6.1% or approximately $15.9 million as a result of a 10.7% increase in
adjusted patient days to 613,025 from 553,560 which was partially offset by a
decrease in the net revenue per adjusted patient day. The increase in adjusted
patient days was due in large part to (i) a 37.0% increase in residential
treatment patient days to 142,661 from 104,147 and (ii) a 37.8% increase in
partial hospitalization visits to 148,340 from 107,687. The increase in
adjusted patient days offset the 9.6% decrease in average length of stay. The
decrease in net revenue per adjusted patient day was the result of the
continuing shift in reimbursement to negotiated rates and cost-based
reimbursement from private pay.
Net operating revenues from the Company's United Kingdom operations increased
by 36.3% or approximately $12.3 million as a result of a 34.8% increase in
inpatient days and a slight increase in average length of stay and net revenue
per adjusted patient day. The Company's United Kingdom operations benefitted
from the acquisition of one new hospital in the first quarter of 1994 and one
new hospital in the fourth quarter of 1994.
Operating expenses as a percentage of net operating revenues increased to
77.3% from 75.5% in the year ended November 30, 1994 compared to the prior
year. This increase was primarily attributable to expenses incurred in
connection with the expansion of the Company's THC operations.
General and administrative expenses decreased as a percentage of net
operating revenues from 8.6% to 8.0% due to cost-containment programs
implemented during the middle of 1993, which included the reduction of
personnel and other overhead. During the fourth quarter of 1994, the Company
implemented further reductions in its overhead by further reducing the number
of overhead personnel. During the fourth quarter of 1994, the Company incurred
approximately $1 million in moving costs and severance pay related to the
relocation of its Corporate office from Laguna Hills, California to Las Vegas,
Nevada.
Bad debt expense increased as a percentage of net operating revenues to 6.3%
in 1994 from 6.2% in 1993. The U. S. Psychiatric Division incurred specific
provisions for bad debt expense of $2 million and $1 million, respectively, in
the third and fourth quarters of 1994 related to temporary interruptions in
Medicare reimbursements to partial hospitalization providers in California. The
Company anticipates future increases in bad debt expense due to decreased
annual and lifetime psychiatric maximum payment limits for individual patients
and increased deductibles and co-insurance.
Other income increased due to gains on the sale of three parcels of land
totalling approximately $2.0 million.
Depreciation and amortization increased mainly due to the increase in
operating facilities at THC from seven as of November 30, 1993 to 13 as of
November 30, 1994.
Interest expense, net of capitalized interest, increased due to the increase
in long-term debt.
Income taxes (benefit) as a percentage of pre-tax income (loss) was 40.5%
compared to (35.4%) in 1993.
For the reasons described above, earnings before depreciation, amortization,
interest, and income taxes for the twelve months ended November 30, 1994
increased by approximately 15.3% to $34.7 million from $30.1 million in the
prior year period and net earnings increased to $10.2 million from $9.9 million
compared to the prior year period.
25
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is incorporated by reference from
Exhibit 1 in Item 14.
ITEM 9. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
The Board of Directors of the Company approved on September 28, 1995 the
dismissal of Ernst & Young LLP and the engagement of Price Waterhouse LLP as
the independent accountants of the Company for the fiscal year ending November
30, 1995, effective September 29, 1995, based on the recommendation of the
Company's Audit Committee.
The reports of Ernst & Young for the fiscal years ended November 30, 1993 and
1994 contained no adverse opinion, disclaimer of opinion or qualification or
modification as to uncertainty, audit scope or accounting principles.
During the fiscal years ended November 30, 1993 and 1994 and the interim
period from December 1, 1994 through September 29, 1995, the date of dismissal,
there were no disagreements between the Company and Ernst & Young on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure, which, if not resolved to the satisfaction of
Ernst & Young would have caused it to make reference to the subject matter of
the disagreement in connection with its report. No event described in paragraph
(a)(1)(v) of Item 304 of Regulation S-K occurred during the Company's fiscal
years ended November 30, 1993 or 1994, or the period from December 1, 1994
through September 29, 1995, except that Ernst & Young advised management and
the Board of Directors in a letter dated January 28, 1994, that, in connection
with the audit of the Company's 1993 fiscal year its representatives had
identified certain matters involving the internal control structure of the
Company's subsidiary, Transitional Hospitals Corporation and its operations
which Ernst & Young considered to be material weaknesses as defined under
standards established by the American Institute of Certified Public
Accountants. Ernst & Young further stated in that letter that these conditions
were considered in determining the nature, timing, and extent of the procedures
performed in their audit for the Company's 1993 fiscal year. Ernst & Young's
letter to the Board of Directors dated January 27, 1995 issued in conjunction
with the audit of the Company's 1994 fiscal year stated that they noted no
matters involving the internal control structure and its operations that they
considered to be material weaknesses as defined under standards established by
the American Institute of Certified Public Accountants.
PART III
Information under the following items required by Part III of Form 10-K is
incorporated by reference from Registrant's definitive Proxy Statement
applicable to Registrant's 1996 Annual Meeting of Shareholders, or will be
provided by Amendment to Form 10-K on Form 10-K/A, to be filed with the
Commission by Registrant no later than 120 days subsequent to the end of its
fiscal year.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
ITEM 11. EXECUTIVE COMPENSATION.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
26
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K.
(a) 1. Financial Statements. The Financial Statements listed in response to
Item 8 are filed herewith.
2. The following Financial Statement Schedule is filed herewith:
Valuation and Qualifying Accounts
3. Exhibits:
(3) Articles of Incorporation and By-laws
<TABLE>
<C> <S>
3.1 Restated Articles of Incorporation as adopted by vote of
shareholders on May 20, 1993 (filed as Appendix B to Registrant's
Proxy Statement dated April 20, 1993 relating to the annual
meeting of its shareholders on May 20, 1993 and incorporated in
full herein by this reference).
3.2 By-Laws as amended by vote of shareholders on May 23, 1991 (filed
as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for its
fiscal year ended November 30, 1991 and incorporated in full
herein by this reference) and as amended by vote of shareholders
on May 20, 1993 (filed as Appendix A to Registrant's Proxy
Statement dated April 20, 1993 relating to the annual meeting of
its shareholders on May 20, 1993 and incorporated in full herein
by this reference).
(10) Material Contracts
10.1 Employment Contract Number Four between Registrant and Richard L.
Conte, dated as of May 1, 1992 (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1993 and incorporated in full herein by reference).*
10.2 Amendment Number One dated as of July 29, 1994, to Employment
Contract Number Four between Registrant and Richard L. Conte
(filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-K
for its fiscal year ended November 30, 1994 and incorporated in
full herein by reference).*
10.2.1 Employment Contract between Registrant and Richard L. Conte dated
as of December 1, 1995.*
10.3 Supplemental Retirement Contract between Registrant and Richard
L. Conte, dated as of September 1, 1988 (filed as Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1988 and incorporated in full herein by this
reference).*
10.4 Restated and Amended Employment Contract between Registrant and
Robert L. Green, dated June 1, 1988 (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1988, and incorporated in full herein by this
reference).
10.5 Amendment Number One dated as of August 1, 1989, and Amendment
Number Two dated as of December 1, 1989 to Restated and Amended
Employment Contract between Registrant and Robert L. Green (filed
as Exhibit 10.5 to Registrant's Annual Report on Form 10-K for
its fiscal year ended November 30, 1994 and incorporated in full
herein by reference).
10.6 Employment Agreement between Registrant and David A. Wakefield
dated as of July 31, 1992 (filed as Exhibit 10.6 to Registrant's
Annual Report on Form 10-K for its fiscal year ended November 30,
1994 and incorporated in full herein by reference).*
10.7 Employment Contract between Registrant and Wendy Simpson dated as
of August 1, 1995.*
10.8 Employment Contract between Registrant and Ronald L. Ooley dated
as of June 1, 1994.*
</TABLE>
27
<PAGE>
<TABLE>
<C> <S>
10.9 Termination Agreement between Registrant and Steven S. Weis
dated as of December 30, 1994 (filed as Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1994 and incorporated in full herein by reference).
10.9.1 Settlement Agreement between Registrant, Kay Seim, Richard Seim
and Continuum Healthcare, Inc. dated as of February 19, 1996.
10.10 Form of Indemnification Agreements between Registrant and its
Directors and Executive Officers (filed as Exhibit C to
Registrant's Proxy Statement, dated April 24, 1987, relating to
the annual meeting of its shareholders on June 1, 1987, and
incorporated in full herein by this reference).
10.11 Registrant's 1989 Stock Incentive Plan (filed as Exhibit A to
Registrant's Proxy Statement, dated July 12, 1989, and
incorporated in full herein by this reference).*
10.12 Form of Stock Option Agreement (filed as Exhibit 10.6.1 to
Registrant's Report on Form 10-K for its fiscal year ended
November 30, 1990 and incorporated in full herein by this
reference).*
10.12.1 Form of Nonstatutory Stock Option Agreement with Director (filed
as Exhibit 10.6.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1990 and incorporated in full
herein by this reference).*
10.13 Registrant's Combined Stock Option Plan for Key Employees and
Amendment Numbers One, Two, Three, Four and Five thereto (filed
as Exhibit 10.7 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.13.1 Form of Stock Option Agreement--General Stock Option (filed as
Exhibit 10.7.1 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.13.2 Form of Stock Option Agreement--Incentive Stock Option (filed as
Exhibit 10.7.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.14 Credit Agreement among Registrant, Transitional Hospitals
Corporation and Bank of America National Trust and Savings
Association, dated as of September 20, 1993 (filed as Exhibit 10
to Registrant's Report on Form 10-Q for its fiscal quarter ended
August 31, 1993 and incorporated in full herein by this
reference).
10.14.1 Second Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America National
Trust and Savings Association, dated as of June 7, 1995.
10.14.2 Letter dated February 26, 1996 waiving compliance for certain
debt covenants under Credit Agreement referred to in Exhibit
10.14.
10.15 Credit Agreement, among Registrant, Priory Hospitals Group
Limited and Bank of America National Trust and Savings
Association dated as of December 23, 1993 (filed as Exhibit
10.11 to Registrant's Annual Report on Form 10-K for its fiscal
year ended November 30, 1993, and incorporated herein by this
reference).
10.16 Credit Agreement among Registrant, Transitional Hospitals
Corporation and Bank of America National Trust Savings
Association, dated as of May 6, 1994 (filed as Exhibit 10 to
Registrant's Report on Form 10-Q for its quarter ended May 31,
1994, and incorporated herein by this reference).
10.17 First Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation and Bank of America National
Trust Savings Association dated as of December 14, 1994 (filed
as Exhibit 10.15 to Registrant's Annual Report on
Form 10-K for its fiscal year ended November 30, 1994 and
incorporated in full herein by reference).
</TABLE>
28
<PAGE>
<TABLE>
<C> <S>
10.18 Second Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America National
Trust and Savings Association, dated as of February 28, 1995.
10.18.1 Third Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America National
Trust and Savings Association, dated as of June 5, 1995.
10.18.2 Fourth Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America National
Trust and Savings Association, dated as of February 26, 1996.
10.19 Agreement and Promissory Note between Registrant and Richard
Conte dated as of June 7, 1995 (filed as Exhibit 10 to
Registrant's Report on Form 10-Q for its quarter ended
August 31, 1995, and incorporated herein by this reference).
10.20 Agreement and Promissory Note between Registrant and J. Rodney
Laughlin dated as of November 9, 1995.
10.21 Agreement and Promissory Note between Registrant and Ronald L.
Ooley dated as of June 2, 1995.
11 Statement re computation of earnings per share
22 Subsidiaries of the Registrant
23 Consents of Experts--Price Waterhouse LLP
23.1 Consents of Experts--Ernst & Young LLP
27 Financial Data Schedule
</TABLE>
(b) Report on Form 8-K: On November 6, 1995, the Registrant filed Form 8-K/A
disclosing a change in the Registrant's certifying accountants.
- --------
* Required to be filed as an exhibit pursuant to item 14(c) of this Form.
29
<PAGE>
SIGNATURES
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.
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ RICHARD L. CONTE
----------------------------------
Date: February 26, 1996 Richard L. Conte
Chairman of the Board of Directors
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ RICHARD L. CONTE Chairman of the Board of February 26, 1996
- ------------------------------------ Directors and Chief
Richard L. Conte Executive Officer
(Principal Executive
Officer)
/s/ WENDY SIMPSON Director and Executive Vice February 26, 1996
- ------------------------------------ President of the Company,
Wendy Simpson and Chief Financial Officer
(Principal Financial
Officer)
/s/ DAVID WAKEFIELD Director and Executive Vice February 26, 1996
- ------------------------------------ President of the Company,
David Wakefield and Chairman Priory
Hospitals Group
/s/ HARTLEY FLEISCHMANN Director February 26, 1996
- ------------------------------------
Hartley Fleischmann
/s/ JACK H. LINDHEIMER, M.D. Director and Medical February 26, 1996
- ------------------------------------ Director, U.S. Psychiatric
Jack H. Lindheimer, M.D. Services
/s/ DANA L. SHIRES, JR., M.D. Director February 26, 1996
- ------------------------------------
Dana L. Shires, Jr., M.D.
/s/ DAVID L. DENNIS Director February 26, 1996
- ------------------------------------
David L. Dennis
/s/ ROBERT L. THOMAS Director February 26, 1996
- ------------------------------------
Robert L. Thomas
/s/ STEVEN M. GRAY Senior Vice President and February 26, 1996
- ------------------------------------ Corporate Controller
Steven M. Gray (Principal Accounting
Officer)
</TABLE>
30
<PAGE>
Annual Report Form 10-K
Item 8, Item 14(a)(1) and (2), (c) and (d)
Financial Statements and Supplementary Data
List of Financial Statements and Financial Statement Schedule
Certain Exhibits
Financial Statement Schedule
Community Psychiatric Centers and Subsidiaries
Las Vegas, Nevada
Year Ended November 30, 1995
31
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
32
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS
FORM 10-K ITEM 14(A)(1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements of Community Psychiatric
Centers and Subsidiaries are included in Item 8:
Report of Independent Accountants--Year ended November 30, 1995--Price
Waterhouse LLP
Report of Independent Auditors--Years ended November 30, 1994 and 1993--
Ernst & Young LLP
Consolidated balance sheets--November 30, 1995 and 1994
Consolidated statements of operations--Years ended November 30, 1995, 1994
and 1993
Consolidated statements of stockholders' equity--Years ended November 30,
1995, 1994 and 1993
Consolidated statements of cash flows--Years ended November 30, 1995, 1994
and 1993
Notes to consolidated financial statements--November 30, 1995
The following consolidated financial statement schedule of Community
Psychiatric Centers and Subsidiaries is included in Item 14(d):
Report of Independent Accountants on Financial Statement Schedule--Year
ended November 30, 1995
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
33
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Community Psychiatric Centers
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Community Psychiatric Centers and its subsidiaries at November 30, 1995 and
the results of their operations and their cash flows for the year then ended
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for the
opinion expressed above.
As discussed in Note 3 of the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
in 1995.
PRICE WATERHOUSE LLP
Los Angeles, California
January 31, 1996
34
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Community Psychiatric Centers
We have audited the accompanying consolidated balance sheet of Community
Psychiatric Centers and Subsidiaries as of November 30, 1994 and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the two years in the period ended November 30, 1994. Our audits
also included the financial statement schedule listed in the index at Item
14(a) as it relates to the two year period ended November 30, 1994. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of Community Psychiatric Centers and Subsidiaries at November 30, 1994 and the
consolidated results of their operations and their cash flows for each of the
two years in the period ended November 30, 1994, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule as it relates to the two year period ended November 30,
1994, when considered in relation to the basic financial statements taken as a
whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
Los Angeles, California
January 27, 1995
35
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.................................. $ 17,263 $ 37,263
Short-term investments..................................... 7,601 13,756
Accounts receivable, less allowance for doubtful accounts
(1995--$24,682 and 1994--$29,381)......................... 113,686 103,128
Receivable from third parties under reimbursement
contracts................................................. 4,550 --
Prepaid expenses and other current assets.................. 14,756 18,305
Property held for sale..................................... 15,512 2,374
Refundable income taxes.................................... 21,028 --
Deferred income taxes...................................... 951 3,773
-------- --------
Total current assets......................................... 195,347 178,599
Property, buildings and equipment, at cost, less allowances
for depreciation............................................ 354,192 376,765
Other assets:
Refundable income taxes.................................... -- 1,103
Deferred income taxes...................................... 21,334 1,720
Other assets............................................... 24,862 25,207
-------- --------
46,196 28,030
Excess of investment in subsidiaries over net assets
acquired, less accumulated amortization (1995--$2,351 and
1994--$3,418)............................................... 8,890 16,610
-------- --------
$604,625 $600,004
======== ========
</TABLE>
See notes to consolidated financial statements.
36
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 30
----------------------
1995 1994
---------- ----------
(IN THOUSANDS, EXCEPT
PAR VALUE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable..................................... $ 18,194 $ 18,305
Accrued payroll and other expenses................... 34,949 30,498
Income taxes payable................................. 4,425 5,845
Payable to third parties under reimbursement
contracts........................................... -- 5,802
Accrued restructuring charges........................ 3,693 1,429
Current maturities on long-term debt................. 18,764 13,224
---------- ----------
Total current liabilities............................ 80,025 75,103
Long-term debt, exclusive of current maturities........ 84,883 69,090
Deferred credits:
Deferred compensation................................ 2,019 1,816
Deferred income taxes................................ 17,659 13,956
---------- ----------
19,678 15,772
Commitments and contingencies
Obligation to be settled in common stock............... 21,250 --
Stockholders' equity:
Preferred stock, par value $1 a share; authorized
2,000 shares; none issued........................... -- --
Common stock, par value $1 a share; authorized
100,000 shares; issued 46,856 in 1995 and 1994...... 46,856 46,856
Additional paid-in capital........................... 62,096 61,357
Less due from employees for exercise of stock options
.................................................... -- (35)
---------- ----------
108,952 108,178
Retained earnings.................................... 327,062 369,131
Foreign currency translation adjustment.............. (2,943) (1,805)
---------- ----------
433,071 475,504
Less cost of treasury stock--3,166 shares in 1995 and
3,265 shares in 1994.................................. (34,282) (35,465)
---------- ----------
398,789 440,039
---------- ----------
$604,625 $600,004
========== ==========
</TABLE>
See notes to consolidated financial statements.
37
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
----------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS, EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Net operating revenues......................... $506,663 $423,955 $335,578
Investment and other income.................... 2,513 3,785 2,301
-------- -------- --------
509,176 427,740 337,879
Costs and expenses:
Operating expense.............................. 384,818 328,508 256,661
General and administrative expense............. 39,444 33,775 26,806
Bad debt expense............................... 28,732 26,966 21,266
Depreciation and amortization.................. 23,344 18,649 14,330
Interest expense............................... 5,256 3,545 2,420
Settlement costs............................... 45,985 -- --
Impairment loss................................ 46,021 -- --
Restructuring charge (credit).................. 2,110 (875) 54,950
-------- -------- --------
575,710 410,568 376,433
-------- -------- --------
Income (loss) before income taxes................ (66,534) 17,172 (38,554)
Income taxes (credit)............................ (24,902) 6,952 (13,662)
-------- -------- --------
Net income (loss)................................ $(41,632) $ 10,220 $(24,892)
======== ======== ========
Net income (loss) per common share............... $ (0.95) $ 0.24 $ (0.58)
======== ======== ========
Average number of common shares.................. 43,642 43,465 42,951
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
38
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AMOUNTS
DUE FROM
EMPLOYEES
FOR FOREIGN
ADDITIONAL EXERCISE CURRENCY TREASURY STOCK
COMMON PAID-IN OF STOCK RETAINED TRANSLATION ----------------
STOCK CAPITAL OPTIONS EARNINGS ADJUSTMENT SHARES AMOUNT
------- ---------- --------- -------- ----------- ------ --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30,
1992................... $46,856 $67,831 $(139) $388,102 $(3,072) (3,831) $(48,645)
Exercise of employees'
stock options........ (2,620) 153 4,283
Payments on amounts
due on stock options. 104
Income tax benefits
derived from employee
stock option
transactions......... 130
Stock repurchased..... (85) (838)
Net loss for the year. (24,892)
Dividends paid, $.09
per common share..... (3,865)
Foreign currency
translation
adjustment........... (743)
------- ------- ----- -------- ------- ------ --------
Balance at November 30,
1993................... 46,856 65,341 (35) 359,345 (3,815) (3,763) (45,200)
Exercise of employees'
stock options........ (4,052) 498 9,735
Income tax benefits
derived from employee
stock option
transactions......... 68
Net income for the
year................. 10,220
Dividends paid, $.01
per common share..... (434)
Foreign currency
translation
adjustment........... 2,010
------- ------- ----- -------- ------- ------ --------
Balance at November 30,
1994................... 46,856 61,357 (35) 369,131 (1,805) (3,265) (35,465)
Exercise of employees'
stock options........ (206) 102 1,235
Expiration of employee
stock options........ 17 35 (3) (52)
Income tax benefits
derived from employee
stock option
transactions......... 928
Net loss for the year. (41,632)
Dividends paid, $.01
per common share..... (437)
Foreign currency
translation
adjustment........... (1,138)
------- ------- ----- -------- ------- ------ --------
Balance at November 30,
1995................... $46,856 $62,096 $ 0 $327,062 $(2,943) (3,166) $(34,282)
======= ======= ===== ======== ======= ====== ========
</TABLE>
See notes to consolidated financial statements.
39
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
----------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................... $(41,632) $ 10,220 $(24,892)
Items not resulting in cash flows:
Depreciation and amortization................. 23,344 18,649 14,330
Provision for uncollectible accounts.......... 28,732 26,966 21,266
Settlement costs.............................. 22,315 -- --
Impairment loss............................... 46,021 -- --
Restructuring charge (credit)................. 2,110 (875) 54,950
Gain on sale of property, buildings and
equipment.................................... -- (1,970) (232)
Other......................................... (1,418) (3,637) (1,795)
Changes in assets and liabilities, exclusive of
business acquisitions:
Short-term investments........................ 6,155 (2,824) (10,932)
Accounts receivable........................... (39,290) (50,070) (23,948)
Receivable/payable to third parties under
reimbursement contracts...................... (10,352) 812 3,170
Accounts payable and accrued expenses......... 4,340 10,438 11,334
Accrued restructuring costs................... 154 (942) (8,892)
Dividends payable............................. -- (111) (3,839)
Income taxes.................................. (34,435) 9,709 (10,685)
-------- -------- --------
Net cash provided from operations............... 6,044 16,365 19,835
FINANCING:
Proceeds from revolving credit facilities....... 39,195 41,982 13,267
Dividends paid.................................. (437) (434) (3,865)
Purchase of treasury shares..................... -- -- (838)
Payments of deferred compensation............... (634) (162) (6,448)
Net proceeds from exercise of stock options..... 1,029 5,683 1,897
Payments on long-term debt...................... (18,859) (1,402) (667)
-------- -------- --------
Net cash provided from financing activities..... 20,294 45,667 3,346
INVESTING:
Payment received on notes....................... 4,591 3,437 669
Purchase of property, buildings and equipment... (40,139) (48,760) (58,269)
Investment in pre-opening costs................. (2,899) (4,225) (2,904)
Proceeds from sale of property, buildings and
equipment...................................... 5,289 7,393 1,039
Loans made to officers.......................... (4,055) (1,242) (227)
Investment in affiliate......................... -- -- (1,602)
Payment for business acquisitions:
Property, buildings and equipment............. (8,604) (4,787) (965)
Excess of purchase price over fair value of
assets acquired.............................. (521) (1,225) (4,119)
-------- -------- --------
Net cash used for investing activities.......... (46,338) (49,409) (66,378)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents.................................... (20,000) 12,623 (43,197)
Beginning cash and cash equivalents............. 37,263 24,640 67,837
-------- -------- --------
Ending cash and cash equivalents................ $ 17,263 $ 37,263 $ 24,640
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
40
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOVEMBER 30, 1995 AND 1994
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. All material intercompany transactions have been
eliminated in the accompanying consolidated financial statements.
The Company provides long-term critical care services to patients suffering
from long-term complex medical problems in the United States. The Company also
provides psychiatric services in the United States and United Kingdom. The
Company currently offers a broad spectrum of services including inpatient,
partial hospitalization, outpatient and residential treatment programs.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Those highly liquid
assets with a maturity of more than three months are classified as short-term
investments.
PROPERTY, BUILDINGS AND EQUIPMENT
Depreciation is computed on the straight-line method based on the estimated
useful lives of fixed assets of 31.5 to 40 years for buildings and three to
ten years for furniture and equipment.
INTANGIBLE ASSETS
Intangible assets consist mainly of goodwill, which represents the excess of
investment in subsidiaries over the fair value of net assets acquired from
acquisitions. Goodwill acquired in acquisitions prior to fiscal year 1995 is
being amortized on a straight-line basis over 40 years. The amortization
period for goodwill acquired in 1995 is 20 years. The Company also has
intangible assets related to covenants not to compete with two former Chairmen
of the Board of Directors. The covenants are amortized over the life of the
agreements (see Note 9).
The Company monitors changes in circumstances that could indicate that the
carrying amounts of intangible assets may not be recoverable. When events or
changes in circumstances are present that indicate the carrying amount of
intangible assets may not be recoverable, the Company assesses the
recoverability of the asset by determining whether the carrying amount will be
recovered through future expected cash flows. The Company recorded an
impairment loss of approximately $9.7 million related to intangible assets in
1995 (see Note 3).
PREOPENING COSTS
Costs incurred prior to the opening of new facilities are deferred and
amortized on a straight-line basis over a five-year period.
CAPITALIZATION OF INTEREST
Interest incurred in connection with development and construction of
hospitals is capitalized as part of the related property.
41
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NET OPERATING REVENUES
Net operating revenues include amounts for hospital services estimated by
management to be reimbursable by federal and state government programs
(Medicare, Medicaid and CHAMPUS); managed care programs (managed care
companies, health maintenance organizations and preferred provider
organizations) and private pay payors (private sources and insurance companies
which base reimbursement on the Company's price schedule).
The following table summarizes the percent of net operating revenue
generated from all payors.
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Medicare.................................................. 37% 28% 19%
Medicaid.................................................. 11 13 16
CHAMPUS................................................... 4 4 5
Other Government (United Kingdom)......................... 5 3 --
--- --- ---
Total Government........................................ 57 48 40
Managed Care.............................................. 27 33 30
Private pay............................................... 16 19 30
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
</TABLE>
Amounts received are generally less than the established billing rates of
the Company and the difference is reported as a contractual allowance and
deducted from operating revenues. Final determination of amounts earned for
hospital services is subject to audit by the payors. In the opinion of
management, adequate provision has been made for any adjustments that may
result from such audits. Differences between estimated provisions and final
settlement are reflected as charges and credits to operating revenues in the
year the audit reports are finalized. In the current year, the Company
received approximately $5.5 million in excess of recorded amounts related to
prior year Medicare settlements. These amounts are included in operating
revenue.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and short-term
investments and receivables from government programs.
The Company maintains cash equivalents and short-term investments with
various financial institutions. The Company's policy is designed to limit
exposure to any one institution. The Company performs periodic evaluations of
the relative credit standing to those financial institutions that are
considered in the Company's investment strategy. The Company and management do
not believe that there are any significant credit risks associated with
receivables from governmental programs. Negotiated and private receivables
consist of receivables from various payors, including individuals involved in
diverse activities, subject to differing economic conditions, and do not
represent any concentrated credit risks to the Company. Furthermore,
management continually monitors and adjusts its reserves and allowances
associated with these receivables.
STOCK OPTIONS
Proceeds from the exercise of stock options are credited to common stock, to
the extent of par value, and the balance to additional paid-in capital, except
when shares held in the treasury are issued. The difference between the cost
of the treasury stock and the option price is charged or credited to
additional paid-in capital. No charges or credits are made to earnings with
respect to options granted or exercised. Income tax benefits derived from
exercise of non-incentive stock options and from sales of stock obtained from
incentive stock options before the minimum holding period are credited to
additional paid-in capital.
42
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share have been computed based upon the weighted average
number of shares of common stock outstanding during the year. Dilutive common
stock equivalents have not been included in the computation of earnings (loss)
per share because the aggregate potential dilution resulting therefrom is less
than 3%.
TRANSLATION OF FOREIGN CURRENCIES
The financial statements of the Company's foreign subsidiaries have been
translated into U.S. dollars in accordance with FASB Statement No. 52. All
balance sheet accounts have been translated at year-end exchange rates.
Statements of earnings amounts have been translated at the average exchange
rate for the year. The resulting currency translation adjustments were made
directly to a separate component of Stockholders' Equity. The effect on the
statement of earnings of translation gains and losses is insignificant for all
years presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In the fourth quarter of fiscal year 1995, the Company elected to adopt
early the provisions of Financial Accounting Standards No. 121 ("FAS 121"),
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to Be Disposed Of". The statement requires impairment losses to be recognized
for long-lived assets used in operations when indicators of impairment are
present and the undiscounted cash flows are not sufficient to recover the
assets' carrying amount. The impairment loss is measured by comparing the fair
value of the asset to its carrying amount. The statement also requires that
assets to be disposed of should be written down to fair value less selling
costs. The adoption of FAS 121 resulted in the Company recording impairment
losses of $46.0 million (see Note 3 to the financial statements for further
discussion).
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation", which becomes
effective for fiscal years beginning after December 15, 1995. FAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense
for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Entities electing to remain with the
accounting in APB Opinion No. 25 will be required to make pro forma
disclosures of net income and earnings per share as if the provisions of FAS
123 had been applied. The Company is in the process of evaluating the
Statement. The potential impact on the Company of adopting the new standard
has not been quantified at this time. The Company must adopt FAS 123 no later
than December 1, 1996.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with 1995 presentations.
NOTE 2--RESTRUCTURING CHARGES (CREDITS)
Effective February 28, 1993, the Company recorded a pre-tax charge of $55.0
million ($35.0 million after tax) in connection with the decision to close
seven of its U.S. psychiatric hospitals. The charge comprised $35.3 million to
write down buildings and other fixed assets, $2.1 million to write off
intangibles, $14.4 million for future operating losses of the seven hospitals
and related corporate restructuring costs associated with terminating
employees, and $3.2 million for additional accounts receivable allowances at
the seven hospitals. Six of the restructured hospitals have ceased operations.
The seventh hospital returned to operating status effective March 1, 1994.
This facility was subsequently closed in November 1995 (see discussion below).
Of the six closed hospitals, five have been sold and one has been converted
into a long-term critical care hospital
43
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
operated by the Company's wholly owned subsidiary, THC. The Company received
cash proceeds of approximately $5.0 million and $5.3 million, respectively, in
the first quarter of 1994 and the second and third quarters of 1995 from the
sale of the five hospitals. The Company continues to hold property for sale
with a remaining book value of $.3 million that was part of the 1993
restructuring.
Effective February 28, 1994, the Company recorded a restructuring credit
totalling $7.2 million ($4.3 million after tax) from the resolution of the
previously restructured psychiatric assets. The restructuring credit resulted
from the Company's success in controlling hospital closure costs and in
divesting one of its restructured properties at a higher price than the 1993
writedown of the facility anticipated.
Effective February 28, 1994, the Company recorded a restructuring charge of
$6.3 million ($3.8 million after tax) in connection with the decision to close
three additional psychiatric facilities. The charge comprised $2.2 million for
future operating losses, $1.5 million for restructuring costs associated with
terminating employees and $2.6 million for additional accounts receivable
allowances and reserves for other assets at the three hospitals. Approximately
225 employees of the restructured hospitals were terminated. Amounts charged
against the reserve for estimated operating losses and termination benefits
paid approximated amounts originally accrued. Total revenue and net operating
income or (loss) for the three closed hospitals totalled $2.8 million and
($1.1 million) for the first quarter of 1994, $20 million and $.6 million for
fiscal year 1993, and $23.5 million and $2.3 million for fiscal year 1992. Of
the three closed hospitals, one is being held for sale (carrying value of $1.5
million), one was converted into a THC facility after the restructuring, and
one was converted into a satellite hospital of a THC facility in September
1995.
Effective May 31, 1995, the Company recorded a restructuring credit
totalling $2.5 million ($1.5 million after tax) from the resolution of
previously restructured psychiatric assets. The restructuring credit resulted
from divesting two restructured properties at higher prices than the 1993
writedown of the facilities anticipated and the Company's success in
collecting accounts receivable balances that were reserved for as part of the
February 28, 1994 restructuring charge.
Effective November 30, 1995, the Company recorded a restructuring charge
totalling $4.6 million ($2.8 million after tax), determined in accordance with
the provisions of the January 1995 Financial Accounting Standards Board
Emerging Issues Task Force Consensus No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring)", ("EITF 94-3"), in
connection with the decision to close six psychiatric facilities and three
regional offices. EITF 94-3 requires the accrual of certain employee
termination costs and costs resulting from a plan to exit an activity that are
not associated with or that do not benefit activities that will continue and
prohibits accrual of expected future operating losses of the activity exited.
The charge comprised $3.4 million for employee termination benefits related to
hospital operations and overhead personnel and $1.2 million for non-cancelable
operating leases and other exit costs. Approximately 314 hospital employees
and 65 corporate and regional employees were terminated. To date, amounts
charged against the reserve for employee termination benefits paid
approximated amounts accrued. Net operating revenue and net operating income
or (loss) for the six closed hospitals totalled $28.5 million and ($2.8
million) for fiscal year 1995, $40.9 million and $2.1 million for fiscal year
1994, and $38.3 million and $6.9 million for fiscal year 1993. Of the six
closed hospitals, three are being held for sale, two will become fully
converted THC hospitals, and one will be exchanged for a similar building held
by another health care provider and will be converted into a THC facility.
Management continually reviews all facilities to evaluate potential
closures, divestitures or conversions. Management may elect to close
additional psychiatric facilities in the future which could result in
additional charges to income for the costs necessary to exit the hospital
operations.
44
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 3--IMPAIRMENT OF ASSETS
In the fourth quarter of fiscal year 1995, the Company elected early
adoption of the provisions of FASB Statement 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of".
The statement requires impairment losses to be recognized for long-lived
assets used in operations when indicators of impairment are present and the
undiscounted cash flows are not sufficient to recover the assets' carrying
amount. The impairment loss is measured by comparing the fair value of the
asset to its carrying amount. The statement also requires that assets to be
disposed of should be written down to fair value less selling costs. Based on
a comparison of the recorded values of long-lived assets (defined as land,
buildings, fixed assets and goodwill) against the expected future cash flows
to be generated by the assets of three U.S. Psychiatric facilities that were
closed in November 1995 as well as three U.S. Psychiatric facilities which
have experienced recent declines in operating performance, and after applying
the principles of measurement contained in the Statement, the Company recorded
an asset impairment charge of approximately $26.5 million. Using the same
principles as described above, the Company recorded an asset impairment charge
of approximately $5.3 million on land that is being held for sale. The closed
facilities as well as the land held for sale are classified as assets held for
sale with a carrying value of $13.7 million after the impairment writedown.
All assets held for sale pertain to the U.S. Psychiatric Division.
The Company completed its installation of a new computer system in the first
quarter of 1995. As several of the promised applications did not function as
specified, an impairment loss of approximately $8.1 million ($6.8 million
related to the U.S. Psychiatric Division and $1.3 million related to THC) was
recorded in the fourth quarter of 1995 to write down a portion of the total
cost of the system. The Company also shortened the estimated useful life of
the system to two years in anticipation of implementing a new alternative.
In November of 1995, the Company closed Harvard Medical Limited, a patient
liaison business in West Germany due to recent declines in operating
performance. Based on these factors, the Company recorded an impairment loss
of $4.1 million to write off the goodwill related to this Company.
NOTE 4--ACQUISITIONS
During 1995, the Company acquired two hospitals in the United Kingdom for
$3.3 million. The Company also purchased for $5.8 million, the land, building,
and fixed assets for a THC facility that had been managed by THC since May of
1994. The excess of the purchase price over the fair value of these assets
totalled $.5 million and is being amortized over 20 years.
During 1994, the Company acquired two hospitals in the United Kingdom for a
total purchase price of $5.7 million.
During 1993, the Company acquired six buildings and the related fixed assets
and modified the buildings into six long-term critical care facilities. Total
consideration paid was $33.0 million. The Company also acquired a substance
abuse center in the United Kingdom for a purchase price of $4.3 million.
The aggregate total costs of the acquisitions in fiscal 1993 and fiscal 1994
exceeded the fair value of the assets acquired by approximately $5.3 million.
The excess is being amortized on a straight-line basis over a 40-year period.
The acquisitions have been accounted for as purchases and, accordingly, the
results of operations of the acquired facilities have been included in the
consolidated statement of earnings since the date of acquisition. The results
of operations of the acquired businesses prior to the date of acquisition were
not material to the consolidated financial statements.
45
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 5--PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are summarized as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1995 1994
--------- --------
(IN THOUSANDS)
<S> <C> <C>
Land................................................... $ 51,598 $ 61,570
Buildings and improvements............................. 300,388 302,779
Furniture, fixtures and equipment...................... 92,933 94,285
Construction in progress (estimated additional cost to
complete at
November 30, 1995--$17.5 million) .................... 12,599 11,068
--------- --------
457,518 469,702
Less accumulated depreciation.......................... (103,326) (92,937)
--------- --------
$ 354,192 $376,765
========= ========
</TABLE>
The Company incurred interest expense of $7.2 million, $4.8 million and $2.5
million in 1995, 1994 and 1993, respectively, including $1.9 million, $1.3
million and $.2 million which was capitalized in 1995, 1994 and 1993,
respectively.
Interest paid was $7.3 million, $4.1 million, and $2.5 million during 1995,
1994 and 1993, respectively.
NOTE 6--INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes". Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of November 30, 1995 and November 30,
1994, are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
------- -------
<S> <C> <C>
Deferred tax liabilities:
Excess tax depreciation.................................. $23,425 $21,978
Other.................................................... 2,018 1,859
Restructuring charge..................................... (7,784) (9,881)
------- -------
Total deferred tax liabilities......................... $17,659 $13,956
======= =======
Deferred tax assets:
Current:
Excess of book over tax bad debt provision............... $ 701 $ 3,506
Other.................................................... 250 267
------- -------
Total current deferred tax assets...................... $ 951 $ 3,773
======= =======
Non-current:
Impairment loss.......................................... $18,108 $ --
Net operating loss....................................... 5,952 3,781
Restructuring charge..................................... 1,094 1,827
Excess tax depreciation.................................. (1,649) (1,647)
Other.................................................... (9) (287)
Net operating loss valuation reserve..................... (2,162) (1,954)
------- -------
Total non-current deferred tax assets.................. $21,334 $ 1,720
======= =======
</TABLE>
46
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deferred tax liabilities and assets by tax jurisdictions are as follows as
of November 30, 1995 (in thousands):
<TABLE>
<CAPTION>
DEFERRED DEFERRED
TAX ASSET TAX LIABILITIES
------------------- -------------------
CURRENT NON-CURRENT CURRENT NON-CURRENT
------- ----------- ------- -----------
<S> <C> <C> <C> <C>
U.S. Federal Income Taxes
(consolidated)........................ $ 830 $15,862 $-- $15,334
Foreign (U.K.)......................... -- -- -- 2,325
State.................................. 121 5,472 -- --
----- ------- --- -------
$ 951 $21,334 $-- $17,659
===== ======= === =======
</TABLE>
For financial reporting purposes, income before income taxes includes the
following components:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax income (loss):
United States...................................... $(79,772) $ 7,846 $(44,796)
Foreign............................................ 13,238 9,326 6,242
-------- ------- --------
$(66,534) $17,172 $(38,554)
======== ======= ========
</TABLE>
Significant components of the provision for income taxes attributable to
continuing operations are as follows:
<TABLE>
<CAPTION>
1995 1994 1993
-------- ------ --------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal........................................... $(14,931) $1,497 $ (3,576)
Foreign........................................... 4,580 1,996 2,169
State............................................. (1,507) 1,614 611
-------- ------ --------
Total current................................... (11,858) 5,107 (796)
Deferred:
Federal........................................... (9,992) 1,295 (9,967)
Foreign........................................... 331 1,364 (94)
State............................................. (3,383) (814) (2,805)
-------- ------ --------
Total deferred.................................. (13,044) 1,845 (12,866)
-------- ------ --------
$(24,902) $6,952 $(13,662)
======== ====== ========
</TABLE>
The reconciliation of income tax attributable to continuing operations
computed at the U.S. federal statutory tax rate to income tax expense is:
<TABLE>
<CAPTION>
1995 1994 1993
----------------- -------------- -----------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
-------- ------- ------ ------- -------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates. $(22,622) (34)% $5,838 34% $(13,108) (34)%
State income taxes, net of
federal tax benefit,
(charge)................... (3,227) (5) 528 3 (1,448) (4)
Restructuring--intangibles.. -- -- -- -- 730 2
Other--net.................. 947 2 586 4 164 1
-------- --- ------ --- -------- ---
$(24,902) (37)% $6,952 41% $(13,662) (35)%
======== === ====== === ======== ===
</TABLE>
47
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Company made income tax payments of $8.0 million in 1995. The Company
received income tax refunds (net of income taxes paid of $4.5 million and $3.2
million) of $2.3 million and $3.2 million in 1994 and 1993, respectively.
NOTE 7--LONG TERM DEBT
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
1995 1994
-------- -------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under revolving credit agreements.................. $ 90,326 $55,169
5 3/4% Convertible Subordinated Debentures due 2012,
convertible into Common Stock of the Company at $35.89 per
share, may be redeemed at 103.75% of face value as of
October 15, 1992 declining annually to 100% of face value on
or after October 15, 1999.................................... 6,885 7,366
8 3/4% Subordinated Guaranteed Debentures due 1996 (net of
unamortized discount of $24)................................. 4,980 4,956
8 1/2% Subordinated Guaranteed Debentures due 1995............ -- 10,840
Notes payable, collateralized by deeds of trust on land,
buildings and equipment with a cost of approximately $8,051,
payable in installments to 2004 including interest ranging
from 7% to 10 1/2%........................................... 1,449 1,903
Note payable due December 31, 1994, interest payable quarterly
at the LIBOR rate plus 2%.................................... -- 1,485
Other......................................................... 7 595
-------- -------
103,647 82,314
Less current portion........................................ 18,764 13,224
-------- -------
$ 84,883 $69,090
======== =======
</TABLE>
During May 1994, the Company, Transitional Hospitals Corporation (THC--the
Company's wholly-owned long-term care subsidiary) and Bank of America National
Trust and Savings Association ("the Bank") entered into a credit agreement
("the Agreement") whereby the Company or THC may borrow, repay and reborrow up
to $50 million through February 28, 1997. Interest is payable at LIBOR plus
2.75% through February 28, 1995. Interest through February 28, 1997 is payable
at LIBOR plus 1-2%, based on calculated ratios as documented in the Agreement.
As of November 30, 1995, $50 million is outstanding under this Agreement.
During September 1993, the Company entered into a credit agreement ("the
Agreement") whereby the Company was able to borrow up to $25 million through
November 30, 1995 (the revolving loan period), at which time the amount
outstanding was converted into a term loan payable in equal quarterly
installments through November 30, 1998. Interest is payable at the lesser of
(1) LIBOR plus 1.25% during the revolving loan period and LIBOR plus 1.50%
during the term loan period or (2) the greater of (a) the Bank's reference
rate or (b) the Fed Funds rate plus .5%. As of November 30, 1995, $25 million
is outstanding under this Agreement.
During October 1993, the Company's subsidiary in the United Kingdom entered
into a temporary revolving credit facility whereby the Company was allowed to
borrow up to $7.5 million through December 31, 1993. Interest was to be
calculated at the rate of interest at which sterling pounds deposits would be
offered to major banks in the London interbank market, plus 1.25%. A final
loan agreement was signed in December 1993 to replace the temporary facility
whereby the Company was able to borrow up to 10 million sterling pounds
through November 30, 1995, at which time the amount outstanding was converted
into a term loan payable in equal quarterly installments through November 30,
1998. Interest on five million sterling pounds of this facility is fixed at
8.95%. Interest on the balance is payable at the sterling pounds LIBOR rate
plus 1.25% up to the conversion
48
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
date and LIBOR plus 1.50% after the conversion date. As of November 30, 1995,
$15.6 million is outstanding under this facility.
The Agreements contain provisions which, among other things, place
restrictions on borrowing, capital expenditures and the payment of dividends,
and requires the maintenance of certain financial ratios including tangible net
worth, fixed charge coverage and funded debt. The Company is currently in
compliance with or has received a waiver for all material covenants and
restrictions contained in the Agreements. Borrowings are unsecured and are
guaranteed by the Company's domestic subsidiaries.
Under the terms of the Debenture Payment Assumption Agreement, Vivra
Incorporated was obligated to pay $4.1 million of the 8 1/2% Subordinated
Guaranteed Debentures that were paid off in 1995. The balance as of November
30, 1994 was reduced by that amount.
The conversion price of the convertible debentures is subject to antidilutive
provisions.
The annual maturities of debt for five years ending November 30, 2000 are as
follows (in thousands):
<TABLE>
<S> <C>
1996.............................................................. $18,764
1997.............................................................. 63,709
1998.............................................................. 13,613
1999.............................................................. 172
2000.............................................................. 158
</TABLE>
NOTE 8--CAPITAL STOCK AND STOCK OPTIONS
The Company has stock option plans whereby options may be granted at not less
than 100% of fair market value at the date of grant and are exercisable at any
time thereafter for a period of ten years, or five years for options granted
prior to November 8, 1990. Options granted on and after November 8, 1990, are
exercisable 20% at date of grant with the remaining 80% becoming exercisable at
the rate of 20% each December 1 thereafter, with the exception of 100,000
options re-issued to certain officers of the Company (see below) which vested
immediately. At the time of exercise, at least one-third is payable in cash and
the balance, if any, with a five-year note bearing interest at 8%. The unpaid
portion of options exercised, evidenced by a note, has been deducted from
Stockholders' Equity in the accompanying Consolidated Balance Sheets. Stock
options may also be exercised by the return of previously acquired shares of
common stock. Shares obtained by such exercises are included in treasury stock
and valued at the market value at date of exercise.
The Compensation Committee of the Board of Directors recommended at their
January 25, 1996 meeting that future stock options granted to certain key
employees be related to the performance of the Company's stock. The Committee
authorized management to utilize an outside compensation consultant to devise
such a plan.
On May 20, 1993, the Company issued 860,000 of non-qualified options to
several key executives. The option price is $20 above the closing price of the
Company's stock on the date of grant, or $29.50 per share. During fiscal year
1994, 146,000 shares of converging options were issued at an option price of
$24.50 per share. For each year during which the Company meets specified
performance targets, the option price will decrease by $5.00 until the option
price and market price converge. The option price will be fixed at the market
price on the date of convergence and the options will vest. If convergence does
not occur during the first five years after grant of the options, the options
will be cancelled and the shares will revert to the 1989 Stock Incentive Plan
and be available for reissuance. The Company met these targets for fiscal 1993.
The Company did not meet these targets in fiscal 1994 or 1995.
On February 14, 1992, 315,200 outstanding options granted in previous years
at prices ranging from $18.54 to $34.13 were revalued to $14.63, the market
price on that day. Options granted previously to the five then most highly-
compensated officers were not revalued. On January 29, 1993, 717,249 options
granted previously to those individuals were cancelled, revalued, and re-issued
at a 1 to 2 ratio. The options were granted in previous
49
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
years at prices ranging from $24.08 to $26.81. The options were revalued to
$10.88, $.25 higher than the closing market price on that day.
A summary of activity under the plans during 1995, 1994 and 1993 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF AGGREGATE
SHARES PER SHARE OPTION PRICE
------------- --------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Options outstanding at November 30,
1992.............................. 2,064,000 $ 10.88-31.88 $ 42,076
Options granted.................. 2,325,000 9.50-33.00 40,673
Options cancelled and expired.... (1,017,000) 14.63-31.88 (23,593)
Options revalued and reissued.... 359,000 10.88 3,906
Treasury stock issued on
exercise........................ (153,000) 10.88-14.63 (1,663)
------------- --------------- -----------
Options outstanding at November 30,
1993.............................. 3,578,000 9.50-33.00 61,399
Options granted.................. 1,264,000 12.38-24.50 18,591
Options cancelled and expired.... (498,000) 9.50-33.00 (5,673)
Treasury stock issued on
exercise........................ (355,000) 9.50-33.00 (5,295)
Options converged................ 24.50 (4,300)
------------- --------------- -----------
Options outstanding at November 30,
1994.............................. 3,989,000 9.50-28.88 64,722
Options granted.................. 1,676,000 9.88-12.88 18,243
Options cancelled and expired.... (758,000) 9.50-24.50 (10,839)
Treasury stock issued on
exercise........................ (102,000) 9.50-12.88 (1,029)
------------- --------------- -----------
Options outstanding at November 30,
1995.............................. 4,805,000 $ 9.50-28.88 $ 71,097
============= =============== ===========
</TABLE>
The market value of the Company's common stock at the date the options were
exercised was $10.88-$13.63, $11.88-$18.75, and $13.00-$13.88 for 1995, 1994,
and 1993, respectively.
At November 30, 1995, 1.7 million options were exercisable and .7 million
(1.7 million and 2.7 million at November 30, 1994 and 1993) were available for
grant under the plans.
NOTE 9--DEFERRED COMPENSATION
On May 21, 1992, the then Chairman of the Board of Directors of the Company
resigned. During the course of his employment with the Company, the former
Chairman had an employment contract which provided for consideration for
consulting services and a noncompetition agreement to commence in 1995 or
earlier in the event of permanent disability. Based on a computation of the
present value of the contractually due amount, a payment of $6.3 million was
made in December 1992. Of this amount, $3.4 million was provided for in the
financial statements of the Company through November 30, 1992. The remaining
amount, $2.9 million, is being amortized as consideration (approximately
$244,000 annually) for services rendered over the term of the consulting and
non-competition agreements which extend to November 30, 2004.
Effective November 30, 1989, a former Chairman of the Board of Directors
terminated his employment with the Company and began receiving deferred
compensation benefits. Approximately $162,000 of the annual payment of
$323,000 is charged to expense as consideration for services rendered over the
term of the consulting and noncompetition agreements which extend to November
30, 2000. Such former Chairman has notified the Company of his position that
certain provisions in the contract that accelerate the payment of certain
deferred compensation have been triggered and that up to $4.5 million is now
due from the Company thereunder. The Board of Directors has established a
committee of directors to evaluate such claims of this former Chairman and to
recommend the appropriate action to be taken by the Company.
50
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--OPERATING LEASES
The Company leases its Corporate headquarters for a term of two years ending
in August 1996. The Company also leases one hospital at THC, one hospital in
the United Kingdom, and various other clinics, outpatient operations and
equipment over terms ranging generally from one to five years. Rent expense
related to noncancellable operating leases amounted to $3.5 million and $2.2
million for the years ended November 30, 1995 and 1994, respectively. Rent
expense related to noncancellable leases was immaterial for 1993.
Future minimum lease payments required under noncancellable operating leases
as of November 30, 1995 are as follows: 1996--$3.4 million; 1997--$2.5
million; 1998--$2 million; 1999--$1.7 million; and 2000--$1.5 million.
NOTE 11--PROFIT SHARING PLAN
The Company has a noncontributory, trusteed profit sharing plan which is
qualified under Section 401 of the Internal Revenue Code. All regular non-
union employees in the United States (union employees are eligible if the
collective bargaining agreement so specifies) with at least 1,000 hours of
service per annum, over 21 years of age, and employed at year-end are eligible
for participation in the plan after one year of employment. The Company's
contribution to the plan for any fiscal year, as determined by the Board of
Directors, is discretionary, but is limited to an amount which is deductible
for federal income tax purposes. Contributions to the plan are allocated among
eligible participants in the proportion of their salaries to the total
salaries of all participants. There were no contributions made by the Company
in 1995, 1994 and 1993. During 1993, a 401(k) segment was added to the plan
which allows employees to defer a portion of their salary on a pre-tax basis.
The Company may match a portion of the amount deferred. The Company's matching
contribution is determined by the Board of Directors each year. During 1995,
1994, and 1993 no matching contribution was made.
NOTE 12--BUSINESS SEGMENT INFORMATION
The Company is engaged in two principal business segments. The Company
provides psychiatric services for adults, adolescents, and children with acute
psychiatric, emotional, substance abuse, and behavioral disorders in the
United States (plus Puerto Rico) and the United Kingdom. The Company also
offers long-term critical care services in the United States.
51
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following tables have been prepared in accordance with the requirements
of FASB Statement No. 14. This information has been derived from the Company's
accounting records.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
----------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating revenues:
U.S. Psychiatric division..................... $248,408 $276,698 $283,539
U.K. Psychiatric division..................... 63,319 46,226 33,918
Long-term critical care division.............. 194,936 101,031 18,121
-------- -------- --------
$506,663 $423,955 $335,578
Operating profit:
U.S. Psychiatric division..................... $ 14,345 $ 29,778 $ 26,559
U.K. Psychiatric division..................... 17,880 12,558 8,893
Long-term critical care division.............. 21,444 (7,630) (4,607)
-------- -------- --------
$ 53,669 $ 34,706 $ 30,845
Other income and expense:
Other income.................................. $ 2,513 $ 3,785 $ 2,301
Depreciation and amortization................. (23,344) (18,649) (14,330)
Interest expense.............................. (5,256) (3,545) (2,420)
Settlement costs.............................. (45,985) -- --
Impairment loss............................... (46,021) -- --
Restructuring (charge) credit................. (2,110) 875 (54,950)
-------- -------- --------
Earnings (loss) before income taxes......... $(66,534) $ 17,172 $(38,554)
Identifiable assets:
U.S. Psychiatric division..................... $343,082 $396,377 $410,892
U.K. Psychiatric division..................... 78,248 68,640 50,550
Long-term critical care division.............. 183,295 134,987 68,898
-------- -------- --------
$604,625 $600,004 $530,340
Depreciation and amortization expense:
U.S. Psychiatric division..................... $ 12,318 $ 11,197 $ 12,161
U.K. Psychiatric division..................... 3,214 2,514 1,691
Long-term critical care division.............. 7,812 4,938 478
-------- -------- --------
$ 23,344 $ 18,649 $ 14,330
Capitalized expenditures for property, building,
and equipment: (1)
U.S. Psychiatric division..................... $ 13,276 $ 11,194 $ 9,104
U.K. Psychiatric division..................... 7,962 6,209 5,018
Long-term critical care division.............. 18,901 31,357 44,147
-------- -------- --------
$ 40,139 $ 48,760 $ 58,269
</TABLE>
- --------
(1) Excludes assets acquired in business acquisitions of $8.6 million, $4.8
million and $1 million in 1995, 1994 and 1993, respectively.
52
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Short-Term Investments: The fair values for marketable securities are based
on quoted market prices which approximate their carrying values.
Long-Term and Short-Term Debt: The carrying amounts of the Company's long-
term and short-term debt approximates its fair value.
NOTE 14--COMMITMENTS AND CONTINGENCIES
On September 28, 1995, the Company reached an agreement to settle certain
consolidated securities class action lawsuits and a related shareholder
derivative action. During the third and fourth quarter of 1995, the Company
recorded charges totalling $46.0 million ($28.9 million after tax) relating to
settlement of the lawsuits and associated legal fees and expenses. The suits,
filed in late 1991, alleged violations of the federal securities laws by the
Company and certain individuals between September 1990 and November 1991
arising from the activities of the U.S. Psychiatric Division.
The principal terms of the agreement call for a settlement amount of $42.5
million consisting of a settlement fund of $21.25 million and the Company's
common stock with an expected value of $21.25 million. The cash amount, plus
interest, was paid in November 1995. The shares to be issued to the plaintiff
class were previously repurchased by the Company pursuant to a stock buyback
program during late 1991 through early 1993. The number of shares of common
stock to be issued will be equal to $21.25 million divided by the average
market value of the common stock over a 10-day trading period prior to the
distribution of shares to settle claims, provided that in any event the
minimum number of shares that will be issued is 1,931,818 and the maximum
number of shares that will be issued is 3,035,714. The maximum limits would be
triggered if the average market value of the common stock is at $7 per share
or below. Upon issuance, these shares will have a dilutive effect on earnings
per share. The agreement is subject to final court approval.
While these cases allege actions taken before present management was in
place, management continues to believe that the claims asserted in the
shareholder suits lack merit. Nevertheless, the Company believed that it was
prudent to settle these cases due to the continuing substantial costs of
defense, the distraction of management's attention and the risks associated
with litigation.
On August 17, 1995 the Company reported developments pertaining to CPC
Southwind Hospital in Oklahoma City, Oklahoma, which is operated by the
Company's subsidiary, CPC Oklahoma, Inc. The first was the filing of a
whistleblower suit against CPC Oklahoma, Inc. under the Federal False Claims
Act, and the second concerned the seizure of certain of Southwind's records
pursuant to a search warrant. On January 19, 1996, the Government filed an
amended complaint alleging that Southwind Hospital submitted false claims to
various federally-funded health care programs. The amended complaint contained
an attached schedule of claims covering periods from 1990 through mid-1992.
Since the service of the original complaint, Southwind Hospital has provided
information to the Government on numerous issues based on internal review. The
Company is currently in the process of reviewing the amended complaint.
Management is presently unable to evaluate the potential impact of the suit on
the Company.
The Company is subject to ordinary and routine litigation incidental to its
business, including those arising from patient treatment, injuries or death
for which it is covered by liability insurance, and those arising from actions
involving employees. Management believes that the ultimate resolution of such
proceedings will not have a material adverse effect on the Company.
53
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly data for the three
years ended November 30, 1995:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-------------------------------------------
FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30
----------- -------- --------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1995
Total revenues............ $120,370 $136,661 $128,563 $123,582
Net earnings (loss)....... 5,930 9,178 (24,332) (32,408)
Earnings (loss) per common
share*................... 0.14 0.21 (0.56) (.74)
Per common share:
Dividend declared........ -- .01 -- --
Stock prices:
High.................... 12 1/2 13 3/4 13 1/2 12 1/2
Low..................... 9 5/8 11 1/2 10 1/2 10 1/4
1994
Total revenues............ $ 92,525 $108,806 $105,660 $120,749
Net earnings.............. 625 2,389 1,667 5,539
Earnings per common
share**.................. 0.01 0.06 0.04 0.13
Per common share:
Dividend declared........ -- .01 -- --
Stock prices:
High.................... 19 18 3/4 15 15 5/8
Low..................... 12 1/4 13 11 5/8 9 1/4
1993
Total revenues............ $ 84,689 $ 86,149 $ 80,009 $ 87,032
Net earnings (loss)....... (37,935) 3,490 4,068 5,485
Earnings (loss) per common
share***................. (.88) 0.08 0.09 0.13
Per common share:
Dividends declared....... .09 -- -- --
Stock prices:
High.................... 11 3/4 13 3/4 12 3/4 14 7/8
Low..................... 8 7/8 9 9 3/4 10 1/8
</TABLE>
- --------
* Included in earnings per share for the second quarter of 1995 is a
restructuring credit $(.03) totalling $2.5 million ($1.5 million after tax)
from the resolution of previously restructured psychiatric assets. Earnings
per share in the third quarter of 1995 include $(.65) for a pre-tax charge
of $45.0 million ($28.4 million after tax) relating to the settlement of
shareholder litigation. Earnings per share in the fourth quarter of 1995
include a charge of $(.01) related to legal expenses associated with the
legal settlement and $(.65) for a pre-tax charge of $46.0 million ($28.4
million after tax) related to impairment of assets. Also included in the
fourth quarter of 1995 is a pre-tax restructuring charge of $4.6 million
($2.8 million after tax) or $.07 per share related to employee termination
benefits and other costs in connection with the decision to close six
psychiatric hospitals and three regional offices.
** Earnings per share in the first quarter of 1994 include $(.09) for a pre-
tax charge of $6.3 million ($3.8 million after tax) in connection with the
decision to close three psychiatric facilities. Also included in earnings
per share for the first quarter is a restructuring credit $(.10) totalling
$7.2 million ($4.3 million after tax) from the resolution of previously
restructured psychiatric assets.
*** Earnings per share in the first quarter of 1993 include $(.81) for a pre-
tax charge of $55.0 million ($34.9 million net of tax) in connection with
the restructuring of certain of its psychiatric hospitals.
54
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 16--SUBSEQUENT EVENTS
On December 20, 1995, the Company announced that its Board of Directors has
preliminarily approved a plan to spin-off its U.S. Psychiatric Division in the
form of a taxable dividend distribution of U.S. Psychiatric Division common
stock to the Community Psychiatric Centers Shareholders.
The spin-off is subject to a number of conditions, including regulatory and
other third party approvals, market conditions, final approval of the Board of
Directors and Shareholder approval. It is anticipated that the spin-off and
related matters will be submitted to Shareholders at the Annual Meeting which
will be scheduled at a later date. The special dividend is expected to be
distributed by mid 1996.
On January 19, 1996, the Company closed Parkwood Hospital, a U.S.
Psychiatric hospital located in Atlanta, Georgia. The fixed assets of this
hospital were written down to their estimated fair market values as part of
the FASB 121 writedown (see footnote 3, Impairment of Assets). In the first
quarter of 1996, the Company expects to record a restructuring charge of an
undetermined amount related to termination benefits to be paid to the
employees of the closed hospital.
55
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To The Board of Directors
of Community Psychiatric Centers
Our audit of the consolidated financial statements of Community Psychiatric
Centers and its subsidiaries referred to in our report dated January 31, 1996
with respect to consolidated financial statements included in this Annual
Report on Form 10-K also included an audit of Financial Statement Schedule II
of Community Psychiatric Centers and its subsidiaries for the year ended
November 30, 1995. In our opinion, this Financial Statement Schedule of
Community Psychiatric Centers and its subsidiaries for the year ended November
30, 1995 presents fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements for the year ended November 30, 1995.
Price Waterhouse LLP
Los Angeles, California
January 31, 1996
56
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ------------------------ ------------ -----------
ADDITIONS
------------------------
BALANCE AT CHARGED TO CHARGED
BEGINNING COSTS TO OTHER BALANCE AT
OF AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Allowance for doubtful
accounts:
Year ended November 30,
1993................... $21,365,000 $21,266,000 $(19,943,000) (1) $22,658,000
(30,000) (2)
Year ended November 30,
1994................... 22,658,000 26,966,000 (20,325,000) (1) 29,381,000
82,000 (2)
Year ended November 30,
1995................... 29,381,000 28,732,000 (33,383,000) (1) 24,682,000
(48,000) (2)
</TABLE>
- --------
(1)Write-offs, net of recoveries.
(2)Foreign currency translation adjustment.
57
<PAGE>
EXHIBIT INDEXES
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
3 Articles of Incorporation and By-Laws:
3.1 Restated Articles of Incorporation as adopted by vote of
shareholders on May 20, 1993 (filed as Appendix B to
Registrant's Proxy Statement dated April 20, 1993, relating to
the annual meeting of its shareholders on May 20, 1993 and
incorporated in full herein by this reference).
3.2 By-Laws as amended by vote of shareholders on May 23, 1991
(filed as Exhibit 3.2 to Registrant's Annual Report on Form 10-
K for its fiscal year ended November 30, 1991 and incorporated
in full herein by this reference) and as amended by vote of
shareholders on May 20, 1993 (filed as Appendix A to
Registrant's Proxy Statement dated April 20, 1993, relating to
the annual meeting of its shareholders on May 20, 1993, and
incorporated in full herein by this reference).
10 Material Contracts
10.1 Employment Contract Number Four between Registrant and Richard
L. Conte, dated as of
May 1, 1992 (filed as Exhibit 10.1 to Registrant's Annual
Report on Form 10-K for its fiscal
year ended November 30, 1993, and incorporated in full herein
by reference).*
10.2 Amendment Number One dated as of July 29, 1994 to Employment
Contract Number Four between Registrant and Richard L. Conte
(filed as Exhibit 10.2 to Registrant's Annual Report on Form
10-K for its fiscal year ended November 30, 1994 and
incorporated in full herein by reference).*
10.2.1 Employment Contract between Registrant and Richard L. Conte
dated as of December 1, 1995.*
10.3 Supplemental Retirement Contract between Registrant and Richard
L. Conte, dated as of
September 1, 1988 (filed as Exhibit 10.4 to Registrant's Annual
Report on Form 10-K for its fiscal year ended November 30, 1988
and incorporated in full herein by this reference).*
10.4 Restated and Amended Employment Contract between Registrant and
Robert L. Green, dated
June 1, 1988 (filed as Exhibit 10.1 to Registrant's Annual
Report on Form 10-K for its fiscal
year ended November 30, 1988, and incorporated in full herein
by this reference).
10.5 Amendment Number One dated as of August 1, 1989, and Amendment
Number Two dated as of December 1, 1989 to Restated and Amended
Employment Contract between Registrant and Robert L. Green
(filed as Exhibit 10.5 to Registrant's Annual Report on Form
10-K for its fiscal year ended November 30, 1994 and
incorporated in full herein by reference).
10.6 Employment Agreement between Registrant and David A. Wakefield
dated as of July 31, 1992 (filed as Exhibit 10.6 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1994 and incorporated in full herein by
reference).*
10.7 Employment Contract between Registrant and Wendy Simpson dated
as of August 1, 1995.*
10.8 Employment Contract between Registrant and Ronald L. Ooley dated
as of June 1, 1994.*
10.9 Termination Agreement between Registrant and Steven S. Weis
dated as of December 30, 1994 (filed as Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1994 and incorporated in full herein by
reference).
10.9.1 Settlement Agreement between Registrant, Kay Seim, Richard Seim
and Continuum Healthcare, Inc. dated as of February 19, 1996.
10.10 Form of Indemnification Agreements between Registrant and its
Directors and Executive Officers (filed as Exhibit C to
Registrant's Proxy Statement, dated April 24, 1987, relating to
the annual meeting of its shareholders on June 1, 1987, and
incorporated in full herein by this reference).
10.11 Registrant's 1989 Stock Incentive Plan (filed as Exhibit A to
Registrant's Proxy Statement, dated July 12, 1989, and
incorporated in full herein by this reference).*
10.12 Form of Stock Option Agreement (filed as Exhibit 10.6.1 to
Registrant's Report on Form 10-K for its fiscal year ended
November 30, 1990 and incorporated in full herein by this
reference).*
</TABLE>
58
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.12.1 Form of Nonstatutory Stock Option Agreement with Director (filed
as Exhibit 10.6.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1990 and incorporated in full
herein by this reference).*
10.13 Registrant's Combined Stock Option Plan for Key Employees and
Amendment Numbers One, Two, Three, Four and Five thereto (filed
as Exhibit 10.7 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.13.1 Form of Stock Option Agreement--General Stock Option (filed as
Exhibit 10.7.1 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.13.2 Form of Stock Option Agreement--Incentive Stock Option (filed as
Exhibit 10.7.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.14 Credit Agreement among Registrant, Transitional Hospitals
Corporation and Bank of America National Trust and Savings
Association, dated as of September 20, 1993 (filed as Exhibit
10 to Registrant's Report on Form 10-Q for its fiscal quarter
ended August 31, 1993 and incorporated in full herein by this
reference).
10.14.1 Second Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America
National Trust and Savings Association, dated as of June 7,
1995.
10.14.2 Letter dated February 26, 1996 waiving compliance for certain
debt covenants under Credit Agreement referred to in Exhibit
10.14.
10.15 Credit Agreement, among Registrant, Priory Hospitals Group
Limited and Bank of America National Trust and Savings
Association dated as of December 23, 1993 (filed as Exhibit
10.11 to Registrant's Annual Report on Form 10-K for its fiscal
year ended November 30, 1993, and incorporated herein by this
reference).
10.16 Credit Agreement among Registrant, Transitional Hospitals
Corporation and Bank of America National Trust Savings
Association, dated as of May 6, 1994 (filed as Exhibit 10 to
Registrant's Report on Form 10-Q for its quarter ended May 31,
1994, and incorporated herein by this reference).
10.17 First Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation and Bank of America National
Trust Savings Association, dated as of December 14, 1994 (filed
as Exhibit 10.15 to Registrant's Annual Report on Form 10-K for
its fiscal year ended November 30, 1994 and incorporated in
full herein by this reference).
10.18 Second Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America
National Trust and Savings Association, dated as of February
28, 1995.
10.18.1 Third Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America
National Trust and Savings Association, dated as of June 5,
1995.
10.18.2 Fourth Amendment to Credit Agreement among Registrant,
Transitional Hospitals Corporation, and Bank of America
National Trust and Savings Association, dated as of February
26, 1996.
10.19 Agreement and Promissory Note between Registrant and Richard
Conte dated as of June 7, 1995 (filed as Exhibit 10 to
Registrant's Report on Form 10-Q for its quarter ended August
31, 1995, and incorporated herein by this reference).
</TABLE>
59
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NO. DOCUMENT
------- --------
<C> <S>
10.20 Agreement and Promissory Note between Registrant and J. Rodney
Laughlin dated as of November 9, 1995.
10.21 Agreement and Promissory Note between Registrant and Ronald L.
Ooley dated as of June 2, 1995.
11 Statement re computation of earnings per share.
22 Subsidiaries of the Registrant.
23 Consents of Experts-Price Waterhouse LLP
23.1 Consents of Experts-Ernst & Young LLP
27 Financial Data Schedule
(b) Report on Form 8-K: On November 6, 1995, the Registrant
filed Form 8-K/A disclosing a change in the Registrant's
certifying accountants.
</TABLE>
- --------
* Required to be filed as an exhibit pursuant to item 14(c) of this Form.
<PAGE>
Exhibit 10.2.1
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Contract") is entered into as of December
1, 1995 (the "Effective Date") by and between COMMUNITY PSYCHIATRIC CENTERS, a
Nevada corporation ("CPC"), and RICHARD L. CONTE, an individual ("Conte").
R E C I T A L S
- - - - - - - -
A. CPC has employed Conte as an executive employee pursuant to prior
employment agreements, and Conte currently serves as CPC's President, Chief
Executive Officer and Chairman of the Board.
B. CPC desires to amend the terms of the currently existing employment
agreement with Conte in order to provide him with additional benefits in
recognition of the valuable services he has rendered CPC.
C. Conte is willing and able to render the services herein provided for,
and he is willing to refrain from activities competitive with the business of
CPC on the terms set forth herein.
NOW THEREFORE, Conte and CPC mutually agree as follows:
ARTICLE ONE
DEFINITIONS
-----------
For purposes of this Contract, the following definitions shall be in
effect:
1.1 ACTUAL AVERAGE COMPENSATION means Conte's average W-2 wages and other
---------------------------
compensation received from CPC for the five (5) calendar years completed
immediately prior to the calendar year in which a Parachute Event occurs. Any
W-2 wages or other compensation for a partial year of employment with CPC will
be annualized, in accordance with the frequency with which such wages are paid
during such partial year, before inclusion within Conte's Actual Average
Compensation. If any of Conte's compensation from CPC during such five (5)-year
or shorter period was not included in his W-2 wages for U.S. income tax purposes
because such compensation was excludible from income as foreign earned income
under Code Section 911 or as pre-tax income under Code Section 125 or 402(g),
then such compensation shall
1
<PAGE>
nevertheless be included in Conte's Actual Average Compensation to the same
extent as if it were part of his W-2 wages.
1.2 BENEFICIARY means any Person or Persons designated from time to time
-----------
by Conte pursuant to Section 7.5.1 to receive any benefits under this Contract
which may become due and payable to Conte following his death.
1.3 BOARD means the Board of Directors of CPC.
-----
1.4 CAUSE means Conte's (i) willful refusal to perform the reasonable
-----
duties of his offices after reasonable written notice from the Board and
reasonable opportunity to remedy such refusal; (ii) commission of any willful
and malicious act which has a materially adverse financial impact upon CPC; or
(iii) conviction of a felony which has a materially adverse financial impact
upon CPC.
1.5 CHANGE OF CONTROL means a change of ownership or control of CPC (OTHER
-----------------
THAN A HOSTILE TAKE-OVER AS DEFINED IN SECTION 1.19) required to be reported
pursuant to Item 6(e) of Schedule 14A of Rule 14 of the Exchange Act, including
(without limitation) the occurrence of any of the following events:
(i) the acquisition by any Person (or any group of related
Persons acting in concert) of beneficial ownership (as defined in Rule 13d-
3 under the Exchange Act), directly or indirectly, of CPC securities
representing twenty percent (20%) or more of the total combined voting
power of CPC's then outstanding securities; or
(ii) a merger or consolidation in which securities representing
twenty percent (20%) or more of the total combined voting power of CPC's
then outstanding securities are transferred to a Person or Persons
different from the Persons holding those securities immediately prior to
such merger or consolidation; or
(iii) the sale of all or substantially all of CPC's assets in
complete liquidation or dissolution of CPC.
1.6 CODE means the Internal Revenue Code of 1986 as amended.
----
1.7 COMPETE means either directly or indirectly to own, initiate, manage,
-------
operate, join, control, advise, consult with or participate in the ownership
(other than ownership of less than five percent (5%) of the outstanding equity
or capital or profit
2
<PAGE>
interests in any entity), operation, management or control of any business
similar to any line of business owned or operated by CPC.
1.8 CONFIDENTIAL INFORMATION means any non-public proprietary or
------------------------
confidential information of CPC or its parent or subsidiary companies, including
(without limitation) trade secrets; information concerning professionals,
referral sources, reimbursement sources, patient and customer lists; records or
research, proposals, reports, methods, techniques, financial information and
other data, and other non-public information regarding CPC and its parent or
subsidiary companies or the existing and planned businesses, properties or
affairs of CPC and its parent or subsidiary companies.
1.9 CONSTRUCTIVE TERMINATION means the occurrence of any of the following
------------------------
events which result in Conte's subsequent resignation from employment with CPC
within the succeeding six (6) months:
(i) CPC's material breach of this Contract which is not remedied
within thirty (30) days after written notice from Conte specifying such
breach in reasonable detail; or
(ii) the assignment to Conte of any duties of materially lesser
status, dignity and character than his duties on the Effective Date, or a
substantial reduction in the nature or status of his responsibilities from
those in effect on the Effective Date.
Without limiting the generality of the foregoing, Conte's loss of his
position as President, or as Chief Executive Officer, or as Chairman of the
Board shall constitute a clause (ii) substantial reduction of his
responsibilities.
1.10 CONTRACT BENEFITS means the following benefits which may become
-----------------
payable to Conte in accordance with the applicable provisions of ARTICLE FIVE,
AS REDUCED DOLLAR FOR DOLLAR for all cash amounts previously paid to Conte
pursuant to ARTICLE FOUR of this Contract:
(i) a special salary continuation benefit in a dollar amount
equal to six (6) times the highest Salary level in effect for Conte at any
time during the Employment Period. This amount shall be designated the
SALARY CONTRACT BENEFIT and shall be paid at the time or times specified in
-----------------------
the applicable provisions of ARTICLE FIVE.
3
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(ii) the maximum bonus which Conte could have achieved under the
CPC Annual Incentive Plan for the Fiscal Year in which the Contract Payout
Event occurs. This clause (ii) amount shall not be less than one hundred
percent (100%) of the Salary level in effect for Conte for such Fiscal
Year, whether or not the performance goals established for such Fiscal Year
are in fact met, and shall be paid within sixty (60) days after the
Contract Payout Event.
(iii) the maximum bonus which Conte could have achieved for
each three-year plan cycle which commences under the CPC Long-Term
Incentive Plan prior to the date of the Contract Payout Event. The clause
(iii) amount for each such plan cycle shall not be less than one hundred
percent (100%) of the Salary level in effect for Conte for the Fiscal Year
in which such Contract Payout Event occurs, whether or not the performance
goals for that plan cycle are in fact met, and shall be paid in a lump sum
within sixty (60) days after the Contract Payout Event. However, the clause
(iii) amount otherwise payable to Conte for any such three-year plan cycle
under the Long-Term Incentive Plan shall be prorated to the extent the
Contract Payment Event occurs less than halfway through such plan cycle.
(iv) forgiveness of any outstanding loans CPC has made to Conte,
except (A) any loans provided to finance the exercise of his options for
shares of CPC common stock, which shall become due and payable in
accordance with their terms, and (B) the special founder recognition award
in the form of a CPC loan to Conte which is to be forgiven over time in
accordance with the express terms of such award. The applicable clause
(iv) loan forgiveness shall occur immediately upon the Contract Payout
Event.
(v) payment of the entire balance credited to the Deferred
Compensation Account maintained for Conte under each long-term deferred
compensation plan in which Conte is a participant on the date of the
Contract Payout Event; plus nine percent (or the percentage applicable to
Conte's Salary under the deferred compensation plan then in effect,
whichever is greater) of the Salary Contract Benefit. The clause (v)
payments shall be made as and when due under the terms of each applicable
plan.
4
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(vi) provision of benefits to Conte or his Beneficiary equivalent
to each of the employee benefits described in paragraph 2.3.4 and 2.3.5, at
CPC's sole cost and expense. These clause (vi) benefits shall be
designated the EMPLOYEE CONTINUATION BENEFITS and shall be provided for a
------------------------------
six (6)-year period measured from the date of the Contract Payout Event;
provided, however, that in the event of a clause (i) Contract Payout Event,
such period shall be reduced to five (5) years. CPC may, at its election,
satisfy its obligation to provide the Employee Continuation Benefits by
paying Conte or his Beneficiary the lump sum present value of those
benefits within sixty (60) days after the applicable Contract Payout Event.
(vii) continuation of CPC's obligations to provide Conte or his
Beneficiary with the benefits described in paragraphs 2.3.7 and 2.3.8, but
only to the extent those benefits are available under the plans then in
effect. Any clause (vii) benefits shall be provided until the November 30
next following the fourth anniversary of the date of the Contract Payout
Event.
(viii) transfer to Conte or his Beneficiary of full title
and ownership to the automobile provided to Conte at the time of the
Contract Payout Event. This clause (viii) transfer shall be provided
to Conte or his Beneficiary without charge and shall be effected as soon as
reasonably practicable following the Contract Payout Event.
1.11 CONTRACT PAYOUT EVENT means any one of the following events, as
---------------------
further detailed in ARTICLE FIVE:
(i) the termination of Conte's employment by reason of his death
or Permanent Disability;
(ii) Conte's termination of employment within one (1) year after
a Change in Control or Corporate Reorganization;
(iii) Conte's termination of employment within six (6) months
after an event of Constructive Termination;
(iv) the termination of Conte's employment by CPC without Cause;
or
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(v) the occurrence of a Hostile Take-Over.
1.12 CORPORATE DIVESTITURE means one or more asset dispositions effected
---------------------
by CPC and measured on either a historical or current basis in accordance with
the following provisions:
1.12.1 HISTORICAL BASIS. A Corporate Divestiture shall be deemed to
----------------
occur on a historical basis upon the consummation of any of the following
transactions:
(i) one or more asset dispositions which involve, on a cumulative
basis, assets with an aggregate book value not less than thirty percent
(30%) of the total book value of the consolidated assets of CPC, including
its equity holdings in one or more subsidiary companies;
(ii) one or more asset dispositions which involve, on a
cumulative basis, assets which generate at least thirty percent (30%) of
the consolidated revenues of CPC; or
(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition(s) shall be measured on the basis of the
book values and revenue levels in effect for the Fiscal Year ending immediately
prior to the Effective Date.
1.12.2 CURRENT BASIS. A Corporate Divestiture shall be deemed to
-------------
occur on a current basis upon the consummation of any of the following
transactions:
(i) the disposition of assets which have, on a stand-alone, non-
cumulative basis, an aggregate book value not less than thirty percent
(30%) of the total book value of the consolidated assets of CPC, including
its equity holdings in one or more subsidiary companies;
(ii) the disposition of assets which have, on a stand-alone, non-
cumulative basis, generated at least thirty percent (30%) of the
consolidated revenues of CPC; or
6
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(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition shall be measured on the basis of the book
values and revenue levels in effect for the Fiscal Year ending immediately prior
to the date of such disposition.
1.12.3 ORDERING PROCEDURE. If a Corporate Divestiture would
------------------
otherwise result on both a historical and current basis, the Corporate
Divestiture shall be determined on the basis which results in the higher bonus
payment under ARTICLE FOUR.
1.13 CORPORATE REORGANIZATION means either of the following events
------------------------
effected by CPC:
(i) one or more dispositions of assets with a cumulative value
not less than eighty percent (80%) of the total value of the consolidated
assets of CPC, including its equity holdings in one or more subsidiary
companies; or
(ii) one or more dispositions of assets with a cumulative revenue
generation of at least eighty percent (80%) of the consolidated revenues of
CPC.
The clause (i) and clause (ii) calculations shall be performed on both a
historical and current basis as follows:
1.13.1 HISTORICAL BASIS. The assets or revenues subject to the
----------------
disposition(s) shall be measured on the basis of (A) the book values and revenue
levels as in effect for the Fiscal Year ending immediately prior to the
Effective Date and (B) the cumulative impact of the asset dispositions effected
since the close of that Fiscal Year.
1.13.2 CURRENT BASIS. The assets or revenues subject to the
-------------
disposition(s) shall be measured currently on the basis of (A) the book values
and revenue levels in effect for the Fiscal Year ending immediately prior to the
actual disposition and (B) the cumulative impact of all other asset dispositions
effected in the same Fiscal Year in which the current disposition occurs.
7
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A Corporate Reorganization shall be deemed to occur if a clause (i) or
clause (ii) event is triggered on either a historical or current basis.
1.14 DEATH BENEFIT means the death benefit of not less than Five Million
-------------
Dollars ($5,000,000) payable under the Policy to Conte's Beneficiary upon his
death.
1.15 DEFERRED COMPENSATION ACCOUNT means Conte's accrued benefit or
-----------------------------
outstanding account balance under each long-term deferred compensation plan now
or hereafter maintained by CPC for executive officers or other highly
compensated employees.
1.16 EMPLOYMENT PERIOD means the period commencing December 1, 1995 and
-----------------
continuing for a period of four (4) years through November 30, 1999. On
December 1, 1995 and on each December 1 thereafter, the Employment Period shall
automatically be extended until the earlier to occur of (i) the fourth
-------
anniversary of the immediately preceding November 30 or (ii) the date on which
Conte's employment with CPC is terminated in accordance with ARTICLE FIVE.
1.17 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
1.18 FISCAL YEAR means CPC's annual accounting period for financial
-----------
accounting and reporting purposes. As of the Effective Date, such period begins
on December 1 each year and ends on the next following November 30.
1.19 HOSTILE TAKE-OVER means either of the following events effecting a
-----------------
change in ownership or control of CPC without the approval of the Board:
(i) the acquisition by any Person (or group of related Persons
acting in concert) of beneficial ownership (as defined in Rule 13d-3 under
the Exchange Act), directly or indirectly, of CPC securities representing
twenty percent (20%) or more of the total combined voting power of CPC's
then outstanding securities in a transaction or series of related
transactions not approved by at least four-fifths of the Board members who
began their Board service prior to the first such transaction; or
(ii) a change in Board membership over any twenty-four
(24)month period such that those individuals who at the start of such
period constitute the Board cease for any reason to constitute at
least a majority of the Board, unless the election of each Board
member who was
8
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not a Board member at the start of such period is approved in advance by at
least fourfifths of the Board members then in office who began their Board
service prior to the start of such twenty-four (24)-month period.
1.20 OPTION means any option to purchase shares of CPC common stock (other
------
than the so-called "converging options" granted with an original exercise price
of $29.50 per share) granted to Conte by CPC and outstanding at the time of an
acceleration event under ARTICLE FOUR or ARTICLE FIVE.
1.21 OPTION PARACHUTE PAYMENT means, with respect to each Option
------------------------
accelerated in whole or in part in connection with a Parachute Event, the
portion of that Option deemed to be a parachute payment under Code Section 280G
and the Treasury Regulations issued thereunder. The portion of such Option
which is categorized as an Option Parachute Payment shall be calculated in
accordance with the valuation provisions established under Code Section 280G and
the applicable Treasury Regulations and shall include an appropriate dollar
adjustment to reflect the lapse of Conte's obligation to remain in CPC's employ
as a condition to the vesting of the accelerated installment. In no event,
however, shall the Option Parachute Payment attributable to any Option (or
accelerated installment) exceed the spread (the excess of the fair market value
of the accelerated option shares over the option exercise price payable for
those shares) existing at the time of acceleration.
1.22 OTHER PARACHUTE PAYMENT means any payment in the nature of
-----------------------
compensation (other than an Option Parachute Payment) which is made to Conte in
connection with a Parachute Event and which accordingly qualifies as a parachute
payment within the meaning of Code Section 280G(b)(2) and the Treasury
Regulations issued thereunder.
1.23 PARACHUTE EVENT means any of the following events specified under
---------------
this Contract, to the extent they constitute a change in ownership or control of
CPC under Code Section 280G and the Treasury Regulations issued thereunder:
(i) Change in Control
(ii) Corporate Divestiture
(iii) Corporate Reorganization
(iv) Hostile Take-Over
9
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1.24 PRESENT VALUE means the value, determined as of the date of the
-------------
applicable Parachute Event, of any payment in the nature of compensation to
which Conte becomes entitled in connection with either the Parachute Event or
his subsequent termination of employment. The Present Value of each such
payment shall be determined in accordance with the provisions of Code Section
280G(d)(4), utilizing a discount rate equal to one
10
<PAGE>
hundred twenty percent (120%) of the applicable Federal rate in effect at the
time of such determination, compounded semi-annually to the effective date of
the Parachute Event.
1.25 PERMANENT DISABILITY means any mental or physical illness, disease or
--------------------
condition which in the opinion of 2 physicians skilled in the specialty does or
will result in Conte's inability to perform the essential functions of his job
for a period of six (6) consecutive months or more.
1.26 PERSON means any individual, corporation, partnership, business
------
trust, joint venture, association, joint stock company, trust, unincorporated
organization or government or agency or political subdivision thereof.
1.27 POLICY means the life insurance policy on Conte's life in a face
------
amount of not less than Five Million Dollars ($5,000,000).
1.28 PRIOR CONTRACTS means all prior employment agreements between Conte
---------------
and CPC, whether express or implied, oral or written.
1.29 SALARY means the annual rate of base salary in effect for Conte for
------
each Fiscal Year within the Employment Period. Such Salary shall be at the
annual rate of Seven Hundred Fifty Thousand Dollars ($750,000) per Fiscal Year,
subject to adjustment from time to time pursuant to Section 2.3.2. Such Salary
shall be in addition to any bonuses or other employment benefits or remuneration
paid or payable by CPC to Conte.
ARTICLE TWO
DUTIES AND BENEFITS DURING EMPLOYMENT PERIOD
--------------------------------------------
2.1 DUTIES. During the Employment Period, Conte shall serve as the
------
President and Chief Executive Officer of CPC and as the Chairman of the Board,
serving at the pleasure of the Board until the termination of his employment as
provided in ARTICLE FIVE. Consistent with those positions, Conte shall perform
all services and do all things necessary or advisable to manage and conduct the
operations and business of CPC, subject always to the authority of the Board.
2.2 PLACE OF BUSINESS. During the Employment Period, Conte's principal
-----------------
place of business shall be in Clark County, Nevada, and he shall not be obliged
to maintain his principal place of business elsewhere.
11
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2.3 COMPENSATION AND BENEFITS. The following compensation and benefits
-------------------------
shall be payable to Conte for his service during the Employment Period:
2.3.1 SALARY. CPC shall pay Conte his Salary in bi-weekly
------
installments in accordance with CPC's general practice and subject to legally
required withholdings.
2.3.2 SALARY REVIEW. The Salary payable to Conte for each Fiscal
-------------
Year commencing after December 1, 1995 shall be subject to annual review by the
Board. The Salary level in effect for Conte for each Fiscal Year during the
Employment Period shall not be less than the greater of (i) Seven Hundred Fifty
-------
Thousand Dollars ($750,000) or (ii) the Salary level most recently determined by
the Board pursuant to this Section 2.3.2. Conte understands that the
requirements of annual review by the Board shall not be construed in any manner
as an express or implied agreement by CPC to raise his Salary. In addition, the
Board may, in connection with one or more Corporate Divestitures or any
Corporate Reorganization, review the Salary level at the time in effect for
Conte to determine whether that level remains appropriate following any material
diminution of his responsibilities occasioned by those events, although the
Salary may not be lessened unless CPC has first paid Conte, in one or more
installments, the full Contract Benefits.
2.3.3 EXPENSE REIMBURSEMENT. CPC shall promptly reimburse Conte,
---------------------
upon his submission to CPC of adequate documentation, for all reasonable out-of-
pocket expenses respecting entertainment, travel, meals, hotel accommodations
and other like-kind expenses, to the extent incurred by Conte in the interests
of CPC's business.
2.3.4 GROUP INSURANCE. CPC shall provide group life and long term
---------------
disability insurance and group travel and accident insurance to Conte and group
medical, dental and hospital insurance to Conte and his eligible dependents, in
each instance in the amount and on the terms made available to other senior
executives of CPC.
2.3.5 LIFE INSURANCE. CPC shall reimburse Conte for the entire cost
--------------
of all premiums paid on the Policy.
2.3.6 DEFERRED COMPENSATION. Conte shall be a participant in CPC's
---------------------
thencurrent deferred compensation plans to the extent and on the same terms on
which any such plan is made available to any senior CPC executive. CPC's
deferred
12
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compensation plan existing on the Effective Date of this Contract provides for
deferred compensation equivalent to nine percent of the Salary.
2.3.7 PROFIT SHARING PLAN. Conte shall be a participant in CPC's
-------------------
401(k) and Profit Sharing Plans, to the extent allowed by law and by the terms
of those plans.
2.3.8 OTHER BENEFITS. By mutual agreement with CPC, Conte may
--------------
participate in additional employment benefits made available by CPC; provided,
however, that this Contract itself shall neither prevent nor compel such
participation.
ARTICLE THREE
COVENANTS AND CONSULTING AGREEMENT
----------------------------------
3.1 COVENANTS. Conte shall be subject to the following covenants and
---------
obligations:
3.1.1 NONDISCLOSURE. While employed by CPC, Conte has had and will
-------------
have access to Confidential Information relating to CPC's present and
anticipated business operations. Conte shall at no time either during or after
his employment by CPC disclose, communicate or use any Confidential Information
which Conte learns as a result of his employment by CPC, except to the extent
required by his performance of duties for CPC, unless he obtains CPC's prior
written consent to do so.
3.1.2 RETURN OF DOCUMENTS. Upon the termination of Conte's
-------------------
employment for any reason, Conte shall promptly relinquish and return to CPC all
Confidential Information and all files, correspondence, memoranda, diaries and
other records, minutes, notes, manuals, papers and other documents and data,
however prepared or memorialized, and all copies thereof, belonging to or
relating to the business of CPC, that are in Conte's custody or control, whether
or not they contain Confidential Information.
3.1.3 NONCOMPETITION COVENANT. While employed by CPC, Conte shall
-----------------------
not Compete or plan or prepare to Compete with CPC. To the extent obligated
pursuant to the provisions of ARTICLE FIVE, Conte shall not Compete with any CPC
line of business, for a period of four (4) years following the termination of
his employment, in any state within the United States or any shire within the
United Kingdom in which (i) CPC owned or operated that line of business either
on the date his employment terminates or at any time within the immediately
preceding Fiscal Year
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or (ii) the Board had approved the commencement of that line of business prior
to his termination.
3.1.4 NONSOLICITATION COVENANT. For a period of four (4) years
------------------------
following the termination of Conte's employment with CPC for any reason other
than in connection with a Hostile Take-Over, Conte shall not, directly or
indirectly, solicit the services of any CPC employee, independent contractor,
customer, referral or reimbursement source, or otherwise induce or attempt to
induce current CPC employees to sever their employment relationship with CPC.
3.1.5 SCOPE AND DURATION; SEVERABILITY. CPC and Conte understand and
--------------------------------
agree that the scope and duration of the covenants contained in this Section 3.1
are reasonable both in time and geographical area and are fairly necessary to
protect the business of CPC. Such covenants shall survive the termination of
Conte's employment, except that the Section 3.1.3 noncompetition covenant shall
remain in effect following such termination of employment only to the extent
required pursuant to the provisions of ARTICLE FIVE. It is further agreed that
such covenants shall be regarded as divisible and shall be operative as to time
and geographical area to the extent that they may be made so and, if any part of
such covenants is declared invalid or unenforceable, the validity and
enforceability of the remainder shall not be affected.
3.1.6 INJUNCTION. Conte understands and agrees that, due to the
----------
highly competitive nature of the health care industry, the breach of any
covenants set out in Section 3.1 will cause irreparable injury to CPC for which
it will have no adequate monetary or other remedy at law. Therefore, CPC shall
be entitled, in addition to such other remedies as it may have hereunder, to a
temporary restraining order and to preliminary and permanent injunctive relief
for any breach or threatened breach of the covenants without proof of actual
damages that have been or may be caused hereby. In addition, CPC shall have
available all remedies provided under state and federal statutes, rules and
regulations as well as any and all other remedies as may otherwise be
contractually or equitably available.
3.1.7 ASSIGNMENT. Except as otherwise provided to the contrary in
----------
ARTICLE FIVE, Conte agrees that the covenants contained in this Section 3.1
shall inure to the benefit of any successor or assign of CPC, with the same
force and effect as if such covenant had been made by Conte with such successor
or assign.
3.2 CONSULTING AGREEMENT. Upon the termination of Conte's employment
--------------------
other than in connection with (i) Permanent Disability, (ii) a clause (i)
Constructive
14
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Termination under Section 1.9 or (iii) a Hostile Take-Over, Conte hereby agrees
to make himself available to perform, for a period not to exceed four (4) years
following such termination of employment, such consulting and advisory services
for CPC with respect to matters relevant to the health care industry as may from
time to time be reasonably requested by the Board. However, such services shall
be subject to the following provisions and limitations:
(a) LOCATION. Such services shall be performed in Clark County,
--------
Nevada or at such other places acceptable to Conte.
(b) TIME. Conte shall not be required to render more than eight (8)
----
hours of consulting services per month.
(c) OFFICE PRIVILEGES. During the consulting period, Conte shall be
-----------------
entitled to the use of appropriate office facilities and secretarial and
administrative services to facilitate the performance of his consulting
services.
3.3 CONSIDERATION FOR COVENANTS AND CONSULTING AGREEMENT. Should Conte's
----------------------------------------------------
employment terminate in connection with a Parachute Event, then the value of his
noncompetition covenant under Section 3.1.3 and his Consulting Agreement under
Section 3.2 shall be determined by independent appraisal, and the Contract
Benefits payable to Conte under Section 5.6 or 5.9 shall, to the extent of such
appraised value, be allocated as reasonable compensation for such covenant and
consulting agreement. A similar appraisal shall be performed in the event (i)
CPC elects to enforce such noncompetition covenant and consulting agreement
pursuant to the provisions of Section 5.4. or (ii) Conte terminates his
employment under Section 5.5. The cost of any appraisal performed pursuant to
the requirements of this Section 3.3 shall be borne solely by CPC.
3.4 SELECTION OF INDEPENDENT APPRAISER. Whenever the appraised value of
----------------------------------
Conte's obligations under Sections 3.1.3 and/or 3.2 must be determined pursuant
to Section 3.3, Conte and CPC shall, within ten (10) business days following
termination of Conte's employment, select an independent third party (either an
experienced tax counsel or a nationally recognized accounting firm) to perform
that appraisal. Should Conte and CPC be unable to mutually agree upon the
selection of such third party, then Conte shall designate a nationally
recognized accounting firm to perform such appraisal, provided such firm has not
previously served as CPC's independent auditors or provided prior tax advice to
Conte on personal matters.
15
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ARTICLE FOUR
CORPORATE DIVESTITURE BENEFITS
------------------------------
4.1 BENEFIT ENTITLEMENT. Upon each Corporate Divestiture effected during
-------------------
the Contract Term, Conte shall become entitled to receive a special interim
payout calculated in accordance with, and subject to the limitations of, this
ARTICLE FOUR.
4.1.1 INTERIM PAYOUT AMOUNT. The interim payout amount that may be
---------------------
paid to Conte in connection with any Corporate Divestiture shall be determined
in accordance with applicable formula below.
4.1.2 HISTORICAL BASIS. If the Corporate Divestiture is determined
----------------
on a historical basis in accordance with Section 1.12.1, then the interim payout
amount shall be calculated as follows:
X = (A x B) - Z, where
X = Interim Payment,
A = Total Interim Payout,
B = The percentage of asset values or revenue levels
(whichever is the greater) which the Corporate
Divestiture represents on a cumulative basis.
Z = All prior interim payments made to Conte pursuant
to this ARTICLE FOUR, and
4.1.3 CURRENT BASIS. If the Corporate Divestiture is determined on a
-------------
current stand-alone basis in accordance with Section 1.12.2, then the interim
payout amount shall be calculated as follows:
X = (A - Z) x B, where
X = Interim Payment,
A = Total Interim Payout,
16
<PAGE>
Z = All prior interim payments made to Conte pursuant
to this ARTICLE FOUR, and
A = The percentage of asset values or revenue levels
(whichever is the greater) which the Corporate Divestiture
represents on a stand-alone basis.
4.1.4 TOTAL INTERIM PAYOUT. For purposes of the applicable Section
--------------------
4.1.2 or 4.1.3 formula, the Total Interim Payout which may be paid under this
ARTICLE FOUR in connection with all corporate Divestitures effected by CPC
during the Employment Period shall be limited to:
(i) five (5) times the highest Salary level in effect for Conte
at any time during the Employment Period, plus
(ii) the aggregate amount credited to all Deferred Compensation
Accounts at the time maintained for Conte, plus nine percent (or the
percentage then applicable to Conte's Salary under the deferred
compensation plan then in effect, whichever is greater) of the amount
payable under Section 4.1.4(i).
4.1.5 PAYMENT. The interim payout calculated for Conte under Section
-------
4.1.2 or 4.1.3 in connection with each Corporate Divestiture shall, subject to
any applicable reduction under Section 4.3, be paid to him in cash within thirty
(30) days after the effective date of such Corporate Divestiture. The payment
shall be subject to CPC's collection of all applicable withholding taxes.
4.2 OPTIONS. All unvested Options outstanding at the time of any
-------
Corporate Divestiture shall, subject to limitation under Section 4.3, accelerate
immediately prior to such Corporate Divestiture and become exercisable for all
the option shares as fully-vested shares of CPC common stock.
4.3 LIMITATION. In no event shall the sum of (i) the Section 4.1 interim
----------
payout payable in connection with any Corporate Divestiture plus (ii) the Option
Parachute Payment associated with acceleration of unvested Options under Section
4.2 exceed the excess (if any) of (A) 2.99 times Conte's Actual Average
Compensation (as calculated through the close of the Fiscal Year immediately
preceding the Fiscal Year in which the current Corporate Divestiture is
effected) over (B) all prior interim payouts and Option Parachute Payments made
or provided to him under this ARTICLE FOUR. If such limitation would otherwise
be exceeded in connection with any Corporate Divestiture, then the Section 4.1.2
or 4.1.3 interim payout and the Section 4.2 Option acceleration
17
<PAGE>
benefit shall be reduced, in the order indicated below, to the extent necessary
(and only to that extent) to eliminate such excess and assure compliance with
this Section 4.3 limitation:
4.3.1 NEW OPTION GRANTS. First, any unvested Options granted within
-----------------
one year prior to the Corporate Divestiture shall not accelerate, with the most
recent Options to be the first not to accelerate under Section 4.2.
18
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4.3.2 INTERIM PAYMENT. Then, the interim payout amount otherwise
---------------
payable under Section 4.1.2 or Section 4.1.3 shall be reduced.
4.3.3 OLD OPTIONS. Finally, any unvested Options granted more than
-----------
one year prior to the Corporate Divestiture shall not accelerate, with the
Options triggering the greatest Option Parachute Payment to be the first not to
accelerate under Section 4.2.
ARTICLE FIVE
PAYOUT OF CONTRACT BENEFITS
---------------------------
5.1 TERMINATION OF EMPLOYMENT. Conte's employment may be terminated by
-------------------------
either Conte or CPC before the end of the Employment Period, for the reasons and
with the consequences set out below. In the event of such termination, Conte
may become entitled to payment of the Contract Benefits in accordance with the
provisions of this ARTICLE FIVE. In any event, the provisions of ARTICLE TWO
shall cease to have any force or effect upon the termination of Conte's
employment, and the compensation and benefit provisions of this ARTICLE FIVE
shall supersede and replace the provisions of ARTICLE TWO.
5.2 DEATH. If Conte dies, his employment shall terminate on the date of
-----
his death.
5.2.1 CONTRACT BENEFITS. In such event, CPC shall pay the Contract
-----------------
Benefits to the Beneficiary; provided, however, that the Salary Contract Benefit
shall be limited to any earned but unpaid Salary due Conte at the time of his
death.
5.3 PERMANENT DISABILITY. Either CPC or Conte may terminate Conte's
--------------------
employment, upon thirty (30) days prior notice, by reason of his Permanent
Disability.
5.3.1 COVENANTS. Following such termination of employment, Conte
---------
shall remain subject to the covenants and obligations set forth in Section 3.1.
5.3.2 CONTRACT BENEFITS. Conte or his Beneficiary shall be entitled
-----------------
to all of the Contract Benefits. However, the Salary Contract Benefit shall be
reduced to five (5) times the highest Salary level in effect for Conte at any
time during the Employment Period. This reduced Salary Contract Benefit shall
be paid in a lump sum within sixty (60) days after the termination date of
Conte's employment under this Section 5.3.
19
<PAGE>
5.4 TERMINATION BY CPC FOR CAUSE. CPC may terminate Conte's employment
----------------------------
for Cause. However, no such termination for Cause shall be made or take effect
unless (i) CPC has proved the Cause by clear and convincing evidence and (ii)
the termination has been approved by at least seventy-five percent (75%) of all
of the Board members.
5.4.1 NO CONTRACT BENEFITS. Following the termination of Conte's
--------------------
employment for Cause, Conte shall not perform any of the services described in
Section 2.1, nor shall he have the right to receive any Contract Benefits, but
he and his eligible dependents shall be entitled, at their sole cost, to receive
continued health care coverage to which they may be entitled by law ("COBRA
Coverage").
5.4.2 COVENANTS. Following such termination for Cause, Conte shall
---------
comply with his covenants and obligations under Section 3.1 (other than Section
3.1.3). However, CPC may elect, at its sole discretion, to enforce Conte's
covenants under Section 3.1.3 and his consulting agreement under Section 3.2
following such termination of employment. If CPC so elects, then (i) CPC shall
so notify Conte in writing, as provided in Section 7.7, within ten (10) days
following the date of his termination, and (ii) CPC shall, as consideration for
such Section 3.1.3 covenant and Section 3.2 consulting agreement, compensate
Conte at the Section 3.3 appraised value of such covenant and consulting
agreement, payable in equal bi-weekly installments (beginning with his
termination date) over the four (4)-year period his Section 3.1.3 covenant and
Section 3.2 consulting agreement are to remain in effect.
5.5 TERMINATION BY CONTE WITHOUT CAUSE. Conte may terminate his
----------------------------------
employment at any time without cause, i.e., for grounds other than those
described in paragraphs 5.3, 5.6, 5.7, 5.9 and 5.10.
5.5.1 NO CONTRACT BENEFITS. Following Conte's termination of
--------------------
employment under this Section 5.5, Conte shall not perform any of the services
described in Section 2.1, nor shall he receive any Contract Benefits, but he and
his eligible dependents shall be entitled, at their sole cost, to COBRA
Coverage.
5.5.2 COVENANTS. Following such termination of employment, Conte
---------
shall comply with all his covenants and obligations under Sections 3.1 and 3.2,
and CPC shall, as consideration for his Section 3.1.3 covenant and Section 3.2
consulting agreement, compensate Conte at the Section 3.3 appraised value of
such covenant and consulting agreement, payable in equal bi-weekly installments
(beginning with his termination date) over the four (4)-year period his Section
3.1.3 covenant and Section 3.2 consulting agreement are to remain in effect.
20
<PAGE>
5.6 CHANGE OF CONTROL. Conte may terminate his employment in connection
-----------------
with a Change of Control, provided such termination is, pursuant to written
notice delivered to CPC, effected within one (1) year after such Change in
Control.
5.6.1 COVENANTS. Following such termination of employment, Conte
---------
shall comply with all his covenants and obligations under Sections 3.1 and 3.2.
5.6.2 CONTRACT BENEFITS. Conte shall be entitled to all of the
-----------------
Contract Benefits, with the Salary Contract Benefit to be paid in a lump sum
within sixty (60) days after the termination date of Conte's employment.
5.6.3 VESTING OF OPTIONS AND OTHER BENEFITS. Whether or not Conte
-------------------------------------
terminates his employment pursuant to this Section 5.6, all Options and related
stock appreciation rights outstanding at the time of the Change in Control shall
vest and become exercisable for all of the underlying shares of CPC common stock
immediately prior to the effective date of such Change of Control, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Conte under any plan or arrangement maintained
by CPC for his benefit shall lapse immediately upon such effective date. Conte
may exercise his Options or related stock appreciation rights at any time until
the earlier of (i) the specified expiration date of the option term or (ii) the
-------
expiration of the twelve (12)-month period measured from his termination date,
and any Options or stock appreciation rights not exercised prior to the
applicable expiration date shall lapse.
5.7 CONSTRUCTIVE TERMINATION. Conte may terminate his employment within
------------------------
six (6) months after any event qualifying as a Constructive Termination under
Section 1.9.
5.7.1 COVENANTS. Following such termination of employment, Conte
---------
shall not perform any further services for CPC and shall have no obligation to
perform his covenants under Section 3.1.3 or his consulting agreement under
Section 3.2.
5.7.2 CONTRACT BENEFITS. Upon Conte's termination of employment
-----------------
under this Section 5.7, Conte shall become entitled to all of the Contract
Benefits, with the Salary Contract Benefit to be paid in a lump sum within sixty
(60) days after his termination date.
5.7.3 VESTING OF OPTIONS AND OTHER BENEFITS. All Options and related
-------------------------------------
stock appreciation rights outstanding at the time of Conte's termination of
employment
21
<PAGE>
under this Section 5.7 shall vest and immediately become exercisable for all
of the underlying shares of CPC common stock, and any restrictions or
forfeiture provisions applicable to any shares of CPC common stock or stock
units awarded to Conte under any plan or arrangement maintained by CPC for his
benefit shall lapse immediately upon such termination. Conte may exercise his
Options and related stock appreciation rights at any time until the earlier of
-------
(i) the specified expiration date of the option term or (ii) the expiration of
the twelve (12)-month period measured from his termination date, and any Options
or stock appreciation rights not exercised prior to the applicable expiration
date shall lapse.
5.8 TERMINATION BY CPC WITHOUT CAUSE. CPC may terminate Conte's
--------------------------------
employment at any time for reasons other than those described in Sections 5.3
and 5.4.
5.8.1 CONTRACT BENEFITS. Upon such termination of employment, Conte
-----------------
shall become entitled to all of the Contract Benefits, with the Salary Contract
Benefit to be paid in a lump sum within sixty (60) days after his termination
date.
5.8.2 COVENANTS. Following the termination of Conte's employment
---------
pursuant to this Section 5.8, Conte shall not perform any further services for
CPC and shall have no obligation to perform his covenants under Section 3.1.3 or
his consulting agreement under Section 3.2.
5.8.3 VESTING OF OPTIONS AND OTHER BENEFITS. All Options and related
-------------------------------------
stock appreciation rights outstanding at the time of the termination of Conte's
employment under this Section 5.8 shall vest and immediately become exercisable
for all of the underlying shares of CPC common stock, and any restrictions or
forfeiture provisions applicable to any shares of CPC common stock or stock
units awarded to Conte under any plan or arrangement maintained by CPC for his
benefit shall lapse immediately upon such termination. Conte may exercise his
Options and related stock appreciation rights at any time until the earlier of
-------
(i) the specified expiration date of the option term or (ii) the expiration of
the twelve (12)-month period measured from his termination date, and any Options
or stock appreciation rights not exercised prior to the applicable expiration
date shall lapse.
5.9 CORPORATE REORGANIZATION. Conte may terminate his employment in
------------------------
connection with a Corporate Reorganization, provided such termination is,
pursuant to written notice delivered to CPC, effected within one (1) year after
such Corporate Reorganization.
22
<PAGE>
5.9.1 COVENANTS. Following Conte's termination of employment under
---------
this Section 5.9, Conte shall comply with all his covenants and obligations
under Sections 3.1 and 3.2.
5.9.2 CONTRACT BENEFITS. Upon such termination of employment, Conte
-----------------
shall become entitled to all of the Contract Benefits, with the Salary Contract
Benefit to be paid in a lump sum within sixty (60) days after the termination
date of Conte's employment.
5.9.3 VESTING OF OPTIONS AND OTHER BENEFITS. All Options and related
-------------------------------------
stock appreciation rights outstanding at the time of Conte's termination of
employment shall immediately vest and become exercisable for all of the
underlying shares of CPC common stock, and any restrictions or forfeiture
provisions applicable to shares of CPC common stock or stock units awarded to
Conte under any plan or arrangement maintained by CPC for his benefit shall
lapse immediately upon his termination of employment. Conte may exercise his
Options and all related stock appreciation rights at any time until the earlier
-------
of (i) the specified expiration date of the option term or (ii) the expiration
of the twelve (12)-month period measured from his termination date, and any
Options or stock appreciation rights not exercised prior to the applicable
expiration date shall lapse.
5.10 HOSTILE TAKE-OVER. In the event of a Hostile Take-Over, Conte shall
-----------------
become entitled to all of the Contract Benefits on the basis of the Contract
Payout Event triggered by the Hostile Take-Over, whether or not Conte chooses to
terminate his employment in connection with such Hostile Take-Over. The Salary
Contract Benefit shall be paid to him in a lump sum within sixty (60) days after
the date of such Hostile Take-Over.
5.10.1 COVENANTS. Upon the subsequent termination of Conte's
---------
employment, whether initiated by Conte or by CPC after the Hostile Take-Over,
Conte shall not perform any further services for CPC and shall have no
obligation to perform his covenants under Section 3.1.3 or his consulting
agreement under Section 3.2.
5.10.2 VESTING OF OPTIONS AND OTHER BENEFITS. Whether or not Conte
-------------------------------------
terminates his employment in connection with the Hostile Take-Over, all Options
and related stock appreciation rights outstanding at the time of such Hostile
Take-Over shall vest and become exercisable for all of the underlying shares of
CPC common stock immediately prior to the effective date of such Hostile Take-
Over, and any restrictions or forfeiture provisions applicable to any shares of
CPC common stock or stock units awarded to Conte under any plan or arrangement
maintained by CPC for his benefit
23
<PAGE>
shall lapse immediately upon such effective date. Conte may exercise his Options
and related stock appreciation rights at any time until the earlier of (i) the
-------
specified expiration date of the option term or (ii) the expiration of the
twelve (12)-month period measured from his termination date, and any Options or
stock appreciation rights not exercised prior to the applicable expiration date
shall lapse.
5.11 WITHHOLDING. All payments made to Conte or his Beneficiary pursuant
-----------
to the provisions of this ARTICLE FIVE shall be subject to withholding by CPC of
such amounts for income and other payroll taxes and deductions as CPC may
reasonably determine should be withheld pursuant to applicable laws and
regulations.
ARTICLE SIX
SPECIAL TAX BENEFIT
-------------------
6.1 TAX PAYMENTS. Conte shall be entitled to receive one or more payments
------------
from CPC which shall compensate him for the following tax liabilities:
(A) any and all excise taxes (collectively, the "Parachute Tax")
imposed pursuant to Code Section 4999 (or any successor provision) and
comparable provisions of applicable state tax laws upon (i) any payment or
other compensation or benefit which is made or provided to or on behalf of
Conte in connection with any Parachute Event under this Contract or his
subsequent termination of employment in connection therewith and which is
deemed to be a parachute payment under Code Section 280G(b)(2) and (ii) all
the special tax payments made to him pursuant to this ARTICLE SIX, and
(B) the ordinary federal and state income taxes imposed upon all the
special tax payments made to him pursuant to this ARTICLE SIX.
6.1.1 INITIAL PAYMENT. Within ninety (90) days after each
---------------
determination is made by the Internal Revenue Service or Conte's tax advisor
that Conte has received a parachute payment for which he is liable for a
Parachute Tax, Conte shall identify the nature of such parachute payment to CPC
and submit to CPC the calculation of the Parachute Tax attributable to that
payment and the tax benefit to which he is entitled under this ARTICLE SIX with
respect to such payment. Upon receipt of such calculation, CPC shall pay Conte
an amount sufficient to satisfy (i) such Parachute Tax and (ii) the ordinary
federal and state income taxes attributable to the clause (i)
24
<PAGE>
payment and all additional payments made pursuant to this clause (ii), with the
net effect of providing Conte with the necessary funds to satisfy both his total
Parachute Tax liability at that time and the additional ordinary federal and
state income taxes attributable to the Section 6.1.1 payments made to him.
Conte's Parachute Tax calculations shall be final and binding upon CPC for
purposes of this Contract, and CPC shall accordingly base any Parachute Tax
withholding on such calculations, provided such calculations are based on
reasonable interpretations of the law.
6.1.2 FINAL DETERMINATION. In the event that Conte's actual
-------------------
Parachute Tax liability is determined by a Final Determination to be greater
than the Parachute Tax liability taken into account for purposes of the payments
made to him pursuant to Section 6.1.1, then within ninety (90) days following
the Final Determination, Conte shall submit to CPC a new Parachute Tax
calculation based upon the Final Determination. Upon receipt of such
calculation, CPC shall pay Conte an amount which, when added to any amounts paid
under Section 6.1.1, will be sufficient to satisfy (I) his aggregate Parachute
Tax and (II) the ordinary federal and state income taxes attributable to all
payments made pursuant to any provision of this ARTICLE SIX, including all
additional payments made pursuant to this clause (II), with the net effect of
providing Conte with sufficient aggregate funds to cover (1) his entire
Parachute Tax liability and (2) the additional federal and state ordinary income
taxes attributable to all the payments made to him pursuant to any provision of
this ARTICLE SIX.
6.1.3 REFUND. In the event that Conte's actual Parachute Tax
------
liability is determined by a Final Determination to be less than the Parachute
Tax liability taken into account for purposes of the payments made to him
pursuant to Sections 6.1.1 and 6.1.2, then Conte shall refund to CPC, promptly
upon receipt, any federal or state tax refund attributable to the Parachute Tax
overpayment.
6.1.4 DEFINITION. For purposes of this ARTICLE SIX, a Final
----------
Determination means an audit adjustment by the Internal Revenue Service that is
either agreed to by Conte or his estate or an adjustment that is sustained by a
court of competent jurisdiction in a decision with which he concurs or with
respect to which the period within which an appeal may be filed has lapsed
without a notice of appeal being filed.
6.2 CORPORATE DIVESTITURE. Conte shall be entitled to the special tax
---------------------
benefits provided under this ARTICLE SIX in connection with a Corporate
Divestiture only in the event that one or more errors (whether factual or legal)
in calculating the Section 4.3 limitation on the benefits payable under ARTICLE
FOUR with respect to that Corporate Divestiture result in Conte's receipt of
payments which trigger a Parachute Tax liability.
25
<PAGE>
ARTICLE SEVEN
MISCELLANEOUS PROVISIONS
------------------------
7.1 ENTIRE AGREEMENT. This Contract contains the entire agreement and
----------------
understanding between Conte and CPC regarding the terms and conditions of his
employment with CPC and the benefits to which he may become entitled upon the
termination of such employment, and supersedes and replaces all Prior Contracts
as well as any other negotiations, understandings and representations (other
than the express terms of the special founder recognition award/loan made to
Conte) regarding the terms and conditions of his employment or termination
benefits. This Contract may not be modified except by a writing executed by
both Conte and CPC.
7.2 ASSIGNMENT BY CPC. This Contract shall be binding upon and shall
-----------------
inure to the benefit of any successors or assigns of CPC. As used in this
Contract, the term "successor" includes any Person or group of Persons acting in
concert which at any time in any form or manner acquires all or substantially
all of the assets or business or more than twenty percent (20%) of the
outstanding voting securities of CPC.
7.3 NONASSIGNABILITY BY CONTE. Neither Conte nor any Beneficiary shall
-------------------------
assign, transfer, pledge or hypothecate any rights, interests or benefits
created hereunder or hereby. Any attempt to do so contrary to the provisions of
this Contract, and any levy of any attachment, execution or similar process
created thereby, shall be null and void and without effect. CPC shall have no
obligation to provide any payments or other consideration to any Beneficiary
until and unless CPC has received such Beneficiary's written assurance that he
or she will comply with the provisions of this Section 7.3.
7.4 SPENDTHRIFT PROVISION. Prior to actual receipt by Conte or his
---------------------
Beneficiary (as the case may be), no right or benefit under this Contract and,
without limitation, no interest in any payment hereunder shall be:
(i) anticipated, assigned or encumbered or subject to any
creditor's claim or subject to execution, attachment or similar legal
process; or
(ii) applied on behalf of or subject to the debts, contracts,
liabilities or torts of the Person entitled or who might become entitled to
such benefits or subject to the claims of any creditor of any such Person.
26
<PAGE>
7.5 BENEFICIARY; RECIPIENTS OF PAYMENTS; DESIGNATION OF BENEFICIARY.
---------------------------------------------------------------
Payment of all Salary, the proceeds of the Policy, and all other compensation
and benefits payable by CPC pursuant to this Contract shall be made only to
Conte during his lifetime or, in the event of his death, to his Beneficiary. If
Conte has not designated a Beneficiary, then the payments shall be made to his
estate. CPC shall have no obligation to make payments to any person not
designated as a Beneficiary pursuant to Section 7.5.1. Furthermore, CPC shall
have no obligation to make any payments to Conte's Beneficiary until and unless
that Beneficiary has agreed in writing to be bound by the provisions of this
Section 7.5. Conte or his estate or Beneficiary, as the case may be, shall
discharge, defend and hold CPC harmless from any liability for payments actually
made to such Beneficiary or to Conte's estate if no Beneficiary has been
designated.
7.5.1 DESIGNATION OF BENEFICIARY. Conte may designate and from time
--------------------------
to time change the Beneficiary only through a written, signed designation to
CPC's Corporate Secretary pursuant to Section 7.7.
7.5.2 ELECTIONS. Whenever this Contract provides for any election
---------
exercisable by Conte or his Beneficiary, that election shall be made solely by
the person or persons receiving payments pursuant to this Contract at that time
and shall be made in that Person's sole discretion and without regard to the
effect of such decision on subsequent payment recipients. Such decision shall
be final and binding on all subsequent recipients of payments.
7.6 ARBITRATION. Any controversy, question or dispute arising out of or
-----------
relating to the construction, application or enforcement of this Contract shall
be settled by arbitration. Among the disputes which are to be settled by
arbitration are any claims by Conte that the termination of his employment
breached any express or implied contract of employment.
7.6.1 APPOINTMENT OF ARBITRATORS. Within five (5) days after the
--------------------------
delivery of written notice of any such dispute from one party to the other, CPC
and Conte shall each appoint one person to hear and determine the dispute, and,
if the two persons so selected are unable to agree on its resolution within ten
(10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.
7.6.2 FINALITY. The determination of a majority of the arbitrators
--------
shall be final and conclusive on Conte and CPC.
27
<PAGE>
7.6.3 PROCEDURE; FORUM; WAIVER OF JURY TRIAL. The arbitration shall
--------------------------------------
be conducted in accordance with the then-current Model Employment Arbitration
Procedures of the American Arbitration Association in the State of Nevada.
Conte and CPC each hereby waive any right to trial by jury of any such dispute.
Notwithstanding the foregoing provisions, however, nothing in this Contract
shall limit or waive any right of either Conte or CPC to obtain injunctive
relief in any court of competent jurisdiction.
7.6.4 DISCOVERY. The parties shall be entitled to avail themselves
---------
of all discovery procedures available in civil actions in the State of Nevada.
7.6.5 DISPUTES NOT GOVERNED BY AGREEMENT TO ARBITRATE. The parties
-----------------------------------------------
have not agreed to arbitrate any dispute except for those disputes arising out
of or relating to the construction, application or enforcement of this Contract.
For example, and without limitation, the parties have not agreed to arbitrate
wage-hour, workers' compensation, defamation, or public policy discharge claims,
or claims arising under state or federal employment discrimination laws. Both
parties expressly reserve all rights and remedies available to them, at law or
in equity, to resolve any dispute which they have not expressly agreed in this
Contract to arbitrate.
7.7 NOTICES. Any notice provided for by this Contract and any other
-------
notice, demand, designation or communication which either party may wish to send
to the other ("Notices") shall be in writing and shall be deemed to have been
properly given if served by (i) personal delivery, (ii) registered or certified
mail, return receipt requested in a sealed envelope, postage and other charges
prepaid, or (iii) telegram, telecopy, telex, facsimile or other similar form of
transmission followed by delivery pursuant to clause (i) or (ii), in each case
addressed to the party for which such notice is intended as follows:
If to CPC: Community Psychiatric Centers
Board of Directors
6600 West Charleston Boulevard
Las Vegas, Nevada 89102
FAX: (702) 259-3650
If to Conte: Richard L. Conte
3013 Astoria Pines Circle
Las Vegas, Nevada 89107
FAX: (702) 877-8928
28
<PAGE>
7.7.1 CHANGE OF ADDRESS. Any address or name specified in this
-----------------
Section 7.7 may be changed by a Notice given by the addressee to the other party
in accordance with this Section 7.7.
7.7.2 EFFECTIVE DATE OF NOTICE. All Notices shall be given and
------------------------
effective as of the date of personal delivery thereof or the date of receipt set
forth on the return receipt. The inability to deliver because of a changed
address of which no Notice was given or rejection or other refusal to accept any
Notice shall be deemed to be the receipt of the Notice as of the date of such
inability to deliver or rejection or refusal to accept.
7.8 GOVERNING LAW; JURISDICTION. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of Nevada, without
reference to its choice of law rules.
7.9 SEVERABILITY. In the event any provision or provisions of this
------------
Contract is or are held invalid, the remaining provisions of this Contract shall
not be affected thereby. In the event that any provision is held to be overly
broad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and the intentions of the parties hereunder.
7.10 ATTORNEY'S FEES AND EXPENSES. If any arbitration proceeding is
----------------------------
commenced following Conte's termination of employment in connection with a
Change in Control or Hostile Take-Over, CPC shall pay all of Conte's reasonable
attorney's fees, costs and other expenses incurred in connection with that
arbitration. In the event arbitration is commenced under any other
circumstances, CPC shall reimburse Conte for all his reasonable attorney's fees,
costs and other expenses incurred in connection with the arbitration, unless the
arbitrator rules that Conte's employment was or could justifiably have been
terminated pursuant to Section 5.4. In the latter event, both parties shall
bear their own attorney's fees, costs and expenses.
29
<PAGE>
IN WITNESS WHEREOF, this Employment Contract has been executed and
delivered by the parties as of the date first set forth above.
/s/ Richard L. Conte
____________________________________
RICHARD L. CONTE
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Dana Shires, M.D.
__________________________________
Dana Shires, M.D.
Chairman, Compensation Committee
By: /s/ Ron L. Ooley
__________________________________
Ron L. Ooley
Executive Vice President
Human Resources
30
<PAGE>
EXHIBIT 10.7
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Contract"), dated as of August 1, 1995,
is made between COMMUNITY PSYCHIATRIC CENTERS, a Nevada Corporation
("Employer"), and WENDY SIMPSON, an individual ("Employee").
R E C I T A L S
---------------
A. Employer employs Employee pursuant to an oral agreement.
B. Employer desires to revise the terms of and continue Employee's
employment, and Employee desires to continue in Employer's employment.
NOW THEREFORE, Employee and Employer agree as follows:
1. Definitions. As used in this Contract, the following terms have the
-----------
following meanings:
1.1 Beneficiary. "Beneficiary" means any Person or Persons
-----------
designated from time to time by Employee pursuant to paragraph 6.4.1.
1.2 Board. "Board" means the Board of Directors of Employer.
-----
1.3 Change of Control. "Change of Control" means a change of control
-----------------
that would be required to be reported pursuant to Item 6(e) of Schedule 14A of
Rule 14 under the Exchange Act; and, without limitation of the foregoing clause,
such a change of control shall be deemed to have occurred if (i) any Person is
or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of Employer representing 20% or more
of the combined voting power of Employer's then outstanding securities, or (ii)
during any twenty-four-month period during the Employment Term, individuals who
at the beginning of such period constitute the Board cease for any reason to
constitute at least a majority thereof, unless the election of each director who
was not a director at the beginning of such period has been approved in advance
by directors representing at least four-fifths of the directors then in office
who were directors at the beginning of such twenty-four-month period. However,
a Change of Control does not include a distribution to Employer's shareholders
of stock of any subsidiary or a purchase of securities or assets of Employer by
a group controlled by directors or executive officers of Employer.
<PAGE>
1.4 Code. "Code" means the Internal Revenue Code of 1986, as
----
amended.
1.5 Commission. "Commission" means the Securities and Exchange
----------
Commission.
1.6 Compete. "Compete" means either directly or indirectly to own,
-------
initiate, manage, operate, join, control, advise, consult with or participate in
the ownership, operation, management or control (other than as a shareholder
owning less than five percent (5%) of the capital stock of any entity, the
shares of which are traded on a national exchange) of any business similar to
the Existing Businesses or the Proposed Businesses within the United States, the
United Kingdom or any foreign country in which Existing or Proposed Businesses
are located, or to lease or sell real or personal property to any such business.
1.7 Confidential Information. "Confidential Information" means
------------------------
1.7.1 Locations. Data regarding location of proposed and
---------
existing hospitals, facilities and buildings;
1.7.2 Markets. Market surveys, studies and analyses;
-------
1.7.3 Personnel. Information concerning the identity, location
---------
and qualifications of professionals and employees, existing and prospective;
1.7.4 Referrals. Information concerning referral sources;
---------
1.7.5 Reimbursement. Information concerning reimbursement
-------------
sources, insurers and other third-party payors and related procedures;
1.7.6 Legal and Regulatory. Tabulated and organized information
--------------------
concerning legislative, administrative, regulatory and zoning requirements,
bodies, procedures and officials;
1.7.7 Medical and Personnel Records. Medical and personnel
-----------------------------
records;
1.7.8 Data. Statistical, financial, cost and accounting data;
----
1.7.9 Patient and Customer Lists. Existing and prospective
--------------------------
patient and customer lists; and
2
<PAGE>
1.7.10 Manuals. Administrative, operations and procedure
-------
manuals and directives.
1.7.11 Ideas. Business ideas pertaining to any Existing or
-----
Proposed Businesses. Business ideas include, but are not limited to, ideas,
concepts or proposals that are conceived, developed or implemented by or
communicated to Employee.
1.8 Employment Term. "Employment Term" means the period commencing
---------------
August 1, 1995 and continuing for a period of three (3) years and four (4)
months ending November 30, 1998, unless earlier terminated pursuant to paragraph
5.
1.9 Exchange Act. "Exchange Act" means the Securities Exchange Act
------------
of 1934, as amended.
1.10 Existing Businesses. "Existing Businesses" means the following
-------------------
businesses in which Employer is currently engaged in the United States and the
United Kingdom:
1.10.1 Dialysis. Ownership, operation and management of
--------
facilities and businesses which provide hemodialysis services and treatments to
patients with chronic or acute kidney diseases or conditions;
1.10.2 Psychiatric Hospitals. Ownership and operation of acute
---------------------
psychiatric hospitals, medical office buildings and pharmacies and related
facilities;
1.10.3 Substance Abuse. Ownership and operation of facilities
---------------
which provide chemical, drug and alcohol dependency treatment and services;
1.10.4 Transitional Care. Ownership and operation of
-----------------
transitional care facilities which provide medically complex treatment to
patients with long-term acute and subacute illnesses;
1.10.5 Patient Care. Provision of inpatient, outpatient,
------------
residential, partial hospitalization and home psychiatric mental health and
substance abuse services and treatment.
1.11 Fiscal Year. "Fiscal Year" means Employer's annual accounting
-----------
period for financial accounting and reporting purposes, which on the date hereof
is the period from each December 1 to and including the next following November
30.
1.12 Permanent Disability. "Permanent Disability" means any mental
--------------------
or physical illness, disease or condition which in the opinion of an
independent, duly licensed physician will or does result in Employee's inability
to perform her duties during normal working hours for six months.
3
<PAGE>
1.13 Person. "Person" means any individual, corporation,
------
partnership, business trust, joint venture, association, joint stock company,
trust, unincorporated organization or government or agency or political
subdivision thereof.
1.14 Proposed Businesses. "Proposed Businesses" means businesses
-------------------
other than and whether or not related to Existing Businesses in which Employer
may from time to time be or plan to be engaged.
1.15 Salary. "Salary" means Two Hundred Seventy-Five Thousand
------
Dollars ($275,000) per Fiscal Year, as adjusted from time to time pursuant to
paragraph 3.1.1; and does not include any bonuses or other employment benefits
or remuneration paid or payable by Employer to Employee.
2. Employment and Duties. During the Employment Term, Employer shall
---------------------
employ Employee and Employee shall serve Employer as Executive Vice President
and Chief Financial Officer, or in such other capacity as may be designated from
time to time by Employer's Chief Executive Officer or Board. During the
Employment Term, Employee shall devote her full productive time, energies and
abilities to the business of Employer under the authority of the Chief Executive
Officer and the Board.
3. Compensation and Benefits.
-------------------------
3.1 Salary. During the Employment Term, Employer shall pay the
------
Salary to Employee in equal monthly or more frequent installments in accordance
with Employer's general practice and subject to legally required withholdings.
3.1.1 Salary Review. The Salary for any Fiscal Year commencing
-------------
after November 30, 1995 shall be subject to annual review by the Board, but in
no event shall the Salary be reduced below the greater of the amount specified
in paragraph 1.16 or the Salary most recently determined by the Board pursuant
to this paragraph 3.1.1. Employee understands that the requirement of annual
review by the Board shall not be construed in any manner as an express or
implied agreement by Employer to raise the Salary.
3.2 Expense Reimbursement. During the Employment Term, Employer
---------------------
shall promptly reimburse Employee, upon submission to Employer by Employee of
adequate documentation, for all reasonable out-of-pocket expenses respecting
entertainment, travel, meals, hotel accommodations and other like-kind expenses,
in each case incurred by Employee in the interest of Employer's business and
consistent with Employer's policies.
3.3 Group Insurance. During the Employment Term, Employer shall
---------------
provide group life insurance, group travel and
4
<PAGE>
accident insurance and group medical, dental and hospital insurance to Employee
in the amount and on the terms such insurance is made available to other senior
executives of Employer with the same status or in the same category.
3.4 Profit Sharing Plan. During the Employment Term, Employee shall
-------------------
be a participant in Employer's Profit Sharing Plan if she otherwise meets the
participation requirements.
3.5 Other Benefits. During the Employment Term by mutual agreement
--------------
with Employer, Employee may participate in employment benefits made available to
other senior executives of Employer with the same status or in the same
category; provided, however, that this Contract itself shall neither prevent nor
compel such participation.
4. Protection of Business Information; Noncompetition; Nonsolicitation.
-------------------------------------------------------------------
4.1 Nondisclosure.
-------------
4.1.1 Confidential Information. In the operation and expansion
------------------------
of the Existing Businesses and in the planning and development of the Proposed
Businesses, Employer has generated and will generate Confidential Information
which is and will be proprietary and confidential and the disclosure of which
would be extremely detrimental to Employer and of great assistance to its
competitors.
4.1.2 Information Held as a Fiduciary. All of the Confidential
-------------------------------
Information which is acquired by, communicated to or in any way comes into the
possession or control of Employee shall be held by Employee in a fiduciary
capacity for the exclusive benefit of Employer.
4.1.3 Nondisclosure Covenant. Employee shall not disclose any
----------------------
Confidential Information to any person, without the consent of Employer.
4.1.4 Exemptions. The restrictions set forth in this paragraph
----------
4.1 shall not apply to any part of the Confidential Information which: (i) is or
becomes generally available to the public or publicly known other than as a
result of disclosure in breach of any obligation of confidentiality; (ii)
becomes available to Employee on a nonconfidential basis from a source other
than Employer or its agents or affiliates; (iii) is disclosed pursuant to the
requirement of a governmental agency or court of competent jurisdiction or as
otherwise required under applicable law; or (iv) was otherwise known or
available to Employee without any obligation of confidentiality.
5
<PAGE>
4.1.5 Following Employment. Upon termination of this Agreement,
--------------------
Employee shall promptly relinquish and return to Employer all Confidential
Information and all files, correspondence, memoranda, diaries and other records,
minutes, notes, manuals, papers and other documents and data, however prepared
or memorialized, and all copies thereof, belonging to or relating to the
business of Employer, that are in Employee's custody or control whether or not
they contain Confidential Information.
4.2 Noncompetition Covenant. During the Employment Term and for a
-----------------------
period of one (1) year thereafter, Employee shall not compete or plan or prepare
to compete with Employer.
4.3 Nonsolicitation Covenant. Employee shall not solicit other
------------------------
employees, independent contractors, customers, referral sources or reimbursement
sources of Employer for use or employment other than in the Existing or Proposed
Businesses.
4.4 Scope and Duration; Severability. Employer and Employee
--------------------------------
understand and agree that the scope and duration of the covenants contained in
this paragraph 4 are reasonable both in time and area and are fairly necessary
to protect the business of Employer. Nevertheless, it is further agreed that
such covenants shall be regarded as divisible and shall be operative as to time
and area to the extent that they may be made so operative and, if any part of
them is declared invalid or unenforceable, the validity and enforceability of
the remainder shall not be affected.
4.5 Injunction. Employee understands and agrees that, due to the
----------
highly competitive nature of the health care industry, the breach of any of the
covenants set out in paragraphs 4.1.3, 4.2 and 4.3 will cause irreparable injury
to Employer for which it will have no adequate monetary or other remedy at law.
Therefore, Employer shall be entitled, in addition to such other remedies as it
may have hereunder, to a temporary restraining order and to preliminary and
permanent injunctive relief for any breach or threatened breach of the covenants
without proof of actual damages that have been or may be caused hereby. In
addition, Employer shall have available all remedies provided under state and
federal statutes, rules and regulations as well as any and all other remedies as
may otherwise be contractually or equitably available.
4.6 Assignment. Except as provided in paragraphs 5.2.4 and 5.2.5,
----------
Employee agrees that the covenants contained in paragraph 4 shall inure to the
benefit of any successor or assign of Employer with the same force and effect as
if such covenants had been made by Employee with such successor or assign.
5. Termination. This Contract shall be terminated before the end of the
-----------
Employment Term for the reasons set out in paragraph 5.1, in each case with the
consequences set out in paragraph 5.2.
6
<PAGE>
5.1 Grounds for Termination.
-----------------------
5.1.1 By Employer. This Contract may be terminated by Employer
-----------
at any time on thirty (30) days' written notice to Employee, for any of the
following reasons:
(a) Breach. Breach of any material provision of this
------
Contract by Employee or her breach or gross neglect of or failure to perform her
duties as employee of Employer;
(b) Cause. For cause;
-----
(c) Permanent Disability. Employee's Permanent
--------------------
Disability.
5.1.2 Termination by Employee. This Contract may be terminated
-----------------------
by Employee at any time upon thirty (30) days' written notice for any of the
following reasons:
(a) Breach. Breach of any material provision of this
------
Contract by Employer which is not remedied within thirty days after written
notice specifying such breach in reasonable detail;
(b) Change of Control. A Change of Control; provided,
-----------------
however, that termination pursuant to this 5.1.2(b) shall be effective if and
only if Employee gives Employer written notice of such termination within one
year after such Change of Control;
(c) Permanent Disability. Employee's Permanent
--------------------
Disability.
5.1.3 Termination upon Death. This Contract shall terminate
----------------------
immediately upon the death of Employee.
5.2 Effect of Termination. If this Contract is terminated pursuant
---------------------
to paragraph 5.1, the parties shall have the following rights and obligations:
5.2.1 By Employer for Breach or Cause. If this Contract is
-------------------------------
terminated by Employer pursuant to paragraphs 5.1.1(a) or (b), Employee shall
not have the right or obligation to perform the services described in paragraph
2.1, nor shall Employee have the right to receive the Salary or any other
compensation or benefits described in paragraph 3 after the date of termination;
but Employee shall be obligated to Employer as provided in paragraph 4, and
Employer shall have all remedies available at law or in equity.
7
<PAGE>
5.2.2 By Employer or Employee upon Permanent Disability. If this
-------------------------------------------------
Contract is terminated by Employer or Employee pursuant to paragraph 5.1.1(c),
or 5.1.2(c), (i) Employee shall thereafter have the obligations described in
paragraph 4, and (ii) Employer shall (A) pay to Employee or her Beneficiary,
within sixty (60) days after such termination, the Salary for the ninety (90)
days immediately following the date of termination, (B) continue to have the
obligations described in paragraphs 3.3 and 3.5, but only to the extent those
benefits are available under the plans then in effect, and (D) sell to Employee,
at her option, at its net book value, any automobile then being provided to her
which is owned by Employer.
5.2.3 Death. If Employee dies, Employer shall (i) within sixty
-----
(60) days pay the Salary to the date of her death if she dies during the
Employment Term and (ii) pay or continue for the benefit of the Beneficiary such
other benefits as may be due pursuant to paragraphs 3.3 and 3.5.
5.2.4 By Employee for Breach. If this Contract is terminated by
----------------------
Employee pursuant to paragraph 5.1.2(a), she shall not have any further
obligation to Employer under paragraphs 2 and 4, and Employer shall (i) pay to
her, within sixty (60) days after such termination, the aggregate Salary for the
twenty-four (24) months immediately following the date of termination, and (ii)
continue to have the obligations described in paragraphs 3.3 and 3.5, but only
to the extent those benefits are available under those plans as then in effect.
Employee shall have all remedies available at law or in equity and shall have no
duty to mitigate her damages.
5.2.5 By Employee upon Change of Control. If there is a Change
----------------------------------
of Control and
(a) Termination. This Contract is terminated by Employee
-----------
pursuant to paragraph 5.1.2(b),
(i) Payments. Employer shall, within 30 days after the
--------
effective date of such termination, pay to her (A) the aggregate Salary for the
twenty-four (24) months immediately following the date of termination, plus (B)
all other compensation and benefits remaining to be paid to her under this
Contract.
(ii) Automobile. Employee shall have the option to purchase
----------
at net book value any automobile then provided to her which is owned by
Employer; and
(iii) Release of Employee Obligations. Employee
-------------------------------
shall not be obligated to perform any duties under paragraph 2.1, any
obligations under paragraph 4 or any other duty,
8
<PAGE>
obligation or covenant under this Contract or as an employee of Employer.
(b) No Termination; Vesting of Options, etc. Whether or not
---------------------------------------
Employee terminates this Contract pursuant to paragraph 5.1.2(b), all stock
options and related stock appreciation rights, restricted stock, contingent
bonuses or payments and similar deferred benefits held by Employee shall vest
and become exercisable immediately upon a Change of Control, and any
restrictions on shares of stock of Employer or on stock units that were awarded
to Employee under any plan or arrangement maintained by Employer for her benefit
shall lapse upon the occurrence of such an event.
5.3 Withholding. Anything in this Contract to the contrary
-----------
notwithstanding,
5.3.1 Withholding. All payments required to be made to Employee
-----------
or the Beneficiary under this Contract shall be subject to the withholding of
such amounts, if any, for income and other payroll taxes and deductions as
Employer may reasonably determine should be withheld pursuant to any applicable
law or regulation.
5.4 Exercise of Options. Notwithstanding anything in Employee's
-------------------
stock option agreements with Employer, Employee may exercise all of her vested
stock options within seven (7) days after termination for any reason of her
employment hereunder.
6. Miscellaneous.
-------------
6.1 Assignment by Employer. Subject to paragraphs 5.2.4 and 5.2.5,
----------------------
this Contract shall be binding upon and shall inure to the benefit of any
successors or assigns of Employer. As used in this Contract, the term
"successor" includes any Person or combination of Persons acting in concert
which at any time in any form or manner acquires all or substantially all of the
assets or business or more than twenty percent (20%) of the voting stock of
Employer or any succession which results from a Change of Control.
6.2 Nonassignability by Employee. Neither Employee nor any
----------------------------
Beneficiary shall assign, transfer, pledge or hypothecate any rights, interests
or benefits created hereunder or hereby. Any attempt to do so contrary to the
provisions of this Contract, and any levy of any attachment, execution or
similar process created thereby, shall be null and void and without effect.
6.3 Spendthrift Provision. Prior to actual receipt by Employee or
---------------------
the Beneficiary, as the case may be, no right or benefit under this Contract
and, without limitation, no interest in any payment hereunder shall be:
9
<PAGE>
6.3.1 Anticipation. Anticipated, assigned or encumbered or
------------
subject to any creditor's claim or subject to execution, attachment or similar
legal process, or
6.3.2 Liability for Debts; Claims. Applied on behalf of or
---------------------------
subject to the debts, contracts, liabilities or torts of the Person entitled or
who might become entitled to such benefits, or subject to the claims of any
creditor of any such Person.
6.4 Beneficiary; Recipients of Payments; Designation of Beneficiary.
---------------------------------------------------------------
The Salary, the proceeds of the life insurance policy described in paragraph 3.4
and other compensation and benefits payable by Employer pursuant to this
Contract shall be made only to Employee during her lifetime or, in the event of
her death, to the Beneficiary. If Employee has not designated a Beneficiary,
the payments shall be made to her estate. Employer shall have no obligation to
make payments to any person not designated pursuant to paragraph 6.4.1 and shall
be discharged, defended and held harmless from any liability for payments
actually made to any Beneficiaries or to Employee's estate if no Beneficiaries
have been designated.
6.4.1 Designation of Beneficiary. Employee may designate and
--------------------------
from time to time change the Beneficiary only by giving a written, signed
designation to Employer's Corporate Secretary pursuant to paragraph 6.6.
6.4.2 Elections. Whenever this Contract provides for any option
---------
or election by Employee or the Beneficiary, the option shall be exercised or the
election made solely by the person or persons receiving payments pursuant to
this Contract at that time, and shall be made in that Person's sole discretion
and without regard to the effect of the decision on subsequent recipients of
payments. Such decision by such Person shall be final and binding on all
subsequent recipients of payments.
6.5 Arbitration. If any controversy, question or dispute arises out
-----------
of or relating to the construction, application or enforcement of this Contract,
it shall be settled by arbitration as follows:
6.5.1 Appointment of Arbitrators. Within five days after the
--------------------------
delivery of written notice of any such dispute from one to the other, Employer
and Employee shall each appoint one person to hear and determine the dispute,
and, if the two persons so selected are unable to agree on its resolution with
ten (10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.
10
<PAGE>
6.5.2 Finality. The determination of a majority of the
--------
arbitrators shall be final and conclusive on Employee and Employer.
6.5.3 Rules. The arbitration shall be conducted in accordance
-----
with the rules of the American Arbitration Association, and judgment on any
award rendered by the arbitrators may be entered in any court having
jurisdiction.
6.5.4 Discovery. The parties shall be entitled to avail
---------
themselves of all discovery procedures available in civil actions in the State
of Nevada.
6.6 Notices. Any notice provided for by this Contract and any other
-------
notice, demand, designation or communication which either party may wish to send
to the other (the "Notices") shall be in writing and shall be deemed to have
been properly given if served by (i) personal delivery, (ii) registered or
certified mail, return receipt requested, in a sealed envelope, postage and
other charges prepaid, or (iii) telegram, telecopy, telex, facsimile or other
similar form of transmission followed by delivery pursuant to clause (i) or
(ii), in each case addressed to the party for which such notice is intended as
follows:
If to Employer:
Executive Vice President--Administration
Community Psychiatric Centers
6600 West Charleston Blvd., Suite 118
Las Vegas, NV 89102
FAX: (702) 259-3650
If to Employee:
Wendy Simpson
Community Psychiatric Centers
6600 West Charleston Blvd., Suite 118
Las Vegas, NV 89102
FAX: (702) 259-3650
6.6.1 Change of Address. Any address or name specified in this
-----------------
paragraph 6.6 may be changed by a Notice given in accordance with this paragraph
6.6.
6.6.2 Effective Date of Notice. All Notices shall be given and
------------------------
effective as of the date of personal delivery thereof or the date of receipt set
forth on the return receipt. The inability to deliver because of a changed
address of which no Notice was given, or rejection or other refusal to accept
any Notice shall be deemed to be the receipt of the Notice as of the date of
such inability to deliver or rejection or refusal to accept.
11
<PAGE>
6.7 Governing Law; Jurisdiction. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of Nevada as that State is
presently constituted. Employer hereby consents and submits to the jurisdiction
of the state and federal courts in Nevada in any suit for the enforcement or
construction of or otherwise arising out of this Contract.
IN WITNESS WHEREOF, this Contract has been executed and delivered by
the parties as of the date first set forth above.
EMPLOYEE
/s/ Wendy Simpson
-----------------------------------------
Wendy Simpson
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Richard L. Conte
--------------------------------------
Richard L. Conte
--------------------------------------
[Print Name]
12
<PAGE>
EXHIBIT 10.8
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Contract"), dated as of June 1, 1994,
is made between COMMUNITY PSYCHIATRIC CENTERS, a Nevada Corporation ("CPC") and
RONALD L. OOLEY, an individual ("Employee").
R E C I T A L S
---------------
A. CPC employs Employee pursuant to an oral agreement.
B. CPC desires to revise the terms of and continue Employee's employment,
and Employee desires to continue in CPC's employment.
NOW THEREFORE, Employee and CPC agree as follows:
1. Definitions. As used in this Contract, the following terms have the
-----------
following meanings:
1.1 Beneficiary. "Beneficiary" means any Person or Persons
-----------
designated from time to time by Employee pursuant to paragraph 6.5.1.
1.2 Board. "Board" means the Board of Directors of CPC.
-----
1.3 Change of Control. "Change of Control" means a change of control
-----------------
that would be required to be reported pursuant to Item 6(e) of Schedule 14A of
Rule 14 under the Exchange Act; and, without limitation of the foregoing clause,
such a change of control shall be deemed to have occurred if (i) any Person is
or becomes the beneficial owner (as defined in Rule 13d-3 under the Exchange
Act), directly or indirectly, of securities of CPC representing 20% or more of
the combined voting power of CPC's then outstanding securities, or (ii) during
any twenty-four-month period during the Employment Term, individuals who at the
beginning of such period constitute the Board cease for any reason to constitute
at least a majority thereof, unless the election of each director who was not a
director at the beginning of such period has been approved in advance by
directors representing at least four-fifths of the directors then in office who
were directors at the beginning of such twenty-four-month period. However, a
Change of Control does not include a distribution to CPC's shareholders of stock
of any subsidiary or a purchase of securities or assets of CPC by a group
controlled by directors or executive officers of CPC.
1.4 Code. "Code" means the Internal Revenue Code of 1986 as amended.
----
<PAGE>
1.5 Commission. "Commission" means the Securities and Exchange
----------
Commission.
1.6 Compete. "Compete" means either directly or indirectly to own,
-------
initiate, manage, operate, join, control, advise, consult with or participate in
the ownership, operation, management or control (other than as a shareholder
owning less than five percent (5%) of the capital stock of any entity, the
shares of which are traded on a national exchange) of any business similar to
the Existing Businesses or the Proposed Businesses within the United States, the
United Kingdom or any foreign country in which Existing or Proposed Businesses
are located, or to lease or sell real or personal property to any such business.
1.7 Confidential Information. "Confidential Information" means
------------------------
1.7.1 Locations. Data regarding location of proposed and
---------
existing hospitals, facilities and buildings;
1.7.2 Markets. Market surveys, studies and analyses;
-------
1.7.3 Personnel. Information concerning the identity, location
---------
and qualifications of professionals and employees, existing and prospective;
1.7.4 Referrals. Information concerning referral sources;
---------
1.7.5 Reimbursement. Information concerning reimbursement
-------------
sources, insurers and other third-party payors and related procedures;
1.7.6 Legal and Regulatory. Tabulated and organized information
--------------------
concerning legislative, administrative, regulatory and zoning requirements,
bodies, procedures and officials;
1.7.7 Medical and Personnel Records. Medical and personnel
-----------------------------
records;
1.7.8 Data. Statistical, financial, cost and accounting data;
----
1.7.9 Patient and Customer Lists. Existing and prospective
--------------------------
patient and customer lists; and
1.7.10 Manuals. Administrative, operations and procedure
-------
manuals and directives.
2
<PAGE>
1.7.11 Ideas. Business ideas pertaining to any Existing or Proposed
-----
Businesses. Business ideas include, but are not limited to, ideas, concepts or
proposals that are conceived, developed or implemented by or communicated to
Employee.
1.8 Employment Term. "Employment Term" means the period commencing
---------------
June 1, 1994 and continuing for a period of three (3) years ending May 31, 1997
unless earlier terminated pursuant to paragraph 5.
1.9 Exchange Act. "Exchange Act" means the Securities Exchange Act
------------
of 1934, as amended.
1.10 Existing Businesses. "Existing Businesses" means the following
-------------------
businesses in which CPC is currently engaged in the United States and the United
Kingdom:
1.10.1 Dialysis. Ownership, operation and management of
--------
facilities and businesses which provide hemodialysis services and treatments to
patients with chronic or acute kidney diseases or conditions;
1.10.2 Psychiatric Hospitals. Ownership and operation of acute
---------------------
psychiatric hospitals, medical office buildings and pharmacies and related
facilities;
1.10.3 Substance Abuse. Ownership and operation of facilities
---------------
which provide chemical, drug and alcohol dependency treatment and services;
1.10.4 Transitional Care. Ownership and operation of
-----------------
transitional care facilities which provide medically complex treatment to
patients with long-term acute and subacute illnesses;
1.10.5 Patient Care. Provision of inpatient, outpatient,
------------
residential, partial hospitalization and home psychiatric mental health and
substance abuse services and treatment.
1.11 Fiscal Year. "Fiscal Year" means CPC's annual accounting period
-----------
for financial accounting and reporting purposes, which on the date hereof is the
period from each December 1 to and including the next following November 30.
1.12 Permanent Disability. "Permanent Disability" means any mental
--------------------
or physical illness, disease or condition which in the opinion of an
independent, duly licensed physician will or does result in Employee's inability
to perform his duties during normal working hours for six months.
1.13 Person. "Person" means any individual, corporation,
------
partnership, business trust, joint venture, association, joint stock company,
trust, unincorporated organization or government or agency or political
subdivision thereof.
3
<PAGE>
1.14 Prior Contracts. "Prior Contracts" means the following
---------------
employment contracts between Employee and CPC: None.
1.15 Proposed Businesses. "Proposed Businesses" means businesses
-------------------
other than and whether or not related to Existing Businesses in which CPC may
from time to time be or plan to be engaged.
1.16 Salary. "Salary" means Two Hundred Thousand Dollars ($200,000)
------
per Fiscal Year, as adjusted from time to time pursuant to paragraph 3.1.1; and
does not include any bonuses or other employment benefits or remuneration paid
or payable by CPC to Employee.
2. Employment and Duties. During the Employment Term, CPC shall employ
---------------------
Employee and Employee shall serve CPC as its Executive Vice President,
Administration, or in such other capacity as may be designated from time to time
by CPC's Chief Executive Officer or Board. During the Employment Term, Employee
shall devote his full productive time, energies and abilities to the business of
CPC under the authority of the Chief Executive Officer and the Board.
3. Compensation and Benefits.
-------------------------
3.1 Salary. During the Employment Term, CPC shall pay the Salary to
------
Employee in equal monthly or more frequent installments in accordance with CPC's
general practice and subject to legally required withholdings.
3.1.1 Salary Review. The Salary for any Fiscal Year commencing
-------------
after December 1, 1993 shall be subject to annual review by the Board, but in no
event shall the Salary be reduced below the greater of the amount specified in
paragraph 1.16 or the Salary most recently determined by the Board pursuant to
this paragraph 3.1.1. Employee understands that the requirement of annual
review by the Board shall not be construed in any manner as an express or
implied agreement by CPC to raise the Salary.
3.2 Expense Reimbursement. During the Employment Term, CPC shall
---------------------
promptly reimburse Employee, upon submission to CPC by Employee of adequate
documentation, for all reasonable out-of-pocket expenses respecting
entertainment, travel, meals, hotel accommodations and other like-kind expenses,
in each case incurred by Employee in the interest of CPC's business and
consistent with CPC's policies.
3.3 Group Insurance. During the Employment Term, CPC shall provide
---------------
group life insurance, group travel and accident insurance and group medical,
dental and hospital insurance to Employee in the amount and on the terms such
insurance is made available to other senior executives of CPC with the same
status or in the same category.
4
<PAGE>
3.4 Profit Sharing Plan. During the Employment Term, Employee shall
-------------------
be a participant in CPC's Profit Sharing Plan if he otherwise meets the
participation requirements.
3.5 Other Benefits. During the Employment Term by mutual agreement
--------------
with CPC, Employee may participate in employment benefits made available to
other senior executives of CPC with the same status or in the same category;
provided, however, that this Contract itself shall neither prevent nor compel
such participation.
4. Protection of Business Information; Noncompetition; Nonsolicitation.
-------------------------------------------------------------------
4.1 Nondisclosure.
-------------
4.1.1 Confidential Information. In the operation and expansion
------------------------
of the Existing Businesses and in the planning and development of the Proposed
Businesses, CPC has generated and will generate Confidential Information which
is and will be proprietary and confidential and the disclosure of which would be
extremely detrimental to CPC and of great assistance to its competitors.
4.1.2 Information Held as a Fiduciary. All of the Confidential
-------------------------------
Information which is acquired by, communicated to or in any way comes into the
possession or control of Employee shall be held by Employee in a fiduciary
capacity for the exclusive benefit of CPC.
4.1.3 Nondisclosure Covenant. Employee shall not disclose any
----------------------
Confidential Information to any person, without the consent of CPC.
4.1.4 Exemptions. The restrictions set forth in this paragraph
----------
4.1 shall not apply to any part of the Confidential Information which: (i) is or
becomes generally available to the public or publicly known other than as a
result of disclosure in breach of any obligation of confidentiality; (ii)
becomes available to Employee on a nonconfidential basis from a source other
than CPC or its agents or affiliates; (iii) is disclosed pursuant to the
requirement of a governmental agency or court of competent jurisdiction or as
otherwise required under applicable law; or (iv) was otherwise known or
available to Employee without any obligation of confidentiality.
4.1.5 Following Employment. Upon termination of this Agreement,
--------------------
Employee shall promptly relinquish and return to CPC all Confidential
Information and all files, correspondence, memoranda, diaries and other records,
minutes, notes, manuals, papers and other documents and data, however prepared
or memorialized, and all copies thereof, belonging to or relating to the
business of CPC, that are in Employee's custody or control whether or not they
contain Confidential Information.
5
<PAGE>
4.2 Noncompetition Covenant. During the Employment Term and for a
-----------------------
period of one and one-half (1.5) years thereafter, Employee shall not compete or
plan or prepare to compete with CPC.
4.3 Nonsolicitation Covenant. Employee shall not solicit other
------------------------
employees, independent contractors, customers, referral sources or reimbursement
sources of CPC for use or employment other than in the Existing or Proposed
Businesses.
4.4 Scope and Duration; Severability. CPC and Employee understand
--------------------------------
and agree that the scope and duration of the covenants contained in this
paragraph 4 are reasonable both in time and area and are fairly necessary to
protect the business of CPC. Nevertheless, it is further agreed that such
covenants shall be regarded as divisible and shall be operative as to time and
area to the extent that they may be made so operative and, if any part of them
is declared invalid or unenforceable, the validity and enforceability of the
remainder shall not be affected.
4.5 Injunction. Employee understands and agrees that, due to the
----------
highly competitive nature of the health care industry, the breach of any of the
covenants set out in paragraphs 4.1.3, 4.2 and 4.3 will cause irreparable injury
to CPC for which it will have no adequate monetary or other remedy at law.
Therefore, CPC shall be entitled, in addition to such other remedies as it may
have hereunder, to a temporary restraining order and to preliminary and
permanent injunctive relief for any breach or threatened breach of the covenants
without proof of actual damages that have been or may be caused hereby. In
addition, CPC shall have available all remedies provided under state and federal
statutes, rules and regulations as well as any and all other remedies as may
otherwise be contractually or equitably available.
4.6 Assignment. Except as provided in paragraphs 5.2.4 and 5.2.5,
----------
Employee agrees that the covenants contained in paragraph 4 shall inure to the
benefit of any successor or assign of CPC with the same force and effect as if
such covenants had been made by Employee with such successor or assign.
5. Termination. This Contract shall be terminated before the end of the
-----------
Employment Term for the reasons set out in paragraph 5.1, in each case with the
consequences set out in paragraph 5.2.
5.1 Grounds for Termination.
-----------------------
5.1.1 By CPC. This Contract may be terminated by CPC at any
------
time on 30 days written notice to Employee, for any of the following reasons:
(a) Breach. Breach of any material provision of this Contract by
------
Employee or his breach or gross neglect of or failure to perform his duties as
employee of CPC;
6
<PAGE>
(b) Cause. For cause;
-----
(c) Permanent Disability. Employee's Permanent
--------------------
Disability.
5.1.2 Termination by Employee. This Contract may be terminated
-----------------------
by Employee at any time upon thirty (30) days' written notice for any of the
following reasons:
(a) Breach. Breach of any material provision of this Contract by CPC
------
which is not remedied within thirty days after written notice specifying such
breach in reasonable detail;
(b) Change of Control. A Change of Control; provided, however, that
-----------------
termination pursuant to this 5.1.2(b) shall be effective if and only if Employee
gives CPC written notice of such termination within one year after such Change
of Control;
(c) Permanent Disability. Employee's Permanent
--------------------
Disability.
5.1.3 Termination upon Death. This Contract shall terminate
----------------------
immediately upon the death of Employee.
5.2 Effect of Termination. If this Contract is terminated pursuant
---------------------
to paragraph 5.1, the parties shall have the following rights and obligations:
5.2.1 By CPC for Breach or Cause. If this Contract is
--------------------------
terminated by CPC pursuant to paragraphs 5.1.1(a) or (b), Employee shall not
have the right or obligation to perform the services described in paragraph 2.1,
nor shall Employee have the right to receive the Salary or any other
compensation or benefits described in paragraph 3 after the date of termination;
but Employee shall be obligated to CPC as provided in paragraph 4, and CPC shall
have all remedies available at law or in equity.
5.2.2 By CPC or Employee upon Permanent Disability. If this
--------------------------------------------
Contract is terminated by CPC or Employee pursuant to paragraph 5.1.1(c), or
5.1.2(c), (i) Employee shall thereafter have the obligations described in
paragraph 4, and (ii) CPC shall (A) pay to Employee or his Beneficiary, within
sixty (60) days after such termination, the Salary for the ninety (90) days
immediately following the date of termination, (B) continue to have the
obligations described in paragraphs 3.3 and 3.5, but only to the extent those
benefits are available under the plans then in effect, and (D) sell to Employee,
at his option, at its net book value, any automobile then being provided to him
which is owned by CPC.
5.2.3 Death. If Employee dies, CPC shall (i) within sixty (60)
-----
days pay the Salary to the date of his death if he dies during the Employment
Term and (ii) pay or continue for the
7
<PAGE>
benefit of the Beneficiary such other benefits as may be due pursuant to
paragraphs 3.3 and 3.5.
5.2.4 By Employee for Breach. If this Contract is terminated by
----------------------
Employee pursuant to paragraph 5.1.2(a), he shall not have any further
obligation to CPC under paragraphs 2 and 4, and CPC shall (i) pay to him, within
sixty (60) days after such termination, the aggregate Salary for the twenty-four
(24) months immediately following the date of termination, and (ii) continue to
have the obligations described in paragraphs 3.3 and 3.5, but only to the extent
those benefits are available under those plans as then in effect. Employee
shall have all remedies available at law or in equity and shall have no duty to
mitigate his damages.
5.2.5 By Employee upon Change of Control. If there is a Change
----------------------------------
of Control and
(a) Termination. This Contract is terminated by Employee
-----------
pursuant to paragraph 5.1.2(b),
(i) Payments. CPC shall, within 30 days after the effective date of
--------
such termination, pay to him (A) the aggregate Salary for the twenty-four (24)
months immediately following the date of termination, plus (B) all other
compensation and benefits remaining to be paid to him under this Contract.
(ii) Automobile. Employee shall have the option to purchase at net
----------
book value any automobile then provided to him which is owned by CPC; and
(iii) Release of Employee Obligations. Employee shall not be obligated
-------------------------------
to perform any duties under paragraph 2.1, any obligations under paragraph 4 or
any other duty, obligation or covenant under this Contract or as an employee of
CPC.
(b) No Termination; Vesting of Options, etc. Whether or not Employee
---------------------------------------
terminates this Contract pursuant to paragraph 5.1.2(b), all stock options and
related stock appreciation rights, restricted stock, contingent bonuses or
payments and similar deferred benefits held by Employee shall vest and become
exercisable immediately upon a Change of Control, and any restrictions on shares
of stock of CPC or on stock units that were awarded to Employee under any plan
or arrangement maintained by CPC for his benefit shall lapse upon the occurrence
of such an event.
5.3 Withholding. Anything in this Contract to the contrary
-----------
notwithstanding,
5.3.1 Withholding. All payments required to be made to Employee
-----------
or the Beneficiary under this Contract shall be subject to the withholding of
such amounts, if any, for income and
8
<PAGE>
other payroll taxes and deductions as CPC may reasonably determine should be
withheld pursuant to any applicable law or regulation.
5.4 Exercise of Options. Notwithstanding anything in Employee's
-------------------
stock option agreements with CPC, Employee may exercise all of his or her vested
stock options within seven (7) days after termination for any reason of his or
her employment hereunder.
6. Miscellaneous.
-------------
6.1 Prior Contracts Null and Void; Mutual Release. CPC and Employee
---------------------------------------------
agree that upon execution and delivery of this Contract by each of them, the
Prior Contracts, if any, shall terminate and be deemed null and void, and shall
have no further force or effect. CPC and Employee each releases and forever
discharges the other and each of their respective officers, directors,
employees, agents, representatives, successors and assigns from all claims,
demands, suits, obligations, liabilities, damages, debts, losses and injuries of
whatever nature heretofore or hereafter arising, except for sums due and unpaid
on May 31, 1994 (collectively, "Claims"), which either may have against the
other arising out of the Prior Contracts. The release provided for in the
preceding sentence extends to all unknown, unforeseen, unanticipated and
unsuspected Claims, and the provisions of all laws providing in substance that
releases do not extend to Claims unknown or unsuspected to exist at the time a
release is executed are hereby expressly waived by both parties and, without
limitation, both parties expressly waive all rights and benefits either of them
may now or in the future may have under the provisions of Section 1542 of the
Civil Code of the State of California which provides as follows:
"A general release does not extend to claims which the creditor
does not know or suspect to exist in his favor at the time of
executing the release, which if known by him must have materially
affected his settlement with the debtor."
6.2 Assignment by CPC. Subject to paragraphs 5.2.4 and 5.2.5, this
-----------------
Contract shall be binding upon and shall inure to the benefit of any successors
or assigns of CPC. As used in this Contract, the term "successor" includes any
Person or combination of Persons acting in concert which at any time in any form
or manner acquires all or substantially all of the assets or business or more
than twenty percent (20%) of the voting stock of CPC or any succession which
results from a Change of Control.
6.3 Nonassignability by Employee. Neither Employee nor any
----------------------------
Beneficiary shall assign, transfer, pledge or hypothecate any rights, interests
or benefits created hereunder or hereby. Any attempt to do so contrary to the
provisions of this Contract, and
9
<PAGE>
any levy of any attachment, execution or similar process created thereby, shall
be null and void and without effect.
6.4 Spendthrift Provision. Prior to actual receipt by Employee or
---------------------
the Beneficiary, as the case may be, no right or benefit under this Contract
and, without limitation, no interest in any payment hereunder shall be:
6.4.1 Anticipation. Anticipated, assigned or encumbered or
------------
subject to any creditor's claim or subject to execution, attachment or similar
legal process, or
6.4.2 Liability for Debts; Claims. Applied on behalf of or
---------------------------
subject to the debts, contracts, liabilities or torts of the Person entitled or
who might become entitled to such benefits, or subject to the claims of any
creditor of any such Person.
6.5 Beneficiary; Recipients of Payments; Designation of Beneficiary.
---------------------------------------------------------------
The Salary, the proceeds of the life insurance policy described in paragraph 3.4
and other compensation and benefits payable by CPC pursuant to this Contract
shall be made only to Employee during his lifetime or, in the event of his
death, to the Beneficiary. If Employee has not designated a Beneficiary, the
payments shall be made to his estate. CPC shall have no obligation to make
payments to any person not designated pursuant to paragraph 6.5.1 and shall be
discharged, defended and held harmless from any liability for payments actually
made to any Beneficiaries or to Employee's estate if no Beneficiaries have been
designated.
6.5.1 Designation of Beneficiary. Employee may designate and
--------------------------
from time to time change the Beneficiary only by giving a written, signed
designation to CPC's Corporate Secretary pursuant to paragraph 6.7.
6.5.2 Elections. Whenever this Contract provides for any option
---------
or election by Employee or the Beneficiary, the option shall be exercised or the
election made solely by the person or persons receiving payments pursuant to
this Contract at that time, and shall be made in that Person's sole discretion
and without regard to the effect of the decision on subsequent recipients of
payments. Such decision by such Person shall be final and binding on all
subsequent recipients of payments.
6.6 Arbitration. If any controversy, question or dispute arises out
-----------
of or relating to the construction, application or enforcement of this Contract,
it shall be settled by arbitration as follows:
6.6.1 Appointment of Arbitrators. Within five days after the
--------------------------
delivery of written notice of any such dispute from one to the other, CPC and
Employee shall each appoint one person to hear and determine the dispute, and,
if the two persons so selected
10
<PAGE>
are unable to agree on its resolution with ten (10) days after their
appointment, they shall select a third impartial arbitrator, and the three
arbitrators so selected shall hear and determine the dispute within sixty (60)
days thereafter.
6.6.2 Finality. The determination of a majority of the
--------
arbitrators shall be final and conclusive on Employee and CPC.
6.6.3 Rules. The arbitration shall be conducted in accordance
-----
with the rules of the American Arbitration Association, and judgment on any
award rendered by the arbitrators may be entered in any court having
jurisdiction.
6.6.4 Discovery. The parties shall be entitled to avail
---------
themselves of all discovery procedures available in civil actions in the State
of California, and, without limitation, Employee and CPC hereby incorporate
Section 1283.05 of the California Code of Civil Procedure into this Contract
pursuant to Section 1283.1 of that Code.
6.7 Notices. Any notice provided for by this Contract and any other
-------
notice, demand, designation or communication which either party may wish to send
to the other (the "Notices") shall be in writing and shall be deemed to have
been properly given if served by (i) personal delivery, (ii) registered or
certified mail, return receipt requested, in a sealed envelope, postage and
other charges prepaid, or (iii) telegram, telecopy, telex, facsimile or other
similar form of transmission followed by delivery pursuant to clause (i) or
(ii), in each case addressed to the party for which such notice is intended as
follows:
If to CPC:
Executive Vice President--Administration
Community Psychiatric Centers
24502 Pacific Park Drive
Laguna Hills, California 92656
FAX: (714) 831-0774
If to Employee:
Ronald L. Ooley
24502 Pacific Park Drive
Laguna Hills, California 92656
FAX: (714) 831-0774
6.7.1 Change of Address. Any address or name specified in this
-----------------
paragraph 6.6 may be changed by a Notice given by the addressee to the other
party in accordance with paragraph 6.6.
6.7.2 Effective Date of Notice. All notices shall be given and
------------------------
effective as of the date of personal delivery
11
<PAGE>
thereof or the date of receipt set forth on the return receipt. The inability to
deliver because of a changed address of which no Notice was given, or rejection
or other refusal to accept any Notice shall be deemed to be the receipt of the
Notice as of the date of such inability to deliver or rejection or refusal to
accept.
6.8 Governing Law; Jurisdiction. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of California as that
State is presently constituted. CPC hereby consents and submits to the
jurisdiction of the state and federal courts in California in any suit for the
enforcement or construction of or otherwise arising out of this Contract.
IN WITNESS WHEREOF, this Contract has been executed and delivered by
the parties as of the date first set forth above.
EMPLOYEE
/s/ Ronlad L. Ooley
---------------------------------------
Ronald L. Ooley
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Richard L. Conte
-----------------------------------
Richard L. Conte
-----------------------------------
[Print Name]
12
<PAGE>
EXHIBIT 10.9.1
SETTLEMENT AGREEMENT
This Settlement Agreement (the "Agreement"), dated as of February 19, 1996,
is made by and among Community Psychiatric Centers, Inc. ("CPC"), Kay Seim,
Richard Seim and Continuum Healthcare, Inc. ("Continuum").
RECITALS
A. In the course of reaching agreement on the terms of Kay Seim's
separation from CPC and amicably settling the differences between the parties, a
series of letters between the parties have been exchanged.
B. This Agreement is intended to definitively set forth that agreement; it
will summarize and supersede all oral and written communications that have taken
place to date.
C. The settlement will go into effect on the date that all parties have
signed this Agreement.
AGREEMENT
NOW, THEREFORE, the parties agree as follows:
1. Termination of Employment and Continuing Compensation. The effective
------------------------------------------------------
date of the termination of Kay Seim's employment by CPC was and is November 3,
1995. For settlement purposes only, CPC will continue to pay, on a regular bi-
weekly basis, the compensation (at the current rate) to which Kay Seim would
have been entitled for the remainder of the one-year renewal term ending on July
1, 1996, pursuant to Paragraph 3 of CPC's Employment Agreement with Kay Seim.
2. Employee Benefits. Kay Seim's medical insurance benefits will continue
------------------
through July 1, 1996 with COBRA availability thereafter. Any profit sharing and
401K funds may roll over. Unused and non-accrued vacation time for 1995 (six
weeks) will be paid. Outplacement services by Lee Hecht Harrison in Bellevue
will be paid for up to an amount of $12,000 by CPC for a period of one year
after the effective date of this settlement agreement.
3. Stock Options. Kay Seim will be entitled to exercise her vested stock
--------------
options until July 1, 1996. However, a "blackout period" will be in effect,
such that Kay Seim will be unable to trade during the blackout period until the
tenth (10th) day after CPC releases its 1995 10-K. Notwithstanding anything to
the contrary, Kay
PAGE 1
<PAGE>
Seim will be released from any "blackout" period on or before May 26, 1996. Kay
Seim has been and will continue to be responsible for ensuring that she is in
compliance with state and federal securities laws governing the exercise of
stock options and trading by corporate "insiders."
4. Office Space. Kay Seim will be entitled to continue to use her current
-------------
office through and including March 31, 1996. On or before that date, Kay Seim
will be able to purchase the furniture, furnishings and equipment from that
office listed in Attachment A for a total price of $2,500.
5. Repayment of Home Equity Loan and Sale of Las Vegas Residence. CPC
--------------------------------------------------------------
will provide Kay Seim with the opportunity to sell her Las Vegas residence until
July 1, 1996. The unpaid remainder of the $300,000 home equity loan that CPC
made to Kay Seim, pursuant to Paragraph 3 of the Addendum to Employment
Contract, plus closing and carrying costs will be repaid from the proceeds of
the sale of the property, with Kay Seim retaining the balance of the proceeds of
sale. In the meantime, Kay Seim will continue to pay the principal and interest
due and comply with all terms of the loan documents.
If the residence is not sold by July 1, 1996 or Kay Seim, at her option,
has not repaid the CPC Loan, CPC will list and sell the property at its sole and
absolute discretion. CPC will initially list the property at its fair market
value, as determined by CPC. Once the property is sold by CPC, Kay Seim will be
paid any proceeds in excess of the remaining loan amount, carrying costs and
expenses associated with the sale transaction.
In order to facilitate the sale of the property by CPC if the property has
not already been sold by Kay Seim or, at Kay Seim's option, she has not repaid
the CPC loan, in each case by July 1, 1996, Kay Seim agrees to provide a grant
deed (deeding the property to CPC) and escrow instructions to Nevada Title no
later than February 28, 1996. Pursuant to the escrow instructions, the escrow
agent will deliver the deed to CPC on July 2, 1996, if Kay Seim has not already
sold the property or repaid the CPC loan by July 1, 1996. Similarly, pursuant
to the escrow instructions, the escrow agent will return the deed to Kay Seim if
she sells the property or repays the CPC loan by July 1, 1996.
6. No Conflict of Interest. In light of the fact that Continuum is
------------------------
referenced in the Addendum to Employment Agreement as not placing Kay Seim in a
conflict of interest, CPC acknowledges that Kay Seim's post-employment
involvement with Continuum will not violate any of her continuing obligations
under Paragraph 6.6 of the Employment Agreement, which shall otherwise be in
effect, with the exception of
PAGE 2
<PAGE>
Paragraph 6.6.7 of that Agreement, which hereafter shall be null, void and
unenforceable.
7. CPC Lease of Space to Continuum. CPC will provide Continuum the
--------------------------------
opportunity to lease space at CPC Fairfax Hospital in Kirkland, Washington.
Continuum is not obligated to enter into such a lease, however. CPC will agree
to a five-year lease term with five one-year renewal options. CPC will have the
ability to terminate the lease under certain circumstances including, but not
limited to, the following: (1) the closure or sale of CPC Fairfax Hospital;
provided that CPC shall be required to provide Continuum with 120 days notice of
such a termination following consummation of an agreement to sell CPC Fairfax
Hospital or a decision to close the hospital; (2) a material change in the stock
ownership of Continuum; (3) a material breach of the lease by Continuum; (4) a
failure by Continuum to obtain or maintain insurance or necessary licenses,
permits or certification for the use; or (5) bankruptcy or insolvency of
Continuum. the rental fee under the lease will be $750.00 per month per bed,
exclusive of "hotel services." These services, as well as others, will be made
available by CPC to Continuum on a cost plus 10% basis.
Unless prohibited by federal or state law and in connection with such a
lease, CPC will transfer the existing Residential Treatment Center ("RTC")
business within CPC Fairfax Hospital to Continuum and will agree not to conduct
an RTC facility in western Washington State. CPC will provide reasonable
assistance to Continuum in employing CPC employees currently working on the RTC
unit at CPC Fairfax Hospital. CPC will provide reasonable cooperation in the
CHAMPUS certification process. CPC will also provide reasonable cooperation to
Continuum in Continuum obtaining any necessary licensing and accreditation. To
the extent that Continuum does not obtain the appropriate licensing and
accreditation, this Paragraph will be of no force and effect.
Any lease entered into pursuant to this paragraph must be executed no later
than March 10, 1996 with additional standard terms agreeable to all parties for
a commencement date of thirty (30) days form execution. Continuum will bear
responsibility and cost for preparation and submission of the lease, and, any
and all amendments required.
8. Adjustments With Continuum. Any bad debt which was accrued by CPC
---------------------------
Fairfax Hospital for RTC receivables while the Continuum/CPC Memorandum of
Understanding was in effect will be shared with Continuum on a 50/50 basis. In
addition, if CPC did not bill CHAMPUS for educations services during the course
of the relationship under the Memorandum of Understanding, then to the extent
legally permissible CPC shall so invoice Champus and any revenues collected from
subsequent billings for that period will be shared with Continuum on a 50/50
basis.
PAGE 3
<PAGE>
9. Releases. In consideration of CPC's promises and releases, Kay Seim,
---------
Richard Seim, and Continuum, on behalf of themselves and their shareholders,
employees, officers, directors, agents, attorneys, subsidiaries, successors and
assigns ("Kay Seim's, Richard Seim's, and Continuum's Affiliates"), fully,
finally and forever release, forgive and discharge CPC and CPC's shareholders,
employees, officers, directors, agents, attorneys, subsidiaries, successors and
assigns ("CPC's Affiliates") from all rights, claims, suits and actions that Kay
Seim, Richard Seim, Continuum and/or their Affiliates now have against CPC
and/or CPC's Affiliates arising out of any act, event or omission of any nature
whatsoever occurring prior to the effective date of this settlement agreement.
It is the intention of Kay Seim, Richard Seim, and Continuum that this
agreement shall be a complete and final resolution of all disputes between
theses parties. Kay Seim, Richard Seim, and Continuum agree not to bring any
claim, action, suit, arbitration or other proceeding against CPC or CPC's
Affiliates regarding or related in any manner to any claim released herein.
Kay Seim, Richard Seim, and Continuum acknowledge and agree that this
release applies to all claims for injuries, costs, expenses, damages or losses
that Kay Seim, Richard Seim, Continuum and/or their Affiliates may have against
CPC or CPC's Affiliates whether known or unknown, foreseen or unforeseen, patent
or latent. Kay Seim, Richard Seim, and Continuum acknowledge that they intend
to waive all claims for damages that may exist as of the effective date of this
settlement agreement but which Kay Seim, Richard Seim, Continuum or their
Affiliates do not know exist and which, if known, would have materially affected
their decision to execute this release, regardless of whether the lack of
knowledge was the result of ignorance, oversight, error, negligence or any other
cause.
In consideration of Richard Seim's and Continuum's promises and releases,
CPC, on behalf of itself and CPC's Affiliates, fully, finally and forever
releases, forgives and discharges Richard Seim and Continuum and their
Affiliates from all rights, claims, suits and actions that CPC or CPC's
Affiliates now have against them arising out of any act, event or omission of
any nature whatsoever occurring prior to the effective date of this settlement
agreement.
It is the intention of CPC that this agreement be a complete and final
resolution of all disputes between (i) CPC and CPC's Affiliates and (ii) Richard
Seim, Continuum and their Affiliates. CPC on behalf of itself and the CPC's
Affiliates agrees not to bring any claim, action, suit, arbitration or other
proceeding against Richard Seim, Continuum and their Affiliates regarding or
related in any manner to any claim released herein.
PAGE 4
<PAGE>
CPC acknowledges and agrees that this release applies to all claims for
injuries, costs, expenses, damages or losses that CPC and/or CPC's Affiliates
may have against Richard Seim, Continuum and their Affiliates whether known or
unknown, foreseen or unforeseen, patent or latent. CPC acknowledges that it
intends to waive all claims for damage that may exist as of the effective date
of this settlement agreement but which CPC and/or CPC's Affiliates do not know
exist and which, if known, would have materially affected their decision to
execute this release, regardless of whether the lack of knowledge was the result
of ignorance, oversight, error, negligence or any other cause.
For avoidance of doubt, Kay Seim shall not be considered an Affiliate of
Richard Seim or Continuum for purposes of the preceding three paragraphs; rather
the release applicable to Kay Seim is set forth below.
In consideration of Kay Seim's promises and release, CPC, on behalf of
itself and CPC's Affiliates, fully, finally and forever releases, forgives and
discharges Kay Seim from all rights, claims, suits and actions that CPC or CPC's
Affiliates now have against her arising out of any act, event or omission of any
nature whatsoever occurring prior to the effective date of this settlement
agreement; provided, however, that CPC and CPC's Affiliates reserve the right,
and the foregoing release shall not release, forgive or discharge any right,
claim, suit or action of CPC or CPC's Affiliates, to make or bring a claim, suit
or action against Kay Seim to seek contribution, seek indemnity or to otherwise
make a claim over against her solely with respect to and only to the extent of
damages sought by a third party in a claim, suit or action against CPC or CPC's
Affiliates arising out of any reckless or intentional misconduct of Kay Seim
("Kay Seim Third Party Claims").
It is the intention of CPC that, except for the Kay Seim Third Party
Claims, this agreement will be a complete and final resolution of all disputes
between (i) CPC and CPC's Affiliates and (ii) Kay Seim. Without limiting their
rights with regard to Kay Seim Third Party Claims, CPC on behalf of itself and
the CPC's Affiliates agrees not to bring any claim, action, suit, arbitration or
other proceeding against Kay Seim regarding or related in any manner to any
claim released herein.
CPC acknowledges and agrees that, except for the Kay Seim Third Party
Claims, this release applies to all claims for injuries, costs, expenses,
damages or losses that CPC and/or CPC's Affiliates may have against Kay Seim,
whether known or unknown, foreseen or unforeseen, patent or latent. CPC
acknowledges that, except for the Kay Seim Third Party Claims, it intends to
waive all claims for damage that may exist as of the effective date of this
settlement agreement but which CPC and/or CPC's Affiliates do not know exist and
which, if known, would have materially affected their decision to execute this
release, regardless of whether the lack of
PAGE 5
<PAGE>
knowledge was the result of ignorance, oversight, error, negligence or any other
cause.
10. Governing Law. This settlement agreement shall be governed by and
--------------
construed in accordance with the laws of the State of Nevada.
11. Entire Agreement. This agreement contains all of the terms and
-----------------
conditions agreed upon by the parties with reference to the subject matter
herein. No other agreements, written or oral, shall be deemed to exist or to
bind any of the parties and all prior agreements, understandings and
representations are merged herein and are superseded by the language of this
agreement. This agreement cannot be modified or changed except in a writing
signed by all parties.
12. Opportunity to Consult Counsel. All parties to this agreement have
-------------------------------
carefully considered its terms and have had the opportunity to consult with
counsel.
13. Cooperation. The parties agree that each of them will sign any and
------------
all additional documents (e.g., escrow instructions) necessary to effectuate the
terms of this settlement agreement. In addition, Kay Seim agrees to cooperate
with CPC and its attorneys in connection with any ongoing legal matters in which
she may be a witness (e.g., by preparing for and attending depositions).
14. Name and Reputation. The parties promise to refrain from engaging,
--------------------
directly or indirectly, in any action or omission which is, or is likely to be,
detrimental to the reputation or goodwill of any other party or any of
directors, officers, owners, employees, related or affiliated entities of any
other party.
PAGE 6
<PAGE>
15. Confidentiality. The parties agree not to disclose the terms and
----------------
conditions of this Agreement to any person or entity not a party hereto except
members of Kay Seim's and Richard Seim's immediate family and legal advisors who
shall be informed of and bound by this confidentiality provisions, unless such
communication is required by law or is necessary to comply with the law (e.g.,
communications to a tax preparer for purposes of submitting an income tax return
to the Internal Revenue Services), except to the extent such disclosure is
necessary to enforce the terms of this Agreement.
/s/ Kay Seim COMMUNITY PSYCHIATRIC CENTERS, INC.
- ----------------------------
Kay Seim
/s/ Richard Seim By: /s/ Ronald L. Ooley
- ---------------------------- Title Executive Vice President
Richard Seim
CONTINUUM HEALTHCARE, INC.
By: /s/ Richard Seim
Richard Seim, President
PAGE 7
<PAGE>
ATTACHMENT A
Items to be purchased from Kay Seim's
Office Inventory
<TABLE>
<CAPTION>
ITEM MODEL # SERIAL #
------ --------- ----------
<S> <C> <C>
Silver Reed electronic typewriter(1) EX-66 861014833
Clauson sideboard(1) C14 14/T
Clauson sideboard(1) C14 14/T
Skovby round dining table(1) S27 Rs18/T
Noleo 3-piece desk(2) No7 327/T
Executive high back office chair(1) V11 323/bk
Kebe gamma visitor chair(4) DO1 291/T
Westergaard printer stand(1) WO2 60-70/T
Pitney-Bowes fax machine(1) 8000 6446496
20 page memory for fax(1)
Hewlett Packard laser jet printer Laser Jet III 3104JE0375
with toner cartridge and cord(1)
Lainer desktop microcassette transcriber(1) 413-1000 2238652
Westergaard bookcase with doors(1)
Toshiba Laptop computer, 8 meg. T4400C 11217707
120 mb hard drive, mouse, carrying case
and battery pack(1)
Dell 486/33 computer(1) 486P/33 1TC2M
Dell ultrascan monitor VC5 22901709(V)
Lotus 123 3
Word Perfect 5.1
Windows 3.1
DOS 5
Central Point Backup
Central Point Anti-Virus
HP/IP Plus Laser Printer(1) HP/IP Plus 3203J413JZ
Meg memory upgrade
Plain paper Fax Machine by HP(1) FAX-950 JPA4106633
Lanier Copier with doc feeder, sorter 6725 311107
and 20 bin(1) S-2035A 503074
Lanier desktop transcriber(1) P120 6295734
Teak hutch for computer desk be Faarup 706/T
Oak bookcase(1)
Gray leather desk chair(1)
Burgandy/oak side chairs(2)
Fellows paper shredder(1)
Sanyo refrigerator(1)
Burgandy armless stacking chairs(6)
Oak corner table with water damage(1)
Hon 4 drawer gray file cabinet(1)
Hon 2 drawer gray file cabinet(1)
Blue side chairs(6)
Hon 4 drawer file cabinets(3)
Lamps(5)
</TABLE>
TOTAL PURCHASE PRICE: $2500.
PAGE 8
<PAGE>
Exhibit 10.14.1
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS SECOND AMENDMENT TO CREDIT AGREEMENT is made and dated as of June
7, 1995 (the "Amendment") among Community Psychiatric Centers, a Nevada
corporation ("CPC", CPC and its Subsidiaries herein being collectively referred
to as the "Company"), Transitional Hospitals Corporation, a Delaware corporation
("THC"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION ("Bank")
and amends that certain Credit Agreement dated as of September 20, 1993, as
amended by the First Amendment to Credit Agreement dated as of May 6, 1994 (as
so amended or modified from time to time, the "Credit Agreement").
RECITAL
-------
The Company has requested, and the Bank has agreed, on the terms and
conditions set forth herein, to amend the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Terms. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein. All references to the Credit
Agreement shall mean the Credit Agreement as hereby amended.
2. Amendment to Credit Agreement.
2.1 Section 7.04(e) of the Credit Agreement is amended by deleting
"$5,000,000" and inserting "$10,000,000" in lieu thereof.
3. Representations and Warranties. The Company represents and warrants
to Bank that, on and as of the date hereof, and after giving effect to this
Amendment:
3.1 Authorization. The execution, delivery and performance of this
Amendment have been duly authorized by all necessary corporate action by the
Company and this Amendment has been duly executed and delivered by the Company.
3.2 Binding Obligation. This Amendment is the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
- 1 -
<PAGE>
3.3 No Legal Obstacle to Credit Agreement. The execution, delivery
and performance of this Amendment will not (a) contravene the terms of the
Company's certificate of incorporation, by-laws or other organization document;
(b) conflict with or result in any breach or contravention of the provisions of
any contract to which the Company is a party, or the violation of any law,
judgment, decree or governmental order, rule or regulation applicable to the
Company, or (c) result in the creation under any agreement or instrument of any
security interest, lien, charge, or encumbrance upon any of the assets of the
Company. No approval or authorization of any governmental authority is required
to permit the execution, delivery or performance by the Company of this
Amendment, or the transactions contemplated hereby.
3.4 Incorporation of Certain Representations. The representations and
warranties of the Company set forth in Section 5 of the Credit Agreement are
true and correct in all respects on and as of the date hereof as though made on
and as of the date hereof.
3.5 Default. No Default or Event of Default under the Credit
Agreement has occurred and is continuing.
4. Conditions, Effectiveness. The effectiveness of this Amendment shall
be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of the following to the Bank in form and
substance satisfactory to the Bank:
4.1 Authorized Signatories. A certificate, signed by the Secretary or
an Assistant Secretary of the Company and dated the date of this Amendment, as
to the incumbency of the person or persons authorized to execute and deliver
this Amendment and any instrument or agreement required hereunder on behalf of
the Company.
4.2 Other Evidence. Such other evidence with respect to the Company
or any other person as the Bank may reasonably request in connection with this
Amendment and the compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Effectiveness of the Credit Agreement and the Loan Documents.
Except as hereby expressly amended, the Credit Agreement and each other Loan
Document shall each remain in full force and effect, and are hereby ratified and
confirmed in all respects on and as of the date hereof.
- 2 -
<PAGE>
5.2 Waivers. This Amendment is limited solely to the matters
expressly set forth herein and is specific in time and in intent and does not
constitute, nor should it be construed as, a waiver or amendment of any other
term or condition, right, power or privilege under the Credit Agreement, the
Loan Documents, or under any agreement, contract, indenture, document or
instrument mentioned therein; nor does it preclude or prejudice any rights of
the Bank thereunder, or any exercise thereof or the exercise of any other right,
power or privilege, nor shall it require the Bank to agree to an amendment,
waiver or consent for a similar transaction or on a future occasion, nor shall
any future waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned in the
Credit Agreement, constitute a waiver of any other default of the same or of any
other term or provision.
5.3 Counterparts. This Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This Amendment shall not become
effective until the Company and the Bank shall have signed a copy hereof,
whether the same or counterparts, and the same shall have been delivered to the
Bank.
5.4 Jurisdiction. This Amendment shall be governed by and construed
under the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the date first written above.
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Wendy Simpson
----------------------------
Name: WENDY SIMPSON
--------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------
TRANSITIONAL HOSPITALS CORPORATION
By: /s/ Wendy Simpson
----------------------------
Name: WENDY SIMPSON
--------------------------
(Signatures continue) Title: CHIEF FINANCIAL OFFICER
-------------------------
- 3 -
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Wyatt Ritchie
----------------------------
Vice President
CONSENT OF GUARANTORS
---------------------
The undersigned Guarantors hereby acknowledge that they have reviewed and
consent to the foregoing Second Amendment dated as of June 7, 1995 to Credit
Agreement dated as of September 20, 1993, and hereby reaffirm their respective
General Continuing General Guaranties, which continue in full force and effect
on and as of the date hereof.
Date: June 7, 1995
EACH OF THE GUARANTORS LISTED ON
ANNEX A HERETO, INCORPORATED BY
REFERENCE HEREIN
By: /s/ Richard Conte
----------------------------
Title: CHAIRMAN AND CEO
-------------------------
By: /s/ Wendy Simpson
----------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------
- 4 -
<PAGE>
Annex A
To Guaranty
COMMUNITY PSYCHIATRIC CENTERS AND
WHOLLY-OWNED SUBSIDIARIES COMMUNITY PSYCHIATRIC CENTERS
PARENT CORPORATION
- ------------------
Community Psychiatric Centers
SUBSIDIARIES
- ------------
Belmedco
C.P.C. of Louisiana
CPC Investment Corp.
CPC Laboratories, Inc.
CPC Pharmacy, Inc.
CPC Properties of Arkansas, Inc.
CPC Properties of Illinois, Inc.
CPC Properties of Indiana, Inc.
CPC Properties of Kansas, Inc.
CPC Properties of Louisiana, Inc.
CPC Properties of Mississippi, Inc.
CPC Properties of Missouri, Inc.
CPC Properties of North Carolina, Inc.
CPC Properties of Wisconsin, Inc.
CPC of Georgia, Inc.
CalProp I, Inc.
CalProp II, Inc.
Community Psychiatric Centers
Properties Incorporated
Community Psychiatric Centers
Properties of Oklahoma, Inc.
Community Psychiatric Centers
Properties of Texas, Inc.
Community Psychiatric Centers
Properties of Utah, Inc.
Community Psychiatric Centers of
Arkansas, Inc.
Community Psychiatric Centers of
California
Community Psychiatric Centers of
Florida, Inc.
Community Psychiatric Centers of
Idaho, Inc.
Community Psychiatric Centers of
Indiana, Inc.
Community Psychiatric Centers of
Kansas, Inc.
Community Psychiatric Centers of
Mississippi, Inc.
Community Psychiatric Centers of
Missouri, Inc.
Community Psychiatric Centers of
North Carolina, Inc.
Community Psychiatric Centers of
Oklahoma, Inc.
Community Psychiatric Centers of
Oregon, Inc.
<PAGE>
SUBSIDIARIES
- ------------
Community Psychiatric Centers of
Puerto Rico, Inc.
Community Psychiatric Centers of
Texas, Inc.
Community Psychiatric Centers of
Utah, Inc.
Community Psychiatric Centers of
Wisconsin
Peachtree-Parkwood Hospital, Inc.
P.P.P., Inc.
Psychiatric Hospitals Consultants
Florida Hospital Properties, Inc.
Old Orchard Hospital, Inc.
Cottonwood Hill, Inc.
Counterpoint Center of Old Orchard, Inc.
Miami Valley Community Centers, Inc.
Transitional Hospitals Corporation
SUBSIDIARIES OF TRANSITIONAL HOSPITALS CORPORATION
- --------------------------------------------------
Transitional Hospitals Corporation of
Indiana, Inc.
Transitional Hospitals Corporation of
Louisiana, Inc.
Transitional Hospitals Corporation of
Massachussetts
Transitional Hospitals Corporation of
Nevada, Inc.
Transitional Hospitals Corporation of
North Carolina, Inc.
Transitional Hospitals Corporation of
Tampa, Inc.
Transitional Hospitals Corporation of
Texas, Inc.
Transitional Hospitals Corporation of
Wisconsin, Inc.
9/20/93
<PAGE>
Exhibit 10.14.2
[BANK OF AMERICA LOGO]
February 26, 1996
Community Psychiatric Centers
6600 West Charleston Boulevard, Suite 118
Las Vegas, Nevada 89102
Transitional Hospitals Corporation
6600 West Charleston Boulevard, Suite 118
Las Vegas, Nevada 89102
Re: Credit Agreement dated as of September 20, 1993
Ladies and Gentlemen:
Reference is hereby made to the Credit Agreement dated as of September
20, 1993, as amended among CPC, THC and Bank (the "Agreement"). Capitalized
terms not otherwise defined herein shall have the meanings specified in the
Agreement.
The Bank hereby agrees to waive compliance for the reporting period
ending November 30, 1995 only with (a) the Net Funded Debt to EBITDA Ratio set
forth in Section 7.14 of the Agreement, (b) the EBITDA to Consolidated Net
Interest Expense Ratio set forth in Section 7.15 of the Agreement, and (c) the
Tangible New Worth Covenant set forth in Section 7.16 of the Credit Agreement.
In consideration for the granting of the foregoing waiver, the Company
represents and warrants to the Bank that the representations and warranties set
forth in Article V of the Agreement are true and correct in all material
respects on and as of the date hereof as though made on and as of the date
hereof, and no Default or Event of Default under the Agreement has occurred and
is continuing.
Except as hereby expressly modified, the Agreement shall remain in full
force and effect and are hereby ratified and confirmed in all respects.
This waiver is specific in time and in intent and does not constitute,
nor should it be construed as, a waiver of any other right, power or privilege
under the Agreement,
<PAGE>
Community Psychiatric Centers
Transitional Hospitals Corporation
February 26, 1996
Page 2
or under any agreement, contract, indenture, document or instrument mentioned in
the Agreement; nor does it preclude other or further exercise hereof or the
exercise of any other right, power or privilege, nor shall any waiver of any
right, power, privilege or default hereunder or under any agreement, contract,
indenture, document or instrument mentioned in the Agreement constitute a waiver
of any default of the same or of any other term or provision thereunder.
This waiver shall not be effective until signed by CPC, THC and the
Guarantors and may be signed in any number of counterparts, each of which when
so executed and delivered shall be deemed an original, but all such counterparts
together shall constitute but one and the same instrument.
Very truly yours,
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Wyatt Ritchie
-----------------------------
Wyatt Ritchie
Vice President
ACCEPTED AND AGREED TO THIS
26TH DAY OF FEBRUARY, 1996
COMMUNITY PSYCHIATRIC CENTERS
TRANSITIONAL HOSPITALS CORPORATION
By: /s/ Richard Conte
------------------------------
Richard Conte
Chairman and CEO
<PAGE>
Exhibit 10.18
SECOND AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS SECOND AMENDMENT TO CREDIT AGREEMENT is made and dated as of
February 28, 1995 (the "Amendment") among Community Psychiatric Centers, a
Nevada corporation ("CPC"), Transitional Hospitals Corporation, a Delaware
corporation ("THC"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
a United States national banking association ("Bank") and amends that certain
Credit Agreement dated as of May 6, 1994 and by a First Amendment to Credit
Agreement dated as of December 14, 1994 (as so amended or modified from time to
time, the "Credit Agreement").
RECITALS
--------
WHEREAS, the Company has requested, and the Bank has agreed, on the
terms and conditions set forth herein, to amend the Credit Agreement to extend
the Termination Date and revise the pricing of credit extensions thereunder;
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Terms. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein. All references to the Credit
Agreement shall mean the Credit Agreement as hereby amended.
2. Amendment to Credit Agreement.
2.1 Section 1.01 of the Credit Agreement is amended as follows:
(a) The definition of "Termination Date" is amended by
deleting "February 28, 1995" and inserting "February 28, 1996" in lieu thereof.
(b) The definition of "Applicable Margin" is hereby amend and
restated as follows:
"`Applicable Margin' means
(i) with respect to Base Rate to Base Rate Loans, the
Base Rate Increment; and
(ii) with respect to Offshore Rate Loans, the Offshore
Rate Increment."
(c) The following definitions are hereby added to Section 1.01
to appear in alphabetical order therein:
"`Base Rate Increment' means the percentage per annum
determined pursuant to subsection 2.08(a).
- 1 -
<PAGE>
"`Offshore Rate Increment' means the percentage per annum
determined pursuant to subsection 2.08(a)."
2.2 Section 2.08 of the Credit Agreement is hereby amended and
restated as follows:
"(a) Each Loan shall bear interest on the outstanding
principal amount thereof from the date when made at a rate per annum
equal to the Offshore Rate or the Base Rate, as the case may be,
plus the Applicable Margin. The Base Rate Increment and the Offshore
Rate Increment shall be automatically adjusted to the rates in the
table immediately following which rates shall correspond to the Net
Funded Debt to EBITDA Ratio shown on the most recent Compliance
Certificate. Each such automatic adjustment shall be effective from
the fifteenth (15th) day following the due date of each Compliance
Certificate and shall remain effective through the fourteenth (14th)
day following the due date of the next Compliance Certificate.
Offshore
Base Rate Rate
Net Funded Debt to EBITDA Ratio Increment Increment
- ------------------------------- --------- ---------
Greater than 2.00 to 1.00 0.75% 2.00%
Greater than 1.50 to 1.00 but
not greater than 2.00 to 1.00 0.50% 1.75%
Greater than 1.00 to 1.00 but
not greater than 1.50 to 1.00 0.25% 1.50%
Greater than 0.50 to 1.00 but
not greater than 1.00 to 1.00 0.00% 1.25%
Not greater than 0.50 to 1.00 0.00% 1.00%"
3. Representations and Warranties. Company represents and warrants
to Bank that, on and as of the date hereof, and after giving effect to this
Amendment:
3.1 Authorization. The execution, delivery and performance of this
Amendment have been duly authorized by all necessary corporate action by the
Company and this Amendment has been duly executed and delivered by the Company.
3.2 Binding Obligation. This Amendment is the legal, valid and
binding obligation of Company, enforceable against the Company in accordance
with its terms.
3.3 No Legal Obstacle to Credit Agreement. The execution, delivery
and performance of this Amendment will not (a) contravene the terms of the
Company's certificate of incorporation, by-laws or other organization document;
(b) conflict with or result in any breach or contravention of the
- 2 -
<PAGE>
provisions of any contract to which the Company is a party, or the violation of
any law, judgment, decree or governmental order, rule or regulation applicable
to Company, or (c) result in the creation under any agreement or instrument of
any security interest, lien, charge, or encumbrance upon any of the assets of
the Company. No approval or authorization of any governmental authority is
required to permit the execution, delivery or performance by the Company of
this Amendment, or the transactions contemplated hereby.
3.4 Incorporation of Certain Representations. The representations and
warranties of the Company set forth in Section 5 of the Credit Agreement are
true and correct in all respects on and as of the date hereof as though made on
and as of the date hereof.
3.5 Default. No Default or Event of Default under the Credit Agreement
has occurred and is continuing.
4. Conditions, Effectiveness. The effectiveness of this Amendment
shall be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of the following to the Bank in form and
substance satisfactory to the Bank:
4.1 Authorized Signatories. A certificate, signed by the Secretary or
an Assistant Secretary of Company and dated the date of this Amendment, as to
the incumbency of the person or persons authorized to execute and deliver this
Amendment and any instrument or agreement required hereunder on behalf of
Company.
4.2 Other Evidence. Such other evidence with respect to the Company or
any other person as the Bank may reasonably request in connection with this
Amendment and the compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Effectiveness of the Credit Agreement and the Loan Documents.
Except as hereby expressly amended, the Credit Agreement and each other Loan
Document shall each remain in full force and effect, and are hereby ratified and
confirmed in all respects on and as of the date hereof.
5.2 Waivers. This Amendment is limited solely to the matters expressly
set forth herein and is specific in time and in intent and does not constitute,
nor should it be construed as, a waiver or amendment of any other term or
condition, right, power or privilege under the Credit Agreement, the Loan
Documents, or under any agreement, contract, indenture, document or instrument
mentioned therein; nor does it preclude or prejudice any rights of the Bank
thereunder, or any exercise thereof or the exercise of any other right, power or
privilege, nor shall it require the Bank to agree to an amendment, waiver or
consent for a similar transaction or on a future occasion, nor shall any future
waiver of any right, power, privilege or default hereunder, or under any
agreement, contract, indenture, document or instrument mentioned in the Credit
Agreement, constitute a waiver of any other default of the same or of any other
term or provision.
5.3 Counterparts. This Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This Amendment shall not become
effective until the Company and the Bank shall have signed a copy hereof,
whether the same or counterparts, and the same shall have been delivered to the
Bank.
- 3 -
<PAGE>
5.4 Jurisdiction. This Amendment shall be governed by and construed
under the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the date first written above.
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Richard Conte
--------------------------
Name: RICHARD CONTE
Title: CEO/CHAIRMAN
TRANSITIONAL HOSPITALS CORPORATION
By: /s/ Wendy Simpson
--------------------------
Name: WENDY SIMPSON
Title: CFO
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Wyatt R. Ritchie
--------------------------
Name: WYATT R. RITCHIE
Title: VICE PRESIDENT
- 4 -
<PAGE>
CONSENT OF GUARANTORS
The undersigned Guarantors hereby acknowledge that they have reviewed and
consent to the foregoing Second Amendment dated as of February 28, 1995 to
Credit Agreement dated as of May 6, 1994, and hereby reaffirm their respective
General Continuing General Guaranties, which continue in full force and effect
on and as of the date hereof.
Date: February 28, 1995
EACH OF THE GUARANTORS LISTED
ON ANNEX A HERETO,
INCORPORATED BY REFERENCE
HEREIN
By: /s/ Richard Conte
---------------------------
Title: CHIEF EXECUTIVE OFFICER
By: /s/ Wendy Simpson
---------------------------
Title: CHIEF FINANCIAL OFFICER
- 5 -
<PAGE>
Exhibit 10.18.1
THIRD AMENDMENT TO CREDIT AGREEMENT
------------------------------------
THIS THIRD AMENDMENT TO CREDIT AGREEMENT is made and dated as of June 7,
1995 (the "Amendment") among Community Psychiatric Centers, a Nevada corporation
("CPC"), Transitional Hospitals Corporation, a Delaware corporation ("THC"), and
BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a United States national
banking association ("Bank") and amends that certain Credit Agreement dated as
of May 6, 1994 and by a First Amendment to Credit Agreement dated as of December
14, 1994 and a Second Amendment to Credit Agreement dated as of February 28,
1995 (as so amended or modified from time to time, the "Credit Agreement").
RECITAL
-------
The Company has requested, and the Bank has agreed, on the terms and
conditions set forth herein, to amend the Credit Agreement.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Terms. All terms used herein shall have the same meanings as in the
Credit Agreement unless otherwise defined herein. All references to the Credit
Agreement shall mean the Credit Agreement as hereby amended.
2. Amendment to Credit Agreement.
2.1 Section 7.04(e) of the Credit Agreement is amended by deleting
"$5,000,000" and inserting "$10,000,000" in lieu thereof.
3. Representations and Warranties. The Company represents and warrants
to Bank that, on and as of the date hereof, and after giving effect to this
Amendment:
3.1 Authorization. The execution, delivery and performance of this
Amendment have been duly authorized by all necessary corporate action by the
Company and this Amendment has been duly executed and delivered by the Company.
- 1 -
<PAGE>
3.2 Binding Obligation. This Amendment is the legal, valid and
binding obligation of the Company, enforceable against the Company in accordance
with its terms.
3.3 No Legal Obstacle to Credit Agreement. The execution, delivery
and performance of this Amendment will not (a) contravene the terms of the
Company's certificate of incorporation, by-laws or other organization document;
(b) conflict with or result in any breach or contravention of the provisions of
any contract to which the Company is a party, or the violation of any law,
judgment, decree or governmental order, rule or regulation applicable to the
Company, or (c) result in the creation under any agreement or instrument of any
security interest, lien, charge, or encumbrance upon any of the assets of the
Company. No approval or authorization of any governmental authority is required
to permit the execution, delivery or performance by the Company of this
Amendment, or the transactions contemplated hereby.
3.4 Incorporation of Certain Representations. The representations and
warranties of the Company set forth in Section 5 of the Credit Agreement are
true and correct in all respects on and as of the date hereof as though made on
and as of the date hereof.
3.5 Default. No Default or Event of Default under the Credit
Agreement has occurred and is continuing.
4. Conditions, Effectiveness. The effectiveness of this Amendment shall
be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of the following to the Bank in form and
substance satisfactory to the Bank:
4.1 Authorized Signatories. A certificate, signed by the Secretary or
an Assistant Secretary of the Company and dated the date of this Amendment, as
to the incumbency of the person or persons authorized to execute and deliver
this Amendment and any instrument or agreement required hereunder on behalf of
the Company.
4.2 Other Evidence. Such other evidence with respect to the Company
or any other person as the Bank may reasonably request in connection with this
Amendment and the compliance with the conditions set forth herein.
5. Miscellaneous.
5.1 Effectiveness of the Credit Agreement and the Loan Documents.
Except as hereby expressly amended, the Credit Agreement and each other Loan
Document shall each remain in full
- 2 -
<PAGE>
force and effect, and are hereby ratified and confirmed in all respects on and
as of the date hereof.
5.2 Waivers. This Amendment is limited solely to the matters
expressly set forth herein and is specific in time and in intent and does not
constitute, nor should it be construed as, a waiver or amendment of any other
term or condition, right, power or privilege under the Credit Agreement, the
Loan Documents, or under any agreement, contract, indenture, document or
instrument mentioned therein; nor does it preclude or prejudice any rights of
the Bank thereunder, or any exercise thereof or the exercise of any other right,
power or privilege, nor shall it require the Bank to agree to an amendment,
waiver or consent for a similar transaction or on a future occasion, nor shall
any future waiver of any right, power, privilege or default hereunder, or under
any agreement, contract, indenture, document or instrument mentioned in the
Credit Agreement, constitute a waiver of any other default of the same or of any
other term or provision.
5.3 Counterparts. This Amendment may be executed in any number of
counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This Amendment shall not become
effective until the Company and the Bank shall have signed a copy hereof,
whether the same or counterparts, and the same shall have been delivered to the
Bank.
5.4 Jurisdiction. This Amendment shall be governed by and construed
under the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be
duly executed and delivered as of the date first written above.
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Wendy Simpson
----------------------------
Name: WENDY SIMPSON
--------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------
TRANSITIONAL HOSPITALS CORPORATION
By: /s/ Wendy Simpson
----------------------------
Name: WENDY SIMPSON
--------------------------
(Signatures continue) Title: CHIEF FINANCIAL OFFICER
-------------------------
- 3 -
<PAGE>
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Wyatt Ritchie
----------------------------
Vice President
CONSENT OF GUARANTORS
---------------------
The undersigned Guarantors hereby acknowledge that they have reviewed and
consent to the foregoing Third Amendment dated as of June 7, 1995 to Credit
Agreement dated as of May 6, 1994 and hereby reaffirm their respective General
Continuing General Guaranties, which continue in full force and effect on and as
of the date hereof.
Date: June 7, 1995
EACH OF THE GUARANTORS LISTED ON
ANNEX A HERETO, INCORPORATED BY
REFERENCE HEREIN
By: /s/ Richard Conte
----------------------------
Title: CHAIRMAN AND CEO
-------------------------
By: /s/ Wendy Simpson
----------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------
- 4 -
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND
WHOLLY-OWNED SUBSIDIARIES
CORPORATION DOMESTIC FOREIGN
- ----------- -------- -------
Community Psychiatric Centers NV CA, NC
Belmedco CA
C.P.C. of Louisiana, Inc. LA
CPC Investment Corp. CA
CPC Laboratories, Inc. GA
CPC Pharmacy, Inc. CA
CPC Properties of Arkansas, Inc. AR
CPC Properties of Illinois, Inc. IL
CPC Properties of Indiana, Inc. IN
CPC Properties of Kansas, Inc. KS
CPC Properties of Louisiana, Inc. LA
CPC Properties of Mississippi, Inc. MS
CPC Properties of Missouri, Inc. MO
CPC Properties of North Carolina, Inc. NC
CPC Properties of Wisconsin, Inc. WI
CPC of Georgia, Inc. GA
CalProp I, Inc. DE
CalProp II, Inc. DE
Community Psychiatric Centers
Properties Incorporated CA WA
Community Psychiatric Centers
Properties of Oklahoma, Inc. OK
Community Psychiatric Centers
Properties of Texas, Inc. TX
Community Psychiatric Centers
Properties of Utah, Inc. UT
Community Psychiatric Centers of
Arkansas, Inc. AR
Community Psychiatric Centers of
California CA WA
Community Psychiatric Centers of
Florida, Inc. FL Virgin Isl
Community Psychiatric Centers of
Idaho, Inc. ID
Community Psychiatric Centers of
Indiana, Inc. IN
Community Psychiatric Centers of
Kansas, Inc. KS
Community Psychiatric Centers of
Mississippi, Inc. MS
Community Psychiatric Centers of
Missouri, Inc. MO
Community Psychiatric Centers of
North Carolina, Inc. NC
Community Psychiatric Centers of
Oklahoma, Inc. OK
Community Psychiatric Centers of
Oregon, Inc. OR
(Guaranty of THC Loans)
<PAGE>
Community Psychiatric Centers of
Puerto Rico, Inc. NV PR
Community Psychiatric Centers of
Texas, Inc. TX
Community Psychiatric Centers of
Utah, Inc. UT
Community Psychiatric Centers of
Wisconsin, Inc. WI
Peachtree-Parkwood Hospital, Inc. GA
P.P.P., Inc. GA
Psychiatric Hospitals Consultants CA MO
Florida Hospital Properties, Inc. FL
Old Orchard Hospital, Inc. IL
Cottonwood Hill, Inc. CO
Counterpoint Center of Old Orchard, Inc. IL
Miami Valley Community Centers, Inc. OH
CPC Managed Health Care Services, Inc. DE CA
Solutions Counseling & Treatment Center, Inc. TX
Transitional Family Services of Georgia, Inc. GA
THC - Chicago, Inc. IL
THC - Hollywood, Inc. FL
THC - Houston, Inc. TX
Transitional Hospitals Corporation of
Indiana, Inc. IN
Transitional Hospitals Corporation of
Louisiana, Inc. LA
Transitional Hospitals Corporation of
Massachusetts, Inc. MA
Transitional Hospitals Corporation of
New Mexico, Inc. NM
THC - Minneapolis, Inc. MN
Transitional Hospitals Corporation of
Nevada, Inc. NV
Transitional Hospitals Corporation of
North Carolina, Inc. NC
THC - Seattle, Inc. WA
THC - St. Petersburg, Inc. FL
Transitional Hospitals Corporation of
Tampa, Inc. FL
Transitional Hospitals Corporation of
Texas, Inc. TX
Transitional Hospitals Corporation of
Wisconsin, Inc. WI
J.B. Thomas Hospital, Inc. MA
4/94
<PAGE>
COMMUNITY PSYCHIATRIC CENTERS AND
WHOLLY-OWNED SUBSIDIARIES
CORPORATION DOMESTIC FOREIGN
- ----------- -------- -------
Belmedco CA
C.P.C. of Louisiana, Inc. LA
CPC Investment Corp. CA
CPC Laboratories, Inc. GA
CPC Pharmacy, Inc. CA
CPC Properties of Arkansas, Inc. AR
CPC Properties of Illinois, Inc. IL
CPC Properties of Indiana, Inc. IN
CPC Properties of Kansas, Inc. KS
CPC Properties of Louisiana, Inc. LA
CPC Properties of Mississippi, Inc. MS
CPC Properties of Missouri, Inc. MO
CPC Properties of North Carolina, Inc. NC
CPC Properties of Wisconsin, Inc. WI
CPC of Georgia, Inc. GA
CalProp I, Inc. DE
CalProp II, Inc. DE
Community Psychiatric Centers
Properties Incorporated CA WA
Community Psychiatric Centers
Properties of Oklahoma, Inc. OK
Community Psychiatric Centers
Properties of Texas, Inc. TX
Community Psychiatric Centers
Properties of Utah, Inc. UT
Community Psychiatric Centers of
Arkansas, Inc. AR
Community Psychiatric Centers of
California CA WA
Community Psychiatric Centers of
Florida, Inc. FL Virgin Isl
Community Psychiatric Centers of
Idaho, Inc. ID
Community Psychiatric Centers of
Indiana, Inc. IN
Community Psychiatric Centers of
Kansas, Inc. KS
Community Psychiatric Centers of
Mississippi, Inc. MS
Community Psychiatric Centers of
Missouri, Inc. MO
Community Psychiatric Centers of
North Carolina, Inc. NC
Community Psychiatric Centers of
Oklahoma, Inc. OK
Community Psychiatric Centers of
Oregon, Inc. OR
(Guaranty of CPC Loans)
<PAGE>
Community Psychiatric Centers of
Puerto Rico, Inc. NV PR
Community Psychiatric Centers of
Texas, Inc. TX
Community Psychiatric Centers of
Utah, Inc. UT
Community Psychiatric Centers of
Wisconsin, Inc. WI
Peachtree-Parkwood Hospital, Inc. GA
P.P.P., Inc. GA
Psychiatric Hospitals Consultants CA MO
Florida Hospital Properties, Inc. FL
Old Orchard Hospital, Inc. IL
Cottonwood Hill, Inc. CO
Counterpoint Center of Old Orchard, Inc. IL
Miami Valley Community Centers, Inc. OH
CPC Managed Care Health Services, Inc. DE CA
Solutions Counseling & Treatment Center, Inc. TX
Transitional Family Services of Georgia, Inc. GA
Transitional Hospitals Corporation DE GA, NM, FL
THC - Chicago, Inc. IL
THC - Hollywood, Inc. FL
THC - Houston, Inc. TX
Transitional Hospitals Corporation of
Indiana, Inc. IN
Transitional Hospitals Corporation of
Louisiana, Inc. LA
Transitional Hospitals Corporation of
Massachusetts, Inc. MA
Transitional Hospitals Corporation of
New Mexico, Inc. NM
THC - Minneapolis, Inc. MN
Transitional Hospitals Corporation of
Nevada, Inc. NV
Transitional Hospitals Corporation of
North Carolina, Inc. NC
THC - Seattle, Inc. WA
THC - St. Petersburg, Inc. FL
Transitional Hospitals Corporation of
Tampa, Inc. FL
Transitional Hospitals Corporation of
Texas, Inc. TX
Transitional Hospitals Corporation of
Wisconsin, Inc. WI
J.B. Thomas Hospital, Inc. MA
4/94
<PAGE>
Exhibit 10.18.2
FOURTH AMENDMENT TO CREDIT AGREEMENT
------------------------------------
AND WAIVER
----------
THIS FOURTH AMENDMENT TO CREDIT AGREEMENT AND WAIVER is made and dated
as of February 26, 1996, (this "Fourth Amendment") among Community Psychiatric
Centers, a Nevada corporation ("CPC"), Transitional Hospitals Corporation, a
Delaware corporation ("THC"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION ("Bank") and amends that certain Credit Agreement dated as of May 6,
1994, as amended by a First Amendment to Credit Agreement dated as of December
14, 1994, a Second Amendment to Credit Agreement dated as of February 28, 1995,
and Third Amendment to Credit Agreement dated as of June 7, 1995 (as so amended
or modified from time to time, the "Agreement").
RECITALS
--------
The Company has requested, and the Bank has agreed, on the terms and
conditions set forth herein, to amend the Agreement to extend the Termination
Date and waive certain Events of Defaults.
NOW, THEREFORE, for good and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties hereby agree as follows:
1. Terms. All terms used herein shall have the same meanings as in the
Agreement unless otherwise defined herein. All references to the Agreement shall
mean the Agreement as hereby amended.
2. Amendment to Agreement.
2.1 The parties hereto agree that the definition of "Termination
Date" in Section 1.01 of the Agreement is amended by deleting "February 28,
1996" and inserting "February 28, 1997" in lieu thereof.
3. Waivers. The Bank hereby agrees to waive compliance for the reporting
period ending November 30, 1995 only with (a) the Net Funded Debt to EBITDA
Ratio set forth in Section 7.14 of this Agreement, (b) the EBITDA to
Consolidated Net Interest Expense Ratio set forth in Section 7.15 of the
Agreement, and (c) the Tangible New Worth Covenant set forth in Section 7.16 of
the Credit Agreement.
- 1 -
<PAGE>
4. Representations and Warranties. The Company represents and warrants
to Bank that, on and as of the date hereof, and after giving effect to this
Fourth Amendment:
4.1 Authorization. The execution, delivery and performance of this
Fourth Amendment have been duly authorized by all necessary corporate action by
the Company and this Fourth Amendment has been duly executed and delivered by
the Company.
4.2 Binding Obligation. This Fourth Amendment is the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms.
4.3 No Legal Obstacle to Credit Agreement. The execution, delivery
and performance of this Fourth Amendment will not (a) contravene the terms of
the Company's certificate of incorporation, by-laws or other organization
document; (b) conflict with or result in any breach or contravention of the
provisions of any contract to which the Company is a party, or the violation of
any law, judgment, decree or governmental order, rule or regulation applicable
to the Company, or (c) result in the creation under any agreement or instrument
of any security interest, lien, charge, or encumbrance upon any of the assets of
the Company. No approval or authorization of any governmental authority is
required to permit the execution, delivery or performance by the Company of this
Fourth Amendment, or the transactions contemplated hereby.
4.4 Incorporation of Certain Representations. The representations and
warranties of the Company set forth in Section 5 of the Agreement are true and
correct in all respects on and as of the date hereof as though made on and as of
the date hereof.
4.5 Default. Except as waived herein no Default or Event of Default
under the Agreement has occurred and is continuing.
5. Conditions, Effectiveness. The effectiveness of this Fourth Amendment
shall be subject to the compliance by the Company with its agreements herein
contained, and to the delivery of the following to the Bank in form and
substance satisfactory to the Bank:
5.1 Corporate Resolution. A copy of a resolution or resolutions
passed by the Board of Directors of the Company, certified by the Secretary or
an Assistant Secretary of the Company as being in full force and effect on the
effective date of this Fourth Amendment, authorizing the amendments herein
provided for and the execution, delivery and performance of this Fourth
Amendment.
- 2 -
<PAGE>
5.2 Authorized Signatories. A certificate, signed by the Secretary or
an Assistant Secretary of the Company and dated the date of this Fourth
Amendment, as to the incumbency of the person or persons authorized to execute
and deliver this Fourth Amendment and any instrument or agreement required
hereunder on behalf of the Company.
5.3 Other Evidence. Such other evidence with respect to the Company
or any other person as the Bank may reasonably request in connection with this
Fourth Amendment and the compliance with the conditions set forth herein.
6. Miscellaneous.
6.1 Effectiveness of the Agreement and the Loan Documents. Except as
hereby expressly amended, the Agreement and each other Loan Document shall each
remain in full force and effect, and are hereby ratified and confirmed in all
respects on and as of the date hereof.
6.2 Waivers. This Fourth Amendment is limited solely to the matters
expressly set forth herein and is specific in time and in intent and does not
constitute, nor should it be construed as, a waiver or amendment of any other
term or condition, right, power or privilege under the Agreement, the Loan
Documents, or under any agreement, contract, indenture, document or instrument
mentioned therein; nor does it preclude or prejudice any rights of the Bank
thereunder, or any exercise thereof or the exercise of any other right, power or
privilege, nor shall it require the Bank to agree to an amendment, waiver or
consent for a similar transaction or on a future occasion, nor shall any future
waiver of any right, power, privilege or default hereunder, or under any
agreement, contract, indenture, document or instrument mentioned in the
Agreement, constitute a waiver of any other default of the same or of any other
term or provision.
6.3 Counterparts. This Fourth Amendment may be executed in any number
of counterparts and all of such counterparts taken together shall be deemed to
constitute one and the same instrument. This Fourth Amendment shall not become
effective until the Company and the Bank shall have signed a copy hereof,
whether the same or counterparts, and the same shall have been delivered to the
Bank.
6.4 Jurisdiction. This Fourth Amendment shall be governed by and
construed under the laws of the State of
- 3 -
<PAGE>
California.
IN WITNESS WHEREOF, the parties hereto have caused this Fourth
Amendment to be duly executed and delivered as of the date first written above.
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Richard Conte
----------------------------
Name: RICHARD CONTE
--------------------------
Title: CHAIRMAN AND CEO
-------------------------
TRANSITIONAL HOSPITALS CORPORATION
By: /s/ Wendy Simpson
----------------------------
Name: WENDY SIMPSON
--------------------------
Title: CHIEF FINANCIAL OFFICER
-------------------------
BANK OF AMERICA NATIONAL TRUST AND
SAVINGS ASSOCIATION
By: /s/ Wyatt Ritchie
----------------------------
Wyatt Ritchie
Vice President
- 4 -
<PAGE>
EXHIBIT 10.20
AGREEMENT AND PROMISSORY NOTE
This Agreement and Promissory Note is made as of November 9, 1995 (the
----------------
"Loan Date"), between J. Rodney Laughlin ("Employee") and Community Psychiatric
------------------
Centers, a Nevada Corporation ("CPC"), under the circumstances set forth in the
Certificate of Resolution, of the Compensation Committee of the Board of
Directors, dated June 2, 1995, wherein said Committee provided for Special
------------
Recognition Awards, for the outcome of the development of the Transitional
Hospitals concept.
NOW, THEREFORE, it is agreed:
1. CPC shall loan to Employee an interest free thirty-six (36) month
nonrecourse loan of one million dollars ($1,000,000). One thirty-sixth (1/36) of
the loan shall be forgiven each month provided the recipient does not
voluntarily terminate employment during the loan's term, in which event the
balance of the loan shall become immediately due and payable. Any balance of the
loan at the time of involuntary termination; change of control; death;
disability; or, termination pursuant to any provision in any applicable
employment agreement permitting the Employee to terminate employment for cause,
shall be forgiven with applicable payroll tax withholding.
At each regular pay period, one seventy-eighth (1/78) of the loan will be
recorded as income as non-cash compensation in forgiveness of that portion of
the loan with all applicable payroll tax withholding.
2. This Agreement supersedes any and all prior express or implied
agreements or promises; whether written or oral between Employee and CPC, its
agents, subsidiaries, successors and assigns; including, but not limited to,
agreements regarding compensation, remuneration or any form of consideration;
relating or pertaining to, the creation, development, management, or operation
of Transitional Hospital Corporation, long-term acute services, and all services
related thereto.
This Agreement and Note shall bind and inure to the benefit of the parties
hereto and their successors and assigns.
/s/ James Rodney Laughlin
----------------------------------------
Signature
Name James Rodney Laughlin
------------------------------------
Address 8108 Bay Harbor Drive
--------------------------------
Las Vegas, Nevada 89128
--------------------------------
--------------------------------
Social Security # ###-##-####
------------------------
<PAGE>
EXHIBIT 10.21
AGREEMENT AND PROMISSORY NOTE
This Agreement and Promissory Note is made as of June 2, 1995 (the
------------
"Loan Date"), between Ronald L. Ooley ("Employee") and Community Psychiatric
---------------
Centers, a Nevada Corporation ("CPC"), under the circumstances set forth in the
Certificate of Resolution, of the Compensation Committee of the Board of
Directors, dated June 2, 1995, wherein said Committee provided for Special
------------
Recognition Awards, for the outcome of the development of the Transitional
Hospitals concept.
NOW, THEREFORE, it is agreed:
1. CPC shall loan to Employee an interest free thirty-six (36) month
nonrecourse loan of seven hundred, fifty thousand ($750,000). One thirty-sixth
(1/36) of the loan shall be forgiven each month provided the recipient does not
voluntarily terminate employment during the loan's term, in which event the
balance of the loan shall become immediately due and payable. Any balance of the
loan at the time of involuntary termination; change of control; death;
disability; or, termination pursuant to any provision in any applicable
employment agreement permitting the Employee to terminate employment for cause,
shall be forgiven with applicable payroll tax withholding.
At each regular pay period, one seventy-eighth (1/78) of the loan will be
recorded as income as non-cash compensation in forgiveness of that portion of
the loan with all applicable payroll tax withholding.
2. This Agreement supersedes any and all prior express or implied
agreements or promises; whether written or oral between Employee and CPC, its
agents, subsidiaries, successors and assigns; including, but not limited to,
agreements regarding compensation, remuneration or any form of consideration;
relating or pertaining to, the creation, development, management, or operation
of Transitional Hospital Corporation, long-term acute services, and all services
related thereto.
This Agreement and Note shall bind and inure to the benefit of the parties
hereto and their successors and assigns.
/s/ Ronald L. Ooley
-----------------------------------
Signature
Name Ronald L. Ooley
-------------------------------
Address 2984 Sun Lake Drive
---------------------------
Las Vegas, Nevada 89128
---------------------------
---------------------------
Social Security # ###-##-####
-----------------
<PAGE>
EXHIBIT 11
STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------------------
1995 1994 1993
------------ ----------- ------------
<S> <C> <C> <C>
Primary:
Average shares outstanding during the
period................................ 43,642,000 43,465,000 42,951,000
(a) Stock options granted to
employees and unpaid portion of
shares issued to employees for
exercise of stock options, based on
the treasury-stock method using
average market price................ ** * **
------------ ----------- ------------
TOTAL............................. 43,642,000 43,465,000 42,951,000
============ =========== ============
Net income (loss)...................... $(41,632,000) $10,220,000 $(24,892,000)
============ =========== ============
Earnings (loss) per share.............. $ (0.95) $ 0.24 $ (0.58)
============ =========== ============
Fully diluted:
Average shares outstanding during the
year.................................. 43,642,000 43,465,000 42,951,000
(a) Stock options granted to
employees and unpaid portion of
shares issued to employees for
exercise of stock options, based on
the treasury-stock method using the
year-end market price, if higher
than average market price........... ** * **
------------ ----------- ------------
TOTAL............................. 43,642,000 43,465,000 42,951,000
============ =========== ============
Net income (loss)...................... $(41,632,000) $10,220,000 $(24,892,000)
============ =========== ============
Earnings (loss) per share.............. $ (0.95) $ 0.24 $ (0.58)
============ =========== ============
</TABLE>
- --------
* As the dilutive common stock equivalents are less than 3% of the weighted
average outstanding shares, they have not been included in the 1994
computation of earnings per share as shown in the Consolidated Statement of
Operations and Five Year Summary of Selected Financial Data.
** The impact of stock options is excluded from earnings (loss) per share as
the impact of stock equivalents is anti-dilutive.
<PAGE>
EXHIBIT 22 RE: SUBSIDIARIES OF THE REGISTRANT
The Company's subsidiaries, the fictitious business names (if any) under
which they do business, and the state or other jurisdiction of incorporation
or organization of each are set forth below. Unless noted otherwise, all are
wholly owned by the Company. All are included in the Consolidated Financial
Statements.
<TABLE>
<CAPTION>
STATE OR COUNTRY
SUBSIDIARY FICTITIOUS BUSINESS NAME OF INCORPORATION
---------- ------------------------ ----------------
<S> <C> <C>
Community Psychiatric
Centers of California..... CPC Alhambra Hospital California
CPC Belmont Hills Hospital
CPC Fairfax Hospital
CPC Fremont Hospital
CPC Heritage Oaks Hospital
CPC Laguna Hills Hospital
(closed)
CPC Rancho Lindo Hospital
(closed)
CPC Santa Ana Hospital (closed)
CPC San Luis Rey Hospital
CPC Sierra Vista Hospital
CPC Vista Del Mar Hospital
CPC Walnut Creek Hospital
Community Psychiatric
Centers of Florida, Inc... CPC Ft. Lauderdale Hospital Florida
CPC Palm Bay Hospital
CPC St. Johns River Hospital
Community Psychiatric
Centers of Idaho, Inc..... CPC Intermountain Hospital Idaho
Community Psychiatric
Centers of Indiana, Inc... CPC Valle Vista Hospital Indiana
Community Psychiatric
Centers of Kansas, Inc.... CPC College Meadows Hospital Kansas
Community Psychiatric
Centers of Mississippi,
Inc....................... CPC Sand Hill Hospital Mississippi
Community Psychiatric
Centers of Missouri, Inc.. CPC Spirit of St. Louis Hospital Missouri
Community Psychiatric
Centers of North Carolina,
Inc....................... CPC Cedar Spring Hospital North Carolina
Community Psychiatric
Centers of Oklahoma, Inc.. CPC Southwind Hospital Oklahoma
Community Psychiatric
Centers of Oregon, Inc.... Oregon
Community Psychiatric
Centers of Puerto Rico,
Inc....................... CPC Hospital San Juan Capestrano Nevada
Community Psychiatric
Centers of Texas, Inc..... CPC Capital Hospital Texas
CPC Millwood Hospital
Community Residential
Centers of San Antonio
(60% Owned Limited
Liability Company)........ CRC of San Antonio Texas
Community Psychiatric
Centers of Utah, Inc...... CPC Olympus View Hospital Utah
Atlantic Psychiatric
Centers, Inc. (60% Owned). Florida
Community Psychiatric
Centers of Wisconsin,
Inc....................... CPC Greenbriar Hospital (closed) Wisconsin
CPC of Georgia, Inc........ Georgia
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR COUNTRY
SUBSIDIARY FICTITIOUS BUSINESS NAME OF INCORPORATION
---------- ------------------------ ----------------
<S> <C> <C>
C.P.C. of Louisiana, Inc... CPC Brentwood Hospital Louisiana
CPC Coliseum Medical Center
(closed)
CPC East Lake Hospital
CPC Meadow Wood Hospital
Miami Valley Community
Centers, Inc.............. Ohio
Old Orchard Hospital, Inc.. CPC Old Orchard Hospital (closed) Illinois
CPC Streamwood Hospital
CounterPoint Center of Old
Orchard, Inc.............. Illinois
Peachtree-Parkwood
Hospital, Inc............. CPC Parkwood Hospital (closed) Georgia
Community Psychiatric
Centers of Arkansas, Inc.. CPC Pinnacle Pointe Hospital Arkansas
Priory Hospitals Group
Limited................... Altrincham Priory United Kingdom
Eden Grove School
Fulford Grange Medical Centre
Grovelands Priory
Hayes Grove Priory
Heath House Priory
Jacques Hall
Langside Priory Hospital
Lynbrook Priory
Marchwood Priory
The Priory
The Woodbourne Clinic
The Dukes Priory
The Nottingham Clinic
Sturt Priory Hospital
P.P.P., Inc................ Georgia
Community Psychiatric
Hospitals Assoc., Inc..... California
Solutions Counseling &
Treatment Center, Inc..... Texas
Community Behavioral Health
Systems, Inc.............. Nevada
Community Psychiatric
Centers Properties
Incorporated.............. California
CPC Properties of Illinois,
Inc....................... Illinois
CPC Properties of Indiana,
Inc....................... Indiana
CPC Properties of Kansas,
Inc....................... Kansas
CPC Properties of
Louisiana, Inc............ Louisiana
CPC Properties of
Mississippi, Inc.......... Mississippi
CPC Properties of Missouri,
Inc....................... Missouri
CPC Properties of North
Carolina, Inc............. North Carolina
CPC Properties of Arkansas,
Inc....................... Arkansas
CPC Properties of Oklahoma,
Inc....................... Oklahoma
CPC Properties of
Wisconsin, Inc............ Wisconsin
Community Psychiatric
Centers Properties of
Texas, Inc................ Texas
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR COUNTRY
SUBSIDIARY FICTITIOUS BUSINESS NAME OF INCORPORATION
---------- ------------------------ ----------------
<S> <C> <C>
Community Psychiatric
Centers Properties of
Utah, Inc................. Utah
Florida Hospital
Properties, Inc........... Florida
CPC Pharmacy, Inc.......... California
CPC Investment Corp........ California
Cottonwood Hill, Inc....... Colorado
CPC Laboratories, Inc...... Georgia
Transitional Family
Services, Inc............. Georgia
CalProp I, Inc............. Delaware
CalProp II, Inc............ Delaware
CPC (Londinium) Limited.... United Kingdom
CPC Managed Care Services,
Inc....................... CPC Managed Care Delaware
Transitional Hospitals
Corporation............... Delaware
Transitional Hospitals
Corporation of Louisiana,
Inc....................... THC--New Orleans Louisiana
Transitional Hospitals
Corporation of Texas,
Inc....................... THC--Arlington Texas
THC--Fort Worth
THC--Seattle, Inc.......... THC--Seattle Washington
Transitional Hospitals
Corporation of Indiana,
Inc....................... THC--Indianapolis Indiana
THC--Minneapolis, Inc...... THC--Minneapolis Minnesota
Transitional Hospitals
Corporation of
Massachusetts, Inc........ Massachusetts
Transitional Hospitals
Corporation of Nevada,
Inc....................... THC--Las Vegas Nevada
THC--Chicago, Inc.......... THC--Chicago Illinois
THC--North Shore, Inc...... Illinois
Transitional Hospitals
Corporation of New Mexico,
Inc....................... THC--Albuquerque New Mexico
Transitional Hospitals
Corporation of Tampa,
Inc....................... Transitional Hospital of Tampa Florida
THC--Hollywood, Inc........ THC--Hollywood Florida
THC--Houston, Inc.......... THC--Houston Texas
J. B. Thomas Hospital,
Inc....................... THC--Boston Massachusetts
Transitional Hospitals
Corporation of Wisconsin,
Inc....................... THC--Milwaukee Wisconsin
THC--Orange County, Inc.... THC--Orange County California
THC--San Diego, Inc........ THC--San Diego California
</TABLE>
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-8 (No. 33-37920), in
the post-effective Amendment No. 1 to the Registration Statement Form S-8 (No.
33-2-76435) and in the Registration Statement on Form S-8 (No. 33-5485) of
Community Psychiatric Centers of our report dated January 31, 1996, with
respect to the consolidated financial statements and schedule of Community
Psychiatric Centers and Subsidiaries as of November 30, 1995 and the year then
ended, included in the Annual Report on Form 10-K for the year ended November
30, 1995.
Price Waterhouse LLP
Los Angeles, California
February 26, 1996
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-37920 and post-effective Amendment No. 1 to Registration Statement No. 33-
2-76435, both on Form S-8 and both dated November 21, 1990 and Registration
Statement No. 33-5485 on Form S-8 dated August 1, 1994 of Community
Psychiatric Centers of our report dated January 27, 1995, with respect to the
consolidated financial statements and schedule of Community Psychiatric
Centers and Subsidiaries as of November 30, 1994 and for each of the two years
in the period then ended, included in the Annual Report on Form 10-K for the
year ended November 30, 1995.
Ernst & Young LLP
Los Angeles, California
February 21, 1996
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1995
<PERIOD-START> DEC-01-1994
<PERIOD-END> NOV-30-1995
<CASH> 17,263
<SECURITIES> 0
<RECEIVABLES> 113,686
<ALLOWANCES> 24,682
<INVENTORY> 0
<CURRENT-ASSETS> 195,347
<PP&E> 354,192
<DEPRECIATION> 103,326
<TOTAL-ASSETS> 604,625
<CURRENT-LIABILITIES> 80,025
<BONDS> 84,883
0
0
<COMMON> 46,856
<OTHER-SE> 351,933
<TOTAL-LIABILITY-AND-EQUITY> 604,625
<SALES> 506,663
<TOTAL-REVENUES> 509,176
<CGS> 384,818
<TOTAL-COSTS> 384,818
<OTHER-EXPENSES> 156,904<F1>
<LOSS-PROVISION> 28,732
<INTEREST-EXPENSE> 5,256
<INCOME-PRETAX> (66,534)
<INCOME-TAX> (24,902)
<INCOME-CONTINUING> (41,632)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (41,632)
<EPS-PRIMARY> (.95)
<EPS-DILUTED> (.95)
<FN>
<F1> Amount includes the following:
General and administrative expense 39,444
Depreciation and amortization 23,344
Settlement costs related to shareholder
litigation 45,985
Impairment loss 46,021
Restructuring charge 4,600
Restructuring (credit) (2,490)
-------
156,904
=======
</FN>
</TABLE>
