<PAGE> 1
SCHEDULE 14A
(RULE 14A-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(A) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec. 240.14a-11(c) or sec. 240.14a-12
Paracelsus Healthcare Corporation
- --------------------------------------------------------------------------------
(Name of Registrant as Specified in its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(l) and
0-11.
(1) Title of each class of securities to which transaction applies:
- --------------------------------------------------------------------------------
(2) Aggregate number of securities to which transaction applies:
- --------------------------------------------------------------------------------
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
- --------------------------------------------------------------------------------
(4) Proposed maximum aggregate value of transaction:
- --------------------------------------------------------------------------------
(5) Total fee paid:
- --------------------------------------------------------------------------------
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
- --------------------------------------------------------------------------------
(2) Form, Schedule or Registration Statement No.:
- --------------------------------------------------------------------------------
(3) Filing Party:
- --------------------------------------------------------------------------------
(4) Date Filed:
- --------------------------------------------------------------------------------
<PAGE> 2
[PARACELSUS LETTERHEAD]
April 22, 1998
Dear Stockholders:
You are cordially invited to the Annual Meeting of Stockholders to be held at
the Hotel Sofitel, 425 North Sam Houston Parkway East, Houston, Texas 77060, on
Thursday, May 14, 1998 at 10:00 a.m., Houston Time.
You are requested to read carefully the accompanying Notice of Meeting and
Proxy Statement. At the meeting, you will be asked to elect five directors,
Messrs. James G. VanDevender, Daryl J. White and Dr. Heiner Meyer zu Losebeck
for a term of three years, Mr. Nolan Lehmann for a term of two years and Mr.
Christian A. Lange for a term of one year. You will also be asked to ratify
the appointment of Ernst & Young LLP as the Company's independent auditors for
1998. The Board of Directors recommends that you vote for the election of
Messrs. VanDevender, White, Lehmann, Lange and Dr. Meyer zu Losebeck and the
ratification of Ernst & Young LLP. A proxy card on which to indicate your vote
and an envelope, postage prepaid, in which to return your proxy, are enclosed.
We hope you will attend our Annual Meeting. Whether or not you plan to attend
the meeting, your vote is important. WE URGE YOU TO COMPLETE, SIGN AND RETURN
THE ENCLOSED PROXY SO THAT YOUR SHARES WILL BE REPRESENTED. If you are able to
attend the meeting, you may revoke your proxy at that time by voting your
shares in person.
If you desire any additional information concerning the meeting, we would be
pleased to hear from you through our Investor Relations Department at (281)
774-5166.
Very truly yours,
/s/ CHARLES R. MILLER
Charles R. Miller
President and Chief Operating Officer
<PAGE> 3
PARACELSUS HEALTHCARE CORPORATION
515 W. GREENS ROAD, SUITE 800
HOUSTON, TEXAS 77067
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
-----------------------
To Be Held May 14, 1998
To Our Stockholders:
NOTICE IS HEREBY GIVEN that the 1998 Annual Meeting of Stockholders of
Paracelsus Healthcare Corporation will be held at the Hotel Sofitel, 425 North
Sam Houston Parkway East, Houston, Texas 77060, on Thursday, May 14, 1998, at
10:00 a.m., Houston Time, for the following purposes:
1. To elect three Class II directors to serve for a term of three
years;
2. To elect one Class I director to serve for a term of two years;
3. To elect one Class III director to serve for a term of one year;
4. To ratify the appointment of Ernst & Young LLP by the Board of
Directors as the Company's independent auditors for 1998; and
5. To transact such other business as may properly come before the
meeting or any adjournment thereof.
The Board of Directors has fixed the close of business on April 13,
1998, as the record date for determining stockholders entitled to notice of and
to vote at the meeting or any adjournment thereof. A list of stockholders
eligible to vote at the meeting may be examined by any stockholder during the
ten-day period preceding the meeting at the Company's executive offices located
at 515 W. Greens Road, Suite 800, Houston, Texas 77067 during ordinary business
hours.
PLEASE PROMPTLY COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY to
assure that your shares are voted and that a quorum will be present at the
meeting. A return envelope, which requires no postage if mailed in the United
States, has been provided for your use. If you attend the meeting and vote your
shares in person or inform the Secretary of the Company in writing that you wish
to revoke your proxy, your proxy will not be used.
By order of the Board of Directors,
/s/ JAMES G. VANDEVENDER
James G. VanDevender
Corporate Secretary
Houston, Texas
April 22, 1998
2
<PAGE> 4
PARACELSUS HEALTHCARE CORPORATION
515 W. GREENS ROAD, SUITE 800
HOUSTON, TEXAS 77067
--------------------
PROXY STATEMENT FOR ANNUAL MEETING OF STOCKHOLDERS
--------------------
To Be Held May 14, 1998
This Proxy Statement is furnished to stockholders in connection with
the solicitation of proxies by the Board of Directors (the "Board") of
Paracelsus Healthcare Corporation (the "Company") to be used at the Annual
Meeting of Stockholders (the "Annual Meeting") to be held at the Hotel Sofitel,
425 North Sam Houston Parkway East, Houston, Texas 77060, on Thursday May 14,
1998, at 10:00 a.m., Houston Time, and any adjournment thereof, as set forth in
the foregoing notice.
This Proxy Statement, the accompanying proxy card and the Annual Report
are being mailed to stockholders on or about April 27, 1998. The proxy, when
properly executed and received by the Secretary of the Company prior to the
Annual Meeting, will be voted as therein specified. If no election is made, the
persons designated as proxies in the accompanying proxy card will vote "FOR" the
election of the nominees to the Board named herein and "FOR" the ratification of
the selection of Ernst & Young LLP as the Company's independent auditors for
1998. The Board is not currently aware of any matters other than those referred
to herein which will come before the Annual Meeting. If any other matter should
be presented at the Annual Meeting for action, the persons named in the
accompanying proxy card will vote the proxy on such matter in their own
discretion.
Proxies may be revoked at any time before they are exercised by
delivering notice of revocation to the Secretary of the Company, by submitting a
subsequently dated proxy, or by attending the Annual Meeting and voting in
person. Attendance at the Annual Meeting will not, in itself, constitute
revocation of the proxy.
Only holders of record of the Company's common stock, no stated par
value ("Common Stock"), at the close of business on April 13, 1998, will be
entitled to vote at the Annual Meeting. As of that date, there were 55,093,417
shares of Common Stock outstanding. Each share of Common Stock entitles the
holder to one vote. A majority of the shares of Common Stock entitled to vote,
present in person or by proxy (including shares that abstain or do not vote with
respect to one or more of the matters presented at the Annual Meeting), will
constitute a quorum for the Annual Meeting. There is no cumulative voting and
there are no other voting securities of the Company outstanding.
The cost of preparing, printing and mailing proxy materials to the
Company's stockholders will be borne by the Company. The Company has retained
Georgeson & Company Inc., a professional solicitation firm, to assist in the
soliciting of proxies from stockholders at a fee of $7.50 for each delivery plus
$0.04 per set of material, but in no event to be less than $600, plus
reimbursement for out-of-pocket expenses. In addition, proxies may be solicited
personally or by telephone by officers or employees of the
3
<PAGE> 5
Company, none of whom will receive additional compensation therefor. The Company
will also reimburse brokerage houses and other nominees for their expenses in
forwarding proxy materials to beneficial owners of Common Stock.
ELECTION OF DIRECTORS
The Bylaws of the Company currently provide that there shall be nine
members on the Board. Currently, the Board consists of five persons, two of whom
are employees of the Company. As of the time of this Annual Meeting, the Board
has not chosen a nominee to replace two director positions that were vacated
prior to the last meeting of stockholders.
In accordance with the Bylaws of the Company, directors are divided
into three classes composed as nearly as possible of an equal number of
directors. Pursuant to a shareholder agreement between Park- Hospital GmbH (the
"Shareholder"), a German corporation, and the Company dated August 16, 1996 (the
"Shareholder Agreement"), four members of the Board, consisting of one Class I
director, one Class II director and two Class III directors, shall be designated
by the Shareholder (the "Shareholder Directors") for nomination by the Board as
each class is up for election. Pursuant to the Shareholder Agreement, three of
the nine members are to be nominees who are neither Shareholder Nominees nor
officers of the Company (the "Independent Directors") and the remaining two
members may be directors who are neither Shareholder Directors nor Independent
Directors (the "Management Directors"). The Company and Shareholder have agreed
that the Class II directors, whose terms expire at the 1998 Annual Meeting,
shall comprise one Shareholder Director, one Management Director and one
Independent Director; the Class III directors, whose terms expire at the 1999
Annual Meeting, shall comprise two Shareholder Directors and one Management
Director; and the Class I directors, whose terms expire at the 2000 Annual
Meeting, shall comprise two Independent Directors and one Shareholder Director.
The Shareholder has agreed to vote its Common Stock for those nominees nominated
pursuant to the Shareholder Agreement. The size of the Board may be increased to
include three additional Independent Directors if the beneficial ownership of
Common Stock of the Shareholder falls below certain levels. Each director will
hold office until a successor has been elected and qualified.
NOMINEES FOR ELECTION TO BOARD OF DIRECTORS
The Board has nominated Messrs. James G. VanDevender, Daryl J. White
and Dr. Heiner Meyer zu Losebeck to serve as Class II directors for a three-year
term expiring at the date of the Annual Meeting in 2001. The Board has also
nominated Mr. Christian A. Lange to serve as a Class III director for a one-year
term expiring at the date of the Annual Meeting in 1999 and Mr. Nolan Lehmann to
serve as a Class I director for a two-year term expiring at the date of the
Annual Meeting in 2000. Messrs. VanDevender, White and Lange currently serve as
Class II directors and each has consented to continue to serve if elected, but
if any nominee becomes unable to serve as a director, and if the Board
designates a substitute nominee, the persons named in the accompanying proxy
card will vote for the substitute nominee designated by the Board. Two positions
on the Board for which there are no nominees are positions the Shareholder under
the Shareholder Agreement has the right to nominate including the position
vacated by Dr. Manfred Georg Krukemeyer's ("Dr. Krukemeyer") resignation as
Chairman of the Board and director in August 1997. The Shareholder has not, at
this time, determined to make these nominations. The
4
<PAGE> 6
accompanying proxy will not be voted to fill any director positions other than
the five positions for whom the nominees are described herein.
The following table sets forth certain information regarding the
nominees, furnished to the Company by such persons. Dr. Meyer zu Losebeck has
been nominated after designation by the Shareholder. Mr. Lehmann has been
nominated pursuant to a request made jointly by the Shareholder and the Ad Hoc
Committee of Former Shareholders of Champion Healthcare Corporation (the
"Committee"). The Committee is composed of certain former Champion Healthcare
Corporation ("Champion") shareholders. The Company understands that a principal
purpose of the Committee is to obtain additional consideration for the Champion
stock they exchanged in connection with the 1996 Merger between the Company and
Champion. See "Litigation." Under the Shareholder Agreement, Mr. Lehmann will be
serving as an Independent Director and Dr. Meyer zu Losebeck will be serving as
a Shareholder Director.
<TABLE>
<CAPTION>
DIRECTOR
NAME AND PRINCIPAL OCCUPATION SINCE CLASS
- ----------------------------- ----- -----
<S> <C> <C>
JAMES G. VANDEVENDER(1), age 50, a Senior Executive Vice President and Chief Financial Officer since 1996 II
June 1997, has served as Executive Vice President and Chief Financial Officer
of the Company since August 1996. From 1990 to 1996, he was Executive Vice President, Chief Financial
Officer, Secretary and a director of Champion which he co-founded. From 1987 to 1989, Mr. VanDevender
pursued private investments. From 1981 to 1987, he was Senior Vice President of Republic Health
Corporation ("Republic"), primarily responsible for acquisitions and development, and held other senior
management positions in the areas of accounting and finance. Prior thereto, he was employed in
various management positions for four years by Hospital Affiliates International ("HAI").
CHRISTIAN A. LANGE(2), age 58, has been President of European Investors, Inc., since 1983 and has 1983 III
served as Chairman of the Board of European Investors Corporate Finance, Inc. Prior to 1983, he was a
senior executive of Friedrich Flick Industrieverwaltung KgaA of Dusseldorf, Germany. From July 1983
to August 1996, Mr. Lange was a financial consultant to the Company.
DARYL J. WHITE(3), age 50, was Chairman of Pinnacle Micro, Inc. from May 1996 to June 1997. He was 1996 II
Senior Vice President, Finance and Chief Financial Officer of Compaq Computer Corp. ("Compaq") from
1989 to 1996. He joined Compaq in 1983 as Director of Information Management and was named Corporate
Controller in 1984, Vice President and Corporate Controller in 1986 and Vice President, Finance and
Chief Financial Officer in 1988. Mr. White is also a director of Imation Corporation.
DR. HEINER MEYER ZU LOSEBECK, age 45, is a Managing Director of Paracelsus-Kliniken-Deutschland GmbH - II
("PKD"), Park-Hospital GmbH, and other affiliates of PKD. PKD owns and operates 26 hospitals ranging
in size from 42 to 350 beds in Germany and Switzerland. Park-Hospital owns approximately 54 percent
of the shares of the Company, and PKD owns all the shares of Park-Hospital. From 1989 through August
1997, Dr. Meyer zu Losebeck was a tax consultant, auditor, and chartered accountant at Dr. Mertens
and Partners, Osnabruck, Germany.
</TABLE>
5
<PAGE> 7
<TABLE>
<CAPTION>
DIRECTOR
NAME AND PRINCIPAL OCCUPATION SINCE CLASS
- ----------------------------- ----- -----
<S> <C> <C>
NOLAN LEHMANN, age 53, has served as the President and a director of Equus Capital Management - I
Corporation, a registered investment advisor since 1983. He also serves as the President and a
director of Equus II Incorporated, a registered investment company. Mr. Lehmann also serves as a
director of Allied Waste Industries, Inc., a solid waste management company, American Residential
Services, Inc., a residential services company, Brazos Sportswear, Inc., a casual sportswear company,
Drypers Corporation, a manufacturer of disposable diapers, and Garden Ridge Corporation, a specialty
retailer, all of which are public companies. Mr. Lehmann is a certified public accountant.
</TABLE>
- -----------------------
1 Pursuant to the Shareholder Agreement, Mr. VanDevender is a Management
Director. Under the terms of his employment agreement, Mr. VanDevender
may terminate the agreement and receive agreed to benefits if he is not
elected a member of the Board and to the Executive Committee.
2 Pursuant to the Shareholder Agreement, Mr. Lange is a Shareholder
Director.
3 Pursuant to the Shareholder Agreement, Mr. White is an Independent
Director.
STOCKHOLDER APPROVAL
SHARES REPRESENTED BY THE ACCOMPANYING PROXY CARD WILL BE VOTED "FOR"
THE ELECTION OF THE ABOVE NOMINEES UNLESS AUTHORITY TO VOTE FOR ALL OR ANY
NOMINEE IS WITHHELD. DIRECTORS WILL BE ELECTED BY A PLURALITY OF THE VOTES OF
THE SHARES OF COMMON STOCK PRESENT IN PERSON OR BY PROXY AT THE ANNUAL MEETING.
ABSTENTIONS ON THIS MATTER WILL BE COUNTED FOR QUORUM PURPOSES BUT NOT VOTED.
BROKER NON-VOTES WILL HAVE NO EFFECT ON THE OUTCOME OF THE ELECTION OF
DIRECTORS.
THE BOARD OF DIRECTORS RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE
ELECTION OF THE ABOVE NOMINEES AS MEMBERS OF THE BOARD.
CONTINUING DIRECTORS WHOSE TERMS ARE NOT EXPIRING
The following table sets forth certain information for those Class III
and I directors who will continue to serve until the 1999 and 2000 Annual
Meetings, respectively. Each director provided the information to the Company.
<TABLE>
<CAPTION>
DIRECTOR
NAME AND PRINCIPAL OCCUPATION SINCE CLASS
- ----------------------------- ----- -----
<S> <C> <C>
CHARLES R. MILLER(1), age 59, has served as President and Chief Operating Officer of the Company since 1996 III
August 1996. From 1990 to 1996, he was Chairman, President and Chief Executive Officer of Champion,
which he co-founded. From 1987 to 1989, he co-owned and operated an acute care hospital in El Paso,
Texas, which he sold in 1988. From 1981 to 1986, he co-founded Republic and served as President and
director until his resignation as a result of his election not to participate in a leveraged buy-out
of Republic, which was then the fifth largest publicly-held hospital management company. Prior
thereto, he was employed in various management positions for seven years by HAI.
</TABLE>
6
<PAGE> 8
<TABLE>
<CAPTION>
DIRECTOR
NAME AND PRINCIPAL OCCUPATION SINCE CLASS
- ----------------------------- ----- -----
<S> <C> <C>
L. STANTON TUTTLE(2) age 57, has been President, Chief Executive Officer and Chairman of L. Stanton 1997 I
Tuttle & Associates, a healthcare consulting firm, since 1995. From 1991 to 1994, Mr. Tuttle was
President, CEO and Chairman of New Day of America, Inc. Prior thereto, he was President of American
Medical International, Inc. Psychiatric Co. from 1988 to 1990, President and CEO of National
Healthcare Corp. from 1986 to 1987, Senior Vice President of Hospital Corporation of America and
President of Hospital Corporation of America Psychiatric Co. from 1983 to 1986. From 1968 to 1985,
Mr. Tuttle was employed in senior executive positions with various healthcare companies, including
Brookwood Health Services, Inc. and ExtendiCare (which later became Humana).
</TABLE>
- -----------------------
1 Pursuant to the Shareholder Agreement, Mr. Miller is a Management
Director. Under the terms of his employment agreement, Mr. Miller may
terminate the agreement and receive agreed to benefits if he is not
elected a member of the Board and to the Executive Committee.
2 Under the Shareholder Agreement, Mr. Tuttle is an Independent Director.
MEETINGS OF THE BOARD
The Board convened eleven times and acted by unanimous written consent
five times during 1997. All current members of the Board participated in at
least 75% of the combined total of the meetings of the Board and its committees
on which they served.
COMMITTEES OF THE BOARD
The Company has four standing committees: the Executive Committee, the
Stock Option and Compensation Committee, the Audit Committee and the Finance and
Strategic Planning Committee. The Company has no standing Nominating Committee.
These committees were established effective August 13, 1996 with the exception
of the Stock Option and Compensation Committee that was established in July
1996.
The Executive Committee is composed of Messrs. Miller and VanDevender,
with one vacant position to be filled at a later date. The Committee is
empowered to exercise all of the powers and authority of the Board permitted by
law between meetings of the Board. The Executive Committee did not meet during
1997.
The Audit Committee is composed of Messrs. White and Tuttle, with one
vacant position to be filled at a later date. The Committee is empowered, among
other things, to (i) recommend to the Board the appointment of independent
public accountants, (ii) review the scope of audits made by independent public
accountants and the audit reports submitted by such accountants, (iii) review
the scope and results of internal audits, overall accounting practices,
accounting policies and accounting and financial controls and (iv) perform such
other functions as may be necessary or appropriate for the efficient discharge
of its duties. The Audit Committee met four times during 1997.
7
<PAGE> 9
The Finance and Strategic Planning Committee is composed of Mr. Lange,
with two vacant positions to be filled at a later date. The Committee is
empowered to supervise the financial and strategic planning of the Company.
There were no meetings of the Finance and Strategic Planning Committee during
1997.
The Stock Option and Compensation Committee is composed of Messrs.
Lange, Tuttle and White. The Committee develops recommendations for compensation
and benefit levels for the executive officers and administers the Company's
stock incentive plan. The Stock Option and Compensation Committee met four times
during 1997.
On October 8, 1996, the Board appointed a Special Committee consisting
of Mr. White and two former directors, James A. Conroy and Michael D. Hofmann,
to supervise and direct the conduct of an inquiry assisted by outside legal
counsel, regarding among other things, the Company's accounting and financial
reporting practices and procedures for the periods prior to the quarter ended
September 30, 1996. In March 1997, Mr. Hofmann resigned as a director of the
Company, with the Special Committee having substantially completed its
investigation. See "Resignation of Mr. James A. Conroy as a Director" for
discussion related to Mr. Conroy's resignation from the Board.
The Shareholder Agreement provides that each committee of the Board
(other than the Audit and Stock Option and Compensation Committees) will contain
that number of Shareholder Directors that is in the same proportion as there are
Shareholder Directors on the Board. In addition, the Audit Committee shall
consist solely of Independent Directors and the Stock Option and Compensation
Committee shall comprise one non-employee Shareholder Director, one Independent
Director and one additional non-employee director.
RESIGNATION OF MR. JAMES A. CONROY AS A DIRECTOR
On June 27, 1997, Mr. James A. Conroy submitted his resignation as a
director of the Company and requested a Form 8-K filing with respect to such. In
his resignation letter, Mr. Conroy stated that his resignation was due to his
disagreement with the Special Committee and other board members to not address
the issue of the old Paracelsus board members' responsibility for the reporting
and accounting failures found by the Special Committee and to not fully disclose
the results of the Special Committee's investigation to the Securities and
Exchange Commission (the "SEC").
The Company's management regrettably accepted Mr. Conroy's resignation,
but did not agree with Mr. Conroy's positions on the matters addressed above
because of the following:
(i) The majority of the Special Committee members, including a
completely disinterested nonmanagement director, at the conclusion of its
investigation to uncover, among others, all facts relevant to the responsibility
of the directors of premerger Paracelsus for the reporting and accounting
failures reflected in the Company's restatement of its financial statements, had
concluded that it was not in the Company's best interests for the Special
Committee to make recommendations concerning the old Paracelsus' board members
at that time. The Committee's position was fully supported by Wilmer, Cutler &
Pickering, an outside legal counsel which had been retained by the Special
Committee to conduct such inquiry.
8
<PAGE> 10
(ii) Given the pendency of the shareholder and derivative litigation
and other factors, Wilmer, Cutler & Pickering advised the Company that it was
not in the best interests of the Company to waive its attorney-client and work
product privileges so as to permit disclosure of the detailed facts uncovered in
the Special Committee's investigation to the SEC. The Company was further
reassured by Wilmer, Cutler & Pickering, that based on the available facts, all
legally required public disclosures concerning the results of the Special
Committee's investigation had already been made.
(iii) The Board was concerned that Mr. Conroy's positions may have
reflected his interests as a member of a large group of former Champion
shareholders, rather than the interests of the Company, its shareholders and all
of its other constituent groups.
Mr. Conroy served as an Independent Director pursuant to the
Shareholder Agreement and was a member of the Audit Committee and the Special
Committee.
LITIGATION
The Company, Champion and Messrs. Miller, VanDevender and Patterson are
defendants in a class action filed in April 1996 in the Court of Chancery of the
State of Delaware in and for New Castle County by a Champion stockholder. This
lawsuit alleges, among other things, that the Merger and the consideration to be
paid to Champion's stockholders was unfair and grossly inadequate and that the
defendants violated their fiduciary duties to Champion and the stockholders of
Champion. In this action, the plaintiff seeks to rescind the Merger transaction
or award Champion stockholders rescissory damages, plus costs and attorneys'
fees.
Since October 11, 1996, a number of complaints have been filed against
the Company by current or former stockholders of the Company relating to the
Merger of the Company and Champion. Seven of these complaints purport to be
class actions filed on behalf of persons who, between August 13, 1996 and
October 9, 1996, received the Company's common stock through the Merger with
Champion, purchased common stock, or purchased the Company's $325.0 million 10%
Senior Subordinated Notes (the "Notes"). Two other complaints purport to be
derivative actions filed on behalf of Champion. Two of the putative class action
complaints were filed in the Superior Court of the State of California, County
of Los Angeles, one in the District Court of Harris County, Texas and four in
the United States District Court for the Southern District of Texas, Houston
Division. The only currently active class action lawsuit is in the U.S. District
Court for the Southern District of Texas, where plaintiffs filed a Consolidated
Class Action Compliant captioned In re Paracelsus Corp. Securities Litigation,
Master File No. H-96-3464, which consolidated and amended the earlier federal
class action complaints. The defendants include the Company, Mr. Miller and Mr.
VanDevender. The three state court class actions have since been suspended in
deference to the Federal class action. The two derivative complaints are also
pending in the U.S. District Court for the Southern District of Texas under the
captions Caven v. Miller, No. H-96-4291, and Orovitz v. Miller, No. H-97-2752.
The defendants in these cases include the Company, and Messrs. Miller,
VanDevender and Patterson. Park-Hospital GmbH, of which Dr. Meyer zu Losebeck is
a Managing Director, was named as a defendant, but has not been served. As
described in more detail in "Security Ownership of Certain Beneficial Owners and
Management," Mr. Lehmann is associated with Company shareholders that are
members of the Committee. These shareholders and the other members of
9
<PAGE> 11
the Committee have interests potentially adverse to the Company, are members of
the putative class on behalf of which the shareholder class action was filed,
and are engaged in settlement discussions to resolve the stockholder claims.
The federal stockholder class action complaint asserts claims against
the Company under sections 11 and 12(a)(2) of the Securities Act of 1933, and
claims against certain existing and former officers and directors of the Company
under sections 11 and 15 of the Securities Act of 1933. The Company has
terminated an agreement with representatives of certain stockholder claimants
tolling the statute of limitations as to certain other unasserted claims. The
plaintiffs allege that during the class period the defendants disseminated
materially misleading statements and omitted disclosing material facts about the
Company and its business, specifically in the reporting and disclosure of
reserves, bad debt expenses, collection expenses and facility closure costs, and
that the price of the Company's common stock was artificially inflated. The
plaintiffs also allege that statements contained in the various registration
statements and prospectuses for securities offerings during the class period
were materially inaccurate and misleading. The plaintiffs seek damages in an
unspecified amount and equitable or injunctive relief, plus costs and attorneys'
fees. The derivative actions assert various state law claims against the
Company, certain of its existing and former officers and directors or their
affiliates, and other persons. Defendants moved to dismiss certain of the class
action and derivative claims. In ruling on defendants' motions to dismiss, the
federal court granted dismissal of the claims involving the sale of the Notes,
but permitted all other claims in the federal actions to proceed to discovery.
In light of the Company's restatement of financial information
contained in the various registration statements and prospectuses, the Company
believes an unfavorable outcome is probable for at least some of the claims
asserted in the stockholder class action. Efforts to settle the stockholder
claims are ongoing. Absent such a settlement within the Company's financial
resources, the Company will continue to defend the litigation vigorously. Many
factors will ultimately affect and determine the results of the litigation, and
the Company can provide no assurance that the results will not have a material
adverse effect on the Company.
COMPENSATION OF DIRECTORS
Non-employee directors of the Company each receive an annual fee of
$30,000 and a fee of $2,500 for each meeting of the Board or any committee
thereof attended. Notwithstanding the foregoing, each member of the Special
Committee also received a fee of $35,000, $2,000 per Special Committee meeting
and was reimbursed for any out of pocket expenses. Directors of the Company who
are also employees of the Company will not receive any additional compensation
for their service as directors. All directors will be reimbursed for reasonable
expenses incurred in the performance of their duties. Certain directors had
services and consulting agreements with the Company during 1997. See "Executive
Compensation - Employment, Services and Other Agreements" for a description of
their 1997 compensation.
Directors are also eligible to receive options to purchase shares of
the Company's Common Stock under the 1996 Stock Incentive Plan (the "Incentive
Plan"). No stock option grants were made to directors under the Incentive Plan
during 1997. See "Executive Compensation - Option Grants in Last Fiscal Year"
for options granted to certain other employees of the Company.
10
<PAGE> 12
Effective August 16, 1996, the Company entered into Indemnity and
Insurance Coverage Agreements with all then existing directors of the Company.
See "Executive Compensation - Employment, Services and Other Agreements" for
information regarding Indemnity and Insurance Coverage Agreements entered into
between the Company and certain executive officers.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of April 13, 1998, certain
information concerning the shares of Common Stock beneficially owned by (i) each
stockholder known by the Company to be a beneficial owner of more than five
percent of the Company's Common Stock, (ii) each director and nominee as
director of the Company, (iii) each "Named Executive" (see "Executive
Compensation"), and (iv) all directors and executive officers of the Company as
a group.
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) BENEFICIAL OWNERSHIP (3)(4) PERCENTAGE OF CLASS (4)
------------------------------------------- --------------------------- -----------------------
<S> <C> <C>
Park-Hospital GmbH (5,6) 29,771,742 (8) 54.0%
Paracelsus-Kliniken-Deutschland GmbH (5,6) 29,771,742 (8) 54.0%
Dr. Heiner Meyer zu Losebeck (5,6) 29,771,742 (8) 54.0%
Peter Frommhold (6,7) 29,771,742 (8) 54.0%
Charles R. Miller 1,325,025 (9) 2.4%
James G. VanDevender 765,000 (10) 1.4%
Christian A. Lange 56,000 (11) *
Daryl J. White 4,000 *
L. Stanton Tuttle - -
Nolan Lehmann (12,13,14) 1,607,307 2.9%
Equus II Incorporated (13,14) 1,263,058 2.3%
Equus Capital Partners, L.P. (13,14) 338,249 *
Ronald R. Patterson 521,761 (15) *
Lawrence A. Humphrey 64,417 (16) *
Warren W. Wilkey 44,917 (17) *
All directors and officers as a group (24 persons) 34,580,568 (18) 60.0%
</TABLE>
- ----------------
* Percentage is less than 1% of the total outstanding shares of the
Company.
(1) The address of each named director, nominee as director, and officer,
unless otherwise indicated, is c/o Paracelsus Healthcare Corporation,
515 W. Greens Road, Suite 800, Houston, Texas 77067.
(2) The Company understands that the members of the Committee do not
consider themselves a group for purposes of reporting requirements
under the federal securities laws. The Committee consists of Company
shareholders that, in the aggregate, own substantially in excess of 10
percent of the Company's Common Stock.
(3) Unless otherwise indicated, such shares of Common Stock are owned
directly with sole voting and investment power.
(4) Includes shares issuable upon exercise of stock options or warrants
that are currently exercisable or that become exercisable within 60
days of April 13, 1998. Such shares, for the purpose of computing the
percentage of outstanding Common Stock, are deemed owned by each named
individual and by the group, but are not deemed to be outstanding for
the purpose of computing the percentage ownership of any other person.
(5) The address is Am Natruper Holz 69, D-49076 Osnabruck, Federal
Republic of Germany.
(6) Park-Hospital GmbH ("Park"), a German corporation wholly owned by
Paracelsus-Kliniken-Deutschland GmbH ("PKD"), is the record owner of
such shares. PKD may be deemed to beneficially own the shares of the
Company's
11
<PAGE> 13
Common Stock owned by Park. Pursuant to the Schedule 13D filed by Park,
PKD, Dr. Heiner Meyer zu Losebeck, and Mr. Peter Frommhold on December
15, 1997, Dr. Meyer zu Losebeck and Mr. Frommhold, as co-executors of
the Estate of Professor Dr. Hartmut Krukemeyer, and the Managing
Directors of Park and PKD share indirect voting and investment power
over the shares of the Company's Common Stock owned by Park. Therefore,
they may be deemed to beneficially own the shares of the Company's
Common Stock owned by Park. Also, according to this Schedule 13D, Dr.
Manfred Georg Krukemeyer no longer has voting or dispositive power over
the shares of the Company's Common Stock owned by Park.
(7) The address is Drubbel 17/18, D-48143 Munster, Federal Republic of
Germany.
(8) Such amount does not include shares owned by Messrs. Miller and
VanDevender which are subject to a voting agreement with Park to vote
with Park, and to sell their shares in accordance with certain
acquisition proposals described in the Shareholder Agreement.
(9) Includes 797,876 shares issuable upon exercise of options that are
currently exercisable.
(10) Includes 665,000 shares issuable upon exercise of options that are
currently exercisable.
(11) Includes 56,000 shares issuable upon exercise of options that are
currently exercisable.
(12) Mr. Lehmann is President of Equus Capital Management Corporation, the
financial advisor and manager of Equus II Incorporated and Equus
Capital Partners, L.P.
(13) Address is 2929 Allen Parkway, Suite 2500, Houston, TX 77019.
(14) Equus II Incorporated is the owner of 1,263,058 shares of the Company's
Common Stock. Equus Capital Partners, L.P. is the owner of 338,249
shares of the Company's Common Stock. By reason of his status as
President of Equus Capital Management Corporation, Mr. Lehmann may be
deemed to be the beneficial owner of the common shares owned by Equus
II Incorporated and Equus Capital Partners, L.P. In addition, Mr.
Lehmann owns directly 6,000 shares of the Company's Common Stock.
Accordingly, Mr. Lehmann may be deemed to be the beneficial owner of
1,607,307 shares of the Company's Common Stock. Mr. Lehmann disclaims
beneficial ownership of the Company's Common Stock owned by Equus II
Inc., and Equus Capital Partners, L.P. One or more of the entities with
which Mr. Lehmann is associated are members of the Committee. The
number of shares beneficially owned by Mr. Lehmann does not include any
shares owned by other members of the Committee. See footnote 2.
(15) Includes 510,690 shares issuable upon exercise of options that are
currently exercisable.
(16) Includes 52,917 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of April 13, 1998.
(17) Includes 42,917 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of April 13, 1998.
(18) Includes 2,496,214 shares issuable upon exercise of options that are
currently exercisable or exercisable within 60 days of April 13, 1998.
The Shareholder Agreement provides that the Shareholder may not acquire
66.7% or more of the outstanding Common Stock except under circumstances
designed to insure a fair price is paid. If the Board determines to support a
proposal to acquire the Company by a third party, the Shareholder has the first
right to make a similar offer on substantially equivalent terms. If the
Shareholder fails to make such an offer, then the Shareholder must vote for or
sell its Common Stock in support of such approved acquisition proposal.
12
<PAGE> 14
EXECUTIVE COMPENSATION
The following table summarizes the compensation for the Company's
Former Chief Executive Officer, the Chief Operating Officer and four most highly
compensated executive officers (the "Named Executives") with respect to all
services rendered to the Company during the calendar years indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------ ---------- --------------
OTHER ALL
ANNUAL SECURITIES OTHER
NAME AND COMPEN UNDERLYING LTIP COMPEN-
PRINCIPAL SALARY BONUS SATION OPTIONS PAYOUTS SATION
POSITION(a) YEAR ($) ($) ($) (#)(e) ($) ($)(g)
- ------------------------ --------- ---------- --------- -------------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
R.J. Messenger (b) 1997 $ 235,000 $ -- $ -- -- $ -- $ 4,034
Former Vice 1996 716,715 627,046 429,651(d) 2,000,000 6,920,858(f) 42,152
Chairman & 1995 686,433 3,970,041 88,370(d) -- 895,134 10,860
Former Chief
Executive
Officer
Charles R. Miller 1997 500,000 -- -- -- -- --
President & 1996 187,500 1,492,188 (c) -- 1,547,876 --
Chief Operating 1995 -- -- -- -- -- --
Officer
James G. VanDevender 1997 360,000 -- -- -- -- --
Senior Executive Vice 1996 131,250 911,875(c) -- 1,070,000 -- --
President & 1995 -- -- -- -- -- --
Chief Financial
Officer
Ronald R. Patterson 1997 360,000 -- -- -- -- 2,375
Executive Vice 1996 131,250 661,875(c) -- 690,690 -- 563
President & 1995 -- -- -- -- -- --
President,
Healthcare
Operations
Lawrence A. Humphrey 1997 245,000 -- -- 100,000 -- 2,375
Executive Vice 1996 73,529 227,367(c) -- 30,000 -- 792
President, 1995 -- -- -- -- -- --
Corporate
Finance
Warren W. Wilkey 1997 250,000 -- -- 100,000 -- 1,211
Senior Vice 1996 84,375 377,755(c) -- 20,000 -- 563
President, 1995 -- -- -- -- -- --
Operations
</TABLE>
- ---------------------
(a) Except for Mr. Messenger, the latter five Named Executives are former
Champion executives who became employees of the Company effective August
16, 1996, the consummation date of the merger with Champion (the
"Merger"). Salaries for 1996 reflect amounts paid for the period from
August 16, 1996 to December 31, 1996 except with respect to Mr.
Messenger.
(b) Effective April 14, 1997, Mr. Messenger ceased to be Chief Executive
Officer and director of the Company. See "Employment, Services and Other
Agreements". Amounts shown for 1995 represent amounts earned for fiscal
years
13
<PAGE> 15
ended September 30, 1995. Effective September 1996, the Company changed
its fiscal year from September 30 to December 31. Accordingly, amounts
shown for 1997 and 1996 represent amounts earned for calendar years
ended December 31, 1997 and 1996, respectively.
(c) Payments of $1.2 million, $750,000, $500,000, $157,500 and $280,000 for
Messrs. Miller, VanDevender, Patterson, Humphrey and Wilkey,
respectively, were made in exchange for Messrs. Miller, VanDevender and
Patterson surrendering certain severance rights under the Change of
Control provisions in their Champion employment agreements and as a
special merger bonus to Messrs. Humphrey and Wilkey.
(d) Represents accrued vacation payment of $405,369 in 1996 and perquisites
and personal benefits, including, among other things, club dues in the
amounts of $21,532 and $20,199 in 1996 and 1995, respectively, and
automobile- related expenses of $2,750 and $35,408 in 1996 and 1995,
respectively.
(e) Includes Champion stock options assumed pursuant to the terms of the
Merger.
(f) Includes payment of $6,881,000 in settlement of the awards outstanding
under the Company's Phantom Equity Long-Term Incentive Plan that was
terminated effective August 16, 1996 upon the Merger.
(g) Represents life insurance premiums and matching contributions paid by
the Company under its Employee Retirement Savings 401(k) Plan.
The following table summarizes stock option grants made during 1997 to
the Named Executives and the potential realizable values of the options, based
on certain assumptions. All options were granted in July 1997 under the
Company's 1996 Stock Incentive Plan. The Company has no outstanding stock
appreciation rights.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
----------------------------------------------------------------------------------
NUMBER OF % OF TOTAL GRANT
SECURITIES OPTIONS MARKET DATE
UNDERLYING GRANTED TO EXERCISE PRICE ON PRESENT
OPTIONS GRANTED EMPLOYEES IN PRICE DATE OF EXPIRATION VALUE
NAME (#) FISCAL YEAR ($/SHARE) GRANT DATE ($)(C)
- ----------------- --------------- ------------ ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
R. Messenger (a) -- -- -- -- -- --
C. Miller -- -- -- -- -- --
J. VanDevender -- -- -- -- -- --
R. Patterson -- -- -- -- -- --
L. Humphrey 100,000 (b) 9.0% $ 5.19 $ 5.19 07/10/2007 $ 366,000
W. Wilkey 100,000 (b) 9.0% $ 5.19 $ 5.19 07/10/2007 $ 366,000
</TABLE>
- -----------------------
(a) Effective April 14, 1997, Mr. Messenger ceased to be Chief Executive
Officer and director of the Company. See "Employment, Services and
Other Agreements."
(b) Options have a ten-year term and are vesting monthly in 2.08%
increments commencing on August 10, 1997, with full vesting occurring
on July 10, 2001 ("1997 Options").
(c) The fair value for these options was estimated at the date of grant or
the assumption date using a Black-Scholes option pricing model with the
following weighted-average assumptions: risk-free interest rate of
5.60%, dividend yield of 0%, volatility factor of the expected market
price of the Company's stock of 97.4%, and a weighted-average expected
life of the option of 4 years. There can be no assurance that the
hypothetical grant date present values of the options reflected in this
table will be realized.
14
<PAGE> 16
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR OPTION VALUES
No options were exercised by the Named Executives during 1997. The
following table sets forth the number of shares covered by unexercised options
held by the Named Executives and their value at December 31, 1997.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-MONEY
OPTIONS AT FY-END (#) OPTIONS AT FY-END($)(a)
---------------------------- -------------------------------
NAME EXERCISABLE UNEXERCISABLE* EXERCISABLE UNEXERCISABLE
- ------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
R. J. Messenger (b) 1,000,000 1,000,000 $ 3,370,000 $ --
Charles R. Miller 797,876 750,000 1,389,360 --
James G. VanDevender 665,000 405,000 777,960 --
Ronald R. Patterson 510,690 180,000 606,600 --
Lawrence A. Humphrey 40,416 89,584 -- --
Warren W. Wilkey 23,749 96,251 -- --
</TABLE>
- ------------------
* In an event of a Change in Control, as defined in the employment
agreements of certain Named Executives, options will become fully
vested.
(a) Market value of underlying securities at December 31, 1997 minus the
option exercise price times the number of unexercised options at
December 31, 1997.
(b) Effective April 14, 1997, Mr. Messenger ceased to be Chief Executive
Officer and director of the Company. See "Employment, Services and
Other Agreements."
SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
The following table sets forth benefits payable to the Named Executives
under the Company's Supplemental Executive Retirement Plan (the "SERP"). Amounts
shown represent the annual benefits to which the Named Executives would be
entitled under the SERP (assuming payment in the form of single life annuity),
but do not reflect an offset with respect to certain Social Security benefits.
PENSION PLAN TABLE
<TABLE>
<CAPTION>
YEARS OF SERVICE
------------------------------------------------------------------------
AVERAGE ANNUAL
COMPENSATION 5 10 15
- --------------------------- ------------------ --------------------- -----------------------
<S> <C> <C> <C>
100,000 $ 18,350 $ 36,700 $ 55,050
125,000 22,938 45,875 68,813
150,000 27,525 55,050 82,575
175,000 32,113 64,225 96,338
200,000 36,700 73,400 110,100
225,000 41,228 85,575 123,863
250,000 45,875 91,750 137,625
300,000 55,050 110,100 165,150
400,000 73,400 146,800 220,200
500,000 91,750 183,500 275,250
600,000 110,100 220,200 330,300
700,000 128,450 256,900 385,350
700,000 146,800 293,600 440,400
</TABLE>
15
<PAGE> 17
SERP benefits are determined, subject to certain vesting requirements,
as (i) the product of (x) number of years of service with the Company, (y) 3.67%
for officer participants (2.33% for non-officer participants) and (z) average
earnings for the final 36 months of employment (final 60 months of employment
for non-officer participants), less (ii) a percentage of the participating
officer's Social Security benefits. SERP benefits generally accrue and vest
ratably over a 15-year period. In the event of a Change in Control, as defined
in the plan document, all benefits become fully vested. Messrs. Miller,
VanDevender, and Patterson each has 6, 6 and 4 years of credited service,
respectively, under the SERP. Mr. Wilkey and Mr. Humphrey do not participate in
the SERP. Mr. Messenger had approximately 15 years of credited service when he
ceased to be Chief Executive Officer and director effective April 14, 1997. In
May 1997, Messrs. Miller, VanDevender and Patterson formally requested, and the
Board approved, the suspension of respective SERP benefits accruing subsequent
to December 31, 1996.
ANNUAL BONUS PLAN
The 1997 Bonus Plan (the "Bonus Plan") is designed to reward certain
officers of the Company for achieving corporate performance objectives. The
Bonus Plan is intended to provide an incentive for superior work and to motivate
participating officers toward higher achievement and business results, to link
their goals and interests more closely with those of the Company and its
stockholders, and to enable the Company to attract and retain highly qualified
officers. With respect to those officers holding the title of executive officer
and above, the Bonus Plan is administered and approved by the Stock Option and
Compensation Committee each year. Upon achievement by the Company of certain
targeted operating results or other performance goals, such as operating income,
earnings per share or quality standards, the Company will pay performance
bonuses, the aggregate amounts of which will be determined annually based upon
an objective formula. The Company is also a party to an employment agreement
with certain executives, which provides for the payment of certain minimum
bonuses upon the achievement of targeted performance criteria under the Bonus
Plan. See "Employment, Services and Other Agreements."
EMPLOYEE RETIREMENT SAVINGS 401(k) PLAN
The Company has a defined contribution 401(k) retirement plan covering
all eligible employees at its hospitals and the corporate office. Effective
April 1, 1997, participants could contribute up to 15% of pretax compensation,
not exceeding a limit set annually by the Internal Revenue Service. The Company
matched $.25 for each $1.00 of employee contributions up to 6% of employees'
gross pay. The Company may make additional discretionary contributions, but did
not elect to make any such contributions in 1997.
CHANGE OF CONTROL SEPARATION PAY PLAN
Effective August 1, 1997, the Company has established the Change of
Control Separation Pay Plan (the "Separation Pay Plan") to retain key employees
and to provide, under certain circumstances, severance to participants whose
employment with the Company ends after a Change of Control, as defined. Messrs.
Miller, VanDevender and Patterson do not participate in the Separation Pay Plan.
Messrs. Humphrey, Wilkey, other officers and certain employees of the Company
participate in the Separation Pay Plan which is administered by the Stock Option
and Compensation Committee and provides participants with severance benefits,
under certain circumstances, ranging from six to twenty-four months base salary,
as defined.
16
<PAGE> 18
EMPLOYMENT, SERVICES AND OTHER AGREEMENTS
The Company is a party to employment agreements with Messrs. Miller,
VanDevender and Patterson which currently provide for base salaries of $500,000,
$375,000 and $375,000 and minimum annual bonuses as a percentage of base salary
of 85%, 70% and 70%, respectively, upon attainment of targeted strategic,
business and financial goals under the Bonus Plan. When Mr. Messenger ceased to
be Chief Executive Officer and director in April 1997, the Company had an
employment agreement with him providing for an initial base salary of $750,000
and a minimum annual bonus of 100% of base salary. The agreements further
provide for such officers to participate in the employee benefit and fringe
benefit plans of the Company that are generally available to all executive
officers of the Company.
Each of the employment agreements of Messrs. Miller and VanDevender has
an initial term of five years, renewable automatically upon expiration of its
initial term and any subsequent five-year term. Mr. Patterson's employment
agreement has an initial term of three years, renewable automatically one time
only for three additional years. Each agreement is renewable for the specified
terms unless the Company or each individual gives 12 months prior notice that
such agreement will not be renewed. The employment of Messrs. Miller and
VanDevender cannot be terminated by the Company without the prior approval of
80% of the Board and 66.7% of the Independent Directors.
Upon termination of the above employment by the Company without Cause
or by such officer for Good Reason, each as defined in his employment agreement,
such officer's outstanding options will immediately vest and become exercisable.
Additionally, such officer will be entitled to receive a lump sum payment equal
to the greater of (x) his current base salary and annual target bonus payable
over the remaining term of employment or (y) three times (2.5 times for Mr.
Patterson) his current annual salary plus annual target bonus, in addition to an
amount sufficient to offset the effect of any excise and other taxes by reason
of Section 4999 of the Internal Revenue Code. In an event of a Change in
Control, as defined in the employment agreements, each such officer may
terminate his employment without Good Reason within a 12-month period following
such event and receive the benefits described above that are otherwise payable
upon termination of his employment with Good Reason.
Effective April 14, 1997, Mr. Messenger ceased to be Chief Executive
Officer and director of the Company. At that time, he and the Company entered
into an agreement in which both parties fully reserved their rights, claims and
defenses, including those under existing agreements such as Mr. Messenger's
employment agreement and the SERP, while they attempt to negotiate a resolution
of all issues between them. In the April 1997 agreement, the Company agreed to
continue to provide certain health and life insurance benefits to Mr. Messenger
and, pursuant to an indemnity and insurance coverage agreement with him, to
continue to advance his reasonable defense costs in connection with litigation,
investigations and other proceedings, subject to his undertaking to repay them
in certain circumstances.
In addition to the agreement entered into with Mr. Messenger, the
Company entered into Indemnity and Insurance Coverage Agreements, effective
August 16, 1996, with the other Named Executives, members of the Board of
Directors and certain other officers of the Company, to advance
17
<PAGE> 19
reasonable defense costs in connection with litigation, investigations and other
proceedings, subject to their undertakings to repay such costs in certain
circumstances. Pursuant to these agreements, the Company has been advancing
reasonable defense costs on behalf of Messrs. Miller, VanDevender and Patterson.
Effective August 16, 1996, the Company became a party to a services
agreement with Dr. Krukemeyer, pursuant to which Dr. Krukemeyer will provide
management and strategic advisory services to the Company for a consulting fee
of $1.0 million per year, for a term not to exceed ten years. Effective April
14, 1997, the annual consulting fee to be paid to Dr. Krukemeyer was reduced to
$250,000 until all obligations of the Company under its senior bank credit
agreement have been satisfied. Payments of $500,000 were made to Dr. Krukemeyer
during 1997 under the services agreement. The services agreement may be
terminated only by mutual consent of the parties. The Company is also a party to
an insurance agreement which provides insurance benefits to Dr. Krukemeyer in
the event of his death or permanent disability, in an amount equal to $1.0
million per year during the 10-year term of such agreement.
STOCK OPTION AND COMPENSATION COMMITTEE'S REPORT ON EXECUTIVE
COMPENSATION
The Stock Option and Compensation Committee (the "Compensation
Committee") was established in July 1996 and is responsible for determining
compensation and benefit levels for the Company's executive officers and for
administrating the Stock Incentive Plan for all plan participants. Its
recommendations are subject to approval by the Board of Directors of the
Company. Executive officers are individuals occupying positions at the level of
Executive Vice President or above. Prior to July 1996, Paracelsus had no
Compensation Committee. Effective in January 1997, the Compensation Committee
was comprised of Messrs. Lange, White and a former director. Effective in August
1997, Mr. Tuttle was added to the Compensation Committee. Accordingly, he did
not participate in setting compensation levels for any executive officers during
1997.
The responsibility for determining compensation and benefit levels for
non-executive officers is governed by the Management Rights Agreement which was
executed as part of the merger with Champion Healthcare Corporation. Under this
agreement, Mr. Miller, President and Chief Operating Officer, has the sole
authority for determining compensation and benefits for all employees except
Messrs. Miller, VanDevender, Patterson and Humphrey.
Grants of options to all employees under the Company's stock option
plans, including its executive officers, is determined by the Compensation
Committee subject to approval by the Board of Directors.
COMPENSATION PHILOSOPHY
The Board of Directors, the Compensation Committee and Mr. Miller set
the Company's executive officer compensation program to meet the following
objectives:
(i) To target executive compensation at a level sufficient to
attract, motivate and retain superior executive talent;
18
<PAGE> 20
(ii) To motivate executives to advance stockholder interests with
compensation plans that are tied to the Company's operating
performance and achievement of strategic objectives;
(iii) To provide a compensation package that balances individual
contributions with overall business results and is competitive
within the healthcare industry; and
(iv) To align the interests of the Company's employees with those of
stockholders through potential stock ownership.
Accordingly, the Company has adopted a compensation program consisting
of base salary, bonus and long-term incentive compensation, mainly through
stock-based incentive awards. The Company, through its Compensation Committee,
attempts to offer an overall compensation program which is competitive with
comparable executive positions in similar- sized publicly traded healthcare
companies. This may be determined by either a formal study by a consulting firm
recognized in the field of executive compensation and/or by a review of
information which may be publicly available on such companies such as proxy
statements, annual reports and similar information. The Company may also take
into consideration any special qualitative or quantitative objectives which may
be unique to the Company's circumstances or performance in terms of structuring
either annual base salary or annual bonus plans for its executives. Executive
compensation is further aligned to stockholder value through stock-based
incentive awards such as stock option grants by providing executives with an
appropriate level of ownership interest in the Company and the opportunity to
participate with stockholders in the value derived from appreciation in the
price of the Company's stock.
EXECUTIVE COMPENSATION PROGRAM
Effective August 16, 1996, the Company increased certain of the Named
Executives' pay levels in effect prior to the Merger. The new salary levels were
deemed appropriate based on comparisons to comparable executive positions in
similar-sized peer group companies as reflected in a study conducted by a
nationally recognized healthcare compensation consulting firm, adjusted for
inflationary increases, that had been previously commissioned by the former
Champion organization in developing the 1996 compensation program for its
executives. Similar guidelines and structure were used in developing
compensation levels for other officers of the Company.
Base Salary - Salaries are reviewed on an annual basis and may be
adjusted at that time based on the Compensation Committee's subjective
assessment of individual performance and contribution to the Company during the
preceding fiscal year, level of responsibility and competitive pay level of a
comparable position at similar organizations.
Bonus - All executive officers and others are eligible to participate
in the Bonus Plan on an annual basis. Bonus payments to executives are
predicated on the Company's success in achieving certain strategic, business and
financial goals as well as other specific objectives set forth for such
individuals at the beginning of each performance period. Reference is made to
the information included under "Executive Compensation - Annual Bonus Plan" for
additional information regarding such plan.
19
<PAGE> 21
Long-term Incentives - The Company provides long-term incentives to
its executives through the Stock Incentive Plan. Through the ability to offer
stock-incentive awards such as stock options, restricted stock, performance
shares, stock appreciation rights and deferred stock, the Company offers the
executives the right to obtain an ownership interest in the Company which is of
value only if the share price increases, with the naturally resulting benefit
to stockholder value. Stock option awards are based on the Company's subjective
assessment of each executive's previous and anticipated future contribution to
the Company and the amount and terms of options already held by the executive.
Stock awards, including all terms such as exercise price and vesting schedule,
are determined by the Compensation Committee. Options were granted at the
current market price to certain Named Executive Officers during 1997. See
"Executive Compensation - Option Grants in Last Fiscal Year."
Executive officers and others may also participate in the Company's
401(k) retirement plan, which includes both employee and employer
contributions. In addition, certain selected executives may participate in a
Supplemental Executive Retirement Plan. See "Executive Compensation -
Supplemental Executive Retirement Plan."
CHIEF EXECUTIVE OFFICER COMPENSATION
Mr. Messenger's compensation was based on those criteria described
above for all executive officers pursuant to the Company's executive
compensation philosophy and policies.
Prior to April 14, 1997, Mr. Messenger received an annual base salary
of $750,000 and was eligible for a bonus up to 100% of his base salary subject
to the attainment of certain performance measures, in accordance with the terms
of his employment agreement.
Mr. Messenger ceased to be Vice-Chairman, Chief Executive Officer and
a director of the Company effective April 14, 1997 and is no longer in the
employ of the Company. See "Executive Compensation - Employment, Services and
Other Agreements." The Company has not designated a new Chief Executive
Officer.
Stock Option and Compensation Committee
/s/ Christian A. Lange
------------------------------------
Mr. Christian A. Lange, Member
/s/ Daryl J. White
------------------------------------
Mr. Daryl J. White, Member
/s/ L. Stanton Tuttle
------------------------------------
Mr. L. Stanton Tuttle, Member
20
<PAGE> 22
STOCK PRICE PERFORMANCE GRAPH
The following graph demonstrates comparison of cumulative stockholder
returns, on a dividend basis, for the Company, the companies on the Standard &
Poor's ("S&P") 500 Stock Index and the companies on the S&P Healthcare Sector,
commencing on August 16, 1996, the first day the Company's Common Stock was
publicly traded.
COMPARISON OF CUMULATIVE TOTAL RETURN
AMONG PARACELSUS HEALTHCARE CORPORATION*,
THE S&P 500 STOCK INDEX AND
THE S&P HEALTHCARE SECTOR INDEX
<TABLE>
<CAPTION>
AUGUST DECEMBER DECEMBER
1996 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Paracelsus Healthcare Corporation $ 100 $ 41 $ 39
S&P 500 Stock Index $ 100 $ 117 $ 156
S&P Healthcare Sector Index $ 100 $ 118 $ 169
</TABLE>
* Assumes $100 invested on August 16, 1996 in the Company's Common Stock
and on July 31, 1996 for the indices presented.
Notwithstanding anything to the contrary set forth in any of the
Company's previous filings under the securities laws that might incorporate
future filings, the report of the Stock Option and Compensation Committee and
the performance graph included in this Proxy Statement shall not be incorporated
by reference into any such filing.
21
<PAGE> 23
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
In conjunction with the Merger in August 1996, Louis G. Rubino, Ph.D.,
Regional Vice President of Operations, inadvertently failed to report on a
timely basis his initial ownership of 500 shares of the Company's Common Stock.
This transaction was reported on an amended Form 3 filed on April 22, 1998.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Shareholder loaned the Company $7.2 million in the form of a $7.2
million 6.51% subordinated note from the Company, payable in the annual amount
of $1.0 million over a term of 10 years. Effective April 14, 1997, pursuant to
the terms of the Company's senior bank credit agreement, the Shareholder waived
its right to receive principal payments under the note until all obligations of
the Company under such credit agreement have been satisfied. The Company made
interest payments of $467,774 during 1997.
Effective August 1996, the Company is a party to an agreement with Dr.
Krukemeyer, pursuant to which he provides management and strategic advisory
services to the Company for an annual consulting fee of $1.0 million, for a term
not to exceed ten years. Effective April 15, 1997, the annual consulting fee to
Dr. Krukemeyer was reduced to $250,000 until all obligations of the Company
under the senior bank credit agreement have been satisfied. Payments of $500,000
were made to Dr. Krukemeyer during 1997.
The Shareholder and certain former Champion investors have contractual
rights to participate in the filing of registration statements by the Company
with the Securities and Exchange Commission.
Effective with the consummation of the Merger on August 16, 1996, Dr.
Krukemeyer and the Company entered into a Non-Compete Agreement that generally
prohibits Dr. Krukemeyer from directly or indirectly competing with the Company
for so long as the Shareholder Agreement is in effect.
Messrs. Miller and VanDevender and the Shareholder executed a voting
agreement effective August 16, 1996 whereby Messrs. Miller and VanDevender
agreed to vote their Common Stock with the Shareholder, as the Shareholder votes
or is required to vote, in connection with certain acquisition proposals
specified in the Shareholder Agreement. Furthermore, Messrs. Miller and
VanDevender are required to sell their Common Stock according to such
acquisition proposals.
RATIFICATION OF INDEPENDENT AUDITORS
The firm of Ernst & Young LLP, Certified Public Accountants, has been
the independent auditors for the Company since 1981. The Board has selected
Ernst & Young LLP as the Company's independent auditors for 1998 and requests
the stockholders to ratify such selection. Representatives of Ernst & Young LLP,
the Company's independent auditors, are expected to be present at the Annual
Meeting to respond to any appropriate questions and to make a statement if they
so desire.
22
<PAGE> 24
STOCKHOLDER APPROVAL
SHARES REPRESENTED BY THE ACCOMPANYING PROXY CARD WILL BE VOTED "FOR"
THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR 1998. THE RATIFICATION MUST BE APPROVED BY THE
AFFIRMATIVE VOTE OF A MAJORITY OF THE SHARES OF COMMON STOCK PRESENT IN PERSON
OR BY PROXY AT THE ANNUAL MEETING. ABSTENTIONS ON THIS MATTER WILL BE COUNTED
FOR QUORUM PURPOSES BUT NOT VOTED. BROKER NON-VOTES WILL HAVE NO EFFECT ON ITS
OUTCOME. IF A MAJORITY OF STOCKHOLDERS VOTING AT THE ANNUAL MEETING SHOULD NOT
APPROVE THIS PROPOSAL, THE SELECTION OF INDEPENDENT AUDITORS MAY BE RECONSIDERED
BY THE BOARD OF DIRECTORS.
THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE
"FOR" THE RATIFICATION OF THE APPOINTMENT OF ERNST & YOUNG LLP AS THE COMPANY'S
INDEPENDENT AUDITORS FOR 1998.
TRANSACTION OF OTHER BUSINESS
The Board of Directors knows of no other business to be brought before
the Annual Meeting. However, if any such other business is properly presented
for action, the persons named in the accompanying form of proxy will vote the
shares represented thereby in their discretion on such matters.
STOCKHOLDER PROPOSALS FOR 1999 ANNUAL MEETING OF STOCKHOLDERS
Proposals of stockholders intended to be presented at the 1999 Annual
Meeting and included in the proxy materials for such meeting must be received by
the Company by no later than January 10, 1999. Otherwise, the Bylaws of the
Company provide that only stockholder proposals containing the information
required by the Bylaws and delivered to, or mailed and received at, the
principal executive offices of the Company not less than 60 days nor more than
90 days prior to the anniversary date of the immediately preceding annual
meeting will be considered at the Annual Meeting.
By order of the Board of Directors
/s/ CHARLES R. MILLER
Charles R. Miller
Date: April 22, 1998 President and Chief Operating Officer
THE COMPANY'S ANNUAL REPORT FOR 1997 INCLUDES AS A PART THEREOF ITS ANNUAL
REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 AS FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. UPON WRITTEN REQUEST AND THE PAYMENT OF A
PER PAGE FEE OF $0.20, THE COMPANY WILL FURNISH STOCKHOLDERS OF RECORD ON APRIL
13, 1998, AND TO EACH BENEFICIAL OWNER OF SHARES ON THAT DATE, COPIES OF
EXHIBITS LISTED IN ITS FORM 10-K FOR 1997. ALL SUCH REQUESTS SHOULD BE DIRECTED
TO MR. JAMES G. VANDEVENDER, CORPORATE SECRETARY, PARACELSUS HEALTHCARE
CORPORATION, 515 W. GREENS ROAD, SUITE 800, HOUSTON, TEXAS 77067. REQUESTS FROM
BENEFICIAL OWNERS OF COMMON STOCK MUST SET FORTH A GOOD FAITH REPRESENTATION AS
TO SUCH OWNERSHIP.
23
<PAGE> 25
PROXY
PARACELSUS HEALTHCARE CORPORATION
This proxy is solicited on behalf of the board of directors for the annual
meeting of stockholders on May 14, 1998.
The undersigned hereby appoints Robert M. Starling and Suzanne S. Miskin,
and any one of them, with full power of substitution, as attorneys and proxies
of the undersigned to represent and vote all shares of common stock of
Paracelsus Healthcare Corporation (the "Company") standing in the name of the
undersigned with all powers which the undersigned would possess if present,
which the undersigned is entitled to vote at the annual meeting of stockholders
of the Company to be held on May 14, 1998, at the Hotel Sofitel, 425 North Sam
Houston Parkway East, Houston, Texas at 10:00 a.m. central standard time
(Houston time) and at any and all continuations and adjournments thereof.
(Please date and sign on the reverse side)
FOLD AND DETACH HERE
<PAGE> 26
<TABLE>
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C>
PLEASE MARK
YOUR VOTE AS [X]
INDICATED IN
THIS EXAMPLE
1. ELECTION OF DIRECTORS NOMINEES: James G. VanDevender, 2. Ratification of appointment for Ernst & Young, LLP, as
Christian A. Lange, Daryl J. White, the Company's auditors for 1998.
FOR the Nolan Lehmann, and
election WITHHOLD Dr. Heiner Meyer zu Losebeck.
(except as authority FOR AGAINST ABSTAIN
indicated for all
below) nominees listed
[ ] [ ] [ ] [ ] [ ]
(Instructions: To withhold authority to vote for any individual nominee, 3. In their discretion, the Proxies are authorized to
write that nominee's name on the line provided below.) vote FOR such other business as may properly come
before the meeting.
________________________________________________________________________ All as described in the Notice of Meeting of
Stockholders and Proxy Statement, receipt of
which is hereby acknowledged.
This proxy will be voted in accordance with
the specifications made herein. If no contrary
specification is made, it will be voted "FOR"
each of the proposals set forth.
Dated this ______ day of ______________, 1998.
______________________________________________
______________________________________________
Signature(s) stockholder(s)
Please sign exactly as your name appears on
your stock certificate. When signing as an
executor, administrator, trustee or other
representative, please sign your full title. All
joint owners should sign. If a corporation, give
full corporate name and have a duly authorized
officer sign, stating title. If a partnership,
please sign in partnership name by authorized
person.
PLEASE DATE, SIGN AND MAIL YOUR PROXY PROMPTLY.
- ------------------------------------------------------------------------------------------------------------------------------------
FOLD AND DETACH HERE
</TABLE>
