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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
FOR THE FISCAL YEAR ENDED NOVEMBER 30, 1996
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-7008
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)
AREA CODE (702) 257-3600
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<S> <C>
COMMON STOCK, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
PACIFIC STOCK EXCHANGE
</TABLE>
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 (Section 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 non-affiliates 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
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<PAGE>
ITEM 1. BUSINESS
This Annual Report on Form 10-K contains certain forward looking statements
that are subject to risk and uncertainty. There can be no assurance that these
future results will be achieved. Readers are cautioned that a number of
factors could adversely affect the Company's ability to obtain these results
including: (a) uncertainties in the regulatory environment due to possible
future health care reform legislation, including changes in Medicare and
Medicaid reimbursement programs, (b) uncertainties in the regulatory
environment regarding obtaining approvals to open new operations or expand
current facilities, (c) increased payor pressures in the domestic psychiatric
industry with respect to negotiated rates and other cost-containment measures
that could affect the Company's equity earnings in Behavioral Healthcare
Corporation ("BHC"), (d) increased competition among hospitals, managed care
providers and other health care providers, (e) the possibility of changing
conditions in the securities markets affecting the Company's plans to
repurchase its own stock, and (f) the availability of suitable acquisition
candidates and the Company's success in negotiating favorable terms to
complete acquisitions.
The following discussion should be read in conjunction with the industry
segment information presented in the notes to the financial statements
appearing in Items 7 and 8.
GENERAL
On November 30, 1996, Transitional Hospitals Corporation (the "Company" or
"THC" and formerly "Community Psychiatric Centers") consummated the sale of
effectively all of its psychiatric operations in the U.S. and Puerto Rico
(with certain limited exceptions set forth below) to BHC. Prior to such sale,
BHC owned 17 psychiatric hospitals. At the November 30 closing, the Company
transferred title to 22 freestanding psychiatric hospitals, a joint venture
interest in another psychiatric operation, an outpatient psychiatric center,
two closed hospitals and vacant land located at three sites in California. Two
other operating hospitals and a joint venture interest (the "Escrowed Assets")
are to be transferred to BHC upon receipt of necessary regulatory approvals,
which management believes are perfunctory. Additionally, effective November
30, 1996, BHC and the Company entered into a management agreement which grants
BHC, with limited protective rights retained by THC, exclusive and complete
responsibility and discretion in the management and control of the Escrowed
Assets as well as the economic benefit thereof. Accordingly, for accounting
purposes, the sale of the Escrowed Assets has been recorded with an effective
date of November 30, 1996. At the initial closing, the Company received
$60,000,000 in cash, 2,214,400 shares of BHC Common Stock, 5,072,579 shares of
BHC Series A Preferred Stock and 46,902 shares of BHC Series B Preferred
Stock. In general, the Series A Preferred Stock converts into BHC Common Stock
on a share for share basis upon sales and dispositions of the Series A
Preferred Stock by the Company and under certain other limited circumstances.
Upon receipt of the necessary regulatory approvals related to the Escrowed
Assets, the Company will receive an additional 3,785,600 shares of BHC Common
Stock, an additional 578,844 shares of BHC Series A Preferred Stock and 3,350
additional shares of BHC Series B Preferred Stock. Upon distribution of all
shares, the Company will have a common equity interest amounting to 44.2% of
BHC's Common Stock outstanding. An agreement has been entered into between BHC
and the Company requiring THC to vote all shares in excess of 20% of BHC's
outstanding Common Stock as instructed by a majority of BHC's Board of
Directors which includes three members of THC's Board of Directors. THC's
Chairman of the Board and Chief Executive Officer, Richard Conte, will serve
as BHC's Chairman of the Board. THC's common equity interest in future BHC
earnings will be recorded on the equity method of accounting. In determining
the amount of the consideration to be paid to the Company, the parties
compared their respective EBITDA's (Earnings before interest, taxes,
depreciation, and amortization) and used multiples generally accorded to
publicly-traded psychiatric hospitals. Based on this analysis, the total value
of the equity interest in BHC was determined to be approximately $70 million.
In addition to the above, the Company also sold three other closed
psychiatric hospitals in fiscal year 1996. As of November 30, 1996, five
closed psychiatric hospitals with a book of value of $13.4 million remain with
the Company and these assets are being held for sale. The book values of these
facilities represents the estimated fair market value less costs to sell the
properties.
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On June 21, 1996, the Company sold its United Kingdom psychiatric hospitals
("Priory Hospitals Group" or "PHG") to Foray 911 Limited ("Foray"), a new
corporation formed by Mercury Development Capital, a division of Mercury Asset
Management plc ("Mercury"). PHG operates 15 freestanding acute psychiatric
hospitals and chemical dependency facilities, including one 42 bed hospital
that was 50% owned by the PHG. Based on the number of licensed hospital beds,
PHG is the leading commercial provider of psychiatric services in the United
Kingdom where psychiatric services are generally available to residents
without charge from government-owned NHS hospitals. Approximately 12% of the
British population is covered by private health insurance. The total purchase
price for the PHG facilities was approximately $135 million, which includes a
$4.6 million subordinated note due in 2009 issued by Foray. Excluded from the
sale was PHG's startup secured training centers business, being developed
under the name Youth Services Ltd. ("YSL") which THC and a 20% joint venture
partner intend to develop in the U.K.
The Company used $50 million of the net cash proceeds from the sale of the
U.K. division to repay $50 million of long-term debt. The Company plans to use
the remaining net cash proceeds from the above described sales to accelerate
THC's expansion through acquisitions of both individual hospitals or chains,
and to continue to take advantage of opportunities to buy back the Company's
stock. During fiscal year 1996, the Company's Board of Directors approved the
expenditure of up to $75 million to buy back the Company's stock in the open
market. Through November 30, 1996, the Company expended approximately $36
million to repurchase approximately 4.2 million shares of the Company's stock.
With the above described transactions completed, the Company will now focus
on the development and growth of its core business of operating long-term
acute care hospitals. As of November 30, 1996, THC operated 14 long-term acute
care hospitals and two satellite facilities, with a total of 1,340 licensed
beds, located in 12 states. In December 1996, the Company opened one new THC
facility in San Diego (34 beds) and a satellite facility in Pasadena, Texas
(46 beds). The Company is evaluating numerous other development projects and
potential acquisitions across the country and other alternatives to enhance
shareholder value.
In November 1992, to diversify beyond psychiatric care, the Company began to
offer long-term acute care services in converted, previously underutilized
psychiatric hospitals and newly-acquired freestanding acute care facilities.
THC offers long-term acute care to patients who are stabilized and do not
require the complete spectrum of intensive care services provided by
traditional acute care hospitals, but who are too ill to return home or be
placed in a nursing home. THC provides care to those suffering from pulmonary
diseases, kidney failure and other complex medical problems; such patients
require a variety of intensive services including life-support systems, post-
surgical stabilization, intravenous therapy, subacute rehabilitation and wound
care. THC also provides contract respiratory therapy services to nursing homes
and hospital facilities owned by third parties. THC's strategy is to provide a
comprehensive range of long-term acute care that will enable it to treat most
types of critical care patients, regardless of their diagnosis or medical
condition, with the objective of returning these patients to full activity.
THC offers managed care organizations and indemnity insurance payors a
single source from which to obtain long-term acute care services. The Company
believes THC addresses cost-containment pressures affecting the health care
industry by offering a high quality, cost-effective alternative to traditional
acute care hospitals.
HOSPITAL OPERATIONS
THC provides long-term acute care in converted psychiatric facilities,
freestanding acute care facilities and space shared with a BHC psychiatric
facility. In December 1996, the Company opened its first leased unit within an
acute care facility owned by another provider. Although THC's patients range
in age from pediatric to geriatric, a substantial portion of THC's patients
are over 65 years of age. THC's long-term acute care facilities include the
equipment and physician and other professional staff necessary to care for
most types of critically ill patients regardless of their diagnosis or medical
condition. THC's professional staffs work in inter-disciplinary teams to
evaluate patients upon admission to determine a treatment plan with an
appropriate level and intensity of care. Where appropriate, the treatment
programs may involve the services of several disciplines, such as
2
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pulmonary and rehabilitation therapy. Currently, THC offers a complex medical
care program, ventilator management program, wound care program and low
tolerance rehabilitation program. Patients who successfully complete treatment
programs are discharged to skilled nursing homes, rehabilitation hospitals or
home care settings. During fiscal 1996, the average length of stay for THC
patients was approximately 40 days.
Traditionally, patients suffering from long-term complex medical problems
have stayed in the intensive care unit of general acute care hospitals until
they were sufficiently well to be transferred to less intensive care settings.
Such stays are relatively expensive, reflecting the cost of intensive on-site
equipment and services that, while necessary for hospitals to accomplish their
primary missions, are not required for the ongoing treatment of these
patients.
Over the past several years, hospitals have come under increasing pressure
to reduce the length of patient stays as a means of containing costs. Managed
care organizations have limited hospitalization costs by controlling hospital
utilization and negotiating discounted rates for hospital services.
Traditional third party indemnity insurers have begun to limit reimbursement
to pre-determined amounts of "reasonable charges," regardless of actual costs,
and to increase the co-payments required to be paid by patients. In 1983,
Congress sought to contain Medicare hospital costs by adopting the Prospective
Payment System ("PPS") under which hospitals generally receive a specified
reimbursement rate regardless of how long the patient remains in the hospital
or the volume of ancillary services ordered by the attending physician. The
effect of these various cost-containment measures have provided hospitals with
an incentive to discharge patients more quickly. THC's long-term acute care
hospitals are exempt from PPS and thus receive reimbursement on a more
favorable basis for providing long-term acute care services to Medicare
patients than general acute care hospitals.
THC has primarily targeted larger-population markets which have significant
populations of persons over the age of 65. The aging of the population,
advancements in medical care, the desire of payors and patients for lower cost
and more specialized alternatives to traditional acute care hospitals and the
disincentive for such hospitals to provide long-term care to critically ill
patients has led to a growing demand for long-term acute care services. The
Company believes that providers such as skilled nursing facilities and home
care providers are not in the best position to efficiently provide health care
services to these critically ill patients. Traditional skilled nursing
facilities have generally focused on providing long-term custodial care to
persons eligible for Medicaid. As a result of Medicaid "cost ceilings" on
reimbursement for each patient, nursing homes face an economic disincentive to
treat medically complex patients. Home health care is not a viable alternative
to inpatient care for such patients because of their continued need for (i)
intensive and specialized medical care and equipment, (ii) the availability of
physicians and 24-hour nursing care, and (iii) a comprehensive array of
rehabilitative therapy. The Company believes that its emphasis on long-term
acute care allows it to provide high quality care to critically ill patients
on a cost effective basis.
3
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HOSPITAL FACILITIES
As of November 30, 1996, THC operated the following 14 long-term acute care
hospitals and two satellite hospitals:
<TABLE>
<CAPTION>
LICENSED
HOSPITAL CITY BEDS DATE OPENED
-------- ---- -------- -----------
<S> <C> <C> <C>
CALIFORNIA
THC Orange County(2)................. Brea 48 May 1995
FLORIDA
THC Hollywood........................ Hollywood 124 October 1993
Transitional Hospital of Tampa....... Tampa 102 March 1993
ILLINOIS
Transitional Hospital of
Chicago(3)(4)....................... Chicago 237 December 1993
INDIANA
THC Indianapolis(1).................. Greenwood 38 November 1993
LOUISIANA
THC New Orleans(2)................... New Orleans 168 November 1992
MASSACHUSETTS
THC Boston........................... Peabody 41 November 1993
MINNESOTA
THC Minneapolis...................... Golden Valley 111 November 1994
NEVADA
THC Las Vegas........................ Las Vegas 52 December 1993
NEW MEXICO
THC Albuquerque...................... Albuquerque 61 December 1993
TEXAS
THC Arlington(2)(4).................. Arlington 160 December 1992
THC Houston(2)....................... Houston 84 December 1993
WASHINGTON
THC Seattle.......................... Seattle 80 May 1994
WISCONSIN
THC Milwaukee(2)..................... Greenfield 34 February 1994
-----
TOTAL THC LICENSED BEDS............ 1,340
=====
</TABLE>
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(1) Shared facility with a former CPC psychiatric hospital (now a BHC
hospital).
(2) Fully converted from a former CPC psychiatric hospital.
(3) Leased facility.
(4) In September of 1995, the Company opened an 80-bed satellite to its
Arlington facility in Fort Worth, Texas. In October 1996, the Company
opened a 103-bed satellite to its Chicago facility in Chicago, Illinois.
Note: A new facility in San Diego, CA (34 beds) opened in December 1996. A new
leased satellite facility in Pasadena, Texas (46 beds) also opened in
December 1996.
HOSPITAL PATIENT ADMISSION
Substantially all of the patient admissions to THC's hospitals are transfers
from other health care providers. Patients are referred from general acute
care hospitals, rehabilitation hospitals, skilled nursing facilities and home
care settings. The majority of THC's admissions are directly from the
intensive care units of general acute care hospitals. Referral sources include
discharge planners, case managers of managed care plans, social workers,
physicians, third party administrators, HMOs and insurance companies.
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THC has directors of patient referrals who educate health care professionals
from traditional acute care hospitals as to the unique nature of the services
provided by THC's hospitals. The directors of patient referrals develop an
annual admission plan for each hospital, with assistance from the hospital's
administrator. The admission plans involve ongoing education of local
physicians and the employees of managed care organizations and acute care
hospitals. THC anticipates that it will direct increased admission efforts
toward insurance company case managers and managed care organizations.
PERFORMANCE IMPROVEMENT--TOTAL QUALITY MANAGEMENT
The Company has a program whereby its hospitals are internally reviewed
annually for compliance with the standards of Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO"), Health Care Financing
Administration ("HCFA"), Occupational Safety and Health Administration
("OSHA"), State and other regulatory agencies. The purpose of this internal
review process is to (i) ensure compliance with the standards of all
regulatory agencies, (ii) provide assistance for hospital operations, and
(iii) assist the facilities in identifying opportunities to improve care.
In addition, each hospital has a multi-disciplinary performance improvement
program that includes: performance indicators, utilization review/case
management, infection control and risk management. The objective of this
program is to ensure that patients are appropriately admitted to the Company's
hospitals and that quality healthcare services are provided in a cost-
effective manner.
SOURCES OF LONG-TERM ACUTE CARE REVENUES
For long-term acute care services rendered to patients, THC receives payment
from (i) the federal government under Medicare, (ii) certain states under
Medicaid, (iii) commercial insurers and patients and (iv) managed care
organizations. During the first six months of operation, a THC facility is
reimbursed under the Medicare Prospective Payment System ("PPS") which does
not pay the full cost of treating Medicare patients with the severity of
illness treated at THC facilities. As a result, a new facility typically
incurs significant start-up losses in the first six months of operation.
Certification as a long-term acute care hospital typically occurs after the
facility's first six months of operations during which the facility
establishes an average length of stay in excess of 25 days. After
certification as a long-term acute care hospital, the THC facility is no
longer subject to PPS limitations. Payments from Medicare and Medicaid are
generally based upon cost, payments from commercial insurers are generally
based upon actual charges and payments from managed care organizations are
based on negotiated rates. The following table summarizes the approximate
percentages of THC revenues from the specified payor sources indicated:
<TABLE>
<CAPTION>
FISCAL YEAR
ENDED
NOVEMBER 30,
----------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Medicare..................................................... 78% 72% 69%
Medicaid..................................................... 3 4 6
Managed Care and Other....................................... 19 24 25
--- --- ---
Total...................................................... 100% 100% 100%
=== === ===
</TABLE>
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SELECTED HOSPITAL OPERATING DATA
The following table summarizes certain operating data of the Company's THC
hospitals:
<TABLE>
<CAPTION>
FISCAL YEAR ENDED
NOVEMBER 30,
-------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Hospitals in operation at period end(1)........... 14 14 13
Licensed beds at period end....................... 1,340 1,154 970
Patient days...................................... 251,980 197,046 100,485
Average daily census.............................. 688 540 275
Occupancy percentage.............................. 51.3% 46.8% 28.4%
</TABLE>
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(1) In September 1995, the Company opened an 80-bed satellite to its Arlington
facility in Fort Worth, Texas. In October 1996, the Company opened a 103-
bed satellite to its Chicago facility in Chicago, Illinois.
COMPETITION
THC's hospitals compete with medical/surgical hospitals, certain long-term
care hospitals, sub-acute facilities, rehabilitation hospitals and nursing
homes specializing in providing care to critically ill patients. Many of these
providers are larger and more established than THC. Certain providers that
compete with the Company's hospitals are operated by not-for-profit,
nontaxpaying or governmental agencies, which can finance capital expenditures
on a tax exempt basis, and which receive funds and charitable contributions
unavailable to the Company's hospitals. The Company believes that to offer
programs providing a cost-effective continuum of care, nursing homes and other
companies are converting their facilities and developing programs that will be
competitive with THC's hospitals. This trend is expected to continue due to
cost-containment pressures, lower hospital occupancy rates experienced in
recent years by general acute care hospitals, and the efforts of nursing homes
to expand their existing markets.
The competitive position of a hospital is affected by the ability of its
management to negotiate service contracts with purchasers of group health care
services, including private employers, preferred provider organizations
("PPOs") and health maintenance organizations ("HMOs"). Such organizations
attempt to obtain discounts from established hospital charges. The importance
of obtaining contracts with PPOs, HMOs and other organizations which finance
health care, and its effect on a hospital's competitive position, varies from
market to market, depending on the number and market strength of such
organizations. It is the Company's policy to enter into these contracts
wherever feasible. Generally, hospitals holding major contracts with managed
care organizations are able to attract more doctors to their active medical
staffs than hospitals without such contracts.
REGULATION AND REIMBURSEMENT
The health care environment in which the Company operates is highly
regulated and subject to frequent and substantial changes and proposals for
change. There can be no assurance that state or federal regulatory and
legislative bodies will not propose or enact rules or laws that could have a
material adverse effect on the Company.
The Company's hospitals are subject to substantial and continuous federal,
state and local government regulation. Such regulations provide for periodic
inspections and other reviews by state and local agencies and the United
States Department of Health and Human Services ("HHS") to determine compliance
with their respective standards pertaining to medical care, staffing
utilization, safety and equipment necessary for continued licensing or
participation in the Medicare or Medicaid programs.
Accreditation and State Licensing
State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in all federally-funded programs. Once a
hospital has been licensed, it must continue to comply with federal, state and
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local licensing requirements in addition to local building and life safety
codes. All of the Company's hospitals have obtained the necessary licenses to
conduct business.
Hospitals may seek an accreditation from JCAHO, a nationwide commission
which establishes standards relating to the physical plant, administration,
quality of patient care and operation of medical staffs of hospitals.
Generally, hospitals and certain other health care facilities are required to
have been in operation at least six months in order to be eligible for
accreditation by JCAHO. After conducting on-site surveys, JCAHO awards
accreditation for up to three years to hospitals found to be in substantial
compliance with JCAHO standards. Accredited hospitals are periodically
resurveyed, including, at the option of JCAHO, upon a major change in
facilities or organization and after a merger or consolidation. All of the
Company's hospitals in operation as of November 30, 1996 are accredited by
JCAHO. The Company intends to seek and obtain JCAHO accreditation for any
additional hospitals it may purchase or lease.
Certain states have certificate of need ("CON") laws which generally provide
that prior to the expansion of an existing facility, the construction of a new
facility, the addition of beds, the acquisition of existing facilities or
major items of equipment or certain changes in services, or the undertaking of
a capital expenditure on behalf of a facility, approval must be obtained from
the designated state health planning agency. The stated objective of the CON
process is to promote quality health care at the lowest possible cost and
avoid unnecessary duplication of services, equipment and facilities. If the
Company is unable to obtain the requisite CONs, the growth of its business
could be adversely affected.
Medicare and Medicaid
Medicare is a federal program that provides certain hospital and medical
insurance benefits to persons age 65 and over and certain disabled persons.
Medicaid is a medical assistance program administered by the states and
partially funded by the federal government under which health care benefits
are available to the indigent. Within the Medicare and Medicaid statutory
framework, there are substantial areas subject to administrative rulings,
interpretations and discretion which may affect payments made to providers.
In order to receive Medicare reimbursement, each hospital must meet the
applicable conditions of participation set forth by HHS relating to the type
of hospital, its equipment, personnel and standard of medical care, as well as
comply with state and local laws and regulations. Hospitals undergo periodic
on-site Medicare certification surveys. The Medicare survey is limited if the
hospital is JCAHO accredited. All of THC's operating hospitals are certified
as Medicare providers. All but two of the Company's operating hospitals are
certified by their respective state Medicaid programs. In fiscal 1996,
Medicaid represented only 3% of THC's net operating revenues. A loss of
certification could adversely affect a hospital's ability to receive payments
from Medicare and Medicaid.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect cost of the services provided to beneficiaries. The Social Security
Amendments of 1983 implemented PPS in an effort to reduce and control Medicare
costs. Under PPS, inpatient costs are reimbursed based upon a fixed payment
amount per discharge using diagnosis related groups ("DRGs"). The DRG payment
under PPS is based upon the national average cost of treating Medicare
patients with the same diagnosis.
Although the average length of stay varies for each DRG, the average stay
for all Medicare patients subject to PPS is approximately six days. An
additional outlier payment is made for patients with unusually long lengths of
stay or higher treatment costs. Outlier payments are designed to cover only
marginal costs. Additionally, PPS payments can only be made once every 60 days
for each patient. Thus, PPS creates an economic incentive for general acute
care hospitals to discharge Medicare patients as soon as clinically possible.
The Social Security Amendments of 1983 exempted psychiatric, rehabilitation,
cancer, children's and long-term care hospitals from PPS. A long-term care
hospital is defined as a hospital which has an average length of stay of
greater than 25 days. The Company's experience is that THC's facilities are
able to meet this definition. Under current law, inpatient operating costs for
long-term care and psychiatric hospitals are reimbursed under a cost-based
reimbursement system. The one exception to this rule is that during the
initial six months of
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operations of a long-term care hospital it will be subject to PPS
reimbursement. As a result of the Tax Equity and Fiscal Responsibility Act of
1982 ("TEFRA"), reimbursement under the cost-based system is subject to a
computed target amount per discharge (the "Target") for inpatient operating
costs. A hospital's Target rate is the per discharge (case) limitation,
derived from the hospital's allowable net Medicare inpatient operating costs
in the hospital's base year, and updated for each subsequent hospital cost
reporting period by the appropriate annual rate-of-increase percentage. If
allowable net inpatient operating costs do not exceed the hospital's Target,
payment to the hospital will be determined on the basis of the lower of (i)
net inpatient operating costs plus 50% of the difference between inpatient
operating costs and the Target; or (ii) net inpatient operating costs plus 5%
of the Target. Prior to October 1, 1991, allowable Medicare operating costs
per discharge in excess of the Target were not reimbursed. Effective October
1, 1991, if a hospital's allowable net inpatient operating costs exceed the
Target, Medicare reimburses the lower of (i) the hospital's target amount plus
50% of the allowable Medicare operating costs per discharge in excess of the
Target or (ii) 110% of the Target. With regard to hospitals certified prior to
October 1, 1992, the TEFRA Target provisions do not apply with respect to
hospitals that have been in operation for less than three full years. For
hospitals certified on or after October 1, 1992 (all of THC's hospitals), the
TEFRA Target provisions do not apply with respect to hospitals that have been
in operation for less than two full years. Under the Omnibus Budget
Reconciliation Act of 1993 ("OBRA 1993"), increases in the Target for fiscal
years 1994 through 1997 are generally limited to the hospital market basket
increase minus one percentage point.
On September 1, 1994, HHS published a regulation to establish additional
criteria for certain long-term care hospitals to meet in order to be exempt
from PPS. These regulations address exemption requests by long-term care
hospitals which operate in space leased from another hospital, sometimes
referred to as a "hospital-within-a-hospital" setting. Among other things, the
regulations, as amended, require that the long-term care hospital and the
"host" hospital have separate governing bodies, separate chief executive
officers, separate chief medical officers, and separate medical staffs. In
addition, the long-term care hospital must perform certain hospital functions
through employees or contracts with organizations other than the host
hospital, have 75% or more of its admissions referred from sources other than
the "host" hospital, or hold its purchases of services from the "host"
hospital below certain dollar thresholds. In locations where it is subject to
these rules, the Company believes it is in compliance with the applicable
regulatory criteria.
Medicare and Medicaid reimbursement is generally determined from annual cost
reports filed by the Company. These cost reports are subject to audit by
Medicare and Medicaid. The Company has established reserves for possible
adjustments at levels which management believes to be adequate to cover any
downward adjustments resulting from audits of these cost reports.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by peer or utilization
review organizations ("PROs") in order to ensure efficient utilization of
hospitals and services. A PRO may conduct such review either prospectively or
retroactively and may, as appropriate, recommend denial of payments upon
admission or retrospectively for services provided to a patient. Such review
is subject to administrative and judicial appeal.
Health Care Reform
The focus of recent health care legislation in Congress has been on
budgetary and related funding mechanism issues. A number of reports, including
the 1995 Annual Report of the Board of Trustees of the Federal Hospital
Insurance Program (Medicare) have projected that the Medicare "trust fund" is
likely to become insolvent by the year 2002 if the current growth rate of
approximately 10% per year in Medicare expenditures continues. Similarly,
federal and state expenditures under the Medicaid program are projected to
increase significantly during the same seven-year period. In response to these
projected expenditure increases, and as part of an effort to balance the
federal budget, both the Congress and the Clinton Administration have made
proposals to reduce the rate of increase in projected Medicare and Medicaid
expenditures and to change funding mechanisms and other aspects of both
programs. In November 1995, Congress passed legislation that would have
substantially reduced payments to providers and would have made significant
changes in the
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Medicare and the Medicaid programs. While President Clinton vetoed this bill,
the Clinton Administration has proposed and is expected to repropose alternate
measures to reduce, to a lesser extent, projected increases in Medicare and
Medicaid expenditures.
The Medicare legislation that was adopted by Congress would have, among
other things, reduced payments to providers (including the Company), and
created incentives for Medicare beneficiaries to enroll in managed care plans.
Earlier versions of this legislation also contained cost controls affecting
long-term acute care hospitals. The Administration's proposal included a
moratorium on the designation of additional Medicare long-term acute care
hospitals and such a provision may be reintroduced in subsequent budget
legislation. The Company anticipates that federal and state governments will
continue to review and assess alternative health care delivery systems and
payment methodologies. Due to the uncertainties regarding the final details of
reform initiatives, the Company cannot predict which proposals, if any will be
adopted or what impact they may have on the Company. Moreover, there can be no
assurance that the adoption of any reform proposals will not have a material
adverse effect on the Company's business, operating results, or financial
condition.
Reimbursement Limitations and Cost-Containment
Regardless of the outcome of any proposed health care reform bills, there
will likely continue to be ongoing efforts to effect cost savings in the
Medicare program. These efforts could include change in the reimbursement of
the Company's long-term critical care hospitals to the DRG method. In fact,
the conference report accompanying the OBRA 1993 urged prompt completion of a
study of methods to subject hospitals such as THC's to PPS, based on DRGs to
be developed for the subject hospitals, from which they are currently exempt.
Similar language was introduced in 1995 legislation, but not incorporated into
the final bill adopted by Congress. Even if cost-based reimbursement for the
THC facilities continues, additional reimbursement limits may be imposed. Such
cost-containment initiatives may vary substantially from the proposed
structural reforms discussed above and may impact the Company more quickly and
directly.
Relationships With Physicians and Clinicians
The Company is subject to federal and state laws that regulate its
relationships with physicians and other providers of health care services.
These laws include the Medicare and Medicaid anti-kickback statute, under
which criminal penalties can be imposed upon persons who pay or receive any
remuneration in return for referrals of patients for items or services
reimbursed under the Medicare, Medicaid or certain state health care programs.
Violations of this law also result in automatic exclusion from these programs.
The Company is also subject to state and federal laws prohibiting false
claims.
HHS's Office of Inspector General ("OIG") and the courts have broadly
construed the anti-kickback statute. "Safe harbor" regulations promulgated by
the OIG define a narrow range of practices that will be exempt from
prosecution or other enforcement action under this statute. To the extent that
offers to pay or payments made are deemed to be for purposes of inducing
referrals and do not satisfy all the criteria for a safe harbor, the
arrangements could be found to violate the anti-kickback laws. Similarly,
state fraud and abuse laws, which vary from state to state, are often vague
and have infrequently been interpreted by courts or regulatory agencies. Given
the breadth of these laws and the dearth of court rulings dealing with
businesses like the Company's, there can be no assurance that the Company's
arrangements with its providers will not be challenged. However, the Company
has in place a compliance program, whereby all personnel including clinicians
are required to execute Certificates of Understanding of and compliance with
the THC Mission and Standards of Business Conduct. Additionally, the evolving
Compliance Program includes the establishment of a "hotline" which all
employees are encouraged to call if they believe there is any illegal conduct
or wrongdoing.
OBRA 1993 contains provisions ("the Stark Act") prohibiting physicians
having a financial relationship with the provider from making referrals for
"designated health services" rendered by the provider which are paid for by
the Medicare or Medicaid programs. These services include radiation therapy
services; durable medical equipment; parenteral and enteral nutrients,
equipment, and supplies; prosthetics, orthotics, and
9
<PAGE>
prosthetic devices; home health services; outpatient prescription drugs; and
inpatient and outpatient hospital services. If such a financial relationship
exists, the entity is prohibited from billing for or receiving reimbursement
on account of such referral and is subject to various penalties and sanctions
for noncompliance. These provisions took effect January 1, 1995.
Numerous exceptions are allowed under the Stark Act for financial
arrangements that would otherwise trigger the referral prohibitions. These
provide, under certain conditions, exceptions for relationships involving
rental of office space and equipment, employment relationships, personal
service arrangements, payments unrelated to designated services, physician
recruitment, and certain isolated transactions. While the Department has
issued regulations governing physician self-referrals of Medicare patients for
clinical laboratory services, the Department has not yet issued regulations
pertaining to referrals involving the other designated health services.
The Company has contracts with physicians to provide hospital services and
in some instances patient services. These contracts have been designed to meet
the requirements of the Stark Act. However, until final regulations are
promulgated or the contracts are otherwise tested, there can be no assurance
that the contracts, or other applicable policies of the Company, will be found
to be in compliance with the Stark Act.
RESPIRATORY THERAPY SERVICES
In 1995, the Company began providing respiratory therapy services and
supplies to appropriate patients of skilled nursing facilities pursuant to
contracts between THC hospitals and skilled nursing facilities. The services
are provided by respiratory therapists employed at the Company's hospitals.
These respiratory therapists perform a wide variety of procedures, including
oxygen therapy, bronchial hygiene, nebulizer and aerosol treatments,
tracheostomy care, ventilator management and patient respiratory education.
The Company receives payments from the skilled nursing facilities for
services rendered and these facilities in turn, receive payments from the
appropriate payor. Respiratory therapy and supplies are covered under the
Medicare program and reimbursed as an ancillary service when the service is
provided by hospital-based respiratory therapists. Many commercial insurers
and managed care providers are seeking hospital discharge options for lower
acuity respiratory patients. Management believes that the Company's pricing
and successful clinical outcomes make its respiratory therapy program
attractive to commercial insurers and managed care providers.
In 1996, the Company began providing respiratory therapy consulting services
to acute care hospitals which desire to use the Company's program in their own
institution. Under these contractual agreements, Company personnel assist the
hospital to develop and manage a respiratory therapy services program in
skilled nursing facilities. The Company also provides billing services for the
hospital. Each hospital that contracts with the Company provides its own
respiratory therapists who are employed by the hospital to provide services in
the skilled nursing facilities. The Company receives payments from the
hospitals for services rendered. The hospitals, in turn, receive payments from
the skilled nursing facilities.
The primary competitive factors for the respiratory therapy services
business are quality of services, charges for services and responsiveness to
the needs of patients, families and the facilities in which the services are
provided. Certain hospitals have entered into the contract services market
through affiliation agreements and management contracts.
DIVESTED PSYCHIATRIC OPERATIONS AND INVESTMENT IN BEHAVIORAL HEALTHCARE
CORPORATION
As noted previously in Item 1, "General", the Company sold its United
States, Puerto Rico, and United Kingdom psychiatric operations during fiscal
year 1996. The United States and Puerto Rico psychiatric operations were sold
to Behavioral Healthcare Corporation which is a private company. THC will have
a 44.2% common equity interest in future BHC earnings. BHC is headquartered in
Nashville, Tennessee, and is now the second largest psychiatric hospital
network in the country, with 38 hospitals and 4 residential treatment centers
10
<PAGE>
in 18 states and Puerto Rico, comprising approximately 3,500 beds. With the
combination of these hospitals, BHC is a leading provider of
psychiatric/behavioral services for adults, adolescents and children with acute
psychiatric, emotional, substance abuse and behavioral disorders. BHC currently
offers a broad spectrum of inpatient, partial hospitalization, outpatient and
residential treatment programs through its hospitals.
The psychiatric/behavioral care industry in the United States continues to
undergo significant change due to the expanding influence of managed care and
cost-containment measures imposed by governmental and third party payors and
employers. Providers such as BHC continue to experience a significant increase
in the percentage of revenues from payors that reimburse on negotiated per diem
or case rates, episodes of care or length of stay rates, or on a discounted
basis. In addition, this same trend has resulted in higher deductibles and co-
insurance for patients. Negotiated rates with managed care, government and
other third parties have decreased, and the use of less intensive settings of
behavioral care in place of inpatient treatment has increased. The development
of alternative services such as partial programs and intensive outpatient
services have had the impact of significantly decreasing the average length of
a patient's stay. Providers such as BHC have also been affected by the
aggressive privatization of state and county psychiatric/behavioral services
which has generally resulted in lower rates. Payors also have adopted
increasingly stringent admission and length of stay criteria and other
treatment constraints. All of these factors adversely affect utilization and
reimbursement for psychiatric services. As a result, psychiatric care providers
in the U.S. have been forced to adapt their clinical practices, business
practices and operating strategies.
The Company believes that the combination of its former psychiatric hospitals
with the BHC hospitals will provide economies of scale that will allow BHC to
operate more cost-efficiently and better compete in today's cost-conscious
psychiatric industry environment. Strategically, both companies have been
concentrating on building a full continuum of psychiatric and behavioral care
services, and developing and operating fully integrated behavioral health care
delivery systems in selective markets.
PSYCHIATRIC CARE OPERATIONS
Services and Programs
Over the past three years, the former CPC and BHC hospitals have
significantly expanded the scope of their psychiatric treatment programs to
create a continuum of care from which the most appropriate and cost-effective
treatments can be selected to meet the needs of its payors and patients. In
addition to offering traditional inpatient treatment programs, BHC provides
less costly treatment alternatives such as partial hospitalization, residential
treatment and intensive and non-intensive outpatient programs. By offering such
programs through a single organization, the Company believes that patients
receive the most appropriate treatment, and that the transition among differing
intensities of care occurs rapidly and cost effectively from the perspective of
the patient, clinical team (including the medical director, the clinical or
nursing director, the admissions director and the program director) and payor.
BHC's patient programs include inpatient, residential, partial hospitalization,
and outpatient services.
Sources of Psychiatric Hospital Revenues
The psychiatric hospitals receive payment for its services from patients,
private health insurers, managed care organizations, and from the Medicare,
Medicaid and CHAMPUS governmental programs.
Competition--U.S. Psychiatric Hospitals
The BHC psychiatric hospitals compete with other free-standing psychiatric
hospitals and psychiatric units in medical/surgical hospitals as well as with
other specialty psychiatric hospitals. Some competing hospitals are either
owned or supported by government agencies. Others are owned by nonprofit
corporations and supported by endowments and charitable contributions. Such
governmental and nonprofit entities are substantially exempt from income and
property taxation. The competitive position of a hospital is, to a significant
degree, dependent upon the number and quality of physicians practicing at the
hospital and the members of its medical staff. The Company also believes that
the competitive position of a hospital is dependent upon the variety of
services offered by a facility.
11
<PAGE>
The competitive position of a hospital is affected by the ability of its
management to negotiate service contracts with purchasers of group health care
services, including private employers, PPOs and HMOs. Such organizations
attempt to obtain discounts from established hospital charges. The importance
of obtaining contracts with PPOs, HMOs and other organizations which finance
health care, and its effect on a hospital's competitive position, varies from
market to market, depending on the number and market strength of such
organizations. Generally, hospitals holding major contracts with managed care
organizations are able to attract more doctors to their active medical staffs
than hospitals without such contracts.
EMPLOYEES
As of November 30, 1996, THC had approximately 4,500 employees, of which
approximately 55% were employed full time and 45% were employed part time. The
employees at one hospital are covered by a union agreement. The Company
considers its labor relations to be satisfactory.
ITEM 2. PROPERTIES
Information related to the number, location, and ownership of the Company's
hospitals is included in "Hospital Operations". The Company also owns the
corporate office building that is located in Las Vegas, Nevada as well as the
real property related to five closed psychiatric facilities that are being
held for sale. All of the existing hospital buildings meet all state and local
requirements for licensing as hospitals to provide the services indicated.
ITEM 3. LEGAL PROCEEDINGS
In July 1995, the Government served a whistleblower suit against the
Company's Subsidiary, CPC Oklahoma, Inc., under the Federal False Claims Act.
CPC Oklahoma, Inc. operated Southwind Hospital, a psychiatric hospital located
in Oklahoma City, Oklahoma. The suit was originally filed by a former employee
and a relative of another employee under the qui tam provisions of the Act.
Invoking its rights under the Act, the United States took over the case. In
November 1996, Southwind and the Government reached an agreement in principle
under which Southwind would pay $750,000 to the Government in exchange for a
release of the Government's civil and administrative claims. The settlement
was paid in February 1997. In a related action, on August 4, 1995, federal and
state authorities executed a search warrant at Southwind and seized various
records. In December 1996, the Government notified Southwind that it had
decided to discontinue any further criminal investigation of this matter.
The Company is subject to ordinary and routine litigation incidental to its
business, including those arising from patient treatment, injuries or death
for which it is covered by liability insurance, and those arising from actions
involving employees. Management believes that the ultimate resolution of such
proceedings will not have a material adverse effect on the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following table describes the matters voted upon at the annual meeting
of stockholders held November 8, 1996 and shows the number of votes cast for,
against or withheld as to such matters.
<TABLE>
<CAPTION>
FOR AGAINST/WITHHELD
---------- ----------------
<C> <S> <C> <C>
1. Election of one director to serve until the
annual meeting in 1999 and until her
successor is duly elected and qualified*:
Wendy Simpson............................... 35,174,115 488,049
2. Amend the Company's Articles of
Incorporation to change the name of the
Company to Transitional Hospitals
Corporation................................. 35,360,326 301,838
3. Ratify an amendment to the Company's Bylaws
to generally require that a majority of the
members of the Board of Directors be
Independent Directors....................... 30,662,164 569,266
</TABLE>
- --------
* The following directors' term of office continued after the meeting:
Richard L. Conte, Jack H. Lindheimer, M.D., Nigel Petrie, Dana L. Shires,
Jr., M.D., Robert L. Thomas and Ralph J. Watts. Carol Burt was appointed to
the Board of Directors in December 1996.
12
<PAGE>
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a)Market Information
(1)(i) The Company's Common Stock is traded on the New York and
Pacific Stock Exchanges. Ticker symbol: THY.
(ii) The information in response to this portion of Item 5 is
incorporated herein by reference from footnote 15 to the financial
statements in Item 8.
(b)Holders
(1) As of February 14, 1997, there were approximately 5,842 holders
of the Company's Common Stock. The number of record holders includes
banks and brokerage houses which are holding shares of the Company's
Common Stock for an undetermined number of beneficial owners.
(c)Dividends
(1) The information in response to this portion of Item 5 is
incorporated by reference from footnote 15 and 16 to the financial
statements in Item 8.
ITEM 6. SELECTED FINANCIAL DATA
TRANSITIONAL HOSPITALS CORPORATION (FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNT)
<S> <C> <C> <C> <C> <C>
Net operating revenues......... $503,266 $514,991 $423,955 $335,578 $344,274
Net income (loss)*............. (5,352) (41,632) 10,220 (24,892) 23,137
Total assets................... 465,947 604,625 600,004 530,340 540,600
Long-term debt, exclusive of
current maturities............ 14,858 84,883 69,090 40,718 26,293
Earnings (loss) per common
share*........................ (0.12) (0.95) 0.24 (0.58) 0.52
Dividends per share............ -- 0.01 0.01 0.09 0.36
</TABLE>
- --------
* See Item 7 "Management's Discussion and Analysis of Financial Condition and
Results of Operations"--"Sale of psychiatric divisions and psychiatric
restructurings" for a discussion of non-recurring transactions related to
the sales of the Company's psychiatric hospitals.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the selected
financial data presented above, the consolidated financial statements and the
notes to the consolidated financial statements appearing in Item 8.
Sale of psychiatric divisions and psychiatric restructurings
On November 30, 1996 the Company sold its U.S. and Puerto Rico psychiatric
operations to BHC for $60 million in cash and BHC stock valued at
approximately $70 million. THC will have a 44.2% common equity interest in
future BHC earnings. BHC is headquartered in Nashville, Tennessee, and is now
the second largest psychiatric hospital network in the country, with 38
hospitals and 4 residential treatment centers in 18 states and Puerto Rico,
comprising approximately 3,500 beds. With the combination of these hospitals,
BHC is a leading provider of psychiatric/behavioral services for adults,
adolescents and children with acute psychiatric, emotional, substance abuse
and behavioral disorder.
13
<PAGE>
The Company also announced the closure of Southwind Hospital, a psychiatric
facility in Oklahoma City, Oklahoma in November of 1996 due to poor financial
performance. Net operating revenue and net operating income or (loss) for
Southwind totaled $4.7 million and $(.8) million for fiscal year 1996, $8.1
million and $(.1) million for fiscal year 1995 and $7.1 million and $.8
million for fiscal year 1994. The hospital is being held for sale. The Company
has reached an agreement to settle the whistleblower suit related to Southwind
with the United States Government for $750,000 (see Item 3, Legal
Proceedings).
The effects on income of the above described transactions are classified as
non-recurring transactions for fiscal year 1996 and include the following: i)
$62.0 million loss on the sale of the psychiatric operations to BHC, ii) $14.4
million of expenses related to the transaction that consist of $6.7 million of
severance costs and payments pursuant to employment contracts, $4.0 million of
transaction costs related primarily to legal and investment banking services,
and $3.7 million related to legal expenses and settlement costs for the
Southwind whistleblower suit and one other lawsuit related specifically to the
US Psychiatric Division, iii) $2.1 million for a settlement of a claim from a
former Chairman of Community Psychiatric Centers related to his contract with
the Company (see further discussion in Note 11 to the financial statements
included in Item 8), iv) impairment charges of $6.7 million to writedown the
property value of Southwind and certain other closed hospitals to their
current estimated fair market value, and v) $1.7 million related to
termination benefits and other exit costs related to the closure of Southwind
Hospital. Approximately 150 employees were terminated due to the Southwind
closure and approximately 80 corporate employees were terminated due to the
sale of the U.S. psychiatric division.
During the first three quarters of 1996, the Company recorded net
restructuring charges of $2.1 million for termination benefits and other exits
costs related to the closure of four U.S. psychiatric division hospitals.
Approximately 280 employees were terminated as a result of the closure of
these hospitals. Two of these properties were sold to BHC and two are being
held for sale.
On June 21, 1996, the Company sold its United Kingdom psychiatric hospitals
to Foray. PHG operates 15 freestanding acute psychiatric hospitals and
chemical dependency facilities, including one 42 bed hospital that was 50%
owned by PHG. Based on the number of licensed hospital beds, PHG is the
leading commercial provider of psychiatric services in the United Kingdom
where psychiatric services are generally available to residents without charge
from government-owned NHS hospitals. The total purchase price for the PHG
facilities was approximately $135 million, which includes a $4.6 million
subordinated note due in 2009 issued by Foray. Included in non-recurring
transactions is the net gain of $55.5 million on the sale of these facilities.
Transaction expenses related to legal, investment banking and severance costs
totaled approximately $4.8 million and are reflected in the $55.5 million
gain.
Effective November 30, 1995, the Company recorded a restructuring charge
totaling $4.6 million ($2.8 million after tax), determined in accordance with
the provisions of the January 1995 Financial Accounting Standards Board
Emerging Issues Task Force Consensus No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring)", ("EITF 94-3"), in
connection with the decision to close six psychiatric facilities and three
regional offices. EITF 94-3 requires the accrual of certain employee
termination costs and costs resulting from a plan to exit an activity that are
not associated with or that do not benefit activities that will continue and
prohibits accrual of expected future operating losses of the activity exited.
The charge comprised $3.4 million for employee termination benefits related to
hospital operations and overhead personnel and $1.2 million for non-cancelable
operating leases and other exit costs. Approximately 314 hospital employees
and 65 corporate and regional employees were terminated. Amounts charged
against the reserve approximated amounts accrued. Of the six closed hospitals,
three have been sold, two were fully converted to THC hospitals, and one was
exchanged for a similar building held by another health care provider and was
converted into a satellite hospital of a THC facility in October 1996.
Effective May 31, 1995, the Company recorded a restructuring credit totaling
$2.5 million ($1.5 million after tax) from the resolution of previously
restructured psychiatric assets. The restructuring credit resulted from
divesting two restructured properties at higher prices than the 1993 writedown
of the facilities anticipated and the Company's success in collecting accounts
receivable balances that were reserved for as part of the February 28, 1994
restructuring charge.
14
<PAGE>
Effective February 28, 1994, the Company recorded a restructuring charge of
$6.3 million ($3.8 million after tax) in connection with the decision to close
three psychiatric facilities. The charge comprised $2.2 million for future
operating losses, $1.5 million for restructuring costs associated with
terminating employees and $2.6 million for additional accounts receivable
allowances and reserves for other assets at the three hospitals. Approximately
225 employees of the restructured hospitals were terminated. Amounts charged
against the reserve for estimated operating losses and termination benefits
paid approximated amounts originally accrued. Of the three closed hospitals,
one was sold in 1996, one was converted into a THC facility after the
restructuring, and one was converted into a satellite hospital of a THC
facility in September 1995.
Effective February 28, 1994, the Company recorded a restructuring credit
totaling $7.2 million ($4.3 million after tax) from the resolution of
previously restructured psychiatric assets. The restructuring credit resulted
from the Company's success in controlling hospital closure costs and in
divesting one of its restructured properties at a higher price than the 1993
writedown of the facility anticipated.
Recent Accounting Pronouncements
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation", which becomes
effective for fiscal years beginning after December 15, 1995. FAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense
for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Entities electing to remain with the
accounting in APB Opinion No. 25 will be required to make pro forma
disclosures of net income and earnings per share as if the provisions of FAS
123 had been applied. The Company is in the process of evaluating the
Statement. The potential impact on the Company of adopting the new standard
has not been quantified at this time. The Company must adopt FAS 123 in fiscal
year 1997.
Sources of Revenue
For fiscal years 1996, 1995, and 1994, approximately 47%, 37%, and 28% of
the Company's net revenues were paid by Medicare which based reimbursement on
the Company's costs (except for THC hospitals in their first six months of
operations which are reimbursed based on DRG rates). Medicare reimbursement as
a percentage of total revenues has increased over the past three years as THC
has grown significantly over that period of time. Net Medicare revenue for THC
was 78%, 72%, and 69% of total THC net operating revenue during 1996, 1995,
and 1994, respectively.
For fiscal years 1996, 1995, and 1994, approximately 9%, 11%, and 13% of the
Company's net revenue was derived from Medicaid with varying rates from state
to state. Net revenue totalling 24%, 27%, and 33% for 1996, 1995, and 1994,
respectively, was based upon negotiated rates with payors such as managed care
companies, health maintenance organizations and preferred provider
organizations. The Company expects the number of patients enrolled in managed
care plans to grow in the future. Approximately 17%, 21%, and 22% of the
Company's net revenues for 1996, 1995, and 1994, respectively, were derived
primarily from private sources and insurance companies which based
reimbursement on the Company's price schedule. The Company believes that
revenues from private sources will continue to decline in the future as
purchasers of health care services continue to shift coverage to managed care
plans.
For fiscal years 1996, 1995, and 1994, approximately 3%, 4%, and 4%,
respectively, of the Company's revenues came from CHAMPUS, a federal
government program which bases reimbursement generally on a regional average
rate.
Liquidity and Capital Resources
Net cash provided from operating activities increased $45.1 million in
fiscal year 1996 compared to fiscal year 1995. Excluding the effects from the
sales of domestic and foreign psychiatric operations, net accounts receivable
balances decreased $2.5 million in 1996. Cash flows from third party payors
increased by
15
<PAGE>
$19.9 million in 1996. The improvement in cash flows from these sources
combined with the $21.3 million of cash paid to settle the securities lawsuit
in fiscal 1995 were the principal causes for the increase in cash flows from
operations in 1996. Excluding fourth quarter revenues generated by the U.S.
psychiatric operations, days revenue in accounts receivable were 72, 82, and
79 at November 30, 1996, 1995, and 1994, respectively. The Company's current
ratio in 1996, 1995 and 1994 was 3.2, 2.4 and 2.4, respectively.
The Company sold its United Kingdom psychiatric operations on June 21, 1996
and its U.S. and Puerto Rico psychiatric operations on November 30, 1996. The
Company also sold three closed psychiatric hospitals in fiscal 1996. The
combined sale of foreign and domestic psychiatric hospitals produced $186.6
million in cash proceeds in addition to non-cash consideration of $10.6
million of notes receivable and BHC stock valued at approximately $70 million.
A portion of the proceeds from the sale of PHG were used for the repayment
of bank credit facilities of $50 million. The Company also repaid an
additional $24.9 million of bank credit facilities and $5.4 million of
subordinated debentures during 1996. Due primarily to the repayment of debt,
the Company's ratio of long-term debt to total equity has been reduced to 3.9%
at November 30, 1996 from 21.3% and 15.7% at November 30, 1995 and 1994,
respectively.
In August 1996, the Company announced that its Board of Directors authorized
spending up to $25 million to buy back company stock from time to time on the
open market. In October 1996, the Board of Directors expanded the buyback
program by authorizing an additional $50 million, bringing the total
authorization for expenditures on company stock to $75 million. In accordance
with this authorization, the Company purchased 4.2 million shares for $35.8
million during 1996. No common stock was repurchased in fiscal years 1995 or
1994.
Purchases of fixed assets totaled $35.4 million in 1996 compared to $40.1
million in 1995. Capital expenditures for 1997 are estimated to be $27 million
for renovation and expansion of existing facilities and equipment additions.
In addition, the Company will pay approximately $5 million for a new computer
system in 1997.
During September 1993, the Company entered into a credit agreement whereby
the Company was able to borrow up to $25 million through November 30, 1995, at
which time the amount outstanding was converted into a term loan payable in
equal quarterly installments through November 30, 1998. As of November 30,
1996, $16.8 million is outstanding under this agreement. The Company believes
that its current cash and cash equivalent balances and its operating cash flow
will be sufficient to fund the Company's operations and capital expenditures
through the end of fiscal 1997.
Operating Results
Following is a summary of net operating revenues by division (dollars in
thousands):
<TABLE>
<CAPTION>
1996 1995 1994
--------------- --------------- --------
% %
AMOUNT CHANGE AMOUNT CHANGE AMOUNT
-------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C>
THC Hospitals.......................... $240,780 24.5 $193,325 91.4 $101,031
Respiratory Therapy Services........... 23,227 133.7 9,939 --
-------- -------- --------
Total THC Net Operating Revenues... 264,007 29.9 203,264 101.2 101,031
Divisions Sold in Fiscal 1996:
U.S. Psychiatric Division.............. 202,069 (18.7) 248,408 (10.2) 276,698
U.K. Psychiatric Division.............. 37,190 (41.3) 63,319 37.0 46,226
-------- -------- --------
Net Operating Revenues................. $503,266 (2.3) $514,991 21.5 $423,955
======== ======== ========
</TABLE>
16
<PAGE>
Fiscal Year 1996 Compared to Fiscal Year 1995
THC hospital net operating revenues increased due to a 27.9% increase in
patient days. Revenue from respiratory therapy services grew by 133.7% in
fiscal year 1996. In 1995, the Company began providing respiratory therapy
services and supplies primarily to skilled nursing facilities. The growth in
revenue related to the respiratory therapy services is due to a 138% increase
in the average number of contracts in effect during the current year compared
to the prior year.
Net operating revenues from the United States psychiatric hospitals
decreased by 18.7% or $46.3 million. Approximately $42.0 million of the
decline is related to the fact that the Company closed six hospitals in
November of 1995, one hospital in January 1996, and two hospitals in the
second quarter of 1996. The remaining portion of the decrease in net operating
revenues was due to a decrease in same store patient days of 2.8%.
The Company closed one additional psychiatric hospital in December 1996 and
sold the remaining operating psychiatric hospitals to Behavioral Healthcare
Corporation on November 30, 1996. The Company received as partial
consideration for the sale of its U.S. and Puerto Rico psychiatric operations
a common equity interest in BHC of approximately 44.2%.
Net operating revenues from the Company's United Kingdom psychiatric
operations declined substantially as the division was sold on June 21, 1996.
Operating expenses as a percentage of net operating revenues increased from
76.3% in fiscal year 1995 to 80.0% in fiscal year 1996. The increase related
to several factors including an increase in personnel costs at the U.S.
psychiatric division as the Company made an effort to upgrade the quality of
its operating and financial personnel in these hospitals as well as expand the
psychiatric and behavioral health services offered. The increase in operating
expenses as a percentage of net operating revenues was also impacted by
approximately $4.0 million of post-closing operating expenses and holding
costs related to the ten U.S. psychiatric division hospitals that have been
closed since November of 1995. These costs were prohibited from being accrued
for in any of the related restructuring charges as they did not qualify as
exit costs as defined by EITF 94-3 (see "Sale of psychiatric divisions and
psychiatric restructurings" for a description of EITF 94-3 and the
restructuring charges taken).
General and administrative expenses decreased $6.4 million and decreased as
a percentage of net operating revenues to 6.6% in 1996 from 7.7% in 1995.
Beginning in November of 1995, the Company closed three psychiatric division
regional offices, consolidated certain positions at the Corporate office, and
continued with further reductions in corporate overhead in January of 1996.
General and administrative expenses also decreased due to the sale of the
United Kingdom psychiatric division in June 1996.
Bad debt expense decreased from 5.6% of net operating revenues in 1995 to
4.0% in 1996. Bad debt expense was higher in 1995 due to the fact that the
Company experienced a slow down in billing and collections as it converted
several U.S. psychiatric hospitals to a centralized billing office as well as
a new computer system. In addition, collections were adversely impacted in the
prior year as certain State Medicaid programs converted to managed care
initiatives in 1995.
Non-recurring transactions related primarily to the sales of the U.S. and
United Kingdom psychiatric divisions in fiscal year 1996 as described above in
"Sale of psychiatric divisions and psychiatric restructurings". Non-recurring
transactions in 1995 related primarily to the settlement of shareholder
litigation from 1991 in the amount of $46.0 million and impairment losses of
$46.0 million related primarily to the U.S. psychiatric division. The
impairment losses were taken upon adoption of Financial Accounting Standard
No. 121 ("FAS 121"), "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of", in the fourth quarter of 1995.
Investment income increased $1.4 million due to higher cash and short-term
investment balances that resulted from the sale of the United Kingdom
psychiatric division in June of 1996.
17
<PAGE>
Interest expense decreased as the Company repaid $80.3 million of long-term
debt in fiscal year 1996.
See Note 7 to the financial statements for a reconciliation of effective
income tax rates to statutory rates.
Fiscal Year 1995 Compared to Fiscal Year 1994
Net operating revenues increased by 21.5% from $422.4 million for the year
ended November 30, 1994 to $515.0 million for the year ended November 30,
1995. The largest portion of this increase was a $93.9 million increase in THC
revenue from $101.0 million in fiscal year 1994 to $194.9 million in fiscal
year 1995. THC's same-store admissions and patient days increased 62.3% and
82.6%, respectively. In addition, the Company began providing respiratory
therapy services and supplies primarily to skilled nursing facilities in
fiscal year 1995. $9.9 million of revenue was generated from this line of
business in fiscal year 1995.
Net operating revenues from the United States psychiatric operations
decreased by 10.2% or approximately $28.3 million as a result of a 12.0%
decrease in adjusted patient days offset by a 2.0% increase in net revenue per
patient day. Net revenue per patient day increased as favorable Medicare and
Medicaid cost report settlements exceeded prior year amounts by approximately
$2 million in fiscal 1995. Adjusted patient days declined primarily due to the
continuing decline in the average length of a patient's stay.
Net operating revenues from the Company's United Kingdom operations
increased by 37.0% or approximately $17.1 million as a result of an increase
in same-store patient days of 15.6% and a 5.6% increase in average net revenue
per patient day. The remaining portion of the increase in net operating
revenue related to additional patient days generated by three new facilities
that started operations subsequent to the third quarter of 1994.
Operating expenses decreased as a percentage of net operating revenues to
76.3% in the year ended November 30, 1995 from 77.5% in the year ended
November 30, 1994. A higher percentage of THC's total costs were being
reimbursed in 1995 because an increased number of THC hospitals received
certification for cost-based reimbursement under Medicare during fiscal year
1995 compared to fiscal year 1994. THC hospitals incur significant start up
losses because they are not entitled to cost based reimbursement for Medicare
patients until they are certified as long-term care hospitals. Pending such
certification, these start up hospitals are reimbursed under the Medicare
Prospective Payment System which does not pay the full cost of treating
Medicare patients with the severity of illness treated at THC facilities. Of
the 14 hospitals in operation during fiscal year 1995, 13 were certified as
long-term care hospitals and therefore received cost-based reimbursement under
Medicare, whereas at the same time in 1994, 13 facilities were in operation
and 11 had been open long enough to receive their long-term care hospital
certification. In addition, 11 facilities completed their TEFRA rate setting
period during fiscal 1995 and were eligible for an additional incentive
payment if their costs were less than the targeted rate per discharge.
General and administrative expenses increased $5.7 million and decreased as
a percentage of net operating revenues to 7.7% in 1995 from 8.0% in 1994. The
increase in general and administrative expenses related primarily to the fact
that the Company centralized functions at the corporate office such as billing
offices for some hospitals in the U.S. psychiatric division and THC as well as
added increased reimbursement support. The Company also completed the
installation of its new computer system in early 1995 and began incurring
costs to support the new system beginning in the second quarter of 1995. All
of these functions supported the daily operations of the Company's hospitals.
Also, additional Corporate administrative functions were added to specifically
support the expanded THC and United Kingdom operations.
Bad debt expense as a percentage of net operating revenue was 5.6% for the
year ended November 30, 1995 compared to 6.4% for the year ended November 30,
1994. Bad debt expense as a percentage of net operating revenues for THC
decreased from 5.6% in fiscal 1994 to 1.3% in fiscal 1995. Beginning in the
middle of fiscal year 1994, the Company strengthened controls over admissions,
insurance verification, and billing for THC revenues. The implementation of
these controls resulted in a decrease in uncollectible accounts and bad debt
expense.
18
<PAGE>
Bad debt expense as a percentage of net operating revenues for the U.S.
psychiatric division increased from 7.3% in 1994 to 10.3% in 1995. A portion
of the increase relates to the fact that collections had slowed from certain
State Medicaid programs that converted to managed care initiatives in 1995. In
addition the Company moved 11 psychiatric hospitals to a central billing
office late in the fourth quarter of 1994 and in the first quarter of 1995
which also contributed to the slowdown in billings and collections and higher
bad debt expense.
Depreciation and amortization expense increased from 4.4% of net operating
revenue in 1994 to 4.6% of net operating revenue in 1995 primarily due to an
increased number of facilities at THC and in the United Kingdom.
Other income decreased primarily due to the fact that the prior year
included $2.0 million of gains on the sale of land that did not occur in the
current year.
Interest expense, net of capitalized interest, increased due to an increase
in borrowings during fiscal year 1995.
See Note 7 to the financial statements for a reconciliation of effective
income tax rates to statutory rates.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information in response to this item is incorporated by reference from
Exhibit 1 in Item 14.
ITEM 9. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
The Board of Directors of the Company approved on September 28, 1995 the
dismissal of Ernst & Young LLP and the engagement of Price Waterhouse LLP as
the independent accountants of the Company for the fiscal year ending November
30, 1995, effective September 29, 1995, based on the recommendation of the
Company's Audit Committee.
The reports of Ernst & Young for the fiscal years ended November 30, 1993
and 1994 contained no adverse opinion, disclaimer of opinion or qualification
or modification as to uncertainty, audit scope or accounting principles.
During the fiscal years ended November 30, 1993 and 1994 and the interim
period from December 1, 1994 through September 29, 1995, the date of
dismissal, there were no disagreements between the Company and Ernst & Young
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which, if not resolved to the
satisfaction of Ernst & Young would have caused it to make reference to the
subject matter of the disagreement in connection with its report. No event
described in paragraph (a)(1)(v) of Item 304 of Regulation S-K occurred during
the Company's fiscal years ended November 30, 1993 or 1994, or the period from
December 1, 1994 through September 29, 1995, except that Ernst & Young advised
management and the Board of Directors in a letter dated January 28, 1994,
that, in connection with the audit of the Company's 1993 fiscal year its
representatives had identified certain matters involving the internal control
structure of the Company's subsidiary, Transitional Hospital Corporation and
its operations which Ernst & Young considered to be material weaknesses as
defined under standards established by the American Institute of Certified
Public Accountants. Ernst & Young further stated in that letter that these
conditions were considered in determining the nature, timing, and extent of
the procedures performed in their audit for the Company's 1993 fiscal year.
Ernst & Young's letter to the Board of Directors dated January 27, 1995 issued
in conjunction with the audit of the Company's 1994 fiscal year stated that
they noted no matters involving the internal control structure and its
operations that they considered to be material weaknesses as defined under
standards established by the American Institute of Certified Public
Accountants.
19
<PAGE>
PART III
Information under the following items required by Part III of Form 10-K is
incorporated by reference from Registrant's definitive Proxy Statement
applicable to Registrant's 1997 Annual Meeting of Shareholders, or will be
provided by Amendment to Form 10-K on Form 10-K/A, to be filed with the
Commission by Registrant no later than 120 days subsequent to the end of its
fiscal year.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULE AND REPORTS ON FORM 8-K
(a)1.Financial Statements. The Financial Statements listed in response to Item
8 are filed herewith.
2.The following Financial Statement Schedule is filed herewith:
Valuation and Qualifying Accounts
3.Exhibits:
(3)Articles of Incorporation and By-laws
3.1 Restated Articles of Incorporation as adopted by vote of
shareholders on May 20, 1993 and as amended by vote of
shareholders on November 8, 1996.
3.2 Amended and Restated By-Laws of the Company.
(10)Material Contracts
10.1 Employment Contract Number Four between Registrant and Richard L.
Conte, dated as of May 1, 1992 (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1993 and incorporated in full herein by reference).*
10.2 Amendment Number One dated as of July 29, 1994, to Employment
Contract Number Four between Registrant and Richard L. Conte
(filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-K
for its fiscal year ended November 30, 1994 and incorporated in
full herein by reference).*
10.2.1 Employment Contract between Registrant and Richard L. Conte
dated as of December 1, 1995 (filed as Exhibit 10.2.1 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1995 and incorporated in full herein by
reference).*
10.3 Supplemental Retirement Contract between Registrant and Richard
L. Conte, dated as of September 1, 1988 (filed as Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1988 and incorporated in full herein by this
reference).*
10.4 Restated and Amended Employment Contract between Registrant and
Robert L. Green, dated June 1, 1988 (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1988, and incorporated in full herein by this
reference).
20
<PAGE>
10.5 Amendment Number One dated as of August 1, 1989, and Amendment
Number Two dated as of December 1, 1989 to Restated and Amended
Employment Contract between Registrant and Robert L. Green (filed
as Exhibit 10.5 to Registrant's Annual Report on Form 10-K for
its fiscal year ended November 30, 1994 and incorporated in full
herein by reference).
10.6 Employment Contract between Registrant and Julia Kopta dated as
of June 6, 1996.*
10.7 Employment Contract between Registrant and Wendy Simpson dated as
of June 6, 1996.*
10.8 Employment Contract between Registrant and Ronald L. Ooley dated
as of June 6, 1996.*
10.9 Employment Contract between Registrant and J. Rodney Laughlin
dated as of June 6, 1996.*
10.10 Termination Agreement between Registrant and Steven S. Weis
dated as of December 30, 1994 (filed as Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1994 and incorporated in full herein by
reference).
10.11 Settlement Agreement between Registrant, Kay Seim, Richard Seim
and Continuum Healthcare, Inc. dated as of February 19, 1996
(filed as Exhibit 10.9.1 to Registrants' Annual Report on Form
10-K for its fiscal year ended November 30, 1995 and
incorporated in full herein by reference).
10.12 Form of Indemnification Agreements between Registrant and its
Directors and Executive Officers (filed as Exhibit C to
Registrant's Proxy Statement, dated April 24, 1987, relating to
the annual meeting of its shareholders on June 1, 1987, and
incorporated in full herein by this reference).
10.13 Registrant's 1989 Stock Incentive Plan (filed as Exhibit A to
Registrant's Proxy Statement, dated July 12, 1989, and
incorporated in full herein by this reference).*
10.14 Form of Stock Option Agreement (filed as Exhibit 10.6.1 to
Registrant's Report onForm 10-K for its fiscal year ended
November 30, 1990 and incorporated in full herein by this
reference).*
10.15 Form of Nonstatutory Stock Option Agreement with Director (filed
as Exhibit 10.6.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1990 and incorporated in full
herein by this reference).*
10.16 Registrant's Combined Stock Option Plan for Key Employees and
Amendment Numbers One, Two, Three, Four and Five thereto (filed
as Exhibit 10.7 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.17 Form of Stock Option Agreement--General Stock Option (filed as
Exhibit 10.7.1 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.18 Form of Stock Option Agreement--Incentive Stock Option (filed as
Exhibit 10.7.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.19 Agreement and Promissory Note between Registrant and Richard
Conte dated as of June 7, 1995 (filed as Exhibit 10 to
Registrant's report on 10-Q for its quarter ended August 31,
1995, and incorporated herein by this reference).
10.20 Agreement and Promissory Note between Registrant and J. Rodney
Laughlin dated as of November 9, 1995 (filed as Exhibit 10.20 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1995 and incorporated in full herein by
reference).*
21
<PAGE>
10.21 Agreement and Promissory Note between Registrant and Ronald L.
Ooley dated as of June 2, 1995 (filed as Exhibit 10.21 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1995 and incorporated in full herein by
reference).*
10.22 Agreement between Community Psychiatric Centers and Foray 911
Limited, dated as of June 21, 1996, related to the sale of the
entire issued share capital of CPC (Londinium) Limited. The
Agreement contains certain attachments designated as "Approved
Form Documents" which were not included in this filing. The
Company will furnish supplementally a copy of any omitted
attachment to the Commission upon request (filed as Exhibit 1 to
Registrant's July 5, 1996 filing on Form 8-K and incorporated in
full herein by reference).
10.23 The Series A Loan Note dated June 21, 1996, made by Foray 911
Limited and payable to Community Psychiatric Centers in the
amount of 3 million British Pounds (filed as Exhibit 2 to
Registrant's July 5, 1996 filing on Form 8-K and incorporated in
full herein by reference).
10.24 Inter-Creditor Agreement between the Royal Bank of Scotland,
Mercury Asset Management PLC, Foray 911 Limited and Community
Psychiatric Centers (filed as Exhibit 3 to Registrant's July 5,
1996 filing on Form 8-K and incorporated in full herein by
reference).
10.25 Rights Agreement, dated as of June 21, 1996 between Community
Psychiatric Centers and Chase Mellon Shareholder Services (filed
as Exhibit 4 to Registrant's July 5, 1996 filing on Form 8-K and
incorporated in full herein by reference).
10.26 Form of Letter to the holders of Community Psychiatric Centers
Common Stock (filed as Exhibit 5 to Registrant's July 5, 1996
filing on Form 8-K and incorporated in full herein by
reference).
10.27 Asset Purchase Agreement, between the Company and BHC, dated
October 22, 1996 (filed as Exhibit 99.1 to Registrant's October
22, 1996 filing on Form 8-K and incorporated in full herein by
reference). **
10.28 Agreement and Plan of Merger between the Company and BHC, dated
October 22, 1996 (filed as Exhibit 99.2 to Registrant's October
22, 1996 filing on Form 8-K and incorporated in full herein by
reference). **
10.29 Schedule 3.10 to the Asset Purchase Agreement, consisting of the
Audited Consolidated Financial Statements of BHC, for fiscal
years ended June 30, 1996, 1995 and 1994 (filed as Exhibit 99.3
to Registrant's October 22, 1996 filing on Form 8-K and
incorporated in full herein by reference).
10.30 First Amendment to Asset Purchase Agreement between the Company
and BHC, dated November 30, 1996 (filed as Exhibit 99.1 to
Registrant's December 16, 1996 filing on Form 8-K and
incorporated in full herein by reference). **
10.31 Amendment to Agreement and Plan of Merger, between the Company
and BHC, dated November 30, 1996 (filed as Exhibit 99.2 to
Registrant's December 16, 1996 filing on Form 8-K and
incorporated in full herein by reference). **
10.32 Debt Instruments--Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished
to the Commission upon request.
11 Statement re computation of earnings per share
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants--Price Waterhouse LLP
23.1 Consent of Independent Auditors--Ernst & Young LLP
27 Financial Data Schedule
22
<PAGE>
(b) Reports on Form 8-K:
Report dated October 22, 1996 reporting the execution of an Asset
Purchase Agreement related to the sale of substantially all of the
psychiatric hospital and residential treatment center operations of the
Company in the United States and Puerto Rico to Behavioral Healthcare
Corporation.
Report dated October 24, 1996 reporting the issuance of a press release
dated October 22, 1996 regarding the sale of the U.S. and Puerto Rico
psychiatric assets to Behavioral Healthcare Corporation.
Report dated December 16, 1996 reporting the completion of the sale of
the U.S. and Puerto Rico psychiatric assets to Behavioral Healthcare
Corporation on November 30, 1996 and related unaudited pro forma financial
information.
- --------
*Required to be filed as an exhibit pursuant to item 14 (c) of this Form.
** The Agreements contain certain schedules and exhibits which were not
included in this filing. The Company will furnish supplementally a copy of
any omitted schedule or exhibit to the Commission upon request.
23
<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: February 26, 1997 By: /s/ Richard L. Conte
___________________________________
Richard L. Conte
Chairman of the Board of
Directors and
Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Richard L. Conte Chairman of the Board of February 26, 1997
____________________________________ Directors and Chief
Richard L. Conte Executive Officer
(Principal Executive
Officer)
/s/ Wendy L. Simpson Director and Executive February 26, 1997
____________________________________ Vice President of the
Wendy L. Simpson Company, Chief Operating
Officer and Chief Financial
Officer (Principal
Financial Officer)
/s/ Jack H. Lindheimer, M.D. Director February 26, 1997
____________________________________
Jack H. Lindheimer, M.D.
/s/ Carol Burt Director February 26, 1997
____________________________________
Carol Burt
/s/ Nigel Petrie Director February 26, 1997
____________________________________
Nigel Petrie
/s/ Dana L. Shires, Jr., M.D. Director February 26, 1997
____________________________________
Dana L. Shires, Jr., M.D.
/s/ Robert L. Thomas Director February 26, 1997
____________________________________
Robert L. Thomas
/s/ Ralph J. Watts Director February 26, 1997
____________________________________
Ralph J. Watts
/s/ Steven M. Gray Senior Vice President and February 26, 1997
____________________________________ Corporate Controller
Steven M. Gray (Principal Accounting
Officer)
</TABLE>
24
<PAGE>
ANNUAL REPORT FORM 10-K
ITEM 8, ITEM 14(a)(1) AND (2), (c) AND (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULE
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
LAS VEGAS, NEVADA
YEAR ENDED NOVEMBER 30, 1996
25
<PAGE>
(THIS PAGE INTENTIONALLY LEFT BLANK)
26
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
FORM 10-K ITEM 14(a)(1) AND (2)
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
The following consolidated financial statements of Transitional Hospitals
Corporation and Subsidiaries are included in Item 8:
Report of Independent Accountants--Years ended November 30, 1996 and 1995--
Price Waterhouse LLP
Report of Independent Auditors--Year ended November 30, 1994--Ernst & Young
LLP
Consolidated balance sheets--November 30, 1996 and 1995
Consolidated statements of operations--Years ended November 30, 1996, 1995
and 1994
Consolidated statements of stockholders' equity--Years ended November 30,
1996, 1995 and 1994
Consolidated statements of cash flows--Years ended November 30, 1996, 1995
and 1994
Notes to consolidated financial statements--November 30, 1996
The following consolidated financial statement schedule of Transitional
Hospitals Corporation and Subsidiaries is included in Item 14(d):
Report of Independent Accountants on Financial Statement Schedule--Year
ended November 30, 1996
Schedule II--Valuation and Qualifying Accounts
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under
the related instructions or are inapplicable, and therefore have been omitted.
27
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To The Board of Directors and Shareholders of
Transitional Hospitals Corporation
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Transitional Hospitals Corporation (formerly Community Psychiatric Centers)
and its subsidiaries at November 30, 1996 and 1995 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express
an opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As discussed in Note 4 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standard No. 121 "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
in 1995.
PRICE WATERHOUSE LLP
Los Angeles, California
January 24, 1997
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Transitional Hospitals Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' equity, and cash flows of Transitional Hospitals Corporation
(formerly Community Psychiatric Centers) for the year ended November 30, 1994.
Our audit also included the financial statement schedule listed in the index
at Item 14(a) as it relates to the year ended November 30, 1994. These
financial statements and schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedule based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated results of
Transitional Hospitals Corporation's (formerly Community Psychiatric Centers)
operations and their cash flows for the year ended November 30, 1994, in
conformity with generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule as it relates to the year
ended November 30, 1994, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
/s/ ERNST & YOUNG LLP
Los Angeles, California
January 27, 1995
29
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
------
Current assets:
Cash and cash equivalents.................................. $ 84,313 $ 17,263
Short-term investments..................................... 16,777 7,601
Accounts receivable, less allowance for doubtful accounts
(1996--$21,448 and 1995--$24,682)......................... 55,557 113,686
Receivable from third parties under reimbursement
contracts................................................. -- 4,550
Prepaid expenses and other current assets.................. 14,784 14,756
Property held for sale..................................... 13,393 15,512
Refundable income taxes.................................... 15,722 21,028
Deferred income taxes...................................... 5,697 951
-------- --------
Total current assets......................................... 206,243 195,347
Property, buildings and equipment, at cost, less allowances
for depreciation............................................. 153,933 354,192
Other assets:
Investment in affiliate.................................... 69,859 --
Refundable income taxes.................................... 9,275 --
Deferred income taxes...................................... 6,691 21,334
Other assets............................................... 19,889 24,862
-------- --------
105,714 46,196
Excess of investment in subsidiaries over net assets
acquired, less accumulated amortization (1996--$62 and
1995--$2,351)............................................... 57 8,890
-------- --------
$465,947 $604,625
======== ========
</TABLE>
See notes to consolidated financial statements.
30
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
NOVEMBER 30
------------------
1996 1995
-------- --------
(IN THOUSANDS,
EXCEPT
PAR VALUE DATA)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable......................................... $ 9,136 $ 18,194
Accrued payroll and other expenses....................... 15,549 34,949
Income taxes payable..................................... 131 4,425
Payable to third parties under reimbursement contracts... 13,954 --
Other accrued liabilities................................ 17,796 3,693
Current maturities on long-term debt..................... 8,467 18,764
-------- --------
Total current liabilities................................ 65,033 80,025
Long-term debt, exclusive of current maturities............ 14,858 84,883
Deferred credits:
Deferred income taxes and other liabilities.............. 3,857 19,678
Commitments and contingencies
Obligation to be settled in common stock................... -- 21,250
Stockholders' equity:
Preferred stock, par value $1 a share; authorized 2,000
shares; none issued..................................... -- --
Common stock, par value $1 a share; authorized 100,000
shares; issued 46,856 in 1996 and 1995.................. 46,856 46,856
Additional paid-in capital............................... 56,657 62,096
Unrealized gains on investments in debt securities....... 163 --
Retained earnings........................................ 321,710 327,062
Foreign currency translation adjustment.................. -- (2,943)
-------- --------
425,386 433,071
Less cost of treasury stock--4,988 shares in 1996 and 3,166
shares in 1995............................................ (43,187) (34,282)
-------- --------
382,199 398,789
-------- --------
$465,947 $604,625
======== ========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30,
-------------------------------------------
1996 1995 1994
------------- ------------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues:
Net operating revenues.......... $ 503,266 $ 514,991 $ 423,955
Investment and other income..... 3,928 2,513 3,785
------------- ------------- -------------
507,194 517,504 427,740
Costs and expenses:
Operating expense............... 402,686 393,146 328,508
General and administrative
expense........................ 33,029 39,444 33,775
Bad debt expense................ 20,101 28,732 26,966
Depreciation and amortization... 22,364 23,344 18,649
Interest expense................ 3,889 5,256 3,545
Non-recurring transactions, net. 33,524 94,116 (875)
------------- ------------- -------------
515,593 584,038 410,568
------------- ------------- -------------
Income (loss) before income taxes. (8,399) (66,534) 17,172
Income taxes (benefit)............ (3,047) (24,902) 6,952
------------- ------------- -------------
Net income (loss)................. $ (5,352) $ (41,632) $ 10,220
============= ============= =============
Net income (loss) per common
share............................ $ (0.12) $ (0.95) $ 0.24
============= ============= =============
Average number of common shares... 43,942 43,642 43,465
============= ============= =============
</TABLE>
See notes to consolidated financial statements.
32
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
AMOUNTS DUE FOREIGN
ADDITIONAL FROM EMPLOYEES CURRENCY
COMMON PAID-IN FOR EXERCISE OF UNREALIZED RETAINED TRANSLATION TREASURY STOCK
STOCK CAPITAL STOCK OPTIONS GAINS EARNINGS ADJUSTMENT SHARES AMOUNT
------ ---------- --------------- ---------- -------- ----------- -------- ------
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at November 30,
1993................... $46,856 $65,341 $(35) $ 0 $359,345 $(3,815) (3,763) $(45,200)
Exercise of employees'
stock options........ (4,052) 498 9,735
Income tax benefits
derived from employee
stock option
transactions......... 68
Net income for the
year................. 10,220
Dividends paid, $.01
per common share..... (434)
Foreign currency
translation
adjustment........... 2,010
------- ------- ---- ---- -------- ------- ------ --------
Balance at November 30,
1994................... 46,856 61,357 (35) 0 369,131 (1,805) (3,265) (35,465)
Exercise of employees'
stock options........ (206) 102 1,235
Expiration of employee
stock options........ 17 35 (3) (52)
Income tax benefits
derived from employee
stock option
transactions......... 928
Net loss for the year. (41,632)
Dividends paid, $.01
per common share..... (437)
Foreign currency
translation
adjustment........... (1,138)
------- ------- ---- ---- -------- ------- ------ --------
Balance at November 30,
1995................... 46,856 62,096 0 0 327,062 (2,943) (3,166) (34,282)
Exercise of employees'
stock options........ (36) 16 186
Issuance of shares
related to settlement
of shareholder
litigation........... (5,482) 2,342 26,732
Stock repurchased..... (4,180) (35,823)
Income tax benefits
derived from employee
stock option
transactions......... 79
Net loss for the year. (5,352)
Foreign currency
translation
adjustment........... 2,943
Unrealized gains from
changes in market
value of investments
in debt securities,
net of income taxes.. 163
------- ------- ---- ---- -------- ------- ------ --------
Balance at November 30,
1996................... $46,856 $56,657 $ 0 $163 $321,710 $ 0 (4,988) $(43,187)
======= ======= ==== ==== ======== ======= ====== ========
</TABLE>
See notes to consolidated financial statements.
33
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
-----------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).............................. $ (5,352) $(41,632) $ 10,220
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation and amortization............. 22,364 23,344 18,649
Provision for uncollectible accounts...... 20,101 28,732 26,966
Nonrecurring transactions................. 33,378 70,446 (2,845)
Other..................................... (821) (3,033) (1,800)
Changes in assets and liabilities, exclusive of
business acquisitions and disposals:
Accounts receivable......................... (17,570) (39,290) (50,070)
Receivable/payable to third parties under
reimbursement contracts.................... 9,529 (10,352) 812
Prepaid expenses and other current assets... (6,259) 1,615 (1,837)
Accounts payable and accrued expenses....... (1,506) 4,340 10,438
Other accrued liabilities................... (5,626) 154 (942)
Dividends payable........................... -- -- (111)
Income taxes................................ (3,252) (34,435) 9,709
--------- -------- --------
Net cash provided from (used for) operations... 44,986 ( 111) 19,189
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving credit facilities...... -- 39,195 41,982
Dividends paid................................. -- (437) (434)
Purchase of treasury shares.................... (35,823) -- --
Payments of deferred compensation.............. (162) (634) (162)
Net proceeds from exercise of stock options.... 150 1,029 5,683
Payments on long-term debt..................... (80,341) (18,859) (1,402)
--------- -------- --------
Net cash provided from (used for) financing
activities.................................... (116,176) 20,294 45,667
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments.. 7,601 16,884 1,934
Purchases of short-term investments............ (16,614) (10,729) (4,758)
Payment received on notes...................... 2,151 4,591 3,437
Purchase of property, buildings and equipment.. (35,419) (40,139) (48,760)
Investment in pre-opening costs................ (3,177) (2,899) (4,225)
Proceeds from sale of psychiatric hospitals.... 186,643 5,289 7,393
Loans made to officers......................... (825) (4,055) (1,242)
Payment for business acquisitions:
Property, buildings and equipment........... (320) (8,604) (4,787)
Excess of purchase price over fair value of
assets acquired............................ (1,800) (521) (1,225)
--------- -------- --------
Net cash provided from (used for) investing
activities.................................... 138,240 (40,183) (52,233)
--------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................... 67,050 (20,000) 12,623
Beginning cash and cash equivalents............ 17,263 37,263 24,640
--------- -------- --------
Ending cash and cash equivalents............... $ 84,313 $ 17,263 $ 37,263
========= ======== ========
</TABLE>
See Notes to consolidated financial statements
34
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Transitional
Hospitals Corporation (formerly Community Psychiatric Centers) and its
subsidiaries (THC or the Company). All material intercompany transactions have
been eliminated in the accompanying consolidated financial statements.
The Company provides long-term acute care services to patients suffering
from long-term complex medical problems in the United States. As of November
30, 1996, THC operated 14 long-term care hospitals and two satellite
facilities with a total of 1,340 beds, located in 12 states. THC also provides
respiratory therapy services to other healthcare providers.
In June of 1996, the Company sold its United Kingdom psychiatric operations
(see Note 2). In November 1996, the company sold its U.S. psychiatric
operations to Behavioral Healthcare Corporation ("BHC") for $60 million in
cash and stock valued at approximately $70 million (see Note 3).
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates.
CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents. Those highly liquid
assets with a maturity of more than three months are classified as short-term
investments.
SHORT-TERM INVESTMENTS
The Company has investments in debt securities which are classified as
available for sale. These investments consist primarily of U.S. corporate
securities and have various maturity dates which do not exceed one year.
Securities classified as available-for-sale are carried at fair value with
unrealized gains, net of tax, reported in a separate component of
stockholders' equity. There were no unrealized losses on any investments held
at November 30, 1996. Realized gains and losses are included in investment
income and are immaterial for all years presented.
PROPERTY, BUILDINGS AND EQUIPMENT
Depreciation is computed on the straight-line method based on the estimated
useful lives of fixed assets of 31.5 to 40 years for buildings and three to
ten years for furniture and equipment.
PREOPENING COSTS
Costs incurred prior to the opening of new facilities are deferred and
amortized on a straight-line basis over a five-year period.
CAPITALIZATION OF INTEREST
Interest incurred in connection with development and construction of
hospitals is capitalized as part of the related property.
35
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NET OPERATING REVENUES
Net operating revenues include amounts for hospital services estimated by
management to be reimbursable by federal and state government programs
(Medicare, Medicaid and CHAMPUS); managed care programs (managed care
companies, health maintenance organizations and preferred provider
organizations) and private pay payors (private sources and insurance companies
which base reimbursement on the Company's price schedule).
The following table summarizes the percent of net operating revenue
generated from all payors.
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Medicare.................................................. 47% 37% 28%
Medicaid.................................................. 9 11 13
CHAMPUS................................................... 3 4 4
--- --- ---
Total Government........................................ 59 52 45
Managed Care.............................................. 24 27 33
Private pay and other..................................... 17 21 22
--- --- ---
Total................................................... 100% 100% 100%
=== === ===
</TABLE>
Amounts received are generally less than the established billing rates of
the Company and the difference is reported as a contractual allowance and
deducted from operating revenues. Final determination of amounts earned for
hospital services is subject to audit by the payors. In the opinion of
management, adequate provision has been made for any adjustments that may
result from such audits. Differences between estimated provisions and final
settlement are reflected as charges and credits to operating revenues in the
year the audit reports are finalized. In the current year, the Company
received approximately $5.6 million in excess of recorded amounts related to
prior year Medicare settlements. These amounts are included in operating
revenue.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and short-term
investments and receivables from government programs.
The Company maintains cash equivalents and short-term investments with
various financial institutions. The Company's policy is designed to limit
exposure to any one institution. The Company performs periodic evaluations of
the relative credit standing to those financial institutions that are
considered in the Company's investment strategy. The Company and management do
not believe that there are any significant credit risks associated with
receivables from governmental programs. Negotiated and private receivables
consist of receivables from various payors, including individuals involved in
diverse activities, subject to differing economic conditions, and do not
represent any concentrated credit risks to the Company. Furthermore,
management continually monitors and adjusts its reserves and allowances
associated with these receivables.
STOCK OPTIONS
Proceeds from the exercise of stock options are credited to common stock, to
the extent of par value, and the balance to additional paid-in capital, except
when shares held in the treasury are issued. The difference between the cost
of the treasury stock and the option price is charged or credited to
additional paid-in capital. No charges or credits are made to earnings with
respect to options granted or exercised. Income tax benefits derived from
exercise of non-incentive stock options and from sales of stock obtained from
incentive stock options before the minimum holding period are credited to
additional paid-in capital.
36
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
EARNINGS (LOSS) PER SHARE
Earnings (loss) per share have been computed based upon the weighted average
number of shares of common stock outstanding during the year. Dilutive common
stock equivalents have not been included in the computation of earnings per
share because the aggregate potential dilution resulting therefrom is less
than 3%.
TRANSLATION OF FOREIGN CURRENCIES
The Company sold its United Kingdom psychiatric hospitals in June of 1996.
For periods prior to the sale, the financial statements of the Company's
foreign subsidiaries have been translated into U.S. dollars in accordance with
FASB Statement No. 52. All balance sheet accounts were translated at year-end
exchange rates. Statements of earnings amounts have been translated at the
average exchange rate for the applicable years. The resulting currency
translation adjustments were made directly to a separate component of
Stockholders' Equity. The effect on the statement of earnings of translation
gains and losses is insignificant for all years presented.
RECENT ACCOUNTING PRONOUNCEMENTS
In October 1995, the FASB issued Statement of Financial Accounting Standards
No. 123 ("FAS 123"), "Accounting for Stock-Based Compensation", which becomes
effective for fiscal years beginning after December 15, 1995. FAS 123
establishes new financial accounting and reporting standards for stock-based
compensation plans. Entities will be allowed to measure compensation expense
for stock-based compensation under FAS 123 or APB Opinion No. 25, "Accounting
for Stock Issued to Employees". Entities electing to remain with the
accounting in APB Opinion No. 25 will be required to make pro forma
disclosures of net income and earnings per share as if the provisions of FAS
123 had been applied. The Company is in the process of evaluating the
Statement. The potential impact on the Company of adopting the new standard
has not been quantified at this time. The Company must adopt FAS 123 in fiscal
year 1997.
RECLASSIFICATIONS
Certain amounts have been reclassified to conform with 1996 presentations.
NOTE 2--NON-RECURRING TRANSACTIONS
On November 30, 1996 the company sold its U.S. psychiatric operations to BHC
for $60 million in cash and stock valued at approximately $70 million. THC
will have a 44.2% common equity interest in future BHC earnings. BHC is
headquartered in Nashville, Tennessee, and is now the second largest
psychiatric hospital network in the country, with 38 hospitals and 4
residential treatment centers in 18 states and Puerto Rico, comprising
approximately 3,500 beds. With the combination of these hospitals, BHC is a
leading provider of psychiatric/behavioral services for adults, adolescents
and children with acute psychiatric, emotional, substance abuse and behavioral
disorder.
The Company also announced the closure of Southwind Hospital, a psychiatric
facility in Oklahoma City, Oklahoma in November of 1996 due to poor financial
performance. Net operating revenue and net operating income or (loss) for
Southwind totaled $4.7 million and $(.8) million for fiscal year 1996, $8.1
million and $(.1) million for fiscal year 1995 and $7.1 million and $.8
million for fiscal year 1994. The hospital is being held for sale. The Company
has reached an agreement to settle the whistleblower suit related to Southwind
with the United States Government for $750,000 (see Note 14).
37
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The effects on income of the above described transactions are classified as
non-recurring transactions for fiscal year 1996 and include the following: i)
$62.0 million loss on the sale of the psychiatric operations to BHC, ii) $14.4
million of expenses related to the transaction that consist of $6.7 million of
severance costs and payments pursuant to employment contracts, $4.0 million of
transaction costs related primarily to legal and investment banking services,
and $3.7 million related to legal expenses and settlement costs for the
Southwind whistleblower suit (see Note 14) and one other lawsuit related
specifically to the US psychiatric division, iii) $2.1 million for a
settlement of a claim from a former Chairman of Community Psychiatric Centers
related to his contract with the Company (see further discussion in Note 11),
iv) impairment charges of $6.7 million to writedown the property value of
Southwind and certain other closed hospitals to their current estimated fair
market value, and v) $1.7 million related to termination benefits and other
exit costs related to the closure of Southwind. Approximately 150 employees
were terminated due to the Southwind closure and approximately 80 corporate
employees were terminated due to the sale of the U.S. psychiatric division. As
of November 30, 1996, approximately $7.8 million is included in other accrued
liabilities for severance and other exit costs related to the corporate office
and Southwind hospital.
During the first three quarters of 1996, the Company recorded net
restructuring charges of $2.1 million for termination benefits and other exit
costs related to the closure of four U.S. psychiatric division hospitals.
Approximately 280 employees were terminated as a result of the closure of
these hospitals. Two of these properties were sold to BHC and two are being
held for sale.
On June 21, 1996, the Company sold its United Kingdom psychiatric hospitals
("Priory Hospitals Group" or "PHG") to Foray 911 Limited ("Foray"), a new
corporation formed by Mercury Development Capital, a division of Mercury Asset
Management plc ("Mercury"). PHG operates 15 freestanding acute psychiatric
hospitals and chemical dependency facilities, including one 42 bed hospital
that was 50% owned by PHG. Based on the number of licensed hospital beds, PHG
is the leading commercial provider of psychiatric services in the United
Kingdom where psychiatric services are generally available to residents
without charge from government-owned NHS hospitals. The total purchase price
for the PHG facilities was approximately $135 million, which includes a $4.6
million subordinated note due in 2009 issued by Foray. Included in non-
recurring transactions is the net gain on the sale of these facilities of
$55.5 million. Transaction expenses related to legal, investment banking and
severance costs totaled approximately $4.8 million and are reflected in the
$55.5 million gain.
During fiscal year 1995, the Company recorded impairment charges related to
the adoption of FASB statement 121 (see Note 4) and settlements costs related
to shareholder lawsuits filed in 1991 (See Note 14). Each matter resulted in
charges of $46.0 million, for a total of $92.0 million.
Effective November 30, 1995, the Company recorded a restructuring charge
totaling $4.6 million ($2.8 million after tax), determined in accordance with
the provisions of the January 1995 Financial Accounting Standards Board
Emerging Issues Task Force Consensus No. 94-3 "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs incurred in a Restructuring)", ("EITF 94-3"), in
connection with the decision to close six psychiatric facilities and three
regional offices. EITF 94-3 requires the accrual of certain employee
termination costs and costs resulting from a plan to exit an activity that are
not associated with or that do not benefit activities that will continue and
prohibits accrual of expected future operating losses of the activity exited.
The charge comprised $3.4 million for employee termination benefits related to
hospital operations and overhead personnel and $1.2 million for non-cancelable
operating leases and other exit costs. Approximately 314 hospital employees
and 65 corporate and regional employees were terminated. Amounts charged
against the reserve approximated amounts accrued. Of the six closed hospitals,
three have been sold, two were fully converted to THC hospitals, and one was
exchanged for a similar building held by another health care provider and was
converted into a satellite hospital of a THC facility in October 1996.
38
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Effective May 31, 1995, the Company recorded a restructuring credit totaling
$2.5 million ($1.5 million after tax) from the resolution of previously
restructured psychiatric assets. The restructuring credit resulted from
divesting two restructured properties at higher prices than the 1993 writedown
of the facilities anticipated and the Company's success in collecting accounts
receivable balances that were reserved for as part of the February 28, 1994
restructuring charge.
NOTE 3--INVESTMENT IN AFFILIATE
On November 30, 1996, THC consummated the sale of effectively all of its
psychiatric operations in the U.S. and Puerto Rico (with certain limited
exceptions set forth below) to BHC. Prior to such sale, BHC owned 17
psychiatric hospitals. At the November 30 closing, the Company transferred
title to 22 freestanding psychiatric hospitals, a joint venture interest in
another psychiatric operation, an outpatient psychiatric center, two closed
hospitals and vacant land located at three sites in California. Two other
operating hospitals and a joint venture interest (the "Escrowed Assets") are
to be transferred to BHC upon receipt of necessary regulatory approvals, which
management believes are perfunctory. Additionally, effective November 30,
1996, BHC and the Company entered into a management agreement which grants
BHC, with limited protective rights retained by THC, exclusive and complete
responsibility and discretion in the management and control of the Escrowed
Assets as well as the economic benefit thereof. Accordingly, for accounting
purposes, the sale of the Escrowed Assets has been recorded with an effective
date of November 30, 1996. At the initial closing, the Company received
$60,000,000 in cash, 2,214,400 shares of BHC Common Stock, 5,072,579 shares of
BHC Series A Preferred Stock and 46,902 shares of BHC Series B Preferred
Stock. In general, the Series A Preferred Stock converts into BHC Common Stock
on a share for share basis upon sales and dispositions of the Series A
Preferred Stock by the Company and under certain other limited circumstances.
Upon receipt of the necessary regulatory approvals related to the Escrowed
Assets, the Company will receive an additional 3,785,600 shares of BHC Common
Stock, an additional 578,844 shares of BHC Series A Preferred Stock and 3,350
additional shares of BHC Series B Preferred Stock. Upon distribution of all
shares, the Company will have a common equity interest amounting to 44.2% of
BHC's Common Stock outstanding. An agreement has been entered into between BHC
and the Company requiring THC to vote all shares in excess of 20% of BHC's
outstanding Common Stock as instructed by a majority of BHC's Board of
Directors which includes three members of THC's Board of Directors. THC's
Chairman of the Board and Chief Executive Officer, Richard Conte, will serve
as BHC's Chairman of the Board. THC's common equity interest in future BHC
earnings will be recorded on the equity method of accounting. In determining
the amount of the consideration to be paid to the Company, the parties
compared their respective EBITDAs (Earnings before interest, taxes,
depreciation, and amortization) and used multiples generally accorded to
publicly-traded psychiatric hospitals. Based on this analysis, the total value
of the equity interest in BHC was determined to be approximately $70 million.
NOTE 4--IMPAIRMENT OF ASSETS
In the fourth quarter of fiscal year 1995, the Company adopted the
provisions of FASB Statement 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of ("FAS 121")". The statement
requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The
impairment loss is measured by comparing the fair value of the asset to its
carrying amount. FAS 121 also requires that assets to be disposed of be
written down to fair value less selling costs. Based on a comparison of the
recorded values of long-lived assets (defined as land, buildings, fixed assets
and goodwill) to the expected future cash flows to be generated by the assets
of three U.S. Psychiatric facilities that were closed in November 1995 as well
as three U.S. Psychiatric facilities which experienced declines in operating
performance in fiscal 1995, and after applying the principles of measurement
contained in FAS 121, the Company recorded an asset impairment charge of
approximately $26.5 million in fiscal 1995.
39
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Using the same principles as described above, the Company recorded an asset
impairment charge of approximately $5.3 million on land that was being held
for sale. The closed facilities as well as the land held for sale were
classified as assets held for sale with a carrying value of $13.7 million
after the impairment writedown as of November 30, 1995. All assets held for
sale pertain to the U.S. Psychiatric Division. All of these assets, with the
exception of three closed hospitals, were sold in fiscal 1996.
The Company completed an installation of a new computer system in the first
quarter of 1995. As several of the promised applications did not function as
specified, an impairment loss of approximately $8.1 million ($6.8 million
related to the U.S. Psychiatric Division and $1.3 million related to THC) was
recorded in the fourth quarter of 1995 to write down a portion of the total
cost of the system. The Company also shortened the estimated useful life of
the system to two years in anticipation of implementing an alternative system.
In November of 1995, the Company closed Harvard Medical Limited, a patient
liaison business in West Germany due to declines in operating performance in
fiscal 1995. Based on these factors, the Company recorded an impairment loss
of $4.1 million to write off the goodwill related to this Company.
In the fourth quarter of 1996, the Company recorded impairment charges
totaling $6.7 million related to the writedown of Southwind psychiatric
hospital, which was closed in December 1996 and two other closed hospitals,
one of which was sold in November 1996.
NOTE 5--ACQUISITIONS
During 1996, the Company exchanged a closed psychiatric hospital with a book
value of $7.3 million for a closed acute care hospital and $.9 million. The
hospital acquired was converted into a THC satellite hospital which opened in
October 1996. No gain or loss was recorded on the exchange.
During 1995, the Company purchased for $5.8 million, the land, building, and
fixed assets for a THC facility that had been managed by THC since May of
1994. All other acquisitions in 1994 to 1996 consisted of psychiatric entities
which were sold in fiscal year 1996.
NOTE 6--PROPERTY, BUILDINGS AND EQUIPMENT
Property, buildings and equipment are summarized as follows:
<TABLE>
<CAPTION>
NOVEMBER 30
-------------------
1996 1995
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Land................................................ $ 18,585 $ 51,598
Buildings and improvements.......................... 102,092 300,388
Furniture, fixtures and equipment................... 61,914 92,933
Construction in progress (estimated additional cost
to complete at November 30, 1996--$12.0 million)... 2,496 12,599
-------- ---------
185,087 457,518
Less accumulated depreciation....................... (31,154) (103,326)
-------- ---------
$153,933 $ 354,192
======== =========
</TABLE>
The Company incurred interest expense of $4.9 million, $7.2 million, and
$4.8 million in 1996, 1995, and 1994, respectively, including $1.0 million,
$1.9 million, and $1.3 million which was capitalized in 1996, 1995, and 1994,
respectively.
Interest paid was $5.8 million, $7.3 million and $4.1 million during 1996,
1995, and 1994, respectively.
40
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 7--INCOME TAXES
The Company accounts for income taxes under the liability method required by
FASB Statement No. 109, "Accounting for Income Taxes". Deferred income taxes
reflect the net tax effects of temporary differences between the carrying
amounts of assets and liabilities for financial reporting purposes and the
amounts used for income tax purposes. Significant components of the Company's
deferred tax liabilities and assets as of November 30, 1996 and November 30,
1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------- -------
<S> <C> <C>
Deferred tax liabilities:
Excess tax depreciation.................................. $ 5,389 $23,425
Disposition of subsidiary................................ 4,337 --
Other.................................................... 1,543 2,018
Sale of hospitals........................................ (4,612) --
Restructuring charge..................................... (3,059) (7,784)
------- -------
Total deferred tax liabilities....................... $ 3,598 $17,659
======= =======
Deferred tax assets:
Current:
Excess of book over tax bad debt provision............. $ 3,485 $ 701
Insurance.............................................. 2,057 --
Other.................................................. 155 250
======= =======
Total current deferred tax assets.................... $ 5,697 $ 951
======= =======
Non-current:
Impairment loss.......................................... $ 2,996 $18,108
Net operating loss....................................... 9,833 5,952
Sale of hospitals........................................ 701 --
Restructuring charge..................................... 452 1,094
Disposition of subsidiary................................ (487) --
Excess tax depreciation.................................. (522) (1,649)
Other.................................................... 19 (9)
Net operating loss valuation reserve..................... (6,301) (2,162)
------- -------
Total non-current deferred tax assets................ $ 6,691 $21,334
======= =======
</TABLE>
Deferred tax liabilities and assets by tax jurisdictions are as follows as
of November 30, 1996 (in thousands):
<TABLE>
<CAPTION>
DEFERRED DEFERRED
TAX ASSETS TAX LIABILITIES
--------------- ---------------
NON- NON-
CURRENT CURRENT CURRENT CURRENT
------- ------- ------- -------
<S> <C> <C> <C> <C>
U.S. Federal Income Taxes (consolidated).... $4,932 $2,533 $ -- $3,598
State....................................... 765 4,158 -- --
------ ------ ----- ------
$5,697 $6,691 $ -- $3,598
====== ====== ===== ======
</TABLE>
41
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Income before income taxes includes the following components:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Pretax income (loss):
United States.................................... $(15,100) $(79,772) $ 7,846
Foreign.......................................... 6,701 13,238 9,326
-------- -------- -------
$ (8,399) $(66,534) $17,172
======== ======== =======
Provision for income taxes consists of the following:
<CAPTION>
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal.......................................... $ (3,409) $(14,931) $ 1,497
Foreign.......................................... 2,418 4,580 1,996
State............................................ (223) (1,507) 1,614
-------- -------- -------
Total current.................................. $ (1,214) $(11,858) $ 5,107
Deferred:
Federal.......................................... $ (2,558) $ (9,992) $ 1,295
Foreign.......................................... 4 331 1,364
State............................................ 721 (3,383) (814)
-------- -------- -------
Total deferred................................. (1,833) (13,044) 1,845
-------- -------- -------
$ (3,047) $(24,902) $ 6,952
======== ======== =======
</TABLE>
Reconciliation of federal statutory rate to effective income tax rate
follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------- ----------------- --------------
AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT
------- ------- -------- ------- ------ -------
(AMOUNT IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Tax at U.S. statutory rates.. $(2,855) (34)% $(22,622) (34)% $5,838 34%
State income taxes, net of
federal taxes benefit
(charge).................... 329 4 (3,227) (5) 528 3
Goodwill..................... (2,428) (29) -- -- -- --
Non-deductible expenses...... 1,170 14 -- -- -- --
Other........................ 737 9 947 2 586 4
------- --- -------- --- ------ ---
$(3,047) (36)% $(24,902) (37)% $6,952 41%
======= === ======== === ====== ===
</TABLE>
The Company received income tax refunds (net of income taxes paid of $5.7
million) of $1.3 million in 1996. The Company made income tax payments of $8.0
million in 1995. The Company received income tax refunds (net of income taxes
paid of $4.5 million) of $2.3 million in 1994.
At November 30, 1996, the Company has deferred tax assets totalling $9.8
million related to State net operating loss carryforwards which expire in 1997
through 2012. Deferred tax assets related to State net operating loss
carryforwards increased $3.9 million in the current year primarily due to the
loss recorded on the sale of the U.S. psychiatric hospitals. The valuation
reserve was increased in fiscal 1996 to reserve for these losses as it is
likely, at this time, that the Company will not receive future tax benefits
therefrom. In fiscal year 1995, the Company decreased the valuation reserve by
$.2 million for THC State net operating loss carryforwards that were realized
in fiscal 1995 and for those that are expected to be realized in future years.
42
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 8--LONG TERM DEBT
Long term debt is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Borrowings under revolving credit agreements.................. $16,800 $ 90,326
5 3/4% Convertible Subordinated Debentures due 2012,
convertible into Common Stock of the Company at $35.89 per
share, may be redeemed at 103.75% of face value as of October
15, 1992 declining annually to 100% of face value on or after
October 15, 1999............................................. 6,511 6,885
8 3/4% Subordinated Guaranteed Debentures due 1996............ -- 4,980
Other......................................................... 14 1,456
------- --------
23,325 103,647
Less current portion.......................................... 8,467 18,764
------- --------
$14,858 $ 84,883
======= ========
</TABLE>
During May 1994, the Company and Bank of America National Trust and Savings
Association entered into a credit agreement whereby THC was able to borrow,
repay and reborrow up to $50 million through February 28, 1997. The Company
repaid $50 million which was outstanding through June 21, 1996 under this
agreement.
During September 1993, the Company entered into a credit agreement with Bank
of America National Trust and Savings Association whereby the Company was able
to borrow up to $25 million through November 30, 1995 (the revolving loan
period), at which time the amount outstanding was converted into a term loan
payable in equal quarterly installments through November 30, 1998. As of
November 30, 1996, interest was payable at LIBOR plus 1.0%. As of November 30,
1996, $16.8 million was outstanding under this agreement.
The credit agreement contains provisions which, among other things, place
restrictions on borrowing, capital expenditures and the payment of dividends,
and requires the maintenance of certain financial ratios including tangible
net worth, fixed charge coverage and funded debt. The Company is currently in
compliance with or has received a waiver for all material covenants and
restrictions contained in the agreement. Borrowings are unsecured and are
guaranteed by the Company's domestic subsidiaries.
The conversion price of the convertible debentures is subject to
antidilutive provisions.
The annual maturities of debt for five years ending November 30, 2001 and
thereafter are as follows (in thousands):
<TABLE>
<S> <C>
1997............................................................... $8,467
1998............................................................... 8,347
1999............................................................... -0-
2000............................................................... -0-
2001............................................................... -0-
Thereafter......................................................... 6,511
</TABLE>
43
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 9--CAPITAL STOCK AND STOCK OPTIONS
The Company has stock option plans whereby options may be granted at not
less than 100% of fair market value at the date of grant and are exercisable
at any time thereafter for a period of ten years, or five years for options
granted prior to November 8, 1990. Options granted on and after November 8,
1990, are exercisable 20% at date of grant with the remaining 80% becoming
exercisable at the rate of 20% each December 1 thereafter. At the time of
exercise, at least one-third is payable in cash and the balance, if any, with
a five-year note bearing interest at 8%. Stock options may also be exercised
by the return of previously acquired shares of common stock. Shares obtained
by such exercises are included in treasury stock and valued at the market
value at date of exercise.
On May 20, 1993, the Company issued 860,000 of non-qualified options to
several key executives. The option price was $20 above the closing price of
the Company's stock on the date of grant, or $29.50 per share. During fiscal
year 1994, 146,000 shares of converging options were issued at an option price
of $24.50 per share. For each year during which the Company meets specified
performance targets, the option price will decrease by $5.00 until the option
price and market price converge. The option price will be fixed at the market
price on the date of convergence and the options will vest.
If convergence does not occur during the first five years after grant of the
options, the options will be canceled and the shares will revert to the 1989
Stock Incentive Plan and be available for reissuance. The Company met these
targets for fiscal 1993. The Company did not meet these targets in fiscal
years 1994-1996.
A summary of activity under the plans during 1996, 1995 and 1994 is as
follows:
<TABLE>
<CAPTION>
NUMBER OF PRICE AGGREGATE
SHARES PER SHARE OPTION PRICE
---------- ------------- ------------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Options outstanding at November 30,
1993............................... 3,578,000 $ 9.50-33.00 $ 61,399
Options granted................... 1,264,000 12.38-24.50 18,591
Options cancelled and expired..... (498,000) 9.50-33.00 (5,673)
Treasury stock issued on exercise. (355,000) 9.50-33.00 (5,295)
Options converged................. -- 24.50 (4,300)
---------- ------------- --------
Options outstanding at November 30,
1994............................... 3,989,000 9.50-28.88 64,722
Options granted................... 1,676,000 9.88-12.88 18,243
Options cancelled and expired..... (758,000) 9.50-24.50 (10,839)
Treasury stock issued on exercise. (102,000) 9.50-12.88 (1,029)
---------- ------------- --------
Options outstanding at November 30,
1995............................... 4,805,000 9.50-28.88 71,097
Options granted................... 1,311,000 8.00-12.00 12,721
Treasury stock issued on exercise. (16,000) 9.50-9.875 (150)
Options cancelled and expired..... (1,735,000) 8.00-28.88 (29,016)
---------- ------------- --------
Options outstanding at November 30,
1996............................... 4,365,000 $ 8.00-28.875 $ 54,652
========== ============= ========
</TABLE>
The market value of the Company's common stock at the date the options were
exercised was $10.875- $12.00, $10.88-$13.63, $11.88-$18.75 for 1996, 1995,
and 1994, respectively.
At November 30, 1996, 2.4 million options were exercisable and 1.2 million
(.7 million and 1.7 million at November 30, 1995 and 1994) were available for
grant under the plans.
44
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 10--PROFIT SHARING PLAN
The Company has a noncontributory, trusteed profit sharing plan which is
qualified under Section 401 of the Internal Revenue Code. All regular non-
union employees in the United States (union employees are eligible if the
collective bargaining agreement so specifies) with at least 1,000 hours of
service per annum, over 21 years of age, and employed at year-end are eligible
for participation in the plan after one year of employment. The Company's
contribution to the plan for any fiscal year, as determined by the Board of
Directors, is discretionary, but is limited to an amount which is deductible
for federal income tax purposes. Contributions to the plan are allocated among
eligible participants in the proportion of their salaries to the total
salaries of all participants. There were no contributions made by the Company
in 1996, 1995 and 1994. During 1993, a 401(k) segment was added to the plan
which allows employees to defer a portion of their salary on a pre-tax basis.
The Company may match a portion of the amount deferred. The Company's matching
contribution is determined by the Board of Directors each year. During 1996,
1995, and 1994 no matching contribution was made.
NOTE 11--DEFERRED COMPENSATION
Effective November 30, 1989, a former Chairman of the Board of Directors of
Community Psychiatric Centers terminated his employment with the Company and
began receiving deferred compensation benefits. Approximately $162,000 of the
annual payment of $323,000 was charged to expense as consideration for
services rendered over the term of the consulting and noncompetition
agreements which was to extend to November 30, 2000. In 1995, such former
Chairman notified the Company of his position that certain provisions in the
contract that accelerate the payment of certain deferred compensation were
triggered and that up to $4.5 million was due from the Company thereunder.
In January 1997, the Company settled this claim for $3.9 million. Of the
amount to be paid, $1.8 million had been previously accrued and, as described
in Note 2, $2.1 million of the settlement was accrued in November 1996. The
settlement amount was paid in February 1997.
45
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 12--BUSINESS SEGMENT INFORMATION
With the sales of the Company's U.S., Puerto Rico and United Kingdom
psychiatric divisions in fiscal 1996, the Company is now primarily a provider
of long-term acute care services in the United States. The following tables
have been prepared in accordance with the requirements of FASB Statement No.
14. This information has been derived from the Company's accounting records.
<TABLE>
<CAPTION>
YEAR ENDED NOVEMBER 30
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Net operating revenues:
U.S. psychiatric division.................. $202,069 $248,408 $276,698
U.K. psychiatric division.................. 37,190 63,319 46,226
Long-term acute care division.............. 264,007 203,264 101,031
-------- -------- --------
$503,266 $514,991 $423,955
Operating profit:
U.S. psychiatric division.................. $ 7,584 $ 14,345 $ 29,778
U.K. psychiatric division.................. 9,442 17,880 12,558
Long-term acute care division.............. 30,424 21,444 (7,630)
-------- -------- --------
$ 47,450 $ 53,669 $ 34,706
Other income and expense:
Other income............................... $ 3,928 $ 2,513 $ 3,785
Depreciation and amortization.............. (22,364) (23,344) (18,649)
Interest expense........................... (3,889) (5,256) (3,545)
Non-recurring transactions, net............ (33,524) (94,116) 875
-------- -------- --------
Earnings (loss) before income taxes...... $ (8,399) $(66,534) $ 17,172
Identifiable assets:
U.S. psychiatric division(1)............... $ 69,859 $343,082 $396,377
U.K. psychiatric division.................. -- 78,248 68,640
Long-term acute care division.............. 396,088 183,295 134,987
-------- -------- --------
$465,947 $604,625 $600,004
Depreciation and amortization expense:
U.S. psychiatric division.................. $ 10,267 $ 12,318 $ 11,197
U.K. psychiatric division.................. 1,954 3,214 2,514
Long-term acute care division.............. 10,143 7,812 4,938
-------- -------- --------
$ 22,364 $ 23,344 $ 18,649
Capitalized expenditures for property,
building, and equipment:(2)
U.S. psychiatric division.................. $ 10,096 $ 13,276 $ 11,194
U.K. psychiatric division.................. 5,973 7,962 6,209
Long-term acute care division.............. 19,350 18,901 31,357
-------- -------- --------
$ 35,419 $ 40,139 $ 48,760
</TABLE>
- --------
(1) The U.S. psychiatric division was sold to Behavioral Healthcare
Corporation on November 30, 1996. Amount represents the equity interest
received as partial compensation for the sale of the division.
(2) Excludes assets acquired in business acquisitions of $2.1 million, $8.6
million and $4.8 million in 1996, 1995 and 1994, respectively.
46
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments:
Cash and Cash Equivalents: The carrying amount reported in the balance
sheet for cash and cash equivalents approximates its fair value.
Short-Term Investments: The fair values for investment in debt securities
are based on quoted market prices with unrealized gains, or losses, net of
tax, reported in a separate component of stockholders' equity.
Long-Term and Short-Term Debt: The carrying amounts of the Company's
long-term and short-term debt approximates its fair value.
NOTE 14--COMMITMENTS AND CONTINGENCIES
On September 28, 1995, the Company reached an agreement to settle certain
consolidated securities class action lawsuits and a related shareholder
derivative action. Although management of the Company believed that the claims
asserted in such suits lacked merit, the Company believed that it was prudent
to settle these cases due to the continuing substantial costs of defense, the
distraction of management's attention and the risks associated with
litigation. During the third and fourth quarter of 1995, the Company recorded
charges totaling $46.0 million ($28.9 million after tax) relating to
settlement of the lawsuits and associated legal fees and expenses. The suits,
filed in late 1991, alleged violations of the federal securities laws by the
Company and certain individuals between September 1990 and November 1991
arising from the activities of the U.S. Psychiatric Division. The principal
terms of the agreement called for a settlement amount of $42.5 million
consisting of a cash settlement fund of $21.25 million and shares of the
Company's common stock with a value of $21.25 million. The cash amount, plus
interest, was paid in November 1995. The shares issued to the plaintiff class
were previously repurchased by the Company pursuant to a stock buyback program
during late 1991 through early 1993. On March 4, 1996 the Company issued
689,189 of common shares to the plaintiffs' attorney which represented a
portion of the settlement to be made in common stock. The remaining portion of
the settlement in common stock totaled 1,652,778 shares which were issued on
August 21, 1996. Upon issuance, these shares had a dilutive effect on the
Company's earnings per share. As a result of the stock issued upon the
settlement of this lawsuit, a large number of shareholders became holders of
less than 100 shares of the Company's stock. To reduce administrative costs
related to servicing these small shareholders, on January 21, 1997, the
Company implemented a small shareholder selling program offering shareholders
who own less than 100 shares a convenient method for selling their shares.
In July 1995, the Government served a whistleblower suit against the
Company's Subsidiary, CPC Oklahoma, Inc., under the Federal False Claims Act.
CPC Oklahoma, Inc. operated Southwind Hospital, a psychiatric hospital located
in Oklahoma City, Oklahoma. The suit was originally filed by a former employee
and a relative of another employee under the qui tam provisions of the Act.
Invoking its rights under the Act, the United States took over the case. In
November 1996, Southwind and the Government reached an agreement in principle
under which Southwind would pay $750,000 to the Government in exchange for a
release of the Government's civil and administrative claims. The settlement
was paid in February 1997. In a related action, on August 4, 1995, federal and
state authorities executed a search warrant at Southwind and seized various
records. In December 1996, the Government notified Southwind that it had
decided to discontinue any further criminal investigation of this matter.
The Company is subject to ordinary and routine litigation incidental to its
business, including those arising from patient treatment, injuries or death
for which it is covered by liability insurance, and those arising from actions
involving employees. Management believes that the ultimate resolution of such
proceedings will not have a material adverse effect on the Company.
47
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE 15--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a tabulation of the unaudited quarterly data for the two
years ended November 30, 1996:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
------------------------------------------
AUGUST
FEBRUARY 28 MAY 31 31 NOVEMBER 30
----------- -------- -------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Total revenues................... $127,975 $142,282 $120,001 $116,936
Net income (loss)................ 3,723 6,226 39,108 (54,409)
Earnings (loss) per common
share*.......................... 0.09 0.14 .88 (1.26)
Per common share:
Dividend declared................ -- -- -- --
Stock prices:
High......................... 12 1/4 10 9 3/4 9 1/2
Low.......................... 8 5/8 8 7 3/4 8
1995
Total revenues................... $121,609 $138,479 $130,909 $126,507
Net income (loss)................ 5,930 9,178 (24,332) (32,408)
Earnings (loss) per common
share**......................... 0.14 0.21 (0.56) (.74)
Per common share:
Dividend declared................ -- .01 -- --
Stock prices:
High......................... 12 1/2 13 3/4 13 1/2 12 1/2
Low.......................... 9 5/8 11 1/2 10 1/2 10 1/4
</TABLE>
- --------
* Included in earnings per share for the first, second and third quarter of
1996 are restructuring charges of $.01, $.01 and $.01 per share,
respectively, related to employee termination benefits and other exit costs
resulting from the closure of four psychiatric hospitals in fiscal year
1996. Included in earnings per share for the third quarter of 1996 is a net
gain of $.81 per share on the sale of the Company's United Kingdom
psychiatric hospitals. Included in earnings per share for the fourth
quarter is a loss of $(1.28) per share related primarily to the sale of the
Company's U.S. psychiatric hospitals.
** Included in earnings per share for the second quarter of 1995 is a
restructuring credit $(.03) totaling $2.5 million ($1.5 million after tax)
from the resolution of previously restructured psychiatric assets. Earnings
per share in the third quarter of 1995 include $(.65) for a pre-tax charge
of $45.0 million ($28.4 million after tax) relating to the settlement of
shareholder litigation. Earnings per share in the fourth quarter of 1995
include a charge of $(.01) related to legal expenses associated with the
legal settlement and $(.65) for a pre-tax charge of $46.0 million ($28.4
million after tax) related to impairment of assets. Also included in the
fourth quarter of 1995 is a pre-tax restructuring charge of $4.6 million
($2.8 million after tax) or $.07 per share related to employee termination
benefits and other costs in connection with the decision to close six
psychiatric hospitals and three regional offices.
NOTE 16--PREFERRED STOCK PURCHASE RIGHTS AND PREFERRED STOCK
On June 21, 1996 the Board of Directors of the Company declared a dividend
of one preferred stock purchase right (the "Rights") on each outstanding share
of common stock, payable to stockholders of record on July 16, 1996. Each
Right will entitle the holder thereof after the Rights become exercisable and
until June 20, 2006 (or the earlier redemption, exchange or termination of the
Rights), to buy one one-hundredth of a share of
48
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Series B Junior Participating Preferred Stock (the "Preferred Stock") at an
exercise price of $45.00, subject to certain antidilution adjustments (the
"Purchase Price"). The Rights will be represented by the Common Stock
certificates and will not be exercisable or transferable apart from the Common
Stock until the earlier of (i) the tenth day after the public announcement
that a Person or group has become an Acquiring Person (a Person who has
acquired, or obtained the right to acquire, beneficial ownership of 15% or
more of the Common Stock), or (ii) the tenth day after a Person or group
commences, or announces an intention to commence, a tender or exchange offer,
the consummation of which would result in the beneficial ownership by a Person
or group of 15% or more of the Common Stock (the earlier of (i) and (ii) being
called herein the "Distribution Date"). Prior to the Distribution Date, the
Board of Directors has the power, under certain circumstances, to postpone the
Distribution Date. The Rights will first become exercisable on the
Distribution Date, unless earlier redeemed or exchanged, and may then begin
trading separately from the Common Stock. The Rights will at no time have any
voting rights.
With certain exceptions, in the event that (i) the Company were acquired in
a merger or other business combination transaction in which the Company is not
the surviving corporation or its Common Stock is changed or exchanged (other
than a merger which follows certain cash offers for all outstanding Common
Stock approved by the Board) or (ii) more than 50% of the Company's assets or
earning power were sold, proper provision shall be made so that each holder of
a Right (except Rights which previously have been voided as set forth above)
shall thereafter have the right to receive, upon exercise thereof, that number
of share of common stock of the acquiring company which at the time of such
transaction would have a market value of two times the then-current exercise
price of one Right.
At any time after a Person has become an Acquiring Person and prior to the
acquisition of 50% or more of the then-outstanding Common Stock by such
Acquiring Person, the Board of Directors may cause the Company to acquire the
Rights (other than Rights owned by an Acquiring person which have become
void), in whole or in part, in exchange for that number of shares of Common
Stock having an aggregate value equal to the excess of the value of the Common
Stock issuable upon exercise of a Right after a Person becomes an Acquiring
Person over the Purchase Price.
The Rights are redeemable at $0.01 per Right prior to the first date of
public announcement that a Person or group has become an Acquiring Person.
Prior to the expiration of the period during which the Rights may be redeemed,
the Board of Directors has the power, under certain circumstances, to extend
the redemption period. The Rights will expire on June 20, 2006 (unless earlier
redeemed or exchanged).
The Purchase Price payable, and the number of shares of Preferred Stock or
other securities or property issuable upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution.
49
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE
To The Board of Directors
of Transitional Hospitals Corporation
Our audits of the consolidated financial statements of Transitional
Hospitals Corporation (formerly Community Psychiatric Centers) and its
subsidiaries referred to in our report dated January 24, 1997 with respect to
the consolidated financial statements included in this Annual Report on Form
10-K also included an audit of Financial Statement Schedule II of Transitional
Hospitals Corporation and its subsidiaries for the years ended November 30,
1996 and 1995. In our opinion, this Financial Statement Schedule of
Transitional Hospitals Corporation and its subsidiaries for the years ended
November 30, 1996 and 1995 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements for the years ended November 30, 1996 and
1995.
Price Waterhouse LLP
Los Angeles, California
January 24, 1997
50
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
(FORMERLY COMMUNITY PSYCHIATRIC CENTERS)
<TABLE>
<CAPTION>
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ----------- ------------------------ ------------ -----------
ADDITIONS
------------------------
CHARGED TO
BALANCE AT CHARGED TO OTHER BALANCE AT
BEGINNING COSTS AND ACCOUNTS-- DEDUCTIONS-- END OF
DESCRIPTION OF PERIOD EXPENSES DESCRIBE DESCRIBE PERIOD
----------- ----------- ----------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Year ended November 30,
1994................... $22,658,000 $26,966,000 $(20,325,000) (1) $29,381,000
82,000 (2)
Year ended November 30,
1995................... 29,381,000 28,732,000 (33,383,000) (1) 24,682,000
(48,000) (2)
Year ended November 30,
1996................... 24,682,000 20,101,000 (3,586,000) (1) 21,448,000
(17,317,000) (3)
(2,432,000) (4)
</TABLE>
- --------
(1) Write-offs, net of recoveries.
(2) Foreign currency translation adjustment.
(3) Represent allowance for bad debts for the U.S. psychiatric hospitals that
were sold on November 30, 1996.
(4) Represent allowance for bad debts for the U.K. psychiatric hospitals that
were sold on June 21, 1996.
51
<PAGE>
EXHIBIT INDEXES
EXHIBIT NO. DOCUMENT
(3)Articles of Incorporation and By-laws
3.1 Restated Articles of Incorporation as adopted by vote of
shareholders on May 20, 1993 and as amended by vote of
shareholders on November 8, 1996.
3.2 Amended and Restated By-Laws of the Company.
(10)Material Contracts
10.1 Employment Contract Number Four between Registrant and Richard L.
Conte, dated as of May 1, 1992 (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1993 and incorporated in full herein by reference).*
10.2 Amendment Number One dated as of July 29, 1994, to Employment
Contract Number Four between Registrant and Richard L. Conte
(filed as Exhibit 10.2 to Registrant's Annual Report on Form 10-K
for its fiscal year ended November 30, 1994 and incorporated in
full herein by reference).*
10.2.1 Employment Contract between Registrant and Richard L. Conte
dated as of December 1, 1995 (filed as Exhibit 10.2.1 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1995 and incorporated in full herein by
reference).*
10.3 Supplemental Retirement Contract between Registrant and Richard
L. Conte, dated as of September 1, 1988 (filed as Exhibit 10.4 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1988 and incorporated in full herein by this
reference).*
10.4 Restated and Amended Employment Contract between Registrant and
Robert L. Green, dated June 1, 1988 (filed as Exhibit 10.1 to
Registrant's Annual Report on Form 10-K for its fiscal year ended
November 30, 1988, and incorporated in full herein by this
reference).
10.5 Amendment Number One dated as of August 1, 1989, and Amendment
Number Two dated as of December 1, 1989 to Restated and Amended
Employment Contract between Registrant and Robert L. Green (filed
as Exhibit 10.5 to Registrant's Annual Report on Form 10-K for
its fiscal year ended November 30, 1994 and incorporated in full
herein by reference).
10.6 Employment Contract between Registrant and Julia Kopta dated as
of June 6, 1996.*
10.7 Employment Contract between Registrant and Wendy Simpson dated as
of June 6, 1996.*
10.8 Employment Contract between Registrant and Ronald L. Ooley dated
as of June 6, 1996.*
10.9 Employment Contract between Registrant and J. Rodney Laughlin
dated as of June 6, 1996.*
10.10 Termination Agreement between Registrant and Steven S. Weis
dated as of December 30, 1994 (filed as Exhibit 10.8 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1994 and incorporated in full herein by
reference).
10.11 Settlement Agreement between Registrant, Kay Seim, Richard Seim
and Continuum Healthcare, Inc. dated as of February 19, 1996
(filed as Exhibit 10.9.1 to Registrants' Annual Report on Form
10-K for its fiscal year ended November 30, 1995 and
incorporated in full herein by reference).
10.12 Form of Indemnification Agreements between Registrant and its
Directors and Executive Officers (filed as Exhibit C to
Registrant's Proxy Statement, dated April 24, 1987, relating to
the annual meeting of its shareholders on June 1, 1987, and
incorporated in full herein by this reference).
<PAGE>
EXHIBIT NO. DOCUMENT
10.13 Registrant's 1989 Stock Incentive Plan (filed as Exhibit A to
Registrant's Proxy Statement, dated July 12, 1989, and
incorporated in full herein by this reference).*
10.14 Form of Stock Option Agreement (filed as Exhibit 10.6.1 to
Registrant's Report on Form 10-K for its fiscal year ended
November 30, 1990 and incorporated in full herein by this
reference).*
10.15 Form of Nonstatutory Stock Option Agreement with Director (filed
as Exhibit 10.6.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1990 and incorporated in full
herein by this reference).*
10.16 Registrant's Combined Stock Option Plan for Key Employees and
Amendment Numbers One, Two, Three, Four and Five thereto (filed
as Exhibit 10.7 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.17 Form of Stock Option Agreement--General Stock Option (filed as
Exhibit 10.7.1 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.18 Form of Stock Option Agreement--Incentive Stock Option (filed as
Exhibit 10.7.2 to Registrant's Report on Form 10-K for its
fiscal year ended November 30, 1989 and incorporated in full
herein by this reference).*
10.19 Agreement and Promissory Note between Registrant and Richard
Conte dated as of June 7, 1995 (filed as Exhibit 10 to
Registrant's report on 10-Q for its quarter ended August 31,
1995, and incorporated herein by this reference).
10.20 Agreement and Promissory Note between Registrant and J. Rodney
Laughlin dated as of November 9, 1995 (filed as Exhibit 10.20 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1995 and incorporated in full herein by
reference).*
10.21 Agreement and Promissory Note between Registrant and Ronald L.
Ooley dated as of June 2, 1995 (filed as Exhibit 10.21 to
Registrant's Annual Report on Form 10-K for its fiscal year
ended November 30, 1995 and incorporated in full herein by
reference).*
10.22 Agreement between Community Psychiatric Centers and Foray 911
Limited, dated as of June 21, 1996, related to the sale of the
entire issued share capital of CPC (Londinium) Limited. The
Agreement contains certain attachments designated as "Approved
Form Documents" which were not included in this filing. The
Company will furnish supplementally a copy of any omitted
attachment to the Commission upon request (filed as Exhibit 1 to
Registrant's July 5, 1996 filing on Form 8-K and incorporated in
full herein by reference).
10.23 The Series A Loan Note dated June 21, 1996, made by Foray 911
Limited and payable to Community Psychiatric Centers in the
amount of 3 million British Pounds (filed as Exhibit 2 to
Registrant's July 5, 1996 filing on Form 8-K and incorporated in
full herein by reference).
10.24 Inter-Creditor Agreement between the Royal Bank of Scotland,
Mercury Asset Management PLC, Foray 911 Limited and Community
Psychiatric Centers (filed as Exhibit 3 to Registrant's July 5,
1996 filing on Form 8-K and incorporated in full herein by
reference).
10.25 Rights Agreement, dated as of June 21, 1996 between Community
Psychiatric Centers and Chase Mellon Shareholder Services (filed
as Exhibit 4 to Registrant's July 5, 1996 filing on Form 8-K and
incorporated in full herein by reference).
<PAGE>
EXHIBIT NO. DOCUMENT
10.26 Form of Letter to the holders of Community Psychiatric Centers
Common Stock (filed as Exhibit 5 to Registrant's July 5, 1996
filing on Form 8-K and incorporated in full herein by
reference).
10.27 Asset Purchase Agreement, between the Company and BHC, dated
October 22, 1996 (filed as Exhibit 99.1 to Registrant's October
22, 1996 filing on Form 8-K and incorporated in full herein by
reference).**
10.28 Agreement and Plan of Merger between the Company and BHC, dated
October 22, 1996 (filed as Exhibit 99.2 to Registrant's October
22, 1996 filing on Form 8-K and incorporated in full herein by
reference).**
10.29 Schedule 3.10 to the Asset Purchase Agreement, consisting of the
Audited Consolidated Financial Statements of BHC, for fiscal
years ended June 30, 1996, 1995 and 1994 (filed as Exhibit 99.3
to Registrant's October 22, 1996 filing on Form 8-K and
incorporated in full herein by reference).
10.30 First Amendment to Asset Purchase Agreement between the Company
and BHC, dated November 30, 1996 (filed as Exhibit 99.1 to
Registrant's December 16, 1996 filing on Form 8-K and
incorporated in full herein by reference).**
10.31 Amendment to Agreement and Plan of Merger, between the Company
and BHC, dated November 30, 1996 (filed as Exhibit 99.2 to
Registrant's December 16, 1996 filing on Form 8-K and
incorporated in full herein by reference).**
10.32 Debt Instruments--Copies of debt instruments for which the
related debt is less than 10% of total assets will be furnished
to the Commission upon request.
11 Statement re computation of earnings per share
21 Subsidiaries of the Registrant
23 Consent of Independent Accountants--Price Waterhouse LLP
23.1 Consent of Independent Auditors--Ernst & Young LLP
27 Financial Data Schedule
(b) Reports on Form 8-K:
Report dated October 22, 1996 reporting the execution of an Asset
Purchase Agreement related to the sale of substantially all of the
psychiatric hospital and residential treatment center operations of the
Company in the United States and Puerto Rico to Behavioral Healthcare
Corporation.
Report dated October 24, 1996 reporting the issuance of a press release
dated October 22, 1996 regarding the sale of the U.S. and Puerto Rico
psychiatric assets to Behavioral Healthcare Corporation.
Report dated December 16, 1996 reporting the completion of the sale of
the U.S. and Puerto Rico psychiatric assets to Behavioral Healthcare
Corporation on November 30, 1996 and related unaudited pro forma financial
information.
- --------
*Required to be filed as an exhibit pursuant to item 14 (c) of this Form.
** The Agreements contain certain schedules and exhibits which were not
included in this filing. The Company will furnish supplementally a copy of
any omitted schedule or exhibit to the Commission upon request.
<PAGE>
RESTATED ARTICLES OF INCORPORATION
OF
COMMUNITY PSYCHIATRIC CENTERS
FIRST: The name of the corporation is COMMUNITY PSYCHIATRIC CENTERS.
SECOND: Its principal office in the State of Nevada is located at One East
First Street, Reno, Washoe County, Nevada 89501. The name and address of its
resident agent is THE CORPORATION TRUST COMPANY OF NEVADA, One East First
Street, Reno, Nevada 89501.
THIRD: The corporation may engage in any lawful activity.
FOURTH: The total number of shares of all classes of stock which the
corporation shall have authority to issue is 102,000,000 shares, of which
2,000,000 shares shall constitute Preferred Stock (the "Preferred Stock") of the
par value of $1.00 per share, and 100,000,000 shares shall constitute Common
stock (the "Common stock"), of the par value of $1.00 per share.
The designations and the powers, preferences and rights of the Preferred
Stock and of the Common Stock, and the qualifications, limitations or
restrictions thereof, are as follows:
(a) Preferred Stock.
1. The Board of Directors is expressly authorized at any time, and
from time to time, to provide for the issuance of shares of Preferred Stock in
one or more series, with such voting powers, full or limited, or without voting
powers and with such designations, preferences and relative, participating,
optional or other special rights, and qualifications, limitations or
restrictions as shall be stated and expressed in the resolution or resolutions
providing for the issue thereof adopted by the Board of Directors, and as are
not stated and expressed in these Articles of Incorporation, or any amendment
thereto, including (but without limiting the generality of the foregoing) the
foregoing:
(i) The designation of such series.
(ii) The dividend rate of such series, the conditions and dates
upon which such dividends shall be payable, the preference or relation
which such dividends shall bear to the dividends payable on any other
class or classes or of any other series of stock, and whether such
dividends shall be cumulative or noncumulative.
(iii) Whether the shares of such series shall be subject to
redemption by the corporation, and, if made subject to such
redemption, the time or times, price or prices, rate or rates,
adjustments and other terms and conditions of such redemption,
including, without limitation, whether the shares of such series shall
be redeemable for cash, property or rights, including securities of
any other corporation, at the option of either the holder or the
corporation or upon the happening of a specified event.
1
<PAGE>
(iv) The terms and amount of any sinking or purchase fund provided
for the purchase or redemption of the shares of such series.
(v) Whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other class or classes or of
any other series of any class or classes of stock of the corporation,
and, if provision be made for conversion or exchange, the times,
prices, rates, adjustments, and other terms and conditions of such
conversion or exchange.
(vi) The extent, if any, to which the holders of the shares of such
series shall be entitled to vote as a class or otherwise with respect
to the election of the directors or otherwise.
(vii) The restrictions, if any, on the issue or reissue of any
additional Preferred Stock.
(viii) The rights of the holders of the shares of such series upon
the dissolution of, or upon the distribution of assets of, the
corporation.
2. There shall be no limitation or restriction on any variation
between any of the different series of Preferred Stock as to the designations,
preferences and relative, participating, optional or other special rights, and
the qualifications, limitations or restrictions thereof; and the several series
of Preferred Stock may, except as in this Article FOURTH otherwise expressly
provided, vary in any and all respects as fixed and determined by the resolution
or resolutions of the Board of Directors providing for the issuance of the
various series; provided, however, that all shares of any one series of
Preferred Stock shall have the same designation, preferences and relative,
participating, optional or other special rights and qualifications, limitations
and restrictions.
3. The Board of Directors is expressly authorized at any time, and
from time to time, to increase or decrease the number of shares of any series so
created, subsequent to the issue of that series, but not below the number of
shares of such series then outstanding.
(b) Common Stock.
1. Subject to the designations, preferences and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions fixed by the Board of Directors for the Preferred Stock as
provided above in this Article FOURTH, the holders of the Common stock shall be
entitled to receive when and as declared by the Board of Directors, out of any
assets which are by law available for the payment of dividends, dividends in
such amounts as shall be declared by the Board of Directors.
2. The right to receive any dividends which may be declared payable in
stock of the corporation of any class is vested exclusively in the holders of
the Common Stock.
2
<PAGE>
(c) Provisions Applicable to the Preferred Stock and to the Common Stock.
1. No holder of Preferred Stock or of Common stock shall be entitled
as such, as a matter of right, to subscribe for or purchase any shares of
Preferred Stock or Common stock of the corporation, whether now or hereafter
authorized, or securities convertible into, exchangeable for, or carrying the
right to acquire, Preferred Stock or Common Stock of the corporation, whether
now or hereafter authorized.
2. The entire voting power and all voting rights, except as otherwise
required by law, or as otherwise fixed by resolution or resolutions of the Board
of Directors with respect to one or more series of Preferred Stock, shall be
vested exclusively in the Common Stock.
3. Except as otherwise provided by law, or as otherwise fixed by
resolution or resolutions of the Board of Directors with respect to one or more
series of preferred stock, whenever provision is made in these Articles of
Incorporation for vote by class of stock, all series of Preferred Stock shall be
considered as one class for this purpose.
FIFTH:
(a) The business and affairs of this corporation shall be managed by a
Board of Directors consisting of not less than six nor more than eleven persons.
The exact number of directors within the limitations specified in the preceding
sentence shall be fixed from time to time by a resolution adopted by the
affirmative vote of the Board of Directors or by a Bylaw duly adopted by the
Board of Directors. No decrease in the number of directors so fixed shall
shorten the current term of any director then holding office, and the number of
directors provided for in paragraph (d) of this Article FIFTH shall not be
changed as a result of any change of directors pursuant to this paragraph (a).
(b) The Board of Directors shall be divided into three classes, each of
which shall to the greatest extent possible have an equal number of directors.
The term of office of one class shall expire each year. Of the first Board of
Directors, the members of one class ("Class One" directors) shall hold office
for a term expiring at the annual meeting of stockholders held during 1973, the
members of the second class ("Class Two" directors) shall hold office for a term
expiring at the annual meeting of stockholders held during 1974 and the members
of the third class ("Class Three" directors) shall hold office for a term
expiring at the annual meeting of stockholders held during 1975. At each annual
meeting of stockholders held after adoption of these articles of incorporation,
the directors elected to succeed those directors whose terms expire shall be
elected for a term of office expiring at the third succeeding annual meeting of
stockholders after their election.
Subject to the rights of the holders of any series of preferred stock then
outstanding, additional directorships resulting from any increase in the number
of directors pursuant to paragraph (a) of this Article FIFTH ("Additional
Directorships") and all other vacancies shall be filled by a majority vote of
the directors then in office or by a sole director, although less than a quorum.
The Board of Directors shall apportion Additional Directorships in such a manner
as to equalize the three classes as they may from time to time be constituted.
Directors chosen pursuant to any of the foregoing provisions shall hold office
for a term expiring at the annual meeting of stockholders at which the term of
the class to which they have been elected or appointed expires, until their
successors are duly elected and have qualified, or until their earlier
resignation or removal.
(c) The names and post office addresses of the first Board of Directors,
which shall be six (6) in
3
<PAGE>
number, are as follows:
William A. Sheppard, Ph.D. Class One
70 Crescent Drive Director
Palo Alto, California 94301
Daniel Siegel, M.D. Class One
1049 La Loma Road Director
Pasadena, California 91105
Hartly Fleischman, Esq. Class Two
593 Market Street, Suite 1020 Director
San Francisco, California 94105
John Alden, M.D. Class Two
245 Castenada Director
San Francisco, California 94105
Robert L. Green Class Three
One Embarcadero Center Director
San Francisco, California 94111
James W. Conte Class Three
4519 North Rosemead Boulevard Director
Rosemead, California 91770
(d) Notwithstanding the foregoing, the Board of Directors may in connection
with the creation of one or more series of Preferred Stock provide for the
election of not more than four (4) directors by the holders of Preferred Stock,
voting separately as a class, in addition to the number of Directors provided
for in paragraph (a) of this Article FIFTH. Whenever the holders of one or more
series of Preferred Stock shall be so entitled to elect directors, the terms of
all directors so elected shall expire not later than the next succeeding annual
meeting of stock holders.
(e) The provisions of this Article FIFTH shall not be amended except by
vote of two-thirds (2/3) of the entire authorized number of directors and by
vote of holders of two-thirds (2/3) of all of the issued and outstanding shares
of each class of the capital stock of this corporation, even though the right to
vote of any class be otherwise restricted or denied.
SIXTH: The capital stock, after the amount of the subscription price, or
par value, has been paid in, shall not be subject to pay the debts of the
corporation.
SEVENTH: The name and post office address of each of the incorporators
signing the Articles of Incorporation are as follows:
Hartly Fleischman, Esq.
593 Market Street, Suite 1020
San Francisco, California 94105
Thomas M. Goetzl, Esq.
4
<PAGE>
593 Market Street, Suite 1020
San Francisco, California 94105
Barbara A. Maestri
593 Market Street, Suite 1020
San Francisco, California 94105
EIGHTH: This corporation is to have perpetual existence.
NINTH:
(a) Any merger or consolidation of this corporation with or into another
corporation shall require the vote of the holders of two-third (2/3) of all of
the issued and outstanding shares of each class of the capital stock of this
corporation even though the right to vote of any class be otherwise restricted
or denied; provided that except as may otherwise be required by applicable
provisions of law no vote of stockholders shall be required to effect a merger
of this corporation with or into another corporation at least eighty percent
(80%) of whose issued and outstanding shares of capital stock of each class are
owned by this corporation.
(b) Any sale, lease, conveyance, exchange, transfer or other disposal of
all or substantially all of the property and assets of this corporation shall
require the vote of the holders of two-third (2/3) of all of the issued and
outstanding shares of each class of the capital stock of this corporation even
though the right to vote of any class be otherwise restricted or denied.
TENTH: Meetings of shareholders may be held outside the State of Nevada,
if the Bylaws so provide. The books of the corporation may be kept (subject to
any provision contained in the statutes) outside the Sate of Nevada at such
place or places as may be designated from time to time by the Board of Directors
or in the Bylaws of the corporation.
ELEVENTH: Amendment of this Articles of Incorporation shall required the
approval of two-thirds (2/3) of the holders of the entire number of outstanding
shares of each class of capital stock of this corporation, even though the right
to vote of any class be otherwise restricted or denied.
TWELFTH:
(a) A director or officer of the corporation shall not be liable to the
corporation or its stockholders for damages for breach of fiduciary duty as a
director or officer except for liability that be express provision of Chapter 78
of the Nevada Revised Statutes as amended and in effect from time to time or by
any successor or other statutes of Nevada having similar import and effect
cannot be eliminated.
(b) This Article TWELFTH shall not eliminate or limit the liability of a
director or officer for any act or omission occurring prior to the date when
this Article TWELFTH first became effective.
(c) This Article TWELFTH shall not be amended or repealed except by vote of
the holders of two-thirds (2/3) of all of the issued and outstanding shares of
each class of the capital stock of this corporation, even though the right to
vote of any class be otherwise restricted or denied. No amendment or repeal of
this Article TWELFTH shall adversely affect any right of any director or officer
existing at the time such amendment or repeal becomes effective.
5
<PAGE>
Dated this 20th day of May, 1993.
/s/ STEVEN S. WEIS
----------------------------------------
STEVEN S. WEIS, Executive Vice President
/s/ MORGAN L. STAINES
----------------------------------------
MORGAN L. STAINES, Secretary
The undersigned hereby certify that they are respectively the Executive
Vice President and Secretary of Community Psychiatric Centers ("CPC"), a
corporation organized and existing under the laws of the State of Nevada, that
they have bene authorized to execute this certificate entitled "Restated
Articles of Incorporation of Community Psychiatric Centers" by a resolution duly
adopted at a meeting of the CPC Board of Directors held on the 29th day of
January, 1993 and approved by the holders of two-thirds of all the issued and
outstanding shares of each class of the capital stock of CPC at a meeting held
on May 20, 1993, and that the certificate correctly sets forth the text of the
articles of incorporation as amended to the date of the certificate, May 20,
1993.
Dated this 22 day of October 1993.
/s/ STEVEN S. WEIS
----------------------------------------
STEVEN S. WEIS, Executive Vice President
/s/ MORGAN L. STAINES
----------------------------------------
MORGAN L. STAINES, Secretary
6
<PAGE>
STATE OF CALIFORNIA )
) ss.
COUNTY OF ORANGE )
On October 22, 1993, before me, Marilee Edgar, a notary public,
personally appeared STEVEN S. WEIS and MORGAN L. STAINES, known to me or proved
to me on the basis of satisfactory evidence to be the persons whose names are
subscribed to the within instrument and acknowledged to me that they executed
the same in their authorized capacities, and that by their signatures on the
instrument, the entity on behalf of which the persons acted executed the
instrument.
WITNESS my hand and official seal.
/s/ MARILEE EDGAR
---------------------------------------
Notary Public
7
<PAGE>
CERTIFICATE OF AMENDMENT OF THE
RESTATED ARTICLES OF INCORPORATION OF
COMMUNITY PSYCHIATRIC CENTERS
The undersigned, being the President and Secretary of COMMUNITY PSYCHIATRIC
CENTERS, a Nevada corporation (the "Corporation"), desiring to give notice of
corporate action effectuating amendment of certain provisions of its Restated
Articles of Incorporation, do hereby certify as follows:
1. On October 22, 1996, the Board of Directors of the Corporation duly
adopted resolutions setting forth an amendment to the Restated Articles of
Incorporation of the Corporation, declaring the advisability of the amendment,
and resolving that the amendment be presented to the Corporation's shareholders
for their approval at the Corporation's next annual meeting thereafter.
2. Said resolution called for Article First of the Restated Articles of
Incorporation of the Corporation to be amended to read as follows:
The name of the corporation is TRANSITIONAL HOSPITALS CORPORATION.
3. The shareholders duly approved the amendment at the annual meeting of
the Corporation held on November 8, 1996. The total number of shares voting in
favor of the amendment equaled or exceeded the vote required. The percentage
vote required was two-thirds of each class of stock entitled to vote.
4. The Restated Articles of Incorporation of the Corporation are hereby
amended as set forth above and the undersigned make this certificate pursuant to
Sections 78.385 and 78.390 of the Nevada Revised Statutes.
Dated: November 8, 1996
COMMUNITY PSYCHIATRIC CENTERS,
a Nevada corporation
By: /s/ RICHARD L. CONTE,
-------------------------------
Richard L. Conte, President
By: /s/ RONALD L. OOLEY
-------------------------------
Ronald L. Ooley, Secretary
8
<PAGE>
The undersigned hereby certify that they are respectively the President and
the Secretary of Community Psychiatric Centers, a corporation organized and
existing under the laws of the State of Nevada, that they are authorized to
execute this "Certificate of Amendment of the Restated Articles of Incorporation
of Community Psychiatric Centers" by a resolution duly adopted at a meeting of
the Corporation's Board of Directors held on October 22, 1996, and approved by
the holders of two-thirds of all the issued and outstanding shares of each class
of capital stock of the Corporation entitled to vote at a meeting held on
November 8, 1996, and that the certificate correctly sets forth the text of the
amendment to the restated articles of incorporation to the date of the
certificate.
Dated: November 8, 1996
COMMUNITY PSYCHIATRIC CENTERS,
a Nevada corporation
By: /s/ RICHARD L. CONTE,
-------------------------------
Richard L. Conte, President
By: /s/ RONALD L. OOLEY
-------------------------------
Ronald L. Ooley, Secretary
9
<PAGE>
COUNTY OF CLARK
This instrument was acknowledged before me on November 8, 1996 by Richard
L. Conte and Ronald L. Ooley.
/s/ BETTY LOU CLENDENING
- ------------------------
NOTARY PUBLIC
My commission expires: June 15, 1999
10
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED
BYLAWS OF
TRANSITIONAL HOSPITALS CORPORATION
1. Principal Office. The principal office of the corporation in the State
----------------
of Nevada shall be 5110 W. Sahara Avenue, Las Vegas, Nevada, 89102. The name and
address of the Registered Agent in charge thereof shall be the Corporation Trust
Company of Nevada, One East First Street, Reno, Nevada 89501.
2. Other Offices. The corporation may also have offices at such other
-------------
places within and without the State of Nevada as the Board of directors may from
time to time determine or the business of the corporation may require.
MEETINGS OF SHAREHOLDERS
3. Place of Meetings. All meetings of shareholders may be held at any
-----------------
place, within or without the State of Nevada which may be designated by the
Board of Directors.
4. Annual Meetings. An annual meeting of the shareholders shall be held on
---------------
the last Tuesday in May at 10:30 o'clock A.M. if not a legal holiday, and if a
legal holiday, then on the next secular day following at the same time, or on
such other day and at such time and place as may be fixed by the Board of
Directors, for the purpose of electing directors and for the transaction of such
other business as may properly be brought before the meeting.
5. Special Meetings. Special meetings of the shareholders, for any purpose
----------------
whatsoever, may be called at any time by the Chairman of the Board, the
President or by a majority of the Board of Directors.
6. Notice of Meetings. A notice of each annual or special meeting of the
------------------
shareholders shall be given in writing by the Secretary or an Assistant
Secretary or, in case of his neglect or refusal, by any Director and shall
specify the place, the day and the hour of the meeting and the general nature of
the business to be transacted. A copy of such notice shall be either delivered
personally to, or shall be mailed, postage prepaid, to each shareholder of
record entitled to vote at such meeting not less than 10 nor more than 60 days
before such meeting.
7. Adjourned Meetings and Notice Thereof. Any shareholders' meeting,
-------------------------------------
annual or special, whether or not a quorum is present, may be adjourned from
time to time by the vote of a majority of the shares, the holders of which are
either present in person or represented by proxy thereat, but in the absence of
a quorum no other business may be transacted at such meeting.
It shall not be necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted thereat, other than by
announcement at the meeting at which such adjournment is taken.
<PAGE>
8. Quorum. The presence in person or by proxy of the persons entitled to
------
vote a majority of the voting shares at any meeting shall constitute a quorum
for the transaction of business except as otherwise provided by statute or by
the Articles of Incorporation. The shareholders present at a duly called or
held meeting at which a quorum is present may continue to do business until
adjournment, notwithstanding the withdrawal of enough shareholders to leave less
than a quorum.
9. Proxies. At any meeting of the shareholders, any shareholder may be
-------
represented and vote by a proxy or proxies appointed by an instrument in
writing. In the event that any such instrument in writing shall designate two
or more persons to act as proxies, a majority of such persons present at the
meeting, or, if only one shall be present, then that one shall have and may
exercise all of the powers conferred by such written instrument upon all of the
persons so designated unless the instrument shall otherwise provide. No such
proxy shall be valid after the expiration of six months from the date of its
execution, unless coupled with an interest, or unless the person executing it
specifies therein the length of time for which it is to continue in force, which
in no case shall exceed seven years from the date of its execution, Subject to
the above, any proxy duly executed is not revoked and continues in full force
and effect until an instrument revoking it or a duly executed proxy bearing a
later date is filed with the Secretary of the corporation.
10. Voting. Every holder of record of common stock of the corporation shall
------
be entitled at such meeting of shareholders to one vote for each share of stock
standing in his name on the books of the corporation. Except as otherwise
provided by law or as otherwise fixed by resolution or resolutions of the Board
of Directors with respect to one or more series of preferred stock or as
otherwise provided in the Articles of Incorporation no other class of stock
shall have voting rights.
11. Action Without Meeting. Any action, except election of directors, which
----------------------
may be taken by the vote of the shareholders at a meeting, may be taken without
a meeting if authorized by the written consent of the holders of at least sixty-
six and two-thirds percent (66 2/3%) of the entire number of shares of each
class, consenting separately, of the outstanding stock of the corporation (even
though the right of any class to vote is otherwise restricted or denied), unless
the provisions of the applicable laws or of the Articles of Incorporation
require a greater proportion of voting power to authorize such action in which
case such greater proportion of written consent shall be required. In no
instance where action is authorized by written consent need a meeting of
shareholders be called or noticed.
DIRECTORS
12. Powers. Each member of the Board of Directors shall be of full age and
------
at least one such member shall be a citizen of the United States. Subject to
the limitations contained in the Articles of Incorporation and in the Nevada
Revised Statutes, Chapter 78, as interpreted as to action to be authorized or
approved by the shareholders, all corporate power shall be exercised by or under
authority of, and the business and affairs of the corporation shall be
controlled by, its Board of Directors. Directors need not be shareholders.
<PAGE>
13. Committee of Directors. The Board of Directors may by resolution or
----------------------
resolutions passed by a majority of the whole Board appoint an executive
committee and other committees, and may delegate to the executive committee any
of the powers and authority of the Board in the management of the business and
affairs of the corporation, except the power to declare dividends and to adopt,
amend or repeal Bylaws. The Board of Directors shall have the power to
prescribe the manner in which proceedings of the executive committee and other
committees shall be conducted. The executive committee shall be composed of two
(2) or more directors or officers of this corporation, or persons holding the
position of regional administrator. The Chairman of the Board of Directors and
the President of the corporation may be ex-officio members of the executive
committee with voting privileges when in attendance at meetings legally called
and held. The executive committee and other committees shall keep regular
minutes of their proceedings and shall report to the Board of Directors when
required.
Meetings of the executive committee shall be held at the principal
office of the corporation, or at any place which has been designated from time
to time by resolution of the executive committee or by written consent of all
members thereof, and may be called by the Chairman of the Board, the President,
any Vice President who is a member of the executive committee, or any two (2)
members thereof, upon written notice to the members of the executive committee
of the time and place of such special meeting given in the manner provided for
the giving of written notice to members of the Board of Directors of the time
and place of special meetings of the Board of Directors; vacancies in the
membership of the executive committee may be filled by the Board of Directors;
subject to the provisions contained in paragraph 25 of these Bylaws, a majority
of the authorized number of members of the executive committee shall constitute
a quorum for the transaction of business; and transactions of any meeting of the
executive committee, however called and noticed or wherever held, shall be as
valid as though had at a meeting duly held after regular call and notice, if a
quorum be present and if, either before or after the meeting, each of the
members not present signs a written waiver of notice or consent to holding such
meeting or approval of the minutes thereof. All such waivers, consents or
approvals shall be filed with the corporate records or made a part of the
minutes of the meeting.
14. (a) Number of Directors. Within the limitations specified in
-------------------
paragraph 14(b) below, the number of directors which shall constitute the whole
Board of Directors shall be fixed by a resolution adopted by the affirmative
vote of a majority of the entire Board of Directors.
(b) Limitations on Size of Board. As provided in Article Fifth of the
----------------------------
Articles of Incorporation, the number of Directors may not be less than 6 nor
more than 11 persons, with the exact number to be fixed from time to time by a
resolution adopted by the affirmative vote of the Board of Directors or by a
Bylaw duly adopted by the Board of Directors.
(c) Election and Term of Office. The Board of Directors shall be
---------------------------
divided into three classes, with the term of office of one class expiring each
year. The directors shall be apportioned equally among the three classes. The
directors whose three-year terms have ended shall be elected at each annual
meeting of shareholders by a plurality of the votes cast at such meeting by
<PAGE>
such shareholders voting either in person or by proxy. Except with respect to
the first Board of Directors (who shall hold office as provided by Article Fifth
of the Articles of Incorporation), each director so elected shall hold office
until the third annual meeting of shareholders following such election, but if
any such annual meeting is not held or if the directors not elected thereat, the
directors then in office shall hold such office until their successors are
elected. Such successors may be elected at any special meeting of shareholders
held for that purpose and so noticed.
When the number of directors is increased, the Board of Directors shall
apportion additional directorships in such manner as to equalize the three
classes as they may from time to time be constituted. No decrease in the number
of directors occurring pursuant to a resolution of the Board of Directors shall
shorten the current term of any director then holding office.
Except for paragraph 14(a) above, the provisions of this paragraph 14
may not be amended except by vote of two-thirds of the entire authorized number
of Directors and by vote of holders of two-thirds of all of the issued and
outstanding shares of each class of the capital stock of the corporation, even
though the right to vote any class of such stock is otherwise restricted or
denied.
15. (a) A person (except an executive officer who is a director and his
or her replacement) who is not an Independent Director (as that term is
hereinafter defined) may only be elected to the Board of Directors if following
such election, the Board of Directors would consist of a majority of Independent
Directors.
A person shall be an Independent Director if (i) such person is not an
officer or employee of the corporation or any subsidiary thereof; and (ii)
neither such person nor any direct or indirect employer thereof nor any
affiliate (as that term is defined in the federal securities law) of such person
or employer or immediate family member of such person has, since the beginning
of the corporation's third prior fiscal year, been a party to any transaction or
series of transactions with or received payments from the corporation or its
subsidiaries (other than the payment of directors' fees, pension payments and/or
deferred compensation payments) where the aggregate amount involved exceeded
$120,000.00 during the three prior fiscal years. No person shall be
disqualified from being an "Independent Director" solely as a result of the
participation by such person, such employer, such affiliate or family member in
any transaction with the corporation or its subsidiaries or as a result of
payments from the corporation or its subsidiaries where: (y) the transaction
or payments relate to services as a bank depository of funds, transfer agent,
registrar, trustee under a trust indenture, or similar services as a common or
contract carrier or public utility; or (z) the interest of such person,
employer, affiliate or family member arises solely from the ownership of
securities of an entity which is a party to a transaction with the corporation
or its subsidiaries or receives payments from the corporation or its
subsidiaries and such person, employer, affiliate or family member beneficially
owns less than 5% of the outstanding securities of such entity.
<PAGE>
16. Vacancies. Vacancies on the Board of Directors may be filled by a
---------
majority of the remaining directors, though less than a quorum, or by a sole
remaining director, and each director so elected shall hold office for the
remainder of the unexpired term of his predecessor.
A vacancy or vacancies in the Board of Directors shall be deemed to
exist in the case of death, resignation, or removal of any director, or if the
authorized number of directors shall be increased, or if the shareholders fail,
at any annual or special meeting of shareholders at which any director or
directors are elected, to elect the full authorized number of directors to be
voted for at that meeting.
If the Board of Directors accepts the resignation of a director tendered
to take effect at a future time, the Board shall have the power to elect a
successor to take office when the resignation is to become effective.
No reduction of the authorized number of directors shall have the effect
of removing any director prior to the expiration of his term of office.
17. Compensation of Directors. Directors, as such, shall not receive any
-------------------------
stated salaries for their services, but, by resolution of the Board of
Directors, a fixed sum and expenses of attendance, if any, may be allowed for
attendance at each regular or special meeting of the Board of Directors;
provided that nothing herein contained shall be construed to preclude any
directors from serving the corporation in any other capacity and receiving
compensation therefor. Members of the executive committee and other committees
may be allowed like compensation and expenses for attending meetings of the
committees.
18. Removal of Directors. The entire Board of Directors or any individual
--------------------
director may be removed from office by the vote or written consent of
shareholders representing not less than two-thirds of the issued and outstanding
shares of each class of stock of the corporation, and entitled to vote at an
election of directors. In case the Board of any one (1) or more directors be so
removed, new directors may be elected at the same meeting.
MEETING OF DIRECTORS
19. Place of Meeting. The Board of Directors may hold its meetings at any
----------------
place within or without the State of Nevada designated from time to time by
resolution of the Board or by written consent of all the members of the Board.
In the absence of such designation, meetings shall be held at the principal
office of the corporation in the State of Nevada. Any regular or special meeting
is valid wherever held if held upon written consent of all the members of the
Board of Directors, given either before or after the meeting and filed with the
Secretary of the Corporation.
<PAGE>
20. Regular Meetings Regular meetings of the Board of Directors may be
----------------
held without notice at such time as shall from time to time be determined by the
Board of Directors, provided notice of any change in the time or place of any
such meeting be sent to all the directors.
21. Special Meetings and Notice Thereof. Special meetings of the Board of
-----------------------------------
Directors may be called by the Chairman of the Board, or, if he is absent or is
unable or refuses to act, by the President, or, if he is absent or is unable or
refuses to act, on the order by any two (2) directors, on two (2) days' written
notice to each director, either personally, by mail, or by other form of written
communication. If the address of a director is not shown on the records and is
not readily ascertainable, such notice shall be addressed to him at the city or
place in which the meetings of the directors are regularly held.
22. Quorum. At all meetings of the Board of Directors a majority of the
------
number of directors fixed in paragraph 14 of these Bylaws shall be necessary and
sufficient to constitute a quorum for the transaction of business, and every act
or decision done or made by a majority of the directors present at a meeting
duly held at which a quorum is present is the act of the directors, unless a
greater number is required by law, these Bylaws, or the Articles of
Incorporation.
23. Adjournment. A quorum of the directors may adjourn any directors'
-----------
meeting to meet again at a stated day and hour; provided, however, that in the
absence of a quorum, a majority of the directors present at any directors'
meeting, either regular or special, may adjourn from time to time until the time
fixed for the next regular meeting of the Board.
24. Action Without Meeting. Any action required or permitted to be taken
----------------------
by the Board of Directors or a Committee of Directors under any provision of the
laws of the State of Nevada or of these Bylaws may be taken without a meeting of
the Board or Committee if all members of the Board or Committee individually or
collectively shall consent in writing to such action. Such written consent or
consents shall be filed with the minutes of the proceedings of the Board or
Committee, as the case may be, and such action by written consent shall have the
same force and effect as a unanimous vote of the Board of Directors or Committee
of Directors.
CONSULTING BOARD
25. Appointment and Membership. Annually, after each election of
--------------------------
directors, the Board of Directors shall appoint an executive committee
designated the "Consulting Board" for each hospital and each dialysis center
owned or operated by the corporation. Each Consulting Board shall consist of not
less than three (3) but no more than six (6) members, with the exact number to
be determined by the Board of Directors. At least one (1) member of the
Consulting Board shall be an officer of the corporation. The Chairman of the
Board of Directors and the President of the corporation may appoint up to four
(4) ex-officio members of each Consulting Board with voting privileges when in
attendance in person or by proxy at meetings legally called and held. The ex-
officio members, together
<PAGE>
with the members who are officers of the corporation shall at all times,
constitute a majority of the members of each Consulting Board.
Each Consulting Board shall adopt bylaws in accordance with the
standards promulgated by the Joint Commission on Accreditation of Hospitals for
governing bodies of hospitals or by the Social Security Administration,
Department of Health, Education and Welfare, for governing bodies of hospitals
and with their community responsibility, identifying the purpose of each
facility and the means of their fulfillment, but such bylaws shall not be
inconsistent with these Bylaws.
26. Tenure and Removal. The consulting board shall hold office until the
------------------
next annual appointment by the Board of Directors or until successors are
selected by it, but the Board of Directors may at any time remove any member of
the consulting board and appoint a successor.
27. Power and Duties. Each consulting board shall be responsible for and
----------------
have the power to conduct the operations of the hospital for which it is
appointed. However, its power shall be limited to governing those operations and
to acting as liaison with the Board of Directors, the administrative staff, and
the medical staff of the respective facility. Subject to the foregoing
definition and limitation, each consulting board shall fulfill all of the
functions of the "governing body" as that term is defined in the Standards
promulgated by the Joint Commission on Accreditation of Hospitals or by the
Social Security Administration, Department of Health, Education and Welfare, and
its powers and duties shall be governed by its bylaws attached hereto and
incorporated herein by this reference, and the powers, duties and
responsibilities of each consulting board shall be limited to and be as set
forth in said bylaws of each consulting board.
28. Meetings and Procedure. The consulting board shall keep regular
----------------------
minutes of its proceedings and shall report to the Board of Directors when
required. Meetings of the consulting board shall be held and conducted in
accordance with the applicable provisions of paragraph 14 of these Bylaws.
OFFICERS
29. Officers. The officers of the corporation shall consist of a Chairman
--------
of the Board, a President, one or more Vice Presidents (any number of whom may
be designated Executive Vice President or any such other designation as the
Board of Directors shall determine), a Secretary, a Resident Agent and a
Treasurer, who shall be chosen by the Board of Directors. The order of
seniority of the Vice Presidents shall be in the order of their nomination,
unless otherwise determined by the Board of Directors. All officers of the
corporation shall hold office at the pleasure of the Board of Directors. The
Board of Directors may choose additional Vice Presidents, one or more Assistant
Secretaries, and Assistant Treasurers. The Chairman of the Board and the
President may
<PAGE>
also choose one or more Assistant Secretaries and Assistant Treasurers. Any two
or more offices, except those of President and Secretary, may be held by the
same person.
30. Election. The Board of Directors, at its first meeting after each
--------
annual meeting of shareholders, shall choose a chairman of the Board, a
President, one or more Vice Presidents, a Secretary and a Treasurer.
31. Other Officers and Agents. The Board of Directors may appoint at such
-------------------------
time, or at such other time or times as the business of the corporation may
require, such other officers and agents as they shall deem necessary, who shall
hold their offices for such terms and shall exercise such powers and perform
such duties as shall be determined from time to time by the Board of Directors.
32. Compensation. The compensation of all officers of the corporation
------------
shall, and compensation of employees may, be fixed from time to time by the
Board of Directors and may be changed from time to time by it in its sole
discretion.
33. Vacancy and Resignation. If the office of any officer becomes vacant
-----------------------
for any reason, the vacancy shall be filled by the Board of Directors. Subject
to any applicable contractual arrangements, any director or officer may resign
his office at any time, such resignation to be made in writing and to take
effect from the time of its receipt by the corporation, unless some time be
fixed in the resignation, and then from that time. The acceptance of a
resignation shall not be required to make it effective.
34. The Chairman of the Board. The Chairman of the Board shall preside at
-------------------------
all meetings of the shareholders and directors, shall in the absence or
disability of the President perform the duties and exercise the powers of the
President, shall be ex-officio member of the executive and other committees,
shall see that all orders and resolutions of the Board of Directors are carried
into effect, and shall have the general powers and duties of management usually
vested in the Chairman of the Board of a corporation, together with such other
powers and duties as may be determined from time to time by the Board of
Directors.
35. The President. The President, in the absence or disability of the
-------------
Chairman of the Board, shall perform the duties and exercise the powers of the
Chairman of the Board, shall be an ex-officio member of the executive and other
committees, and shall have the general powers and duties of management usually
vested in the office of the President of a corporation, together with such other
powers and duties as may be determined from time to time by the Board of
Directors.
36. The Executive Vice President and Vice Presidents. The Executive Vice
------------------------------------------------
President, in the absence or disability of the Chairman of the Board and the
President, shall perform the duties and exercise the powers of the President,
together with such other powers and duties as may be determined from time to
time by the Board of Directors. The other Vice Presidents, in the absence
<PAGE>
or disability of the Chairman of the Board, the President and the Executive Vice
President shall, in the order of their seniority, perform the duties and
exercise the powers of the President, and shall perform such other duties as may
be determined from time to time by the Board of Directors.
37. The Secretary. The Secretary shall attend all sessions of the Board
-------------
and all meetings of the shareholders and record all votes and minutes of all
proceedings in a book to be kept for that purpose at the principal office of the
corporation or at such other place as the Board of Directors may from time to
time determine. He shall keep at the principal office for the transaction of
the business of the corporation the original or a copy of the Bylaws amended or
otherwise altered to date, certified by him. There shall be kept at the
principal office of the corporation or at the office of the transfer agent a
share register or a duplicate share register, showing the names of the
shareholders and their addresses, the number and class of shares held by each,
the number and date of certificates issued for the same, and the number and date
of cancellation of every certificate surrendered for cancellation. He shall
give such notices as may be required by law or these Bylaws. In addition, he
shall exercise such other powers and perform such other duties as shall be
determined by the Board of Directors.
38. Assistant Secretaries. The Assistant Secretaries, in the order of
---------------------
their seniority, shall, in the absence or disability of the Secretary, perform
the duties and exercise the powers of the Secretary, and shall perform such
other duties as the Board of Directors, the Chairman of the Board or the
President shall prescribe.
39. The Treasurer. The Treasurer shall have the custody of the corporate
-------------
funds and securities and shall keep adequate and correct accounts of the
corporate properties and business transactions. He shall disburse the funds of
the corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, shall render to the Chairman of the Board, the
President and Directors, at the regular meetings of the Board of Directors or
whenever they may require it, an account of all his transactions as Treasurer
and of the financial condition of the corporation, and shall exercise such other
powers and perform such other duties as shall be determined by the Board of
Directors.
40. Assistant Treasurers. The Assistant Treasurers, in the order of their
--------------------
seniority, shall, in the absence or disability of the Treasurer, perform the
duties and exercise the powers of the Treasurer, and shall perform such other
duties as the Board of Directors, the Chairman of the Board or the President
shall prescribe.
NOTICES
41. Written Notice. Notices to directors and shareholders shall be in
--------------
writing and delivered personally or mailed to the directors or shareholders at
their addresses appearing on the books of the corporation. Notice by mail shall
be deemed to be given at the time when the same shall be mailed.
<PAGE>
Notice to directors may also be given by facsimile, telegram or any other manner
permitted by these Bylaws.
42. Consent. Whenever all parties entitled to vote at any meeting,
-------
whether of directors or shareholders, consent, either by a writing on the
records of the meeting or filed with the Secretary, or by presence at such
meeting and oral consent entered on the minutes, or by taking part in the
deliberations at such meeting without objection, the doings of such meeting
shall be as valid as if had at a meeting regularly called and noticed, and at
such meeting any business may be transacted which is not excepted from the
written consent or to the consideration of which no objection for want of notice
is made at the time, and if any meeting be irregular for want of notice or of
such consent, provided a quorum was present at such meeting, the proceedings of
said meeting may be ratified and approved and rendered likewise valid and the
irregularity or defect therein waived by a writing signed by all parties having
the right to vote at such meetings; and such consent or approval of shareholders
may be by proxy or attorney, but all such proxies and powers of attorney must be
in writing.
43. Waiver. Whenever any notice whatever is required to be given under
------
the provisions of the statutes, of the Articles of Incorporation or of these
Bylaws, a waiver thereof in writing, signed by the person or persons entitled to
said notice, whether before or after the time stated therein, shall be deemed
equivalent thereto.
MISCELLANEOUS
44. Certificate for Shares. The certificate for shares shall be numbered
----------------------
and registered as they are issued. They shall exhibit the holder's name, the
number, designation, if any, and class or series of shares represented thereby,
the par value of the shares or a statement that such shares are without par
value, and shall be signed by the President or Vice President and the Secretary
or an Assistant Secretary, or be authenticated by facsimiles of the signatures
of the President and Secretary or by facsimile of the signature of the President
and the written signature of the Secretary or an Assistant Secretary, provided,
however, every certificate for shares authenticated by a facsimile of a
signature shall be countersigned by a transfer agent or transfer clerk and be
registered by an incorporated bank or trust company as registrar of transfers
before issuance.
When the corporation is authorized to issue shares of more than one
series of any class, there shall be set forth upon the face or back of the
certificate, or the certificate shall have a statement that the corporation will
furnish to any shareholder upon request and without charge, a full or summary
statement of the designations, preferences and relative, participating, optional
or other special rights of the various classes of stock or series thereof and
the qualifications, limitations or restrictions of such rights, and, if the
corporation shall be authorized to issue only special stock, such certificate
shall set forth in full or summarize the rights of the holders of such stock.
<PAGE>
45. Registered Shareholders. The corporation shall be entitled to treat
-----------------------
the holder of record of any share or shares as the holder in fact thereof, and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person whether or not
it shall have express or other notice thereof, except as otherwise provided by
the laws of Nevada.
46. Lost Certificates. The Board of Directors may direct a new
-----------------
certificate or certificates to be issued in place of any certificate or
certificate theretofore issued by the corporation alleged to have been lost or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate for shares to be lost or destroyed. When authorizing such issue
of a new certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof, require the
owner of such lost or destroyed certificate or certificates, or his legal
representative, to advertise the same in such manner as it shall require and/or
give the corporation a bond in such sum as it may direct as indemnity against
any claim that may be made against the corporation with respect to the
certificate alleged to have been lost or destroyed.
47. Record Date and Closing of Transfer Books. The Board of Directors may
-----------------------------------------
fix a time in the future as a record for the determination of the shareholders
entitled to notice of and to vote at any meeting of shareholders or entitled to
receive any dividend or distribution, or any allotment of rights, or to exercise
rights in respect to any change, conversion, or exchange of shares. The record
date so fixed shall be not more than sixty (60) days prior to the date of the
meeting or event for the purposes for which it is fixed. When a record date is
so fixed, only shareholders of record on that date are entitled to notice of and
to vote at the meeting or to receive the dividend, distribution, or allotment of
rights, or to exercise the rights, as the case may be, notwithstanding any
transfer of any shares on the books of the corporation after the record date.
The Board of Directors may close the books of the corporation against transfers
of shares during the whole or any part of a period not more than sixty (60) days
prior to the date of shareholders' meeting, the date when the right to any
dividend, distribution, or allotment of right vests, or the effective date of
any change, conversion, or exchange of shares.
48. Representation of Shares of other Corporations. The Chairman of the
----------------------------------------------
Board, the President or any Vice President and the Secretary or Assistant
Secretary of this corporation are authorized to vote, represent, and exercise on
behalf of this corporation all rights incident to any and all shares of any
other corporation or corporations standing in the name of this corporation. The
authority herein granted to said officers to vote or represent on behalf of this
corporation any and all shares held by this corporation in any other corporation
or corporations may be exercised either by such officers in person or by any
other person authorized so to do by proxy or power of attorney duly executed by
said officers.
49. Dividends. Dividends upon the capital stock of the corporation,
---------
subject to the provisions of the Articles of Incorporation, if any, may be
declared by the Board of Directors at any
<PAGE>
regular or special meeting pursuant to law. Dividends may be paid in cash, in
property, or in shares of the capital stock, subject to the provisions of the
Articles of Incorporation.
Before payment of any dividend, there may be set aside out of any funds
of the corporation available for dividends such sum or sums as the directors
from time to time, in their absolute discretion, think proper as a reserve or
for repairing or maintaining any property of the corporation, or for such other
purpose as the directors shall think conducive to the interest of the
corporation, and the directors may modify or abolish any such reserves in the
manner in which it was created.
50. Checks. All checks or demands for money and notes of the corporation
------
shall be signed by such officer or officers or such other person or persons as
the Board of Directors may from time to time designate.
51. Fiscal Year. The fiscal year of the corporation shall be fixed by
-----------
resolution of the Board of Directors.
52. Seal. The corporate seal shall have inscribed thereon the name of the
----
corporation, the year of its incorporation and the words "Corporate Seal,
Nevada."
AMENDMENTS
53. Power of Shareholders. Except as otherwise provided in these Bylaws
---------------------
and the Articles of Incorporation, new Bylaws may be adopted or these Bylaws may
be amended or repealed by the vote or written consent of shareholders
representing not less than a majority of the issued and outstanding stock of the
corporation entitled to vote at any meeting of shareholders called for such
purpose, provided however that Paragraphs 6, 7, 12, 54, 55-60 and this Paragraph
may be amended only by vote of the holders of sixty-six and two-thirds percent
(66 2/3%) of the entire number of shares of each class, voting separately, of
the outstanding stock of the corporation (even though the right of any class to
vote is otherwise restricted or denied).
54. Power of Directors. Except as otherwise provided and subject to the
------------------
right of the shareholders to adopt, amend or repeal Bylaws as provided in
Paragraph 53, a majority of the quorum of the Board of Directors may adopt,
amend or repeal any of these Bylaws; provided, however, that Paragraphs 6, 7,
12, 53,55-60 and this Paragraph may be amended or repealed only by vote of
eighty percent (80%) of the total number of Directors and the holders of sixty-
six and two-thirds percent (66 2/3%) of the entire number of shares of each
class, voting separately, of the outstanding stock of the corporation (even
though the right of any class to vote is otherwise restricted or denied.)
<PAGE>
INDEMNIFICATION
55. Indemnification. The corporation shall, unless prohibited by Nevada
---------------
Law, indemnify any person (an "Indemnitee") who is or was involved in any manner
(including, without limitation, as a party or a witness) or is threatened to be
so involved in any threatened, pending or completed action, suit or proceeding,
whether civil, criminal, administrative, arbitrative or investigative, including
without limitation, any action, suit or proceeding brought by or in the right of
the corporation to procure a judgment in its favor (collectively, a
"Proceeding") by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request of the
corporation as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust, employee benefit plan or other entity or
enterprise, against all Expenses and Liabilities actually and reasonably
incurred by him in connection with such Proceeding. The right to
indemnification conferred in this Article shall be presumed to have been relied
upon by the directors, officers, employees and agents of the corporation and
shall be enforceable as a contract right and inure to the benefit of heirs,
executors and administrators of such individuals.
56. Indemnification Contracts. The Board of Directors is authorized on
-------------------------
behalf of the corporation, to enter into, deliver and perform agreements or
other arrangements to provide any Indemnitee with specific rights of
indemnification in addition to the rights provided hereunder to the fullest
extent permitted by Nevada law. Such agreements or arrangements may provide (i)
that the Expenses of the officers and directors incurred in defending a civil or
criminal action, suit or proceeding, must be paid by the corporation as they are
incurred and in advance of the final disposition of any such action, suit or
proceeding provided that, if required by Nevada law at the time of such advance,
the officer or director provides an undertaking to repay such amounts if it is
ultimately determined by a court of competent jurisdiction that such individual
is not entitled to be indemnified against such expenses, (ii) that the
Indemnitee shall be presumed to be entitled to indemnification under this
Article or such agreement or arrangement and the corporation shall have the
burden of proof to overcome that presumption, (iii) for procedures to be
followed by the corporation and the Indemnitee in making any determination of
entitlement to indemnification or for appeals therefrom and (iv) for insurance
or such other Financial Arrangements described in Paragraph 57 of this Article,
all as may be deemed appropriate by the Board of Directors at the time of
execution of such agreement or arrangement.
57. Insurance and Financial Arrangements. The corporation may, unless
------------------------------------
prohibited by Nevada Law, purchase and maintain insurance or make other
financial arrangements ("Financial Arrangements") on behalf of any Indemnitee
for any liability asserted against him and liability and expenses incurred by
him in his capacity as a director, officer, employee or agent, or arising out of
his status as such, whether or not the corporation has the authority to
indemnify him against such liability and expenses. Such other Financial
Arrangements may include (i) the creation of a trust fund, (ii) the
establishment of a program of self-insurance, (iii) the securing of the
corporation's obligation
<PAGE>
of indemnification by granting a security interest or other lien on any assets
of the corporation, or (iv) the establishment of a letter of credit, guaranty or
surety.
58. Definitions. For purposes of this Article:
-----------
58.1 Expenses. The word "Expenses" shall be broadly construed and,
--------
without limitation, means (i) all direct and indirect costs incurred, paid or
accrued, (ii) all attorneys' fees, retainers, court costs, transcripts, fees of
experts, witness fees, travel expenses, food and lodging expenses while
traveling, duplicating costs, printing and binding costs, telephone charges,
postage, delivery service, freight or other transportation fees and expenses,
(iii) all other disbursements and out-of-pocket expenses, (iv) amounts paid in
settlement, to the extent permitted by Nevada Law, and (v) reasonable
compensation for time spent by the Indemnitee for which he is otherwise not
compensated by the corporation or any third party, actually and reasonably
incurred in connection with either the appearance at or investigation, defense,
settlement or appeal of a Proceeding or establishing or enforcing a right to
indemnification under any agreement or arrangement, this Article, the Nevada Law
or otherwise; provided, however, that "Expenses" shall not include any judgments
or fines or excise taxes or penalties imposed under the Employee Retirement
Income Security Act of 1974, as amended ("ERISA") or other excise taxes or
penalties.
58.2 Liabilities. "Liabilities" means liabilities of any type
-----------
whatsoever, including, but not limited to, judgments or fines, ERISA or other
excise taxes and penalties, and amounts paid in settlement.
58.3 Nevada Law. "Nevada Law" means Chapter 78 of the Nevada Revised
----------
Statutes as amended and in effect from time to time or any successor or other
statues of Nevada having similar import and effect.
58.4 This Article. "This Article" means Paragraphs 55 through 60 of
------------
these Bylaws or any portion of them.
59. Power of Stockholders. Paragraphs 55 through 60, including this
---------------------
Paragraph, of these Bylaws may be amended by the stockholders only by vote of
the holders of sixty-six and two-thirds percent (66-2/3%) of the entire number
of shares of each class, voting separately, of the outstanding capital stock of
the corporation (even though the right of any class to vote is otherwise
restricted or denied); provided, however, no amendment or repeal of this Article
shall adversely affect any right of the Indemnitee existing at the time such
amendment or repeal becomes effective.
60. Power of Directors. Paragraphs 55 through 59 of this Paragraph of
------------------
these Bylaws may be amended or repealed by the Board of Directors only by vote
of eighty percent (80%) of the total number of Directors and the holders of
sixty-six and two-thirds percent (66-2/3%) of the entire number of shares of
each class, voting separately, of the outstanding capital stock of the
corporation
<PAGE>
(even though the right of any class to vote is otherwise restricted or denied);
provided, however, no amendment or repeal of this Article shall adversely affect
any right of the Indemnitee existing at the time such amendment or repeal
becomes effective.
<PAGE>
EXHIBIT 10.6
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Contract") is entered into as of June 6,
1996 (the "Effective Date") by and between COMMUNITY PSYCHIATRIC CENTERS, a
Nevada corporation ("CPC"), and JULIA KOPTA, an individual ("Executive").
R E C I T A L S
- - - - - - - -
A. CPC has employed Executive as an executive employee pursuant to prior
employment agreements, and Executive currently serves as CPC's Executive Vice
President and General Counsel.
B. CPC desires to amend the terms of the currently existing employment
agreement with Executive in order to provide her with additional benefits in
recognition of the valuable services she has rendered CPC.
C. Executive is willing and able to render the services herein provided
for, and she is willing to refrain from activities competitive with the business
of CPC on the terms set forth herein.
NOW THEREFORE, Executive and CPC mutually agree as follows:
ARTICLE ONE
DEFINITIONS
-----------
For purposes of this Contract, the following definitions shall be in
effect:
1.1 BENEFICIARY means any Person or Persons designated from time to time
-----------
by Executive pursuant to Section 6.5.1 to receive any benefits under this
Contract which may become due and payable to Executive following her death.
1.2 BOARD means the Board of Directors of CPC.
-----
1.3 CAUSE means Executive's (i) willful refusal to perform the reasonable
-----
duties of her office after reasonable written notice from the Board and
reasonable opportunity to remedy such refusal; (ii) commission of any willful
and malicious act which has a materially adverse financial impact upon CPC; or
(iii) conviction of a felony which has a materially adverse financial impact
upon CPC.
1.4 CHANGE OF CONTROL means a change of ownership or control of CPC
-----------------
required to be reported pursuant to Item 6(e) of Schedule 14A of Rule 14 of the
Exchange Act, including (without limitation) the occurrence of any of the
following events:
<PAGE>
(i) the acquisition by any Person (or any group of related
Persons acting in concert) of beneficial ownership (as defined in Rule 13d-
3 under the Exchange Act), directly or indirectly, of CPC securities
representing twenty percent (20%) or more of the total combined voting
power of CPC's then outstanding securities; or
(ii) a merger or consolidation in which securities representing
twenty percent (20%) or more of the total combined voting power of CPC's
then outstanding securities are transferred to a Person or Persons
different from the Persons holding those securities immediately prior to
such merger or consolidation; or
(iii) the sale of all or substantially all of CPC's assets in
complete liquidation or dissolution of CPC.
1.5 CODE means the Internal Revenue Code of 1986 as amended.
----
1.6 COMPETE means either directly or indirectly to own, initiate, manage,
-------
operate, join, control, advise, consult with or participate in the ownership
(other than ownership of less than five percent (5%) of the outstanding equity
or capital or profit interests in any entity), operation, management or control
of any business similar to any line of business owned or operated by CPC.
1.7 CONFIDENTIAL INFORMATION means any non-public proprietary or
------------------------
confidential information of CPC or its parent or subsidiary companies, including
(without limitation) trade secrets; information concerning professionals,
referral sources, reimbursement sources, patient and customer lists; records or
research, proposals, reports, methods, techniques, financial information and
other data, and other non-public information regarding CPC and its parent or
subsidiary companies or the existing and planned businesses, properties or
affairs of CPC and its parent or subsidiary companies.
1.8 CONSTRUCTIVE TERMINATION means the occurrence of any of the following
------------------------
events which result in Executive's subsequent resignation from employment with
CPC within the succeeding six (6) months:
(i) CPC's material breach of her Contract which is not remedied
within thirty (30) days after written notice from Executive specifying such
breach in reasonable detail; or
(ii) the assignment to Executive of any duties of materially
lesser status, dignity and character than her duties on the Effective Date,
or a material reduction in the nature or status of her responsibilities
from those in effect on the Effective Date, or CPC's relocation of
Executive's principal place of business to a site at least thirty (30)
miles from Executive's principal place of business immediately prior to
that relocation.
2
<PAGE>
1.9 CONTRACT BENEFITS means the following benefits which may become
-----------------
payable to Executive in accordance with the applicable provision of ARTICLE
FIVE, AS REDUCED DOLLAR FOR DOLLAR for all cash amounts previously paid to
Executive pursuant to ARTICLE FOUR of this Contract:
(i) a special salary continuation benefit in a dollar amount
equal to two (2) times the highest Salary level in effect for Executive at
any time during the Employment Period. This amount shall be designated the
SALARY CONTRACT BENEFIT and shall be paid at the time or times specified in
-----------------------
the applicable provisions of ARTICLE FIVE.
(ii) the maximum bonus which Executive could have achieved under
the CPC Annual Incentive Plan for the Fiscal Year in which the Contract
Payout Event occurs. This clause (ii) amount shall be paid whether or not
the performance goals established for such Fiscal Year are in fact met, and
shall be paid within sixty (60) days after the Contract Payout Event.
(iii) the maximum bonus which Executive could have achieved for
each three-year plan cycle which commences under the CPC Long-Term
Incentive Plan prior to the date of the Contract Payout Event. The clause
(iii) amount for each such plan cycle shall be paid whether or not the
performance goals for that plan cycle are in fact met, and shall be paid in
a lump sum within sixty (60) days after the Contract Payout Event.
However, the clause (iii) amount otherwise payable to Executive for any
such three-year plan cycle under the Long-Term Incentive Plan shall be
prorated to the extent the Contract Payment Event occurs less than halfway
through such plan cycle.
(iv) forgiveness of any outstanding loans CPC has made to
Executive, except (A) any loans provided to finance the exercise of her
options for shares of CPC common stock, which shall become due and payable
in accordance with their terms, and (B) the special founder recognition
award in the form of a CPC loan to Executive, which is to be forgiven over
time in accordance with the express terms of such award. The applicable
clause (iv) loan forgiveness shall occur immediately upon the Contract
Payout Event.
(v) provision of benefits to Executive or her Beneficiary
equivalent to each of the employee benefits described in paragraph 2.2.4
and 2.2.5, at CPC's sole cost and expense. These clause (v) benefits shall
be designated the EMPLOYEE CONTINUATION BENEFITS and shall be provided for
------------------------------
a two (2)-year period measured from the date of the Contract Payout Event.
CPC may, at its election, satisfy its obligation to provide the Employee
Continuation Benefits by paying Executive or her Beneficiary the lump sum
present value of those benefits within sixty (60) days after the applicable
Contract Payout Event.
3
<PAGE>
(vi) continuation of CPC's obligations to provide Executive or
her Beneficiary with the benefits described in paragraph 2.2.6, but only to
the extent those benefits are available under the plans then in effect.
Any clause (vii) benefits shall be provided until the November 30 next
following the second anniversary of the date of the Contract Payout Event.
(vii) provision of outplacement services to Executive by a
counselor paid for and selected by CPC.
(viii) continuation of CPC's obligation to pay Executive or her
Beneficiary the car allowance provided to Executive at the time of the
Contract Payout Event, for two year following that event.
1.10 CONTRACT PAYOUT EVENT means any one of the following events, as
---------------------
further detailed in ARTICLE FIVE:
(i) the termination of Executive's employment by reason of her
death or Permanent Disability;
(ii) Executive's termination of employment within six (6) months
after an event of Constructive Termination; or
(iii) the termination of Executive's employment by CPC without
Cause.
1.11 CORPORATE DIVESTITURE means one or more asset dispositions effected
---------------------
by CPC and measured on either a historical or current basis in accordance with
the following provisions:
1.11.1 HISTORICAL BASIS. A Corporate Divestiture shall be deemed to
----------------
occur on a historical basis upon the consummation of any of the following
transactions:
(i) one or more asset dispositions which involve, on a cumulative
basis, assets with an aggregate book value not less than thirty percent
(30%) of the total book value of the consolidated assets of CPC, including
its equity holdings in one or more subsidiary companies;
(ii) one or more asset dispositions which involve, on a
cumulative basis, assets which generate at least thirty percent (30%) of
the consolidated revenues of CPC; or
(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
4
<PAGE>
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition(s) shall be measured on the basis of the
book values and revenue levels in effect for the Fiscal Year ending immediately
prior to the Effective Date.
1.11.2 CURRENT BASIS. A Corporate Divestiture shall be deemed to
-------------
occur on a current basis upon the consummation of any of the following
transactions:
(i) the disposition of assets which have, on a stand-alone, non-
cumulative basis, an aggregate book value not less than thirty percent
(30%) of the total book value of the consolidated assets of CPC, including
its equity holdings in one or more subsidiary companies;
(ii) the disposition of assets which have, on a stand-alone, non-
cumulative basis, generated at least thirty percent (30%) of the
consolidated revenues of CPC; or
(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition shall be measured on the basis of the book
values and revenue levels in effect for the Fiscal Year ending immediately prior
to the date of such disposition.
1.12 EMPLOYMENT PERIOD means the period commencing on the Effective Date
-----------------
and continuing through November 30, 1999. On December 1, 1996 and on each
December 1 thereafter, the Employment Period shall automatically be extended
until the earlier to occur of (i) the third anniversary of the immediately
-------
preceding November 30 or (ii) the date on which Executive's employment with CPC
is terminated in accordance with ARTICLE FIVE.
1.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
1.14 FISCAL YEAR means CPC's annual accounting period for financial
-----------
accounting and reporting purposes. As of the Effective Date, such period begins
on December 1 each year and ends on the next following November 30.
1.15 OPTION means any option to purchase shares of CPC common stock (other
------
than the so-called "converging options" granted with an original exercise price
of $29.50 per share) granted to Executive by CPC and outstanding at the time of
their acceleration under Section 5.6.3.
1.16 PERMANENT DISABILITY means any mental or physical illness, disease or
--------------------
condition which in the opinion of a physician skilled in the specialty does or
will result in Executive's inability to perform the essential functions of her
job for a period of six (6) consecutive months or more.
5
<PAGE>
1.17 PERSON means any individual, corporation, partnership, business
------
trust, joint venture, association, joint stock company, trust, unincorporated
organization or government or agency or political subdivision thereof.
1.18 PRIOR CONTRACTS means all prior employment agreements between
---------------
Executive and CPC, whether express or implied, oral or written.
1.19 SALARY means the annual rate of base salary in effect for Executive
------
for each Fiscal Year within the Employment Period. Such Salary shall be at the
annual rate of Two Hundred Fifty Thousand Dollars ($250,000) per Fiscal Year,
subject to adjustment from time to time pursuant to Section 2.2.2. Such Salary
shall be in addition to any bonuses or other employment benefits or remuneration
paid or payable by CPC to Executive.
6
<PAGE>
ARTICLE TWO
DUTIES AND BENEFITS DURING EMPLOYMENT PERIOD
--------------------------------------------
2.1 DUTIES. During the Employment Period, Executive shall serve as the
------
Executive Vice President and General Counsel of CPC or other capacity designated
by the Chief Executive Officer or the Board, serving at the pleasure of the
Chief Executive Officer and the Board until the termination of her employment as
provided in ARTICLE FIVE. Consistent with those positions, Executive shall
devote her full productive time, energies and abilities to CPC's business,
subject always to the authority of the Chief Executive Officer and the Board.
2.2 COMPENSATION AND BENEFITS. The following compensation and benefits
-------------------------
shall be payable to Executive for her service during the Employment Period:
2.2.1 SALARY. CPC shall pay Executive her Salary in bi-weekly
------
installments in accordance with CPC's general practice and subject to legally
required withholdings.
2.2.2 SALARY REVIEW. The Salary payable to Executive for each Fiscal
-------------
Year commencing after December 1, 1996 shall be subject to annual review by the
Board. The Salary level in effect for Executive for each Fiscal Year during the
Employment Period shall not be less than the greater of (i) Two Hundred Fifty
-------
Thousand Dollars ($250,000) or (ii) the Salary level most recently determined by
the Board pursuant to this Section 2.2.2. Executive understands that the
requirement of annual review by the Board shall not be construed in any manner
as an express or implied agreement by CPC to raise her Salary.
2.2.3 EXPENSE REIMBURSEMENT. CPC shall promptly reimburse Executive,
---------------------
upon her submission to CPC of adequate documentation, for all reasonable out-of-
pocket expenses respecting entertainment, travel, meals, hotel accommodations
and other like-kind expenses, to the extent incurred by Executive in the
interests of CPC's business.
2.2.4 GROUP INSURANCE. CPC shall provide group life and long term
---------------
disability insurance and group travel and accident insurance to Executive and
group medical, dental and hospital insurance to Executive and her eligible
dependents, in each instance in the amount and on the terms made available to
other senior executives of CPC.
2.2.5 PROFIT SHARING PLAN. Executive shall be a participant in CPC's
-------------------
401(k) and Profit Sharing Plans, to the extent allowed by law and by the terms
of those plans.
2.2.6 OTHER BENEFITS. By mutual agreement with CPC, Executive may
--------------
participate in additional employment benefits made available by CPC; provided,
however, that this Contract itself shall neither prevent nor compel such
participation.
7
<PAGE>
ARTICLE THREE
COVENANTS AND CONSULTING CONTRACT
---------------------------------
3.1 COVENANTS. Executive shall be subject to the following covenants and
---------
obligations:
3.1.1 NONDISCLOSURE. While employed by CPC, Executive has had and
-------------
will have access to Confidential Information relating to CPC's present and
anticipated business operations. Executive shall at no time either during or
after her employment by CPC disclose, communicate or use any Confidential
Information which Executive learns as a result of her employment by CPC, except
to the extent required by her performance of duties for CPC, unless she obtains
CPC's prior written consent to do so.
3.1.2 RETURN OF DOCUMENTS. Upon the termination of Executive's
-------------------
employment for any reason, Executive shall promptly relinquish and return to CPC
all Confidential Information and all files, correspondence, memoranda, diaries
and other records, minutes, notes, manuals, papers and other documents and data,
however prepared or memorialized, and all copies thereof, belonging to or
relating to the business of CPC, that are in Executive's custody or control,
whether or not they contain Confidential Information.
3.1.3 NONCOMPETITION COVENANT. While employed by CPC, Executive
-----------------------
shall not Compete or plan or prepare to Compete with CPC. To the extent
obligated pursuant to the provisions of ARTICLE FIVE, Executive shall not
Compete with any CPC line of business, for a period of two (2) years following
the termination of her employment, in any state within the United States or any
shire within the United Kingdom in which (i) CPC owned or operated that line of
business either on the date her employment terminates or at any time within the
immediately preceding Fiscal Year or (ii) the Board had approved the
commencement of that line of business prior to her termination.
3.1.4 NONSOLICITATION COVENANT. For a period of two (2) years
------------------------
following the termination of Executive's employment with CPC for any reason,
Executive shall not, directly or indirectly, solicit the services of any CPC
employee, independent contractor, customer, referral or reimbursement source, or
otherwise induce or attempt to induce current CPC employees to sever their
employment relationship with CPC.
3.1.5 SCOPE AND DURATION; SEVERABILITY. CPC and Executive understand
--------------------------------
and agree that the scope and duration of the covenants contained in this Section
3.1 are reasonable both in time and geographical area and are fairly necessary
to protect the business of CPC. Such covenants shall survive the termination of
Executive's employment, except that the Section 3.1.3 noncompetition covenant
shall remain in effect following such termination of employment only to the
extent required pursuant to the provisions of ARTICLE FIVE. It is further
agreed that such covenants shall be regarded as divisible and shall be operative
as to time and geographical area to the extent that they may be made so and, if
any part of such covenants is declared invalid or unenforceable, the validity
and enforceability of the remainder shall not be affected.
8
<PAGE>
3.1.6 INJUNCTION. Executive understands and agrees that, due to the
----------
highly competitive nature of the health care industry, the breach of any
covenants set out in Section 3.1 will cause irreparable injury to CPC for which
it will have no adequate monetary or other remedy at law. Therefore, CPC shall
be entitled, in addition to such other remedies as it may have hereunder, to a
temporary restraining order and to preliminary and permanent injunctive relief
for any breach or threatened breach of the covenants without proof of actual
damages that have been or may be caused hereby. In addition, CPC shall have
available all remedies provided under state and federal statutes, rules and
regulations as well as any and all other remedies as may otherwise be
contractually or equitably available.
3.1.7 ASSIGNMENT. Except as otherwise provided to the contrary in
----------
ARTICLE FIVE, Executive agrees that the covenants contained in this Section 3.1
shall inure to the benefit of any successor or assign of CPC, with the same
force and effect as if such covenant had been made by Executive with such
successor or assign.
3.2 CONSULTING CONTRACT. Except when Executive is relieved of any
-------------------
obligation to honor her Section 3.1.3 obligations by applicable provisions of
ARTICLE FIVE, then upon the termination of Executive's employment, Executive
hereby agrees to make herself available to perform, for a period not to exceed
two (2) years following such termination of employment, such consulting and
advisory services for CPC with respect to matters relevant to the health care
industry as may from time to time be reasonably requested by the Board.
However, such services shall be subject to the following provisions and
limitations:
(a) TIME. Executive shall not be required to render more than eight
----
(8) hours of consulting services per month.
(b) OFFICE PRIVILEGES. During the consulting period, Executive shall
-----------------
be entitled to the use of appropriate office facilities and secretarial and
administrative services to facilitate the performance of her consulting
services.
3.3 CONSIDERATION FOR COVENANTS AND CONSULTING CONTRACT. Whenever this
---------------------------------------------------
Contract requires Executive to honor her obligations under Section 3.1.3
following the termination of Executive's employment, then the value of her
noncompetition covenant under Section 3.1.3 and her Consulting Contract under
Section 3.2 shall be determined by independent appraisal, and the Contract
Benefits payable to Executive under ARTICLE FIVE shall, to the extent of such
appraised value, be allocated as reasonable compensation for such covenant and
consulting agreement. The cost of any appraisal performed pursuant to the
requirements of this Section 3.3 shall be borne solely by CPC.
9
<PAGE>
3.4 SELECTION OF INDEPENDENT APPRAISER. Whenever the appraised value of
----------------------------------
Executive's obligations under Sections 3.1.3 and/or 3.2 must be determined
pursuant to Section 3.3, Executive and CPC shall, within ten (10) business days
following termination of Executive's employment, select an independent third
party (either an experienced tax counsel or a nationally recognized accounting
firm) to perform that appraisal. Should Executive and CPC be unable to mutually
agree upon the selection of such third party, then the Compensation Committee of
the Board shall designate a nationally recognized accounting firm to perform
such appraisal, provided such firm has not previously served as CPC's
independent auditors or provided prior tax advice to Executive on personal
matters.
10
<PAGE>
ARTICLE FOUR
CORPORATE DIVESTITURE BENEFITS
------------------------------
4.1 BENEFIT ENTITLEMENT. Upon each Corporate Divestiture effected during
-------------------
the Contract Term, the Board may elect, in its sole discretion, to pay Executive
a special interim payout calculated in accordance with this ARTICLE FOUR. The
total value of any and all such interim payouts shall reduce, dollar for dollar,
any payout made to Executive pursuant to ARTICLE FIVE.
4.2 INTERIM PAYOUT AMOUNT. The interim payout amount that may be paid to
---------------------
Executive in connection with any Corporate Divestiture shall be determined by
the Board, in its sole discretion.
4.3 PAYMENT. The interim payout to Executive in connection with each
-------
Corporate Divestiture shall be subject to CPC's collection of all applicable
withholding taxes.
11
<PAGE>
ARTICLE FIVE
PAYOUT OF CONTRACT BENEFITS
---------------------------
5.1 TERMINATION OF EMPLOYMENT. Executive's employment may be terminated
-------------------------
at any time by either Executive or CPC, for the reasons and with the
consequences set out below. In the event of such termination, Executive may
become entitled to payment of the Contract Benefits in accordance with the
provisions of this ARTICLE FIVE. In any event, the provisions of ARTICLE TWO
shall cease to have any force or effect upon the termination of Executive's
employment, and the compensation and benefit provisions of this ARTICLE FIVE
shall supersede and replace the provisions of ARTICLE TWO.
5.2 DEATH. If Executive dies, her employment shall terminate on the date
-----
of her death.
5.2.1 CONTRACT BENEFITS. In such event, CPC shall (i) pay the
-----------------
Beneficiary the Salary to the date of Executive's death, within sixty (60) days,
and (ii) continue to have the obligations described in Sections 2.2.4 and 2.2.5,
to the extent those benefits are available under those plans then in effect.
5.3 PERMANENT DISABILITY. Either CPC or Executive may terminate
--------------------
Executive's employment, upon thirty (30) days prior notice, by reason of her
Permanent Disability.
5.3.1 COVENANTS. Following such termination of employment, Executive
---------
shall remain subject to the covenants and obligations set forth in Section 3.1.
5.3.2 CONTRACT BENEFITS. Executive or her Beneficiary shall be
-----------------
entitled to receive payment of ninety days' Salary, less applicable withholding,
in a lump sum within sixty (60) days after the termination date of Executive's
employment under this Section 5.3. In addition, Executive or her Beneficiary
shall be entitled to receive the Contract Benefits described in Sections 1.9(ii)
through 1.9(vi) on the terms stated in those provisions, in consideration for
Executive's covenants in Section 3.1.
5.4 TERMINATION BY CPC FOR CAUSE. CPC may terminate Executive's
----------------------------
employment for Cause.
5.4.1 NO CONTRACT BENEFITS. Following the termination of Executive's
--------------------
employment for Cause, Executive shall not perform any of the services described
in Section 2.1, nor shall she have the right to receive any Contract Benefits,
but she and her eligible dependents shall be entitled, at their sole cost, to
receive continued health care coverage to which they may be entitled by law
("COBRA Coverage").
5.4.2 COVENANTS. Following such termination for Cause, Executive
---------
shall comply with her covenants and obligations under Section 3.1 (other than
Section 3.1.3). However, CPC may elect, at its sole discretion, to enforce
Executive's covenants under Section 3.1.3 and her consulting agreement under
Section 3.2 following such termination of employment. If CPC so elects, then
(i) CPC shall so notify Executive in writing, as provided in Section 6.7, within
ten (10) days following
12
<PAGE>
the date of her termination, and (ii) CPC shall, as consideration for such
Section 3.1.3 covenant and Section 3.2 consulting agreement, compensate
Executive at the Section 3.3 appraised value of such covenant and consulting
agreement, payable in equal bi-weekly installments (beginning with her
termination date) over the two (2)-year period her Section 3.1.3 covenant and
Section 3.2 consulting agreement are to remain in effect.
5.5 TERMINATION BY EXECUTIVE WITHOUT CAUSE. Executive may terminate her
--------------------------------------
employment at any time without cause, i.e., for grounds other than those
described in paragraphs 5.2, 5.3, 5.6, and 5.7.
5.5.1 NO CONTRACT BENEFITS. Following Executive's termination of
--------------------
employment under this Section 5.5, Executive shall not perform any of the
services described in Section 2.1, nor shall she receive any Contract Benefits,
but she and her eligible dependents shall be entitled, at their sole cost, to
COBRA Coverage.
5.5.2 COVENANTS. Following such termination of employment, Executive
---------
shall comply with all her covenants and obligations under Sections 3.1 and 3.2,
and CPC shall, as consideration for her Section 3.1.3 covenant and Section 3.2
consulting agreement, compensate Executive at the Section 3.3 appraised value of
such covenant and consulting agreement, payable in equal bi-weekly installments
(beginning with her termination date) over the two (2)-year period her Section
3.1.3 covenant and Section 3.2 consulting agreement are to remain in effect.
5.6 CHANGE OF CONTROL. Kopta may terminate her employment in connection
-----------------
with a Change of Control, provided such termination is, pursuant to written
notice delivered to CPC, effected at least six months and within one (1) year
after such Change in Control.
5.6.1 COVENANTS. Following such termination of employment, Kopta
---------
shall comply with all her covenants and obligations under Sections 3.1 and 3.2.
5.6.2 CONTRACT BENEFITS. Kopta shall be entitled to all of the
-----------------
Contract Benefits, with the Salary Contract Benefit to be paid in a lump sum
within sixty (60) days after the termination date of Kopta's employment.
5.6.3 VESTING OF OPTIONS AND OTHER BENEFITS. Whether or not Kopta
-------------------------------------
terminates her employment pursuant to this Section 5.6, all Options and related
stock appreciation rights outstanding at the time of the Change in Control shall
vest and become exercisable for all of the underlying shares of CPC common stock
immediately prior to the effective date of such Change of Control, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Kopta under any plan or arrangement maintained
by CPC for her benefit shall lapse immediately upon such
13
<PAGE>
effective date. Kopta may exercise her Options or related stock appreciation
rights at any time until the earlier of (i) the specified expiration date of the
--------
option term or (ii) the expiration of the twelve (12)-month period measured from
her termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.7 CONSTRUCTIVE TERMINATION. Executive may terminate her employment
------------------------
within six (6) months after any event qualifying as a Constructive Termination
under Section 1.8.
5.7.1 COVENANTS. Following such termination of employment, Executive
---------
shall not perform any further services for CPC and shall have no obligation to
perform her covenants under Section 3.1.3 or her consulting agreement under
Section 3.2.
5.7.2 CONTRACT BENEFITS. Upon Executive's termination of employment
-----------------
under ther Section 5.7, Executive shall become entitled to all of the Contract
Benefits, with the Salary Contract Benefit to be paid in a lump sum within sixty
(60) days after her termination date.
5.7.3 OPTION VESTING. If Executive terminates her employment
--------------
pursuant to Section 5.7, all Options and related stock appreciation rights
outstanding on the employment termination date shall vest and become exercisable
for all of the underlying shares of CPC common stock as of that date, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Executive under any plan or arrangement
maintained by CPC for her benefit shall lapse immediately on that date.
Executive may exercise her Options or related stock appreciation rights at any
time until the earlier of (i) the specified expiration date of the option term
-------
or (ii) the expiration of the twelve (12)-month period measured from her
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.8 TERMINATION BY CPC WITHOUT CAUSE. CPC may terminate Executive's
--------------------------------
employment at any time for reasons other than those described in Sections 5.3
and 5.4.
5.8.1 CONTRACT BENEFITS. Upon such termination of employment,
-----------------
Executive shall become entitled to all of the Contract Benefits, with the Salary
Contract Benefit to be paid in a lump sum within sixty (60) days after her
termination date.
5.8.2 COVENANTS. Following the termination of Executive's employment
---------
pursuant to this Section 5.8, Executive shall not perform any further services
for CPC and shall have no obligation to perform her covenants under Section
3.1.3 or her consulting agreement under Section 3.2.
14
<PAGE>
5.8.3 OPTION VESTING. If CPC terminates Executive's employment
--------------
pursuant to Section 5.8, all Options and related stock appreciation rights
outstanding on the date of termination of Executive's employment shall vest and
become exercisable for all of the underlying shares of CPC common stock on that
date, and any restrictions or forfeiture provisions applicable to any shares of
CPC common stock or stock units awarded to Executive under any plan or
arrangement maintained by CPC for her benefit shall lapse immediately on that
date. Executive may exercise her Options or related stock appreciation rights
at any time until the earlier of (i) the specified expiration date of the option
--------
term or (ii) the expiration of the twelve (12)-month period measured from her
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.11 WITHHOLDING. All payments made to Executive or her Beneficiary
-----------
pursuant to the provisions of this ARTICLE FIVE shall be subject to withholding
by CPC of such amounts for income and other payroll taxes and deductions as CPC
may reasonably determine should be withheld pursuant to applicable laws and
regulations.
15
<PAGE>
ARTICLE SIX
MISCELLANEOUS PROVISIONS
------------------------
6.1 ENTIRE CONTRACT. This Contract contains the entire agreement and
---------------
understanding between Executive and CPC regarding the terms and conditions of
her employment with CPC and the benefits to which she may become entitled upon
the termination of such employment, and supersedes and replaces all Prior
Contracts as well as any other negotiations, understandings and representations
(other than the express terms of the special founder recognition award/loan made
to Executive) regarding the terms and conditions of her employment or
termination benefits. This Contract may not be modified except by a writing
executed by both Executive and CPC.
6.2 ASSIGNMENT BY CPC. This Contract shall be binding upon and shall
-----------------
inure to the benefit of any successors or assigns of CPC. As used in this
Contract, the term "successor" includes any Person or group of Persons acting in
concert which at any time in any form or manner acquires all or substantially
all of the assets or business or more than twenty percent (20%) of the
outstanding voting securities of CPC.
6.3 NONASSIGNABILITY BY EXECUTIVE. Neither Executive nor any Beneficiary
-----------------------------
shall assign, transfer, pledge or hypothecate any rights, interests or benefits
created hereunder or hereby. Any attempt to do so contrary to the provisions of
this Contract, and any levy of any attachment, execution or similar process
created thereby, shall be null and void and without effect. CPC shall have no
obligation to provide any payments or other consideration to any Beneficiary
until and unless CPC has received such Beneficiary's written assurance that she
or she will comply with the provisions of this Section 6.3.
6.4 SPENDTHRIFT PROVISION. Prior to actual receipt by Executive or her
---------------------
Beneficiary (as the case may be), no right or benefit under this Contract and,
without limitation, no interest in any payment hereunder shall be:
(i) anticipated, assigned or encumbered or subject to any
creditor's claim or subject to execution, attachment or similar legal
process; or
(ii) applied on behalf of or subject to the debts, contracts,
liabilities or torts of the Person entitled or who might become entitled to
such benefits or subject to the claims of any creditor of any such Person.
6.5 BENEFICIARY; RECIPIENTS OF PAYMENTS; DESIGNATION OF BENEFICIARY.
---------------------------------------------------------------
Payment of all Salary, the proceeds of the Policy, and all other compensation
and benefits payable by CPC pursuant to this Contract shall be made only to
Executive during her lifetime or, in the event of her death, to her Beneficiary.
If Executive has not designated a Beneficiary, then the payments shall be made
to her estate. CPC shall have no obligation to make payments to any person not
designated as a Beneficiary pursuant to Section 6.5.1. Furthermore, CPC shall
have no obligation to make any payments to Executive's Beneficiary until and
unless that Beneficiary has agreed in writing to be bound by the provisions of
this Section 6.5. Executive or her estate or Beneficiary, as the case may be,
shall discharge, defend and hold CPC harmless from any liability for payments
actually made to
16
<PAGE>
such Beneficiary or to Executive's estate if no Beneficiary has been designated.
6.5.1 DESIGNATION OF BENEFICIARY. Executive may designate and from
--------------------------
time to time change the Beneficiary only through a written, signed designation
to CPC's Corporate Secretary pursuant to Section 6.7.
6.5.2 ELECTIONS. Whenever this Contract provides for any election
---------
exercisable by Executive or her Beneficiary, that election shall be made solely
by the person or persons receiving payments pursuant to this Contract at that
time and shall be made in that Person's sole discretion and without regard to
the effect of such decision on subsequent payment recipients. Such decision
shall be final and binding on all subsequent recipients of payments.
6.6 ARBITRATION. Any controversy, question or dispute arising out of or
-----------
relating to the construction, application or enforcement of this Contract shall
be settled by arbitration. Among the disputes which are to be settled by
arbitration are any claims by Executive that the termination of her employment
breached any express or implied contract of employment.
6.6.1 APPOINTMENT OF ARBITRATORS. Within five (5) days after the
--------------------------
delivery of written notice of any such dispute from one party to the other, CPC
and Executive shall each appoint one person to hear and determine the dispute,
and, if the two persons so selected are unable to agree on its resolution within
ten (10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.
6.6.2 FINALITY. The determination of a majority of the arbitrators
--------
shall be final and conclusive on Executive and CPC.
6.6.3 PROCEDURE; FORUM; WAIVER OF JURY TRIAL. The arbitration shall
--------------------------------------
be conducted in accordance with the then-current Model Employment Arbitration
Procedures of the American Arbitration Association in the State of Nevada.
Executive and CPC each hereby waive any right to trial by jury of any such
dispute. Notwithstanding the foregoing provisions, however, nothing in this
Contract shall limit or waive any right of either Executive or CPC to obtain
injunctive relief in any court of competent jurisdiction.
6.6.4 DISCOVERY. The parties shall be entitled to avail themselves
---------
only of discovery procedures as the arbitrators permit.
6.6.5 DISPUTES NOT GOVERNED BY CONTRACT TO ARBITRATE. The parties
----------------------------------------------
have not agreed to arbitrate any dispute except for those disputes arising out
of or relating to the construction, application or enforcement of this Contract.
For example, and without limitation, the parties have not agreed to arbitrate
wage-hour, workers' compensation, defamation, or public policy discharge claims,
or claims arising under state or federal employment discrimination laws. Both
parties expressly reserve all rights and remedies available to them, at law or
in equity, to resolve any dispute which they have not expressly agreed in this
Contract to arbitrate.
6.7 NOTICES. Any notice provided for by this Contract and any other
-------
notice, demand,
17
<PAGE>
designation or communication which either party may wish to send to the other
("Notices") shall be in writing and shall be deemed to have been properly given
if served by (i) personal delivery, (ii) registered or certified mail, return
receipt requested in a sealed envelope, postage and other charges prepaid, or
(iii) telegram, telecopy, telex, facsimile or other similar form of transmission
followed by delivery pursuant to clause (i) or (ii), in each case addressed to
the party for which such notice is intended as follows:
If to CPC: Community Psychiatric Centers
Board of Directors
6600 West Charleston Boulevard
Las Vegas, Nevada 89102
FAX: (702) 259-3650
If to Executive: Julia Kopta
8236 Paseo Vista Drive
Las Vegas, Nevada 89128
FAX: (702) 233-6149
6.7.1 CHANGE OF ADDRESS. Any address or name specified in this
-----------------
Section 6.7 may be changed by a Notice given by the addressee to the other party
in accordance with this Section 6.7.
6.7.2 EFFECTIVE DATE OF NOTICE. All Notices shall be given and
------------------------
effective as of the date of personal delivery thereof or the date of receipt set
forth on the return receipt. The inability to deliver because of a changed
address of which no Notice was given or rejection or other refusal to accept any
Notice shall be deemed to be the receipt of the Notice as of the date of such
inability to deliver or rejection or refusal to accept.
6.8 GOVERNING LAW; JURISDICTION. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of Nevada, without
reference to its choice of law rules.
6.9 SEVERABILITY. In the event any provision or provisions of this
------------
Contract is or are held invalid, the remaining provisions of this Contract shall
not be affected thereby. In the event that any provision is held to be overly
broad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and the intentions of the parties hereunder.
18
<PAGE>
6.10 ATTORNEY'S FEES AND EXPENSES. If any arbitration proceeding is
----------------------------
commenced following Executive's termination of employment, the prevailing party
shall be entitled to recover its reasonable attorney's fees, costs and all other
expenses incurred in connection with the arbitration.
IN WITNESS WHEREOF, this Employment Contract has been executed and
delivered by the parties as of the date first set forth above.
/s/ Julia Kopta
------------------------------------
JULIA KOPTA
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Dana Shires
--------------------------------
Dana Shires, M.D.
Chairman, Compensation
Committee
By: /s/ Richard L. Conte
--------------------------------
Richard L. Conte
Chairman, President
and Chief Executive Officer
19
<PAGE>
EXHIBIT 10.7
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Contract") is entered into as of June 6,
1996 (the "Effective Date") by and between COMMUNITY PSYCHIATRIC CENTERS, a
Nevada corporation ("CPC"), and WENDY L. SIMPSON an individual ("Executive").
R E C I T A L S
- - - - - - - -
A. CPC has employed Executive as an executive employee pursuant to prior
employment agreements, and Executive currently serves as CPC's Executive Vice
President and Chief Financial Officer.
B. CPC desires to amend the terms of the currently existing employment
agreement with Executive in order to provide her with additional benefits in
recognition of the valuable services she has rendered CPC.
C. Executive is willing and able to render the services herein provided
for, and she is willing to refrain from activities competitive with the business
of CPC on the terms set forth herein.
NOW THEREFORE, Executive and CPC mutually agree as follows:
ARTICLE ONE
DEFINITIONS
-----------
For purposes of this Contract, the following definitions shall be in
effect:
1.1 BENEFICIARY means any Person or Persons designated from time to time
-----------
by Executive pursuant to Section 6.5.1 to receive any benefits under this
Contract which may become due and payable to Executive following her death.
1.2 BOARD means the Board of Directors of CPC.
-----
1.3 CAUSE means Executive's (i) willful refusal to perform the reasonable
-----
duties of her office after reasonable written notice from the Board and
reasonable opportunity to remedy such refusal; (ii) commission of any willful
and malicious act which has a materially adverse financial impact upon CPC; or
(iii) conviction of a felony which has a materially adverse financial impact
upon CPC.
1.4 CHANGE OF CONTROL means a change of ownership or control of CPC
-----------------
required to be reported pursuant to Item 6(e) of Schedule 14A of Rule 14 of the
Exchange Act, including (without limitation) the occurrence of any of the
following events:
<PAGE>
(i) the acquisition by any Person (or any group of related
Persons acting in concert) of beneficial ownership (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of CPC securities
representing twenty percent (20%) or more of the total combined voting
power of CPC's then outstanding securities; or
(ii) a merger or consolidation in which securities representing
twenty percent (20%) or more of the total combined voting power of CPC's
then outstanding securities are transferred to a Person or Persons
different from the Persons holding those securities immediately prior to
such merger or consolidation; or
(iii) the sale of all or substantially all of CPC's assets in
complete liquidation or dissolution of CPC.
1.5 CODE means the Internal Revenue Code of 1986 as amended.
----
1.6 COMPETE means either directly or indirectly to own, initiate, manage,
-------
operate, join, control, advise, consult with or participate in the ownership
(other than ownership of less than five percent (5%) of the outstanding equity
or capital or profit interests in any entity), operation, management or control
of any business similar to any line of business owned or operated by CPC.
1.7 CONFIDENTIAL INFORMATION means any non-public proprietary or
------------------------
confidential information of CPC or its parent or subsidiary companies, including
(without limitation) trade secrets; information concerning professionals,
referral sources, reimbursement sources, patient and customer lists; records or
research, proposals, reports, methods, techniques, financial information and
other data, and other non-public information regarding CPC and its parent or
subsidiary companies or the existing and planned businesses, properties or
affairs of CPC and its parent or subsidiary companies.
1.8 CONSTRUCTIVE TERMINATION means the occurrence of any of the following
------------------------
events which result in Executive's subsequent resignation from employment with
CPC within the succeeding six (6) months:
(i) CPC's material breach of her Contract which is not remedied
within thirty (30) days after written notice from Executive specifying such
breach in reasonable detail; or
(ii) the assignment to Executive of any duties of materially
lesser status, dignity and character than her duties on the Effective Date,
or a material reduction in the nature or status of her responsibilities
from those in effect on the Effective Date, or CPC's relocation of
Executive's principal place of business to a site at least thirty (30)
miles from Executive's principal place of business immediately prior to
that relocation.
2
<PAGE>
1.9 CONTRACT BENEFITS means the following benefits which may become
-----------------
payable to Executive in accordance with the applicable provision of ARTICLE
FIVE, AS REDUCED DOLLAR FOR DOLLAR for all cash amounts previously paid to
Executive pursuant to ARTICLE FOUR of this Contract:
(i) a special salary continuation benefit in a dollar amount
equal to two (2) times the highest Salary level in effect for Executive at
any time during the Employment Period. This amount shall be designated the
SALARY CONTRACT BENEFIT and shall be paid at the time or times specified in
-----------------------
the applicable provisions of ARTICLE FIVE.
(ii) the maximum bonus which Executive could have achieved under
the CPC Annual Incentive Plan for the Fiscal Year in which the Contract
Payout Event occurs. This clause (ii) amount shall be paid whether or not
the performance goals established for such Fiscal Year are in fact met, and
shall be paid within sixty (60) days after the Contract Payout Event.
(iii) the maximum bonus which Executive could have achieved for
each three-year plan cycle which commences under the CPC Long-Term
Incentive Plan prior to the date of the Contract Payout Event. The clause
(iii) amount for each such plan cycle shall be paid whether or not the
performance goals for that plan cycle are in fact met, and shall be paid in
a lump sum within sixty (60) days after the Contract Payout Event.
However, the clause (iii) amount otherwise payable to Executive for any
such three-year plan cycle under the Long-Term Incentive Plan shall be
prorated to the extent the Contract Payment Event occurs less than halfway
through such plan cycle.
(iv) forgiveness of any outstanding loans CPC has made to
Executive, except (A) any loans provided to finance the exercise of her
options for shares of CPC common stock, which shall become due and payable
in accordance with their terms, and (B) the special founder recognition
award in the form of a CPC loan to Executive, which is to be forgiven over
time in accordance with the express terms of such award. The applicable
clause (iv) loan forgiveness shall occur immediately upon the Contract
Payout Event.
(v) provision of benefits to Executive or her Beneficiary
equivalent to each of the employee benefits described in paragraph 2.2.4
and 2.2.5, at CPC's sole cost and expense. These clause (v) benefits shall
be designated the EMPLOYEE CONTINUATION BENEFITS and shall be provided for
------------------------------
a two (2)-year period measured from the date of the Contract Payout Event.
CPC may, at its election, satisfy its obligation to provide the Employee
Continuation Benefits by paying Executive or her Beneficiary the lump sum
present value of those benefits within sixty (60) days after the applicable
Contract Payout Event.
3
<PAGE>
(vi) continuation of CPC's obligations to provide Executive or
her Beneficiary with the benefits described in paragraph 2.2.6, but only to
the extent those benefits are available under the plans then in effect.
Any clause (vii) benefits shall be provided until the November 30 next
following the second anniversary of the date of the Contract Payout Event.
(vii) provision of outplacement services to Executive by a
counselor paid for and selected by CPC.
(viii) continuation of CPC's obligation to pay Executive or her
Beneficiary the car allowance provided to Executive at the time of the
Contract Payout Event, for two year following that event.
1.10 CONTRACT PAYOUT EVENT means any one of the following events, as
---------------------
further detailed in ARTICLE FIVE:
(i) the termination of Executive's employment by reason of her
death or Permanent Disability;
(ii) Executive's termination of employment within six (6) months
after an event of Constructive Termination; or
(iii) the termination of Executive's employment by CPC without
Cause.
1.11 CORPORATE DIVESTITURE means one or more asset dispositions effected
---------------------
by CPC and measured on either a historical or current basis in accordance with
the following provisions:
1.11.1 HISTORICAL BASIS. A Corporate Divestiture shall be deemed to
----------------
occur on a historical basis upon the consummation of any of the following
transactions:
(i) one or more asset dispositions which involve, on a cumulative
basis, assets with an aggregate book value not less than thirty percent
(30%) of the total book value of the consolidated assets of CPC, including
its equity holdings in one or more subsidiary companies;
(ii) one or more asset dispositions which involve, on a
cumulative basis, assets which generate at least thirty percent (30%) of
the consolidated revenues of CPC; or
(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
4
<PAGE>
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition(s) shall be measured on the basis of the
book values and revenue levels in effect for the Fiscal Year ending immediately
prior to the Effective Date.
1.11.2 CURRENT BASIS. A Corporate Divestiture shall be deemed to
-------------
occur on a current basis upon the consummation of any of the following
transactions:
(i) the disposition of assets which have, on a stand-alone, non-
cumulative basis, an aggregate book value not less than thirty percent
(30%) of the total book value of the consolidated assets of CPC, including
its equity holdings in one or more subsidiary companies;
(ii) the disposition of assets which have, on a stand-alone, non-
cumulative basis, generated at least thirty percent (30%) of the
consolidated revenues of CPC; or
(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition shall be measured on the basis of the book
values and revenue levels in effect for the Fiscal Year ending immediately prior
to the date of such disposition.
1.12 EMPLOYMENT PERIOD means the period commencing on the Effective Date
-----------------
and continuing through November 30, 1999. On December 1, 1996 and on each
December 1 thereafter, the Employment Period shall automatically be extended
until the earlier to occur of (i) the third anniversary of the immediately
-------
preceding November 30 or (ii) the date on which Executive's employment with CPC
is terminated in accordance with ARTICLE FIVE.
1.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
1.14 FISCAL YEAR means CPC's annual accounting period for financial
-----------
accounting and reporting purposes. As of the Effective Date, such period begins
on December 1 each year and ends on the next following November 30.
1.15 OPTION means any option to purchase shares of CPC common stock (other
------
than the so-called "converging options" granted with an original exercise price
of $29.50 per share) granted to Executive by CPC and outstanding at the time of
their acceleration under Section 5.6.3.
1.16 PERMANENT DISABILITY means any mental or physical illness, disease or
--------------------
condition which in the opinion of a physician skilled in the specialty does or
will result in Executive's inability to perform the essential functions of her
job for a period of six (6) consecutive months or more.
5
<PAGE>
1.17 PERSON means any individual, corporation, partnership, business
------
trust, joint venture, association, joint stock company, trust, unincorporated
organization or government or agency or political subdivision thereof.
1.18 PRIOR CONTRACTS means all prior employment agreements between
---------------
Executive and CPC, whether express or implied, oral or written.
1.19 SALARY means the annual rate of base salary in effect for Executive
------
for each Fiscal Year within the Employment Period. Such Salary shall be at the
annual rate of Three Hundred Dollars ($300,000) per Fiscal Year, subject to
adjustment from time to time pursuant to Section 2.2.2. Such Salary shall be in
addition to any bonuses or other employment benefits or remuneration paid or
payable by CPC to Executive.
6
<PAGE>
ARTICLE TWO
DUTIES AND BENEFITS DURING EMPLOYMENT PERIOD
--------------------------------------------
2.1 DUTIES. During the Employment Period, Executive shall serve as the
------
Executive Vice President and Chief Financial Officer of CPC or other capacity
designated by the Chief Executive Officer or the Board, serving at the pleasure
of the Chief Executive Officer and the Board until the termination of her
employment as provided in ARTICLE FIVE. Consistent with those positions,
Executive shall devote her full productive time, energies and abilities to CPC's
business, subject always to the authority of the Chief Executive Officer and the
Board.
2.2 COMPENSATION AND BENEFITS. The following compensation and benefits
-------------------------
shall be payable to Executive for her service during the Employment Period:
2.2.1 SALARY. CPC shall pay Executive her Salary in bi-weekly
------
installments in accordance with CPC's general practice and subject to legally
required withholdings.
2.2.2 SALARY REVIEW. The Salary payable to Executive for each Fiscal
-------------
Year commencing after December 1, 1996 shall be subject to annual review by the
Board. The Salary level in effect for Executive for each Fiscal Year during the
Employment Period shall not be less than the greater of (i) Three Hundred
-------
Thousand Dollars ($300,000) or (ii) the Salary level most recently determined by
the Board pursuant to this Section 2.2.2. Executive understands that the
requirement of annual review by the Board shall not be construed in any manner
as an express or implied agreement by CPC to raise her Salary.
2.2.3 EXPENSE REIMBURSEMENT. CPC shall promptly reimburse Executive,
---------------------
upon her submission to CPC of adequate documentation, for all reasonable out-of-
pocket expenses respecting entertainment, travel, meals, hotel accommodations
and other like-kind expenses, to the extent incurred by Executive in the
interests of CPC's business.
2.2.4 GROUP INSURANCE. CPC shall provide group life and long term
---------------
disability insurance and group travel and accident insurance to Executive and
group medical, dental and hospital insurance to Executive and her eligible
dependents, in each instance in the amount and on the terms made available to
other senior executives of CPC.
2.2.5 PROFIT SHARING PLAN. Executive shall be a participant in CPC's
-------------------
401(k) and Profit Sharing Plans, to the extent allowed by law and by the terms
of those plans.
2.2.6 OTHER BENEFITS. By mutual agreement with CPC, Executive may
--------------
participate in additional employment benefits made available by CPC; provided,
however, that this Contract itself shall neither prevent nor compel such
participation.
7
<PAGE>
ARTICLE THREE
COVENANTS AND CONSULTING Contract
---------------------------------
3.1 COVENANTS. Executive shall be subject to the following covenants and
---------
obligations:
3.1.1 NONDISCLOSURE. While employed by CPC, Executive has had and
-------------
will have access to Confidential Information relating to CPC's present and
anticipated business operations. Executive shall at no time either during or
after her employment by CPC disclose, communicate or use any Confidential
Information which Executive learns as a result of her employment by CPC, except
to the extent required by her performance of duties for CPC, unless she obtains
CPC's prior written consent to do so.
3.1.2 RETURN OF DOCUMENTS. Upon the termination of Executive's
-------------------
employment for any reason, Executive shall promptly relinquish and return to CPC
all Confidential Information and all files, correspondence, memoranda, diaries
and other records, minutes, notes, manuals, papers and other documents and data,
however prepared or memorialized, and all copies thereof, belonging to or
relating to the business of CPC, that are in Executive's custody or control,
whether or not they contain Confidential Information.
3.1.3 NONCOMPETITION COVENANT. While employed by CPC, Executive
-----------------------
shall not Compete or plan or prepare to Compete with CPC. To the extent
obligated pursuant to the provisions of ARTICLE FIVE, Executive shall not
Compete with any CPC line of business, for a period of two (2) years following
the termination of her employment, in any state within the United States or any
shire within the United Kingdom in which (i) CPC owned or operated that line of
business either on the date her employment terminates or at any time within the
immediately preceding Fiscal Year or (ii) the Board had approved the
commencement of that line of business prior to her termination.
3.1.4 NONSOLICITATION COVENANT. For a period of two (2) years
------------------------
following the termination of Executive's employment with CPC for any reason,
Executive shall not, directly or indirectly, solicit the services of any CPC
employee, independent contractor, customer, referral or reimbursement source, or
otherwise induce or attempt to induce current CPC employees to sever their
employment relationship with CPC.
3.1.5 SCOPE AND DURATION; SEVERABILITY. CPC and Executive understand
--------------------------------
and agree that the scope and duration of the covenants contained in this Section
3.1 are reasonable both in time and geographical area and are fairly necessary
to protect the business of CPC. Such covenants shall survive the termination of
Executive's employment, except that the Section 3.1.3 noncompetition covenant
shall remain in effect following such termination of employment only to the
extent required pursuant to the provisions of ARTICLE FIVE. It is further
agreed that such covenants shall be regarded as divisible and shall be operative
as to time and geographical area to the extent that they may be made so and, if
any part of such covenants is declared invalid or unenforceable, the validity
and enforceability of the remainder shall not be affected.
8
<PAGE>
3.1.6 INJUNCTION. Executive understands and agrees that, due to the
----------
highly competitive nature of the health care industry, the breach of any
covenants set out in Section 3.1 will cause irreparable injury to CPC for which
it will have no adequate monetary or other remedy at law. Therefore, CPC shall
be entitled, in addition to such other remedies as it may have hereunder, to a
temporary restraining order and to preliminary and permanent injunctive relief
for any breach or threatened breach of the covenants without proof of actual
damages that have been or may be caused hereby. In addition, CPC shall have
available all remedies provided under state and federal statutes, rules and
regulations as well as any and all other remedies as may otherwise be
contractually or equitably available.
3.1.7 ASSIGNMENT. Except as otherwise provided to the contrary in
----------
ARTICLE FIVE, Executive agrees that the covenants contained in this Section 3.1
shall inure to the benefit of any successor or assign of CPC, with the same
force and effect as if such covenant had been made by Executive with such
successor or assign.
3.2 CONSULTING CONTRACT. Except when Executive is relieved of any
-------------------
obligation to honor her Section 3.1.3 obligations by applicable provisions of
ARTICLE FIVE, then upon the termination of Executive's employment, Executive
hereby agrees to make herself available to perform, for a period not to exceed
two (2) years following such termination of employment, such consulting and
advisory services for CPC with respect to matters relevant to the health care
industry as may from time to time be reasonably requested by the Board.
However, such services shall be subject to the following provisions and
limitations:
(a) TIME. Executive shall not be required to render more than eight
----
(8) hours of consulting services per month.
(b) OFFICE PRIVILEGES. During the consulting period, Executive shall
-----------------
be entitled to the use of appropriate office facilities and secretarial and
administrative services to facilitate the performance of her consulting
services.
3.3 CONSIDERATION FOR COVENANTS AND CONSULTING CONTRACT. Whenever this
---------------------------------------------------
Contract requires Executive to honor her obligations under Section 3.1.3
following the termination of Executive's employment, then the value of her
noncompetition covenant under Section 3.1.3 and her Consulting Contract under
Section 3.2 shall be determined by independent appraisal, and the Contract
Benefits payable to Executive under ARTICLE FIVE shall, to the extent of such
appraised value, be allocated as reasonable compensation for such covenant and
consulting agreement. The cost of any appraisal performed pursuant to the
requirements of this Section 3.3 shall be borne solely by CPC.
9
<PAGE>
3.4 SELECTION OF INDEPENDENT APPRAISER. Whenever the appraised value of
----------------------------------
Executive's obligations under Sections 3.1.3 and/or 3.2 must be determined
pursuant to Section 3.3, Executive and CPC shall, within ten (10) business days
following termination of Executive's employment, select an independent third
party (either an experienced tax counsel or a nationally recognized accounting
firm) to perform that appraisal. Should Executive and CPC be unable to mutually
agree upon the selection of such third party, then the Compensation Committee of
the Board shall designate a nationally recognized accounting firm to perform
such appraisal, provided such firm has not previously served as CPC's
independent auditors or provided prior tax advice to Executive on personal
matters.
10
<PAGE>
ARTICLE FOUR
CORPORATE DIVESTITURE BENEFITS
------------------------------
4.1 BENEFIT ENTITLEMENT. Upon each Corporate Divestiture effected during
-------------------
the Contract Term, the Board may elect, in its sole discretion, to pay Executive
a special interim payout calculated in accordance with this ARTICLE FOUR. The
total value of any and all such interim payouts shall reduce, dollar for dollar,
any payout made to Executive pursuant to ARTICLE FIVE.
4.2 INTERIM PAYOUT AMOUNT. The interim payout amount that may be paid to
---------------------
Executive in connection with any Corporate Divestiture shall be determined by
the Board, in its sole discretion.
4.3 PAYMENT. The interim payout to Executive in connection with each
-------
Corporate Divestiture shall be subject to CPC's collection of all applicable
withholding taxes.
11
<PAGE>
ARTICLE FIVE
PAYOUT OF CONTRACT BENEFITS
---------------------------
5.1 TERMINATION OF EMPLOYMENT. Executive's employment may be terminated
-------------------------
at any time by either Executive or CPC, for the reasons and with the
consequences set out below. In the event of such termination, Executive may
become entitled to payment of the Contract Benefits in accordance with the
provisions of this ARTICLE FIVE. In any event, the provisions of ARTICLE TWO
shall cease to have any force or effect upon the termination of Executive's
employment, and the compensation and benefit provisions of this ARTICLE FIVE
shall supersede and replace the provisions of ARTICLE TWO.
5.2 DEATH. If Executive dies, her employment shall terminate on the date
-----
of her death.
5.2.1 CONTRACT BENEFITS. In such event, CPC shall (i) pay the
-----------------
Beneficiary the Salary to the date of Executive's death, within sixty (60) days,
and (ii) continue to have the obligations described in Sections 2.2.4 and 2.2.5,
to the extent those benefits are available under those plans then in effect.
5.3 PERMANENT DISABILITY. Either CPC or Executive may terminate
--------------------
Executive's employment, upon thirty (30) days prior notice, by reason of her
Permanent Disability.
5.3.1 COVENANTS. Following such termination of employment, Executive
---------
shall remain subject to the covenants and obligations set forth in Section 3.1.
5.3.2 CONTRACT BENEFITS. Executive or her Beneficiary shall be
-----------------
entitled to receive payment of ninety days' Salary, less applicable withholding,
in a lump sum within sixty (60) days after the termination date of Executive's
employment under this Section 5.3. In addition, Executive or her Beneficiary
shall be entitled to receive the Contract Benefits described in Sections 1.9(ii)
through 1.9(vi) on the terms stated in those provisions, in consideration for
Executive's covenants in Section 3.1.
5.4 TERMINATION BY CPC FOR CAUSE. CPC may terminate Executive's
----------------------------
employment for Cause.
5.4.1 NO CONTRACT BENEFITS. Following the termination of Executive's
--------------------
employment for Cause, Executive shall not perform any of the services described
in Section 2.1, nor shall she have the right to receive any Contract Benefits,
but she and her eligible dependents shall be entitled, at their sole cost, to
receive continued health care coverage to which they may be entitled by law
("COBRA Coverage").
5.4.2 COVENANTS. Following such termination for Cause, Executive
---------
shall comply with her covenants and obligations under Section 3.1 (other than
Section 3.1.3). However, CPC may elect, at its sole discretion, to enforce
Executive's covenants under Section 3.1.3 and her consulting agreement under
Section 3.2 following such termination of employment. If CPC so elects, then
(i) CPC shall so notify Executive in writing, as provided in Section 6.7, within
ten (10) days following
12
<PAGE>
the date of her termination, and (ii) CPC shall, as consideration for such
Section 3.1.3 covenant and Section 3.2 consulting agreement, compensate
Executive at the Section 3.3 appraised value of such covenant and consulting
agreement, payable in equal bi-weekly installments (beginning with her
termination date) over the two (2)-year period her Section 3.1.3 covenant and
Section 3.2 consulting agreement are to remain in effect.
5.5 TERMINATION BY EXECUTIVE WITHOUT CAUSE. Executive may terminate her
--------------------------------------
employment at any time without cause, i.e., for grounds other than those
described in paragraphs 5.2, 5.3, 5.6, and 5.7.
5.5.1 NO CONTRACT BENEFITS. Following Executive's termination of
--------------------
employment under this Section 5.5, Executive shall not perform any of the
services described in Section 2.1, nor shall she receive any Contract Benefits,
but she and her eligible dependents shall be entitled, at their sole cost, to
COBRA Coverage.
5.5.2 COVENANTS. Following such termination of employment, Executive
---------
shall comply with all her covenants and obligations under Sections 3.1 and 3.2,
and CPC shall, as consideration for her Section 3.1.3 covenant and Section 3.2
consulting agreement, compensate Executive at the Section 3.3 appraised value of
such covenant and consulting agreement, payable in equal bi-weekly installments
(beginning with her termination date) over the two (2)-year period her Section
3.1.3 covenant and Section 3.2 consulting agreement are to remain in effect.
5.6 CHANGE OF CONTROL. Simpson may terminate her employment in connection
-----------------
with a Change of Control, provided such termination is, pursuant to written
notice delivered to CPC, effected at least six months and within one (1) year
after such Change in Control.
5.6.1 COVENANTS. Following such termination of employment, Simpson
---------
shall comply with all her covenants and obligations under Sections 3.1 and 3.2.
5.6.2 CONTRACT BENEFITS. Simpson shall be entitled to all of the
-----------------
Contract Benefits, with the Salary Contract Benefit to be paid in a lump sum
within sixty (60) days after the termination date of Simpson's employment.
5.6.3 VESTING OF OPTIONS AND OTHER BENEFITS. Whether or not Simpson
-------------------------------------
terminates her employment pursuant to this Section 5.6, all Options and related
stock appreciation rights outstanding at the time of the Change in Control shall
vest and become exercisable for all of the underlying shares of CPC common stock
immediately prior to the effective date of such Change of Control, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Simpson under any plan or arrangement maintained
by CPC for her benefit shall lapse immediately upon
13
<PAGE>
such effective date. Simpson may exercise her Options or related stock
appreciation rights at any time until the earlier of (i) the specified
--------
expiration date of the option term or (ii) the expiration of the twelve (12)-
month period measured from her termination date, and any Options or stock
appreciation rights not exercised prior to the applicable expiration date shall
lapse.
5.7 CONSTRUCTIVE TERMINATION. Executive may terminate her employment
------------------------
within six (6) months after any event qualifying as a Constructive Termination
under Section 1.8.
5.7.1 COVENANTS. Following such termination of employment, Executive
---------
shall not perform any further services for CPC and shall have no obligation to
perform her covenants under Section 3.1.3 or her consulting agreement under
Section 3.2.
5.7.2 CONTRACT BENEFITS. Upon Executive's termination of employment
-----------------
under this Section 5.7, Executive shall become entitled to all of the Contract
Benefits, with the Salary Contract Benefit to be paid in a lump sum within sixty
(60) days after her termination date.
5.7.3 OPTION VESTING. If Executive terminates her employment
--------------
pursuant to Section 5.7, all Options and related stock appreciation rights
outstanding on the employment termination date shall vest and become exercisable
for all of the underlying shares of CPC common stock as of that date, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Executive under any plan or arrangement
maintained by CPC for her benefit shall lapse immediately on that date.
Executive may exercise her Options or related stock appreciation rights at any
time until the earlier of (i) the specified expiration date of the option term
-------
or (ii) the expiration of the twelve (12)-month period measured from her
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.8 TERMINATION BY CPC WITHOUT CAUSE. CPC may terminate Executive's
--------------------------------
employment at any time for reasons other than those described in Sections 5.3
and 5.4.
5.8.1 CONTRACT BENEFITS. Upon such termination of employment,
-----------------
Executive shall become entitled to all of the Contract Benefits, with the Salary
Contract Benefit to be paid in a lump sum within sixty (60) days after her
termination date.
5.8.2 COVENANTS. Following the termination of Executive's employment
---------
pursuant to this Section 5.8, Executive shall not perform any further services
for CPC and shall have no obligation to perform her covenants under Section
3.1.3 or her consulting agreement under Section 3.2.
14
<PAGE>
5.8.3 OPTION VESTING. If CPC terminates Executive's employment
--------------
pursuant to Section 5.8, all Options and related stock appreciation rights
outstanding on the date of termination of Executive's employment shall vest and
become exercisable for all of the underlying shares of CPC common stock on that
date, and any restrictions or forfeiture provisions applicable to any shares of
CPC common stock or stock units awarded to Executive under any plan or
arrangement maintained by CPC for her benefit shall lapse immediately on that
date. Executive may exercise her Options or related stock appreciation rights
at any time until the earlier of (i) the specified expiration date of the option
--------
term or (ii) the expiration of the twelve (12)-month period measured from her
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.11 WITHHOLDING. All payments made to Executive or her Beneficiary
-----------
pursuant to the provisions of this ARTICLE FIVE shall be subject to withholding
by CPC of such amounts for income and other payroll taxes and deductions as CPC
may reasonably determine should be withheld pursuant to applicable laws and
regulations.
15
<PAGE>
ARTICLE SIX
MISCELLANEOUS PROVISIONS
------------------------
6.1 ENTIRE CONTRACT. This Contract contains the entire agreement and
---------------
understanding between Executive and CPC regarding the terms and conditions of
her employment with CPC and the benefits to which she may become entitled upon
the termination of such employment, and supersedes and replaces all Prior
Contracts as well as any other negotiations, understandings and representations
(other than the express terms of the special founder recognition award/loan made
to Executive) regarding the terms and conditions of her employment or
termination benefits. This Contract may not be modified except by a writing
executed by both Executive and CPC.
6.2 ASSIGNMENT BY CPC. This Contract shall be binding upon and shall
-----------------
inure to the benefit of any successors or assigns of CPC. As used in this
Contract, the term "successor" includes any Person or group of Persons acting in
concert which at any time in any form or manner acquires all or substantially
all of the assets or business or more than twenty percent (20%) of the
outstanding voting securities of CPC.
6.3 NONASSIGNABILITY BY EXECUTIVE. Neither Executive nor any Beneficiary
-----------------------------
shall assign, transfer, pledge or hypothecate any rights, interests or benefits
created hereunder or hereby. Any attempt to do so contrary to the provisions of
this Contract, and any levy of any attachment, execution or similar process
created thereby, shall be null and void and without effect. CPC shall have no
obligation to provide any payments or other consideration to any Beneficiary
until and unless CPC has received such Beneficiary's written assurance that she
will comply with the provisions of this Section 6.3.
6.4 SPENDTHRIFT PROVISION. Prior to actual receipt by Executive or her
---------------------
Beneficiary (as the case may be), no right or benefit under this Contract and,
without limitation, no interest in any payment hereunder shall be:
(i) anticipated, assigned or encumbered or subject to any
creditor's claim or subject to execution, attachment or similar legal
process; or
(ii) applied on behalf of or subject to the debts, contracts,
liabilities or torts of the Person entitled or who might become entitled to
such benefits or subject to the claims of any creditor of any such Person.
6.5 BENEFICIARY; RECIPIENTS OF PAYMENTS; DESIGNATION OF BENEFICIARY.
---------------------------------------------------------------
Payment of all Salary, the proceeds of the Policy, and all other compensation
and benefits payable by CPC pursuant to this Contract shall be made only to
Executive during her lifetime or, in the event of her death, to her Beneficiary.
If Executive has not designated a Beneficiary, then the payments shall be made
to her estate. CPC shall have no obligation to make payments to any person not
designated as a Beneficiary pursuant to Section 6.5.1. Furthermore, CPC shall
have no obligation to make any payments to Executive's Beneficiary until and
unless that Beneficiary has agreed in writing to be bound by the provisions of
this Section 6.5. Executive or her estate or Beneficiary, as the case may be,
shall discharge, defend and hold CPC harmless from any liability for payments
actually made to
16
<PAGE>
such Beneficiary or to Executive's estate if no Beneficiary has been designated.
6.5.1 DESIGNATION OF BENEFICIARY. Executive may designate and from
--------------------------
time to time change the Beneficiary only through a written, signed designation
to CPC's Corporate Secretary pursuant to Section 6.7.
6.5.2 ELECTIONS. Whenever this Contract provides for any election
---------
exercisable by Executive or her Beneficiary, that election shall be made solely
by the person or persons receiving payments pursuant to this Contract at that
time and shall be made in that Person's sole discretion and without regard to
the effect of such decision on subsequent payment recipients. Such decision
shall be final and binding on all subsequent recipients of payments.
6.6 ARBITRATION. Any controversy, question or dispute arising out of or
-----------
relating to the construction, application or enforcement of this Contract shall
be settled by arbitration. Among the disputes which are to be settled by
arbitration are any claims by Executive that the termination of her employment
breached any express or implied contract of employment.
6.6.1 APPOINTMENT OF ARBITRATORS. Within five (5) days after the
--------------------------
delivery of written notice of any such dispute from one party to the other, CPC
and Executive shall each appoint one person to hear and determine the dispute,
and, if the two persons so selected are unable to agree on its resolution within
ten (10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.
6.6.2 FINALITY. The determination of a majority of the arbitrators
--------
shall be final and conclusive on Executive and CPC.
6.6.3 PROCEDURE; FORUM; WAIVER OF JURY TRIAL. The arbitration shall
--------------------------------------
be conducted in accordance with the then-current Model Employment Arbitration
Procedures of the American Arbitration Association in the State of Nevada.
Executive and CPC each hereby waive any right to trial by jury of any such
dispute. Notwithstanding the foregoing provisions, however, nothing in this
Contract shall limit or waive any right of either Executive or CPC to obtain
injunctive relief in any court of competent jurisdiction.
6.6.4 DISCOVERY. The parties shall be entitled to avail themselves
---------
only of discovery procedures as the arbitrators permit.
6.6.5 DISPUTES NOT GOVERNED BY CONTRACT TO ARBITRATE. The parties
----------------------------------------------
have not agreed to arbitrate any dispute except for those disputes arising out
of or relating to the construction, application or enforcement of this Contract.
For example, and without limitation, the parties have not agreed to arbitrate
wage-hour, workers' compensation, defamation, or public policy discharge claims,
or claims arising under state or federal employment discrimination laws. Both
parties expressly reserve all rights and remedies available to them, at law or
in equity, to resolve any dispute which they have not expressly agreed in this
Contract to arbitrate.
6.7 NOTICES. Any notice provided for by this Contract and any other
-------
notice, demand,
17
<PAGE>
designation or communication which either party may wish to send to the other
("Notices") shall be in writing and shall be deemed to have been properly given
if served by (i) personal delivery, (ii) registered or certified mail, return
receipt requested in a sealed envelope, postage and other charges prepaid, or
(iii) telegram, telecopy, telex, facsimile or other similar form of transmission
followed by delivery pursuant to clause (i) or (ii), in each case addressed to
the party for which such notice is intended as follows:
If to CPC: Community Psychiatric Centers
Board of Directors
6600 West Charleston Boulevard
Las Vegas, Nevada 89102
FAX: (702) 259-3650
If to Executive: Wendy L. Simpson
1704 Wincanton Drive
Las Vegas, Nevada 89134
FAX: (702) 242-3385
6.7.1 CHANGE OF ADDRESS. Any address or name specified in this
-----------------
Section 6.7 may be changed by a Notice given by the addressee to the other party
in accordance with this Section 6.7.
6.7.2 EFFECTIVE DATE OF NOTICE. All Notices shall be given and
------------------------
effective as of the date of personal delivery thereof or the date of receipt set
forth on the return receipt. The inability to deliver because of a changed
address of which no Notice was given or rejection or other refusal to accept any
Notice shall be deemed to be the receipt of the Notice as of the date of such
inability to deliver or rejection or refusal to accept.
6.8 GOVERNING LAW; JURISDICTION. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of Nevada, without
reference to its choice of law rules.
6.9 SEVERABILITY. In the event any provision or provisions of this
------------
Contract is or are held invalid, the remaining provisions of this Contract shall
not be affected thereby. In the event that any provision is held to be overly
broad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and the intentions of the parties hereunder.
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<PAGE>
6.10 ATTORNEY'S FEES AND EXPENSES. If any arbitration proceeding is
----------------------------
commenced following Executive's termination of employment, the prevailing party
shall be entitled to recover its reasonable attorney's fees, costs and all other
expenses incurred in connection with the arbitration.
IN WITNESS WHEREOF, this Employment Contract has been executed and
delivered by the parties as of the date first set forth above.
/s/ Wendy L. Simpson
------------------------------------
WENDY L. SIMPSON
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Dana Shires
-------------------------------
Dana Shires, M.D.
Chairman, Compensation
Committee
By: /s/ Richard L. Conte
-------------------------------
Richard L. Conte
Chairman, President
and Chief Executive Officer
19
<PAGE>
EXHIBIT 10.8
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Contract") is entered into as of June 6,
1996 (the "Effective Date") by and between COMMUNITY PSYCHIATRIC CENTERS, a
Nevada corporation ("CPC"), and RONALD L. OOLEY an individual ("Executive").
R E C I T A L S
- - - - - - - -
A. CPC has employed Executive as an executive employee pursuant to prior
employment agreements, and Executive currently serves as CPC's Executive Vice
President - Administration.
B. CPC desires to amend the terms of the currently existing employment
agreement with Executive in order to provide him with additional benefits in
recognition of the valuable services he has rendered CPC.
C. Executive is willing and able to render the services herein provided
for, and he is willing to refrain from activities competitive with the business
of CPC on the terms set forth herein.
NOW THEREFORE, Executive and CPC mutually agree as follows:
ARTICLE ONE
DEFINITIONS
-----------
For purposes of this Contract, the following definitions shall be in
effect:
1.1 BENEFICIARY means any Person or Persons designated from time to time
-----------
by Executive pursuant to Section 6.5.1 to receive any benefits under this
Contract which may become due and payable to Executive following his death.
1.2 BOARD means the Board of Directors of CPC.
-----
1.3 CAUSE means Executive's (i) willful refusal to perform the reasonable
-----
duties of his office after reasonable written notice from the Board and
reasonable opportunity to remedy such refusal; (ii) commission of any willful
and malicious act which has a materially adverse financial impact upon CPC; or
(iii) conviction of a felony which has a materially adverse financial impact
upon CPC.
1.4 CHANGE OF CONTROL means a change of ownership or control of CPC
-----------------
required to be reported pursuant to Item 6(e) of Schedule 14A of Rule 14 of the
Exchange Act, including (without limitation) the occurrence of any of the
following events:
<PAGE>
(i) the acquisition by any Person (or any group of related
Persons acting in concert) of beneficial ownership (as defined in Rule 13d-
3 under the Exchange Act), directly or indirectly, of CPC securities
representing twenty percent (20%) or more of the total combined voting
power of CPC's then outstanding securities; or
(ii) a merger or consolidation in which securities representing
twenty percent (20%) or more of the total combined voting power of CPC's
then outstanding securities are transferred to a Person or Persons
different from the Persons holding those securities immediately prior to
such merger or consolidation; or
(iii) the sale of all or substantially all of CPC's assets in
complete liquidation or dissolution of CPC.
1.5 CODE means the Internal Revenue Code of 1986 as amended.
----
1.6 COMPETE means either directly or indirectly to own, initiate, manage,
-------
operate, join, control, advise, consult with or participate in the ownership
(other than ownership of less than five percent (5%) of the outstanding equity
or capital or profit interests in any entity), operation, management or control
of any business similar to any line of business owned or operated by CPC.
1.7 CONFIDENTIAL INFORMATION means any non-public proprietary or
------------------------
confidential information of CPC or its parent or subsidiary companies, including
(without limitation) trade secrets; information concerning professionals,
referral sources, reimbursement sources, patient and customer lists; records or
research, proposals, reports, methods, techniques, financial information and
other data, and other non-public information regarding CPC and its parent or
subsidiary companies or the existing and planned businesses, properties or
affairs of CPC and its parent or subsidiary companies.
1.8 CONSTRUCTIVE TERMINATION means the occurrence of any of the following
------------------------
events which result in Executive's subsequent resignation from employment with
CPC within the succeeding six (6) months:
(i) CPC's material breach of this Contract which is not
remedied within thirty (30) days after written notice from Executive
specifying such breach in reasonable detail; or
(ii) the assignment to Executive of any duties of materially
lesser status, dignity and character than his duties on the Effective Date,
or a material reduction in the nature or status of his responsibilities
from those in effect on the Effective Date, or CPC's relocation of
Executive's principal place of business to a site at least thirty (30)
miles from Executive's principal place of business immediately prior to
that relocation.
2
<PAGE>
1.9 CONTRACT BENEFITS means the following benefits which may become
-----------------
payable to Executive in accordance with the applicable provision of ARTICLE
FIVE, as reduced dollar for dollar for all cash amounts previously paid to
Executive pursuant to ARTICLE FOUR of this Contract:
(i) a special salary continuation benefit in a dollar amount
equal to two (2) times the highest Salary level in effect for Executive at
any time during the Employment Period. This amount shall be designated the
SALARY CONTRACT BENEFIT and shall be paid at the time or times specified in
-----------------------
the applicable provisions of ARTICLE FIVE.
(ii) the maximum bonus which Executive could have achieved under
the CPC Annual Incentive Plan for the Fiscal Year in which the Contract
Payout Event occurs. This clause (ii) amount shall be paid whether or not
the performance goals established for such Fiscal Year are in fact met, and
shall be paid within sixty (60) days after the Contract Payout Event.
(iii) the maximum bonus which Executive could have achieved for
each three-year plan cycle which commences under the CPC Long-Term
Incentive Plan prior to the date of the Contract Payout Event. The clause
(iii) amount for each such plan cycle shall be paid whether or not the
performance goals for that plan cycle are in fact met, and shall be paid in
a lump sum within sixty (60) days after the Contract Payout Event. However,
the clause (iii) amount otherwise payable to Executive for any such three-
year plan cycle under the Long-Term Incentive Plan shall be prorated to the
extent the Contract Payment Event occurs less than halfway through such
plan cycle.
(iv) forgiveness of any outstanding loans CPC has made to
Executive, except (A) any loans provided to finance the exercise of his
options for shares of CPC common stock, which shall become due and payable
in accordance with their terms, and (B) the special founder recognition
award in the form of a CPC loan to Executive, which is to be forgiven over
time in accordance with the express terms of such award. The applicable
clause (iv) loan forgiveness shall occur immediately upon the Contract
Payout Event.
(v) provision of benefits to Executive or his Beneficiary
equivalent to each of the employee benefits described in paragraph 2.2.4
and 2.2.5, at CPC's sole cost and expense. These clause (v) benefits shall
be designated the EMPLOYEE CONTINUATION BENEFITS and shall be provided for
------------------------------
a two (2)-year period measured from the date of the Contract Payout Event.
CPC may, at its election, satisfy its obligation to provide the Employee
Continuation Benefits by paying Executive or his Beneficiary the lump sum
present value of those benefits within sixty (60) days after the applicable
Contract Payout Event.
3
<PAGE>
(vi) continuation of CPC's obligations to provide Executive or
his Beneficiary with the benefits described in paragraph 2.2.6, but only to
the extent those benefits are available under the plans then in effect.
Any clause (vii) benefits shall be provided until the November 30 next
following the second anniversary of the date of the Contract Payout Event.
(vii) provision of outplacement services to Executive by a
counselor paid for and selected by CPC.
(viii) continuation of CPC's obligation to pay Executive or his
Beneficiary the car allowance provided to Executive at the time of the
Contract Payout Event, for two year following that event.
1.10 CONTRACT PAYOUT EVENT means any one of the following events, as
---------------------
further detailed in ARTICLE FIVE:
(i) the termination of Executive's employment by reason of his
death or Permanent Disability;
(ii) Executive's termination of employment within six (6) months
after an event of Constructive Termination; or
(iii) the termination of Executive's employment by CPC without
Cause.
1.11 CORPORATE DIVESTITURE means one or more asset dispositions effected
---------------------
by CPC and measured on either a historical or current basis in accordance with
the following provisions:
1.11.1 HISTORICAL BASIS. A Corporate Divestiture shall be deemed to
----------------
occur on a historical basis upon the consummation of any of the following
transactions:
(i) one or more asset dispositions which involve, on a
cumulative basis, assets with an aggregate book value not less than thirty
percent (30%) of the total book value of the consolidated assets of CPC,
including its equity holdings in one or more subsidiary companies;
(ii) one or more asset dispositions which involve, on a
cumulative basis, assets which generate at least thirty percent (30%) of
the consolidated revenues of CPC; or
(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
4
<PAGE>
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition(s) shall be measured on the basis of the
book values and revenue levels in effect for the Fiscal Year ending immediately
prior to the Effective Date.
1.11.2 CURRENT BASIS. A Corporate Divestiture shall be deemed to
-------------
occur on a current basis upon the consummation of any of the following
transactions:
(i) the disposition of assets which have, on a stand-alone,
non-cumulative basis, an aggregate book value not less than thirty percent
(30%) of the total book value of the consolidated assets of CPC, including
its equity holdings in one or more subsidiary companies;
(ii) the disposition of assets which have, on a stand-alone,
non-cumulative basis, generated at least thirty percent (30%) of the
consolidated revenues of CPC; or
(iii) the disposition of any division or subsidiary of CPC which
represents a stand-alone business operation of CPC.
For purposes of any clause (i) or clause (ii) calculation, the assets or
revenues subject to the disposition shall be measured on the basis of the book
values and revenue levels in effect for the Fiscal Year ending immediately prior
to the date of such disposition.
1.12 EMPLOYMENT PERIOD means the period commencing on the Effective Date
-----------------
and continuing through November 30, 1999. On December 1, 1996 and on each
December 1 thereafter, the Employment Period shall automatically be extended
until the earlier to occur of (i) the third anniversary of the immediately
-------
preceding November 30 or (ii) the date on which Executive's employment with CPC
is terminated in accordance with ARTICLE FIVE.
1.13 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
1.14 FISCAL YEAR means CPC's annual accounting period for financial
-----------
accounting and reporting purposes. As of the Effective Date, such period begins
on December 1 each year and ends on the next following November 30.
1.15 OPTION means any option to purchase shares of CPC common stock (other
------
than the so-called "converging options" granted with an original exercise price
of $29.50 per share) granted to Executive by CPC and outstanding at the time of
their acceleration under Section 5.6.3.
1.16 PERMANENT DISABILITY means any mental or physical illness, disease or
--------------------
condition which in the opinion of a physician skilled in the specialty does or
will result in Executive's inability to perform the essential functions of his
job for a period of six (6) consecutive months or more.
5
<PAGE>
1.17 PERSON means any individual, corporation, partnership, business
------
trust, joint venture, association, joint stock company, trust, unincorporated
organization or government or agency or political subdivision thereof.
1.18 PRIOR CONTRACTS means all prior employment agreements between
---------------
Executive and CPC, whether express or implied, oral or written.
1.19 SALARY means the annual rate of base salary in effect for Executive
------
for each Fiscal Year within the Employment Period. Such Salary shall be at the
annual rate of Two Hundred Fifty Thousand Dollars ($250,000) per Fiscal Year,
subject to adjustment from time to time pursuant to Section 2.2.2. Such Salary
shall be in addition to any bonuses or other employment benefits or remuneration
paid or payable by CPC to Executive.
6
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ARTICLE TWO
DUTIES AND BENEFITS DURING EMPLOYMENT PERIOD
--------------------------------------------
2.1 DUTIES. During the Employment Period, Executive shall serve as the
------
Executive Vice President - Administration of CPC or other capacity designated by
the Chief Executive Officer or the Board, serving at the pleasure of the Chief
Executive Officer and the Board until the termination of his employment as
provided in ARTICLE FIVE. Consistent with those positions, Executive shall
devote his full productive time, energies and abilities to CPC's business,
subject always to the authority of the Chief Executive Officer and the Board.
2.2 COMPENSATION AND BENEFITS. The following compensation and benefits
-------------------------
shall be payable to Executive for his service during the Employment Period:
2.2.1 SALARY. CPC shall pay Executive his Salary in bi-weekly
------
installments in accordance with CPC's general practice and subject to legally
required withholdings.
2.2.2 SALARY REVIEW. The Salary payable to Executive for each Fiscal
-------------
Year commencing after December 1, 1996 shall be subject to annual review by the
Board. The Salary level in effect for Executive for each Fiscal Year during the
Employment Period shall not be less than the greater of (i) Two Hundred Fifty
-------
Thousand Dollars ($250,000) or (ii) the Salary level most recently determined by
the Board pursuant to this Section 2.2.2. Executive understands that the
requirement of annual review by the Board shall not be construed in any manner
as an express or implied agreement by CPC to raise his Salary.
2.2.3 EXPENSE REIMBURSEMENT. CPC shall promptly reimburse Executive,
---------------------
upon his submission to CPC of adequate documentation, for all reasonable out-of-
pocket expenses respecting entertainment, travel, meals, hotel accommodations
and other like-kind expenses, to the extent incurred by Executive in the
interests of CPC's business.
2.2.4 GROUP INSURANCE. CPC shall provide group life and long term
---------------
disability insurance and group travel and accident insurance to Executive and
group medical, dental and hospital insurance to Executive and his eligible
dependents, in each instance in the amount and on the terms made available to
other senior executives of CPC.
2.2.5 PROFIT SHARING PLAN. Executive shall be a participant in CPC's
-------------------
401(k) and Profit Sharing Plans, to the extent allowed by law and by the terms
of those plans.
2.2.6 OTHER BENEFITS. By mutual agreement with CPC, Executive may
--------------
participate in additional employment benefits made available by CPC; provided,
however, that this Contract itself shall neither prevent nor compel such
participation.
7
<PAGE>
ARTICLE THREE
COVENANTS AND CONSULTING CONTRACT
---------------------------------
3.1 COVENANTS. Executive shall be subject to the following covenants and
---------
obligations:
3.1.1 NONDISCLOSURE. While employed by CPC, Executive has had and
-------------
will have access to Confidential Information relating to CPC's present and
anticipated business operations. Executive shall at no time either during or
after his employment by CPC disclose, communicate or use any Confidential
Information which Executive learns as a result of his employment by CPC, except
to the extent required by his performance of duties for CPC, unless he obtains
CPC's prior written consent to do so.
3.1.2 RETURN OF DOCUMENTS. Upon the termination of Executive's
-------------------
employment for any reason, Executive shall promptly relinquish and return to CPC
all Confidential Information and all files, correspondence, memoranda, diaries
and other records, minutes, notes, manuals, papers and other documents and data,
however prepared or memorialized, and all copies thereof, belonging to or
relating to the business of CPC, that are in Executive's custody or control,
whether or not they contain Confidential Information.
3.1.3 NONCOMPETITION COVENANT. While employed by CPC, Executive
-----------------------
shall not Compete or plan or prepare to Compete with CPC. To the extent
obligated pursuant to the provisions of ARTICLE FIVE, Executive shall not
Compete with any CPC line of business, for a period of two (2) years following
the termination of his employment, in any state within the United States or any
shire within the United Kingdom in which (i) CPC owned or operated that line of
business either on the date his employment terminates or at any time within the
immediately preceding Fiscal Year or (ii) the Board had approved the
commencement of that line of business prior to his termination.
3.1.4 NONSOLICITATION COVENANT. For a period of two (2) years
------------------------
following the termination of Executive's employment with CPC for any reason,
Executive shall not, directly or indirectly, solicit the services of any CPC
employee, independent contractor, customer, referral or reimbursement source, or
otherwise induce or attempt to induce current CPC employees to sever their
employment relationship with CPC.
3.1.5 SCOPE AND DURATION; SEVERABILITY. CPC and Executive understand
--------------------------------
and agree that the scope and duration of the covenants contained in this Section
3.1 are reasonable both in time and geographical area and are fairly necessary
to protect the business of CPC. Such covenants shall survive the termination of
Executive's employment, except that the Section 3.1.3 noncompetition covenant
shall remain in effect following such termination of employment only to the
extent required pursuant to the provisions of ARTICLE FIVE. It is further agreed
that such covenants shall be regarded as divisible and shall be operative as to
time and geographical area to the extent that they may be made so and, if any
part of such covenants is declared invalid or unenforceable, the validity and
enforceability of the remainder shall not be affected.
8
<PAGE>
3.1.6 INJUNCTION. Executive understands and agrees that, due to the
----------
highly competitive nature of the health care industry, the breach of any
covenants set out in Section 3.1 will cause irreparable injury to CPC for which
it will have no adequate monetary or other remedy at law. Therefore, CPC shall
be entitled, in addition to such other remedies as it may have hereunder, to a
temporary restraining order and to preliminary and permanent injunctive relief
for any breach or threatened breach of the covenants without proof of actual
damages that have been or may be caused hereby. In addition, CPC shall have
available all remedies provided under state and federal statutes, rules and
regulations as well as any and all other remedies as may otherwise be
contractually or equitably available.
3.1.7 ASSIGNMENT. Except as otherwise provided to the contrary in
----------
ARTICLE FIVE, Executive agrees that the covenants contained in this Section 3.1
shall inure to the benefit of any successor or assign of CPC, with the same
force and effect as if such covenant had been made by Executive with such
successor or assign.
3.2 CONSULTING CONTRACT. Except when Executive is relieved of any
-------------------
obligation to honor his Section 3.1.3 obligations by applicable provisions of
ARTICLE FIVE, then upon the termination of Executive's employment, Executive
hereby agrees to make himself available to perform, for a period not to exceed
two (2) years following such termination of employment, such consulting and
advisory services for CPC with respect to matters relevant to the health care
industry as may from time to time be reasonably requested by the Board.
However, such services shall be subject to the following provisions and
limitations:
(a) TIME. Executive shall not be required to render more than eight
----
(8) hours of consulting services per month.
(b) OFFICE PRIVILEGES. During the consulting period, Executive shall
-----------------
be entitled to the use of appropriate office facilities and secretarial and
administrative services to facilitate the performance of his consulting
services.
3.3 CONSIDERATION FOR COVENANTS AND CONSULTING CONTRACT. Whenever this
---------------------------------------------------
Contract requires Executive to honor his obligations under Section 3.1.3
following the termination of Executive's employment, then the value of his
noncompetition covenant under Section 3.1.3 and his Consulting Contract under
Section 3.2 shall be determined by independent appraisal, and the Contract
Benefits payable to Executive under ARTICLE FIVE shall, to the extent of such
appraised value, be allocated as reasonable compensation for such covenant and
consulting agreement. The cost of any appraisal performed pursuant to the
requirements of this Section 3.3 shall be borne solely by CPC.
9
<PAGE>
3.4 SELECTION OF INDEPENDENT APPRAISER. Whenever the appraised value of
----------------------------------
Executive's obligations under Sections 3.1.3 and/or 3.2 must be determined
pursuant to Section 3.3, Executive and CPC shall, within ten (10) business days
following termination of Executive's employment, select an independent third
party (either an experienced tax counsel or a nationally recognized accounting
firm) to perform that appraisal. Should Executive and CPC be unable to mutually
agree upon the selection of such third party, then the Compensation Committee of
the Board shall designate a nationally recognized accounting firm to perform
such appraisal, provided such firm has not previously served as CPC's
independent auditors or provided prior tax advice to Executive on personal
matters.
10
<PAGE>
ARTICLE FOUR
CORPORATE DIVESTITURE BENEFITS
------------------------------
4.1 BENEFIT ENTITLEMENT. Upon each Corporate Divestiture effected during
-------------------
the Contract Term, the Board may elect, in its sole discretion, to pay Executive
a special interim payout calculated in accordance with this ARTICLE FOUR. The
total value of any and all such interim payouts shall reduce, dollar for dollar,
any payout made to Executive pursuant to ARTICLE FIVE.
4.2 INTERIM PAYOUT AMOUNT. The interim payout amount that may be paid to
---------------------
Executive in connection with any Corporate Divestiture shall be determined by
the Board, in its sole discretion.
4.3 PAYMENT. The interim payout to Executive in connection with each
-------
Corporate Divestiture shall be subject to CPC's collection of all applicable
withholding taxes.
11
<PAGE>
ARTICLE FIVE
PAYOUT OF CONTRACT BENEFITS
---------------------------
5.1 TERMINATION OF EMPLOYMENT. Executive's employment may be terminated
-------------------------
at any time by either Executive or CPC, for the reasons and with the
consequences set out below. In the event of such termination, Executive may
become entitled to payment of the Contract Benefits in accordance with the
provisions of this ARTICLE FIVE. In any event, the provisions of ARTICLE TWO
shall cease to have any force or effect upon the termination of Executive's
employment, and the compensation and benefit provisions of this ARTICLE FIVE
shall supersede and replace the provisions of ARTICLE TWO.
5.2 DEATH. If Executive dies, his employment shall terminate on the date
-----
of his death.
5.2.1 CONTRACT BENEFITS. In such event, CPC shall (i) pay the
-----------------
Beneficiary the Salary to the date of Executive's death, within sixty (60) days,
and (ii) continue to have the obligations described in Sections 2.2.4 and 2.2.5,
to the extent those benefits are available under those plans then in effect.
5.3 PERMANENT DISABILITY. Either CPC or Executive may terminate
--------------------
Executive's employment, upon thirty (30) days prior notice, by reason of his
Permanent Disability.
5.3.1 COVENANTS. Following such termination of employment, Executive
---------
shall remain subject to the covenants and obligations set forth in Section 3.1.
5.3.2 CONTRACT BENEFITS. Executive or his Beneficiary shall be
-----------------
entitled to receive payment of ninety days' Salary, less applicable withholding,
in a lump sum within sixty (60) days after the termination date of Executive's
employment under this Section 5.3. In addition, Executive or his Beneficiary
shall be entitled to receive the Contract Benefits described in Sections 1.9(ii)
through 1.9(vi) on the terms stated in those provisions, in consideration for
Executive's covenants in Section 3.1.
5.4 TERMINATION BY CPC FOR CAUSE. CPC may terminate Executive's
----------------------------
employment for Cause.
5.4.1 NO CONTRACT BENEFITS. Following the termination of Executive's
--------------------
employment for Cause, Executive shall not perform any of the services described
in Section 2.1, nor shall he have the right to receive any Contract Benefits,
but he and his eligible dependents shall be entitled, at their sole cost, to
receive continued health care coverage to which they may be entitled by law
("COBRA Coverage").
5.4.2 COVENANTS. Following such termination for Cause, Executive
---------
shall comply with his covenants and obligations under Section 3.1 (other than
Section 3.1.3). However, CPC may elect, at its sole discretion, to enforce
Executive's covenants under Section 3.1.3 and his consulting agreement under
Section 3.2 following such termination of employment. If CPC so elects, then
(i) CPC shall so notify Executive in writing, as provided in Section 6.7, within
ten (10) days following
12
<PAGE>
the date of his termination, and (ii) CPC shall, as consideration for such
Section 3.1.3 covenant and Section 3.2 consulting agreement, compensate
Executive at the Section 3.3 appraised value of such covenant and consulting
agreement, payable in equal bi-weekly installments (beginning with his
termination date) over the two (2)-year period his Section 3.1.3 covenant and
Section 3.2 consulting agreement are to remain in effect.
5.5 TERMINATION BY EXECUTIVE WITHOUT CAUSE. Executive may terminate his
--------------------------------------
employment at any time without cause, i.e., for grounds other than those
described in paragraphs 5.2, 5.3, 5.6, and 5.7.
5.5.1 NO CONTRACT BENEFITS. Following Executive's termination of
--------------------
employment under this Section 5.5, Executive shall not perform any of the
services described in Section 2.1, nor shall he receive any Contract Benefits,
but he and his eligible dependents shall be entitled, at their sole cost, to
COBRA Coverage.
5.5.2 COVENANTS. Following such termination of employment, Executive
---------
shall comply with all his covenants and obligations under Sections 3.1 and 3.2,
and CPC shall, as consideration for his Section 3.1.3 covenant and Section 3.2
consulting agreement, compensate Executive at the Section 3.3 appraised value of
such covenant and consulting agreement, payable in equal bi-weekly installments
(beginning with his termination date) over the two (2)-year period his Section
3.1.3 covenant and Section 3.2 consulting agreement are to remain in effect.
5.6 CHANGE OF CONTROL. Ooley may terminate his employment in connection
-----------------
with a Change of Control, provided such termination is, pursuant to written
notice delivered to CPC, effected at least six months and within one (1) year
after such Change in Control.
5.6.1 COVENANTS. Following such termination of employment, Ooley
---------
shall comply with all his covenants and obligations under Sections 3.1 and 3.2.
5.6.2 CONTRACT BENEFITS. Ooley shall be entitled to all of the
-----------------
Contract Benefits, with the Salary Contract Benefit to be paid in a lump sum
within sixty (60) days after the termination date of Ooley's employment.
5.6.3 VESTING OF OPTIONS AND OTHER BENEFITS. Whether or not Ooley
-------------------------------------
terminates his employment pursuant to this Section 5.6, all Options and related
stock appreciation rights outstanding at the time of the Change in Control shall
vest and become exercisable for all of the underlying shares of CPC common stock
immediately prior to the effective date of such Change of Control, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Ooley under any plan or arrangement maintained
by CPC for his benefit shall lapse immediately upon such
13
<PAGE>
effective date. Ooley may exercise his Options or related stock appreciation
rights at any time until the earlier of (i) the specified expiration date of the
--------
option term or (ii) the expiration of the twelve (12)-month period measured from
his termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.7 CONSTRUCTIVE TERMINATION. Executive may terminate his employment
------------------------
within six (6) months after any event qualifying as a Constructive Termination
under Section 1.8.
5.7.1 COVENANTS. Following such termination of employment, Executive
---------
shall not perform any further services for CPC and shall have no obligation to
perform his covenants under Section 3.1.3 or his consulting agreement under
Section 3.2.
5.7.2 CONTRACT BENEFITS. Upon Executive's termination of employment
-----------------
under this Section 5.7, Executive shall become entitled to all of the Contract
Benefits, with the Salary Contract Benefit to be paid in a lump sum within sixty
(60) days after his termination date.
5.7.3 OPTION VESTING. If Executive terminates his employment
--------------
pursuant to Section 5.7, all Options and related stock appreciation rights
outstanding on the employment termination date shall vest and become exercisable
for all of the underlying shares of CPC common stock as of that date, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Executive under any plan or arrangement
maintained by CPC for his benefit shall lapse immediately on that date.
Executive may exercise his Options or related stock appreciation rights at any
time until the earlier of (i) the specified expiration date of the option term
-------
or (ii) the expiration of the twelve (12)-month period measured from his
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.8 TERMINATION BY CPC WITHOUT CAUSE. CPC may terminate Executive's
--------------------------------
employment at any time for reasons other than those described in Sections 5.3
and 5.4.
5.8.1 CONTRACT BENEFITS. Upon such termination of employment,
-----------------
Executive shall become entitled to all of the Contract Benefits, with the Salary
Contract Benefit to be paid in a lump sum within sixty (60) days after his
termination date.
5.8.2 COVENANTS. Following the termination of Executive's employment
---------
pursuant to this Section 5.8, Executive shall not perform any further services
for CPC and shall have no obligation to perform his covenants under Section
3.1.3 or his consulting agreement under Section 3.2.
14
<PAGE>
5.8.3 OPTION VESTING. If CPC terminates Executive's employment
--------------
pursuant to Section 5.8, all Options and related stock appreciation rights
outstanding on the date of termination of Executive's employment shall vest and
become exercisable for all of the underlying shares of CPC common stock on that
date, and any restrictions or forfeiture provisions applicable to any shares of
CPC common stock or stock units awarded to Executive under any plan or
arrangement maintained by CPC for his benefit shall lapse immediately on that
date. Executive may exercise his Options or related stock appreciation rights at
any time until the earlier of (i) the specified expiration date of the option
--------
term or (ii) the expiration of the twelve (12)-month period measured from his
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.11 WITHHOLDING. All payments made to Executive or his Beneficiary
-----------
pursuant to the provisions of this ARTICLE FIVE shall be subject to withholding
by CPC of such amounts for income and other payroll taxes and deductions as CPC
may reasonably determine should be withheld pursuant to applicable laws and
regulations.
15
<PAGE>
ARTICLE SIX
MISCELLANEOUS PROVISIONS
------------------------
6.1 ENTIRE CONTRACT. This Contract contains the entire agreement and
---------------
understanding between Executive and CPC regarding the terms and conditions of
his employment with CPC and the benefits to which he may become entitled upon
the termination of such employment, and supersedes and replaces all Prior
Contracts as well as any other negotiations, understandings and representations
(other than the express terms of the special founder recognition award/loan made
to Executive) regarding the terms and conditions of his employment or
termination benefits. This Contract may not be modified except by a writing
executed by both Executive and CPC.
6.2 ASSIGNMENT BY CPC. This Contract shall be binding upon and shall
-----------------
inure to the benefit of any successors or assigns of CPC. As used in this
Contract, the term "successor" includes any Person or group of Persons acting in
concert which at any time in any form or manner acquires all or substantially
all of the assets or business or more than twenty percent (20%) of the
outstanding voting securities of CPC.
6.3 NONASSIGNABILITY BY EXECUTIVE. Neither Executive nor any Beneficiary
-----------------------------
shall assign, transfer, pledge or hypothecate any rights, interests or benefits
created hereunder or hereby. Any attempt to do so contrary to the provisions of
this Contract, and any levy of any attachment, execution or similar process
created thereby, shall be null and void and without effect. CPC shall have no
obligation to provide any payments or other consideration to any Beneficiary
until and unless CPC has received such Beneficiary's written assurance that he
will comply with the provisions of this Section 6.3.
6.4 SPENDTHRIFT PROVISION. Prior to actual receipt by Executive or his
---------------------
Beneficiary (as the case may be), no right or benefit under this Contract and,
without limitation, no interest in any payment hereunder shall be:
(i) anticipated, assigned or encumbered or subject to any
creditor's claim or subject to execution, attachment or similar legal
process; or
(ii) applied on behalf of or subject to the debts, contracts,
liabilities or torts of the Person entitled or who might become entitled to
such benefits or subject to the claims of any creditor of any such Person.
6.5 BENEFICIARY; RECIPIENTS OF PAYMENTS; DESIGNATION OF BENEFICIARY.
---------------------------------------------------------------
Payment of all Salary, the proceeds of the Policy, and all other compensation
and benefits payable by CPC pursuant to this Contract shall be made only to
Executive during his lifetime or, in the event of his death, to his Beneficiary.
If Executive has not designated a Beneficiary, then the payments shall be made
to his estate. CPC shall have no obligation to make payments to any person not
designated as a Beneficiary pursuant to Section 6.5.1. Furthermore, CPC shall
have no obligation to make any payments to Executive's Beneficiary until and
unless that Beneficiary has agreed in writing to be bound by the provisions of
this Section 6.5. Executive or his estate or Beneficiary, as the case may be,
shall discharge, defend and hold CPC harmless from any liability for payments
actually made to
16
<PAGE>
such Beneficiary or to Executive's estate if no Beneficiary has been designated.
6.5.1 DESIGNATION OF BENEFICIARY. Executive may designate and from
--------------------------
time to time change the Beneficiary only through a written, signed designation
to CPC's Corporate Secretary pursuant to Section 6.7.
6.5.2 ELECTIONS. Whenever this Contract provides for any election
---------
exercisable by Executive or his Beneficiary, that election shall be made solely
by the person or persons receiving payments pursuant to this Contract at that
time and shall be made in that Person's sole discretion and without regard to
the effect of such decision on subsequent payment recipients. Such decision
shall be final and binding on all subsequent recipients of payments.
6.6 ARBITRATION. Any controversy, question or dispute arising out of or
-----------
relating to the construction, application or enforcement of this Contract shall
be settled by arbitration. Among the disputes which are to be settled by
arbitration are any claims by Executive that the termination of his employment
breached any express or implied contract of employment.
6.6.1 APPOINTMENT OF ARBITRATORS. Within five (5) days after the
--------------------------
delivery of written notice of any such dispute from one party to the other, CPC
and Executive shall each appoint one person to hear and determine the dispute,
and, if the two persons so selected are unable to agree on its resolution within
ten (10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.
6.6.2 FINALITY. The determination of a majority of the arbitrators
--------
shall be final and conclusive on Executive and CPC.
6.6.3 PROCEDURE; FORUM; WAIVER OF JURY TRIAL. The arbitration shall
--------------------------------------
be conducted in accordance with the then-current Model Employment Arbitration
Procedures of the American Arbitration Association in the State of Nevada.
Executive and CPC each hereby waive any right to trial by jury of any such
dispute. Notwithstanding the foregoing provisions, however, nothing in this
Contract shall limit or waive any right of either Executive or CPC to obtain
injunctive relief in any court of competent jurisdiction.
6.6.4 DISCOVERY. The parties shall be entitled to avail themselves
---------
only of discovery procedures as the arbitrators permit.
6.6.5 DISPUTES NOT GOVERNED BY CONTRACT TO ARBITRATE. The parties
----------------------------------------------
have not agreed to arbitrate any dispute except for those disputes arising out
of or relating to the construction, application or enforcement of this Contract.
For example, and without limitation, the parties have not agreed to arbitrate
wage-hour, workers' compensation, defamation, or public policy discharge claims,
or claims arising under state or federal employment discrimination laws. Both
parties expressly reserve all rights and remedies available to them, at law or
in equity, to resolve any dispute which they have not expressly agreed in this
Contract to arbitrate.
6.7 NOTICES. Any notice provided for by this Contract and any other
-------
notice, demand,
17
<PAGE>
designation or communication which either party may wish to send to the other
("Notices") shall be in writing and shall be deemed to have been properly given
if served by (i) personal delivery, (ii) registered or certified mail, return
receipt requested in a sealed envelope, postage and other charges prepaid, or
(iii) telegram, telecopy, telex, facsimile or other similar form of transmission
followed by delivery pursuant to clause (i) or (ii), in each case addressed to
the party for which such notice is intended as follows:
If to CPC: Community Psychiatric Centers
Board of Directors
6600 West Charleston Boulevard
Las Vegas, Nevada 89102
FAX: (702) 259-3650
If to Executive: Ronald L. Ooley
2984 Sun Lake Drive
Las Vegas, Nevada 89128
FAX: (702) 242-3403
6.7.1 CHANGE OF ADDRESS. Any address or name specified in this
-----------------
Section 6.7 may be changed by a Notice given by the addressee to the other party
in accordance with this Section 6.7.
6.7.2 EFFECTIVE DATE OF NOTICE. All Notices shall be given and
------------------------
effective as of the date of personal delivery thereof or the date of receipt set
forth on the return receipt. The inability to deliver because of a changed
address of which no Notice was given or rejection or other refusal to accept any
Notice shall be deemed to be the receipt of the Notice as of the date of such
inability to deliver or rejection or refusal to accept.
6.8 GOVERNING LAW; JURISDICTION. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of Nevada, without
reference to its choice of law rules.
6.9 SEVERABILITY. In the event any provision or provisions of this
------------
Contract is or are held invalid, the remaining provisions of this Contract shall
not be affected thereby. In the event that any provision is held to be overly
broad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and the intentions of the parties hereunder.
18
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6.10 ATTORNEY'S FEES AND EXPENSES. If any arbitration proceeding is
----------------------------
commenced following Executive's termination of employment, the prevailing party
shall be entitled to recover its reasonable attorney's fees, costs and all other
expenses incurred in connection with the arbitration.
IN WITNESS WHEREOF, this Employment Contract has been executed and
delivered by the parties as of the date first set forth above.
/s/ RONALD L. OOLEY
-------------------------------------
RONALD L. OOLEY
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ DANA SHIRES, M.D.
---------------------------------
Dana Shires, M.D.
Chairman, Compensation
Committee
By: /s/ RICHARD L. CONTE
---------------------------------
Richard L. Conte
Chairman, President
and Chief Executive Officer
19
<PAGE>
EXHIBIT 10.9
EMPLOYMENT CONTRACT
-------------------
THIS EMPLOYMENT CONTRACT (the "Contract") is entered into as of June 6,
1996 (the "Effective Date") by and between COMMUNITY PSYCHIATRIC CENTERS, a
Nevada corporation ("CPC"), and JAMES RODNEY LAUGHLIN, an individual
("Executive").
R E C I T A L S
- - - - - - - -
A. CPC has employed Executive as an executive employee pursuant to prior
employment agreements, and Executive currently serves as Executive Vice
President of CPC and as President of CPC's wholly owned subsidiary, Transitional
Hospitals Corporation ("THC").
B. CPC desires to amend the terms of the currently existing employment
agreement with Executive in order to provide him with additional benefits in
recognition of the valuable services he has rendered CPC.
C. Executive is willing and able to render the services herein provided
for, and he is willing to refrain from activities competitive with the business
of CPC on the terms set forth herein.
NOW THEREFORE, Executive and CPC mutually agree as follows:
ARTICLE ONE
DEFINITIONS
-----------
For purposes of this Contract, the following definitions shall be in
effect:
1.1 BENEFICIARY means any Person or Persons designated from time to time
-----------
by Executive pursuant to Section 6.5.1 to receive any benefits under this
Contract which may become due and payable to Executive following his death.
1.2 BOARD means the Board of Directors of CPC.
-----
1.3 CAUSE means Executive's (i) willful refusal to perform the reasonable
-----
duties of his office after reasonable written notice from the Board and
reasonable opportunity to remedy such refusal; (ii) commission of any willful
and malicious act which has a materially adverse financial impact upon CPC; or
(iii) conviction of a felony which has a materially adverse financial impact
upon CPC.
<PAGE>
1.4 CHANGE OF CONTROL means a change of ownership or control of CPC
-----------------
required to be reported pursuant to Item 6(e) of Schedule 14A of Rule 14 of the
Exchange Act, including (without limitation) the occurrence of any of the
following events:
(i) the acquisition by any Person (or any group of related
Persons acting in concert) of beneficial ownership (as defined in Rule 13d-
3 under the Exchange Act), directly or indirectly, of CPC securities
representing twenty percent (20%) or more of the total combined voting
power of CPC's then outstanding securities; or
(ii) a merger or consolidation in which securities representing
twenty percent (20%) or more of the total combined voting power of CPC's
then outstanding securities are transferred to a Person or Persons
different from the Persons holding those securities immediately prior to
such merger or consolidation; or
(iii) the sale of all or substantially all of CPC's assets in
complete liquidation or dissolution of CPC.
1.5 COMPETE means either directly or indirectly to own, initiate, manage,
-------
operate, join, control, advise, consult with or participate in the ownership
(other than ownership of less than five percent (5%) of the outstanding equity
or capital or profit interests in any entity), operation, management or control
of any business similar to any line of business owned or operated by CPC.
1.6 CONFIDENTIAL INFORMATION means any non-public proprietary or
------------------------
confidential information of CPC or its parent or subsidiary companies, including
(without limitation) trade secrets; information concerning professionals,
referral sources, reimbursement sources, patient and customer lists; records or
research, proposals, reports, methods, techniques, financial information and
other data, and other non-public information regarding CPC and its parent or
subsidiary companies or the existing and planned businesses, properties or
affairs of CPC and its parent or subsidiary companies.
1.7 CONSTRUCTIVE TERMINATION means the occurrence of any of the following
------------------------
events which result in Executive's subsequent resignation from employment with
CPC within the succeeding six (6) months:
(i) CPC's material breach of this Contract which is not remedied
within thirty (30) days after written notice from Executive specifying such
breach in reasonable detail; or
(ii) the assignment to Executive of any duties of materially
lesser status, dignity and character than his duties on the Effective Date,
or a material reduction in the nature or status of his responsibilities
from those in effect on the Effective Date, or CPC's relocation of
Executive's principal place of business to a site at least thirty (30)
miles from Executive's principal place of business immediately prior to
that relocation; provided, however, that Executive's loss of any job title
with THC shall not be deemed to be an event of Constructive Termination.
2
<PAGE>
1.8 CONTRACT BENEFITS means the following benefits which may become
-----------------
payable to Executive in accordance with the applicable provision of ARTICLE
FIVE, AS REDUCED DOLLAR FOR DOLLAR for all cash amounts previously paid to
Executive pursuant to ARTICLE FOUR of this Contract:
(i) a special salary continuation benefit in a dollar amount
equal to two (2) times the highest Salary level in effect for Executive at
any time during the Employment Period. This amount shall be designated the
SALARY CONTRACT BENEFIT and shall be paid at the time or times specified in
-----------------------
the applicable provisions of ARTICLE FIVE.
(ii) the maximum bonus which Executive could have achieved under
the CPC Annual Incentive Plan for the Fiscal Year in which the Contract
Payout Event occurs. This clause (ii) amount shall be paid whether or not
the performance goals established for such Fiscal Year are in fact met, and
shall be paid within sixty (60) days after the Contract Payout Event.
(iii) the maximum bonus which Executive could have achieved for
each three-year plan cycle which commences under the CPC Long-Term
Incentive Plan prior to the date of the Contract Payout Event. The clause
(iii) amount for each such plan cycle shall be paid whether or not the
performance goals for that plan cycle are in fact met, and shall be paid in
a lump sum within sixty (60) days after the Contract Payout Event.
However, the clause (iii) amount otherwise payable to Executive for any
such three-year plan cycle under the Long-Term Incentive Plan shall be
prorated to the extent the Contract Payment Event occurs less than halfway
through such plan cycle.
(iv) forgiveness of any outstanding loans CPC has made to
Executive, except (A) any loans provided to finance the exercise of his
options for shares of CPC common stock, which shall become due and payable
in accordance with their terms, and (B) the special founder recognition
award in the form of a CPC loan to Executive, which is to be forgiven over
time in accordance with the express terms of such award. The applicable
clause (iv) loan forgiveness shall occur immediately upon the Contract
Payout Event.
(v) provision of benefits to Executive or his Beneficiary
equivalent to each of the employee benefits described in paragraph 2.2.4
and 2.2.5, at CPC's sole cost and expense. These clause (v) benefits shall
be designated the EMPLOYEE CONTINUATION BENEFITS and shall be provided for
------------------------------
a two (2)-year period measured from the date of the Contract Payout Event.
CPC may, at its election, satisfy its obligation to provide the Employee
Continuation Benefits by paying Executive or his Beneficiary the lump sum
present value of those benefits within sixty (60) days after the applicable
Contract Payout Event.
(vi) continuation of CPC's obligations to provide Executive or
3
<PAGE>
his Beneficiary with the benefits described in paragraph 2.2.6, but only to
the extent those benefits are available under the plans then in effect.
Any clause (vii) benefits shall be provided until the November 30 next
following the second anniversary of the date of the Contract Payout Event.
(vii) provision of outplacement services to Executive by a
counselor paid for and selected by CPC.
(viii) continuation of CPC's obligation to pay Executive or his
Beneficiary the car allowance provided to Executive at the time of the
Contract Payout Event, for two years following that event.
1.9 CONTRACT PAYOUT EVENT means any one of the following events, as
---------------------
further detailed in ARTICLE FIVE:
(i) the termination of Executive's employment by reason of his
death or Permanent Disability;
(ii) Executive's termination of employment within six (6) months
after an event of Constructive Termination; or
(iii) the termination of Executive's employment by CPC without
Cause.
1.10 CORPORATE DIVESTITURE means the disposition of all or substantially
---------------------
all of the operations of THC, whether through an asset or stock sale, measured
as of the last completed fiscal quarter.
1.11 EMPLOYMENT PERIOD means the period commencing on the Effective Date
-----------------
and continuing through November 30, 1999. On December 1, 1996 and on each
December 1 thereafter, the Employment Period shall automatically be extended
until the earlier to occur of (i) the third anniversary of the immediately
-------
preceding November 30 or (ii) the date on which Executive's employment with CPC
is terminated in accordance with ARTICLE FIVE.
1.12 EXCHANGE ACT means the Securities Exchange Act of 1934, as amended.
------------
1.13 FISCAL YEAR means CPC's annual accounting period for financial
-----------
accounting and reporting purposes. As of the Effective Date, such period begins
on December 1 each year and ends on the next following November 30.
1.14 OPTION means any option to purchase shares of CPC common stock (other
------
than the so-called "converging options" granted with an original exercise price
of $29.50 per share) granted to Executive by CPC and outstanding at the time of
their acceleration under Section 5.6.3.
1.15 PERMANENT DISABILITY means any mental or physical illness, disease or
--------------------
condition
4
<PAGE>
which in the opinion of a physician skilled in the specialty does or will result
in Executive's inability to perform the essential functions of his job for a
period of six (6) consecutive months or more.
1.16 PERSON means any individual, corporation, partnership, business
------
trust, joint venture, association, joint stock company, trust, unincorporated
organization or government or agency or political subdivision thereof.
1.17 PRIOR CONTRACTS means all prior employment agreements between
---------------
Executive and CPC, whether express or implied, oral or written.
1.18 SALARY means the annual rate of base salary in effect for Executive
------
for each Fiscal Year within the Employment Period. Such Salary shall be at the
annual rate of Four Hundred Thousand Dollars ($400,000) per Fiscal Year, subject
to adjustment from time to time pursuant to Section 2.2.2. Such Salary shall be
in addition to any bonuses or other employment benefits or remuneration paid or
payable by CPC to Executive.
5
<PAGE>
ARTICLE TWO
DUTIES AND BENEFITS DURING EMPLOYMENT PERIOD
--------------------------------------------
2.1 DUTIES. During the Employment Period, Executive shall serve as the
------
Executive Vice President of CPC or other capacity designated by the Chief
Executive Officer or the Board, serving at the pleasure of the Chief Executive
Officer and the Board until the termination of his employment as provided in
ARTICLE FIVE. Consistent with those positions, Executive shall devote his full
productive time, energies and abilities to CPC's business, subject always to the
authority of the Chief Executive Officer and the Board.
2.2 COMPENSATION AND BENEFITS. The following compensation and benefits
-------------------------
shall be payable to Executive for his service during the Employment Period:
2.2.1 SALARY. CPC shall pay Executive his Salary in bi-weekly
------
installments in accordance with CPC's general practice and subject to legally
required withholdings.
2.2.2 SALARY REVIEW. The Salary payable to Executive for each Fiscal
-------------
Year commencing after December 1, 1996 shall be subject to annual review by the
Board. The Salary level in effect for Executive for each Fiscal Year during the
Employment Period shall not be less than the greater of (i) Four Hundred
-------
Thousand Dollars ($400,000) or (ii) the Salary level most recently determined by
the Board pursuant to this Section 2.2.2. Executive understands that the
requirement of annual review by the Board shall not be construed in any manner
as an express or implied agreement by CPC to raise his Salary.
2.2.3 EXPENSE REIMBURSEMENT. CPC shall promptly reimburse Executive,
---------------------
upon his submission to CPC of adequate documentation, for all reasonable out-of-
pocket expenses respecting entertainment, travel, meals, hotel accommodations
and other like-kind expenses, to the extent incurred by Executive in the
interests of CPC's business.
2.2.4 GROUP INSURANCE. CPC shall provide group life and long term
---------------
disability insurance and group travel and accident insurance to Executive and
group medical, dental and hospital insurance to Executive and his eligible
dependents, in each instance in the amount and on the terms made available to
other senior executives of CPC.
2.2.5 PROFIT SHARING PLAN. Executive shall be a participant in CPC's
-------------------
401(k) and Profit Sharing Plans, to the extent allowed by law and by the terms
of those plans.
6
<PAGE>
2.2.6 OTHER BENEFITS. By mutual agreement with CPC, Executive may
--------------
participate in additional employment benefits made available by CPC; provided,
however, that this Contract itself shall neither prevent nor compel such
participation.
7
<PAGE>
ARTICLE THREE
COVENANTS AND CONSULTING CONTRACT
---------------------------------
3.1 COVENANTS. Executive shall be subject to the following covenants and
---------
obligations:
3.1.1 NONDISCLOSURE. While employed by CPC, Executive has had and
-------------
will have access to Confidential Information relating to CPC's present and
anticipated business operations. Executive shall at no time either during or
after his employment by CPC disclose, communicate or use any Confidential
Information which Executive learns as a result of his employment by CPC, except
to the extent required by his performance of duties for CPC, unless he obtains
CPC's prior written consent to do so.
3.1.2 RETURN OF DOCUMENTS. Upon the termination of Executive's
-------------------
employment for any reason, Executive shall promptly relinquish and return to CPC
all Confidential Information and all files, correspondence, memoranda, diaries
and other records, minutes, notes, manuals, papers and other documents and data,
however prepared or memorialized, and all copies thereof, belonging to or
relating to the business of CPC, that are in Executive's custody or control,
whether or not they contain Confidential Information.
3.1.3 NONCOMPETITION COVENANT. While employed by CPC, Executive
-----------------------
shall not Compete or plan or prepare to Compete with CPC. To the extent
obligated pursuant to the provisions of ARTICLE FIVE, Executive shall not
Compete with any CPC line of business, for a period of two (2) years following
the termination of his employment, in any city in which (i) CPC owned or
operated that line of business either on the date his employment terminates or
at any time within the immediately preceding Fiscal Year or (ii) the Board had
approved the commencement of that line of business prior to his termination.
3.1.4 NONSOLICITATION COVENANT. For a period of two (2) years
------------------------
following the termination of Executive's employment with CPC for any reason,
Executive shall not, directly or indirectly, solicit the services of any CPC
employee, independent contractor, customer, referral or reimbursement source, or
otherwise induce or attempt to induce current CPC employees to sever their
employment relationship with CPC.
3.1.5 SCOPE AND DURATION; SEVERABILITY. CPC and Executive understand
--------------------------------
and agree that the scope and duration of the covenants contained in this Section
3.1 are reasonable both in time and geographical area and are fairly necessary
to protect the business of CPC. Such covenants shall survive the termination of
Executive's employment, except that the Section 3.1.3 noncompetition covenant
shall remain in effect following such termination of employment only to the
extent required pursuant to the provisions of ARTICLE FIVE. It is further
agreed that such covenants shall be regarded as divisible and shall be operative
as to time and geographical area to the extent that they may be made so and, if
any part of such covenants is declared invalid or unenforceable, the validity
and enforceability of the remainder shall not be affected.
3.1.6 INJUNCTION. Executive understands and agrees that, due to the
----------
highly competitive nature of the health care industry, the breach of any
covenants set out in Section 3.1 will
8
<PAGE>
cause irreparable injury to CPC for which it will have no adequate monetary or
other remedy at law. Therefore, CPC shall be entitled, in addition to such other
remedies as it may have hereunder, to a temporary restraining order and to
preliminary and permanent injunctive relief for any breach or threatened breach
of the covenants without proof of actual damages that have been or may be caused
hereby. In addition, CPC shall have available all remedies provided under state
and federal statutes, rules and regulations as well as any and all other
remedies as may otherwise be contractually or equitably available.
3.1.7 ASSIGNMENT. Except as otherwise provided to the contrary in
----------
ARTICLE FIVE, Executive agrees that the covenants contained in this Section 3.1
shall inure to the benefit of any successor or assign of CPC, with the same
force and effect as if such covenant had been made by Executive with such
successor or assign.
3.2 CONSULTING CONTRACT. Except when Executive is relieved of any
-------------------
obligation to honor his Section 3.1.3 obligations by applicable provisions of
ARTICLE FIVE, then upon the termination of Executive's employment, Executive
hereby agrees to make himself available to perform, for a period not to exceed
two (2) years following such termination of employment, such consulting and
advisory services for CPC with respect to matters relevant to the health care
industry as may from time to time be reasonably requested by the Board.
However, such services shall be subject to the following provisions and
limitations:
(a) TIME. Executive shall not be required to render more than eight
----
(8) hours of consulting services per month.
(b) OFFICE PRIVILEGES. During the consulting period, Executive shall
-----------------
be entitled to the use of appropriate office facilities and secretarial and
administrative services to facilitate the performance of his consulting
services.
3.3 CONSIDERATION FOR COVENANTS AND CONSULTING CONTRACT. Whenever this
---------------------------------------------------
Contract requires Executive to honor his obligations under Section 3.1.3
following the termination of Executive's employment, then the value of his
noncompetition covenant under Section 3.1.3 and his Consulting Contract under
Section 3.2 shall be determined by independent appraisal, and the Contract
Benefits payable to Executive under ARTICLE FIVE shall, to the extent of such
appraised value, be allocated as reasonable compensation for such covenant and
consulting agreement. The cost of any appraisal performed pursuant to the
requirements of this Section 3.3 shall be borne solely by CPC.
3.4 SELECTION OF INDEPENDENT APPRAISER. Whenever the appraised value of
----------------------------------
Executive's obligations under Sections 3.1.3 and/or 3.2 must be determined
pursuant to Section 3.3, Executive and CPC shall, within ten (10) business days
following termination of Executive's employment, select an independent third
party (either an experienced tax counsel or a nationally recognized accounting
firm) to perform that appraisal. Should Executive and CPC be unable to mutually
agree upon the selection of such third party, then the Compensation Committee of
the Board shall designate a nationally recognized accounting firm to perform
such appraisal, provided such firm has not previously served as CPC's
independent auditors or provided prior tax advice to Executive on personal
matters.
9
<PAGE>
ARTICLE FOUR
CORPORATE DIVESTITURE BENEFITS
------------------------------
4.1 BENEFIT ENTITLEMENT. Upon any Corporate Divestiture effected during
-------------------
the Contract Term, the Board may elect, in its sole discretion, to pay Executive
a special interim payout calculated in accordance with this ARTICLE FOUR. The
total value of any and all such interim payouts shall reduce, dollar for dollar,
any payout made to Executive pursuant to ARTICLE FIVE.
4.2 INTERIM PAYOUT AMOUNT. The interim payout amount that may be paid to
---------------------
Executive in connection with any Corporate Divestiture shall be determined by
the Board, in its sole discretion.
4.3 PAYMENT. The interim payout to Executive in connection with each
-------
Corporate Divestiture shall be subject to CPC's collection of all applicable
withholding taxes.
10
<PAGE>
ARTICLE FIVE
PAYOUT OF CONTRACT BENEFITS
---------------------------
5.1 TERMINATION OF EMPLOYMENT. Executive's employment may be terminated
-------------------------
at any time by either Executive or CPC, for the reasons and with the
consequences set out below. In the event of such termination, Executive may
become entitled to payment of the Contract Benefits in accordance with the
provisions of this ARTICLE FIVE. In any event, the provisions of ARTICLE TWO
shall cease to have any force or effect upon the termination of Executive's
employment, and the compensation and benefit provisions of this ARTICLE FIVE
shall supersede and replace the provisions of ARTICLE TWO.
5.2 DEATH. If Executive dies, his employment shall terminate on the date
-----
of his death.
5.2.1 CONTRACT BENEFITS. In such event, CPC shall (i) pay the
-----------------
Beneficiary the Salary to the date of Executive's death, within sixty (60) days,
and (ii) continue to have the obligations described in Sections 2.2.4 and 2.2.5,
to the extent those benefits are available under those plans then in effect.
5.3 PERMANENT DISABILITY. Either CPC or Executive may terminate
--------------------
Executive's employment, upon thirty (30) days prior notice, by reason of his
Permanent Disability.
5.3.1 COVENANTS. Following such termination of employment, Executive
---------
shall remain subject to the covenants and obligations set forth in Section 3.1.
5.3.2 CONTRACT BENEFITS. Executive or his Beneficiary shall be
-----------------
entitled to receive payment of ninety days' Salary, less applicable withholding,
in a lump sum within sixty (60) days after the termination date of Executive's
employment under this Section 5.3. In addition, Executive or his Beneficiary
shall be entitled to receive the Contract Benefits described in Sections 1.8(ii)
through 1.8(vi) on the terms stated in those provisions, in consideration for
Executive's covenants in Section 3.1.
5.4 TERMINATION BY CPC FOR CAUSE. CPC may terminate Executive's
----------------------------
employment for Cause.
5.4.1 NO CONTRACT BENEFITS. Following the termination of Executive's
--------------------
employment for Cause, Executive shall not perform any of the services described
in Section 2.1, nor shall he have the right to receive any Contract Benefits,
but he and his eligible dependents shall be entitled, at their sole cost, to
receive continued health care coverage to which they may be entitled by law
("COBRA Coverage").
11
<PAGE>
5.4.2 COVENANTS. Following such termination for Cause, Executive
---------
shall comply with his covenants and obligations under Section 3.1 (other than
Section 3.1.3). However, CPC may elect, at its sole discretion, to enforce
Executive's covenants under Section 3.1.3 and his consulting agreement under
Section 3.2 following such termination of employment. If CPC so elects, then
(i) CPC shall so notify Executive in writing, as provided in Section 6.7, within
ten (10) days following the date of his termination, and (ii) CPC shall, as
consideration for such Section 3.1.3 covenant and Section 3.2 consulting
agreement, compensate Executive at the Section 3.3 appraised value of such
covenant and consulting agreement, payable in equal bi-weekly installments
(beginning with his termination date) over the two (2)-year period his Section
3.1.3 covenant and Section 3.2 consulting agreement are to remain in effect.
5.5 TERMINATION BY EXECUTIVE WITHOUT CAUSE. Executive may terminate his
--------------------------------------
employment at any time without cause, i.e., for grounds other than those
described in paragraphs 5.2, 5.3, 5.4, 5.6, and 5.7.
5.5.1 NO CONTRACT BENEFITS. Following Executive's termination of
--------------------
employment under this Section 5.5, Executive shall not perform any of the
services described in Section 2.1, nor shall he receive any Contract Benefits,
but he and his eligible dependents shall be entitled, at their sole cost, to
COBRA Coverage.
5.5.2 COVENANTS. Following such termination of employment, Executive
---------
shall comply with all his covenants and obligations under Sections 3.1 and 3.2,
and CPC shall, as consideration for his Section 3.1.3 covenant and Section 3.2
consulting agreement, compensate Executive at the Section 3.3 appraised value of
such covenant and consulting agreement, payable in equal bi-weekly installments
(beginning with his termination date) over the two (2)-year period his Section
3.1.3 covenant and Section 3.2 consulting agreement are to remain in effect.
5.6 CHANGE OF CONTROL. Executive may terminate his employment in
-----------------
connection with a Change of Control, provided such termination is, pursuant to
written notice delivered to CPC, effected at least six months and within one (1)
year after such Change in Control.
5.6.1 COVENANTS. Following such termination of employment, Executive
---------
shall comply with all his covenants and obligations under Sections 3.1 and 3.2.
5.6.2 CONTRACT BENEFITS. Executve shall be entitled to all of the
-----------------
Contract Benefits, with the Salary Contract Benefit to be paid in a lump sum
within sixty (60) days after the termination date of Executive's employment.
12
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5.6.3 VESTING OF OPTIONS AND OTHER BENEFITS. Whether or not
-------------------------------------
Executive terminates his employment pursuant to this Section 5.6, all Options
and related stock appreciation rights outstanding at the time of the Change in
Control shall vest and become exercisable for all of the underlying shares of
CPC common stock immediately prior to the effective date of such Change of
Control, and any restrictions or forfeiture provisions applicable to any shares
of CPC common stock or stock units awarded to Executive under any plan or
arrangement maintained by CPC for his benefit shall lapse immediately upon such
effective date. Executive may exercise his Options or related stock
appreciation rights at any time until the earlier of (i) the specified
--------
expiration date of the option term or (ii) the expiration of the twelve (12)-
month period measured from his termination date, and any Options or stock
appreciation rights not exercised prior to the applicable expiration date shall
lapse.
5.7 CONSTRUCTIVE TERMINATION. Executive may terminate his employment
------------------------
within six (6) months after any event qualifying as a Constructive Termination
under Section 1.7.
5.7.1 COVENANTS. Following such termination of employment, Executive
---------
shall not perform any further services for CPC and shall have no obligation to
perform his covenants under Section 3.1.3 or his consulting agreement under
Section 3.2.
5.7.2 CONTRACT BENEFITS. Upon Executive's termination of employment
-----------------
under this Section 5.7, Executive shall become entitled to all of the Contract
Benefits, with the Salary Contract Benefit to be paid in a lump sum within sixty
(60) days after his termination date.
5.7.3 OPTION VESTING. If Executive terminates his employment
--------------
pursuant to Section 5.7, all Options and related stock appreciation rights
outstanding on the employment termination date shall vest and become exercisable
for all of the underlying shares of CPC common stock as of that date, and any
restrictions or forfeiture provisions applicable to any shares of CPC common
stock or stock units awarded to Executive under any plan or arrangement
maintained by CPC for his benefit shall lapse immediately on that date.
Executive may exercise his Options or related stock appreciation rights at any
time until the earlier of (i) the specified expiration date of the option term
-------
or (ii) the expiration of the twelve (12)-month period measured from his
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.8 TERMINATION BY CPC WITHOUT CAUSE. CPC may terminate Executive's
--------------------------------
employment at any time for reasons other than those described in Sections 5.3
and 5.4.
5.8.1 CONTRACT BENEFITS. Upon such termination of employment,
-----------------
Executive shall become entitled to all of the Contract Benefits, with the Salary
Contract Benefit to be paid in a lump sum within sixty (60) days after his
termination date.
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5.8.2 COVENANTS. Following the termination of Executive's employment
---------
pursuant to this Section 5.8, Executive shall not perform any further services
for CPC and shall have no obligation to perform his covenants under Section
3.1.3 or his consulting agreement under Section 3.2.
5.8.3 OPTION VESTING. If CPC terminates Executive's employment
--------------
pursuant to Section 5.8, all Options and related stock appreciation rights
outstanding on the date of termination of Executive's employment shall vest and
become exercisable for all of the underlying shares of CPC common stock on that
date, and any restrictions or forfeiture provisions applicable to any shares of
CPC common stock or stock units awarded to Executive under any plan or
arrangement maintained by CPC for his benefit shall lapse immediately on that
date. Executive may exercise his Options or related stock appreciation rights
at any time until the earlier of (i) the specified expiration date of the option
--------
term or (ii) the expiration of the twelve (12)-month period measured from his
termination date, and any Options or stock appreciation rights not exercised
prior to the applicable expiration date shall lapse.
5.11 WITHHOLDING. All payments made to Executive or his Beneficiary
-----------
pursuant to the provisions of this ARTICLE FIVE shall be subject to withholding
by CPC of such amounts for income and other payroll taxes and deductions as CPC
may reasonably determine should be withheld pursuant to applicable laws and
regulations.
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ARTICLE SIX
MISCELLANEOUS PROVISIONS
------------------------
6.1 ENTIRE CONTRACT. This Contract contains the entire agreement and
---------------
understanding between Executive and CPC regarding the terms and conditions of
his employment with CPC and the benefits to which he may become entitled upon
the termination of such employment, and supersedes and replaces all Prior
Contracts as well as any other negotiations, understandings and representations
(other than the express terms of the special founder recognition award/loan made
to Executive) regarding the terms and conditions of his employment or
termination benefits. This Contract may not be modified except by a writing
executed by both Executive and CPC.
6.2 ASSIGNMENT BY CPC. This Contract shall be binding upon and shall
-----------------
inure to the benefit of any successors or assigns of CPC. As used in this
Contract, the term "successor" includes any Person or group of Persons acting in
concert which at any time in any form or manner acquires all or substantially
all of the assets or business or more than twenty percent (20%) of the
outstanding voting securities of CPC.
6.3 NONASSIGNABILITY BY EXECUTIVE. Neither Executive nor any Beneficiary
-----------------------------
shall assign, transfer, pledge or hypothecate any rights, interests or benefits
created hereunder or hereby. Any attempt to do so contrary to the provisions of
this Contract, and any levy of any attachment, execution or similar process
created thereby, shall be null and void and without effect. CPC shall have no
obligation to provide any payments or other consideration to any Beneficiary
until and unless CPC has received such Beneficiary's written assurance that he
will comply with the provisions of this Section 6.3.
6.4 SPENDTHRIFT PROVISION. Prior to actual receipt by Executive or his
---------------------
Beneficiary (as the case may be), no right or benefit under this Contract and,
without limitation, no interest in any payment hereunder shall be:
(i) anticipated, assigned or encumbered or subject to any
creditor's claim or subject to execution, attachment or similar legal
process; or
(ii) applied on behalf of or subject to the debts, contracts,
liabilities or torts of the Person entitled or who might become entitled to
such benefits or subject to the claims of any creditor of any such Person.
6.5 BENEFICIARY; RECIPIENTS OF PAYMENTS; DESIGNATION OF BENEFICIARY.
---------------------------------------------------------------
Payment of all Salary, the proceeds of the Policy, and all other compensation
and benefits payable by CPC pursuant to this Contract shall be made only to
Executive during his lifetime or, in the event of his death, to his Beneficiary.
If Executive has not designated a Beneficiary, then the payments shall be made
to his estate. CPC shall have no obligation to make payments to any person not
designated as a Beneficiary pursuant to Section 6.5.1. Furthermore, CPC shall
have no obligation to make any payments to Executive's Beneficiary until and
unless that Beneficiary has agreed in writing to be bound by the provisions of
this Section 6.5. Executive or his estate or Beneficiary, as the case may be,
shall discharge, defend and hold CPC harmless from any liability for payments
actually made to
15
<PAGE>
such Beneficiary or to Executive's estate if no Beneficiary has been designated.
6.5.1 DESIGNATION OF BENEFICIARY. Executive may designate and from
--------------------------
time to time change the Beneficiary only through a written, signed designation
to CPC's Corporate Secretary pursuant to Section 6.7.
6.5.2 ELECTIONS. Whenever this Contract provides for any election
---------
exercisable by Executive or his Beneficiary, that election shall be made solely
by the person or persons receiving payments pursuant to this Contract at that
time and shall be made in that Person's sole discretion and without regard to
the effect of such decision on subsequent payment recipients. Such decision
shall be final and binding on all subsequent recipients of payments.
6.6 ARBITRATION. Any controversy, question or dispute arising out of or
-----------
relating to the construction, application or enforcement of this Contract shall
be settled by arbitration. Among the disputes which are to be settled by
arbitration are any claims by Executive that the termination of his employment
breached any express or implied contract of employment.
6.6.1 APPOINTMENT OF ARBITRATORS. Within five (5) days after the
--------------------------
delivery of written notice of any such dispute from one party to the other, CPC
and Executive shall each appoint one person to hear and determine the dispute,
and, if the two persons so selected are unable to agree on its resolution within
ten (10) days after their appointment, they shall select a third impartial
arbitrator, and the three arbitrators so selected shall hear and determine the
dispute within sixty (60) days thereafter.
6.6.2 FINALITY. The determination of a majority of the arbitrators
--------
shall be final and conclusive on Executive and CPC.
6.6.3 PROCEDURE; FORUM; WAIVER OF JURY TRIAL. The arbitration shall
--------------------------------------
be conducted in accordance with the then-current Model Employment Arbitration
Procedures of the American Arbitration Association in the State of Nevada.
Executive and CPC each hereby waive any right to trial by jury of any such
dispute. Notwithstanding the foregoing provisions, however, nothing in this
Contract shall limit or waive any right of either Executive or CPC to obtain
injunctive relief in any court of competent jurisdiction.
16
<PAGE>
6.6.4 DISCOVERY. The parties shall be entitled to avail themselves
---------
only of such discovery procedures as the arbitrators permit.
6.6.5 DISPUTES NOT GOVERNED BY CONTRACT TO ARBITRATE. The parties
----------------------------------------------
have not agreed to arbitrate any dispute except for those disputes arising out
of or relating to the construction, application or enforcement of this Contract.
For example, and without limitation, the parties have not agreed to arbitrate
wage-hour, workers' compensation, defamation, or public policy discharge claims,
or claims arising under state or federal employment discrimination laws. Both
parties expressly reserve all rights and remedies available to them, at law or
in equity, to resolve any dispute which they have not expressly agreed in this
Contract to arbitrate.
6.7 NOTICES. Any notice provided for by this Contract and any other
-------
notice, demand, designation or communication which either party may wish to send
to the other ("Notices") shall be in writing and shall be deemed to have been
properly given if served by (i) personal delivery, (ii) registered or certified
mail, return receipt requested in a sealed envelope, postage and other charges
prepaid, or (iii) telegram, telecopy, telex, facsimile or other similar form of
transmission followed by delivery pursuant to clause (i) or (ii), in each case
addressed to the party for which such notice is intended as follows:
If to CPC: Community Psychiatric Centers
Board of Directors
6600 West Charleston Boulevard
Las Vegas, Nevada 89102
FAX: (702) 259-3650
If to Executive: James Rodney Laughlin
1801 Glenview Drive
Las Vegas, Nevada 89134
FAX: (702) 242-3252
6.7.1 CHANGE OF ADDRESS. Any address or name specified in this
-----------------
Section 6.7 may be changed by a Notice given by the addressee to the other party
in accordance with this Section 6.7.
6.7.2 EFFECTIVE DATE OF NOTICE. All Notices shall be given and
------------------------
effective as of the date of personal delivery thereof or the date of receipt set
forth on the return receipt. The inability to deliver because of a changed
address of which no Notice was given or rejection or other refusal to accept any
Notice shall be deemed to be the receipt of the Notice as of the date of such
inability to deliver or rejection or refusal to accept.
6.8 GOVERNING LAW; JURISDICTION. This Contract shall be construed in
---------------------------
accordance with and governed by the laws of the State of Nevada, without
reference to its choice of law rules.
17
<PAGE>
6.9 SEVERABILITY. In the event any provision or provisions of this
------------
Contract is or are held invalid, the remaining provisions of this Contract shall
not be affected thereby. In the event that any provision is held to be overly
broad as written, such provision shall be deemed amended to narrow its
application to the extent necessary to make the provision enforceable according
to applicable law and the intentions of the parties hereunder.
6.10 ATTORNEY'S FEES AND EXPENSES. If any arbitration proceeding is
----------------------------
commenced following Executive's termination of employment, the prevailing party
shall be entitled to recover its reasonable attorney's fees, costs and all other
expenses incurred in connection with the arbitration.
IN WITNESS WHEREOF, this Employment Contract has been executed and
delivered by the parties as of the date first set forth above.
/s/ James Rodney Laughlin
------------------------------------
JAMES RODNEY LAUGHLIN
COMMUNITY PSYCHIATRIC CENTERS
By: /s/ Dana Shires, M.D.
------------------------------
Dana Shires, M.D.
Chairman, Compensation
Committee
By: /s/ Richard L. Conte
------------------------------
Richard L. Conte
Chairman, President
and Chief Executive Officer
18
<PAGE>
EXHIBIT 11
STATEMENTS RE: COMPUTATION OF PER SHARE EARNINGS
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
--------------------------------------
1996 1995 1994
----------- ------------ -----------
<S> <C> <C> <C>
Primary:
Average shares outstanding during the
period................................. 43,942,000 43,642,000 43,465,000
(a) Stock options granted to employees
and unpaid portion of shares
issued to employees for exercise
of stock options, based on the
treasury-stock method using
average market price.............. ** * *
----------- ------------ -----------
TOTAL............................ 43,942,000 43,642,000 43,465,000
=========== ============ ===========
Net income (loss)....................... $(5,352,000) $(41,632,000) $10,220,000
=========== ============ ===========
Earnings (loss) per share............... $ (0.12) $ (0.95) $ 0.24
=========== ============ ===========
Fully diluted:
Average shares outstanding during the
year................................... 43,942,000 43,642,000 43,465,000
(a) Stock options granted to employees
and unpaid portion of shares
issued to employees for exercise
of stock options, based on the
treasury-stock method using the
year-end market price, if higher
than average market price......... ** * *
----------- ------------ -----------
TOTAL............................ 43,942,000 43,642,000 43,465,000
=========== ============ ===========
Net income (loss)....................... $(5,352,000) $(41,632,000) $10,220,000
=========== ============ ===========
Earnings (loss) per share............... $ (0.12) $ (0.95) $ 0.24
=========== ============ ===========
</TABLE>
- --------
* As the dilutive common stock equivalents are less than 3% of the weighted
average outstanding shares, they have not been included in the 1994
computation of earnings per share as shown in the Consolidated Statement of
Operations and Five Year Summary of Selected Financial Data.
** The impact of stock options is excluded from earnings (loss) per share as
the impact of stock equivalents is anti-dilutive.
<PAGE>
EXHIBIT 21 RE: SUBSIDIARIES OF THE REGISTRANT
The Company's subsidiaries, the fictitious business names (if any) under
which they do business, and the state or other jurisdiction of incorporation
or organization of each are set forth below. Unless noted otherwise, all are
wholly owned by the Company. All are included in the Consolidated Financial
Statements.
<TABLE>
<CAPTION>
STATE OR COUNTRY
SUBSIDIARY FICTITIOUS BUSINESS NAME OF INCORPORATION
---------- ------------------------ ----------------
<S> <C> <C>
Transitional Hospitals
Corporation of Louisiana,
Inc. ...................... THC--New Orleans Louisiana
Transitional Hospitals
Corporation of Texas,
Inc. ...................... THC--Arlington Texas
THC--Fort Worth
THC--Seattle, Inc. ......... THC--Seattle Washington
Transitional Hospitals
Corporation of Indiana,
Inc. ...................... THC--Indianapolis Indiana
THC--Minneapolis, Inc. ..... THC--Minneapolis Minnesota
Transitional Hospitals
Corporation of
Massachusetts, Inc. ....... Massachusetts
Transitional Hospitals
Corporation of Nevada,
Inc. ...................... THC--Las Vegas Nevada
THC--Chicago, Inc. ......... THC--Chicago Illinois
THC--North Shore, Inc. ..... Illinois
Transitional Hospitals
Corporation of New Mexico,
Inc. ...................... THC--Albuquerque New Mexico
Transitional Hospitals
Corporation of Tampa,
Inc. ...................... Transitional Hospital of Tampa Florida
THC--Hollywood, Inc. ....... THC--Hollywood Florida
THC--Houston, Inc. ......... THC--Houston Texas
J. B. Thomas Hospital,
Inc. ...................... THC--Boston Massachusetts
Transitional Hospitals
Corporation of Wisconsin,
Inc. ...................... THC--Milwaukee Wisconsin
THC--Orange County, Inc. ... THC--Orange County California
THC--San Diego, Inc. ....... THC--San Diego California
Community Psychiatric
Centers of California...... CPC Alhambra Hospital* California
CPC Belmont Hills Hospital*
CPC Fairfax Hospital*
CPC Fremont Hospital*
CPC Heritage Oaks Hospital*
CPC San Luis Rey Hospital*
CPC Sierra Vista Hospital*
CPC Vista Del Mar Hospital*
CPC Walnut Creek Hospital*
Community Psychiatric
Centers of Florida, Inc. .. CPC Ft. Lauderdale Hospital* Florida
CPC St. Johns River Hospital*
Community Psychiatric
Centers of Idaho, Inc. .... CPC Intermountain Hospital* Idaho
Community Psychiatric
Centers of Indiana, Inc. .. CPC Valle Vista Hospital* Indiana
Community Psychiatric
Centers of Kansas, Inc. ... CPC College Meadows Hospital* Kansas
Community Psychiatric
Centers of Mississippi,
Inc. ...................... CPC Sand Hill Hospital* Mississippi
Community Psychiatric
Centers of Missouri, Inc. . CPC Spirit of St. Louis Hospital* Missouri
Community Psychiatric
Centers of North Carolina,
Inc. ...................... CPC Cedar Spring Hospital* North Carolina
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
STATE OR COUNTRY
SUBSIDIARY FICTITIOUS BUSINESS NAME OF INCORPORATION
---------- ------------------------ ----------------
<S> <C> <C>
Community Psychiatric Centers
of Oklahoma, Inc. ........... CPC Southwind Hospital (closed) Oklahoma
C.P.C. of Louisiana, Inc. .... CPC East Lake Hospital* Louisiana
CPC Meadow Wood Hospital*
Old Orchard Hospital, Inc. ... CPC Streamwood Hospital* Illinois
Community Psychiatric Centers
of Arkansas, Inc. ........... CPC Pinnacle Pointe Hospital* Arkansas
Community Behavioral Health
Systems, Inc. ............... Nevada
Community Psychiatric Centers
Properties Incorporated*..... California
CPC Properties of Illinois,
Inc*. ....................... Illinois
CPC Properties of Indiana,
Inc*. ....................... Indiana
CPC Properties of Kansas,
Inc*. ....................... Kansas
CPC Properties of Louisiana,
Inc*. ....................... Louisiana
CPC Properties of Mississippi,
Inc*. ....................... Mississippi
CPC Properties of Missouri,
Inc*. ....................... Missouri
CPC Properties of Arkansas,
Inc*. ....................... Arkansas
CPC Properties of Oklahoma,
Inc. ........................ Oklahoma
Community Psychiatric Centers
Properties of Texas, Inc*. .. Texas
Community Psychiatric Centers
Properties of Utah, Inc*. ... Utah
Florida Hospital Properties,
Inc*. ....................... Florida
</TABLE>
- --------
* Substantially all of the assets and liabilities of these subsidiaries were
sold to Behavioral Health Care Corporation on November 30, 1996.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-37920 and No. 33-5485) and in the post-effective
Amendment No. 1 to the Registration Statement on Form S-8 (No. 33-276435) of
Transitional Hospitals Corporation (formerly Community Psychiatric Centers) of
our report dated January 24, 1997 appearing on page 28 of this Form 10-K. We
also consent to the incorporation by reference of our report on the Financial
Statement Schedule, which appears on page 50 of this Form 10-K.
Price Waterhouse LLP
Los Angeles, California
February 25, 1997
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in Registration Statement No.
33-37920 and post-effective Amendment No. 1 to Registration Statement No. 33-
2-76435, both on Form S-8 and both dated November 21, 1990 and Registration
Statement No. 33-5485 on Form S-8 dated August 1, 1994 of Transitional
Hospitals Corporation (formerly Community Psychiatric Centers) of our report
dated January 27, 1995, with respect to the consolidated statements of
operations, stockholders' equity, and cash flows and financial statement
schedule for the year ended November 30, 1994 included in the Annual Report on
Form 10-K for the year ended November 30, 1996.
Ernst & Young LLP
Los Angeles, California
February 25, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SEC FORM
10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> NOV-30-1996
<PERIOD-START> DEC-01-1995
<PERIOD-END> NOV-30-1996
<CASH> 84,313
<SECURITIES> 0
<RECEIVABLES> 55,557
<ALLOWANCES> 21,448
<INVENTORY> 0
<CURRENT-ASSETS> 206,243
<PP&E> 153,933
<DEPRECIATION> 31,154
<TOTAL-ASSETS> 465,947
<CURRENT-LIABILITIES> 65,033
<BONDS> 14,858
0
0
<COMMON> 46,856
<OTHER-SE> 335,343
<TOTAL-LIABILITY-AND-EQUITY> 465,947
<SALES> 503,266
<TOTAL-REVENUES> 507,194
<CGS> 402,686
<TOTAL-COSTS> 402,686
<OTHER-EXPENSES> 88,917<F1>
<LOSS-PROVISION> 20,101
<INTEREST-EXPENSE> 3,889
<INCOME-PRETAX> (8,399)
<INCOME-TAX> (3,047)
<INCOME-CONTINUING> (5,352)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (5,352)
<EPS-PRIMARY> (.12)
<EPS-DILUTED> (.12)
<FN>
<F1> Amount includes the following:
General and administrative expense 33,029
depreciation and amortization 22,364
non-recurring transactions 33,524
------
88,917
======
</FN>
</TABLE>
