<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A NO. 1
[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, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ___________ TO ______________
COMMISSION FILE NUMBER 1-7008
TRANSITIONAL HOSPITALS CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
NEVADA 94-1599386
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
5110 W. SAHARA AVENUE LAS VEGAS, NV 89102
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE (702) 257-3600
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
Common Stock, $1.00 Par Value New York Stock Exchange
Pacific Stock Exchange
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
--- ---
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. [X]
The aggregate market value of the voting stock held by nonaffiliates of the
Registrant on February 14, 1997, based on the closing price on the New York
Stock Exchange was: $360,351,000
Number of shares outstanding on February 14, 1997: 40,039,000
<PAGE>
Items 10, 11, 12 and 13 are hereby amended to read in their entirety as set
forth below.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
INFORMATION CONCERNING DIRECTORS
The following table lists and provides biographical data about the
directors of the Company.
<TABLE>
<CAPTION>
DIRECTOR
OCCUPATION AND CONTINUOUSLY TERM
NAME AGE BUSINESS EXPERIENCE SINCE EXPIRES*
---- --- ------------------- ------------ --------
<S> <C> <C> <C> <C>
Carol J. Burt(1)(2)(4)(5).......... 39 Senior Vice President-Finance and Treasurer, American Medical 1996 1999
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 Directors since May 21, 1992, Chief 1991 1997
Executive Officer since April 13, 1992 and President since
October 7, 1993; President 1991-1992; Mr. Conte is also
Chairman of the Board of Directors of Behavioral Healthcare
Corporation.
Jack H. Lindheimer, M.D.(2)(3)..... 65 Corporate Medical Director, U.S. Psychiatric Services 1983 1998
1991-1996; Medical Director, CPC Alhambra Hospital 1970-1992;
physician in private practice since 1960, specializing in
psychiatry.
Nigel Petrie(1)(4)(5).............. 50 Managing Director, United Kingdom, Edison Mission Energy, a 1995 1998
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 practice since 1961 specializing in 1989 1997
nephrology; Chairman, Chief Executive Officer and President of
LifeLink Foundation, a not-for-profit corporation.
</TABLE>
1
<PAGE>
<TABLE>
<CAPTION> DIRECTOR
OCCUPATION AND CONTINUOUSLY TERM
NAME AGE BUSINESS EXPERIENCE SINCE EXPIRES*
---- --- ------------------- ----- --------
<S> <C> <C> <C> <C>
Wendy L. Simpson(1)(2)(3)........... 47 Executive Vice President, Chief Operating Officer since August 1995 1999
1996 and Chief Financial Officer since December 1994; Senior
Vice President--Transitional Hospitals Corporation 1994;
Senior Vice President and Chief Financial Officer, Weisman
Taylor Simpson & Sabatino 1992-1994; Senior Vice President and
Chief Financial Officer, American Medical International
1990-1991; Ms. Simpson is also a director of Behavioral
Healthcare Corporation and LTC Properties, Inc., a real estate
investment trust.
Robert L. Thomas(1)(2)(3)(4)(5)..... 72 Retired since 1993; Consultant, 1992-1993 and Executive 1993 1997
Director, 1977-1992, National Association of Private
Psychiatric Hospitals, a nonprofit entity. Mr. Thomas is also
a director of Behavioral Healthcare Corporation.
Ralph J. Watts(1)(4)(5)............ 50 President and Chief Executive Officer, Cardiovascular 1996 1998
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.
</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 will be presented to the shareholders at the next annual meeting.
If such amendment is approved, annual elections will occur for all members of
the Board of Directors.
(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 EXECUTIVE OFFICERS
The following table lists and provides biographical data about the executive
officers of the Company.
<TABLE>
<CAPTION>
PERIOD OF SERVICE AND
NAME AGE TITLE BUSINESS EXPERIENCE
---- --- ----- -------------------
<S> <C> <C> <C>
Richard L. Conte............. 43 Chairman of the Board, Chief See information under "Information Concerning
Executive Officer and President Directors."
Wendy L. Simpson............. 47 Executive Vice President, Chief See information under "Information Concerning
Operating Officer, Chief Directors."
Financial Officer and Treasurer
</TABLE>
2
<PAGE>
<TABLE>
<CAPTION>
PERIOD OF SERVICE AND
NAME AGE TITLE BUSINESS EXPERIENCE
---- --- ----- -------------------
<S> <C> <C> <C>
James R. Laughlin............ 50 Executive Vice President Appointed Executive Vice President--Development
--Development August 1996 and President--THC Subsidiary May
1992; President, The Phoenix Group, health care
consultants 1991-1992.
Ronald L. Ooley.............. 51 Chief Operating Officer - U.S. Appointed Chief Operating Officer--U.S. Hospital
Hospital Operations 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
1991- 1992.
Julia L. Kopta............... 47 Executive Vice President Appointed Corporate Secretary August 1996, General
--General Counsel and Corporate Counsel 1995 and Executive Vice President--Corporate
Secretary Planning and Development 1993; Chairperson and Chief
Executive Officer, Care Visions Corporation 1987-1993.
Eric Grafals 44 Executive Vice President Appointed Executive Vice President Puerto Rico and Latin
--Puerto Rico and Latin American Operations and Development August 1996; Senior
American Operations and Vice President of the same in 1995; Vice President
Development --Development, Silverado Healthcare, Inc. in 1994; Vice
President, Community Psychiatric Centers--U.S. psychiatric
operations in 1993 and the Florida region in 1992;
Administrator-- CPC San Juan Capestrano in 1991.
</TABLE>
3
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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
AWARDS PAYOUTS
-----------------------------------
SECURITIES ALL
ANNUAL COMPENSATION 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 President--Chief 1995 267,468 104,000 80,000 41,665 25,000(7)
Operating Officer and Chief
Financial Officer 1994 87,800 50,000 76,023 -- --
Ronald L. Ooley 1996 250,000 176,300 65,000 209,833 272,549(8)
Executive Vice President--U.S. 1995 200,000 76,000 170,000 68,160 156,730(8)
Hospitals Operations 1994 200,000 -- 27,475 -- --
Julia L. Kopta 1996 250,000 176,300 155,000 167,742 202,203(9)
Executive Vice President- 1995 221,152 56,250 75,000 60,350 --
General Counsel 1994 200,000 50,000 57,373 -- 32,321(9)
- -------------
</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
("PHG")-25%; U.S. Psychiatric Division-25%; and Transitional Hospitals
Corporation ("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%.
4
<PAGE>
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 hospitals
that were sold to Behavioral Healthcare Corporation, 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.
(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 in connection with the sale of
the United Kingdom and United States psychiatric divisions which reduce
total payments due to Mr. Conte under his employment contract (see "Certain
Employment Arrangements-Employment Contracts"), $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 $4.5 million in connection with the termination of
such plan. (See "Certain Employment Arrangements-Employment Contracts".)
(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, $200,000 interim payment paid
pursuant to Mr. Laughlin's employment contract in connection with the sale
of the U.S. psychiatric division (See "Certain Employment Arrangements-
Employment Contracts") 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 (see "Certain Employment Arrangements-Employment Contracts") and
$19,614 paid for car allowance. $25,000 was paid for reimbursement of
relocation expenses in 1995.
(8) Represents $250,000 and $153,846 in loan forgiveness in 1996 and 1995,
respectively. $22,549 was paid for car allowance in 1996.
(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 (See
"Certain Employment Arrangements-Employment Contracts") and $2,203 for a car
allowance in 1996. Amounts paid in 1994 relate to reimbursement of
relocation expenses of $25,000 and $7,321 paid in lieu of accrued vacation.
5
<PAGE>
Stock Options and Stock Appreciation Rights. The following table contains
information concerning the grant of stock options and tandem limited stock
appreciation rights (''SARs'') under the Company's 1989 Stock Incentive Plan to
the persons listed in the Summary Compensation Table during the fiscal year
ended November 30, 1996:
OPTION/SAR GRANTS IN THE LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
--------------------------------------------------------
% OF TOTAL
NUMBER OF OPTIONS/SARS POTENTIAL REALIZABLE VALUE
SECURITIES GRANTED TO EXERCISE AT ASSUMED ANNUAL RATE OF
UNDERLYING EMPLOYEES IN OR BASE STOCK PRICE APPRECIATION
OPTIONS/SARS FISCAL PRICE EXPIRATION OVER OPTION TERM
NAME GRANTED (1) YEAR ($/SH.) DATE 5%(2) 10%(2)
---- ------------ ------------ -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Richard L. Conte.... 100,000(3) 7.65 11.000 12/01/05 $ 691,784 $1,753,117
100,000(3) 7.65 8.891 10/22/06 559,150 1,416,996
James R. Laughlin... 30,000(3) 2.30 11.000 12/01/05 207,535 525,935
Wendy L. Simpson.... 30,000(3) 2.30 11.000 12/01/05 207,535 525,935
90,000(4) 6.89 12.000 01/05/06 679,206 1,721,242
223,977(3) 17.14 8.891 10/22/06 1,252,368 3,173,746
Ronald L. Ooley..... 20,000(3) 1.53 11.000 12/01/05 138,357 350,623
45,000(4) 3.44 12.000 01/05/06 339,603 860,621
Julia Kopta 20,000(3) 1.53 11.000 12/01/05 138,357 350,623
85,000(4) 6.51 12.000 01/05/06 641,473 1,625,617
50,000(3) 3.83 8.891 10/22/06 279,575 708,498
- -------------
</TABLE>
(1) These stock options were granted under the Stock Incentive Plan.
(2) 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.
(3) Twenty percent of the granted options vested on the date of grant. An
additional 20% vest on the anniversary date of the grant date of each of the
following four fiscal years. Pursuant to the terms of his Employment
Agreement, all options granted to Mr. Conte vested as a result of the sales
of the Priory Hospitals Group ("PHG") and the U.S. psychiatric division.
(4) 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.
6
<PAGE>
Options/SAR Holdings. The following table sets forth the number of shares
of Common Stock 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 common stock on the New York Stock
Exchange on November 30, 1996 was $9.125.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
SHARES UNDERLYING UNEXERCISED VALUE OF UNEXERCISED,
ACQUIRED OPTIONS/SARS HELD AT IN-THE-MONEY OPTIONS
ON VALUE FISCAL YEAR END /SARS AT FISCAL YEAR END(1)
NAME EXERCISE REALIZED($) 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 Common Stock 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 Common Stock
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."
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 million life insurance
policy.
In connection with the sale of PHG, the Company agreed to make Mr. Conte
available to serve on the Board of Directors of the purchaser of PHG ("New PHG")
for one year and thereafter with the consent of the Company and New PHG. Any
fees payable by New PHG for Mr. Conte's service as a director of New PHG will be
paid to the Company. New PHG presently pays the Company (Pounds)50,000
(approximately $78,000) each year plus reimbursements for certain expenses. In
connection with the sale of the U.S. psychiatric hospitals to Behavioral
Healthcare Corporation, 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 as long as Mr. Conte
is employed by THC. Should Mr. Conte's employment with THC cease, such payments
will be made to Mr. Conte for the period remaining of the original four years.
7
<PAGE>
Mr. Conte may terminate his employment by giving notice to the Company
within six months after a "constructive termination," within one year after a
"change in control" (as the terms "constructive termination" and "change in
control" are defined in the employment agreement) or within one year after a
"corporate reorganization" (generally, one or more dispositions of at least 80%
of the Company's assets or of assets generating at least 80% of the Company's
consolidated revenues), or if Mr. Conte's employment is terminated by the
Company without cause (as defined in the agreement), in general he would be
entitled to receive the following (collectively, the "Termination Benefits");
(i) a lump sum payment (the "Lump Sum Payment") equal to six times his highest
salary level during the employment term in addition to one year's total salary
and contract benefits representing amounts due Mr. Conte during the one year's
notice period, (ii) the maximum bonus which he could have achieved under the
Company's Incentive Compensation Plan for the fiscal year in which his
employment terminates, which shall not be less than his then salary, (iii) the
maximum bonus which he could have achieved for each three-year plan cycle which
commences under the Company's Long-Term Incentive Compensation Plan prior to his
termination date, which for each plan cycle shall not be less than his then
salary, (iv) forgiveness of certain loans made to him by the Company, (v)
payment of all deferred compensation, (vi) title to his company car, (vii)
payment of premiums on a $5 million life policy for six years, and (viii)
continuation of coverage under certain employee benefit programs for up to six
years, (ix) plus an additional 9.5% of cash compensation (the "Applicable
Percentage"). Mr. Conte would also be entitled to receive the Termination
Benefits, whether or not his employment terminates, after a "hostile takeover"
(as defined in the agreement).
If Mr. Conte's employment terminates because of his permanent disability
(as defined in the agreement), he will receive the Termination Benefits except
that (i) the Lump sum Payment will be reduced to five times his highest salary
during the employment term (plus the Applicable Percentage of such amount) and
(ii) the Company will be obligated to pay the premiums on a $5 million life
insurance for five rather than six years and continue coverage under certain
employee benefit programs for up to five rather than six years. If Mr. Conte's
employment were to terminate by reason of his death, Mr. Conte's beneficiary
would be entitled to receive the Termination Benefits, except that there would
be no Lump Sum Payment, and the Company would be obligated to continue coverage
for Mr. Conte's beneficiary under certain employee benefit programs for up to
five rather than six years. Mr. Conte's beneficiary would also receive payments
under certain insurance policies.
If Mr. Conte terminates his employment within six months for a constructive
termination or within one year of a Corporate reorganization, or if the Company
terminates his employment without cause, all outstanding options other than
converging options ("Options") and related stock appreciation rights then held
by Mr. Conte will vest, and such Options and stock appreciation rights may be
exercised for up to 12 months following his termination. In the event of a
change of control or hostile takeover, all outstanding Options and stock
appreciation rights will vest immediately prior to the change in control or
hostile takeover, whether or not Mr. Conte terminates his employment, and will
be exercisable for up to a 12 month period.
If Mr. Conte's employment terminates in connection with a change of
control, a corporate reorganization or permanent disability, under his new
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 10 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.
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 consolidate 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 the Applicable Percentage of
such amount) plus the
8
<PAGE>
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 Internal Revenue Code of 1986, as amended (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.
On June 21, 1996, the Company completed the sale of PHG, which was
substantially all of the Company's United Kingdom operations. On November 30,
1996, the Company completed the sale of substantially all of its U.S.
psychiatric operations. Such sales constituted corporate divestitures (as such
term is defined above) and resulted in Mr. Conte receiving Interim Payments of
$549,499 and $2,139,948, respectively, upon the sale of these divisions. In
addition, an aggregate of 536,735 Options having exercise prices ranging from
$8.89 to $24.50 per share immediately vested.
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 and Mr. Laughlin are entitled to an annual salary of not less than
$400,000, and Mr. Ooley and Ms. Kopta are entitled to receive an annual salary
of not less than $250,000. Ms. Simpson's annual salary was increased to $500,000
effective December 1, 1996. Each of their contracts contain non-competition and
non-solicitation covenants. Should the employment of these individuals terminate
within one year after certain specified changes in control or ownership of the
Company involving 20% or more of the Company's outstanding voting securities,
the terminated individual would be entitled to receive, in addition to one
year's total salary and contract benefits representing amounts due these
employees within one year under their contract, a lump sum severance payment
equal to two times the highest salary level during the employment term, the
maximum bonus which she or he could have achieved under the Company's Incentive
Compensation Plan for the fiscal year in which such employment terminates plus
the maximum bonus which she or he could have earned for each three-year plan
cycle which commences under the Company's Incentive Compensation Plan prior to
such termination date, forgiveness of certain loans owed to the Company, and the
continuation of her or his coverage under certain employee benefit programs and
car allowance at the Company's expense for a two-year period. In addition, all
Options and related stock appreciation rights held by any of them at the time of
the change in control event will immediately vest, whether or not their
employment terminates. Each individual will be subject to a two year non-
competition covenant in specified territories upon such termination of
employment and would also be obligated to render consulting services for five
years for up to eight hours per month.
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 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 consolidate
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 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
9
<PAGE>
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. The Compensation Committee's advisors are in the process of
memorializing and documenting the New SRA as adopted and approved by the
Compensation Committee. Mr. Conte agreed to the termination of the SRA which
allowed the Company to terminate or borrow against the 11 corporate-owned life
insurance policies pertaining to these five executive officers. The Company
received approximately $4.5 million 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.
10
<PAGE>
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
OWNERSHIP OF COMPANY SECURITIES
Set forth in the following table is the beneficial ownership of Common
Stock as of February 28, 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, beneficial
owners of 5% or more of the Common Stock.
<TABLE>
<CAPTION>
AMOUNT
OF BENEFICIAL PERCENT
OWNERSHIP AS OF OF
DIRECTORS AND EXECUTIVE OFFICERS FEBRUARY 28, 1997 CLASS(1)
- -------------------------------- ----------------- ----------
<S> <C> <C>
Carol Burt(2)................................... 0 *
Richard L. Conte(3)............................. 1,070,802 2.69%
Julia Kopta(4).................................. 113,000 *
James R. Laughlin(5)............................ 329,000 *
Jack H. Lindheimer(6)........................... 96,000 *
Ronald L. Ooley(7).............................. 191,500 *
Nigel Petrie(8)................................. 1,500 *
Dana L. Shires(9)............................... 63,299 *
Wendy Simpson(10)............................... 175,195 *
Robert L. Thomas(11)............................ 20,000 *
Ralph Watts(12)................................. 0 *
All directors & executive officers as a group
(12 persons)(13)................................ 2,072,296 5.07%
OTHER BENEFICIAL OWNERSHIP:
Brandywine Asset Management..................... 2,740,200 7.06%
3 Christina Center, Suite 1200
201 North Walnut Street
Wilmington, Delaware 19801
Merrill Lynch Asset Management.................. 6,462,984 16.64%
P.O. Box 9011
800 Scudder Mill Road
Plainsboro, New Jersey 08543
Heartland Advisors, Inc......................... 2,852,100 7.35%
790 North Milwaukee Street
Milwaukee, WI 53202
- -------------
</TABLE>
* Less than 1%.
(1) Shares which each identified stockholder has the right to acquire within 60
days of the date of the table are deemed to be outstanding in calculating
the percentage ownership of such stockholder, but are not deemed to be
outstanding as to any other person. Except as otherwise noted, the Company
believes that each stockholder has sole voting and investment power over the
shares beneficially owned.
11
<PAGE>
(2) Does not include options to purchase 5,000 shares of Common Stock issued
under the Stock Incentive Plan, none of which are exercisable within 60 days
of the date of the table.
(3) Includes 1,040,000 shares of Common Stock which Mr. Conte 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 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.
(4) Consists of 113,000 shares of Common Stock which Ms. Kopta has the right to
acquire within 60 days of the date of the table upon exercise of options
vested under the Stock Incentive Plan. Does not include options to purchase
174,373 shares of Common Stock issued under the Stock Incentive Plan, none
of which are exercisable within 60 days of the date of the table.
(5) Consists of 329,000 shares of Common Stock which Mr. Laughlin has the right
to acquire within 60 days of the date of the table upon exercise of options
vested under the Stock Incentive Plan. Does not include options to purchase
176,000 shares of Common Stock issued under the Stock Incentive Plan, none
of which are exercisable within 60 days of the date of the table.
(6) Includes 96,000 shares of Common Stock which Dr. Lindheimer has the right to
acquire within 60 days of the date of the table upon exercise of options
vested under the Stock Incentive Plan.
(7) Includes 189,000 shares of Common Sock which Mr. Ooley has the right to
acquire within 60 days of the date of the table upon exercise of options
vested under the Stock Incentive Plan. Does not include options to purchase
158,475 shares of Common Stock issued under the Stock Incentive Plan, none
of which are exercisable within 60 days of the date of the table.
(8) Includes 1,500 shares of Common Stock which Mr. Petrie has the right to
acquire within 60 days of the date of the table upon exercise of options
vested under the Stock Incentive Plan. Does not include options to purchase
6,000 shares of Common Stock issued under the Stock Incentive Plan, none of
which are exercisable within 60 days of the date of the table.
(9) Includes 35,000 shares of Common Stock 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. Does not include options to purchase
5,000 shares of Common Stock issued under the Stock Incentive Plan, none of
which are exercisable within 60 days of the date of the table. Includes 49
shares held by Dr. Shires' spouse.
(10) Includes 170,795 shares of Common Stock 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. Does not include options to
purchase 329,205 shares of Common Stock issued under the Stock Incentive
Plan, none of which are exercisable within 60 days of the date of the
table. 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.
(11) Consists of 20,000 shares of Common Stock 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. Does not include options to purchase
5,000 shares of Common Stock issued under the Stock Incentive Plan, none of
which are exercisable within 60 days of the date of the table.
(12) Does not include options to purchase 5,000 shares of Common Stock issued
under the Stock Incentive Plan, none of which are exercisable within 60
days of the date of the table.
(13) Includes 2,006,295 shares of Common Stock subject to options granted
pursuant to the Stock Incentive Plan, all of which are exercisable within
60 days of the date of the table.
12
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
INDEBTEDNESS OF MANAGEMENT
Option Loans. The Company's 1989 Stock Incentive Plan authorizes THC'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.
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 shareholders to
develop the new Transitional Hospitals Corporation (''THC'') 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 (/1//36) 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, 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 THC 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. 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 THC 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 February 28, 1997.
<TABLE>
<CAPTION>
LARGEST
AGGREGATE BALANCE AS OF
INDEBTEDNESS FEBRUARY 28, 1997
------------ -----------------
<S> <C> <C>
Richard L. Conte.... $1,088,073 $711,861
Ronald L. Ooley..... 1,090,259 596,746
Julia L. Kopta...... 297,813 292,123
Wendy L. Simpson.... 299,640 294,051
James R. Laughlin... 1,258,333 569,444
William E. Hale..... 75,000 0
</TABLE>
13
<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.
TRANSITIONAL HOSPITALS CORPORATION
Date: March 28, 1997
By: /s/ Wendy L. Simpson
---------------------------
Wendy L. Simpson
Chief Operating Officer and
Chief Financial Officer
14
