<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended May 31, 1997
-----------------------------------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from_______________________ to _____________________
Commission file number 1-7008
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- ------------------------------------------------------------------------------
TRANSITIONAL HOSPITALS CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
NEVADA 94-1599386
- ------------------------------- -------------
(State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization)
5110 W. Sahara Avenue, Las Vegas, Nevada 89102
- ----------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (702)257-3600
-------------
Not Applicable
- ------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 and (2) has been subject to such filing requirements for
the past 90 days.
Yes X No
---- ----
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date: 38,994,413 as of June 15,
1997. ----------
Total number of pages: 27
Exhibit Index at page: 14
Page 1 of 27
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31 May 31
1997 1996 1997 1996
---------------------------------------------
(000s omitted except per share data)
----------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Net operating revenues $156,543 $269,223 $81,627 $141,734
Investment and other income 5,872 1,240 3,344 754
-------- -------- ------- --------
162,415 270,463 84,971 142,488
COSTS AND EXPENSES:
Operating expenses 126,178 210,760 67,186 109,483
General and administrative
expenses 11,536 16,631 6,227 8,696
Bad debt expense 3,821 10,379 2,242 5,480
Depreciation and amortization 6,969 11,776 3,470 6,133
Interest expense 606 3,228 248 1,855
Non-recurring transactions 6,606 1,643 6,606 800
-------- -------- ------- --------
155,716 254,417 85,979 132,447
INCOME(LOSS)BEFORE INCOME TAXES 6,699 16,046 (1,008) 10,041
Income taxes 5,189 6,097 2,183 3,815
-------- -------- ------- --------
NET INCOME(LOSS) $ 1,510 $ 9,949 $(3,191) $ 6,226
======== ======== ======= ========
NET INCOME(LOSS)PER SHARE $ 0.04 $ 0.23 $ (0.08) $ 0.14
======== ======== ======= ========
WEIGHTED AVERAGE COMMON SHARES 39,768 44,051 38,860 44,396
======== ======== ======= ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 2 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
May 31 November 30
1997 1996
(Unaudited) (Audited)
------------------ ------------------
ASSETS (000s omitted except per share data)
- ------ ----------------------------------
<S> <C> <C>
CURRENT:
Cash and cash equivalents $ 60,359 $ 84,313
Short-term investments 5,888 16,777
Accounts receivable, less allowances
for doubtful accounts
1997 - $12,728/1996 - $21,448 59,098 55,557
Prepaid expenses and other current assets 12,669 14,784
Property held for sale 8,533 13,393
Refundable and deferred income taxes 16,881 21,419
-------- --------
TOTAL CURRENT ASSETS 163,428 206,243
PROPERTY, BUILDINGS & EQUIPMENT-at
cost less allowances for depreciation 164,466 153,933
Investment in affiliate 72,480 69,859
Refundable and deferred income taxes 6,099 15,966
Other assets 23,390 19,946
-------- --------
$429,863 $465,947
======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
- ----------------------------------
CURRENT:
Accounts payable $ 9,387 $ 9,136
Accrued payroll and other expenses 15,920 15,680
Income taxes payable 451 --
Payable to third parties under
reimbursement contracts 15,840 13,954
Other accrued liabilities 8,921 17,796
Current maturities on long-term debt 8,371 8,467
-------- --------
TOTAL CURRENT LIABILITIES 58,890 65,033
LONG-TERM DEBT, EXCLUSIVE OF CURRENT
MATURITIES 10,442 14,858
DEFERRED INCOME TAXES AND OTHER LIABILITIES 3,505 3,857
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00, authorized
2,000 shares; none issued -- --
Common Stock, par value $1.00, authorized
100,000 shares; issued 1997 - 46,856
shares 1996 - 46,856 shares 46,856 46,856
Additional paid-in capital 57,173 56,657
Unrealized gains on investments in debt securities 34 163
Retained earnings 323,220 321,710
Less treasury stock-at cost 1997 - 7,862
shares and 1996 - 4,988 shares (70,257) (43,187)
-------- -------
357,026 382,199
-------- -------
$429,863 $465,947
======== ========
</TABLE>
NOTE: The balance sheet at November 30, 1996 has been derived from the audited
financial statement at that date but does not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements.
See notes to condensed consolidated financial statements.
Page 3 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended
May 31
1997 1996
--------- ---------
(000s omitted)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,510 $ 9,949
Adjustments to reconcile net income to
cash used for operating activities:
Depreciation and amortization 6,969 11,776
Provision for bad debts 3,821 10,379
Non-recurring transactions 6,100 1,643
Gain on the sale of property -- (103)
Other (1,785) 1,038
Changes in assets and liabilities, exclusive
of business acquisitions and disposals:
Accounts receivable (7,362) (12,882)
Payable to third parties
under reimbursement contracts 1,886 9,304
Prepaid expenses and other current assets (1,015) (4,901)
Accounts payable and accrued expenses 491 (9,020)
Other accrued liabilities (14,975) (5,199)
Income taxes 14,762 11,445
-------- --------
Net cash provided from operations 10,402 23,429
CASH FLOWS FROM FINANCING ACTIVITIES:
Purchase of treasury shares (28,531) --
Payment of deferred compensation (545) --
Net proceeds from exercise of stock options 1,975 150
Payments on long-term debt (4,512) (11,939)
-------- --------
Net cash used for financing activities (31,613) (11,789)
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of short-term investments 20,516 5,601
Purchases of short-term investments (9,756) --
Payments received on notes 3,358 1,145
Loans made to officers (300) (750)
Purchase of property, buildings and equipment (9,414) (18,917)
Proceeds from the sale of property, buildings
and equipment 4,534 1,632
Investment in joint venture (4,009) --
Investment in pre-opening costs (1,435) (831)
Payments for business acquisitions:
Property, buildings and equipment (6,057) --
Excess of purchase price over value of
assets acquired (180) --
-------- --------
Net cash used for investing activities (2,743) (12,120)
-------- --------
Net decrease in cash and cash equivalents (23,954) (480)
Beginning cash and cash equivalents 84,313 17,263
-------- --------
Ending cash and cash equivalents $ 60,359 $ 16,783
======== ========
</TABLE>
See notes to condensed consolidated financial statements.
Page 4 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
MAY 31, 1997
NOTE A: Basis of Presentation
---------------------
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. For further information, refer
to the consolidated financial statements and footnotes thereto
included in the Transitional Hospitals Corporation (the "Company")
Annual Report on Form 10-K for the year ended November 30, 1996.
NOTE B: Merger with Vencor, Inc.
------------------------
On June 18, 1997, the Company entered into an agreement and plan
of merger with Vencor, Inc. (the "Vencor Merger Agreement") under
which Vencor, Inc. ("Vencor") would acquire all of the Company's
outstanding common stock at $16.00 per share (the "Acquisition"). The
Acquisition is structured as a cash tender offer to be followed by a
second-step merger pursuant to which a wholly-owned subsidiary of
Vencor will acquire all shares which were not acquired in the tender
offer. Vencor's wholly-owned subsidiary acquired 37.2 million shares
(approximately 95.5% of the outstanding shares of the Company) in the
tender offer which expired on June 19, 1997. On June 24, 1997, the
Company completed the tender offer, after which time operations of the
Company will be consolidated with those of Vencor. The Company and
Vencor are in the process of completing the merger of Vencor's wholly-
owned subsidiary with and into the Company. Upon consummation of the
merger, each share not purchased through the tender offer will be
converted into the right to receive $16.00 in cash. The closing of the
Acquisition is subject to customary conditions. The merger is expected
to be completed within 45 to 60 days of the expiration of the tender
offer.
Prior to entering into the Vencor Merger Agreement, the Company
had entered into an agreement and plan of merger with Select Medical
Corporation ("Select") whereby Select would acquire all of the
outstanding common stock of the Company for $14.55 per share (the
"Select Merger Agreement"). The Select Merger Agreement was terminated
prior to the execution of the Vencor Merger Agreement. Pursuant to the
terms of the Select Merger Agreement, the Company paid Select a break-
up fee of approximately $19.4 million in June 1997. This payment is
not included in the statement of operations for the six months ended
May 31, 1997.
NOTE C: Transaction Expenses (non-recurring transactions)
-------------------------------------------------
As of May 31, 1997, $6.6 million had been expensed for investment
banking and legal fees related to the sale of the Company. These
transaction expenses are considered to be permanent differences for
income tax purposes, and thus are not tax effected for purposes of
calculating the fiscal year 1997 tax provision.
For the six months and quarter ended May 31, 1996, non-recurring
transaction costs totaling $1.6 million and $.8 million, respectively,
for termination benefits and other exit costs were incurred in
connection with the decision to close three psychiatric hospitals.
Page 5 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
MAY 31, 1997
NOTE D: Disposals of Psychiatric Hospitals
----------------------------------
As more fully described in the Company's 1996 Annual Report to
Stockholders and Annual Report on Form 10-K, the Company sold its
United Kingdom psychiatric operations on June 21, 1996 and
substantially all of its U.S. psychiatric operations on November 30,
1996. The U.S. psychiatric operations were sold to Behavioral
Healthcare Corporation ("BHC") for $60 million in cash and a 61%
(44.2% voting equity interest) ownership interest in BHC. Following is
a summary of unaudited summary financial information for the above
described entities included in the Company's historical statement of
operations.
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31 May 31
1997 1996 1997 1996
------ -------- ------- ---------
(000s omitted except per share data)
----------------------------------
<S> <C> <C> <C> <C>
U.K. psychiatric operations:
Total revenues - $ 33,094 - $17,840
Income before taxes - 6,496 - 4,397
Net income - 4,222 - 2,858
Earnings per share - 0.10 - 0.06
U.S. psychiatric operations:
Total revenues - $109,479 - $56,823
Income before taxes* - 1,568 - 1,373
Net income - 810 - 737
Earnings per share - 0.02 - 0.02
</TABLE>
* Included in the statements of operations for the six months and
quarter ended May 31, 1996 are operating losses and restructuring
charges related to nine U.S. psychiatric hospitals that were closed
between November 1995 and April 1996. Total operating losses for these
facilities were $4.2 million and $2.4 million, respectively, for the
six months and quarter ended May 31, 1996. Total restructuring charges
for the closure of these facilities were $1.6 million and $.8 million
for the six months and quarter ended May 31, 1996.
Page 6 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
MAY 31, 1997
NOTE E: Investment in Affiliate
-----------------------
As described in Note D, the Company retained a 61% (44.2% voting
equity interest) ownership interest in BHC. The investment is
accounted for under the equity method of accounting and thus only the
Company's share of BHC's net income is included in the statement of
operations for both the six months and quarter ended May 31, 1997. A
summary of unaudited BHC statement of operations information is
described below:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31, 1997 May 31, 1997
------------ ------------
(000s omitted except per share data)
----------------------------------
<S> <C> <C>
Total revenues $159,254 $83,496
Income before taxes 10,872 7,961
Net income 6,558 4,774
Company's share of
BHC net income 2,901 2,112
Earnings per share 0.04 0.03
</TABLE>
NOTE F: Contingencies
-------------
On June 20, 1997, the Company was made aware of a lawsuit that
was filed against the Company and certain senior executives and
directors of the Company alleging that the Company failed to make
timely disclosure to stockholders that it had received a written offer
to acquire all of the Company's common stock. The complaint asserts
claims pursuant to Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended, and common law principles of negligent
misrepresentation. The plaintiffs in the suit are persons who sold the
Company's common stock between February 26, 1997 and May 4, 1997. The
Company has not been served with this lawsuit nor is the Company able
to determine what impact, if any, that the lawsuit would have on the
Company's financial position or results of operations.
On June 6, 1997, the Company announced that it had been advised
that it was a target of a grand jury investigation arising from
activities of the Company's formerly owned dialysis business. The
investigation involves purported Medicare fraud involving certain
laboratory tests performed by a partnership which existed from June
1987 to June 1992 between Damon Corporation and the Company. The
Company spun off its dialysis business, now called Vivra Incorporated,
on September 1, 1989. Based on the current status of this matter,
management is not able to determine what impact, if any, the
resolution of this matter will have on the Company's financial
position or results of operations.
Page 7 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(CONTINUED)
(UNAUDITED)
MAY 31, 1997
NOTE F: Contingencies (continued)
-------------
On May 14, 1997, Charles Miller and Kenneth Steiner, former
stockholders of the Company, filed a purported class action lawsuit
against the Company and each of its directors in the District Court
for Clark County, Nevada. The complaint alleges that the Board
breached its fiduciary duty by entering into the Select Merger
Agreement, and seeks, among other things, (i) injunctive relief
barring the Company from consummating the transactions contemplated by
the Select Merger Agreement, (ii) declaratory relief to invalidate the
provisions of the Select Merger Agreement providing for the
termination fee of $19.4 million payable to Select under certain
circumstances, and (iii) damages against the Company's directors for
breaching their fiduciary duties in connection with the negotiation
and execution of the Select Merger Agreement. The Company believes
that the allegations in the complaint are without merit.
On May 7, 1997, Vencor, Jill L. Force and Patrick Mattingly (the
"Vencor Complaint") filed a complaint in the United States District
Court of Nevada against the Company, each of the directors of the
Company and SM Acquisition Co. (a wholly owned subsidiary of Select).
The issues raised in the Vencor Complaint were similar to those raised
in the Miller/Steiner complaint noted above. The Vencor Complaint was
dismissed without prejudice in June 1997.
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's financial
position or results of operations.
Page 8 of 27
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
Results of Operations
Net operating revenues for the quarter and six months ended May 31, 1997
decreased $60.1 million and $112.7 million, respectively. The decrease in net
operating revenues was the result of the sale of the Company's United Kingdom
("U.K.") and United States ("U.S.") psychiatric operations in June 1996 and
November 1996, respectively.
Net operating revenues from the Company's long-term acute care hospitals
increased 19.0% from $67.8 million in the second quarter of 1996 to $80.7
million in the second quarter of 1997. Second quarter patient days increased
13.8% and net revenue per patient day increased 3.9%. Net operating revenues
from the long-term acute care hospitals increased from $127.8 million to $154.6
million, or 21.0%, for the first six months of fiscal year 1997 compared to the
prior year. Year to date patient days and net revenue per patient day increased
13.8% and 5.6%, respectively. The increase in patient days is mainly the result
of the opening of four new long-term acute care facilities since October 1996 as
well as increases in same-store patient days of 2.7% and 4.4%, respectively, for
the quarter and six months ended May 31, 1997. Net revenue per patient day
increased as a result of more favorable prior period Medicare settlements in the
current period compared to the prior year.
Investment and other income increased $2.6 million and $4.6 million during
the second quarter of fiscal year 1997 and the first six months of fiscal year
1997 compared to corresponding periods in the prior year. Interest income
increased $.8 million and $2.3 million during the periods noted above due to
higher cash and short-term investment balances that resulted from the sales of
the U.K. and U.S. psychiatric operations during 1996. Also contributing to the
increase was equity earnings from the Company's unconsolidated affiliate,
Behavioral Healthcare Corporation ("BHC") which totaled $2.1 million and $2.9
million, respectively, for the quarter and the six months ended May 31, 1997.
The Company acquired an approximate 44.2% voting equity interest in BHC as
partial consideration for the sale of substantially all of its U.S. psychiatric
operations to BHC on November 30, 1996.
Operating expenses as a percentage of net operating revenues were 82.3% and
80.6%, respectively, for the quarter and six months ended May 31, 1997.
Percentages for the comparable prior year periods were 77.2% and 78.3%,
respectively. The current year increase in operating expenses as a percentage of
net operating revenues is due to the sale of the U.K. psychiatric operations in
June of 1996. The U.K. operations historically had lower operating costs than
the other divisions of the Company. Operating expenses as a percentage of net
operating revenues for the long-term acute care division were 80.0% and 80.3%
for the six months ended May 31, 1997 and 1996 and 81.7% and 80.3% for the
quarter ended May 31, 1997 and 1996, respectively. Operating expenses as a
percentage of net operating revenues were higher in the second quarter of 1997
primarily due to start-up operating losses after the opening of one new facility
in Detroit.
General and administrative expense decreased $2.5 million for the second
quarter of 1997 and $5.1 million for the six months ended May 31, 1997.
Reductions in corporate overhead were implemented with the sales of the U.K. and
U.S. psychiatric operations in June 1996 and November 1996, respectively.
Bad debt expense decreased from 3.9% of net operating revenues in the
second quarter of 1996 to 2.7% of net operating revenues in the second quarter
of 1997 and from 3.9% to 2.4% during the comparable six month periods. The
decrease is primarily due to the sale of U.S. psychiatric hospitals at the close
of fiscal 1996, which historically incurred higher bad debt expense as a
percentage of net operating revenues than the Company's long-term acute care
hospitals.
Depreciation and amortization decreased due to the sale of the U.K. and
U.S. psychiatric operations in fiscal year 1996.
Interest expense decreased as the Company repaid $80.3 million of long-term
debt during fiscal year 1996 from the proceeds of the sale of the U.K.
psychiatric hospitals in June of 1996.
Page 9 of 27
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF
OPERATIONS AND FINANCIAL CONDITION (CONTINUED)
Results of Operations (continued)
Non-recurring transactions in the second quarter of 1997 related to the
accrual of investment banking and legal fees related to the sale of the Company
in June of 1997. Non-recurring transaction costs totaling $1.6 million for
termination benefits and other exit costs were incurred during the first two
quarters of 1996 in connection with the decision to close three psychiatric
hospitals. See Notes B and C of the Notes to Condensed Consolidated Financial
Statements.
The effective income tax rate for the six months ended May 31, 1997 was
77.5% compared to 38.0% for the comparable period in the prior year. The
increase is due to $6.6 million of transaction expenses related to the sale of
the Company. These transaction expenses are treated as permanent differences for
purposes of calculating the fiscal year 1997 tax provision.
Liquidity and Capital Resources at May 31, 1997
Cash flows provided from operations were $10.4 million and $23.4 million
for the six months ended May 31, 1997 and 1996, respectively. Amounts paid in
the first two quarters of 1997 for severance and other exit costs related to the
sale of the U.S. psychiatric operations exceeded by $9.8 million amounts paid
for similar costs in the first two quarters of 1996 related to the closure of
six U.S. psychiatric hospitals, three regional offices and corporate severance.
In 1996, the Company's Board of Directors authorized spending up to $75
million to repurchase Company common stock from time to time on the open market.
In accordance with this authorization, the Company repurchased 4.2 million
shares of common stock for $35.8 million during the third and fourth quarters of
1996. During the first quarter of 1997, an additional 3.0 million shares were
repurchased for $28.5 million. Of the $28.5 million, $21.1 million was paid by
the Company during the quarter ended February 28, 1997 and $7.4 million was paid
in March 1997 for repurchases made on the last three days of February 1997.
Purchases of fixed assets totaled $9.4 million during the first six months
of 1997 compared to $18.9 million during the first six months of 1996. In the
second quarter of 1997, the Company received $4.5 million from the sale of one
of its closed psychiatric facilities.
Until the acquisition of the Company by Vencor, the Company's development
focus had been primarily on expanding and enhancing the long-term acute care
business as well as, to a lesser extent, on developing new business in Puerto
Rico, Latin America and Europe where the Company believes that it has the
experience and opportunities to provide cost effective healthcare services. In
the first quarter of 1997, the Company opened two new long-term acute care
hospitals. In the second quarter of 1997, the Company acquired for $6.5 million,
a hospital in Detroit, Michigan that was converted into a long-term acute care
hospital. In addition, the Company made an investment of $3.2 million in a joint
venture whereby the Company and its joint venture partner will build and operate
a drug and alcohol treatment facility on the island of Antigua. The Company's
investment in the joint venture is included in other assets at May 31, 1997.
The Company believes that its current cash and cash equivalent balances
along with its operating cash flow will be sufficient to fund the Company's
normal operating requirements through the date of the completion of the
Acquisition.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
NOT APPLICABLE
Page 10 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
MAY 31, 1997
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS:
-----------------
On June 20, 1997, the Company was made aware that a lawsuit was filed
against the Company and certain senior executives and directors of the Company
alleging that the Company failed to make timely disclosure to stockholders that
it had received a written offer to acquire all of the Company's common stock.
The complaint asserts claims pursuant to Sections 10(b) and 20(a) of the
Securities Exchange Act of 1934, as amended, and common law principles of
negligent misrepresentation. The plaintiffs in the suit are persons who sold the
Company's common stock between February 26, 1997 and May 4, 1997. The Company
has not been served with this lawsuit nor is the Company able to determine what
impact, if any, that the lawsuit would have on the Company's financial position
or results of operations.
On June 6, 1997, the Company announced that it had been advised that it was
a target of a grand jury investigation arising from activities of the Company's
formerly owned dialysis business. The investigation involves purported Medicare
fraud involving certain laboratory tests performed by a partnership which
existed from June 1987 to June 1992 between Damon Corporation and the Company.
The Company spun off its dialysis business, now called Vivra Incorporated, on
September 1, 1989. Based on the current status of this matter, management is not
able to determine what impact, if any, the resolution of this matter will have
on the Company's financial position or results of operations.
On May 14, 1997, Charles Miller and Kenneth Steiner, former shareholders of
the Company, filed a purported class action lawsuit against the Company and each
of its directors in the Distric Court for Clark County, Nevada. The complaint
alleges that the Board breached its fiduciary duty by entering into the Select
Merger Agreement, and seeks, among other things, (i) injunctive relief barring
the Company from consummating the transactions contemplated by the Select Merger
Agreement, (ii) declaratory relief to invalidate the provisions of the Select
Merger Agreement providing for the termination fee of $19.4 million payable to
Select under certain circumstances, and (iii) damages against the Company's
directors for breaching their fiduciary duties in connection with the
negotiation and execution of the Select Merger Agreement. The Company believes
that the allegations in the complaint are without merit.
On May 7, 1997, Vencor, Jill L. Force and Patrick Mattingly filed the
Vencor Complaint in the United States District Court of Nevada against the
Company, each of the directors of the Company and SM Acquisition Co.(a wholly
owned subsidiary of Select). The issues raised in the Vencor Complaint were
similar to those raised in the Miller/Steiner complaint noted above. The Vencor
Complaint was dismissed without prejudice in June 1997.
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's financial
position or results of operations.
Page 11 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
MAY 31, 1997
ITEM 5. OTHER INFORMATION:
-----------------
On June 18, 1997, the Company entered into the Vencor Merger Agreement
under which Vencor would acquire all of the Company's outstanding stock at
$16.00 per share. The Acquisition is structured as a cash tender offer to
be followed by a second-step merger pursuant to which a wholly-owned
subsidiary of Vencor will acquire all shares which were not acquired in the
tender offer. Vencor's wholly-owned subsidiary acquired 37.2 million shares
(approximately 95.5% of the outstanding shares of the Company) in the
tender offer which expired on June 19, 1997. On June 24, 1997 the Company
completed the tender offer, after which time operations of the Company will
be consolidated with those of Vencor. The Company and Vencor are in the
process of completing the merger of Vencor's wholly-owned subsidiary with
and into the Company. Upon consummation of the merger, each share not
purchased through the tender offer will be converted into the right to
receive $16.00 in cash. The closing of the Acquisition is subject to
customary conditions. The merger is expected to be completed within 45 to
60 days of the expiration of the tender offer.
Prior to entering into the Vencor Merger Agreement, the Company had
entered into the Select Merger Agreement whereby Select would acquire all
of the outstanding shares of the Company for $14.55 per share. The Select
Merger Agreement was terminated prior to the execution of the Vencor Merger
Agreement. Pursuant to the terms of the Select Merger Agreement, the
Company paid Select a break-up fee of approximately $19.4 million in June
1997. This payment is not included in the statements of operations for the
six months ended May 31, 1997.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
--------------------------------
A) The following exhibits are included herein:
Exhibit 10.1 The Transitional Hospitals Corporation Deferred
Compensation Plan.
10.2 Employment Contract Amendment No.1 dated April 3, 1997
between the Company and Richard Conte, Wendy Simpson,
James Laughlin, Ronald Ooley and Julia Kopta (filed as
Exhibits (7), (9), (11), (13), and (15) to Schedule
14D-9 on May 19, 1997 and incorporated herein by
reference).
10.3 Agreement and Plan of Merger, dated May 2, 1997, among
Select, SM Acquisition Co. and the Company (filed as
Exhibit 99.1 to the Company's Form 8-K dated May 2,
1997 and incorporated herein by reference).
11 Computation of Earnings per Share.
27 Financial Data Schedule (included only in filings
submitted under the Electronic Data Gathering Analysis
and Retrieval (EDGAR) system).
B) Reports on Form 8-K:
Report dated May 2, 1997 reporting an Agreement and Plan of Merger
among Select, SM Acquisition Co. and the Company.
Report dated May 7, 1997 reporting that the Board of Directors would
meet to respond to the Vencor tender offer.
Report dated May 9, 1997 reporting that the Board authorized
management to negotiate with Vencor.
Page 12 of 27
<PAGE>
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
MAY 31, 1997
SIGNATURES
----------
Pursuant to the requirements 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
(Registrant)
Dated: July 11, 1997 /s/ W. BRUCE LUNSFORD
------------------------------
W. Bruce Lunsford
Chairman of the Board, President
and Chief Executive Officer
/s/ W. EARL REED, III
------------------------------
W. Earl Reed, III
Executive Vice President and Chief
Financial Officer (Principal
Financial Officer)
Page 13 of 27
<PAGE>
EXHIBIT INDEX
Exhibit Page No.
- ------- --------
10.1 The Transitional Hospitals Corporation
Deferred Compensation Plan. 15
10.2 Employment Contract Amendment No.1 dated
April 3, 1997 between the Company and Richard
Conte, Wendy Simpson, James Laughlin, Ronald
Ooley and Julia Kopta (filed as Exhibits (7),
(9), (11), (13), and (15) to Schedule 14D-9 on
May 19, 1997 and incorporated herein by reference).
10.3 Agreement and Plan of Merger, dated May 2, 1997,
among Select, SM Acquisition Co. and the Company
(filed as Exhibit 99.1 to the Company's Form 8-K
dated May 2, 1997 and incorporated herein by
reference).
11 Computation of Earnings Per Share. 27
27 Financial Data Schedule.
Page 14 of 27
<PAGE>
EXHIBIT 10.1
TRANSITIONAL HOSPITALS CORPORATION
DEFERRED COMPENSATION PLAN
WHEREAS, a Supplemental Retirement Agreement ("Old Plan") between
Richard L. Conte and Community Psychiatric Centers (now known as Transitional
Hospitals Corporation) was entered into on September 1, 1988; and,
WHEREAS, in October 1994, the Compensation Committee decided to
terminate the Old Plan and pay Mr. Conte the total surrender cash value of the
company-owned life insurance policy as of July 31, 1994 to enable Transitional
Hospitals Corporation ("Company") to obtain approximately $4.5 million in cash
benefits from the Company owned life insurance policy for the Company's use;
and, further on January 26, 1995 the Compensation Committee agreed that the Old
Plan would be terminated effective May 31, 1995 with a replacement plan to be
developed for an effective date of June 1, 1995; and,
WHEREAS, Mr. Conte consented to have the then current Plan terminated
with the proviso that a new written Plan would be developed with changes
approved by the Committee; and
WHEREAS, the Company failed to develop a new written Plan for an
effective date of June 1, 1995, the Company has now developed a written Deferred
Compensation Plan to address the changes previously passed by the Compensation
Committee and the changes passed by the Compensation Committee since the
termination of the Old Plan, including those changes defining the basis of
deferred compensation.
The Company hereby sets forth below the Deferred Compensation Plan.
ARTICLE I
NAME AND PURPOSE
----------------
1.1 Name. The Transitional Hospitals Corporation Deferred
----
Compensation Plan (the "Plan") is hereby established retroactive to January 1,
1997.
1.2 Purpose. The purpose of this Plan is to provide a source of
-------
retirement income for certain executive officers of the Corporation through the
deferral of a portion of the compensation which they otherwise earn for each
year of service with the Corporation. The deferred amounts will earn an
investment return over the deferral period and will be paid out following the
officer's retirement, death, disability or other termination of employment.
The obligation to pay the compensation deferred under the plan shall
be an unfunded liability of the Corporation, and all amounts which become due
under the Plan shall accordingly be paid either directly from the general assets
of the Corporation or through a grantor trust arrangement established in
accordance with the provisions of Article VII. The interest of each participant
(and his or her beneficiary) in any compensation deferred under the plan shall
be that of an unsecured creditor of the Corporation.
This plan document also incorporates the individual deferred
compensation arrangement which has been in existence for Mr. Richard L. Conte,
the Corporation's President and Chief Executive Officer, for the period June 1,
1995 to March 31, 1997. The arrangement has been authorized and approved by
resolution of the Board without a formal plan document, and the compensation
deferred under such arrangement has been accrued by the Corporation on all
financial statements filed for all relevant periods from June 1, 1995. This new
plan document shall supersede Mr. Conte's existing arrangement, effective April
1, 1997, for all Years of Service completed after December 31, 1996
Page 15 of 27
<PAGE>
ARTICLE II
DEFINITIONS
-----------
2.1 "Board" shall mean the Board of Directors of the Corporation.
2.2 "Bonus Awards" shall mean (i) the incentive bonus earned for each
Fiscal Year, beginning with the Fiscal Year ending November 30, 1997, under the
Corporation's Annual Incentive Plan and paid to the Participant on a current
cash basis after the end of that Fiscal Year, (ii) any special recognition
bonus, whether paid in cash or in the form of loan forgiveness, earned for any
Fiscal Year, beginning with the Fiscal Year ending November 30, 1997, and (iii)
the long-term performance bonus earned for each three (3)-year performance cycle
completed under the Corporation's Long-Term Incentive Plan, beginning with the
performance cycle which started on December 1, 1996, and paid to the Participant
on a current cash basis after the end of the cycle.
2.3 "Change in Control" shall mean any of the following transactions:
(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 THC securities representing
twenty percent (20%) or more of the total combined voting power of THC'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 THC'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 THC's assets in
complete liquidation or dissolution of THC.
2.4 "Corporation" shall mean Transitional Hospitals Corporation, a
Nevada corporation, and any successor or assignee corporation, whether by way of
merger, acquisition or other reorganization.
2.5 "Deferred Compensation" shall mean that portion of the
compensation earned by a Participant for a Year of Service which is deferred and
credited to the Deferred Compensation Account maintained for that Participant
under the Plan.
2.6 "Deferred Compensation Account" shall mean the account maintained
on the books and records of the Corporation for each Participant who is credited
with Deferred Compensation for one or more Years of Service under the Plan.
2.7 "Distribution Election" shall mean the election, in substantially
the form of attached Exhibit A, which the Participant must file under the Plan
for purposes of designating the payout event for his or her Deferred
Compensation Account and the method of payment.
2.8 "Disability" shall mean any mental or physical illness, disease
or condition which in the opinion of two (2) physicians skilled in the specialty
does or will result in Mr. Conte's inability to perform the essential functions
of his job for a period of six (6) consecutive months or more.
2.9 "Effective Date" shall mean (i) June 1, 1995 for the pre-existing
deferred compensation arrangement in effect for Mr. Conte for the period June 1,
1995 to December 31, 1996 and (ii) January 1, 1997 for the new deferred
compensation program to be in effect for him and one or more other Participants
under this Plan document.
2.10 "Eligible Employee" shall mean each Employee who is an executive
officer of the Corporation.
2.11 "Employee" shall mean any individual in the employ of the
Corporation who is subject to the Corporation's control and direction as to both
the work to be performed and the manner and method of performance.
2.12 "Fiscal Year" shall mean the fiscal year of the Corporation for
financial accounting purposes which begins on December 1 each year and ends on
November 30 of the following year.
2.13 "Hostile Take-Over" shall mean any of the following changes in
control or ownership of the Corporation:
Page 16 of 27
<PAGE>
(i) the acquisition by any person or related group of persons, other
than the Corporation or a person that directly or indirectly controls, is
controlled by or is under common control with the Corporation, of beneficial
ownership of securities possessing twenty percent (20%) or more of the total
combined voting power of the Corporation's outstanding securities in a
transaction or series of related transactions not approved by at least a four-
fifths majority of those Board members who begun their Board service prior to
the first transaction, or
(ii) a change in the composition of the Board over a period of twenty-
four (24) consecutive months or less such that a majority of the Board members
ceases for any reason to be comprised of individuals who either (A) have been
members of the Board contiguously since the beginning of such period or (B) have
been elected or nominated for election as Board members during such period by at
least a four-fifths majority of the Board members described in clause (A) who
were still in office at the time such election or nomination was approved by the
Board.
2.14 "Investment Funds" shall mean the funds listed on Schedule I, as
such Schedule may be modified from time to time, which the Participant may
designate as the measure of the investment return on his or her Deferred
Compensation Account during the deferral period under the Plan, provided the
Investment Fund Program has been implemented under the Plan.
2.15 "Investment Fund Program" shall mean the program which may, in
the Plan Administrator's discretion, be implemented at any time under the Plan
pursuant to which each Participant will have the right to designate the
particular Investment Fund or Funds which are to serve as the measure of the
investment return on his or her Deferred Compensation Account.
2.16 "Investment Election" shall mean the election, in substantially
the form of attached Exhibit B, which the Participant must file under the Plan
for purposes of specifying the Investment Fund or Funds which are to serve as
the measure of the investment return on his or her Deferred Compensation
Account.
2.17 "Participant" shall mean each Eligible Employee selected for
participation in the Plan.
2.18 "Plan" shall mean the Corporation's Deferred Compensation Plan,
as set forth in this document and in amendments from time to time made hereto.
2.19 "Plan Administrator" shall mean the Compensation Committee of the
Board acting in its capacity as administrator of this Plan.
2.20 "Salary" shall mean the level of base salary in effect for the
Participant for each Year of Service coincident with his or her period of
participation under the Plan.
2.21 "Valuation Date" shall mean the last business day of each
calendar quarter.
2.22 "Year of Service" shall mean each calendar year of participation
in the Plan. The first Year of Service taken into account under the plan shall
be (i) the 1995 calendar year for the pre-existing deferred compensation
arrangement in effect for Mr. Conte and (ii) the 1997 calendar year for the new
deferred compensation arrangement to be in effect for him and one or more other
Participants under this new plan document.
ARTICLE III
PARTICIPANT
-----------
3.1 Commencement of Participation.
-----------------------------
A. The Plan Administrator shall, prior to the start of each Year
of Service, select the Eligible Employees who are to participate in the Plan for
that Year, and the selected individuals shall commence their participation in
the Plan as of the first day of that Year of Service. However, for the Year of
Service coincidental with the 1997 calendar year, the Plan Administrator may
select the Participants at any time during the thirty (30)0-day period
immediately following the Board's adoption of this new Plan on April 3, 1997.
Mr. Conte's participation in the prior deferred compensation arrangement
incorporated into this plan document commenced on June 1, 1995.
B. A newly-hired Eligible Employee may commence participation in
the Plan after the start of a Year of Service, provided he or she is selected
for participation within the thirty (30)-day period measured from his or her
hire date.
Page 17 of 27
<PAGE>
C. The Plan Administrator shall have absolute discretion in
selecting the Eligible Employees who are to participate in the Plan for one or
more Years of Service.
3.2 Cessation of Participation. Every Eligible Employee who becomes
--------------------------
a Participant shall continue to participate in the Plan until the earliest of
--------
(i) his or her removal from the Plan upon written notice from the Plan
Administrator, (ii) his or her cessation of Employee status, or (iii) the
termination of the Plan. Upon such individual's cessation of Participant
status, he or she shall not be entitled to any further Deferred Compensation
under the Plan, but his or her Deferred Compensation Account shall continue to
be credited with an investment return until the Corporation has paid out the
entire balance credited to that Account.
ARTICLE IV
PRE-EXISTING DEFERRED COMPENSATION ARRANGEMENT
----------------------------------------------
This Article IV shall apply to (i) the compensation deferred on Mr.
Conte's behalf during the period from June 1, 1995 to December 31, 1996, (ii)
the investment return on that deferred compensation for such period, and (iii)
the subsequent payout of that deferred compensation amount.
4.1 Amount. The amount of Deferred Compensation earned by Mr. Conte
------
for each Year of Service coincidental with his or her period of participation in
the Plan for the period June 1, 1995 to December 31, 1996 has been determined as
follows:
For the period from June 1, 1995 to May 31, 1996, the amount of
such Deferred Compensation was equal to nine and one-half percent (9.5%)
of (i) the Salary earned for that period, (ii) the incentive bonus
accrued for that period under the Corporation's Annual Incentive Plan,
and (iii) any special recognition bonus, whether payable in cash or in
the form of loan forgiveness, accrued for that period.
For the period from June 1, 1996 to December 31, 1996, the
amount of such Deferred Compensation was equal to nine and one-half
percent (9.5%) of (i) the Salary earned for that period, (ii) the
incentive bonus accrued for that period under the Corporation's Annual
Incentive Plan, (iii) the incentive bonus accrued for that period with
respect to the three (3)-year performance cycle which began under the
Corporation's Long-Term Incentive Plan on December 1, 1995, (iv) any
special recognition bonus, whether payable in cash or in the form of
loan forgiveness, accrued for that period, and (v) the interim payouts
made to him during such period under his December 1, 1995 Employment
Contract in connection with the sale of the Corporation's U.K. and U.S.
psychiatric care business operations.
4.2 Credit to Deferred Compensation Account. The applicable amount
---------------------------------------
of Deferred Compensation earned by Mr. Conte for the period June 1, 1995 to
December 31, 1996 Plan shall be credited to his or her Deferred Compensation
Account monthly, and the balance credited to that Account shall earn interest
for such period at the rate of eight percent (8%) per annum, compounded semi-
annually.
4.3 Payment of Deferred Compensation Account. The balance credited
----------------------------------------
to the Deferred Compensation Account maintained for Mr. Conte under this Article
IV shall be paid at the same time and in the same manner as his post-December
31, 1996 Deferred Compensation Account is paid in accordance with Article VII of
the Plan.
ARTICLE V
DEFERRED COMPENSATION
---------------------
This Article V shall apply to all compensation deferred under the Plan
by Mr. Conte and any other Participant for all periods beginning after December
31, 1996.
Page 18 of 27
<PAGE>
5.1 Amount. The amount of Deferred Compensation to be earned by the
------
Participant for each post-1996 Year of Service coincidental with his or her
period of participation in the Plan shall be determined as follows:
For Mr. Conte, the amount of such Deferred Compensation shall
be equal to nine and one-half percent (9.5%) of the Salary earned for
that Year of Service, (ii) the aggregate amount of Bonus Awards accrued
for that Year of Service, (iii) any interim payouts made to him during
that Year of Service under his December 1, 1995 Employment Contract, and
(iv) all other cash compensation earned by him for services rendered the
Corporation in such Year of Service.
For all other Participants, the amount of such Deferred
Compensation shall be equal to seven percent (7%) of (i) the Salary-
earned of that Year of Service, and (ii) the aggregate amount of Bonus
Awards earned or accrued for that Year of Service.
5.2 Credit to Deferred Compensation Account. The applicable amount
---------------------------------------
of Deferred Compensation earned by the Participant for each Year of Service
completed under the Plan after December 31, 1996 shall be credited to his or her
Deferred Compensation Account as follows:
Deferred Compensation attributable to his or her Salary shall be
credited to the Deferred Compensation Account at the end of each
calendar month during the Year of Service.
Deferred Compensation attributable to his or her Bonus Awards
shall be credited to the Deferred Compensation Account either as the
Awards are accrued by the Corporation for financial reporting purposes
or as those Awards are actually paid to the Participant to the extent
not previously accrued.
ARTICLE VI
DEFERRED COMPENSATION ACCOUNT
-----------------------------
6.1 Investment Return.
-----------------
A. Until such time as the Plan Administrator elects to implement
the Investment Fund Program, the balance credited to each Deferred Compensation
Account maintained under the Plan shall earn interest at the rate of eight
percent (8%) per annum, compounded semi-annually until paid.
B. The Plan Administrator may at any time during the term of the
Plan implement the Investment Fund Program pursuant to which the Deferred
Compensation Account of each Participant shall earn an investment return tied to
the Investment Fund or Funds selected from time to time by the Participant. The
Participant shall file his or her initial Investment Election with the Plan
Administrator within thirty (30) days after the later of (i) the implementation
-----
of the Investment Fund Program by the Plan Administrator, or (ii) the
individual's selection for participation in the Plan. On each Valuation Date,
the Deferred Compensation Account shall be adjusted to reflect the investment
gains, earnings or losses which the Account would have actually realized had it
been invested for the valuation period in the Investment Fund or Funds
designated by the Participant. The Participant may redesignate his or her
Investment Funds once per calendar quarter, with the change to become effective
on the first day of the first calendar quarter following the date the new
Investment Election is filed with the Plan Administrator.
6.2 Account Value. The value of a Participant's Deferred
-------------
Compensation Account on any particular date in question shall be deemed to be
equal to the balance credited to that Account on the Valuation Date coincident
with or immediately preceding the date such value is to be determined, increased
by any Deferred Compensation credited to, or decreased by any payment made from,
that the Account after such Valuation Date but before the actual date on which
the value of the Account is to be
Page 19 of 27
<PAGE>
determined. The Participant shall receive a written statement of the value of
each of his or her Deferred Compensation Account at least once each calendar
year.
6.3 Vested Interest. The Participant shall at all times be fully
---------------
vested in his or her Deferred Compensation Account.
ARTICLE VII
DISTRIBUTION OF BENEFITS
------------------------
7.1 Payout Event. The balance credited to the Deferred Compensation
------------
Account maintained for each Participant shall become distributable upon the
occurrence of any payout event listed in this Section 7.1 which the Participant
selects pursuant to his or her Distribution Election. The Participant must file
his or her initial Distribution Election with the Plan Administrator within
thirty (30) days after his or her selection for participation in the Plan. The
Participant may change the elected payout event at any time by filing a new
Distribution Election with the Plan Administrator; provided, however, that the
new election shall not be effective if the Distribution Election is filed with
the Plan Administrator within two (2) years prior to the actual occurrences of
the selected payout event. The applicable payout events under the Plan shall be
as follows:
- termination of employment for any reason, including death or
Disability.
- attainment of the age specified by the Participant in his or her
Distribution Election.
- expiration of the period of years (not to exceed twenty (20)
years) specified by the Participant in his or her Distribution
Election.
- the earlier of (i) the Participant's attainment of the age
-------
specified in his or her Distribution Election, or (ii) the
Participant's termination of employment.
- the later of (i) the Participant's attainment of the age
-----
specified by the Participant in his or her Distribution Election, or
(ii) the Participant's termination of employment.
- In no event may the Participant designate an attained age
beyond age seventy (70)
7.2 Form of Distribution. Upon the occurrence of the applicable
--------------------
payout event under Section 7.1, the Deferred Compensation Account shall become
payable in any form of distribution listed in this Section 7.2 which the
Participant selects pursuant to his or her initial Distribution Election filed
with the Plan Administrator within thirty (30) days after his or her selection
for participation in the Plan. The Participant may change the elected for of
distribution at any time by filing a new Distribution election with the Plan
Administrator; provided, however, that the new election shall not be effective
if the Distribution Election is filed with the Plan Administrator within two (2)
years prior to the occurrence of the applicable payout event for the Deferred
Compensation Account. The applicable forms of distribution under the Plan shall
be as follows:
Lump Sum. A Participant may elect to have the entire Deferred
--------
Compensation Account distributed in a lump sum. If such election is
made, then the Plan Administrator shall distribute the Account to the
Participant as soon as administratively feasible after the applicable
payout event under Section 7.1, but in no event shall the distribution
be made more than ninety (90) days after such payout event.
Installments. A Participant may elect to have the Deferred
------------
Compensation Account distributed in a series of installments over either
a five (5) year or a ten (10)-year period. The first installment shall
be paid within ninety (90) days after the applicable payout event under
Section 7.1, and each subsequent installment shall be paid at quarterly
intervals following each quarterly Valuation Date. The amount of each
installment shall be determined by the following formula:
Page 20 of 27
<PAGE>
X = Y + Z, where
X = the dollar amount of the current installment
Y = the balance credited to the Deferred Compensation Account
immediately prior to the payment of the current installment.
Z = the number of quarterly installments (including the current
installment) which remain to be paid over the balance of the
applicable five (5)-year or ten (10)-year period.
7.3 Investment Return over Payout Period. If the Participant's
------------------------------------
Deferred Compensation Account is to be distributed in installments, then the
following provisions shall govern the investment return on the unpaid balance of
the Account over the installment payout period:
- Unless the Investment Fund Program has been implemented, the
unpaid balance shall continue to accrue interest over the installment period at
the rate of eight percent (8%) per annum, compounded semi-annually.
- If the Investment Fund Program is in effect, the Participant
may, during the installment period, continue to designate and redesignate the
Investment Funds which are to serve as the measure of the investment return
through the filing of one or more Investment Elections with the Plan
Administrator. Such designations may not be made more than once per calendar
quarter over the installment period, with the new designation to become
effective on the first day of the first calendar quarter following the date the
new Investment Election is filed with the Plan Administrator.
- Prior to each installment distribution effected during the
period the Investment Fund Program is in effect, the Participant shall have the
right to select the Investment Fund or Funds which are to serve as the source of
that distribution, and the Participant's interest in those Funds as a measure of
his or her investment return shall be deemed to be liquidated to the extent of
such distribution. In the absence of such designation, the distribution shall
be deemed to be funded pro-rata from each Investment Fund which at the time
serves as the measure of the investment return on the Deferred Compensation
Account.
7.4 Hardship Withdrawal. Should an unforeseeable and extraordinary
-------------------
financial hardship occur for which the Participant does not have any other
resources available, whether through reimbursement (by insurance or otherwise),
liquidation of existing assets (to the extent such liquidation would not itself
result in financial hardship), termination of his or her deferrals to an
Internal Revenue Code Section 401(k) plan or a loan from such plan or any
commercially reasonable source, then the Participant may apply to the Plan
Administrator for an immediate distribution from his or her Deferred
Compensation Account in an amount necessary to satisfy such financial hardship.
The Plan Administrator shall have complete discretion to accept or reject the
request and shall in no event authorize a distribution in an amount in excess of
that required to meet such financial hardship.
7.5 Disability. Should the Participant cease Employee status by
----------
reason of Disability, then such Participant may apply to the Plan Administrator
for an immediate distribution of all or part of the balance credited to his or
her Deferred Compensation Account. The Plan Administrator shall have complete
discretion to honor such request to the extent the payout would not otherwise
have a materially adverse effect upon the Corporation's financial condition.
7.6 Distribution Upon Hostile Take-Over. Immediately prior to the
-----------------------------------
consummation of a Hostile Take-Over, all Deferred Compensation Accounts
outstanding under the Plan shall be paid in full irrespective of any
Distribution elections to the contrary in effect for those Accounts.
Accordingly, this Section 7.6 shall supersede and take precedence over all
Distribution Elections in effect at the time of the Hostile Take-Over.
7.7 Death before Distribution. Should the Participant die prior to
-------------------------
distribution of the entire balance of his or her Deferred Compensation Account,
the unpaid
Page 21 of 27
<PAGE>
balance shall be paid to his or her beneficiary, as designated on the
Participant's most recently effective Distribution Election, at the same time as
such balance would have been paid to the Participant had he or she survived.
7.8. Withholding. All payments made under the Plan shall be subject
-----------
to the Corporation's withholding of all required Federal, State and local income
and employment taxes, and all such payments shall be net of such tax
withholding.
ARTICLE VIII
MISCELLANEOUS
-------------
8.1 Benefits Not Funded.
-------------------
A. The obligation to pay the balance of each Deferred
Compensation Account shall at all times be an unfunded and unsecured obligation
of the Corporation. Except to the extent the Plan Administrator may in its sole
discretion elect to implement a so-called "Rabbi Trust" to serve as a funding
vehicle for the amounts which become payable under the Plan, the Corporation
shall have no obligation to establish any trust, escrow arrangement or other
segregated account for purposes of establishing a funding vehicle for the
payment of such amounts, nor shall the Corporation be under any obligation to
invest any portion of its general assets in mutual funds, insurance contracts,
stocks, bonds, securities or other similar investments in order to accumulate
funds for the satisfaction of its obligations under the Plan. The Participant
(or his or her beneficiary) shall look solely and exclusively to the general
assets of the Corporation for the payment of the Deferred Compensation Account
maintained on the Participant's behalf under the Plan.
B. The Corporation shall, prior to the effective date of any
transaction that qualifies as a Change in Control, establish a Rabbit Trust and
irrevocably contribute to that trust sufficient funds to cover the Corporation's
total accrued liability existing at that time under the Plan, and the
contributed funds shall be invested by the trustee to provide for the investment
returns contemplated by Articles IV and VII of the Plan. Payments from the
Rabbi Trust shall be made as and when benefits become payable to Participants in
accordance with the distribution provisions of Article VII of the Plan, with any
remaining balance due the Participants to be paid out of the Company's assets.
8.2 No Employment Right. Neither the action of the Corporation in
-------------------
establishing or maintaining the Plan, nor any action taken under the Plan by the
Plan Administrator, nor any provision of the Plan itself shall be construed so
as to grant any person the right to remain in the employ of the Corporation for
any period of specific duration, and the Participant may be discharged at any
time, with or without cause.
8.3 Amendment/Termination.
---------------------
A. The Board may at any time terminate the Plan in whole or in
part, and the Board may also at any time amend the provisions of the Plan to any
extent and in any manner the Board shall deem advisable, with such amendment to
become effective at the time of Board action.
B. No such amendment or termination of the Plan shall adversely
affect the benefits of Participants accrued to date under the Plan nor otherwise
reduce the then outstanding balances credited to their Deferred Compensation
Accounts, and all Deferred Compensation credited to those Accounts prior to the
date of any such plan amendment or termination shall continue to become due and
payable in accordance with the distribution provisions of Article VII.
8.4 Applicable Law. The Plan is intended to constitute an unfunded
--------------
deferred compensation arrangement for a select group of management or other
highly compensation persons, and all rights hereunder shall be construed,
administered and governed in all respects in accordance with the provisions of
the Employee Retirement Income Security Act of 1974 (as amended from time to
time) applicable to such an
Page 22 of 27
<PAGE>
arrangement and, to the extent no pre-empted thereby, by the laws of the State
of Nevada without resort to that State's conflict-of-laws provisions. If any
provision of this Plan shall be held by a court of competent jurisdiction to be
invalid or unenforceable, the remaining provisions of the plan shall continue to
be fully effective.
8.5 Satisfaction of Claims. Any payment made to a Participant or his
----------------------
or her legal representative or beneficiary in accordance with the terms of the
Plan shall to the extent thereof be in full satisfaction of all claims with
respect to such payment which such person may have against the Plan, the Plan
Administrator (or its delegate) and the Corporation, any of whom may require the
Participant or his or her legal representative or beneficiary, as a condition
precedent to such payment, to execute a receipt and release therefor in such
form as shall be determined by the Plan Administrator.
8.6 Alienation of Benefits. No persons entitled to any benefits
----------------------
under the Plan shall have the right to alienate, pledge, hypothecate or
otherwise encumber his or her interest in such benefits, and such benefits shall
not, to the maximum extent permissible by law, be subject to claim of his or her
creditors or liable to attachment, execution or other process of law.
8.7 Expenses. All costs and expenses incurred in the operation and
--------
administration of the Plan shall be borne by the Corporation.
8.8 Successors and Assigns. The obligations of the Corporation under
----------------------
the Plan shall be binding upon the successors and assigns of the Corporation,
whether by merger, consolidation, acquisition or other reorganization. No
amendment or termination of the Plan by any such successor assign shall
adversely affect or otherwise impair the rights of the Participants to receive
their benefit payments hereunder, to the extent attributable to any Deferred
Compensation credited to their Deferred Compensation Accounts prior to the date
of such amendment or termination, in accordance with the applicable distribution
provisions of Article VII of the Plan.
ARTICLE IX
BENEFIT CLAIMS
--------------
9.1 Claims Procedure. No application is required for the payment of
----------------
benefits under the Plan. However, if any Participant (or beneficiary) believes
he or she is entitled to a benefit from the Plan which differs from the benefit
determined by the Plan Administrator, then such individual may file a written
claim for benefits with the Plan Administrator. Each claim shall be acted upon
and approved or denied within ninety (90) days following receipt by the Plan
Administrator.
9.2 Denial of Benefits. In the event any claim for benefits is
------------------
denied, in whole or in part, the Plan Administrator shall notify the claimant in
writing of such denial and of his or her right to a review by the Plan
Administrator and shall set forth, in a manner calculated to be understood by
the claimant, specific reasons for such denial, specific references to pertinent
provisions of this Plan on which the denial is based, a description of any
additional material or information necessary to perfect the claim, an
explanation of why such material or information is necessary, and an explanation
of the review procedure.
9.3 Review.
------
A. Any person whose claim for benefits is denied in whole or in
part may appeal to the Plan Administrator for a full and fair review of the
decision by submitting to the Plan Administrator, within ninety (90) days after
receiving written notice from the Plan Administrator of such denial, a written
statement;
(i) Requesting a review by the Plan Administrator of his or
her claim for benefits;
(ii) Setting forth all of the grounds upon which the request
for the review is based and any facts in support thereof; and
(iii) Setting forth any issues or comments which the
claimant deems pertinent to his or her claim.
Page 23 of 27
<PAGE>
B. The Plan Administrator shall act upon each such claim within
sixty (60) days after receipt of the claimant's request for review by the Plan
Administrator, unless special circumstances require an extension of time for
processing. If such an extension is required, written notice of the extension
shall be furnished to the claimant within the initial sixty (60)-day period, and
a decision shall be rendered as soon as possible, but not later than one hundred
twenty (120) days after receipt of the initial request for review. The Plan
Administrator shall make a full and fair review of each such claim and any
written materials submitted by the claimant or the Corporation in connection
therewith and may require the Corporation or the claimant to submit such
additional facts, documents, or other evidence as the Plan Administrator any, in
its sole discretion, deem necessary or advisable in making such a review. On
the basis of its review, the Plan Administrator shall make an independent
determination of the claimant's eligibility for benefits under the Plan. The
decision of the Plan Administrator on any benefit claim shall be final and
conclusive upon all persons.
C. In the event the Plan Administrator denies an appeal in
whole or in part, the Plan Administrator shall give written notice of such
decision to the claimant, setting forth in a manner calculated to be understood
by the claimant the specific reasons for such denial and specific reference to
the pertinent Plan provisions on which the decision of the Plan Administrator
was based.
Page 24 of 27
<PAGE>
SCHEDULE I
----------
LIST OF AVAILABLE INVESTMENT FUNDS
----------------------------------
Page 25 of 27
<PAGE>
EXHIBIT A
---------
Page 26 of 27
<PAGE>
EXHIBIT 11
TRANSITIONAL HOSPITALS CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
May 31 May 31
1997 1996 1997 1996
------------------------------------------
(000s, except per share data)
<S> <C> <C> <C> <C>
Weighted average
common shares 39,768 44,051 38,860 44,396
======= ======= ======= =======
Net Earnings (loss) $ 1,510 $ 9,949 $(3,191) $ 6,226
======= ======= ======= =======
Earnings (loss) per share* $ 0.04 $ 0.23 $ (0.08) $ 0.14
======= ======= ======= =======
</TABLE>
* The exercise of stock options has not been assumed for the earnings per
share calculation for the six months ended May 31, 1997 as the market price
of the Company's common stock did not exceed the exercise price of
outstanding options for substantially all of the three months ending May
31, 1997. The impact of stock options is antidilutive for the second
quarter of 1997. For fiscal year 1996, dilutive common stock equivalents
are less than 3% of weighted average common shares outstanding.
Page 27 of 27
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1997
<PERIOD-START> DEC-01-1996
<PERIOD-END> MAY-31-1997
<CASH> 60,359
<SECURITIES> 5,888
<RECEIVABLES> 59,098
<ALLOWANCES> 12,728
<INVENTORY> 0
<CURRENT-ASSETS> 163,428
<PP&E> 164,466
<DEPRECIATION> 33,341
<TOTAL-ASSETS> 429,863
<CURRENT-LIABILITIES> 58,890
<BONDS> 10,442
0
0
<COMMON> 46,856
<OTHER-SE> 310,170
<TOTAL-LIABILITY-AND-EQUITY> 429,863
<SALES> 156,543
<TOTAL-REVENUES> 162,415
<CGS> 126,178
<TOTAL-COSTS> 126,178
<OTHER-EXPENSES> 25,111
<LOSS-PROVISION> 3,821
<INTEREST-EXPENSE> 606
<INCOME-PRETAX> 6,699
<INCOME-TAX> 5,189
<INCOME-CONTINUING> 1,510
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,510
<EPS-PRIMARY> .04
<EPS-DILUTED> .04
</TABLE>
