<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
SCHEDULE 14D-9
AMENDMENT NO. 6
SOLICITATION/RECOMMENDATION STATEMENT PURSUANT TO
SECTION 14(D)(4) OF THE SECURITIES EXCHANGE ACT OF 1934
----------------
TRANSITIONAL HOSPITALS CORPORATION
(NAME OF SUBJECT COMPANY)
TRANSITIONAL HOSPITALS CORPORATION
(NAME OF PERSON(S) FILING STATEMENT)
----------------
COMMON STOCK, PAR VALUE $1.00 PER SHARE,
INCLUDING THE ASSOCIATED RIGHTS TO PURCHASE
SERIES B JUNIOR PARTICIPATING PREFERRED STOCK
(TITLE OF CLASS OF SECURITIES)
20 401 510
(CUSIP NUMBER OF CLASS OF SECURITIES)
----------------
RICHARD L. CONTE
CHAIRMAN AND CHIEF EXECUTIVE OFFICER
TRANSITIONAL HOSPITALS CORPORATION
5110 WEST SAHARA AVENUE
LAS VEGAS, NEVADA 89102
(702) 257-3600
(NAME, ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE
NOTICE AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING THIS STATEMENT)
----------------
COPIES TO:
STEPHEN D. SILBERT, ESQ. JULIA L. KOPTA, ESQ.
CHRISTENSEN, MILLER, FINK, JACOBS, EXECUTIVE VICE PRESIDENTAND
GLASER, WEIL & SHAPIRO, LLP GENERAL COUNSEL
2121 AVENUE OF THE STARS, SUITE 1800 TRANSITIONAL HOSPITALS CORPORATION
LOS ANGELES, CALIFORNIA 90067 5110 WEST SAHARA AVENUE
(310) 553-3000 LAS VEGAS, NEVADA 89102
(702) 257-3600
================================================================================
<PAGE>
This Amendment No. 6 is filed to supplement and amend the information set
forth in the Solicitation/Recommendation Statement on Schedule 14D-9 dated May
19, 1997, as amended by Amendment Nos. 1 through 5 thereto (as amended, the
"Schedule 14D-9"), filed by Transitional Hospitals Corporation, a Nevada
corporation (the "Company"), relating to the tender offer of LV Acquisition
Corp., a Delaware corporation (the "Purchaser") and a wholly-owned subsidiary
of Vencor, Inc., a Delaware corporation ("Vencor"), to purchase all the
outstanding common stock, par value $1.00 per share (the "Shares"), of the
Company, including the associated rights to purchase Series B Junior
Participating Preferred Stock (the "Rights") upon the terms and conditions set
forth in the Schedule 14D-1 dated May 7, 1997, as amended (the "Schedule 14-D-
1"), filed by Purchaser and Vencor. Capitalized terms used and not defined
herein shall have the meanings set forth in the Schedule 14D-9. The
description in this Schedule 14D-9 of any agreement, instrument, document or
portion thereof filed as an exhibit to this Schedule 14D-9 is qualified in its
entirety by reference to the copy of such agreement, instrument, document or
portion thereof filed as such exhibit hereto.
ITEM 4. THE SOLICITATION OR RECOMMENDATION
Item 4 of the Schedule 14D-9 is hereby amended and supplemented by adding
thereto the following:
On June 19, 1997, the Company issued a letter to stockholders and press
release communicating the Board's recommendation that the stockholders
accept the Amended Offer and tender their shares pursuant thereto. A form
of the letter to stockholders and the press release are filed as Exhibits
99.25 and 99.26 hereto, respectively, and incorporated herein by reference.
ITEM 8. ADDITIONAL INFORMATION TO BE FURNISHED
Item 8 of the Schedule 14D-9 is hereby amended and supplemented by adding
thereto the following:
Board Representation. The Vencor Merger Agreement provides that upon
consummation of the Amended Offer Vencor may cause the Company to take such
action as is necessary to cause certain persons designated by Vencor to
become directors of the Company. Vencor has informed the Company that it
intends to designate four of the following six persons: W. Bruce Lunsford,
W. Earl Reed, III, Michael R. Barr, Thomas T. Ladt, Jill L. Force and James
H. Gillenwater, Jr., to serve as directors of the Company following
consummation of the Amended Offer. As required by Section 14(f) of the
Securities Exchange Act of 1934, as amended and Rule 14f-1 promulgated
thereunder, information concerning such persons and certain information
concerning the Company is set forth on Schedule I hereto.
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS
Item 9 of the Schedule 14D-9 is hereby amended and supplemented by adding
thereto the following:
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
------- -----------
<C> <S>
99.25 Letter dated June 19, 1997 from the Company to its stockholders
99.26 Press release of the Company dated June 19, 1997
</TABLE>
1
<PAGE>
SIGNATURE
After reasonable inquiry and to the best of my knowledge and belief, I
certify that the information set forth in this statement is true, complete and
correct.
Date: June 19, 1997 TRANSITIONAL HOSPITALS CORPORATION,
a Nevada corporation
By: /s/ Richard L. Conte
-----------------------------
Name: Richard L. Conte
Title: Chairman, Chief Executive
Officer and President
2
<PAGE>
SCHEDULE I
INFORMATION PURSUANT TO SECTION 14(F) OF THE SECURITIES EXCHANGE ACT OF 1934
AND RULE 14F-1 THEREUNDER
GENERAL
The following information is being furnished to holders of the common stock,
par value $1.00 per share (the "Shares"), of Transitional Hospitals
Corporation, a Nevada corporation (the "Company"), in connection with the
designation by Vencor, Inc., a Delaware corporation ("Vencor"), of a majority
of the members of the board of directors of the Company pursuant to the terms
of an Agreement and Plan of Merger, dated as of June 18, 1997 (the "Merger
Agreement"), by and among the Company, Vencor and LV Acquisition Corp., a
Delaware corporation and wholly-owned subsidiary of Vencor (the "Purchaser").
THIS INFORMATION IS BEING PROVIDED SOLELY FOR INFORMATION PURPOSES AND NOT IN
CONNECTION WITH A VOTE OF THE COMPANY'S STOCKHOLDERS.
The Merger Agreement provides that, promptly following the purchase by the
Purchaser of Shares pursuant to the tender offer by Purchaser and Vencor
described in the Schedule 14D-1 dated May 7, 1997, as amended, filed by them
(the "Offer"), Vencor may request that the Company take all actions necessary
to cause persons designated by Vencor to become directors of the Company so
that the total number of such persons equals that number of directors, rounded
up to the next whole number, which represents the product of (x) the total
number of directors on the Board of Directors of the Company multiplied by (y)
the percentage that the number of Shares so accepted for payment plus any
Shares beneficially owned by Vencor or its affiliates as of the date of the
Merger Agreement bears to the number of Shares outstanding at the consummation
of the Offer. Vencor has informed the Company that upon consummation of the
Offer it intends to designate four of the following persons to serve as
directors of the Company: Michael R. Barr, W. Bruce Lunsford, W. Earl Reed,
III, Thomas Ladt, Jill L. Force and James H. Gillenwater, Jr.
The information contained in this Schedule I concerning Vencor and the
Purchaser and its officers and directors has been furnished to the Company by
Vencor and the Purchaser, and the Company assumes no responsibility for the
accuracy or completeness of any such information.
THE COMMON STOCK
The only outstanding class of voting securities of the Company is the
Shares. As of June 11, 1997, there were outstanding 38,994,413 Shares, each of
which is entitled to one vote on each matter to be considered at meetings of
stockholders, including the election of directors. See "Ownership of Company
Securities."
DESIGNEES TO THE COMPANY'S BOARD OF DIRECTORS
Vencor has informed the Company that it will designate four of the persons
set forth below to serve on the Board of Directors of the Company following
consummation of the Offer. The following table, prepared from information
furnished to the Company by Vencor and the Purchaser, sets forth the name,
occupation and age of each of such persons. Each of such persons is a citizen
of the United States of America.
<TABLE>
<CAPTION>
NAME OCCUPATION AGE
---- ---------- ---
<C> <S> <C>
Michael R. Barr................ Executive Vice President and Chief 47
Operating Officer of Vencor
W. Bruce Lunsford.............. Chairman of the Board, President and 49
Chief Executive Officer of Vencor
W. Earl Reed, III.............. Executive Vice President and Chief 45
Financial Officer of Vencor
Thomas T. Ladt................. Executive Vice President, Operations of 46
Vencor
Jill L. Force.................. Senior Vice President, General Counsel 44
and Corporate Secretary of Vencor
James H. Gillenwater, Jr....... Senior Vice President of Planning and 40
Development of Vencor
</TABLE>
1
<PAGE>
Michael R. Barr, a founder of Vencor, physical therapist and certified
respiratory therapist, has served as Chief Operating Officer and Executive
Vice President of Vencor since February 1996 and as Vice President and a
director of the Purchaser since May 1997. From November 1995 to February 1996,
he was Executive Vice President of Vencor and Chief Executive Officer of
Vencor's Hospital Division. Mr. Barr served as Vice President, Operations from
1985 to November 1995. He has been a director of Vencor since 1985. Mr. Barr
is a director of Colorado MEDtech, Inc., a medical products and equipment
company.
W. Bruce Lunsford, a founder of Vencor, certified public accountant and
attorney, has served as Chairman of the Board, President and Chief Executive
Officer of Vencor since Vencor commenced operations in 1985 and as Chairman of
the Board, President and Chief Executive Officer of the Purchaser since May
1997. Mr. Lunsford is a director of National City Corporation, a bank holding
company; Churchill Downs Incorporated, the owner of Churchill Downs horse race
track; and Res-Care, Inc., a provider of residential training and support
services for persons with developmental disabilities and certain vocational
training services. Mr. Lunsford is a member and Chairman of the Executive
Committee of the Board of Directors of Vencor.
W. Earl Reed, III, a certified public accountant, has served as a director
of Vencor since 1987 and as Vice President and a director of the Purchaser
since May 1997. He has been Chief Financial Officer and Executive Vice
President of Vencor since November 1995. From 1987 to November 1995, Mr. Reed
served as Vice President, Finance and Development of Vencor.
Thomas T. Ladt has served as Executive Vice President, Operations of Vencor
since February 1996 and as Vice President and a director of the Purchaser
since May 1997. From November 1995 to November 1996, he served as President of
Vencor's Hospital Division. From December 1993 to November 1995, Mr. Ladt was
Vice President of Vencor's Hospital Division. From 1989 to December 1993, he
was Regional Director of Operations of Vencor.
Jill L. Force has served as Senior Vice President, General Counsel and
Corporate Secretary of Vencor since December 1996 and as Secretary of the
Purchaser since May 1997. From November 1995 to December 1996, she was Vice
President, General Counsel and Corporate Secretary. From 1989 to 1995, she was
General Counsel and Corporate Secretary.
James H. Gillenwater, Jr. has served as Senior Vice President of Planning
and Development of Vencor since December 1996 and as Vice President of the
Purchaser since May 1997. From November 1995 through December 1996 he was Vice
President of Planning and Development of Vencor. From 1989 through November
1995 he was Director of Planning and Development of Vencor.
2
<PAGE>
INFORMATION CONCERNING EXISTING DIRECTORS OF THE COMPANY
The following table lists and provides biographical data about the existing
directors of the Company. Following the Offer, each of the directors, other
than Richard L. Conte, Wendy L. Simpson and Nigel Petrie, will resign.
<TABLE>
<CAPTION>
DIRECTOR
OCCUPATION AND CONTINUOUSLY TERM
NAME AGE BUSINESS EXPERIENCE SINCE EXPIRES*
---- --- ------------------- ------------ --------
<C> <C> <S> <C> <C>
Carol J. Burt(1)(2)(4)(5)........ 39 Senior Vice President-- 1996 1999
Finance and Treasurer,
American Medical
Response since 1996;
Managing Director and
head of the Healthcare
Group of Chase
Securities Inc., a
subsidiary of the Chase
Manhattan Corporation,
1992-1996.
Richard L. Conte................. 43 Chairman of the Board of 1991 1997
Directors since May
1992, Chief Executive
Officer since April
1992 and President
since October 1993;
President 1991-1992;
Mr. Conte is also
Chairman of the Board
of Directors of
Behavioral Healthcare
Corporation, a company
providing behavioral
healthcare services in
which the Company has a
significant investment
("BHC").
Jack H. Lindheimer, M.D.(2)(3)... 65 Corporate Medical 1983 1998
Director, U.S.
Psychiatric Services of
the Company, 1991-1996;
Medical Director, CPC
Alhambra Hospital, a
psychiatric hospital
formerly owned by the
Company, 1970-1992;
physician in private
practice since 1960,
specializing in
psychiatry.
Nigel Petrie(1)(4)(5)............ 50 Managing Director, 1995 1998
United Kingdom, Edison
Mission Energy, a
subsidiary of Edison
International based in
Rosemead, California,
independent power
developers and
operators, since 1996;
General Manager of the
Pumped Storage Business
of National Grid
Company plc 1993-1996;
General Manager,
Resourcing, National
Grid Company, from
1989-1993.
Dana L. Shires, M.D.(1)(3)(4)(5). 64 Physician in private 1989 1997
practice since 1961
specializing in
nephrology; Chairman,
Chief Executive Officer
and President of
LifeLink Foundation, a
not-for-profit
corporation.
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
DIRECTOR
OCCUPATION AND CONTINUOUSLY TERM
NAME AGE BUSINESS EXPERIENCE SINCE EXPIRES*
---- --- ------------------- ------------ --------
<C> <C> <S> <C> <C>
Wendy L. Simpson(1)(2)(3)....... 48 Executive Vice 1995 1999
President, Chief
Operating Officer of
the Company since
August 1996 and Chief
Financial Officer and
Treasurer of the
Company since December
1994; Senior Vice
President of the
Company, July 1994-
December 1994; Senior
Vice President and
Chief Financial
Officer, Weisman
Taylor Simpson &
Sabatino, a consulting
company, from February
1992 through July
1994; Ms. Simpson is
also a director of BHC
and LTC Properties,
Inc., a real estate
investment trust.
Robert L. Thomas(1)(2)(3)(4)(5). 72 Retired since 1993; 1993 1997
Consultant, 1992-1993
and Executive
Director, 1977-1992,
National Association
of Private Psychiatric
Hospitals, a nonprofit
entity; Mr. Thomas is
also a director of
BHC.
Ralph J. Watts(1)(4)(5)......... 50 President and Chief 1996 1998
Executive Officer,
Cardiovascular
Ventures, Inc. since
1992; President and
Chief Executive
Officer of Ramsay
Health Care, Inc.
1988-1992; Mr. Watts
is also a director of
Health and Retirement
Trust, a real estate
investment trust.
</TABLE>
- --------
* In January 1997, the Board of Directors voted to amend the Company's
Articles of Incorporation to repeal the Company's historic classified board
structure, which provided for elections of board members by classes for
three year terms. Such amendment was to be presented to the stockholders at
the next annual meeting.
(1) Member of the Audit Committee.
(2) Member of the Committee on Public Policy.
(3) Member of the Quality Management Committee.
(4) Member of the Compensation Committee.
(5) Member of the Nominating Committee.
INFORMATION CONCERNING BOARD AND COMMITTEE MEETINGS
The Board of Directors held 15 meetings during fiscal 1996. The Board of
Directors has standing audit, compensation, nominating, public policy and
quality management committees.
The Audit Committee met two times during fiscal 1996. The Audit Committee
reviewed with the auditors the results of the 1996 audit, evaluated the
adequacy of the internal accounting controls of the Company, the internal
audit function, the procedures for recording, evaluating and collecting
accounts receivable and the scope and cost of the audit for fiscal 1997.
The Committee on Public Policy met three times during fiscal 1996. This
committee examines the potential effect on the Company of proposed legislation
and other rules and regulations affecting the Company.
4
<PAGE>
The Quality Management Committee met three times during fiscal 1996. This
committee evaluates the quality and outcomes of care provided at the Company's
facilities.
The Compensation Committee met four times during fiscal 1996. The
Compensation Committee reviewed and set executive compensation for 1996. See
"Compensation Committee Report on Executive Compensation."
The Nominating Committee met two times during fiscal 1996. Its function is
to recommend nominees to the Company's Board of Directors. The Nominating
Committee will consider nominees recommended by stockholders; provided that
any stockholder recommendation must be in writing and must include (i) the
name, address and number of Shares beneficially owned by the stockholder and
the nominee, (ii) all biographical information relating to the nominee
required by law to be disclosed in solicitations of proxies for elections of
directors and (iii) the nominee's written consent to submission of his or her
name to the Nominating Committee for consideration. Such notices may be
submitted at any time, but a recommendation of a nominee for the election of
directors at an annual meeting of stockholders must be received by the Company
no later than the date stockholder proposals for such meeting must be
submitted. The Nominating Committee and the Board have and reserve the right
to make all final decisions, in their sole discretion, with respect to
nominees for director.
LEGAL PROCEEDINGS
On May 7, 1997, Vencor, Jill L. Force and Patrick W. Mattingly filed a
complaint in the United States District Court of Nevada against the Company,
each of the directors of the Company and SM Acquisition Co. seeking damages
and injunctive relief for alleged breaches of fiduciary duty in connection
with the negotiations and execution of the Agreement and Plan of Merger dated
as of May 2, 1997 among the Company, Select Medical Corporation and SM
Acquisition Co. Vencor has informed the Company that Vencor intends to
discontinue the action. Vencor has determined to take such action based on
information that it has obtained during the course of its negotiations with
the Company which has led Vencor to believe that the actions taken by the
Board of Directors forming the basis of Vencor's complaint were the result of
misunderstandings.
5
<PAGE>
INFORMATION CONCERNING EXECUTIVE OFFICERS
The following table lists and provides biographical data about the current
executive officers of the Company.
<TABLE>
<CAPTION>
PERIOD OF SERVICE AND
NAME AGE TITLE BUSINESS EXPERIENCE
---- --- ----- ---------------------
<C> <C> <C> <S>
Richard L. Conte.. 43 Chairman of the Board of Directors, See information under
Chief Executive Officer "Information Concerning
and President of the Company Existing Directors of
the Company."
Wendy L. Simpson.. 48 Executive Vice President, See information under
Chief Operating Officer, "Information Concerning
Chief Financial Officer Existing Directors of
and Treasurer of the Company the Company."
James R. Laughlin. 50 Executive Vice President Appointed Executive Vice
--Development of the Company President--Development
August 1996 and
President of the
Company's transitional
hospitals subsidiary
May 1992; President,
The Phoenix Group,
health care consultants
1991-1992.
Ronald L. Ooley... 51 Chief Operating Officer-- Appointed Chief
U.S. Hospital Operations Operating Officer--U.S.
of the Company Hospital Operations
August 1996; Corporate
Secretary 1994-1996;
Executive Vice
President--
Administration 1993-
1996; Senior Vice
President--Human
Resources 1992; Vice
President--Human
Resources, The Phoenix
Group, health care
consultants, 1991-1992.
Julia L. Kopta.... 47 Executive Vice President Appointed Corporate
--General Counsel and Secretary August 1996,
Corporate Secretary of the Company General Counsel of the
Company 1995 and
Executive Vice
President--Corporate
Planning and
Development of the
Company 1993;
Chairperson and Chief
Executive Officer, Care
Visions Corporation, a
health care corporation
1987-1993.
Eric Grafals...... 44 Executive Vice President Appointed Executive Vice
--Puerto Rico President Puerto Rico
and Latin American and Latin American
Operations and Development Operations and
of the Company Development of the
Company August 1996;
Senior Vice President
of the same in 1995;
Vice President--
Development, Silverado
Healthcare, Inc, 1994;
Vice President, U.S.
psychiatric operations
of the Company in 1993
and the Florida region,
1992; Administrator--
CPC San Juan
Capestrano, a
psychiatric hospital
formerly operated by
the Company, 1991.
</TABLE>
6
<PAGE>
EXECUTIVE OFFICER COMPENSATION
Summary of Cash and Certain Other Compensation. The following table shows
compensation earned by the named executive officers during the fiscal years
covered and paid by the Company to (i) the Chief Executive Officer, for his
service in all executive capacities during the fiscal years ending November
30, 1994, 1995 and 1996, and (ii) to each of the other four most highly
compensated executive officers who were serving as executive officers on
November 30, 1996, in all executive capacities in which they served during the
fiscal years ending November 30, 1994, 1995 and 1996:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
--------------------------
ANNUAL COMPENSATION SECURITIES ALL
-------------------- UNDERLYING LTIP(1) OTHER
YEAR SALARY($) BONUS($) OPTIONS/SARS(#) PAYOUTS($) COMPENSATION($)
---- ---------- --------- --------------- ---------- ---------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Conte........ 1996 750,000 528,900 200,000 605,250 $3,280,274(2)
Chief Executive Officer
and 1995 750,000 285,000 300,000 213,000 837,475(3)
President 1994 750,000 237,500 100,000 -- 218,802(4)
James R. Laughlin....... 1996 400,000 202,040 30,000 91,844 547,505(5)
Executive Vice 1995 400,000 83,200 155,000 -- 124,982(6)
President--Development 1994 400,000 50,000 105,000 -- --
Wendy L. Simpson........ 1996 331,155 225,566 343,977 300,597 219,614(7)
Executive Vice 1995 267,468 104,000 80,000 41,665 25,000(7)
President--Chief 1994 87,800 50,000 76,023 -- --
Operating Officer and
Chief Financial Officer
Ronald L. Ooley......... 1996 250,000 176,300 65,000 209,833 272,549(8)
Executive Vice 1995 200,000 76,000 170,000 68,160 156,730(8)
President--U.S. 1994 200,000 -- 27,475 -- --
Hospitals Operations
Julia L. Kopta.......... 1996 250,000 176,300 155,000 167,742 202,203(9)
Executive Vice 1995 221,152 56,250 75,000 60,350 --
President-- 1994 200,000 50,000 57,373 -- 32,321(9)
General Counsel
</TABLE>
- --------
(1) From fiscal year 1994 to 1996, the Company had an Incentive Compensation
Plan that measured both annual and long-term performance of key executives
related to the Company's three business segments. The annual incentive
plan provided for cash bonuses as a function of each business segment
meeting certain annual net income targets. Awards were weighted among the
three business divisions of the Company as follows: Priory Hospitals
Group, the Company's former operations in the United Kingdom ("PHG")--25%;
U.S. Psychiatric Division, the Company's former psychiatric operations in
the U.S.--25%; and the Company's transitional hospitals line of business
("THC")--50%. The long-term portion of the plan measured performance over
successive three-year periods against EBITDA (earnings before interest,
taxes, depreciation, and amortization) targets applicable to each of the
Company's business segments and strategic criteria established by the
Compensation Committee of the Board of Directors. In the case of THC,
expansion of its facility base was also a factor. Performance measures
were stated in terms of minimum, target and maximum achievement standards.
The Company's Chief Executive Officer had the discretion to increase or
decrease awards under the long-term incentive plan by up to 20%. With the
sale of PHG and the U.S. psychiatric hospitals in fiscal year 1996,
certain payments were made under the long-term plan based on results
through fiscal year 1996. Bonuses were paid based on PHG achieving the
maximum EBITDA target for the three years ending in 1996, THC achieving
the maximum EBITDA target for the two years ending in 1996, and THC
exceeding the minimum of its facility expansion target over the three year
period. In recognition of the successful sale and financial turnaround of
the psychiatric hospitals that were sold to BHC, the Board of Directors
approved a small amount for bonus (equal to a maximum 3.7% of salary)
related to the U.S. psychiatric segment. For fiscal year 1995, long-term
incentive bonuses were paid based on PHG achieving the maximum of its
EBITDA target over a two year period and THC exceeding the minimum of its
facility expansion target over a two year period.
7
<PAGE>
(2) Includes $241,036 deferred compensation accrued for Mr. Conte, $333,333 in
loan forgiveness related to a bonus awarded in the form of a three year
loan in recognition of the founding of THC, $2,689,447 of interim payments
pursuant to Mr. Conte's employment contract, $12,000 in life insurance
premiums, and $4,458 paid for car allowance.
(3) Includes $133,803 deferred compensation accrued for Mr. Conte, $192,308 in
loan forgiveness, $118,293 paid in lieu of accrued vacation, $11,125 in
life insurance premiums and $75,000 in relocation funds accrued for Mr.
Conte. Also includes $306,946 paid to Mr. Conte as reimbursement for
certain income taxes arising from the payout of deferred compensation in
connection with the termination of the Company's Supplemental Retirement
Plan. The Company received approximately $4,500,000 in connection with the
termination of such plan.
(4) Represents $54,930 in life insurance premiums paid by the Company on
behalf of Mr. Conte and $163,872 of deferred compensation accrued for Mr.
Conte in 1994.
(5) Represents $333,333 in loan forgiveness related to a bonus awarded in the
form of a three year loan in recognition of the founding of THC, $200,000
interim payment paid pursuant to Mr. Laughlin's employment contract in
connection with the sale of the U.S. psychiatric division and $14,172 paid
for car allowance.
(6) Represents $41,666 in loan forgiveness, $29,230 paid in lieu of accrued
vacation, $47,000 in relocation funds and $7,086 paid for car allowance.
(7) Represents $200,000 interim payment paid pursuant to Ms. Simpson's
employment contract in connection with the sale of the U.S. psychiatric
division and $19,614 paid for car allowance. In 1995 $25,000 was paid to
Ms. Simpson for reimbursement of relocation expenses.
(8) Represents $250,000 and $153,846 in loan forgiveness in 1996 and 1995,
respectively. In 1995 $2,884 was paid in lieu of accrued vacation. In 1996
$22,549 was paid to Mr. Ooley for car allowance.
(9) Represents $200,000 interim payment paid pursuant to Ms. Kopta's
employment contract in connection with the sale of the U.S. psychiatric
division and $2,203 for a car allowance in 1996. Amounts paid in 1994
relate to reimbursement of relocation expenses of $25,000 and $7,321 paid
in lieu of accrued vacation.
8
<PAGE>
Stock Options and Stock Appreciation Rights. The following table contains
information concerning the grant of stock options and tandem limited stock
appreciation rights ("SARs") under the Company's 1989 Stock Incentive Plan
(the "Stock Incentive Plan") to the persons listed in the Summary Compensation
Table during the fiscal year ended November 30, 1996:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
---------------------------------------------- POTENTIAL REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS/SARS ANNUAL RATE OF STOCK
SECURITIES GRANTED TO EXERCISE PRICE APPRECIATION
UNDERLYING EMPLOYEES IN OR BASE OVER OPTION TERM
OPTIONS/SARS FISCAL PRICE EXPIRATION ---------------------
NAME GRANTED YEAR ($/SH.) DATE 5%(1) 10%(1)
---- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Conte........ 100,000(2) 7.65 11.000 12/01/05 $ 691,784 $1,753,117
100,000(2) 7.65 8.891 10/22/06 559,150 1,416,996
James R. Laughlin....... 30,000(2) 2.30 11.000 12/01/05 207,535 525,935
Wendy L. Simpson........ 30,000(2) 2.30 11.000 12/01/05 207,535 525,935
90,000(3) 6.89 12.000 01/05/06 679,206 1,721,242
223,977(2) 17.14 8.891 10/22/06 1,252,368 3,173,746
Ronald L. Ooley......... 20,000(2) 1.53 11.000 12/01/05 138,357 350,623
45,000(3) 3.44 12.000 01/05/06 339,603 860,621
Julia Kopta............. 20,000(2) 1.53 11.000 12/01/05 138,357 350,623
85,000(3) 6.51 12.000 01/05/06 641,473 1,625,617
50,000(2) 3.83 8.891 10/22/06 279,575 708,498
</TABLE>
- --------
(1) The assumed 5% and 10% annual rates of appreciation over the term of the
options are set forth in accordance with rules and regulations adopted by
the Securities and Exchange Commission and do not represent the Company's
estimate of stock price appreciation. The Merger Agreement provides that
holders of options will receive the difference, if any, between $16.00 and
the exercise price of the options. See "Executive Officer Compensation--
Options/SAR Holdings."
(2) Twenty percent of the granted options vested on the date of grant. An
additional 20% were to vest on the anniversary date of the grant date of
each of the following four fiscal years. In accordance with the Merger
Agreement all of the options will become fully vested and exercisable
prior to the consummation of the Offer. Pursuant to the terms of his
Employment Agreement, all options granted to Mr. Conte vested as a result
of the sales of PHG and the U.S. psychiatric division.
(3) Twenty percent of the granted options vested on the date of grant. An
additional 20% vest on the first day of each of the following four fiscal
years. In accordance with the Merger Agreement all of the options will
become fully vested and exercisable prior to the consummation of the
Offer.
9
<PAGE>
Options/SAR Holdings. The following table sets forth the number of Shares
acquired on exercise of options during the fiscal year ended November 30, 1996
and the number subject to outstanding stock options held by each of the
persons listed in the Summary Compensation Table as of the end of that fiscal
year. The closing price of the Shares on the New York Stock Exchange on
November 30, 1996 was $9.125.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED,
OPTIONS/SARS HELD AT IN-THE-MONEY OPTIONS/
FISCAL YEAR END SARS AT FISCAL YEAR END(1)
------------------------- ------------------------------
SHARES
ACQUIRED
ON VALUE
NAME EXERCISE REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- ------------ ----------- ------------- ------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Conte........ 0 0 1,040,000 0 $ 23,400 0
James R. Laughlin....... 0 0 263,000 242,000 0 0
Wendy L. Simpson........ 0 0 130,795 369,205 10,482 41,929
Ronald L. Ooley......... 0 0 129,000 218,475 0 0
Julia Kopta............. 0 0 73,000 214,373 2,340 9,360
</TABLE>
- --------
(1) Options are "in the money" at the fiscal year-end if the fair market value
of the Shares underlying the option on such date exceeds the exercise or
base price of the option. The amounts set forth in the table above
represent the difference between the fair market value of the Shares
underlying the options on November 30, 1996, as reported by the New York
Stock Exchange ($9.125 per share), and the exercise price of the options,
multiplied by the number of "in the money" options. Mr. Conte had 100,000
exercisable options that were "in the money"; Ms. Simpson had 44,795
exercisable and 179,182 unexercisable options that were "in the money";
and Ms. Kopta had 10,000 exercisable and 40,000 unexercisable options that
were "in the money." The Merger Agreement provides that holders of options
will receive the difference, if any, between $16.00 and the exercise price
of the options. Mr. Conte, Mr. Laughlin, Ms. Simpson, Mr. Ooley and Ms.
Kopta will receive approximately $4,657,000, $1,748,000, $2,642,000,
$1,327,000 and $1,162,000, respectively, for their options.
CERTAIN EMPLOYMENT ARRANGEMENTS
Employment Contracts. In December 1995, the Company entered into a new
employment agreement with Mr. Conte. In connection with such agreement, the
Company obtained the advice of an independent compensation firm and outside
legal counsel. The agreement was unanimously approved by the Company's
Compensation Committee.
Pursuant to the agreement, Mr. Conte is employed as the President, Chief
Executive Officer and Chairman of the Board of the Company for a four-year
term beginning December 1, 1995, with an automatic one-year extension of such
term on December 1 of each year. Mr. Conte is to receive an annual salary of
not less than $750,000 and will be entitled to participate in insurance and
deferred compensation plans which may be established from time to time by the
Company, with such participation generally to be on the same terms on which
any such plan is made available to any senior Company executive. Mr. Conte
presently receives deferred compensation equal to 9.5% of his cash
compensation, which deferred compensation is payable following his termination
of employment. Mr. Conte also participates in the Company's 401(k) plan. The
agreement provides that the Company will reimburse Mr. Conte for premiums on a
$5,000,000 life insurance policy.
In connection with the sale of the U.S. psychiatric hospitals to BHC, the
Company, BHC and Mr. Conte entered into an agreement pursuant to which the
Company agreed to make Mr. Conte available to serve as the Chairman of BHC's
Board of Directors for a period of four years. BHC will pay the Company
$200,000 per year for Mr. Conte's services so long as Mr. Conte is employed by
the Company. Should Mr. Conte's employment with the Company cease, such
payments will be made to Mr. Conte for the period remaining of the original
four years. The parties have agreed in principal to (and the Boards of
Directors of BHC and the
10
<PAGE>
Company have approved) an amendment to the agreement whereby, if there is a
change of control of BHC (as that term is defined), BHC would pay to the
Company, or to Mr. Conte if he is no longer employed by the Company in his
current positions or if the Board of Directors of the Company otherwise
agrees, all amounts which would have been paid by BHC under the agreement from
the date of the change of control of BHC through November 30, 2000. The
amendment would also provide that if Mr. Conte's employment with the Company
terminates subsequent to a change of control of BHC, Mr. Conte would be
entitled to receive a payment from the Company in an amount equal to the
portion of the payment made to the Company by BHC which is attributable to
periods commencing after the termination of Mr. Conte's employment. It is
expected that Mr. Conte will terminate his employment with the Company shortly
following the consummation of the Offer. Thereafter, all payments under this
agreement will be paid directly to Mr. Conte.
Following a change in control of the Company and upon the earlier of (i) the
date on which Mr. Conte gives notice of his intent to terminate his
employment, (ii) the date on which the Company gives notice to him that it
intends to terminate his employment and (iii) the date of his death, Mr. Conte
would be entitled to receive a lump sum payment in an amount equal to the sum
of: (i) six times Mr. Conte's salary (presently $750,000 per year);
(ii) salary for the period commencing on the date of the change of control and
ending one year following such date; (iii) the maximum bonus Mr. Conte could
have received under the Company's annual incentive compensation plan for the
fiscal year in which the change of control occurred (which amount must be at
least equal to his salary); (iv) the maximum bonus Mr. Conte could have
received for each three-year plan cycle under the Company's long-term
compensation plan (which amount for each plan year must be at least equal to
his salary, and provided that amounts payable for any three-year plan cycle
will be pro rated to the extent the change of control occurs less than halfway
through such plan cycle); (v) all deferred compensation accrued through the
date of the change of control and (vi) pursuant to his deferred compensation
plan, an additional amount equal to 9.5% of the sum of (A) all salary, bonus,
deferred compensation, loan forgiveness and other amounts paid to Mr. Conte
upon a change of control and (B) the appreciated value of stock options. Also,
certain loans made to Mr. Conte by the Company will be forgiven. In accordance
with the terms of his employment agreement, certain amounts were previously
paid in connection with the sale of the Company's psychiatric operations. Mr.
Conte would also receive the foregoing benefits in the event of a hostile
takeover or corporate reorganization (as such terms are defined in Mr. Conte's
employment agreement). Mr. Conte's employment agreement provides that he may
terminate his employment at any time within one year after a change of control
or corporate reorganization of the Company or immediately upon a hostile
takeover of the Company. It is expected that Mr. Conte will terminate his
employment with the Company shortly following the consummation of the Offer.
For six years following the termination of his employment, Mr. Conte will be
reimbursed for premiums on a $5,000,000 life insurance policy, will continue
to be covered under the Company's employee benefit programs and will continue
to receive income tax preparation services. Mr. Conte will also receive title
to the automobile provided for his use by the Company. In addition, the
Company will pay Mr. Conte for any excise taxes resulting from payments made
to him in connection with the change of control, corporate reorganization or
hostile takeover of the Company being deemed parachute payments under
Section 280G of the Internal Revenue Code of 1986, as amended (the "Code").
Mr. Conte will make himself available as a consultant to the Company for ten
years following his termination of employment, during which time Mr. Conte
will be entitled to use his present office as well as secretarial and
administrative services of the Company.
If Mr. Conte's employment terminates in connection with a change of control,
a corporate reorganization or permanent disability, under his employment
agreement Mr. Conte will be subject to a four-year non-competition covenant in
specified territories and a four-year non-solicitation covenant, and he will
be obligated to make himself available for consulting services for a period of
ten years for up to eight hours per month. If Mr. Conte voluntarily resigns,
in certain instances he will remain subject to his non-competition, non-
solicitation and consulting covenants, but he will receive no other severance
benefits under the employment agreement other than the appraised value of the
non-competition and consulting covenants.
11
<PAGE>
Mr. Conte will receive no severance payments or other benefits if his
employment is terminated by the Company for cause (as defined and subject to
certain standards of proof set forth in the agreement) unless the Company
elects to enforce his non-competition and consulting covenants, in which event
the Company will pay him the appraised value of such covenants.
Upon each "corporate divestiture" (generally, the disposition of any one or
more stand-alone business operations or other disposal of assets which
represent at least 30% of the book value of the Company's consolidated assets
or which generate at least 30% of its consolidated revenues), Mr. Conte will
receive an interim payment of a portion of his severance benefit (an "Interim
Payment"), determined on a formula basis, and all his unvested options will
immediately vest. The total amount which may be paid during the term of the
agreement in connection with "corporate divestitures" is limited to five times
Mr. Conte's highest salary during the employment period (plus 9.5% of such
amount) plus the amount credited to all his deferred compensation accounts.
The amount of all such interim benefits which are deemed to be parachute
payments under Section 280G of the Code, together with all other interim
benefits received pursuant to this provision which are deemed to be parachute
payments, is also limited to 2.99 times Mr. Conte's average compensation for
the five years prior to such payment. Any Interim Payments will be subtracted
from any severance benefits later payable to Mr. Conte upon a termination of
employment.
The agreement provides that Mr. Conte will be entitled to reimbursement by
the Company for (i) all excise taxes imposed upon any of the benefits paid to
him under the employment agreement which are deemed to constitute excess
parachute payments under Section 280G of the Code and (ii) the ordinary
federal and state income taxes imposed on that reimbursement.
The Company also has entered into separate employment contracts with Ms.
Simpson, Mr. Laughlin, Mr. Ooley, and Ms. Kopta, each of which expire November
30, 1999 and provide for automatic one-year extensions of such term on
December 1 of each year. Mr. Ooley's contract was not renewed as of December
1, 1996. Ms. Simpson, Mr. Laughlin, Mr. Ooley and Ms. Kopta are entitled to an
annual salary of $500,000, $400,000, $250,000 and $300,000, respectively. Each
of their employment contracts provides that following upon a change of control
of the Company (as such term is defined in such employment agreement) and upon
the earlier of (i) the date on which he or she gives notice of his or her
intent to terminate his or her employment (which notice must specify a
termination date no sooner than December 24, 1997), (ii) the date on which the
Company gives notice to him or her that it intends to terminate his or her
employment and (iii) the date of his or her death, each would be entitled to
receive a lump sum payment equal to the sum of: (i) two times his or her
salary; (ii) the maximum bonus he or she could have received under the
Company's annual incentive compensation plan for the fiscal year in which the
change of control occurs; (iii) the maximum incentive bonus he or she could
have received for each three-year plan cycle under the Company's long-term
incentive compensation plan (provided that amounts payable for any three-year
plan cycle will be prorated to the extent the change of control occurs less
than halfway through such plan cycle); and (iv) an amount equal to his or her
car allowance payable for two years following the change of control. Also
certain loans made to them by the Company will be forgiven. The Company will
also pay each of them for any excise taxes resulting from payments made to
them in connection with the change of control of the Company being deemed
parachute payments under Section 280G of the Code. Following a change of
control the Company will place into escrow an additional amount equal to one
year's salary for each person. Such amount will be released to each person at
the earlier of six months following the change of control and the date on
which such person is released from his or her employment with the Company. If
any of them terminate their employment, they will continue to be covered under
the Company's employment benefit programs for two years following their
termination of employment and will receive certain outplacement services. Each
of them will make themselves available as a consultant for five years
following their termination of employment, during which time they will be
entitled to use their present office as well as secretarial and administrative
services of the Company.
These individuals would be entitled to receive substantially the same
benefits if their employment were to be terminated by the Company other than
for certain specified events of misconduct or if they terminated their
12
<PAGE>
employment following (i) a material breach by the Company of their respective
contracts or (ii) a material change in their duties or responsibilities. In
such event, the terminating individual would not be subject to the non-
competition covenant or consulting arrangement under her or his contract.
In the event of a "corporate divestiture" (generally, the disposition of any
one or more stand-alone business operations or other disposal of assets which
represent at least 30% of the book value of the Company's consolidated assets
or which generate at least 30% of its consolidated revenues), the Board of
Directors may elect, in its sole discretion, to pay these individuals a
special interim payment in an amount determined by the Board of Directors. Any
interim payment made to these individuals will be subtracted from any
severance benefits later payable to them upon a termination of employment. In
connection with the sale of the U.S. psychiatric hospitals, the Board of
Directors approved interim payments in the amount of $200,000 to Ms. Simpson,
Ms. Kopta, and Mr. Laughlin.
None of these employees would receive any severance payments or other
benefits under their contracts in the event their employment were to be
terminated by the Company for certain specified acts of misconduct, unless the
Company elects to enforce the non-competition and consulting covenants under
their contracts, in which event the Company will pay these employees the
appraised value of those contracts. If any of these employees should
voluntarily resign other than in connection with a material change in her or
his duties or responsibilities, than such individual will remain subject to
her or his non-competition and consulting covenants under the contract upon
the Company's payment of the appraised value of those covenants, but such
individual will receive no other severance under the contract.
Retirement Benefits. During 1995, the Company terminated the Supplemental
Retirement Agreement (the "SRA") to which Mr. Conte and four former executive
officers had been parties since 1988. At the same time, the Board of Directors
authorized and established a new Supplemental Retirement Agreement (the "New
SRA") to which Mr. Conte is a party. Mr. Conte agreed to the termination of
the SRA which allowed the Company to terminate or borrow against 11 corporate-
owned life insurance policies pertaining to these five executive officers. The
Company received approximately $4,500,000 from these policies. During 1995,
Mr. Conte, the sole remaining participant, agreed to receive a lump sum
payment, which allowed the Company to complete the termination of the SRA.
Accordingly, Mr. Conte received $779,400 which had been accrued under the SRA,
and the Company was able to record a tax benefit of approximately $287,00 as a
result of this payout. The Board of Directors also authorized $306,946 for
reimbursement of income taxes on the deferred benefits paid in connection with
the termination of the SRA, which amounts were included in the payment
described above. See "Executive Officer Compensation--Summary Compensation
Table." The New SRA provides for the same contributions as the SRA; (i)
deferred benefits equal to 9.5% of total cash compensation and (ii) interest
will continue to be credited annually to this accrued amount at a rate to be
specified from time to time by the Company, currently at 8% per year.
Distributions will be made at the time of Mr. Conte's retirement or
termination of employment. During fiscal years 1996 and 1995, respectively,
$241,036 and $133,803 was accrued on behalf of Mr. Conte under the new SRA
based on cash compensation received by Mr. Conte during the respective plan
years. In 1997 Mr. Conte received a payout of approximately $545,000 under the
SRA.
13
<PAGE>
COMPENSATION OF DIRECTORS
During fiscal 1996 those directors who were not employed by the Company
received a fee of $3,000 for each Board meeting and $1,000 for each committee
meeting attended, plus travel expenses. These directors also receive a fee of
$2,500 for each telephonic meeting of the Board of Directors and $500 for each
telephonic meeting of a committee thereof. Officers of the Company who serve
as directors receive only reimbursement of expenses incurred in attending
meetings. Pursuant to the Company's Stock Incentive Plan, annual automatic
grants of options covering 5,000 shares are made to each nonemployee director
on January 26 of each year.
OWNERSHIP OF COMPANY SECURITIES
Set forth in the following table is the beneficial ownership of Shares as of
May 31, 1997 for all current directors, the executive officers of the Company
named in the Summary Compensation Table, directors and executive officers as a
group, and, to the best of the Company's knowledge, based on information
available to the Company and a review of statements filed with the Securities
and Exchange Commission pursuant to Section 13(d) and 13(g) of the Exchange
Act, beneficial owners of 5% or more of the Shares. Such table gives effect to
the vesting of options in connection with the consummation of the Offer as
provided in the Merger Agreement.
<TABLE>
<CAPTION>
AMOUNT OF BENEFICIAL PERCENT
OWNERSHIP AS OF OF
DIRECTORS AND EXECUTIVE OFFICERS MAY 31, 1997 CLASS
-------------------------------- -------------------- -------
<S> <C> <C>
Carol Burt(1).................................. 5,000 *
Richard L. Conte(2)............................ 1,070,802 2.67%
Julia Kopta(3)................................. 287,373 *
James R. Laughlin(4)........................... 505,000 1.28%
Jack H. Lindheimer(5).......................... 96,000 *
Ronald L. Ooley(6)............................. 349,975 *
Nigel Petrie(7)................................ 12,500 *
Dana L. Shires(8).............................. 68,299 *
Wendy Simpson(9)............................... 504,400 1.28%
Robert L. Thomas(10)........................... 25,000 *
Ralph Watts(11)................................ 5,000 *
All directors & executive officers as a group
(12 persons)(12).............................. 2,979,349 7.10%
OTHER BENEFICIAL OWNERSHIP:
Brandywine Asset Management.................... 2,740,200 7.03%
3 Christina Center, Suite 1200
201 North Walnut Street
Wilmington, Delaware 19801
Heartland Advisors, Inc. ...................... 2,852,100 7.32%
790 North Milwaukee Street
Milwaukee, WI 53202
</TABLE>
- --------
*Less than 1%.
(1) Consists of options to purchase 5,000 Shares issued under the Stock
Incentive Plan.
(2) Includes 1,040,000 Shares which Mr. Conte has the right to acquire
pursuant to exercise of options vested under the Stock Incentive Plan.
Includes 6,640 shares owned by Mr. Conte and also includes 24,162 shares
held in trust for Mr. Conte's children for which he disclaims any
beneficial ownership or interest.
(3) Consists of 287,373 Shares which Ms. Kopta has the right to acquire upon
exercise of options vested under the Stock Incentive Plan.
(4) Consists of 505,000 Shares which Mr. Laughlin has the right to acquire
upon exercise of options vested under the Stock Incentive Plan.
(5) Includes 96,000 Shares which Dr. Lindheimer has the right to acquire upon
exercise of options vested under the Stock Incentive Plan.
(6) Includes 347,475 Shares which Mr. Ooley has the right to acquire upon
exercise of options vested under the Stock Incentive Plan.
(7) Includes 12,500 Shares which Mr. Petrie has the right to acquire upon
exercise of options vested under the Stock Incentive Plan.
14
<PAGE>
(8) Includes 40,000 Shares which Dr. Shires has the right to acquire within 60
days of the date of the table upon exercise of options vested under the
Stock Incentive Plan. Includes 49 shares held by Dr. Shires' spouse.
(9) Includes 500,000 Shares which Ms. Simpson has the right to acquire within
60 days of the date of the table upon exercise of options vested under the
Stock Incentive Plan. Includes 300 shares held by Ms. Simpson's spouse in
an IRA account and 1,900 shares which are jointly owned by Ms. Simpson and
her spouse.
(10) Consists of 25,000 Shares which Mr. Thomas has the right to acquire
within 60 days of the date of the table upon exercise of options vested
under the Stock Incentive Plan.
(11) Consists of options to purchase 5,000 Shares issued under the Stock
Incentive Plan,
(12) Includes 2,913,348 Shares subject to options granted pursuant to the
Stock Incentive Plan,
INDEBTEDNESS OF MANAGEMENT
Option Loans. The Stock Incentive Plan authorizes the Company's Board of
Directors to extend credit to enable optionees to exercise their options. The
Board has discretion from time to time to change the terms of such credit. The
past policy and practice of the Board has been to require payment of one-third
of the option price in cash with the balance payable within the earlier of ten
years of the date of exercise or twelve years of the date of grant. The
resulting obligations are evidenced by full recourse promissory notes with
interest at a rate established by the Board, payable annually, and are secured
by a pledge of the stock so purchased. The Company also makes unsecured loans
on the same terms to optionees to enable them to pay income taxes due on
exercise of options granted thereunder which do not qualify as incentive stock
options. No option loans are currently outstanding.
Residence Loans. The Company has loaned $300,000 to each of Messrs. Conte
and Laughlin, Ms. Simpson, and Ms. Kopta, in each case at 5% interest per
year, to enable these executive officers to acquire residences in close
proximity to their principal business offices. The Company has also loaned
$296,000 to Mr. Ooley on the same terms described above. The loans, which are
secured by the residences, originally mature in three years and provide for
consecutive three-year extensions while employment continues. The loans are
paid in monthly installments of principal and interest based on a 30-year
amortization and are accelerated and become immediately due and payable ninety
days after termination of employment. These loans will be forgiven immediately
in connection with the consummation of the Offer pursuant to the terms of such
loans.
Loans to Management. Pursuant to an Agreement and Promissory Note between
the Company and Richard L. Conte, in 1995 the Company granted a Special
Recognition Award for his significant efforts on behalf of the stockholders to
develop the new transitional hospitals line of business. Because the Board
also wanted to incentivize management to remain with the Company, this award
was made in the form of a 36-month nonrecourse, interest free loan to Mr.
Conte in the amount of $1,000,000. One thirty-sixth of the loan amount is
forgiven each month provided that Mr. Conte does not voluntarily terminate his
employment with the Company during the term of the loan. Upon any such
voluntary termination, the remaining balance of the loan shall become due and
payable. In the case of involuntary termination, change of control (such as
the consummation of the Offer), disability or pursuant to the provisions of
any applicable employment agreement permitting Mr. Conte to terminate his
employment for cause, the remaining balance of the loan shall be forgiven.
Upon the same terms and conditions as those described above with respect to
the Special Recognition Award to Mr. Conte, pursuant to an Agreement and
Promissory Note between the Company and James R. Laughlin, in 1995 the Company
made a 36-month, interest free loan to Mr. Laughlin in the amount of
$1,000,000 in recognition of his efforts to develop the transitional hospitals
line of business and as an incentive for him to remain with the Company.
Upon the same terms and conditions as those described above with respect to
the Special Recognition Award to Mr. Conte, pursuant to an Agreement and
Promissory Note between the Company and Ronald L.
15
<PAGE>
Ooley, in 1995 the Company made a 36-month, interest free loan to Mr. Ooley in
the amount of $750,000 in recognition of his efforts to develop the
transitional hospitals line of business and as an incentive for him to remain
with the Company.
Schedule of Indebtedness. The following table shows, as to each director or
executive officer whose indebtedness exceeded $60,000, the largest aggregate
amount of such indebtedness during fiscal year 1996 and the balance due the
Company as of May 31, 1997.
<TABLE>
<CAPTION>
LARGEST
AGGREGATE BALANCE AS OF
INDEBTEDNESS MAY 31, 1997
------------ -------------
<S> <C> <C>
Richard L. Conte................................ $1,088,073 $627,382
Ronald L. Ooley................................. 1,090,259 532,645
Julia L. Kopta.................................. 297,813 290,926
Wendy L. Simpson................................ 299,640 292,888
James R. Laughlin............................... 1,258,333 785,388
William E. Hale................................. 75,000 0
</TABLE>
COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Compensation Committee is composed entirely of non-employee directors.
The Compensation Committee is responsible for approving the compensation of
the management directors, reviewing the compensation of executive officers,
including the executive officers named in the Summary Compensation Table, and
approving awards under the Company's incentive plans, including options, for
each such officer.
Compensation Policy. The Company's management compensation policies have
been designed to encourage and reward substantial efforts to achieve the
Company's primary business goals, which is to be the preeminent provider of
quality long-term critical care services wherever it operates. These policies
must provide remuneration which: (i) is competitive in the employment market
so as to enable the Company to aggressively pursue and retain talented,
experienced and entrepreneurial professionals capable of developing, operating
and marketing a new business while containing costs in an increasingly
competitive and difficult health care environment, (ii) is comprehensive and
consistent at all management levels so as to avoid arbitrary differences that
hinder the Company's ability to retain higher caliber management; and (iii)
provides incentives that reward performance and encourage cooperative effort
to the good of the Company as a whole and its stockholders.
The Compensation Committee places heavy emphasis on incentives at all levels
to implement these policies. As executive responsibility increases, the
performanced-based portion of compensation will also increase. Thus, basic
salary and employment market considerations will give way to incentives
measured both qualitatively and by the short-and long-term operating and
investment results of the Company as a whole. The Compensation Committee
strongly believes that this order of priorities enables the Company to respond
competitively and relates compensation more directly to enhancement of
stockholder value.
Compensation of the Chief Executive Officer. The compensation of the Chief
Executive Officer in 1996 was composed of base salary, bonus payments, stock
options and other compensation described under "Executive Officer
Compensation--Summary Compensation Table." The Compensation Committee
calculates Mr. Conte's base salary on an analysis of the remuneration of
executives in businesses that are in direct competition with the Company for
executive recruitment and retainment, but does not limit the analysis to the
businesses forming the Company's peer group since the Company seeks executive
talent from the broader pool of health care service companies than its
operations require. Therefore, compensation packages must be competitive to
recruit and retain highly qualified individuals to lead the Company. Mr.
Conte's base salary also compensates him for his performance of the duties of
the Company's Chairman and President.
At Mr. Conte's request, the Committee did not recommend a salary increase
for Mr. Conte in 1996. He earned a cash bonus of $528,900 based on specific
performance of annual goals established under the Company's
16
<PAGE>
Incentive Compensation Plan due to strong performances by PHG and the
Company's transitional hospitals line of business. The Company's Incentive
Compensation Plan provides for cash bonuses as a function of each business
segment meeting certain annual net income targets. In fiscal 1996, awards were
weighed among the three business divisions as follows: PHG--25%; U.S.
psychiatric division--25%; and the transitional hospitals line of business--
50%.
The Committee also believes that stock options relate Mr. Conte's total
compensation directly to increases in stockholder value and thus considers
stock options an important part of his incentive plan. In fiscal 1996, the
Committee recommended and the Board approved the issuance to Mr. Conte of
options to purchase an aggregate of 200,000 Shares. See "Executive Officer
Compensation--Stock Options and Stock Appreciation Rights."
The Company's Incentive Compensation Plan also measures long-term executive
performance over successive three-year periods against earnings before
interest, taxes, depreciation and amortization ("EBITDA") targets applicable
in each of the Company's business segments and strategic criteria established
by the Compensation Committee. In the case of the transitional hospitals line
of business, expansion of its facility base is also a factor. Performance
measures are stated in terms of minimum, target and maximum achievement
standards. Incentive opportunities range from 80% to 100% of average base
salary over the performance cycle for achievement of target goals, but no
incentive bonus can be earned unless the maximum financial goal is achieved.
Weighting among the three business agreements is the same as annual bonuses
under the annual Incentive Compensation Plan. At the end of each performance
cycle the long-term incentive period is paid in cash, stock or a combination
of cash and stock at the Compensation Committee's discretion. With the sale of
PHG and the U.S. psychiatric hospitals in fiscal year 1996, certain payments
were made under the long-term plans based on results through fiscal year 1996.
A bonus was paid to Mr. Conte in fiscal 1996 based on PHG achieving the
maximum EBITDA target for the two years ending in 1996, and the transitional
hospitals line of business exceeding the minimum of its facility expansion
target over the three year period. In recognition of the successful sale and
financial turnaround of the psychiatric hospitals that were sold to BHC in
fiscal 1996, the Compensation Committee recommended and the Board approved a
discretionary bonus for Mr. Conte (equal to a maximum 3.7% of Mr. Conte's
salary). For fiscal 1996, long-term incentive bonuses were paid based on PHG
achieving the maximum of its EBITDA target over a two year period and the
transitional hospitals line of business exceeding the minimum of its facility
expansion target over a two year period.
Compensation Committee:
Carol J. Burt Nigel Petrie
Dana L. Shires, M.D. Robert L. Thomas
Ralph J. Watts
17
<PAGE>
PERFORMANCE GRAPH
The following graph compares the yearly percentage change in the Company's
cumulative total stockholder return on the Shares for the five fiscal years
ended November 30, 1996, based upon the market price of the Shares as reported
on the New York Stock Exchange with the cumulative total return (and assuming
reinvestment of dividends) with the (i) S&P 500 Stock Index and (ii) an index
of a group of companies in the health care industry consisting of Ramsay Health
Care Inc., Comprehensive Care Corporation, Magellan Health Services, Inc. and
Tenet Healthcare Corp. This peer group is not identical to the group of
companies used by the Compensation Committee for compensation comparisons
because it comprises companies (a) whose revenues and earnings derive primarily
from the delivery of the same health care services provided by the Company in
1996, i.e., psychiatric or long-term critical care services; (b) who compete in
some markets directly with the Company for the same patients and referral and
payor sources; (c) whose facilities and treatment programs are subject to the
same government regulations and reimbursement practices by private and public
payors as the Company's. The companies used as a basis of comparison for
establishing executive compensation may deliver services and derive the
majority of their revenues and earnings from healthcare services different than
the Company's--i.e. medical surgical hospitals or nursing homes--but are
considered competitors in the employment market for executive talent.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN*
AMONG TRANSITIONAL HOSPITALS CORPORATION,
THE S & P 500 INDEX AND A PEER GROUP
PERFORMANCE GRAPH APPEARS HERE
<TABLE>
<CAPTION>
TRANSITIONAL
Measurement Period HOSPITAL S&P
(Fiscal Year Covered) CORPORATION 500 INDEX Peer Group
- --------------------- ----------- --------- ----------
<S> <C> <C> <C>
Measurement Pt- 11/91 $100 $100 $100
FYE 11/92 $ 90 $118 $102
FYE 11/93 $114 $130 $103
FYE 11/94 $ 89 $132 $124
FYE 11/95 $100 $181 $143
FYE 11/96 $ 82 $231 $167
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) COMPANY S&P INDEX PEER GROUP
--------------------- ------- --------- ----------
<S> <C> <C> <C>
Measurement Pt--11/91 $100 $100 $100
FYE 11/92 90 118 102
FYE 11/93 114 130 103
FYE 11/94 89 132 124
FYE 11/95 100 181 143
FYE 11/96 82 231 167
</TABLE>
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Exchange Act requires the Company's directors and
executive officers, and persons who own more than 10% of the outstanding
Shares of Common Stock, to file with the Securities and Exchange Commission,
the New York Stock Exchange and the Pacific Exchange initial reports of
ownership and reports of changes in ownership of such stock. Regulations
adopted by the Securities and Exchange Commission establish specific due dates
for these reports. The Company is required to disclose herein any failure to
file a report for the most recent fiscal year or prior fiscal years on a
timely basis.
To the Company's knowledge, based solely upon review of the copies of such
reports furnished to it, during the most recent fiscal year and prior fiscal
years all Section 16(a) filing requirements applicable to its executive
officers, directors and beneficial owners of more than 10% of the outstanding
Shares were complied with.
19
<PAGE>
EXHIBIT 99.25
[LOGO OF TRANSITIONAL HOSPITALS CORPORATION]
June 19, 1997
Dear Transitional Hospitals Corporation Shareholder:
We are pleased to announce that Transitional Hospitals Corporation has
entered into a merger agreement with Vencor, Inc. and its wholly-owned
subsidiary, LV Acquisition Corp., pursuant to which our stockholders will
receive $16.00 per share in cash. The merger agreement with Select Medical
Corporation, which provided that stockholders would receive $14.55 per share,
has been terminated.
Your Board of Directors has unanimously approved (with Richard L. Conte and
Wendy L. Simpson, directors who are also officers of the company, abstaining)
the Vencor merger agreement. In the event you do not tender your shares
pursuant to the tender offer, all shares not acquired in the tender offer will
still be acquired by Vencor through a merger of the company with LV
Acquisition Corp., a wholly-owned subsidiary of Vencor. Stockholders will
receive in the merger the same price per share as in the tender offer, except
to the extent stockholders exercise their dissenters' rights.
Even though we had not expected our aggressive growth plans for Transitional
to be interrupted via a sale of the company, our Board of Directors believed
that this transaction with Vencor is in the best interests of Transitional's
shareholders. We are proud of what we have achieved on your behalf. This
strategic combination should also benefit our employees and other
constituencies we serve. We look forward to working with Vencor to ensure a
smooth transition.
Accompanying this letter are copies of amendments to the company's
Solicitation/Recommendation Statement on Schedule 14D-9, which we urge you to
review carefully. Thank you for your past trust and support.
Until we meet again,
/s/ Richard L. Conte /s/ Wendy L. Simpson
Richard L. Conte Wendy L. Simpson
Chairman and Chief Executive Officer Chief Operating Officer and Chief
Financial Officer
<PAGE>
EXHIBIT 99.26
[LETTERHEAD OF TRANSITIONAL HOSPITALS CORPORATION]
Contact: Vencor, Inc. Transitional Hospitals Corporation
W. Earl Reed, III Suzanne Shirley
(502) 596-7380 (702) 257-3663
Abernathy/MacGregor Group Sitrick And Company
Joele Frank/Judith Wilkinson Michael Sitrick/Jeffrey Lloyd
(212) 371-5999 (310) 788-2850
FOR IMMEDIATE RELEASE
Vencor and Transitional Hospitals Sign Definitive Merger
Agreement for Acquisition of Transitional at $16.00 Per Share
LOUISVILLE, Kentucky and LAS VEGAS, Nevada (June 19, 1997) -- Vencor, Inc.
[NYSE:VC] and Transitional Hospitals Corporation [NYSE:THY] today announced
that they have signed a definitive merger agreement providing for the
acquisition of Transitional by Venor at a price of $16.00 per share in cash for
each outstanding share of Transitional's common stock. Transitional has
approximately 40.0 million shares outstanding on a fully diluted basis, giving
the transaction a total equity value of approximately $639 million.
Vencor's wholly owned subsidiary, LV Acquisition Corp., previously
commenced a tender offer for all outstanding shares of Transitional at a price
of $16.00 per share in cash. The tender offer is scheduled to expire Thursday,
June 19, 1997 at 12:00 midnight, New York City time, unless further extended.
Vencor expects the tender offer to be completed at that time.
Following the completion of the tender offer, Vencor intends to consummate
a second step merger in which all remaining shares will be converted into $16.00
per share in cash. Transitional's Board of Directors has approved the tender
offer and the merger and recommends that Transitional shareholders accept the
tender offer and tender their shares.
Transitional also announced that its merger agreement with Select Medical
Corporation has been terminated.
"We are very excited about the combination of Vencor and Transitional,"
said W. Bruce Lunsford, Chairman, President and Chief Executive Officer of
Vencor. "This combination represents a win-win opportunity for both companies'
shareholders, employees and customers. In our discussions with Transitional, we
were impressed with the quality of their operations and the strategic potential
of our combined company. The addition of Transitional expands our network of
long-term acute care hospitals that provide the foundation for our healthcare
continuum. Together we can offer payors and patients a full spectrum of
high-quality outcomes-oriented, cost-efficient healthcare services."
<PAGE>
Richard L. Conte, Chairman of the Board and Chief Executive Officer of
Transitional, said, "Even though we had not expected our aggressive growth plans
for THC to be interrupted via a sale of the company, our Board of Directors
believes that this transaction with Vencor is in the best interests of
Transitional's shareholders. The Board recommends that Transitional shareholders
tender their shares into the Vencor tender offer. This strategic combination
should benefit our employees and the other constituencies we serve. We look
forward to working with Vencor to ensure a smooth transition."
The combination of Vencor and Transitional, which operates long-term acute
care hospitals, advances the growth strategy of Vencor, the nation's largest
full-service long-term healthcare provider. The combined company will have 58
hospitals, 314 skilled nursing centers, over 4,000 institutional customers for
contract ancillary services, over 80,000 employees and pro forma annual revenues
of approximately $3.3 billion.
Vencor, a $3 billion long-term healthcare company, owns and operates a
national network of hospitals, nursing centers and contract service providers in
46 states.
Transitional, formerly Community Psychiatric Centers, operates 16 long-term
acute care hospitals and three satellite facilities in 13 states, and also owns
a 61 percent interest in Behavioral Healthcare Corporation, a provider of
psychiatric and behavioral health services based in Nashville, Tennessee.
###
