-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: keymaster@town.hall.org Originator-Key-Asymmetric: MFkwCgYEVQgBAQICAgADSwAwSAJBALeWW4xDV4i7+b6+UyPn5RtObb1cJ7VkACDq pKb9/DClgTKIm08lCfoilvi9Wl4SODbR1+1waHhiGmeZO8OdgLUCAwEAAQ== MIC-Info: RSA-MD5,RSA, MXqQUc/cWGjqi/G+5EkGtrXRenR9wQZFcP4EpPT0LPaWjH29GgolFrCJx/0RnZNG e14PApzqjJKz1UA3WLCNiw== 0000912057-95-001020.txt : 19950301 0000912057-95-001020.hdr.sgml : 19950301 ACCESSION NUMBER: 0000912057-95-001020 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19941130 FILED AS OF DATE: 19950227 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COMMUNITY PSYCHIATRIC CENTERS /NV/ CENTRAL INDEX KEY: 0000022764 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-HOSPITALS [8060] IRS NUMBER: 941599386 STATE OF INCORPORATION: NV FISCAL YEAR END: 1130 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-07008 FILM NUMBER: 95515765 BUSINESS ADDRESS: STREET 1: 24502 PACIFIC PARK DR CITY: LAGUNA HILLS STATE: CA ZIP: 92656 BUSINESS PHONE: 7148311166 FORMER COMPANY: FORMER CONFORMED NAME: SUCCESSOR TO COMMUNITY PSYCHIATRIC CENTERS/CA/ DATE OF NAME CHANGE: 19600201 10-K 1 10-K FORM 10-K SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended November 30, 1994 ------------------------------------------------------ OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the transition period from to --------------------- ------------------------ Commission file number 1-7008 --------------------------------------------------------- COMMUNITY PSYCHIATRIC CENTERS --------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Nevada 94-1599386 - ------------------------------ ------------------------------------ State or other jurisdiction of I.R.S. Employer incorporation or organization Identification Number 6600 W. Charleston Boulevard, Suite 118, Las Vegas, NV 89102 - ------------------------------------------------------ ------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (702) 259-3600 ----------------------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $1.00 Par Value New York Stock Exchange - -------------------------------- ----------------------- Pacific Stock Exchange Preferred Stock Purchase Rights ---------------------- - ------------------------------- New York Stock Exchange ----------------------- Securities registered pursuant to section 12(g) of the Act: NONE - -------------------------------------------------------------------------------- (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ------- ------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is NOT contained will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates of the Registrant on January 31, 1995, based on the closing price on the New York Stock Exchange was: $533,218,000 ---------------- Number of shares outstanding on January 31, 1995 46,860,672 ---------------- ITEM 1. BUSINESS The following discussion should be read in conjunction with the industry segment information presented in the notes to the financial statements appearing in item 8. OVERVIEW The Company is a leading provider of psychiatric services for adults, adolescents and children with acute psychiatric, emotional, substance abuse and behavioral disorders. The Company currently offers a broad spectrum of inpatient, partial hospitalization, outpatient and residential treatment programs through 35 hospitals in 17 states and Puerto Rico, and 13 hospitals in the United Kingdom. The Company also offers long-term critical care services in nine states through ten freestanding hospitals and three units within three of its psychiatric hospitals. PSYCHIATRIC SERVICES The inpatient psychiatric hospital industry in the United States is undergoing significant change due to the expanding influence of managed care and cost-containment measures imposed by governmental and third party payors and employers. In recent years, providers such as the Company have experienced a significant increase in the percentage of revenues from payors that reimburse on a negotiated per diem or capitated rate, or on a discounted basis. In addition, this same trend has resulted in higher deductibles and co-insurance for patients. Negotiated discounts to the majority of the Company's payors have increased as has the use of less intensive settings of behavioral care in place of inpatient treatment. Payors also have increasingly stringent admission and length of stay criteria and other treatment constraints. All of these adversely affect utilization and reimbursement for psychiatric services. The Company's operating results for the periods presented have been adversely affected by the influence of managed care and efforts by government and private payors to contain or reduce the cost of psychiatric care, as well as the Company's efforts to address the changing demands of the marketplace. The Company has, among other things (i) changed and expanded senior management, (ii) significantly expanded the scope of its psychiatric programs to provide the patient, clinical team and payor a continuum of care from which the most appropriate and cost-effective treatments can be selected, (iii) increased its marketing efforts to managed care organizations and (iv) implemented company-wide cost control and reduction measures and closed underutilized facilities. During the fourth quarter of 1994, the Company changed its clinical staffing model within the hospitals to ensure the most cost-effective delivery of quality care in an environment of reduced reimbursement and inpatient hospital stays. LONG-TERM CRITICAL CARE In November 1992, to diversify beyond psychiatric care, the Company, through its wholly-owned subsidiary Transitional Hospitals Corporation ("THC"), began to offer long-term critical care services in converted, previously underutilized psychiatric hospitals and newly-acquired freestanding acute care facilities. The Company incurs significant capital and start-up costs in connection with the acquisition and conversion of each facility, and each of the new facilities is expected to generate significant operating losses until the facility is certified as a long-term critical care hospital at which time it qualifies for cost-based reimbursement. Such certification typically occurs after the facility's first six months of operations during which the facility establishes an average length of stay in excess of 25 days. ITEM 1. BUSINESS (CONTINUED) BUSINESS STRATEGY PSYCHIATRIC HOSPITALS--UNITED STATES To address the changing needs and demands of its marketplace, the Company has adopted the following strategies and programs: - EXPANDED SERVICES. Over the past three years, the Company has significantly expanded and expects to continue expanding the scope of its psychiatric treatment programs to create a continuum of care from which the most appropriate and cost-effective treatments can be selected to meet the needs of its patients. In addition to offering traditional inpatient treatment programs, the Company now provides less costly treatment alternatives such as partial hospitalization, residential treatment and intensive and non-intensive outpatient programs. By offering a continuum of care through a single organization, the Company believes that patients receive the most appropriate treatment, and that the transition among differing intensities of care occurs rapidly and cost effectively from the perspective of the patient, clinical team and payor. - DECENTRALIZED OPERATIONS. Over the past three years, the Company has installed a new senior management team, upgraded its field management and adopted a more decentralized operating philosophy. The Company has reorganized its field operations into three regional divisions, each managed by a Senior Vice President with its own financial, marketing and clinical services functions. Each hospital is supported by its regional division team, but is operated as a separate business unit and managed by its own Chief Executive Officer, most of whom have been recruited within the last three years. The Company believes this decentralized approach to management facilitates the attraction and retention of highly capable managers who can be responsive to the needs and opportunities of local markets served by the Company. - INCREASED MANAGED CARE FOCUS. The Company's management and marketing organization are focusing increasingly on the demands and needs of managed care payors. In addition to expanding the range of treatment programs it provides to offer less costly alternatives to inpatient care, the Company, through its Managed Care Division, has placed increased emphasis on developing and using internal systems to measure outcomes, develop treatment plans, create and maintain documentation, perform utilization review and communicate effectively with external case managers. - IMPLEMENTED OPERATING COST CONTROLS. To position itself to remain a high quality provider of an expanded number of cost-competitive services, the Company has undertaken cost-reduction and cost-containment measures such as the closure or disposition of underutilized facilities, reduction of personnel and elimination of unnecessary overhead. The Company intends to continue to closely monitor the utilization of its hospitals and its operating costs and management is committed to taking such future action as it believes is necessary, including discontinuing operations of underperforming hospitals, to remain competitive and remain profitable. ITEM 1. BUSINESS (CONTINUED) BUSINESS STRATEGY (CONTINUED) PSYCHIATRIC HOSPITALS AND DIALYSIS UNITS--UNITED KINGDOM Currently, the Company operates 13 psychiatric hospitals and operates three smaller units in the United Kingdom through which it provides primarily inpatient treatment to patients covered by private health insurance. It also operates two kidney dialysis facilities for Britain's National Health Service ("NHS"). Based on the number of licensed hospital beds, the Company is the leading commercial provider of psychiatric services in the United Kingdom, where psychiatric services are generally available to residents without charge from government-owned NHS hospitals. Approximately 12% of the British population is covered by private health insurance and recent legislation encourages the NHS to contract with private providers. As a result of this legislation, a joint venture agreement to operate a small psychiatric facility has been entered into with the NHS. Management intends to continue to explore acquisitions and alliances to take advantage of an increasing willingness on the part of the British government to contract with private providers, and to expand the Company's dialysis business in the United Kingdom. THC HOSPITALS Traditionally, patients suffering from long-term complex medical problems have stayed in the intensive care unit of general acute care hospitals until they were sufficiently well to be transferred to less intensive care settings. Such stays are relatively expensive, reflecting the cost of intensive on-site equipment and services that, while necessary for hospitals to accomplish their primary missions, are not required for the ongoing treatment of these patients. Over the past ten years, hospitals have come under increasing pressure to reduce the length of patient stays as a means of containing costs. Managed care organizations have limited hospitalization costs by controlling hospital utilization and negotiating discounted rates for hospital services. Traditional third party indemnity insurers have begun to limit reimbursement to pre-determined amounts of "reasonable charges," regardless of actual costs, and to increase the co-payments required to be paid by patients. In 1983, Congress sought to contain Medicare hospital costs by adopting the Prospective Payment System (PPS) under which hospitals generally receive a specified reimbursement rate regardless of how long the patient remains in the hospital or the volume of ancillary services ordered by the attending physician. The effect of these various cost-containment measures have provided hospitals with an incentive to discharge patients more quickly. THC has primarily targeted larger-population markets which have significant populations of persons over the age of 65. The aging of the population, advancements in medical care, the desire of payors and patients for lower cost and more specialized alternatives to traditional acute care hospitals and the disincentive for such hospitals to provide long-term care to critically ill patients has led to a growing demand for long-term critical care services. The Company believes that providers such as skilled nursing facilities and home care providers are not in the best position to efficiently provide health care services to these critically ill patients. Traditional skilled nursing facilities have generally focused on providing long-term custodial care to persons eligible for Medicaid. As a result of Medicaid "cost ceilings" on reimbursement for each patient, nursing homes face an economic disincentive to treat medically complex patients. Home health care is not a viable alternative to inpatient care for such patients because of their continued need for (i) intensive and specialized medical care and equipment, (ii) the availability of physicians and 24-hour nursing care, and (iii) a comprehensive array of rehabilitative therapy. As a result, the Company believes, and the 1994 operating results have begun to demonstrate, that a significant market opportunity exists for providers dedicated exclusively to providing long-term critical care. ITEM 1. BUSINESS (CONTINUED) BUSINESS STRATEGY (CONTINUED) THC HOSPITALS (CONTINUED) To capitalize on this opportunity, THC offers long-term critical care to patients who do not require the intensive care provided by traditional acute care hospitals but who are too ill to return home or be placed in a nursing home. THC provides care to those suffering from pulmonary diseases, kidney failure and other complex medical problems; such patients require a variety of intensive services including life-support systems, post-surgical stabilization, intravenous therapy, subacute rehabilitation and wound care. THC's strategy is to provide a comprehensive range of long-term critical care that will enable it to treat most types of critical care patients, regardless of their diagnosis or medical condition, with the objectives of returning these patients to full activity. THC offers managed care organizations and indemnity insurance payors a single source from which to obtain long-term critical care services. The Company believes THC addresses cost-containment pressures affecting the health care industry by offering a high quality, cost-effective alternative to traditional acute care hospitals. THC's immediate expansion plan is to open three facilities in fiscal 1995. The Company will expand THC's operations primarily by (i) converting selective previously underutilized psychiatric hospitals owned by the Company to long-term critical care use, (ii) acquiring and converting freestanding acute care and psychiatric facilities and (iii) leasing beds in acute care facilities owned by others. PSYCHIATRIC CARE OPERATIONS SERVICES AND PROGRAMS The Company offers a continuum of specialized treatment programs that are designed to provide high quality care that is specific to the patient's needs and is cost-effective to payors. The Company's programs include: - INPATIENT. Inpatient treatment is provided when the patient's disorder prevents him or her from safely performing routine daily activities without 24-hour supervision. Intensive individual or group therapy is provided and the patient's daily activities are highly structured. Treatment regimens are designed to enable transition to a less intensive treatment program as soon as feasible. - RESIDENTIAL. Residential treatment programs specialize in providing treatment for adolescents who need more structured treatment than can be provided through outpatient care. The Company's 21 residential treatment centers typically have 10 to 30 beds and each are staffed with a psychiatrist, 24-hour nursing and an on-site licensed program therapist. - PARTIAL HOSPITALIZATION. Partial hospitalization (including outpatient visits) is provided when the patient's disorder does not require 24-hour supervision and is such that the patient may be treated while living at home. Treatment regimens are generally for 6-12 hours per day, up to 7 days per week, and are structured to meet the patient's specific clinical needs as well as the patient's work, school and home life requirements. ITEM 1. BUSINESS (CONTINUED) PSYCHIATRIC CARE OPERATIONS (CONTINUED) SERVICES AND PROGRAMS (continued) - INTENSIVE OUTPATIENT. Intensive outpatient programs are provided when a patient's disorder necessitates routine observation, supervision or intervention but does not require inpatient or partial hospitalization treatment. Treatment is generally provided for 3-4 hours per day, typically 3-4 days per week, according to the patient's clinical needs and daily routine. - OUTPATIENT. Outpatient treatment is offered when a patient's disorder requires therapeutic intervention at a level that is less intensive than the Company's other psychiatric services. This type of treatment generally involves individual, family or group therapy of 45-90 minutes per session on a scheduled basis. Typically, the Company will refer these types of patients to community-based clinicians as appropriate to the needs and location of the patient. For the year ended November 30, 1994, the average length of stay for psychiatric hospitals for the Company's domestic inpatient and residential treatment programs was 10.6 days and 77.8 days, respectively. Adjusted patient days for inpatient, partial hospitalization (including outpatient visits), and residential treatment programs were 410,711, 65,745 and 145,852, respectively, for the same period. PSYCHIATRIC HOSPITALS PRO FORMA OPERATING DATA The following is a comparison of the quarterly and annual statistical data for fiscal years 1994 and 1993 for the Company's 35 United States psychiatric hospitals and its ten United Kingdom psychiatric hospitals which were open in both years. In all periods presented, adjusted patient days include inpatient days and equivalent days for partial hospitalization and outpatient programs.
QUARTER ENDED --------------------------------------------- UNITED STATES FEB. 28 MAY 31 AUG. 31 NOV. 30 - ------------- ------- ------ ------- ------- Adjusted patient days 1993 134,127 150,600 128,952 139,881 1994 146,991 167,531 149,979 148,524 Admissions 1993 8,098 8,980 7,894 8,576 1994 8,909 10,599 9,846 9,924 Average length of stay 1993 15.4 14.8 14.7 13.5 1994 13.4 13.8 13.1 12.5 UNITED KINGDOM - -------------- Adjusted patient days 1993 21,187 23,622 24,236 23,970 1994 24,912 26,738 27,083 29,399 Admissions 1993 847 866 906 979 1994 943 1,020 1,040 1,197 Average length of stay 1993 22.3 24.4 23.6 23.9 1994 23.0 22.8 22.4 23.2
ITEM 1. BUSINESS (CONTINUED) PSYCHIATRIC CARE OPERATIONS (CONTINUED) PSYCHIATRIC HOSPITALS As of November 30, 1994, the Company was operating the following psychiatric hospitals: LICENSED YEAR HOSPITAL CITY BEDS OPENED/ACQUIRED - -------- ---- -------- --------------- ARKANSAS Pinnacle Point Hospital Little Rock 102 1991 CALIFORNIA Alhambra Hospital Rosemead 98 1968 Belmont Hills Hospital Belmont 84 1962 Fremont Hospital Fremont 78 1990 Heritage Oaks Hospital Sacramento 76 1988 Laguna Hills Hospital Laguna Hills 78 1988 Rancho Lindo Hospital Fontana 74 1988 San Luis Rey Hospital Encinitas 123 1976 Santa Ana Hospital Santa Ana 100 1970 Sierra Vista Hospital Sacramento 72 1986 Vista Del Mar Hospital Ventura 87 1985 Walnut Creek Hospital Walnut Creek 108 1972 FLORIDA Fort Lauderdale Hospital Ft. Lauderdale 100 1978 Palm Bay Hospital Palm Bay 60 1986 St. Johns River Hospital Jacksonville 99 1973 GEORGIA Parkwood Hospital Atlanta 152 1981 IDAHO Intermountain Hospital Boise 75 1980 ILLINOIS Old Orchard Hospital Skokie 168 1976 Streamwood Hospital Streamwood 100 1991 INDIANA Valle Vista Hospital Greenwood 98 1983 (Indianapolis) KANSAS College Meadows Hospital Lenexa 79 1986 LOUISIANA Brentwood Hospital Shreveport 174 1990 Coliseum Medical Center New Orleans 90 1980 East Lake Hospital New Orleans 80 1987 Meadow Wood Hospital Baton Rouge 85 1985 MISSISSIPPI Sand Hill Hospital Gulfport 60 1984 MISSOURI Spirit of St. Louis Hospital St. Charles 104 1980 (St. Louis) NORTH CAROLINA Cedar Spring Hospital Pineville 70 1985 (Charlotte) OKLAHOMA Southwind Hospital Oklahoma City 80 1989 ITEM 1. BUSINESS (CONTINUED) PSYCHIATRIC CARE OPERATIONS (CONTINUED) PSYCHIATRIC HOSPITALS LICENSED YEAR HOSPITAL CITY BEDS OPENED/ACQUIRED - -------- ---- -------- --------------- TEXAS Capital Hospital Austin 130 1987 Millwood Hospital Arlington 130 1981 CRC of San Antonio* San Antonio 18 1994 UTAH Olympus View Hospital Salt Lake City 102 1986 WASHINGTON Fairfax Hospital Kirkland (Seattle) 133 1971 WISCONSIN Greenbriar Hospital Greenfield 80 1971 (Milwaukee) PUERTO RICO Hospital San Juan Capestrano Rio Piedras 88 1988 TOTAL U. S. PSYCHIATRIC LICENSED BEDS 3,435 *Joint venture, Residential Treatment Center. UNITED KINGDOM - -------------- YEAR FACILITY NAME AND LOCATION BEDS OPENED/ACQUIRED - -------------------------- ---- --------------- Altrincham Priory Hospital 54 1986 South Manchester The Dukes Priory Hospital 42 1992 Chelmsford, Essex Fulford Grange Medical Centre* 22 1993 Leeds Grovelands Priory Hospital 65 1986 Southgate, London Hayes Grove Priory Hospital 55 1983 Bromley, Kent Heath House Priory Hospital 42 1994 Bristol Jacques Hall (adolescents) 26 1993 Manningtree, Essex Marchwood Priory Hospital 59 1987 Southampton Nottingham Clinic (chemical dependency) 21 1993 Nottingham The Priory Hospital 86 1980 Roehampton, London Sturt House Clinic 21 1994 Walton-on-the-Hill, Surrey Lynbrook Priory Hospital 26 1994 Woking, Surrey ITEM 1. BUSINESS (CONTINUED) PSYCHIATRIC CARE OPERATIONS (CONTINUED) PSYCHIATRIC HOSPITALS UNITED KINGDOM (continued) - -------------- YEAR FACILITY NAME AND LOCATION BEDS OPENED/ACQUIRED - -------------------------- ---- --------------- The Woodbourne Clinic 60 1984 Birmingham TOTAL U. K. PSYCHIATRIC BEDS 579 * 50% owned MANAGED UNITS Priory Suite, Beardwood Hospital 14 1993 Blackburn Priory Suite, Winfield Hospital 6 1992 Gloucester Priory Suite, Nuffield Hospital 8 1991 Leicester TOTAL U. K. MANAGED UNITS 28 TOTAL U. K. PSYCHIATRIC LICENSED BEDS 607 ------------------------------------- A 20-bed hospital is under construction in Glasgow, Scotland which will replace an 8-bed managed unit in the spring of 1995 and will be owned and operated by CPC. U. K. DIALYSIS UNITS STATIONS Carmarthen, Wales 13 1985 Rotherham, Yorkshire 11 1992 ITEM 1. BUSINESS (CONTINUED) PSYCHIATRIC CARE OPERATIONS (CONTINUED) SOURCES OF PSYCHIATRIC HOSPITAL REVENUES - U.S. Patients are typically referred to the Company by physicians and other health care professionals, managed care organizations, employee assistance programs, the clergy, law enforcement officials, schools, emergency rooms and crisis intervention services. In some areas, the Company provides a community outreach program called the Psychiatric Assessment Team which is able to respond on a 24-hour basis to emergency calls for help in assessing people's problems and making referrals to the appropriate mental health service or setting. Psychiatrists and, in some states, psychologists are authorized to admit patients to the Company's facilities. It is against Company policy to pay referral sources for hospital admissions. The Company believes it obtains referrals from both physicians and secondary sources primarily as a result of its competitive pricing and the quality and scope of its programs. The Company receives payment for its psychiatric hospital services from patients, private health insurers, managed care organizations, and from the Medicare, Medicaid and CHAMPUS governmental programs. While variations or hybrid programs may exist, the following four categories include all methods by which the Company's hospitals receive payment for services: - NEGOTIATED RATE. Negotiated rate reimbursement is at prices established in advance by negotiation or competitive bidding for contracts with insurers and other payors such as health maintenance organizations, preferred provider organizations and other similar plans. - PRIVATE PAY. Payment by patients and their private indemnity health insurance plans is generally based on the Company's schedule of rates for that location. The Company's general policy is to set rates for services at amounts equal to or less than the average rates of its competitors' comparable facilities in each hospital market. - COST-BASED. Cost-based reimbursement is predicated on the allowable cost of services, plus an incentive payment where costs fall below a target rate. It is used by Medicare and Medicaid to reimburse psychiatric hospital services and provides a lower rate of reimbursement than the Company's schedule of rates. - CHAMPUS. CHAMPUS is a federal program which provides health insurance for certain active and retired military personnel and their dependents. CHAMPUS reimbursement is at either (i) regionally set rates, (ii) 1988 charges adjusted upward by the Medicare Market Basket Index, or (iii) a fixed rate per day at certain of the Company's California facilities where CHAMPUS contracts with a benefit administration group. The following table summarizes, as a percentage of net operating revenues for all of the Company's United States psychiatric hospitals, the percentage of net operating revenues from each reimbursement method for the periods presented.
FISCAL YEAR ENDED NOVEMBER 30, 1994 1993 1992 ------ ------ ------ Negotiated Rate 58% 48% 41% Private Pay 16 23 38 Cost-Based 20 23 16 CHAMPUS 6 6 5 --- --- --- Total 100% 100% 100% --- --- --- --- --- ---
In 1994, as a percentage of U.S. psychiatric patient days, negotiated rate represented 58%, private pay 11%, cost-based 24%, and CHAMPUS 7%. ITEM 1. BUSINESS (CONTINUED) PSYCHIATRIC CARE OPERATIONS (CONTINUED) SOURCES OF PSYCHIATRIC HOSPITAL REVENUES - U.K. Approximately 12% of United Kingdom's population has private health insurance which provides benefits for psychiatric and substance abuse treatment. There are few private psychiatric hospitals in the United Kingdom because NHS hospitals (British government-owned) are available to its residents without charge. Approximately 76% (85% in 1993 and 95% in 1992) of the Company's 1994 revenues for services in its psychiatric hospitals and alcoholism treatment facilities in the United Kingdom were derived from private sources not subject to any governmental payment limitations, but which are being affected by reimbursement restrictions imposed by private insurers. LONG-TERM CRITICAL CARE The Company, through THC, provides long-term critical care in converted psychiatric facilities, freestanding acute care facilities, and hospital space leased from owners of other acute care facilities. Although THC's patients range in age from pediatric to geriatric, a substantial portion of THC's patients are over 65 years of age. THC's long-term critical care facilities include the equipment and physician and other professional staff necessary to care for most types of critically ill patients regardless of their diagnosis or medical condition. THC's professional staffs work in inter-disciplinary teams to evaluate patients upon admission to determine a treatment plan with an appropriate level and intensity of care. Where appropriate, the treatment programs may involve the services of several disciplines, such as pulmonary and rehabilitation therapy. Currently, THC offers a complex medical care program, ventilator management program, wound care program and low tolerance rehabilitation program. Patients who successfully complete treatment programs are discharged to skilled nursing homes, rehabilitation hospitals or home care settings. LONG-TERM CRITICAL CARE HOSPITALS As of November 30, 1994, THC operated the following 13 long-term critical care hospitals: TRANSITIONAL HOSPITALS CORPORATION LICENSED HOSPITAL CITY BEDS DATE OPENED - -------- ---- -------- ----------- FLORIDA THC Hollywood Hollywood 124 October 1993 Transitional Hospital of Tampa Tampa 102 March 1993 ILLINOIS THC Chicago (3) Chicago 134 December 1993 INDIANA THC Indianapolis (1) Greenwood 38 November 1993 LOUISIANA THC New Orleans (1) New Orleans 78 November 1992 MASSACHUSETTS THC Boston Peabody 41 November 1993 MINNESOTA THC Minneapolis Golden Valley 112 November 1994 NEVADA THC Las Vegas Las Vegas 52 December 1993 NEW MEXICO THC Albuquerque Albuquerque 61 December 1993 TEXAS THC Arlington (2) Arlington 80 December 1992 THC Houston (2) Houston 42 December 1993 ITEM 1. BUSINESS (CONTINUED) LONG-TERM CRITICAL CARE HOSPITALS (continued) TRANSITIONAL HOSPITALS CORPORATION (CONTINUED) LICENSED HOSPITAL CITY BEDS DATE OPENED - -------- ---- -------- ----------- WASHINGTON THC Seattle (4) Seattle 80 May 1994 WISCONSIN THC Milwaukee (1) Greenfield 34 February 1994 TOTAL THC LICENSED BEDS 978 ----------------------- (1) Shared facility with CPC. (2) Fully converted from a CPC psychiatric hospital. (3) Leased facility. (4) Managed facility. Note: Four additional facilities are under development in Brea, CA (48 beds - fully converted), Ft. Worth, TX (satellite of Arlington-fully converted), San Diego, CA (37 beds) and Chicago, IL (104 beds). The Company conducts market research prior to opening a new facility to determine (i) the need for placement of ventilator-dependent patients and other classes of critically ill patients, (ii) the existing physician referral patterns, (iii) the presence of competitors, (iv) the payor mix and (v) the political and regulatory climate. The Company generally seeks to purchase hospitals with fewer than 100 beds in major metropolitan areas and also considers hospitals in other markets where its research indicates the need for such hospitals. PATIENT ADMISSION Substantially all of the patient admissions to THC's hospitals are transfers from other health care providers. Patients are referred from general acute care hospitals, rehabilitation hospitals, skilled nursing facilities and home care settings. The majority of THC's admissions are directly from the intensive care units of general acute care hospitals. Referral sources include discharge planners, case managers of managed care plans, social workers, physicians, third party administrators, HMOs and insurance companies. THC has directors of patient referrals who educate health care professionals from traditional acute care hospitals as to the unique nature of the services provided by THC's hospitals. The directors of patient referrals develop an annual admission plan for each hospital, with assistance from the hospital's administrator. The admission plans involve ongoing education of local physicians and the employees of managed care organizations and acute care hospitals. THC anticipates that it will direct increased admission efforts toward insurance company case managers and managed care organizations. SOURCES OF LONG-TERM CRITICAL CARE REVENUES For long-term critical care services rendered to patients, THC receives payment from (i) the federal government under Medicare, (ii) certain states under Medicaid, (iii) commercial insurers and patients and (iv) managed care organizations. After certification of the THC facility as PPS exempt, payments from Medicare and Medicaid are generally based upon cost; payments from commercial insurers are generally based upon charges and payments from managed care organizations are based on negotiated rates. Net Medicare revenue for THC totalled 75% of total THC net operating revenues for fiscal year 1994. The Company anticipates reimbursement from Medicare will continue to constitute a significant portion of THC's revenues in the future. See "Business--Regulation and Reimbursement." ITEM 1. BUSINESS (CONTINUED) COMPETITION The Company's psychiatric hospitals compete with psychiatric units in medical/surgical hospitals as well as with other specialty psychiatric hospitals. Some competing hospitals are either owned or supported by government agencies. Others are owned by nonprofit corporations and supported by endowments and charitable contributions. In each case, they are substantially exempt from income and property taxation. The competitive position of a hospital is, to a significant degree, dependent upon the number and quality of physicians practicing at the hospital and the members of its medical staff. The Company also believes that the competitive position of a hospital is dependent upon the variety of services offered by a facility, and the Company strives to implement programs best suited to the needs of patients and payors in each particular market. THC's hospitals compete with medical/surgical hospitals, certain long-term care hospitals, sub-acute facilities, rehabilitation hospitals and nursing homes specializing in providing care to medically complex patients. Many of these providers are larger and more established than THC. The Company believes that, to offer programs providing a cost-effective continuum of care, nursing homes and other companies are converting their facilities and developing programs that will be competitive with THC's hospitals. This trend is expected to continue due to cost-containment pressures and the efforts of nursing homes to expand their existing markets. The competitive position of a hospital, including the Company's psychiatric hospitals and THC's hospitals, is affected by the ability of its management to negotiate service contracts with purchasers of group health care services, including private employers, PPOs and HMOs. Such organizations attempt to obtain discounts from established hospital charges. The importance of obtaining contracts with PPOs, HMOs and other organizations which finance health care, and its effect on a hospital's competitive position, vary from market to market, depending on the number and market strength of such organizations. It is the Company's policy to enter into these contracts wherever feasible. Generally, hospitals holding major contracts with managed care organizations are able to attract more doctors to their active medical staffs than hospitals without such contracts. EMPLOYEES As of November 30, 1994, the Company had approximately 9,775 employees, of which approximately half were employed full time and half were employed part time. The employees at one of the Company's psychiatric hospitals (representing less than 1% of total employees) are covered by a union agreement. The Company considers its labor relations to be satisfactory. There is a national shortage of nursing personnel which, in general, has required the Company to pay a wage premium in excess of the normal standards to recruit a satisfactory complement of nurses. REGULATION AND REIMBURSEMENT The Company's hospitals are subject to substantial and continuous federal, state and local government regulation. Such regulations provide for periodic inspections and other reviews by state and local agencies, HHS and CHAMPUS to determine compliance with their respective standards pertaining to medical care, staffing utilization, safety and equipment necessary for continued licensing or participation in the Medicare, Medicaid or CHAMPUS programs. The admission and treatment of patients at the Company's psychiatric hospitals are also subject to state and federal regulation relating to confidentiality of medical records. ITEM 1. BUSINESS (CONTINUED) REGULATION AND REIMBURSEMENT (CONTINUED) ACCREDITATION AND STATE LICENSING State licensing of hospitals is a prerequisite to the operation of each hospital and to participation in all federally-funded programs. Once a hospital has been licensed, it must continue to comply with federal, state and local licensing requirements in addition to local building and life safety codes. All of the Company's hospitals have obtained the necessary licenses to conduct business. Hospitals may seek an accreditation from The Joint Commission on Accreditation of Healthcare Organizations ("JCAHO"), a nationwide commission which establishes standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of hospitals. Generally, hospitals and certain other health care facilities are required to have been in operation at least six months in order to be eligible for accreditation by JCAHO. After conducting on-site surveys, JCAHO awards accreditation for up to three years to hospitals found to be in substantial compliance with JCAHO standards. Accredited hospitals are periodically resurveyed, including, at the option of JCAHO, upon a major change in facilities or organization and after a merger or consolidation. All of the Company's hospitals are accredited by JCAHO. The Company intends to seek and obtain JCAHO accreditation for any additional hospitals it may purchase or lease. State certificate of need ("CON") laws generally provide that prior to the expansion of an existing facility, the construction of a new facility, the addition of beds, the acquisition of existing facilities or major items of equipment or certain changes in services, or the undertaking of a capital expenditure on behalf of a facility, approval must be obtained from the designated state health planning agency. The stated objective of the CON process is to promote quality health care at the lowest possible cost and avoid unnecessary duplication of services, equipment and facilities. If the Company is unable to obtain the requisite CONs, the growth of its business and especially that of THC could be adversely affected. MEDICARE AND MEDICAID During fiscal 1994, approximately 37% of the Company's United States psychiatric operating revenues were derived from patients covered by Medicare and Medicaid programs, and the Company anticipates that this participation will increase in the future. Medicare is a federal program that provides certain hospital and medical insurance benefits to persons age 65 and over and certain disabled persons. Medicaid is a medical assistance program administered by the states and partially funded by the federal government under which health care benefits are available to the indigent. Within the Medicare and Medicaid statutory framework, there are substantial areas subject to administrative rulings, interpretations and discretion which may affect payments made to providers. In order to receive Medicare reimbursement, each hospital must meet the applicable conditions of participation set forth by the Department relating to the type of hospital, its equipment, personnel and standard of medical care, as well as comply with state and local laws and regulations. Hospitals undergo periodic on-site Medicare certification surveys. The Medicare survey is limited if the hospital is JCAHO accredited. All but one of the Company's operating hospitals are certified as Medicare providers. All of the Company's operating hospitals are certified by their respective state Medicaid programs. A loss of certification could adversely affect a hospital's ability to receive payments from Medicare and Medicaid. ITEM 1. BUSINESS (CONTINUED) REGULATION AND REIMBURSEMENT (CONTINUED) MEDICARE AND MEDICAID (continued) Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and indirect cost of the services provided to beneficiaries. The Social Security Amendments of 1983 implemented PPS in an effort to reduce and control Medicare costs. Under PPS, inpatient costs are reimbursed based upon a fixed payment amount per discharge using diagnosis related groups ("DRGs"). The DRG payment under PPS is based upon the national average cost of treating Medicare patients with the same diagnosis. Although the average length of stay varies for each DRG, the average stay for all Medicare patients subject to PPS is approximately six days. An additional outlier payment is made for patients with unusually long lengths of stay or higher treatment costs. Outliers are designed to cover only marginal costs. Additionally, PPS payments can only be made once every 60 days for each patient. Thus, PPS creates an economic incentive for general acute care hospitals to discharge Medicare patients as soon as clinically possible. The Social Security Amendments of 1983 exempted psychiatric, rehabilitation, cancer, children's and long-term care hospitals from PPS. A long-term care hospital is defined as a hospital which has an average length of stay of greater than 25 days. The Company's experience is that THC's facilities are able to meet this definition. Under current law, inpatient operating costs for long-term care and psychiatric hospitals are reimbursed under a cost-based reimbursement system, except for their initial six months of operation, when they are subject to PPS reimbursement. As a result of the Tax Equity and Fiscal Responsibility Act of 1982 ("TEFRA"), reimbursement under the cost-based system is subject to a computed target amount per discharge (the "Target") for inpatient operating costs. A hospital's Target rate is the per discharge (case) limitation, derived from the hospital's allowable net Medicare inpatient operating costs in the hospital's base year, and updated for each subsequent hospital cost reporting period by the appropriate annual rate-of-increase percentage. If allowable net inpatient operating costs do not exceed the hospital's Target, payment to the hospital will be determined on the basis of the lower of (i) Net inpatient operating costs plus 50% of the difference between inpatient operating costs and the Target; or (ii) Net inpatient operating costs plus 5% of the Target. Prior to October 1, 1991, allowable Medicare operating costs per discharge in excess of the Target were not reimbursed. Effective October 1, 1991, if a hospital's allowable net inpatient operating costs exceed the Target, Medicare reimburses the lower of (i) the hospital's target amount plus 50% of the allowable Medicare operating costs per discharge in excess of the Target or (ii) 110% of the Target. With regard to hospitals certified prior to October 1, 1992, the TEFRA Target provisions do not apply with respect to hospitals that have been in operation for less than three full years. For hospitals certified on or after October 1, 1992, the TEFRA Target provisions do not apply with respect to hospitals that have been in operation for less than two full years. Under the Omnibus Budget Reconciliation Act of 1993 ("OBRA"), increases in the Target for fiscal years 1994 through 1997 are generally limited to the hospital market basket increase minus one percentage point. In October 1993, the United States Department of Health and Human Services ("HHS"), acting through the Health Care Financing Administration, issued a memorandum to its regional offices directing them to review carefully Medicare certification requests by long-term care hospitals operating in space leased from another hospital. The memorandum mandated new rules for long-term care hospitals to qualify for exclusion from PPS in a "hospital within a hospital" setting. The new rules require a separate governing body, separate medical and financial staffs, and 75% or more of the admissions must be referred from sources other than the "host" hospital. THC is currently in compliance with the new regulations with no exceptions. Medicare and Medicaid reimbursement is generally determined from annual cost reports filed by the Company. These cost reports are subject to audit by Medicare and Medicaid. The Company has established reserves for possible adjustments at levels which management believes to be adequate to cover any downward adjustments resulting from audits of these cost reports. ITEM 1. BUSINESS (CONTINUED) REGULATION AND REIMBURSEMENT (CONTINUED) MEDICARE AND MEDICAID (continued) Federal regulations provide that admission to and utilization of hospitals by Medicare and Medicaid patients must be reviewed by peer or utilization review organizations ("PROs") in order to ensure efficient utilization of hospitals and services. A PRO may conduct such review either prospectively or retroactively and may, as appropriate, recommend denial of payments upon admission or retrospectively for services provided to a patient. Such review is subject to administrative and judicial appeal. HEALTH CARE REFORM The health care industry is undergoing fundamental change as a direct result of political, economic, and regulatory influences. The Company anticipates that Congress and state legislatures will continue to review and assess health care delivery systems, payor and provider relationships and payment methodologies. Public debate will likely continue in the future. During October of 1993, proposed health care reform called for a moratorium on the designation of additional long-term care hospitals. No such legislation was enacted. The Company cannot predict the ultimate form or timing of enacted legislation, if any, or its effect on the Company, and no assurance can be given that any such legislation will not have a material adverse effect on the Company's business and results of operations. REIMBURSEMENT LIMITATIONS AND COST-CONTAINMENT Regardless of the outcome of the proposed health care reform bills, there will likely continue to be vigorous efforts to effectuate cost savings in the Medicare program. These efforts could include change in the reimbursement of the Company's long-term critical care hospitals to the DRG method. In fact, the conference report accompanying the 1993 OBRA urged prompt completion of a study of methods to subject hospitals such as THC's to PPS, from which they are currently exempt. Even if cost-based reimbursement for the THC facilities continues, additional reimbursement limits may be imposed. Such cost-containment initiatives may vary substantially from the proposed structural reforms discussed above and may impact the Company more quickly and directly. Similar changes in reimbursement of psychiatric services could also adversely impact the Company's business and results of operations. Conversely, there is also potential for a positive effect on the Company's psychiatric operations in the event that Congress, as part of any health care reform legislation, mandates mental health benefits for all Americans. RATE SETTING LAWS In recent years various forms of prospective reimbursement legislation have been proposed or enacted in states in which the Company owns hospitals. For example, the Company's Florida hospitals are governed by a prospective reimbursement law which generally allows rate increases based on the Consumer Price Index. The Company's Washington psychiatric hospital was subject to a prospective reimbursement law based on each facility's budgeted costs until June 30, 1989, when the law lapsed and was not renewed. If prospective reimbursement laws were to be enacted in the future in one or more of the states in which the Company operates hospitals, it could have an adverse effect on the Company's business and results of operations. In addition, the enactment of such legislation in states where the Company does not now have hospitals could have a deterrent effect on the decision to acquire or establish facilities in such states. ITEM 1. BUSINESS (CONTINUED) REGULATION AND REIMBURSEMENT (CONTINUED) RELATIONSHIPS WITH CLINICIANS The Company is subject to federal and state laws that regulate its relationships with physicians and other providers of health care services. These laws include the Medicare and Medicaid anti-kickback statute, under which criminal penalties can be imposed upon persons who pay or receive any remuneration in return for referrals of patients for items or services reimbursed under the Medicare, Medicaid or certain state health care programs. Violations of this law also results in automatic exclusion from these programs. The Company is also subject to state and federal laws prohibiting false claims. The Department, courts and officials of the Office of Inspector General have broadly construed the anti-kickback statute. "Safe harbor" regulations promulgated by the Department define a narrow range of practices that will be exempted from prosecution or other enforcement action under this statute. To the extent that offers to pay or payments made are deemed to be for purposes of inducing referrals and do not satisfy all the criteria for a safe harbor, the arrangements could be found to violate the anti-kickback laws. Similarly, state fraud and abuse laws, which vary from state to state, are often vague and have infrequently been interpreted by courts or regulatory agencies. Given the breadth of these laws and the dearth of court rulings dealing with businesses like the Company's, there can be no assurance that the Company's arrangements with its providers will not be challenged. OBRA of 1993 contains provisions ("Stark Act") prohibiting physicians having a financial relationship with the provider from making referrals for "designated health services" rendered by the provider. These services include radiation therapy services; durable medical equipment; parenteral and enteral nutrients, equipment, and supplies; prosthetics, orthotics, and prosthetic devices; home health services; outpatient prescription drugs; and inpatient and outpatient hospital services. In addition, if such a financial relationship exists, the entity is prohibited from billing for or receiving reimbursement on account of such referral. These provisions take effect January 1, 1995. Numerous exceptions are allowed under the Stark Act for financial arrangements that would otherwise trigger the referral prohibitions. These provide, under certain conditions, exceptions for relationships involving rental of office space and equipment, employment relationships, personal service arrangements, payments unrelated to designated services, physician recruitment, and certain isolated transactions. The Department has not yet issued regulations, however, and there can be no assurance that these provisions will be interpreted in a manner consistent with the practices of the Company. The Company has contracts with physicians to provide hospital services and in some instances patient services. These contracts have been revised to meet the requirements of the Stark Act. However, until clear regulations are promulgated or the contracts are otherwise tested, there can be no assurance that the contracts will be found to be in compliance. ITEM 2. PROPERTIES This item incorporates by reference the tables of psychiatric and long-term critical care hospital and dialysis facility locations set forth in Item 1. Ownership information is set forth in the text of this item. U. S. PSYCHIATRIC HOSPITAL PROPERTIES The Company owns, in fee simple, all of the real property on which its acute psychiatric hospital facilities are located. In 1994, three of the above-described facilities were shared with THC. As of November 30, 1994, the Company was in the process of converting two other facilities into long-term critical care facilities. ITEM 2. PROPERTIES U. S. PSYCHIATRIC HOSPITAL PROPERTIES (CONTINUED) The Company's existing hospital facilities range in size from 20,000 to 100,000 square feet and each facility has sufficient acreage to allow space for outdoor recreation. All of the existing hospital buildings meet all state and local requirements for licensing as hospitals to provide the services indicated. Six facilities ceased operations in fiscal year 1993. Two of these hospitals were sold in January and February of 1994. Three of these hospitals are being held for sale, and one is being converted into a THC facility. Three additional hospitals ceased operations in fiscal year 1994. One of these hospitals was converted into a THC facility in 1994, and one will be converted in 1995. The remaining hospital is being held for sale. The Company has four separate mortgage loans with lenders, each of which is secured by one of the Company's hospitals. OTHER PROPERTIES: The Company leases office space for its Corporate office in Las Vegas, Nevada. The leases for this space aggregate approximately 22,000 square feet of office space with lease terms of two years. The Company also owns a three-story building completed in 1988 used for a portion of its Corporate headquarters; medical office buildings adjacent to twenty of its hospital facilities; three parcels of land for potential hospital development or future sale, two parcels of land being developed for sale for investment purposes (non-hospital related), and one apartment in a location central to the Company's operations for use by employees whose duties require them to travel. UNITED KINGDOM PSYCHIATRIC HOSPITAL PROPERTIES: The Company owns, in fee simple, the real property for eleven of its psychiatric hospitals. The Company leases one of its psychiatric hospitals. The Company also owns, in fee simple, one clinic specializing in the treatment of substance abuse. The Company operates two dialysis centers from buildings located on National Health Service properties. All of the Company's existing facilities range in size from one-half acre to five acres. THC PROPERTIES: The Company owns, in fee simple, the real property for eleven of its long-term critical care facilities. The Company leases one long-term critical care facility and manages one other long-term critical care facility. All of the Company's facilities are located on sites ranging from one to forty-two acres. As of November 30, 1994, THC operated additional units within three of the Company's psychiatric hospitals. The Company currently leases office space for its eastern region office in Atlanta, Georgia. The lease for this space aggregates approximately 14,000 square feet of office space with a remaining lease term of seven months as of November 30, 1994, after which the Company plans to occupy a currently unused medical office building on the campus of a CPC psychiatric facility in Atlanta. ITEM 3. LEGAL PROCEEDINGS Immediately following the Company's public announcement of the increased charge for uncollectible accounts referred to in "Management's Discussion and Analysis of Results of Operations and Financial Condition 1991 Compared to 1990", eleven securities class action lawsuits were filed against the Company and several of its officers and directors in the United States District Court for the Central District of California. These suits allege generally that the Company has in the past made materially false and misleading public statements or failed to disclose material adverse information regarding its earnings, financial condition and business prospects. These suits have been consolidated into a single action. A shareholders' derivative action was filed at about the same time in the Superior Court for Orange County, California, against the Company, its then directors and certain other officers alleging breach of fiduciary duty, waste of corporate assets and gross mismanagement based largely on the same operative facts. The Company maintains that the public statements and reports in question were complete and correct and that its policy is and always has been to disclose material adverse information publicly and on a timely basis. It has not been possible to assess the likely outcome of these actions, but the Company has defended them vigorously. Each of its officers and directors has broad indemnification contracts with the Company and are entitled to indemnity under circumstances prescribed by applicable law. In addition, the Company's Articles of Incorporation and applicable law restrict the liability of its officers and directors for damages for breach of their fiduciary duties. 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 all pending proceedings will not have a material adverse effect on the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not applicable. PART II ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information (1) (i) The Common Stock of Community Psychiatric Centers is traded on the New York and Pacific Stock Exchanges. Ticker symbol: CMY. (ii) The information in response to this portion of Item 5 is incorporated by reference from footnote 13 to the financial statements in Item 8. (b) Holders (1) Approximate number of holders of the $1.00 Par Value Common Stock of the Company at January 31, 1995 2,361 - The number of record holders includes banks and brokerage houses which are holding shares of the Company's Common Stock for an undetermined number of beneficial owners. (c) Dividends (1) The information in response to this portion of Item 5 is incorporated by reference from footnote 13 to the financial statements in Item 8. ITEM 6. SELECTED FINANCIAL DATA Community Psychiatric Centers and Subsidiaries YEAR ENDED NOVEMBER 30 1994 1993 1992 1991 1990 ------------------------------------------------------- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Operating revenues $ 423,955 $ 335,578 $ 344,274 $392,873 $ 371,221 Net earnings (loss) 10,220 (24,892) 23,137 45,289 83,211 Total assets 605,404 530,340 540,600 569,670 551,590 Long-term debt, ex- clusive of current maturities 69,090 40,718 26,293 27,172 28,577 Earnings (loss) per common share: $ 0.24 $ (0.58) $ 0.52 $ 0.98 $ 1.80 Dividends per share 0.01 0.09 0.36 0.36 0.36 See "Management's Discussion and Analysis of Financial Condition and Results of Operations"-- "Restructuring Charges (Credit)." ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the selected financial data on the preceding page and the notes to financial statements appearing in Item 8. RESTRUCTURING CHARGES (CREDIT) Effective February 28, 1993, the Company recorded a pre-tax charge of $55.0 million ($35.0 million after tax) in connection with the decision to close seven of its psychiatric hospitals. The charge comprised $35.3 million to write down buildings and other fixed assets, $2.1 million to write off intangibles, $14.4 million for future operating losses of the seven hospitals and related corporate restructuring costs associated with terminating employees, and $3.2 million for additional accounts receivable allowances at the seven hospitals. Six of the restructured hospitals have ceased operations. The seventh hospital, which returned to operating status effective March 1, 1994, has been reconstituted under new management into a rapid stabilization facility. Of the six closed hospitals, two have been sold, three are being held for sale or lease, and one is being converted into a THC facility. The Company received cash proceeds of approximately $5.0 million in January and February 1994 from the sale of two of these hospitals. Effective February 28, 1994, the Company recorded a restructuring credit totalling $7.2 million ($4.3 million after tax) from the resolution of the previously restructured psychiatric assets. The restructuring credit resulted from the Company's success in controlling hospital closure costs and in divesting one of its restructured properties at a higher price than the year-ago writedown of the facility anticipated. Effective February 28, 1994 the Company recorded a restructuring charge of $6.3 million ($3.8 million after tax) in connection with the decision to close three additional psychiatric facilities. The charge comprised $2.2 million for future operating losses, $1.5 million for restructuring costs associated with terminating employees and $2.6 million for additional accounts receivable allowances and reserves for other assets at the three hospitals. Approximately 225 employees of the restructured hospitals were terminated. Amounts charged against the reserve, including termination benefits paid, approximated amounts originally accrued. Total revenue and net operating income or (loss) for the three closed hospitals totalled $2.8 million and ($1.1 million) for the first quarter of 1994, $20 million and $.6 million for fiscal year 1993, and $23.5 million and $2.3 million for fiscal year 1992. Of the three closed hospitals, one is being held for sale, one was converted into a THC facility after the restructuring, and one will be converted into a THC facility in fiscal year 1995. LIQUIDITY AND CAPITAL RESOURCES At November 30, 1994, cash and equivalents were $37.3 million and total working capital was $103.5 million, net of the accrual for restructuring costs of $2.7 million. Cash was principally used during the year ended November 30, 1994 to fund working capital and operating losses for THC facilities, and for the purchase of equipment and improvements ($48.8 million). The Company also acquired a psychiatric hospital and a residential treatment center in the United Kingdom for a combined purchase price of $5.7 million. In March of 1994, the Company paid a one-time dividend to shareholders of record on March 1, 1994 totalling $.4 million (.01 per share). The increase in accounts receivable at November 30, 1994, is due primarily to the expansion of THC's operation during the year. Proceeds from borrowings on revolving credit facilities totalled $42.0 million for the year ended November 30, 1994. The Company's current ratio in 1994, 1993, and 1992 was 2.3, 2.7, and 5.0, respectively. The Company's ratio of long-term debt to total capital at November 30, 1994, 1993, and 1992 was 15.7%, 9.6%, and 6.0%, respectively. The increase in these ratios is reflective of the $40.7 million increase in debt levels which was used to fund growth in THC and the United Kingdom. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) LIQUIDITY AND CAPITAL RESOURCES (CONTINUED) The Company presently expects to expend up to $29 million in fiscal 1995 for the conversion and maintenance of its THC facilities. In addition to these capital expenditures, the Company expects to expend up to $5 million in fiscal 1995 to fund both the working capital (principally accounts receivable) and start-up operating losses principally for THC facilities opening in late 1994 and 1995. The Company also expects to spend approximately $14.0 million on capital expenditures for maintenance of its psychiatric facilities and acquisitions in the United Kingdom. In January 1995, the Board of Directors authorized the expenditure of $9.5 million to build a new Corporate office which will be situated on the campus of the THC Las Vegas Hospital in Las Vegas, Nevada. A portion of this building will be utilized by the hospital in order to provide needed expansion of patient care space within the current hospital. The Company expects to expend $8.2 million on the construction of the building in fiscal year 1995. In January 1992, the Board of Directors authorized the expenditure of up to $50.0 million of cash on hand for the repurchase of the Company's common stock from time-to-time in the open market. As of November 30, 1992, the Company had purchased 2,890,000 shares for $31.1 million, including 451,000 at market value from the former chairman, under that authorization. Through November 30, 1993, an additional 85,000 shares were repurchased for $0.8 million. Under an authorization in effect prior to January 31, 1992, the Company had repurchased 549,800 shares for $6.3 million. No common stock was repurchased in fiscal year 1994. The Company received net cash proceeds of approximately $5 million in January and February of 1994 from the sale of two closed facilities. The Company also received approximately $2.3 million in cash proceeds from three sales of vacant land during 1994. The Company has a $25.0 million revolving credit facility with Bank of America National Trust and Savings Association ("BofA"). At November 30, 1994, $25.0 million has been borrowed under this facility. The Company may borrow, repay and reborrow up to $25 million through November 30, 1995 (the revolving loan period), at which time any amount outstanding is converted into a term loan payable in equal quarterly installments through November 30, 1998. The Company's subsidiary in the United Kingdom has a credit facility whereby the Company is allowed to borrow up to $15 million. At November 30, 1994, approximately $10.2 million was outstanding under this facility. On May 6, 1994, the Company entered into an additional revolving credit facility with Bank of America for $50 million. As of November 30, 1994, $20 million was outstanding under this facility. Any amount outstanding under this facility is due and payable on February 28, 1996. Unused revolving credit facilities of approximately $30 million remain available to the Company at November 30, 1994. The Company believes that its current cash and cash equivalent balances, its operating cash flow, and the amounts available under its revolving credit facilities will be sufficient to fund the Company's operations and capital expenditures through the end of fiscal 1995. The Company is presently evaluating proposals for additional funding from other financing sources. Additional funding sources will be needed to support further expansion of THC and to repay outstanding borrowings under the $50 million credit facility. OPERATING RESULTS The following table presents selected unaudited pro forma income statement data for the years ended November 30, 1994, 1993 and 1992 adjusted as if the restructurings had occurred on November 30, 1991. The data presented below may not be indicative of the results that would have been obtained had the restructurings actually occurred on the date assumed. In the opinion of management, this data includes all adjustments, consisting of normal recurring adjustments, that the Company considers necessary for a fair presentation of the data set forth therein. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) OPERATING RESULTS (CONTINUED)
YEAR ENDED NOVEMBER 30 1994 1993 1992 -------- -------- -------- Net operating revenues $ 422,363 $ 311,249 $ 286,287 Other income 3,785 2,301 3,433 ----------------------------- 426,148 313,550 289,720 Operating expense 326,616 235,000 206,342 General and administrative expense 33,775 26,806 21,747 Bad debt expense 26,503 19,316 12,383 Depreciation and amortization 18,524 13,790 12,425 Interest expense 3,545 2,420 1,607 ----------------------------- 408,963 297,332 254,504 ----------------------------- Earnings before income taxes 17,185 16,218 35,216 Income taxes 6,960 6,325 13,030 ----------------------------- Net earnings $ 10,225 $ 9,893 $ 22,186 ----------------------------- -----------------------------
FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 The following discussion excludes the restructuring charges and operating results of the Restructured Hospitals. Net operating revenues for the year ended November 30, 1994 increased by approximately 35.7% to $422.4 million from $311.2 million for the prior year. This increase was due primarily to the addition of $82.9 million of THC revenue in 1994 compared to 1993. Net operating revenues from the United States psychiatric hospitals increased by 6.1% or approximately $15.9 million as a result of a 10.7% increase in adjusted patient days to 613,025 from 553,560 which was partially offset by a decrease in the net revenue per adjusted patient day. The increase in adjusted patient days was due in large part to (i) a 37.0% increase in residential treatment patient days to 142,661 from 104,147 and (ii) a 37.8% increase in partial hospitalization visits to 148,340 from 107,687. The increase in adjusted patient days offset the 9.6% decrease in average length of stay. The decrease in net revenue per adjusted patient day was the result of the continuing shift in reimbursement to negotiated rates and cost-based reimbursement from private pay. Net operating revenues from the Company's United Kingdom operations increased by 36.3% or approximately $12.3 million as a result of a 34.8% increase in inpatient days and a slight increase in average length of stay and net revenue per adjusted patient day. The Company's United Kingdom operations benefitted from the acquisition of one new hospital in the first quarter and one new hospital in the fourth quarter. Operating expenses as a percentage of net operating revenues increased to 77.3% from 75.5% in the year ended November 30, 1994 compared to the prior year. This increase was primarily attributable to expenses incurred in connection with the expansion of the Company's THC operations. General and administrative expenses decreased as a percentage of net operating revenues from 8.6% to 8.0% due to cost-containment programs implemented during the middle of 1993, which included the reduction of personnel and other overhead. During the fourth quarter of 1994, the Company implemented further reductions in its overhead by further reducing the number of overhead personnel. During the fourth quarter of 1994, the Company incurred approximately $1 million in moving costs and severance pay related to the relocation of its Corporate office from Laguna Hills, California to Las Vegas, Nevada. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FISCAL YEAR 1994 COMPARED TO FISCAL YEAR 1993 (CONTINUED) Bad debt expense increased as a percentage of net operating revenues to 6.3% in 1994 from 6.2% in 1993. The U. S. Psychiatric Division incurred specific provisions for bad debt expense of $2 million and $1 million, respectively, in the third and fourth quarters of 1994 related to continued interruptions in Medicare reimbursement to partial hospitalization providers in California. A concerted effort is being made to collect the unpaid amounts, however, it is not certain when the situation will be resolved. The Company anticipates future increases in bad debt expense due to decreased annual and lifetime psychiatric maximum payment limits for individual patients and increased deductibles and co-insurance. Other operating results, after the effect of the restructuring charges are described as follows: Other income increased due to gains on the sale of three parcels of land totalling approximately $2.0 million. Depreciation and amortization increased mainly due to the increase in operating facilities at THC from seven as of November 30, 1993 to 13 as of November 30, 1994. Interest expense, net of capitalized interest, increased due to the increase in long-term debt. Income taxes (benefit) as a percentage of pre-tax income (loss) was 40.5% compared to (35.4%) in 1993. For the reasons described above, earnings before depreciation, amortization, interest, and income taxes for the twelve months ended November 30, 1994 increased by approximately 17.9% to $35.5 million from $30.1 million in the prior year period and net earnings increased to $10.2 million from $9.9 million compared to the prior year period. In 1994, approximately 18% of the Company's net revenues were paid by private sources and insurance companies which based reimbursement on the Company's price schedule. Approximately 44% of the Company's net revenues were paid by Medicare, Medicaid and other programs which based reimbursement on the Company's costs and DRG rates. Therefore, to the extent that costs increased, higher cost-based reimbursement was generally received on a dollar-for-dollar basis. Approximately 5% was paid by CHAMPUS, a Federal Government Program which based reimbursement generally on a regional average rate. The balance of approximately 33% was paid based upon rates negotiated with insurers and other payors including managed care companies, health maintenance organizations, preferred provider organizations and similar plans. The number of patients covered under negotiated rate plans has grown significantly in recent years and such growth is expected to continue in the future. FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992 The following discussion excludes the restructuring charge and operating results of the Restructured Hospitals. Net operating revenues for the year ended November 30, 1993 increased by approximately 8.7% to $311.2 million from $286.3 million for the prior year. This increase was due primarily to the addition of $18.1 million of THC revenue in 1993 as compared to effectively no THC revenue in 1992. Net operating revenues from the United States psychiatric hospitals increased by 2.5% or approximately $6.4 million as a result of a 8.3% increase in adjusted patient days to 553,560 from 511,318 which was partially offset by a decrease in the net revenue per adjusted patient day. The increase in adjusted patient days was due in a large part to (i) a 78.3% increase in residential treatment patient days to 104,147 from 58,402 and (ii) a 79.4% increase in ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992 (CONTINUED) partial hospitalization visits to 107,687 from 60,011. The increase in adjusted patient days more than offset the 7.0% decrease in average length of stay. The decrease in net revenue per adjusted patient day was the result of the continuing shift in reimbursement to negotiated rates and cost-based reimbursement from private pay. Net operating revenues from the Company's United Kingdom operations increased by 1.2% or approximately $412,000 as a result of an increase in inpatient admissions and average length of stay which was partially offset by a decline in net revenue per adjusted patient day. Operating expenses as a percentage of net operating revenues increased to 75.5% from 72.1% in the year ended November 30, 1993 compared to the prior year. This increase was primarily attributable to expenses incurred in connection with the Company's THC operations which were not existent in the 1992 period and an increase in personnel costs in the first quarter of 1993 related to the Company's expansion of its continuum of care. General and administrative expenses increased by approximately 23.0% to $26.8 million from $21.8 million and increased as a percentage of net operating revenues to 8.6% from 7.6% due primarily to (i) an increase in personnel costs related to the Company's initiatives to enhance the quality of its services and strengthen its revenue generation efforts (ii) the expenses incurred in connection with providing a continuum of care and (iii) THC operations which were not existent in the 1992 period. Provision for uncollectible accounts, exclusive of a 1992 recovery of previously written off accounts receivable, increased as a percentage of total revenues to 6.2% from 4.3%. Cost-containment programs, which included reduction of personnel and elimination of overhead, were implemented during the second and third quarters of 1993 and resulted in reductions of operating and general and administrative expenses as a percentage of net operating revenues from 95.7% in the first quarter to 76.8% in the fourth quarter. For the reasons described above, earnings before depreciation, amortization, interest, other income and income taxes for the twelve months ending November 30, 1993 declined by approximately 34.3% to $30.1 million from $45.8 million in the prior year period and net earnings declined to $9.9 million from $22.2 million compared to the prior year period. Other operating results, after the effect of the restructuring charge, are described as follows: - Depreciation expense decreased because the Restructured Hospitals were excluded from operations subsequent to the end of the first quarter of 1993. - Interest expense increased in 1993 because of the decrease in amounts capitalized and the increase in long-term debt. - Income taxes (benefit) as a percent of pre-tax income (loss) was (35.4%) in 1993 compared to 37% in 1992. In 1993, approximately 30% of the Company's net revenues were paid by private sources and insurance companies which based reimbursement on the Company's price schedule. Approximately 24% of the Company's net revenues were paid by Medicare, Medicaid and other programs which based reimbursement on the Company's costs and DRG rates. Therefore, to the extent that costs increased, higher cost-based reimbursement was generally received on a dollar-for-dollar basis. Approximately 5% was paid by CHAMPUS, a Federal Government Program which based reimbursement generally on a regional average rate. The balance of approximately 41% was paid based upon rates negotiated with insurers and other ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) FISCAL YEAR 1993 COMPARED TO FISCAL YEAR 1992 (CONTINUED) payors including managed care companies, health maintenance organizations, preferred provider organizations and similar plans. The number of patients covered under negotiated rate plans has grown significantly in recent years and such growth is expected to continue in the future. The Company's ability to negotiate rate increases successfully with these plans that are comparable to the Company's cost increases is significant to maintaining adequate operating margins. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information in response to this item is incorporated by reference from Exhibit 1 in Item 14. ITEM 9. CHANGE IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. INFORMATION CONCERNING NOMINEES AND CONTINUING DIRECTORS The following information is furnished with respect to each nominee and the continuing Directors.
DIRECTOR OCCUPATION AND CONTINUOUSLY TERM NAME* AGE BUSINESS EXPERIENCE SINCE EXPIRES - ---- --- ------------------- ------------ -------- NOMINEES: Hartly Fleischmann . . . . . . 67 Attorney since 1952, member of Fleischmann & 1972 1995 Fleischmann, San Francisco, California, engaged in the general practice of law; counsel to the Company since 1971. Jack H.Lindheimer, M.D. . . . . 63 Corporate Medical Director, U.S. Psychiatric 1983 1995 Services since 1991; Medical Director, CPC Alhambra Hospital 1970-1992; physician in private practice since 1960, specializing in psychiatry. CONTINUING DIRECTORS: Richard L. Conte . . . . . . . 41 Chairman of the Board of Directors since May 21, 1991 1997 1992 and Chief Executive Officer since April 13, 1992; President 1991-1992; Chief Financial Officer 1989-1991; Executive Vice President--Dialysis, European and Home Health Division 1985-1989; General Counsel 1980-1990. Dana L. Shires, M.D. . . . . . 62 Physician in private practice since 1961 1989 1997 specializing in nephrology; Chairman, Chief Executive Officer and President of LifeLink Foundation, a not-for-profit corporation. David L. Dennis . . . . . . . . 46 Managing Director, Investment Banking, Donaldson, 1991 1996 Lufkin & Jenrette Securities Corporation, responsible for that corporation's health care and media industry financing on the West Coast since 1989.
PART III (CONTINUED) ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) INFORMATION CONCERNING NOMINEES AND CONTINUING DIRECTORS (CONTINUED) - --------------------------------------------------------
OCCUPATION AND CONTINUOUSLY TERM NAME* AGE BUSINESS EXPERIENCE SINCE EXPIRES - ---- --- ------------------- ------------ -------- David A. Wakefield . . . . . . 48 Chairman, Priory Hospitals Group since 1993; 1992 1996 Executive Vice President since 1992, responsible for hospital operations and development in the United Kingdom and Europe; Senior Vice President-- United Kingdom and European Division 1988-1992. Robert L. Thomas . . . . . . . 70 Retired since 1993; Consultant, 1992-1993 and 1993 1997 Executive Director, 1977-1992, National Association of Private Psychiatric Hospitals, a nonprofit entity. - -------------- * Stephen J. Powers resigned as a director effective February 8, 1995.
INFORMATION CONCERNING EXECUTIVE OFFICERS - ----------------------------------------- The following table lists and provides biographical data about the executive officers of the Company.
PERIOD OF SERVICE AND NAME AGE TITLE BUSINESS EXPERIENCE ---- --- ----- --------------------- Richard L. Conte . . . . . . . . . . 41 Chairman of the Board and Chief Executive Officer Appointed April 13, 1992; President 1991-1992; Chief Financial Officer 1989-1991; Executive Vice President-- Dialysis, European and Home Health Division 1985-1989; General Counsel 1980-1990. James R. Laughlin . . . . . . 48 Executive Vice President of the Company and Appointed Executive Vice President--Transitional Hospitals Corporation President 1993; Appointed President--Transitional Hospitals Corporation 1992; President, The Phoenix Group, health care consultants 1991- 1992; Executive Vice President, Development and Administrative Services, Charter Medical Corporation 1987-1990.
PART III (CONTINUED) ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) INFORMATION CONCERNING NOMINEES AND CONTINUING DIRECTORS (CONTINUED) - --------------------------------------------------------
NAME AGE TITLE BUSINESS EXPERIENCE ---- --- ----- --------------------- Kay E. Seim . . . . . . . . . . . . . 48 Executive Vice President of the Company and Appointed March 1994; President--U.S. Psychiatric Services Executive Vice President--U.S. Psychiatric Operations 1993; Executive Vice President-- West Coast Hospitals 1992; Senior Vice President and Chief Operating Officer, Ramsay Health Care, Inc. 1991- 1992; Vice President-- Northwest Region of the Company 1986-1991. David A. Wakefield . . . . . . . . . 48 Executive Vice President of the Company and Appointed Chairman--Priory Chairman--Priory Hospitals Group Hospitals Group 1993; Appointed Executive Vice President 1992; Senior Vice President--United Kingdom and European Division 1988-1992. Wendy L. Simpson . . . . . . . . . . 45 Executive Vice President of the Company, Chief Appointed December 1994; Financial Officer and Treasurer Senior Vice President-- Transitional Hospitals Corporation 1994; Senior Vice President and Chief Financial Officer, Weisman Taylor Simpson & Sabatino 1992-1994; Senior Vice President and Chief Financial Officer, American Medical International 1990-1991; Vice President and Controller, American Medical International 1988-1990. Ronald L. Ooley . . . . . . . . . . . 49 Executive Vice President--Administration and Appointed Corporate Secretary Corporate Secretary 1994; Appointed Executive Vice President 1993; Senior Vice President--Human Resources 1992; Vice President--Human Resources, The Phoenix Group 1991-1992; consultant, Core Management Resources, a benefits consulting company, 1990-1991; Senior Vice President--Human Resources, Charter Medical Corporation, 1988-1990. Jack H. Lindheimer, M.D. . . . . . . 63 Corporate Medical Director, U.S. Psychiatric Appointed 1991; Medical Services Director, CPC Alhambra Hospital 1970-1992; physician in private practice since 1960, specializing in psychiatry.
PART III (CONTINUED) ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT (CONTINUED) INFORMATION CONCERNING NOMINEES AND CONTINUING DIRECTORS (CONTINUED) - --------------------------------------------------------
PERIOD OF SERVICE AND NAME AGE TITLE BUSINESS EXPERIENCE ---- --- ----- --------------------- Julia L. Kopta . . . . . . . . . . . 45 General Counsel and Executive Vice President-- Appointed General Counsel Corporate Planning and Development January 27, 1995; Appointed Executive Vice President-- Corporate Planning and Development 1993; Chairperson, Care Visions Corporation 1987- 1993. Steven S. Weis . . . . . . . . . . . 52 * - --------------- * Steven S. Weis resigned as Executive Vice President and Chief Financial Officer effective December 31, 1994. See "Settlement with Steven S. Weis."
COMPLIANCE WITH SECTION 16(A) OF THE SECURITIES EXCHANGE ACT OF 1934 - -------------------------------------------------------------------- Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than ten percent of the outstanding shares of the Company's common stock, to file with the Securities and Exchange Commission and the New York and Pacific Stock Exchanges initial reports of ownership and reports of changes in ownership of such stock. SEC regulations establish specific due dates for these reports. The Company is required to disclose any failure to file a report for the 1994 fiscal year on a timely basis. To the Company's knowledge, based solely upon review of the copies of such reports furnished to it, during the fiscal year ended November 30, 1994 all Section 16(a) filing requirements applicable to its officers and directors were complied with, except that (i) Dr. Shires filed a late report on Form 4 relating to one transaction; and (ii) Messrs. Wakefield and Weis filed their year-end reports on Form 5 late. PART III (CONTINUED) ITEM 11. EXECUTIVE COMPENSATION. SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION - ---------------------------------------------- The following table shows the cash compensation paid by the Company, as well as certain other compensation paid or accrued, (i) to the Chief Executive Officer for his service in all executive capacities during 1992, the fiscal year in which he was appointed chief executive officer and during the fiscal years ending November 30, 1993 and 1994; and (ii) to each of the other four most highly compensated executive officers who were serving as executive officers on November 30, 1994, in all executive capacities in which they served during the fiscal years ending November 30, 1992, 1993 and 1994:
Summary Compensation Table -------------------------- Long Term Compensation Annual Compensation Awards ------------------- ------------ Securities Underlying All Name and Options/ Other Principal Salary Bonus SARs Compen- Position Year ($) ($) (#) sation - -------- ---- ------- ------- -------- ------- Richard L. Conte, 1994 750,000 237,500 100,000 218,802(7) Chief Executive 1993 550,000 412,500 550,000(6) 223,844(7) Officer(1) 1992 456,246 150,000 50,000 31,469(8) James R. Laughlin, 1994 400,000 50,000 105,000 Executive Vice President 1993 275,000 275,000 115,000 of the Company and 1992 181,850 100,000 President--Transitional Hospitals Corporation(2) Kay E. Seim, Executive 1994 407,209(9) 30,000 Vice President of the 1993 222,807 50,000 115,000 Company and President-- 1992 89,154 20,000 100,000 U.S. Psychiatric Services(3) David A. Wakefield, 1994 191,250(10) 191,250(10) 32,882 Executive Vice President 1993 150,000 150,000 155,000 of the Company and 1992 150,000 23,000 0 Chairman--Priory Hospitals Group(4)(12) Steven S. Weis(5) 1994 275,000 30,000 341,493(11) 1993 243,577 50,000 115,000 1992 219,950 25,000 100,000 - ---------------- 1 Mr. Conte was appointed Chief Executive Officer on April 13, 1992. 2 Prior to his appointment as an executive in May 1992, Mr. Laughlin received compensation as a consultant to the Company. 3 Ms. Seim rejoined the Company as an executive on June 29, 1992. 4 Mr. Wakefield was appointed an executive officer in 1993. 5 Steven S. Weis resigned as Executive Vice President and Chief Financial Officer effective December 31, 1994. See "Settlement with Steven S. Weis." 6 Includes options on 166,328 shares, which were repriced on January 29, 1993 in exchange for the forfeiture of options on 332,656 shares. 7 Includes $54,930 and $56,528 in life insurance premiums paid by the Company on behalf of Mr. Conte in 1994 and 1993, respectively (see "Employment Contracts"), and $163,872 and $167,316 deferred compensation accrued for Mr. Conte in 1994 and 1993, respectively (see "Employment Contracts-- Retirement Benefits"). 8 Deferred compensation accrued for Mr. Conte. See "Employment Contracts-- Retirement Benefits." 9 Includes $49,458 paid in lieu of accrued vacation. 10 Paid in currency of the U.K. Exchange rates used were 1.53, 1.50, and 1.68 for the years ended 11/30/94, 11/30/93, and 11/30/92, respectively.
PART III (CONTINUED) ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) SUMMARY OF CASH AND CERTAIN OTHER COMPENSATION (CONTINUED) - ---------------------------------------------- 11 Paid or to be paid in connection with the resignation of Mr. Weis as follows: $275,000 severance pay; $34,064 accrued vacation; up to $5,635 relocation expenses; $19,513 net book value of Company car and $7,281 net book value of Company laptop and desk computers. See "Settlement with Steven S. Weis." 12 Mr. Wakefield's salary was not included in prior years pursuant to instruction 3 of Item 402(a)(iii) that excludes compensation pursuant to overseas assignments and is included currently as the results of operations of the United Kingdom Psychiatric Division have become more material to the consolidated operating results in the current year.
STOCK OPTIONS AND STOCK APPRECIATION RIGHTS - ------------------------------------------- The following table contains information concerning the grant of stock options and tandem limited stock appreciation rights ("SARs") under the Company's 1989 Stock Incentive Plan to the named executives during the fiscal year ended November 30, 1994:
Option/SAR Grants in Last Fiscal Year ------------------------------------- Potential Realizable Value at Assumed Annual Rates of Stock Price Appreciation Individual Grants for Option Term - ------------------------------------------------------------------------- ---------------- Number of % of Total Securities Options/ Underlying SARs Options/ Granted to Exercise SARs Employees or Base Expira- Granted in Fiscal Price tion Name (#)(1) Year ($/Sh) Date 5% ($) 10% ($) - ---- ---------- --------- -------- -------- ------- ---------- Richard L. Conte 100,000 7.90 12.38 12/01/03 778,578 1,973,372 James R. Laughlin 30,000 2.40 12.38 12/01/03 233,573 592,012 75,000 5.90 17.00 01/28/04 801,848 2,032,350 Kay E. Seim 30,000 2.40 12.38 12/01/03 233,573 592,012 David A. Wakefield 32,882(4) 2.60 12.38 12/01/93 256,012 891,036 Steven S. Weis 30,000(2) 2.40 12.38 12/31/95(3) 7,428 14,856 - --------------- 1 All options vest 20% on the date of grant and on the first day of each of the following four fiscal years. 2 Mr. Weis is entitled to exercise options on 12,000 of these shares, which is the amount vested on the effective date of his termination. See "Settlement with Steven S. Weis." 3 See "Settlement with Steven S. Weis." 4 2,882 of these options fully vested on the date of grant.
PART III (CONTINUED) ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) OPTION/SAR HOLDINGS - ------------------- The following table sets forth the number of shares of Common Stock acquired on exercise of options during the fiscal year ended November 30, 1994, and the number subject to outstanding stock options held by each of the named executives as of the end of that fiscal year. The closing price of the Company's common stock on the New York Stock Exchange on November 30, 1994 was $10.00.
Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year-End Option/SAR Values --------------------------------- Number of Securities Underlying Unexercised Value of Unexercised, Shares Options/SARs In-the-Money, Options/ Acquired At Fiscal Year End SARs on Value Unexercis- At Fiscal Year End ($)(4) Exercise Realized Exercis- able Exercis- Unexercis- Name (#) ($) (1) able (2) (#) (3) able able - ---- ------- --------- ------- ------- ------ ------ Richard L. Conte 160,000 1,245,004 189,796 350,204 0 15,000 James R. Laughlin 0 0 97,000 223,000 6,000 9,000 Kay E. Seim 45,500 358,312 36,500 163,000 6,000 9,000 David A. Wakefield 0 0 81,881 157,001 6,000 9,000 Steven S. Weis 0 0 82,000 163,000 6,000 9,000 - --------------- (1) Represents the difference between the market value of the underlying securities at exercise minus the exercise or base price. (2) Includes options on 189,796 shares for Mr. Conte; 85,000 shares for Mr. Laughlin; 24,000 shares for Ms. Seim; 69,881 shares for Mr. Wakefield; and 70,000 shares for Mr. Weis, which were not "in the money" as of November 30, 1994. (3) Includes Converging Options on 100,000 shares for Mr. Conte and 75,000 shares for Messrs. Laughlin, Wakefield and Weis and Ms. Seim, which were not "in the money" as of November 30, 1994. (4) Represents the difference between the closing price of the Company's common stock on November 30, 1994 as reported on the New York Stock Exchange and the exercise price of options that were "in the money" as of that date.
EMPLOYMENT CONTRACTS - -------------------- EMPLOYMENT CONTRACTS. The Company has entered into an employment contract with Mr. Conte, which provided (i) for the last seven months of fiscal 1992 and for fiscal 1993, an annual salary of $550,000, subject to annual review by the Board; (ii) an initial employment term ending November 30, 1996 and automatically extending for an additional year on each December 1 of the employment term; (iii) noncompetition, nondisclosure and nonsolicitation covenants; and (iv) payment by the Company of the cost of a life insurance policy for Mr. Conte with a death benefit of not less than $5,000,000. If employment terminates because of Mr. Conte's permanent disability as defined in the contract or if Mr. Conte terminates employment because of a breach of the contract by the Company or within one (1) year after a "change in control" of the Company as defined in the contract, he would be entitled to receive termination payments equal to his salary through the November 30 following the fourth anniversary of such termination and all other compensation and benefits due under the contract and his "Supplemental Retirement Agreement" (see "Retirement Benefits"); and in the case of termination because of a breach by the Company or a "change in control," after such termination, Mr. Conte would not be bound by the noncompetition, nondisclosure and nonsolicitation covenants. Further, all options, contingent bonuses and similar deferred benefits held by Mr. Conte immediately vest and become exercisable upon a change in control. Effective December 1, 1993, Mr. Conte's annual salary was increased to $750,000. PART III (CONTINUED) ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) EMPLOYMENT CONTRACTS (CONTINUED) - -------------------- The Company also has entered into employment contracts with Ms. Seim and Mr. Wakefield which expire July 1, 1995 and July 30, 1995, respectively, and which automatically renew for additional one-year periods. Ms. Seim's contract provided for an annual salary of $200,000 and $225,000 for fiscal 1992 and 1993, respectively. Effective December 1, 1993 and April 15, 1994, Ms. Seim's annual salary was increased to $300,000 and $400,000, respectively. Mr. Wakefield's contract provided for an annual salary of L77,000 for July 31 through November 30, 1992. Effective December 1, 1992 and 1993, Mr. Wakefield's salary was increased to L100,000 ($150,000) and L125,000 ($191,250), respectively. These contracts contain noncompetition, nondisclosure and nonsolicitation covenants. If Ms. Seim or Mr. Wakefield terminates employment within ninety (90) days after a "change in control" of the Company as defined in the agreements, she or he would be entitled to receive termination payments equal to two years' salary and would not be bound by the noncompetition, nondisclosure and nonsolicitation covenants after such termination. Mr. Weis had a similar employment contract with the Company which has been superseded by a Separation Agreement and General Release. See "Settlement with Steven S. Weis." RETIREMENT BENEFITS. In addition to his employment agreement, Mr. Conte, as of June 1, 1988, entered into a Supplemental Retirement Agreement with the Company pursuant to which he will become vested at the rate of 10% per year in deferred benefits equal to 9 1/2% of his compensation each year plus any amount by which the Company's authorized contributions for him to its profit sharing or any other employee benefit plan cannot be allocated to his account in the plan because the contribution exceeds limits imposed by the Internal Revenue Code of 1986 as amended. Interest will be credited annually to this accrued amount at a rate to be specified from time to time by the Company but at not less than 6% per annum. Distributions of the retirement benefits will be made in 20 equal annual installments commencing 60 days after the later of the executive's 55th birthday or the termination of his employment. During fiscal 1993, the Board of Directors authorized vesting of Mr. Conte's deferred benefits at the rate of 100%, which resulted in $167,316 accrued on behalf of Mr. Conte for that year and $163,872 for fiscal 1994. See "Summary Compensation Table." SETTLEMENT WITH STEVEN S. WEIS Steven S. Weis resigned as Executive Vice President and Chief Financial Officer of the Company effective December 31, 1994. Mr. Weis and the Company have entered into an agreement which settles the rights and obligations of Mr. Weis and the Company with regard to his employment. Mr. Weis has released the Company from certain obligations related to his employment and remains subject to certain nondisclosure and nonsolicitation covenants, but he is no longer bound by the noncompetition covenant in his employment contract. The Company has agreed to pay Mr. Weis severance pay of $275,000, payable in 13 equal installments of $21,154 on each of the first 13 dates after December 30, 1994 on which the Company regularly pays its employees. In addition, the Company has paid Mr. Weis $34,064 for accrued but unused vacation time as of December 31, 1994 and has agreed to reimburse Mr. Weis up to $5,635 in connection with his relocation to either Los Angeles or Orange County, California at any time prior to December 30, 1995. The Company will continue to provide Mr. Weis with health insurance benefits through November 30, 1995, and thereafter, Mr. Weis will be eligible to purchase 18 months of continued health coverage under the provisions of the Consolidated Omnibus Budget Reconciliation Act. In addition, the Company transferred to Mr. Weis, free of charge, the Company automobile and laptop and desk computers that he had used as an employee, and the Company has accepted a grant deed to the real property in Las Vegas, Nevada, on which Mr. Weis had been constructing a residence in full satisfaction of sums advanced to him for the purchase thereof and has agreed to assume Mr. Weis' construction loan to complete the construction commenced thereon. The Company believes that the fair market value of such real property is at least equal to the aggregate of the amounts advanced to Mr. Weis and to be paid by the Company under the construction loan. PART III (CONTINUED) ITEM 11. EXECUTIVE COMPENSATION (CONTINUED) EMPLOYMENT CONTRACTS (CONTINUED) - -------------------- SETTLEMENT WITH STEVEN S. WEIS (CONTINUED) The Company also extended until December 31, 1995 the expiration date for options to purchase 18,000, 4,000, 12,000 and 80,000 shares of the Company's common stock at exercise prices of $9.50, $10.875, $12.375 and $14.625 per share, respectively, which options had been fully vested in Mr. Weis at the time his employment terminated. Nonvested options held by Mr. Weis terminated December 31, 1994. REMUNERATION OF DIRECTORS During fiscal 1994 those directors who were not employed by the Company received a fee of $3,000 for each Board meeting and $1,000 for each Committee meeting attended, plus travel expenses, if any, and they will receive the same compensation for 1995. Officers of the Company who serve as directors receive only reimbursement of expenses, if any, incurred in attending meetings. Pursuant to the Company's 1989 Stock Incentive Plan, annual automatic grants of options on 5,000 shares have been and will be made to each nonemployee director on January 26 of each year, the first of such grants having been made on January 26, 1989. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Powers, Dennis and Thomas and Dr. Shires served on the Company's Compensation Committee during the last fiscal year. Mr. Powers resigned as a director effective February 8, 1995. PART III (CONTINUED) ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The following tables show the beneficial ownership of the Company's common stock, $1.00 par value, by all directors, executive officers and others. BENEFICIAL OWNERSHIP OF MANAGEMENT
AMOUNT AND NATURE OF BENEFICIAL OWNERSHIP PERCENT OF NAME(1) AS OF 2/10/95(2) CLASS(3) ---- -------------------- ---------- Richard L. Conte 312,533 David L. Dennis 20,000 Hartly Fleischmann 41,665 James R. Laughlin 152,000 Jack H. Lindheimer 51,000 Stephen J. Powers 20,000 Kay E. Seim 76,544 Dana L. Shires 68,299 Robert L. Thomas 15,000 David A. Wakefield 121,007 All directors and executive 955,048 2.0% officers as a group (13 persons) - --------------- (1) Steven S. Weis resigned as Executive Vice President and Chief Financial Officer effective December 31, 1994. See "Settlement with Steven S. Weis." (2) Includes shares subject to options granted under the Company's 1989 Stock Incentive Plan which are presently exercisable or which will become exercisable on or before April 11, 1995, as follows: Mr. Conte, 286,531; Mr. Wakefield, 119,882; Ms. Seim, 76,500; Dr. Lindheimer, 51,000; Mr. Fleischmann, 35,765; Dr. Shires, 30,000; Messrs. Dennis and Powers, 20,000; Mr. Thomas, 15,000; Mr. Laughlin, 152,000; and the group, 863,678. Also includes shares held in trust, for which an above listed person acts as trustee. (3) In all cases except the group, the holdings represent less than 1% of the outstanding shares of common stock.
OTHER BENEFICIAL OWNERSHIP
AMOUNT AND NATURE OF NAME AND ADDRESS BENEFICIAL OWNERSHIP PERCENT OF CLASS ---------------- -------------------- ---------------- Invesco M.I.M. PLC 3,709,775(1) 8.5% 11 Devonshire Square London, EC 2M 4YR England Goldman, Sachs & Co. 3,383,600(1) 7.8% 85 Broad Street New York, NY 10004 - ----------- (1) Shared voting power and shared investment power with respect to all such shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. Fleischmann & Fleischmann, of which Mr. Fleischmann is a general partner, was paid $237,713 for legal services rendered to the Company and its subsidiary, Transitional Hospitals Corporation, during fiscal 1994. The Company believes that the terms and conditions of its relationship with Fleischmann & Fleischmann are as favorable as those that could have been obtained from a third party, and it plans to retain Fleischmann & Fleischmann to provide legal services in fiscal 1995. PART III (CONTINUED) ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (CONTINUED) INDEBTEDNESS OF MANAGEMENT OPTION LOANS. The Company's 1989 Stock Incentive Plan authorizes the Board of Directors to extend credit to enable optionees to exercise their options. The Board has discretion from time to time to change the terms of such credit. The past policy and practice of the Board has been to require payment of one- third of the option price in cash with the balance payable within the earlier of ten years of the date of exercise or twelve years of the date of grant. The resulting obligations are evidenced by full recourse promissory notes with interest at a rate established by the Board, payable annually, and are secured by a pledge of the stock so purchased. The Company also makes unsecured loans on the same terms to optionees to enable them to pay income taxes due on exercise of options granted thereunder which do not qualify as incentive stock options. RESIDENCE LOANS. The Company has loaned $296,000 to Mr. Ooley and $299,646 to Ms. Seim, in each case at 5% interest per year, to enable these executive officers to acquire residences in close proximity to their principal business offices. The loans, which are secured by the residences, originally mature in three years and provide for consecutive three-year extensions while employment continues. The loans are paid in monthly installments of principal and interest based on a 30-year amortization and are accelerated and become immediately due and payable ninety days after termination of employment. RELOCATION LOANS AND PURCHASE OF EQUITY.The Company had loaned $300,000 to Mr. Conte and Mr. Weis on the same terms outlined above, which loans have been deemed paid in full pursuant to the Company's home purchase program, through which, in connection with the Company's relocation of its corporate headquarters from Laguna Hills, California, to Las Vegas, Nevada, the Company has purchased Messrs. Conte and Weis' equity interests in their former homes and has assumed all burdens of ownership, including payment of all expenses and debts associated therewith. The Company has also purchased an equity interest in Mr. Laughlin's former home and has assumed all burden of ownership, including payment of all expenses and debts associated therewith. The Company assumes the risk of loss in connection with the sale of such properties, but also is entitled to any profit realized thereon. As part of the home purchase program, the Company also will pay Mr. Conte's moving expenses. Also in connection with the Company's relocation of its corporate headquarters, the Company has loaned $15,300 to Ms. Kopta and an additional $49,000 to Mr. Ooley to assist them to acquire residences in close proximity to the new corporate headquarters. In each case, interest is at the annual rate of 5% and are secured by the officers' new or former residences and other security. The loans mature in fifteen months and are paid in monthly installments of interest only, beginning in the fourth such month. The Company has loaned an additional $85,600 to Ms. Kopta, also at 5% annual interest and secured by the property she acquired in Nevada, which loan matures in twelve months and is paid in monthly installments of principal and interest based on a 30-year amortization. All of these loans are accelerated and become immediately due and payable thirty days after termination of employment. The Company had advanced $150,000 to Mr. Weis under the relocation program. In connection with the termination of his employment, the Company has accepted a grant deed to the real property in Las Vegas, Nevada, purchased by Mr. Weis in full satisfaction of the sums advanced to him. See "Settlement with Steven S. Weis." SCHEDULE OF INDEBTEDNESS. The following table shows, as to each director or executive officer whose indebtedness exceeded $60,000, the largest aggregate amount of such indebtedness during fiscal year 1994 and the balance due the Company as of February 10, 1995.
Largest Balance Aggregate Due as of Indebtedness February 10, 1995 ------------ ----------------- Richard L. Conte $ 295,000 $ -0- Kay E. Seim 299,000 294,000 Ronald L. Ooley 345,000 344,000 Julia Kopta 100,900 100,000 Steven S. Weis 441,000 -0-
PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) 1. Financial Statements. The Financial Statements listed in response to Item 8 are filed herewith. 2. The following Financial Statement Schedules is filed herewith: Valuation and Qualifying Accounts 3. Exhibits: (3) Articles of Incorporation and By-laws 3.1 Restated Articles of Incorporation as adopted by vote of shareholders on May 20, 1993 (filed as Appendix B to Registrant's Proxy Statement dated April 20, 1993 relating to the annual meeting of its shareholders on May 20, 1993 and incorporated in full herein by this reference). 3.2 By-Laws as amended by vote of shareholders on May 23, 1991 (filed as Exhibit 3.2 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1991 and incorporated in full herein by this reference) and as amended by vote of shareholders on May 20, 1993 (filed as Appendix A to Registrant's Proxy Statement dated April 20, 1993 relating to the annual meeting of its shareholders on May 20, 1993 and incorporated in full herein by this reference). (10) Material Contracts 10.1 Employment Contract Number Four between Registrant and Richard L. Conte, dated as of May 1, 1992 (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1993 and incorporated in full herein by reference).* 10.2 Amendment Number One dated as of July 29, 1994, to Employment Contract Number Four between Registrant and Richard L. Conte.* 10.3 Supplemental Retirement Contract between Registrant and Richard L. Conte, dated as of September 1, 1988 (filed as Exhibit 10.4 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1988 and incorporated in full herein by this reference).* 10.4 Restated and Amended Employment Contract between Registrant and Robert L. Green, dated June 1, 1988 (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1988, and incorporated in full herein by this reference). PART IV (CONTINUED) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (CONTINUED) 10.5 Amendment Number One dated as of August 1, 1989, and Amendment Number Two dated as of December 1, 1989 to Restated and Amended Employment Contract between Registrant and Robert L. Green. 10.6 Employment Agreement between Registrant and David A. Wakefield dated as of July 31, 1992.* 10.7 Employment Contract between Registrant and Kay E. Seim dated as of June 15, 1992 (filed as Exhibit 10.9 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1993 and incorporated in full herein by this reference). 10.8 Termination Agreement between Registrant and Steven S. Weis dated as of December 30, 1994. 10.9 Form of Indemnification Agreements between Registrant and its Directors and Executive Officers (filed as Exhibit C to Registrant's Proxy Statement, dated April 24, 1987, relating to the annual meeting of its shareholders on June 1, 1987, and incorporated in full herein by this reference). 10.10 Registrant's 1989 Stock Incentive Plan (filed as Exhibit A to Registrant's Proxy Statement, dated July 12, 1989, and incorporated in full herein by this reference).* 10.10.1 Form of Stock Option Agreement (filed as Exhibit 10.6.1 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1990 and incorporated in full herein by this reference).* 10.10.2 Form of Nonstatutory Stock Option Agreement with Director (filed as Exhibit 10.6.2 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1990 and incorporated in full herein by this reference).* 10.11 Registrant's Combined Stock Option Plan for Key Employees and Amendment Numbers One, Two, Three, Four and Five thereto (filed as Exhibit 10.7 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1989 and incorporated in full herein by this reference).* 10.11.1 Form of Stock Option Agreement--General Stock Option (filed as Exhibit 10.7.1 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1989 and incorporated in full herein by this reference).* 10.11.2 Form of Stock Option Agreement--Incentive Stock Option (filed as Exhibit 10.7.2 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1989 and incorporated in full herein by this reference).* PART IV (CONTINUED) ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (CONTINUED) 10.12 Credit Agreement among Registrant, Transitional Hospitals Corporation and Bank of America National Trust and Savings Association, dated as of September 20, 1993 (filed as Exhibit 10 to Registrant's Report on Form 10-Q for its fiscal quarter ended August 31, 1993 and incorporated in full herein by this reference). 10.13 Credit Agreement, among Registrant, Priory Hospitals Group Limited and Bank of America National Trust and Savings Association dated as of December 23, 1993 (filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1993, and incorporated herein by this reference). 10.14 Credit Agreement among Registrant, Transitional Hospitals Corporation and Bank of American National Trust Savings Association, dated as of May 6, 1994 (filed as Exhibit 10 to Registrant's Report on Form 10-Q for its fiscal year ended May 31, 1994, and incorporated herein by this reference). 10.15 First Amendment to Credit Agreement among Registrant, Transitional Hospitals Corporation and Bank of America National Trust Savings Association dated as of December 14, 1994. 10.16 Letter of Intent dated February 15, 1995 extending due date under Credit Agreement referred to in Exhibit 10.15. (11) Statement re computation of earnings per share (22) Subsidiaries of the Registrant (24) Consents of Experts (b) Report on Form 8-K: None. *Required to be filed as an exhibit pursuant to item 14(c) of this Form. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. COMMUNITY PSYCHIATRIC CENTERS By:/s/ Richard L. Conte Date: February 24, 1995 ------------------------ Richard L. Conte Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. /s/ Richard L. Conte Date: February 24, 1995 ------------------------ Richard L. Conte Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) /s/ Wendy Simpson Date: February 24, 1995 ------------------------ Wendy Simpson Executive Vice President and Chief Financial Officer (Principal Financial Officer) /s/ David Wakefield Date: February 24, 1995 ------------------------ David Wakefield Director and Executive Vice President of the Company, and Chairman Priory Hospitals Group /s/ Hartly Fleischmann Date: February 24, 1995 ------------------------ Hartly Fleischmann Director /s/ Jack H. Lindheimer, M.D. Date:February 24, 1995 ---------------------------- Jack H. Lindheimer, M.D. Director and Medical Director, U.S. Psychiatric Services /s/ Dana L. Shires, Jr., M.D. Date: February 24, 1995 ----------------------------- Dana L. Shires, Jr., M.D. Director /s/ David L. Dennis Date: February 24, 1995 ------------------------ David L. Dennis Director /s/ Robert L. Thomas Date: February 24, 1995 ------------------------ Robert L. Thomas Director /s/ Steven M. Gray Date: February 24, 1995 ----------------------- Steven M. Gray Vice President and Corporate Controller (Principal Accounting Officer) Annual Report Form 10-K Item 8, Item 14(a)(1) and (2), (c) and (d) Financial Statements and Supplementary Data List of Financial Statements and Financial Statement Schedule Certain Exhibits Financial Statement Schedule Community Psychiatric Centers and Subsidiaries Las Vegas, Nevada YEAR ENDED NOVEMBER 30, 1994 Community Psychiatric Centers Form 10-K Item 14(a)(1) and (2) List of Financial Statements and Financial Statement Schedules The following consolidated financial statements of Community Psychiatric Centers and Subsidiaries are included in Item 8: Report of Independent Auditors Consolidated statements of operations - Years ended November 30, 1994, 1993 and 1992 Consolidated balance sheets - November 30, 1994 and 1993 Consolidated statements of stockholders' equity - Years ended November 30, 1994, 1993 and 1992 Consolidated statements of cash flows - Years ended November 30, 1994, 1993 and 1992 Notes to consolidated financial statements - November 30, 1994 The following consolidated financial statement schedule of Community Psychiatric Centers and Subsidiaries is included in Item 14(d): Schedule VIII - Valuation and Qualifying Accounts All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. REPORT OF INDEPENDENT AUDITORS Board of Directors Community Psychiatric Centers We have audited the accompanying consolidated balance sheets of Community Psychiatric Centers and Subsidiaries as of November 30, 1994 and 1993, and the related consolidated statements of operations, stockholders' equity, and cash flows for each of the three years in the period ended November 30, 1994. Our audits also included the financial statement schedule listed in the index at Item 14(a). These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Community Psychiatric Centers and Subsidiaries at November 30, 1994 and 1993, and the consolidated results of their operations and their cash flows for each of the three years in the period ended November 30, 1994, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 5 to the consolidated financial statements, effective December 1, 1992, the Company adopted Statement of Financial Accounting Standard No. 109 "Accounting for Income Taxes." ERNST & YOUNG LLP Los Angeles, California January 27, 1995 COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
NOVEMBER 30 ----------------------- 1994 1993 ---- ---- (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents $ 37,263 $ 24,640 Short-term investments 13,756 10,932 Accounts receivable, less allowance for doubtful accounts (1994 - $29,381 and 1993--$22,658) 103,128 80,024 Prepaid expenses and other current assets 18,305 16,468 Property held for sale, net 7,774 10,551 Refundable income taxes -- 5,763 Deferred income taxes 3,773 1,859 -------- -------- Total current assets 183,999 150,237 Property, buildings and equipment, at cost, less allowances for depreciation 376,765 339,078 Other assets: Refundable income taxes 1,103 -- Deferred income taxes 1,720 1,126 Other assets 25,207 24,178 -------- -------- 28,030 25,304 Excess of investment in subsidiaries over net assets acquired, less accumulated amortization (1994 - $3,418 and 1993 - $2,940) 16,610 15,721 -------- -------- $605,404 $530,340 -------- -------- -------- --------
See notes to consolidated financial statements. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED)
NOVEMBER 30 ----------------------- 1994 1993 ---- ---- (IN THOUSANDS, EXCEPT PAR VALUE DATA) LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 18,305 $ 15,332 Accrued payroll and other expenses 34,624 23,033 Dividends payable -- 111 Income taxes payable 5,845 2,641 Payable to third parties under reimbursement contracts 5,802 4,990 Accrued restructuring charges 2,703 8,666 Current maturities on long-term debt 13,224 940 -------- -------- Total current liabilities 80,503 55,713 Long-term debt, exclusive of current maturities 69,090 40,718 Deferred credits: Deferred compensation 1,816 1,814 Deferred income taxes 13,956 9,603 -------- -------- 15,772 11,417 Stockholders' equity: Preferred stock, par value $1 a share; authorized 2,000 shares; none issued -- -- Common stock, par value $1 a share; authorized 100,000 shares; issued 46,856 in 1994 and 1993 46,856 46,856 Additional paid-in capital 61,357 65,341 Less due from employees for exercise of stock options (35) (35) -------- -------- 108,178 112,162 Retained earnings 369,131 359,345 Foreign currency translation adjustment (1,805) (3,815) -------- -------- 475,504 467,692 Less cost of treasury stock--3,265 shares in 1994 and 3,763 shares in 1993 (35,465) (45,200) -------- -------- 440,039 422,492 -------- -------- $605,404 $530,340 -------- -------- -------- --------
See notes to consolidated financial statements. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
YEAR ENDED NOVEMBER 30 -------------------------------------- 1994 1993 1992 ---- ---- ---- (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Revenues: Net operating revenues $423,955 $335,578 $344,274 Other income 3,785 2,301 3,433 -------- -------- -------- 427,740 337,879 347,707 Costs and expenses: Operating expense 328,508 256,661 255,799 General and administrative expense 33,775 26,806 21,747 Bad debt expense 26,966 21,266 17,482 Depreciation and amortization 18,649 14,330 14,319 Interest (principally on long-term debt) 3,545 2,420 1,607 Restructuring charge (875) 54,950 -- -------- -------- -------- 410,568 376,433 310,954 -------- -------- -------- Earnings (loss) before income taxes 17,172 (38,554) 36,753 Income taxes (credit) 6,952 (13,662) 13,616 -------- -------- -------- Net earnings (loss) $ 10,220 $(24,892) $ 23,137 -------- -------- -------- -------- -------- -------- Earnings (loss) per common share $ 0.24 $ (0.58) $ 0.52 -------- -------- -------- -------- -------- -------- Average number of common shares 43,465 42,951 44,668 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
AMOUNTS DUE FROM EMPLOYEES FOR FOREIGN ADDITIONAL EXERCISE CURRENCY TREASURY STOCK COMMON PAID-IN OF STOCK RETAINED TRANSLATION ------------------ STOCK CAPITAL OPTIONS EARNINGS ADJUSTMENT SHARES AMOUNT ------ --------- --------- -------- ----------- ------ ------ (IN THOUSANDS) Balance at November 30, 1991 $46,855 $67,828 $ (141) $380,995 $2,580 (665) $(14,181) Payments on amounts due on stock options 2 Subordinated debenture conversion 1 3 Stock repurchased (3,166) (34,464) Net earnings for year 23,137 Dividends paid, $.36 per common share (16,030) Foreign currency translation adjustment (5,652) ------- ------- -------- --------- ------- ------ -------- Balance at November 30, 1992 46,856 67,831 (139) 388,102 (3,072) (3,831) (48,645) Exercise of employees' stock options (2,620) 153 4,283 Payments on amounts due on stock options 104 Income tax benefits derived from employee stock option transactions 130 Stock repurchased (85) (838) Net loss for the year (24,892) Dividends paid, $.09 per common share (3,865) Foreign currency translation adjustment (743) ------- ------- -------- --------- ------- ------ -------- Balance at November 30, 1993 46,856 65,341 (35) 359,345 (3,815) (3,763) (45,200) Exercise of employees' stock options (4,052) 498 9,735 Income tax benefits derived from employee stock option transactions 68 Net earnings for year 10,220 Dividends paid, $.01 per common share (434) Foreign currency translation adjustment 2,010 ------- ------- -------- --------- ------- ------ -------- Balance at November 30, 1994 $46,856 $61,357 $ (35) $369,131 $(1,805) (3,265) $(35,465) ------- ------- -------- --------- ------- ------ -------- ------- ------- -------- --------- ------- ------ --------
See notes to consolidated financial statements. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED NOVEMBER 30 -------------------------------------- 1994 1993 1992 ---- ---- ---- (IN THOUSANDS) CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings (loss) $ 10,220 $(24,892) $ 23,137 Items not resulting in cash flows: Depreciation and amortization 18,649 14,330 14,319 Provision for uncollectible accounts 26,966 21,266 17,482 Restructuring charge (credit) (875) 54,950 -- (Gain) loss on sale of property, buildings and equipment (1,970) (232) 387 Other (1,780) 1,343 166 Changes in assets and liabilities, exclusive of business acquisitions: Short-term investments (2,824) (10,932) -- Accounts receivable (50,070) (23,948) (8,737) Payable to third parties under reimbursement contracts 812 3,170 9,260 Prepaid expenses and other current assets (1,837) (3,138) (1,106) Accounts payable and accrued expenses 14,564 11,334 2,303 Accrued restructuring costs (5,088) (8,892) -- Dividends payable (111) (3,839) (232) Income taxes 9,709 (10,685) 5,561 -------- -------- -------- Net cash provided from operations 16,365 19,835 62,540 FINANCING: Proceeds from revolving credit facilities 41,982 13,267 -- Dividends paid (434) (3,865) (16,030) Purchase of treasury shares -- (838) (34,464) Payments of deferred compensation (162) (6,448) -- Net proceeds from exercise of stock options, payments on loans and related transactions 5,683 1,897 -- Payments on long-term debt (1,402) (667) (1,703) -------- -------- -------- Net cash provided from (used for) financing activities 45,667 3,346 (52,197) INVESTING: Payment received on notes 3,437 669 277 Purchase of property, buildings and equipment (48,760) (58,269) (19,419) Investment in pre-opening costs (4,225) (2,904) (1,365) Proceeds from sale of property, buildings and equipment 7,393 1,039 -- Loans made to officers (1,242) (227) (916) Investment in affiliate -- (1,602) -- Payment for business acquisitions: Property, buildings and equipment (4,787) (965) -- Excess of purchase price over fair value of assets acquired (1,225) (4,119) (584) -------- -------- -------- Net cash used for investing activities (49,409) (66,378) (22,007) -------- -------- -------- Net increase (decrease) in cash and cash equivalents 12,623 (43,197) (11,664) Beginning cash and cash equivalents 24,640 67,837 79,501 -------- -------- -------- Ending cash and cash equivalents $ 37,263 $ 24,640 $ 67,837 -------- -------- -------- -------- -------- --------
See notes to consolidated financial statements. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOVEMBER 30, 1994 NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All material intercompany transactions have been eliminated in the accompanying consolidated financial statements. The excess of investment in subsidiaries over net assets acquired resulting from acquisitions subsequent to 1970 is being amortized on a straight-line basis over 40 years. CASH EQUIVALENTS The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Those highly liquid assets with a maturity of more than three months are classified as short-term investments. PROPERTY, BUILDINGS AND EQUIPMENT Depreciation is generally computed on the straight-line method based on the estimated useful lives of buildings or items of equipment. PREOPENING COSTS Costs incurred prior to the opening of new facilities are deferred and amortized on a straight-line basis over a five-year period. CAPITALIZATION OF INTEREST Interest incurred in connection with development and construction of hospitals is capitalized as part of the related property. NET OPERATING REVENUES Net operating revenues include amounts for hospital services estimated by management to be reimbursable by federal and state government programs (Medicare, Medicaid and CHAMPUS); negotiated programs (managed care companies, health maintenance organizations and preferred provider organizations) and private pay payors (private sources and insurance companies which base reimbursement on the Company's price schedule). The following table summarizes the percent of net operating revenue generated from all payors (1994 and 1993 percentages include THC operations).
1994 1993 1992 ---- ---- ---- Government and other cost-based* 44% 24% 16% CHAMPUS 5 5 4 Negotiated rate 33 41 35 Private pay 18 30 45 ---- ---- ---- 100% 100% 100% ---- ---- ---- ---- ---- ---- * Includes Medicare DRG payments to THC.
Amounts received are generally less than the established billing rates of the Company and the difference is reported as a contractual allowance and deducted from operating revenues. Final determination of amounts earned for hospital services is subject to audit by the payors. In the opinion of management, adequate provision has been made for any adjustments that may result from such audits. Differences between estimated provisions and final settlement are reflected as charges and credits to operating revenues in the year the audit reports are finalized. In the current year, the Company received approximately $5.5 million in excess of recorded amounts related to prior year Medicare settlements. These amounts are included in operating revenue. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CONCENTRATION OF CREDIT RISK Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash investments and receivables from government programs. The Company maintains cash equivalents and short-term investments with various financial institutions. The Company's policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing to those financial institutions that are considered in the Company's investment strategy. The Company and management do not believe that there are any credit risks associated with receivables from governmental programs. Negotiated and private receivables consist of receivables from various payors, including individuals involved in diverse activities, subject to differing economic conditions, and do not represent any concentrated credit risks to the Company. Furthermore, management continually monitors and adjusts its reserves and allowances associated with these receivables. STOCK OPTIONS Proceeds from the exercise of stock options are credited to common stock, to the extent of par value, and the balance to additional paid-in capital, except when shares held in the treasury are issued. The difference between the cost of the treasury stock and the option price is charged or credited to additional paid-in capital. No charges or credits are made to earnings with respect to options granted or exercised. Income tax benefits derived from exercise of non-incentive stock options and from sales of stock obtained from incentive stock options before the minimum holding period are credited to additional paid-in capital. EARNINGS (LOSS) PER SHARE Earnings (loss) per share have been computed based upon the weighted average number of shares of common stock outstanding during the year. Dilutive common stock equivalents have not been included in the computation of earnings (loss) per share because the aggregate potential dilution resulting therefrom is less than 3%. TRANSLATION OF FOREIGN CURRENCIES The financial statements of the Company's foreign subsidiaries have been translated into U.S. dollars in accordance with FASB Statement No. 52. All balance sheet accounts have been translated at year-end exchange rates. Statements of earnings amounts have been translated at the average exchange rate for the year. The resulting currency translation adjustments were made directly to a separate component of Stockholders' Equity. The effect on the statement of earnings of translation gains and losses is insignificant for all years presented. RECLASSIFICATIONS Certain amounts have been reclassified to conform with 1994 presentations. Certain hospital expenses that were previously classified as general and administrative expense have been re-classified to operating expenses for all periods presented. NOTE 2--RESTRUCTURING CHARGE Effective February 28, 1993, the Company recorded a pre-tax charge of $55.0 million ($35.0 million after tax) in connection with the decision to close seven of its psychiatric hospitals. The charge comprised $35.3 million to write down buildings and other fixed assets, $2.1 million to write off intangibles, $14.4 million for future operating losses of the seven hospitals and related corporate restructuring costs associated with terminating employees, and $3.2 million for COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2--RESTRUCTURING CHARGE (CONTINUED) additional accounts receivable allowances at the seven hospitals. Six of the restructured hospitals have ceased operations. The seventh hospital, which returned to operating status effective March 1, 1994, has been reconstituted under new management into a rapid stabilization facility. Of the six closed hospitals, two have been sold, three are being held for sale or lease, and one is being converted into a THC facility. The Company received cash proceeds of approximately $5 million in January and February of 1994 from the sale of two of these hospitals. Effective February 28, 1994, the Company recorded a restructuring credit totalling $7.2 million ($4.3 million after tax) from the resolution of the previously restructured psychiatric assets. The restructuring credit resulted from the Company's success in controlling hospital closure costs and in divesting one of its restructured properties at a higher price than the year-ago writedown of the facility anticipated. Effective February 28, 1994 the Company recorded a restructuring charge of $6.3 million ($3.8 million after tax) in connection with the decision to close three additional psychiatric facilities. The charge comprised $2.2 million for future operating losses, $1.5 million for restructuring costs associated with terminating employees and $2.6 million for additional accounts receivable allowances and reserves for other assets at the three hospitals. Approximately 225 employees of the restructured hospitals were terminated. Amounts charged against the reserve, including termination benefits paid, approximated amounts originally accrued. Total revenue and net operating income or (loss) for the three closed hospitals totalled $2.8 million and ($1.1 million) for the first quarter of 1994, $20.0 million and $.6 million for fiscal year 1993, and $23.5 million and $2.3 million for fiscal year 1992. Of the three closed hospitals, one is classified as held for sale, one was converted into a THC facility, and one will be converted into a THC facility in fiscal year 1995. NOTE 3--ACQUISITIONS In April 1990, the Company acquired the assets of Harvard Medical Limited, a patient liaison business in West Germany for approximately $2.3 million including acquisition costs. The purchase agreement provided for additional annual payments through 1993 if certain economic performance criteria were achieved. In September 1991, October 1992, and October 1993, total additional payments of $2.3 million were made. During 1993, the Company acquired six buildings and the related fixed assets and modified the buildings into six long-term critical care facilities. Total consideration paid was $33.0 million. The Company also acquired a substance abuse center in the United Kingdom for a purchase price of $4.3 million. During 1994, the Company acquired two hospitals in the United Kingdom for a total purchase price of $5.7 million. The aggregate total costs of these acquisitions exceeded the fair value of the assets acquired by approximately $8.7 million. The excess is being amortized on a straight-line basis over a 40-year period. The acquisitions have been accounted for as purchases and, accordingly, the results of operations of the acquired facilities have been included in the consolidated statement of earnings since the date of acquisition. The results of operations of the acquired businesses prior to the date of acquisition were not material to the consolidated financial statements. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4--PROPERTY, BUILDINGS AND EQUIPMENT Property, buildings and equipment are summarized as follows:
YEAR ENDED NOVEMBER 30 ------------------- 1994 1993 ---- ---- (IN THOUSANDS) Land $ 61,570 $ 55,685 Buildings and improvements 302,779 282,027 Furniture, fixtures and equipment 94,285 70,855 Construction in progress (estimated additional cost to complete at November 30, 1994--$5.2 million) 11,068 8,362 -------- -------- 469,702 416,929 Less accumulated depreciation (92,937) (77,851) -------- -------- $376,765 $339,078 -------- -------- -------- --------
The Company incurred interest expense of $4.8 million, $2.5 million and $2.4 million in 1994, 1993 and 1992, respectively, including $1.3 million, $.2 million and $.8 million which was capitalized in 1994, 1993 and 1992, respectively. Interest paid excluding the capitalized portion was $4.1 million, $2.5 million, and $1.6 million during 1994, 1993 and 1992, respectively. NOTE 5--INCOME TAXES Effective December 1, 1992, the Company changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109, "Accounting for Income Taxes". The changes required by FASB No. 109 (principally adjusting the balances of certain deferred tax accounts) did not have a significant effect on the financial statements of the Company. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax liabilities and assets as of November 30, 1994 and November 30, 1993, are as follows (in thousands):
1994 1993 ---- ---- Deferred tax liabilities: Excess tax depreciation $ 21,978 $ 21,421 Other 1,859 2,219 Restructuring charge ( 9,881) (14,037) -------- -------- Total deferred tax liabilities $ 13,956 $ 9,603 -------- -------- -------- -------- Deferred tax assets: Current: Excess of book over tax bad debt provision $ 3,506 $ 1,575 Other 267 284 -------- -------- Total current deferred tax assets $ 3,773 $ 1,859 -------- -------- -------- -------- Non-current: Net operating loss $ 3,781 $ 2,134 Restructuring charge 1,827 1,882 Excess tax depreciation (1,647) (2,136) Other (287) (54) Net operating loss valuation reserve (1,954) (700) -------- -------- Total non-current deferred tax assets $ 1,720 $ 1,126 -------- -------- -------- --------
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--INCOME TAXES (CONTINUED) Deferred tax liabilities and assets by tax jurisdictions are as follows (in thousands):
DEFERRED DEFERRED TAX ASSET TAX LIABILITIES --------- --------------- CURRENT NON-CURRENT CURRENT NON-CURRENT ------- ----------- ------- ----------- U.S. Federal Income Taxes (consolidated) $3,283 $ -- $ -- $11,917 Foreign (U.K.) -- -- -- 2,039 State 490 1,720 -- -- ------ ------ ------ ------- $3,773 $1,720 $ -- $13,956 ------ ------ ------ ------- ------ ------ ------ -------
For financial reporting purposes, income before income taxes includes the following components:
1994 1993 1992 ---- ---- ---- (IN THOUSANDS) Pretax income (loss): United States $ 7,846 $(44,796) $29,566 Foreign 9,326 6,242 7,187 -------- -------- ------- $ 17,172 $(38,554) $36,753 -------- -------- ------- -------- -------- -------
Significant components of the provision for income taxes attributable to continuing operations are as follows:
DEFERRED LIABILITY METHOD METHOD ---------------- -------- 1994 1993 1992 ---- ---- ---- (IN THOUSANDS) Current: Federal $ 1,497 $ (3,576) $ 7,951 Foreign 1,996 2,169 1,773 State 1,614 611 1,325 -------- -------- ------- Total current 5,107 (796) 11,049 Deferred: Federal 1,295 (9,967) 2,697 Foreign 1,364 (94) (116) State (814) (2,805) (14) -------- -------- ------- Total deferred 1,845 (12,866) 2,567 -------- -------- ------- $ 6,952 $(13,662) $13,616 -------- -------- ------- -------- -------- -------
The components of the provision for deferred income taxes for the year ended November 30, 1992 are as follows:
1992 ---- (IN THOUSANDS) Depreciation $ 1,771 Bad debts 733 Other 63 ------- Provision for deferred income taxes $ 2,567 ------- -------
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 5--INCOME TAXES (CONTINUED) The reconciliation of income tax attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense is:
LIABILITY METHOD DEFERRED METHOD ----------------------------------------------------- ------------------------ 1994 1993 1992 ------------------------ ----------------------- ------------------------ AMOUNT PERCENT AMOUNT PERCENT AMOUNT PERCENT ------ ------- ------ ------- ------ ------- (AMOUNTS IN THOUSANDS) Tax at U.S. statutory rates $ 5,838 34% ($13,108) (34)% $12,496 34% State income taxes, net of federal tax benefit, (charge) 528 3 ( 1,448) (4) 865 2 Restructuring-intangibles -- -- 730 2 -- -- Other--net 586 4 164 1 255 1 -------- --- -------- ---- ------- ---- $ 6,952 41% ($13,662) (35%) $13,616 37% -------- --- -------- ---- ------- ---- -------- --- -------- ---- ------- ----
The Company received income tax refunds (net of income taxes paid of $4.5 million and $3.2 million) of $2.3 million and $3.2 million in 1994 and 1993, respectively. The Company made income tax payments of $7.9 million in 1992. NOTE 6--LONG-TERM DEBT
1994 1993 ------- ------- (IN THOUSANDS) Borrowings under revolving credit agreements $55,169 $13,267 5 3/4% Convertible Subordinated Debentures due 2012, convertible into Common Stock of the Company at $35.89 per share, may be redeemed at 103.75% of face value as of October 15, 1992 declining annually to 100% of face value on or after October 15, 1999 7,366 7,903 8 3/4% Subordinated Guaranteed Debentures due 1996 (net of unamortized discount of $44) 4,956 4,932 8 1/2% Subordinated Guaranteed Debentures due 1995 (net of unamortized discount of $22) 10,840 10,788 Notes payable, collateralized by deeds of trust on land, buildings and equipment with a cost of approximately $8,051, payable in installments to 2004 including interest ranging from 7% to 10 1/2% 1,903 2,421 Note payable due December 31, 1994, interest payable quarterly at the LIBOR rate plus 2% 1,485 1,485 Other 595 862 ------- ------- 82,314 41,658 Less current portion 13,224 940 ------- ------- $69,090 $40,718 ------- ------- ------- -------
During May 1994, the Company, Transitional Hospitals Corporation (THC - the Company's wholly-owned long-term care subsidiary) and Bank of America National Trust and Savings Association ("the Bank") entered into a credit agreement ("the Agreement") whereby the Company or THC may borrow, repay and reborrow up to $50 million through February 28, 1996. Interest is payable at LIBOR plus 2.75% through February 28, 1995. Interest through February 28, 1996 is payable at LIBOR plus 1.50%. As of November 30, 1994, $20 million is outstanding under this agreement. During September 1993, the Company entered into a credit agreement ("the Agreement") whereby the Company may borrow, repay and reborrow up to $25 million through November 30, 1995 (the revolving loan period), at which time any amount outstanding is converted into a term loan payable in equal quarterly installments through November 30, 1998. Interest is payable at the lesser of (1) LIBOR plus 1.25% during the revolving loan period and LIBOR plus 1.50% during the term loan period or (2) the greater of (a) the Bank's reference rate or (b) the Fed Funds rate plus .5%. As of November 30, 1994, $25 million is outstanding under this agreement. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6--LONG-TERM DEBT (CONTINUED) During October 1993, the Company's subsidiary in the United Kingdom entered into a temporary revolving credit facility whereby the Company was allowed to borrow up to $7.5 million through December 31, 1993. Interest was to be calculated at the rate of interest at which sterling pounds deposits would be offered to major banks in the London interbank market, plus 1.25%. A final loan agreement was signed in December 1993 to replace the temporary facility whereby the Company may borrow up to 10 million sterling pounds through November 30, 1995, at which time any amount outstanding is converted into a term loan payable in equal quarterly installments through November 30, 1998. Interest is payable at the sterling pounds LIBOR rate plus 1.25% up to the conversion date and LIBOR plus 1.50% after the conversion date. As of November 30, 1994, $10.2 million is outstanding under this facility. The Agreements contain provisions which, among other things, place restrictions on borrowing, capital expenditures and the payment of dividends, and requires the maintenance of certain financial ratios including tangible net worth, fixed charge coverage and funded debt. The Company is currently in compliance with all material covenants and restrictions contained in the Agreements. Borrowings are unsecured and are guaranteed by the Company's domestic subsidiaries. Under the terms of the Debenture Payment Assumption Agreement, Vivra Incorporated is obligated to pay $4.1 million of the 8 1/2% Subordinated Guaranteed Debentures due 1995. The balance shown above has been reduced by that amount. The Company has guaranteed the payment by Vivra. The conversion price of the convertible debentures is subject to antidilutive provisions. The annual maturities of debt for five years ending November 30, 1999 are as follows (In thousands): 1995 $13,224 1996 $36,994 1997 $12,025 1998 $11,872 1999 $ 172 NOTE 7--CAPITAL STOCK AND STOCK OPTIONS The Company has stock option plans whereby options may be granted at not less than 100% of fair market value at the date of grant and are exercisable at any time thereafter for a period of ten years, or five years for options granted prior to November 8, 1990. Options granted on and after November 8, 1990, are exercisable 20% at date of grant with the remaining 80% becoming exercisable at the rate of 20% each December 1 thereafter, with the exception of 100,000 options re-issued to certain officers of the Company (see below) which vested immediately. At the time of exercise, at least one-third is payable in cash and the balance, if any, with a five-year note bearing interest at 8%. The unpaid portion of options exercised, evidenced by a note, has been deducted from Stockholders' Equity in the accompanying Consolidated Balance Sheet. Stock options may also be exercised by the return of previously acquired shares of common stock. Shares obtained by such exercises are included in treasury stock and valued at the market value at date of exercise. On May 20, 1993, the Company issued 860,000 of non-qualified options to several key executives. The option price is $20 above the closing price of the Company's stock on the date of grant, or $29.50 per share. For each year during which the Company meets specified performance targets, the option price will decrease by $5.00 until the option price and market price converge. The option price will be fixed at the market price on the date of convergence and the options will vest. If convergence does not occur during the first five years after grant of the options, the options will be cancelled and the shares will revert to the 1989 Stock Incentive Plan and be available for reissuance. The COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 7--CAPITAL STOCK AND STOCK OPTIONS (CONTINUED) Company met these targets for fiscal 1993. During fiscal year 1994, 146,000 shares of converging options were issued at an option price of $24.50 per share. On February 14, 1992, 315,200 outstanding options granted in previous years at prices ranging from $18.54 to $34.13 were revalued to $14.63, the market price on that day. Options granted previously to the five then most highly-compensated officers were not revalued. On January 29, 1993, 717,249 options granted previously to those individuals were cancelled, revalued, and re-issued at a 1 to 2 ratio. The options were granted in previous years at prices ranging from $24.08 to $26.81. The options were revalued to $10.88, $.25 higher than the closing market price on that day. A summary of activity under the plans during 1994, 1993 and 1992 is as follows:
NUMBER AGGREGATE OF SHARES PER SHARE OPTION PRICE --------- -------- ------------ (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) Options outstanding at November 30, 1991 1,572,600 $18.54-34.13 $ 41,188 Options granted 624,000 10.88-14.63 8,108 Options cancelled and expired (132,600) 21.27-27.13 (3,451) Options revalued (3,769) ---------- ------------ -------- Options outstanding at November 30, 1992 2,064,000 10.88-31.88 42,076 Options granted 2,325,000 9.50-33.00 40,673 Options cancelled and expired (1,017,000) 14.63-31.88 (23,593) Options revalued and reissued 359,000 10.88 3,906 Treasury stock issued on exercise (153,000) 10.88-14.63 (1,663) ---------- ------------ -------- Options outstanding at November 30, 1993 3,578,000 $ 9.50-33.00 $ 61,399 Options granted 1,264,000 12.38-24.50 18,591 Options cancelled and expired (498,000) 9.50-14.63 (5,673) Treasury stock issued on exercise (355,000) 9.50-33.00 (5,295) Options converged 24.50 (4,300) ---------- ------------ -------- Options outstanding at November 30, 1994 3,989,000 $9.50-33.00 $ 64,722 ---------- ------------ -------- ---------- ------------ --------
The market value of the Company's common stock at the date the options were exercised was $11.88 - $18.75 for 1994. The market value of the Company's common stock at the date the options were exercised was $13.00 - $13.88 for 1993. There were no options exercised in 1992. At November 30, 1994, 1.3 million options were exercisable and 1.7 million (2.7 million and .4 million at November 30, 1993 and 1992) were available for grant under the plans. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 8--DEFERRED COMPENSATION On May 21, 1992, the then Chairman of the Board of Directors of the Company resigned. During the course of his employment with the Company, the former Chairman had an employment contract which provided for consideration for consulting services and a noncompetition agreement to commence in 1995 or earlier in the event of permanent disability. The consideration was equivalent to one-half of the total qualifying compensation paid during full time employment from December 1, 1970 through November 30, 1990 and commencing December 1, 1975, the amount on which such qualifying consideration was based increased by 6.5% annually through November 30, 1990 and 8% annually thereafter. The amount due under the terms of the contract was payable in equal annual installments over the life of the former Chairman. At the time of the former Chairman's resignation, an acceleration of payments due him was agreed to by the Company. Based on a computation of the present value of the contractually due amount, a payment of $6.3 million was made in December 1992. Of this amount, $3.4 million was provided for in the financial statements of the Company through November 30, 1992. The remaining amount, $2.9 million, is being amortized as consideration (approximately $244,000 annually) for services rendered over the term of the consulting and non-competition agreements which extend to November 30, 2004. Effective November 30, 1989, a former Chairman of the Board of Directors terminated his employment with the Company and began receiving deferred compensation benefits in accordance with contract terms substantially the same as the contract described above. Approximately $162,000 of the annual payment of $323,000 is charged to expense as consideration for services rendered over the term of the consulting and noncompetition agreements which extend to November 30, 2000. Deferred compensation accrued for 1994, 1993 and 1992 was $326,000, $329,000 and $292,000, respectively. NOTE 9--PROFIT SHARING PLAN The Company has a noncontributory, trusteed profit sharing plan which is qualified under Section 401 of the Internal Revenue Code. All regular nonunion employees in the United States (union employees are eligible if the collective bargaining agreement so specifies) with at least 1,000 hours of service per annum, over 21 years of age, and employed at year-end are eligible for participation in the plan after one year of employment. The Company's contribution to the plan for any fiscal year, as determined by the Board of Directors, is discretionary, but is limited to an amount which is deductible for federal income tax purposes. Contributions to the plan are allocated among eligible participants in the proportion of their salaries to the total salaries of all participants. There were no contributions made by the Company in 1994, 1993 and 1992. During 1993, a 401(k) segment was added to the plan which allows employees to defer a portion of their salary on a pre-tax basis. The Company may match a portion of the amount deferred. The Company's matching contribution is determined by the Board of Directors each year. During 1994, no matching contribution was made. NOTE 10--BUSINESS SEGMENT INFORMATION The Company is engaged in two principal business segments. The Company provides psychiatric services for adults, adolescents, and children with acute psychiatric, emotional, substance abuse, and behavioral disorders in the United States (plus Puerto Rico) and the United Kingdom. The Company also offers long- term critical care services. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10--BUSINESS SEGMENT INFORMATION (CONTINUED) The following tables have been prepared in accordance with the requirements of FASB Statement No. 14. This information has been derived from the Company's accounting records.
YEAR ENDED NOVEMBER 30 -------------------------------------- 1994 1993 1992 ---- ---- ---- (IN THOUSANDS) Net operating revenues: U.S. Psychiatric division $ 276,698 $ 283,539 $ 310,768 U.K. Psychiatric division 46,226 33,918 33,506 Long-term critical care division 101,031 18,121 -- --------- --------- --------- $ 423,955 $ 335,578 $ 344,274 Operating profit: U.S. Psychiatric division $ 29,778 $ 26,559 $ 40,072 U.K. Psychiatric division 12,558 8,893 9,505 Long-term critical care division (7,630) (4,607) (331) --------- --------- --------- 34,706 30,845 49,246 Other income and expense: Other income 3,785 2,301 3,433 Depreciation and amortization (18,649) (14,330) (14,319) Interest expense (3,545) (2,420) (1,607) Restructuring (charge) credit 875 (54,950) -- --------- --------- --------- Earnings (loss) before income taxes $ 17,172 $ (38,554) $ 36,753 Identifiable Assets: U.S. Psychiatric division $ 401,777 $ 410,892 $ 499,110 U.K. Psychiatric division 68,640 50,550 39,684 Long-term critical care division 134,987 68,898 1,806 --------- --------- --------- $ 605,404 $ 530,340 $ 540,600 Depreciation Expense: U.S. Psychiatric division $ 9,948 $ 10,401 $ 11,021 U.K. Psychiatric division 2,316 1,691 1,610 Long-term critical care division 3,611 478 -- --------- --------- --------- $ 15,875 $ 12,570 $ 12,631 Capitalized Expenditures for property, building, and equipment: (1) U.S. Psychiatric division $ 11,194 $ 9,104 $ 10,914 U.K. Psychiatric division 6,209 5,018 7,254 Long-term critical care division 31,357 44,147 1,251 --------- --------- --------- $ 48,760 $ 58,269 $ 19,419 (1) Excludes assets acquired in business acquisitions of $4.8 million and $1 million in 1994 and 1993, respectively.
COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 11--FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheet for cash and cash equivalents approximates its fair value. SHORT-TERM INVESTMENTS: The fair values for marketable securities are based on quoted market prices. LONG-TERM AND SHORT-TERM DEBT: The carrying amounts of the Company's long- term and short-term debt approximates its fair value. The carrying amounts and fair values of the Company's financial instruments at November 30, 1994:
CARRYING FAIR AMOUNT VALUE -------- ------ (IN THOUSANDS) Cash and cash equivalents $37,263 $37,263 Short-term investments $13,756 $13,756 Short-term debt $13,224 $13,224 Long-term debt $69,090 $69,090
NOTE 12--CONTINGENCIES Following the release of the Company's third quarter earnings in September 1991, several securities class action lawsuits and one related shareholder derivative action were filed against the Company and certain of its officers and directors. These suits allege the Company made false and misleading statements about its financial condition and business prospects in past periods. The Company maintains its actions were correct and will vigorously defend these suits. The Company is subject to other claims and suits arising in the ordinary course of business. In the opinion of management, ultimate resolution of all pending legal proceedings will not have a material adverse effect on the Company's business or financial condition. COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 13--QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following is a tabulation of the unaudited quarterly data for the three years ended November 30, 1994:
THREE MONTHS ENDED -------------------------------------------------------- FEBRUARY 28 MAY 31 AUGUST 31 NOVEMBER 30 ----------- ------ --------- ----------- (IN THOUSANDS, EXCEPT PER SHARE DATA) 1994 Total revenues $ 92,525 $108,806 $105,660 $120,749 Net earnings 625 2,389 1,667 5,539 Earnings per common share *0.01 0.06 0.04 0.13 Per common share: Dividend declared -- .01 -- -- Stock prices: High 19 18 3/4 15 15 5/8 Low 12 1/4 13 11 5/8 9 1/4 1993 Total revenues $ 84,689 $86,149 $80,009 $87,032 Net earnings (loss) (37,935) 3,490 4,068 5,485 Earnings (loss) per common share **(.88) 0.08 0.09 0.13 Per common share: Dividends declared .09 -- -- -- Stock prices: High 11 3/4 13 3/4 12 3/4 14 7/8 Low 8 7/8 9 9 3/4 10 1/8 1992 Total revenues $84,451 $94,696 $81,662 $86,898 Net earnings 6,941 12,946 2,098 1,152 Earnings per common share 0.15 0.29 0.05 0.03 Per common share: Dividends declared 0.09 0.09 0.09 0.09 Stock prices: High 15 1/2 13 3/4 11 3/4 10 5/8 Low 11 3/4 10 5/8 9 1/2 8 5/8 - ----------- * Earnings per share in the first quarter include $(.09) for a pre-tax charge of $6.3 million ($3.8 million after tax) in connection with the decision to close three psychiatric facilities. Also included in earnings per share for the first quarter is a restructuring credit $(.10) totalling $7.2 million ($4.3 million after tax) from the resolution of the previously restructured psychiatric assets. ** Earnings per share in the first quarter include $(.81) for a pre-tax charge of $55.0 million ($34.9 million net of tax) in connection with the restructuring of certain of its psychiatric hospitals.
SCHEDULE VIII--VALUATION AND QUALIFYING ACCOUNTS COMMUNITY PSYCHIATRIC CENTERS AND SUBSIDIARIES
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ------------ -------------- -------------------------------- ------------ ---------------- ADDITIONS -------------------------------- CHARGED BALANCE AT TO OTHER BEGINNING OF CHARGED TO COSTS ACCOUNTS-- DEDUCTIONS-- BALANCE AT END DESCRIPTION PERIOD AND EXPENSES DESCRIBE DESCRIBE OF PERIOD --------------- -------------- ---------------- -------------- ------------- ---------------- Allowance for doubtful accounts: Year ended November 30, 1992 $ 23,304,000 $ 17,482,000 $ (19,165,000) (1) $ 21,365,000 (256,000) (2) Year ended November 30, 1993 21,365,000 21,266,000 (19,943,000) (1) 22,658,000 (30,000) (2) Year ended November 30, 1994 22,658,000 26,966,000 (20,325,000) (1) 29,381,000 82,000 (2) - --------------- (1) Write-offs, net of recoveries. (2) Foreign currency translation adjustment.
EXHIBIT INDEXES EXHIBIT NO. DOCUMENT - -------- -------- 3 Articles of Incorporation and By-Laws: 3.1 Restated Articles of Incorporation as adopted by vote of shareholders on May 20, 1993 (filed as Appendix B to Registrant's Proxy Statement dated April 20, 1993, relating to the annual meeting of its shareholders on May 20, 1993 and incorporated in full herein by this reference). 3.2 By-Laws as amended by vote of shareholders on May 23, 1991 (filed as Exhibit 3.2 to Registrant's Annual Report on Form 10-k for its fiscal year ended November 30, 1991 and incorporated in full herein by this reference) and as amended by vote of shareholders on May 20, 1993 (filed as Appendix A to Registrant's Proxy Statement dated April 20, 1993, relating to the annual meeting of its shareholders on May 20, 1993, and incorporated in full herein by this reference). 10 Material Contracts 10.1 Employment Contract Number Four between Registrant and Richard L. Conte, dated as of May 1, 1992 (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1993, and incorporated in full herein by reference).* 10.2 Amendment Number One dated as of July 29, 1994 to Employment Contract Number Four between Registrant and Richard L. Conte.* 10.3 Supplemental Retirement Contract between Registrant and Richard L. Conte, dated as of September 1, 1988 (filed as Exhibit 10. to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1988 and incorporated in full herein by this reference).* 10.4 Restated and Amended Employment Contract between Registrant and Robert L. Green, dated June 1, 1988 (filed as Exhibit 10.1 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1988, and incorporated in full herein by this reference). 10.5 Amendment Number One dated as of August 1, 1989, and Amendment Number Two dated as of December 1, 1989 to Restated and Amended Employment Contract between Registrant and Robert L. Green. 10.6 Employment Agreement between Registrant and David A. Wakefield dated as of July 31, 1992.* 10.7 Employment Contract between Registrant and Kay E. Seim dated as of June 15, 1992 (filed as Exhibit 10.9 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1993 and incorporated in full herein by this reference). EXHIBIT INDEXES (CONTINUED) EXHIBIT NO. DOCUMENT - ------- -------- 10 10.8 Termination Agreement between Registrant and Steven S. Weis dated as of December 30, 1994. 10.9 Form of Indemnification Agreements between Registrant and its Directors and Executive Officers (filed as Exhibit C to Registrant's Proxy Statement, dated April 24, 1987, relating to the annual meeting of its shareholders on June 1, 1987, and incorporated in full herein by this reference). 10.10 Registrant's 1989 Stock Incentive Plan. (filed as Exhibit A to Registrant's Proxy Statement, dated July 12, 1989, and incorporated in full herein by this reference).* 10.10.1 Form of Stock Option Agreement (filed as Exhibit 10.6.1 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1990 and incorporated in full herein by this reference).* 10.10.2 Form of Nonstatutory Stock Option Agreement with Director (filed as Exhibit 10.6.2 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1990 and incorporated in full herein by this reference).* 10.11 Registrant's Combined Stock Option Plan for Key Employees and Amendment Numbers One, Two, Three, Four and Five thereto (filed as Exhibit 10.7 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1989 and incorporated in full herein by this reference).* 10.11.1 Form of Stock Option Agreement--General Stock Option (filed as Exhibit 10.7.1 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1989 and incorporated in full herein by this reference).* 10.11.2 Form of Stock Option Agreement--Incentive Stock Option (filed as Exhibit 10.7.2 to Registrant's Report on Form 10-K for its fiscal year ended November 30, 1989 and incorporated in full herein by this reference).* 10.12 Credit Agreement among Registrant, Transitional Hospitals Corporation and Bank of America National Trust and Savings Association, dated as of September 20, 1993 (filed as Exhibit 10 to Registrant's Report on Form 10-Q for its fiscal quarter ended August 31, 1993 and incorporated in full herein by this reference). 10.13 Credit Agreement, among Registrant, Priory Hospitals Group Limited and Bank of America National Trust and Savings Association dated as of December 23, 1993 (filed as Exhibit 10.11 to Registrant's Annual Report on Form 10-K for its fiscal year ended November 30, 1993, and incorporated herein by this reference). 10.14 Credit Agreement among Registrant, Transitional Hospitals Corporation and Bank of American National Trust Savings Association, dated as of May 6, 1994 (filed as Exhibit 10 to Registrant's Report on Form 10-Q for its fiscal year ended May 31, 1994, and incorporated herein by this reference). EXHIBIT INDEXES (CONTINUED) EXHIBIT NO. DOCUMENT - ------- -------- 10 10.15 First Amendment to Credit Agreement among Registrant, Transitional Hospitals Corporation and Bank of America National Trust Savings Association, dated as of December 14, 1994. 10.16 Letter of Intent dated February 15, 1995 extending due date under Credit Agreement referred to in Exhibit 10.15. 11 Statement re computation of earnings per share. 22 Subsidiaries of the Registrant. 24 Consents of Experts. *Required to be filed as an exhibit pursuant to item 14(c) of this Form. EX-10.2 2 EXHIBIT 10.2 AMENDMENT NUMBER ONE TO EMPLOYMENT CONTRACT NUMBER FOUR This Amendment Number One (Amendment) to Employment Contract Number Four (Contract), dated as of July 29, 1994, is made between community Psychiatric Centers, a Nevada corporation (CPC) and Richard L. Conte, an individual (Conte). 1 Recitals. This Amendment is made in consideration of the following facts: 1.1 CPC has employed Conte as an executive pursuant to prior contracts and as its Chief Executive Officer pursuant to the existing Contract, Employment Contract Number Four. 1.2 The Board of Directors of CPC has authorized and directed Conte and other employees of CPC to relocate the corporate headquarters from Orange County, California to Las Vegas, Nevada. The accomplishment of the relocation of the corporate headquarters and related matters require Conte to promptly establish and maintain his principal place of business and residence in Clark County, Nevada. 1.3 CPC desires to revise certain terms of Conte's employment and to continue to employ him, and Conte desires to continue in CPC's employment. 2 Place of Business. Section 2.2 of the Contract, "Place of Business," is amended to provide: Effective August 1, 1994, and continuing thereafter during the Employment Term, Conte's principal place of business shall be in Clark County, Nevada, and he shall not be obliged to maintain his principal place of business elsewhere. 3 Relocation Package. CPC will provide to Conte the relocation benefits specified in Exhibit A, attached and incorporated. 4 No Other changes. Except as specified in this Amendment, the Contract remains unchanged and in full force. Community Psychiatric Centers /s/ Richard L. Conte --------------------------------- Richard L. Conte By: /s/ Dana L. Shires, M.D. --------------------------- Title: Chairman, Compensation Committee --------------------------------- PAGE 1 OF 4 COMMUNITY Policy No. PSYCHIATRIC Page: CENTERS Effective Date: 8/1/94 STAFF RELOCATION POLICY (Corporate Office Relocation) I. PURPOSE To communicate policy and procedures as they relate to reimbursement of relocation expenses connected with the move of the Corporate Office. II. POLICY The Company will provide a uniform basis for reimbursing employees of CPC for reasonable expenses which are connected with their move. III. SCOPE All Corporate Office Executive Vice President. IV. PROVISIONS A. Temporary Lodging and Living Expenses 1. Lodging and Meals The employee and family (if appropriate) will be reimbursed for lodging and meal expenses incurred during temporary residence requirements in Las Vegas. The total cost is not to exceed $1,250. 2. Employees will be reimbursed for transportation expenses for one trip home prior to relocation of household goods and one additional trip for the purpose of closing on their former home. B. Househunting Trips Employees and their spouses will be entitled to reimbursement for the actual transportation (including rental car), $20 per day per adult and $10 per day per child for meals and lodging up to a maximum of two round trips each -- not to exceed 3 days each trip, inclusive of travel time. The company will reimburse for children to accompany parents on one househunting trip. C. Relocation Expense Allowance 1. Employees will be provided an allowance to cover all or a portion of each person's incurred expenses. This allowance is intended to cover a variety of relocation costs. Examples of costs that this allowance will cover include: a) Movement of Household Goods b) Movement of personal automobiles PAGE 2 OF 4 c) New Residence Expense -- Closing costs incurred in connection with the purchase of a new residence. Reimbursable costs include, but are not limited to, appraisals required by the mortgage lender, title insurance, attorney fees, recording fees, service charges, loan origination fees, loan service fees, discount points, etc. -- Interest on construction loans, if necessary. d) Miscellaneous expenses - including: -- Cleaning costs -- Drapes -- Installation of playground equipment -- Appliance hookups and servicing -- Automobile tags -- Licenses -- Fix-up painting e) Financial assistance to pay taxes on relocation benefits that are taxable. 2. Allowance Levels: Ten percent of the employee's annual salary, or $25,000 minimum - - For those employees who: a) Purchase a house in Las Vegas b) Rent in Las Vegas due to their having negative equity in their current residence c) Who rent in Las Vegas with their current residence listed. $20,000 - For those employees who: a) Rent in Las Vegas and do not meet the criteria above. Note: If the employee purchases a home in Las Vegas before completion of the Corporate office building, that employee will receive the additional $5,00. 3. Allowance Reimbursement: Employees will be reimbursed for their actual moving expenses incurred by submitting receipts. At the completion of their move any remaining balance will be paid directly to the employee. 4. Homeowner's Allowance: Employees who own homes will be reimbursed for the real estate commission incurred, up to five and one-half percent of the sales' price, in the sale of their residence. 5. Home Purchase Program: Employees will be provided a Home Purchase Program established through Coldwell Banker Relocation Services, Inc. This program will offer participants with a guaranteed appraised price for the sale of their current residence. 6. Bridge Loans: The company will provide temporary (bridge) loans to assist the employee in obtaining a new home. These loans will be secured by either equity in their current home PAGE 3 OF 4 or other assets. If a bridge loan is requested, approval must be received from their supervisor and the Executive Vice President, Administration. The term of these loans will be interest free for the first three months and at 5 percent per annum for an additional twelve months. 7. Loan Assistance: The company will provide the employee with a home loan at 80 percent of the appraised value of the home to be purchased up to a maximum of $300,000. The term of the loan will be 5 percent interest per annum and amortized over 30 years. 8. Employment with Company: Relocated employees who voluntarily resign from CPC within the first six (6) months of relocation to Las Vegas will be required to reimburse 50% of the paid relocation allowance back to the company. Employees voluntarily resigning within the 7th to 12th month of relocation will be responsible for reimbursing the paid relocation allowances on a pro-rated basis. D. Company-paid Best Start Marketing Program The company will provide homeowner's the benefit of an advance marketing program provided by a relocation firm to assist the relocatee in the selling of their home. PAGE 4 OF 4 EX-10.5 3 EXHIBIT 10.5 AMENDMENT NUMBER ONE TO RESTATED AND AMENDED EMPLOYMENT CONTRACT OF ROBERT L. GREEN This Amendment Number One ("Amendment") is made as of August 1, 1989, to the Restated and Amended Employment Contract (the "Contract") dated as of June 1, 1988, between Community Psychiatric Centers, a Nevada corporation ("CPC"), and Robert L. Green, an individual ("Green"). RECITALS A. CPC employs Green pursuant to the Contract. B. CPC has transferred its dialysis and home health businesses to its wholly owned subsidiary, Vivra, Inc., a Delaware corporation ("Vivra") and proposes to distribute all of Vivra's capital stock to CPC's shareholders (the "Spinoff"). It is in the best interests of CPC and its shareholders and Vivra that Green be employed as Vivra's Chief Executive Officer, and Green desires to be so employed. Therefore, CPC and Green desire to terminate the Employment Term of the Contract pursuant to all the terms and conditions of this Amendment. NOW, THEREFORE, IT IS AGREED: 1. Termination of Employment Term. Paragraph 2.1 of the Contract is hereby amended to provide that the Employment Term of the Contract shall terminate on August 31, 1989. 2. Post-Employment Term. Paragraph 2.2 of the Contract is hereby amended to provide that the Post-Employment Term of the Contract shall commence on September 1, 1989. 3. Salary. Green's salary shall be increased to Four Hundred Fifty Thousand Dollars ($450,000) per year commencing as of December 1, 1988 and shall continue at that rate through November 30, 1989. 4. Noncompetition. The noncompetition covenant contained in paragraph 4.1.2(a) is amended to provide that neither Green's employment by Vivra will nor any actions taken in the course and scope of that employment are or be a violation thereof. 5. Post-Employment Term Compensations. Green's compensation during the Post-Employment Term shall be calculated pursuant to paragraph 4.2.2 of the Contract as if the Employment Term had ended on November 30, 1989. 6. Effect of Amendment. Except as amended hereby, the Contract shall remain in full force and effect. IN WITNESS WHEREOF, this Amendment Number One to Restated and Amended Employment contract of Robert L. Green has been executed by the parties on the date set forth opposite their names. September 11, 1989. /s/ Robert L. Green -------------------------------- Robert L. Green COMMUNITY PSYCHIATRIC CENTERS September 14, 1989. By: /s/ James W. Conte --------------------------- James W. Conte, President AMENDMENT NUMBER TWO TO RESTATED AND AMENDED EMPLOYMENT CONTRACT This Amendment Number Two to Restated and Amended Employment Contract ("Amendment") is made as of December 1, 1989 between Robert L. Green, an individual ("Green") and Community Psychiatric Centers, a Nevada corporation ("CPC"). RECITALS A. Effective June 1, 1988, Green and CPC entered into a Restated and Amended Employment Contract (the "Contract"). All capitalized terms in this Amendment have the same meanings as in the Contract. B. On August 31, 1989, the Employment Term of the Contract ended and, by agreement of Green and CPC, the Post-Employment Term began on December 1, 1989. On September 1, 1989, Green became the President, Chief Executive Officer and Chairman of the Board of Directors of VIVRA, Incorporated, a Delaware corporation ("VIVRA") and since that day has been and now is in the full-time employ of VIVRA. C. Paragraph 4.2.1 of the Contract obliges CPC to provide certain benefits to Green during the Post-Employment Term. This Amendment is intended to clarify and define CPC's obligations pursuant to paragraph 4.2.1 of the Contract during the Post-Employment Term. NOW, THEREFORE, IT IS AGREED: 1. Office and Secretary. Recognizing that Vivra currently provides him with office space and secretarial assistance, CPC shall pay Green Two Thousand Dollars ($2,000) per month while he continues in the full-time employment of VIVRA, in lieu of providing the suitable office space and secretarial assistance referred to in paragraph 4.2.1 of the Contract. Such payments shall fully discharge CPC's obligations to provide such space and assistance during the periods for which they are made. However, if and as soon as Green's employment by VIVRA terminates or VIVRA ceases to provide him with such office space and secretarial assistance as at present, paragraph 4.2.1 of the Contract shall govern his entitlement to such benefits. 2. Automobile. CPC is now providing and will continue to provide Green with an automobile of his choice and will reimburse Green for all of his expenses incurred for personal use or for CPC's business, but not for expenses for VIVRA's business. 3. Group Insurance. CPC will continue to carry Green as an insured under its group travel insurance policy and group medical, dental and hospital policy pursuant to and subject to the terms of paragraphs 3.4 and 4.2.1(a) of the Contract. 4. Profit Sharing Plan. CPC has been advised by special counsel that Green is/is not currently entitled to participate in CPC's Profit Sharing Plan. CPC will review his status in this respect annually. 5. Except as specifically provided in this Amendment, the Contract shall remain in full force and effect. IN WITNESS WHEREOF this Amendment has been executed and delivered by the parties on the dates set forth opposite their names. Dated: February 27, 1991 /s/ Robert L. Green ------------------------------ Robert L. Green COMMUNITY PSYCHIATRIC CENTERS Dated: February 25, 1991 By: /s/ Richard L. Conte ------------------------------ Richard L. Conte, President EX-10.6 4 EXHIBIT 10.6 EMPLOYMENT AGREEMENT 1. Parties. This Employment Agreement ("Agreement") is made between COMMUNITY PSYCHIATRIC CENTERS, a Nevada corporation with its International Headquarters located in Laguna Hills, California ("CPC"), and DAVID WAKEFIELD, an individual ("Employee"), under the following circumstances: 2. Continuation of Employment, End of Prior Contract. Pursuant to all the terms and conditions of this Agreement, CPC desires to continue to employ Employee and he desires to continue in his employment, and each of them desires to terminate and cancel any prior contract. 2.1 Employment and Duties. CPC shall employ Employee and Employee shall serve CPC as one of its executive employees and shall perform such duties as the President or Chief Executive Officer of CPC may direct. Employee shall devote his full productive time, energies and abilities to the business of CPC. 2.2 Subsidiaries of CPC. From time to time, Employee may be assigned to work for or on behalf of various subsidiaries of CPC. All obligations of Employee to CPC shall also apply between Employee and all subsidiaries of CPC. 3. Employment Term. The initial Employment Term of this Agreement shall commence on July 31, 1992 and shall continue for a period of three years, ending on July 30, 1995. Unless either party gives written notice of non-renewal to the other not less than sixty (60) days prior to the expiration of any Employment Term, this Agreement shall automatically renew for additional Employment Terms of one (1) year each. 4. Compensation. 4.1 Salary. CPC shall pay to Employee an initial salary of L77,000 (Seventy-seven thousand pounds) per year in equal semi-monthly or more frequent installments in accordance with CPC's payroll practices from time to time in effect. 4.1.1 Salary Review. For fiscal years commencing on or after December 1, 1992, Employee's salary shall be subject to annual review by the parties but this requirement of annual review shall not be construed in any manner as an express or implied agreement by CPC to raise Employee's salary. 4.2 Expense Reimbursement. Upon submission of appropriate vouchers and in accordance with the reimbursement policy stated in CPC's Administrative Manual from time to time in effect, CPC shall reimburse Employee for all authorized travel and entertainment expenses. 4.3 Other Benefits. Employee shall be entitled to participate in employment benefits made available to other salaried employees of CPC and described in Chapter 700 of the CPC's Administrative Manual from time to time in effect. This Agreement shall not restrict in any way the right of CPC to add to, modify or eliminate any employment benefits. 4.4 Bonus Plan. Employee shall be allowed to participate in a bonus plan as approved from time to time by CPC's Board of Directors. 5. Termination. This Agreement may be terminated prior to the end of the Employment Term as follows: 5.1 Mutual Consent. By mutual written consent of the parties. 5.2 CPC. By CPC, for any of the following reasons: 5.2.1 Breach. Upon breach by Employee of any of his duties as Employee or the breach by Employee of any term of this Agreement; 5.2.2 Neglect, etc.. For habitual neglect or nonperformance by Employee of his duties; 5.2.3 Incapacity. Upon incapacity of Employee to perform his duties under this Agreement for any consecutive period of more than ninety (90) business days; or 5.2.4 Cause. For cause. 5.3 Employee. By Employee, for any of the following reasons: 5.3.1 Breach. Upon breach by CPC of any of its material obligations to Employee under this Agreement; 5.3.2 Cause. For cause; or 5.3.3 Change in Control. Within ninety (90) days after the occurrence of any of the following events: 5.3.3.1 Tender or Exchange Offer. The purchase of thirty-three and one-third percent (33 1/3%) of the outstanding shares of the CPC's One Dollar par value Common Stock (the "Common Stock") pursuant to any tender or exchange offer (other than such an offer by CPC), whether or not such purchase is opposed by CPC; 5.3.3.2 Other Acquisition of Controlling Stock. The date CPC receives notice that any person or group deemed to be a person under Section 13(d)(3) of the Securities Exchange Act of 1934 and regulations thereunder, in any transaction or series of transactions, becomes the beneficial owner directly or indirectly of Common Stock sufficient to entitle such person or group to thirty-three and one-third percent (33 1/3%) or more or all votes which all shareholders of CPC would be entitled to cast in an election held on such date; 5.3.3.3 Change in Directors. A date during any one-year period when individuals, who at the beginning of that period, constituted the Board of Directors of CPC cease for any reason to constitute a majority thereof, unless the election, or the nomination for election by the shareholders of CPC of each new director was approved by a vote of at least two-thirds of the directors in office who were directors at the beginning of the period; 5.3.3.4 Reorganization, Sale of Assets. The date of approval by the shareholders of CPC of an agreement providing for: 5.3.3.4.1 The merger or consolidation of CPC with another corporation where the shareholders of CPC immediately prior to the merger or consolidation do not beneficially own immediately thereafter shares of the corporation issuing cash or securities in the merger or consolidation, entitling such shareholders to fifty percent (50%) or more of all votes to which all shareholders of such corporation would be entitled in the election of Directors, or where the members of the Board of Directors of CPC immediately prior to the merger or consolidation do not immediately thereafter constitute a majority of the Board of Directors of the corporation issuing cash or securities in the merger or consolidation; or 5.3.3.4.2 The sale or other disposition of all or substantially all of the assets of CPC. 5.5 Payment on Termination. 5.5.1 Change in Control. If Employee terminates his employment pursuant to paragraph 5.3.3, he shall be entitled to receive, in addition to any amounts due pursuant to paragraph 5.5.2, a cash payment equivalent to two (2) year's salary as severance pay, regardless of the Employment Term remaining at the time of such termination. 5.5.2 Other Termination. Upon termination of Employee's employment for any reason, he shall be paid all salary and vacation time (not including sick time) accrued to the date of termination; provided, however, that: 5.5.2.1 Notice of and Payments upon Termination. Employee shall give at least sixty (60) days prior written notice to CPC of his intention to terminate his employment pursuant to paragraphs 5.3.1 or 5.3.2 and if he fails to give such notice to CPC, he shall pay to CPC, as liquidated damages, an amount equal to one month's salary which amount shall be used by employer to offset the costs incurred in replacing Employee on short notice; and 5.5.2.2 Repayment of Obligations, etc.. Upon termination of his employment for any reason, Employee shall pay to CPC all sums due under any notes or other obligations from his to it and all such obligations shall then become due and payable. Such obligations include, but are not limited to, those incurred for purchase of CPC stock upon exercise of stock options held by Employee. 5.5.3 Return of Property. Upon termination of employment for any reason, Employee shall return to CPC all property belonging to CPC, in his possession or under his control. 5.5.4 Stock Options. Employee acknowledges that CPC's Qualified, Non-qualified and Combined Stock Option Plans for Key Employees provide that all unexercised options held by him thereunder shall expire upon termination of employment for any reason, except for termination by Employee pursuant to paragraph 5.3.3. Upon termination of employment pursuant to that paragraph, Employee will be entitled to a cash payment in the amount of the difference between the option price of shares of CPC stock subject to options held by him and the then fair market value of such shares, all as more fully described in CPC's stock option plans. The plans may be changed or eliminated and may not be modified or controlled by this Agreement. 6. Protection of Business Information. 6.1 Existing Businesses. At the present time, CPC is engaged in the following businesses (the "Existing Businesses"): 6.1.1 Ownership and operation of acute psychiatric hospitals and related facilities, which include, but are not limited to, medical buildings and pharmacies; 6.1.2 Ownership and operation of facilities which provide chemical, drug and alcohol dependency treatment and services; 6.2 Proposed Businesses. In addition, CPC plans to be engaged in other businesses (the "Proposed Businesses") related and unrelated to the Existing Businesses. 6.3 Information. In the operation, planning and development of the Existing Businesses and the Proposed Businesses, CPC generates and will generate business information, confidential information and trade secrets which are and will be proprietary and confidential ("Information") and the disclosure of which would be extremely detrimental to CPC and of great assistance to its competitors. The Information includes, but is not limited to: 6.3.1 Data regarding location of proposed and existing facilities; 6.3.2 Market survey, studies and analyses; 6.3.3 Information concerning the identity, location and qualifications of professionals and employees, existing and prospective; 6.3.4 Information concerning referral sources; 6.3.5 Information concerning reimbursement sources, insurers and other third-party payors; 6.3.6 Tabulated and organized information concerning legislative, administrative, regulatory and zoning requirements, bodies and officials; 6.3.7 Medical and personnel records; 6.3.8 Statistical, financial, cost and accounting data; 6.3.9 Existing and prospective customer lists; and 6.3.10 Administrative, operations and procedure manuals and directives. 6.3.11 Business ideas pertaining to any Existing or Proposed Businesses of CPC. Business ideas include, but are not limited to, ideas, concepts or proposals that are conceived, developed or implemented by or communicated to Employee. 6.4 Information Held as a Fiduciary. All of the Information which is acquired by, communicated to or in any way comes into the possession or control of Employee shall be held by employee in a fiduciary capacity for the exclusive benefit of CPC. 6.5 During Employment. Prior to termination of this Agreement, Employee shall have these obligations: 6.5.1 No Competition. Employee shall not compete with CPC. "Compete" means to either directly or indirectly own, manage, operate, control or participate or join in or advise, consult with or assist in the establishment or operation of any business similar to the Existing Businesses or the Proposed Businesses which is located within any county or equivalent jurisdiction in which any of the Existing Business or Proposed Businesses are located or proposed to be located; within any contiguous county; within the United Kingdom; or within a two hundred mile radius of any Prospective Business located in any foreign country. 6.5.2 No Planning to Compete Following Employment. Employee shall not plan or otherwise prepare to compete with CPC following Employee's employment with CPC. 6.5.3 No Solicitation to Compete. Employee shall not solicit other employees, independent contractors, customers, referral sources or reimbursement sources of CPC to compete with CPC during or following Employee's employment with CPC. 6.5.4 No Disclosure. Employee shall not disclose to any person, who, on behalf of CPC, has no business reason to know, any business information, confidential information or trade secrets of CPC. 6.6 Following Employment. Upon termination of this Agreement, Employment shall have the following obligations: 6.6.1 Return of Information. Employee will promptly relinquish to CPC all files, correspondence, memoranda, diaries and other records, minutes, notes, manuals, papers and other documents and data, however prepared or memorialized, and all copies thereof, belonging to or relating to the business of CPC, that are in Employee's custody or control. 6.6.2 No Use of Trade Secrets. Employee shall not use or disclose any trade secret acquired from or on behalf of CPC before, during or after Employment with CPC. 6.6.3 No Use of Confidential Information. Employee shall not use or disclose any confidential information acquired from, for or about CPC before, during or after Employee's employment with CPC. 6.6.4 No Use of Business Information. Employee shall not use or disclose any business information acquired from, for or about CPC before, during or after Employee's employment with CPC. 6.6.5 No Interference. Employee shall not interfere with any contracts or business relationships of CPC. 6.6.6 No Solicitation. Employee shall not solicit other employees, independent contractors, customers, referral sources or reimbursement sources of CPC to compete with CPC. 6.6.7 No Competition. Employee shall not compete with CPC for a period of two years following termination of employment. 6.7 Exception for Publicly Held Companies. Notwithstanding the provisions of paragraphs 6.5 and 6.6 above, Employee may participate as a non- controlling shareholder (but not in any other capacity), holding less than five percent (5%) of any class of stock in a publicly owned corporation whose stock is traded on a National Securities Exchange or on the over-the- counter market. 6.8 Exception for Change of Control. The provisions of paragraph 6.6 shall not apply if employee's employment is terminated pursuant to paragraph 5.3.3 above. 6.9 Scope of Covenant. It is expressly understood and agreed that the scope of the various covenants in this paragraph 6 are reasonable both in time and area and are fair and necessary to protect the investment of CPC against the material adverse effects which would result from the violation of any of these covenants. 6.10 Divisibility of Covenants. The covenants of this paragraph 6 shall be regarded as divisible and shall be given the greatest operative effect possible. If any part of them is declared invalid or unenforceable in any respect, the validity and enforceability of the remainder shall not be affected. 6.11 Remedies for Breach of Obligations Regarding Business Information. In addition to CPC's right to seek damages for any violation of the covenants in this paragraph 6, Employee acknowledges that because his duties are of a special, unique, unusual, extraordinary or intellectual character, which gives them peculiar value which cannot be reasonably or adequately compensated by an award of damages, equitable relief in the form of injunction or other order will be available to CPC. 7. Notices. Any notice provided for by this Contract and any other notice, demand or communication which either party may wish to send to the other ("Notices") shall be in writing and shall be deemed to have been properly given when received if delivered by personal delivery; certified mail, return receipt requested; or other commercially acceptable means. Notices shall be addressed as follows: If to CPC: Richard L. Conte, Chairman & Chief Executive Officer Community Psychiatric Centers 24502 Pacific Park Drive Laguna Hills, California 92656 If to Employee: David Wakefield 53 Ringford Road London, SW18 1RP Either party may change its address for Notices by giving notice of the change to the other party. 8. Successors, Assignment. Except as provided in paragraph 5.3.3, this agreement shall be binding on the heirs, assigns, personal representatives and successors of CPC and Employee. However, due to the nature of the services to be provided by Employee, Employee shall have no power to assign any rights or duties under this Agreement. 9. Applicable Law. This agreement shall be governed by and construed in accordance with the laws of the State of California and the parties consent to the jurisdiction of its courts. 10. Divisibility of Agreement. This Agreement shall be divisible and if any part of it is determined to be invalid or unenforceable the remaining portions shall not be affected and the Agreement shall be carried out to the greatest extent possible in accordance with all of its provisions. 11. Entire Agreement. This Agreement represents the entire agreement between CPC and Employee, and this Agreement supersedes any other agreements, oral or written, that may define the employment relationship between Employee and CPC. Neither CPC nor Employee has relied upon any promise or other inducement which is not expressed in this Agreement. 12. Amendment. This Agreement may be amended only by written agreement of CPC and Employee and may not be modified by any oral agreement. 13. Practices Inconsistent with this Agreement. No provision of this Agreement shall be modified or construed by any practice or occurrence that is inconsistent with any provision. Failure of either party to insist upon compliance with any provision shall not constitute an amendment or a waiver of the right to insist upon compliance with that provision or any other provision. EMPLOYEE Dated: August 19, 1992 ------------------------------- /s/ David Wakefield ------------------------------- David Wakefield Executive Vice President COMMUNITY PSYCHIATRIC CENTERS Dated: September 9, 1992 ------------------------------- /s/ Richard L. Conte ------------------------------- Richard L. Conte, Chairman Chief Executive Officer EX-10.8 5 EXHIBIT 10.8 SEPARATION AGREEMENT AND GENERAL RELEASE This Separation Agreement and General Release ("Agreement") is entered into by and between Community Psychiatric Centers ("Employer") and Steve Weis ("Employee") in consideration of the following facts: A. Employee is employed by Employer in the position of Executive Vice President and Chief Financial Officer of Employer. B. Employee has voluntarily resigned from his position as Executive Vice President and Chief Financial Officer of Employer, subject to the execution of this Agreement, and Employer has accepted Employee's resignation. Employer and Employee have agreed that Employee's employment will permanently terminate effective December 31, 1994 ("Termination Date"). C. Employee acknowledges that he has timely received all wages due through the Termination Date. D. Employer and Employee are desirous of entering into an agreement to provide for the settlement and release of any claims related to Employee's employment and the termination of that employment. ACCORDINGLY, in consideration of the terms, conditions and agreements set forth below, the parties covenant and agree as follows: 1. Review Period. Employee shall have until the close of business on January 21, 1995, to accept the terms of this Agreement. Employee may use as much of that time as Employee wishes. Employee has consulted with an attorney before signing this Agreement. 2. Severance Benefits. Provided Employee executes this Agreement and all documents required to effectuate same, then upon expiration of the seven (7) day revocation period described in paragraph 18 below, Employer agrees to provide Employee the payments and benefits set forth below in subparagraphs 2.1 through 2.8 Employee understands that the amounts set forth below are all that Employee is entitled to receive from Employer except for the right to purchase continuation coverage under Employer's group health plan for employee and any eligible dependents pursuant to the provisions of the Consolidated Omnibus Budget Reconciliation Act (COBRA) as explained in the notice delivered to Employee contemporaneously with the delivery of this document, except for any other vested employee benefits, including but not limited to, any retirement benefits governed by or arising under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Internal Revenue Code Section 401(k), and, the Indemnification Agreement dated December 7, 1991 (the "Indemnification Agreement"). Employee hereby acknowledges that the severance benefit set forth below is more than the Employer is required to pay under its normal policies and practices. 2.1 Severance Pay. Employer will pay Employee a severance benefit of Two Hundred Seventy-Five Thousand Dollars ($275,000.00) equal to fifty-two (52) weeks of pay at Employee's base rate of pay, less deductions required by law. Payment will be made in thirteen (13) equal increments of Twenty-One Thousand One Hundred Fifty-Three Dollars and Eighty-Four Cents ($21,153.84), payable consecutively on the first thirteen (13) dates on which Employer pays its employees, beginning with the next regular pay day after receipt of the signed copy of this Agreement and expiration of the seven (7) day revocation period described in paragraph 18 below. Such payments shall be mailed to Employee's most recent address on file with Employer. 2.2 Vacation Pay Employee has accrued Two Hundred Fifty-Seven and Seventy-Two Hundreds (257.72) hours of unused vacation time for which he is entitled to receive payment in the amount of Thirty-Four Thousand Sixty-Three Dollars and Sixty-Eight Cents ($34,063.68), which Employer shall pay in one lump sum. 2.3 Health Insurance Benefits Employer will continue Employee's eligibility for health benefits under Employer's Health Payment Plan through December 31, 1995 (unless Employee obtains other coverage earlier and notifies Employer of such by written notice.) Employer and Employee shall each pay their usual share of such premiums, and Employer is hereby authorized to deduct Employee's share of such premiums from the severance benefits payable under paragraph 2.1 hereof. Employer shall be entitled to modify or terminate its Health Payment Plan, but Employee shall not be treated any worse than any other employees of Employer in such event. After December 31, 1995, or upon the earlier termination by Employee as hereinabove provided, Employee will be eligible to purchase eighteen (18) months of continued health care coverage pursuant to the provisions of COBRA. 2.4 Transfer of Company Automobile Employer will deliver to Employee, free of charge to Employee, a certificate of title to the automobile owned by Employer that Employee is presently using to Employee that is properly endorsed to transfer ownership of the vehicle to Employee. The automobile is being transferred in its "as is" condition, without covenant or warranty, express or implied, of any kind, nature or description. Employee covenants and agrees to immediately register ownership of the vehicle in his name promptly upon delivery of the endorsed certificate of title. Employee shall be, from and after the date of delivery of the endorsed certificate of title, solely responsible for all expenses associated with the cost of transferring title, including, but not limited to, any license fees, certificate transfer fees and use taxes, and the care, upkeep and insuring the vehicle. Notwithstanding the foregoing, it is understood and agreed that Employer shall continue to furnish insurance on the vehicle through February 28, 1995, at Employee's sole cost and expense, until Employee can establish California residency and qualify for California automobile insurance. The cost of such insurance coverage shall be deducted from the payments to be made to Employee during the months of January and February, 1995, under paragraph 2.1 hereof. Should Employee fail to register the vehicle in his name and provide Employer with written proof of same by no later than February 25, 1995, then until Employee does so, Employer shall be entitled to continue insurance coverage beyond February 28, and to deduct the cost of same from the amount owed to Employee AND to suspend any and all further payments coming due under paragraph 2.1 from and after February 25, 1995. 2.5 Transfer of Company Computer Employer will transfer to Employee, free of charge to Employee, all of its right, title and interest in and to the laptop and desk computers that Employee utilized in his position with Employer. These computers are being transferred in their "as is" condition, without covenant or warranty, express or implied, of any kind, nature or description. Employee shall be, from and after the Termination Date, responsible for all taxes on and all expenses associated with the care, upkeep and insuring the computers. 2.6 Purchase of Employee's Residences Employer has advanced certain sums to Employee in connection with the construction of a single family residence in Las Vegas, Nevada. Employer hereby agrees to accept a grant deed to the subject property upon which the single family residence is being constructed, in form and content acceptable to Employer, properly executed and notarized by Employee and his wife, together with an appropriate endorsement to Employee's title insurance policy naming Employer, as Employee's assignee, as the insured under the policy in full satisfaction of Employee's indebtedness for all advances heretofore made by Employer to Employee for such construction. It is understood and agreed that nothing contained in this Agreement shall alter or modify the contract by which Employer acquired title to Employee's former residence in Laguna Hills, California, or otherwise entitle Employer to rescind that contract, and Employer shall be entitled to dispose of the California property through the Coldwell Banker Relocation Group and to retain all proceeds realized from any sale of that property, and Employee hereby acknowledges that he shall have no right, title or interest in or to any portion of the proceeds realized from such sale. 2.7 Relocation to California Employer will reimburse Employee for the cost of moving Employee's household goods to either Los Angeles or Orange Counties, California at any time within one (1) year from the date of this Agreement. The maximum amount that Employer shall be obligated to reimburse Employee under this Agreement, regardless of the actual cost of relocation, shall be Five Thousand Six Hundred Thirty-Five Dollars ($5,635.00) or the actual amount paid to the moving company, whichever is lower. Payment shall be made within seven (7) days of receipt of a valid invoice. 2.8 Employee Stock Options Employee shall be entitled to exercise his vested stock options according to the Plan Agreement, as of December 31, 1994, for a period not to extend beyond December 31, 1995. 2.9 Taxation of Benefits. It is understood and agreed that Employer shall not withhold any taxes or other payroll deductions from the amounts to be paid under paragraph 2.1 or 2.2 hereof for the value of any of the benefits conferred on Employee under paragraphs 2.3 though 2.7 hereof, however, Employee understands and agrees that Employer shall file an IRS form 1099 for the value of all such benefits conferred on Employee. For purposes of form 1099, Employer shall use the net book value of the automobile. 3. Release of Claims. 3.1 Subject to paragraph 3.2 hereof, in consideration of Employer's acceptance of this General Release and its resulting obligations hereunder, and other good and valuable consideration of the receipt and sufficiency whereof is hereby acknowledged, Employee, for himself, his heirs, executors, representatives, principals, successors and assigns, and for all persons acting by, through or under him, does hereby release, acquit and forever discharge Employer and its parent corporation, its subsidiaries and affiliates, both past and present, as well as each and all of their respective past and present agents, employees, officers, directors, stockholders, partners, attorneys, accountants, successors and assigns, and each of them, of and from any and all losses, claims, debts, liabilities, demands, obligations, costs and expenses, actions and causes of actions, of every kind, nature and description, known or unknown, suspected or unsuspected, which Employee now owns or hold, or at any time heretofore has owned or held, or may at any time own or hold, or which could, might or may be claimed to exist by reason of any matter, cause or thing whatsoever occurred, done, omitted or suffered to be done or omitted, prior to the date of this instrument, including, but without limiting the generality of the foregoing, relating to, pertaining to, or arising out of in any way (a) any contract, whether express or implied, written or oral agreement, letter, or other document signed by, sent by CPC to, or received by Employee from any of the parties being released hereby, which, with the exception, subject to the provisions of paragraph 3.8 hereof, of the Indemnification Agreement, are hereby terminated, of no further force or effect and superseded by this Agreement, or (b) Employee's employment by Employer or (c) the circumstances or conditions under which the employment relationship between Employee and Employer was terminated. This release includes (but is not limited to) any claims for wages, compensation, deferred compensation, bonuses, vacation, sick pay, or any other fringe benefits or benefits for services rendered, waiting time penalties or other penalties or fines, any claim under the Age Discrimination in Employment Act, which prohibits age discrimination in employment, Title VII of the Civil Rights Act, which prohibits discrimination in employment based on race, color, sex, religion or national origin, or any other federal, state or local law or regulation prohibiting employment discrimination, or any claim for wrongful discharge, intentional or negligent infliction of emotional distress, interference with prospective economic advantage, defamation, fraud, misrepresentation, any other claim, however styled, pertaining to Employee's employment or termination of employment for Employer. 3.2 The release set forth in paragraph 3.1 does not affect Employee's right, if any, to receive benefits under the terms of the CPC Employees' Profit Sharing Plan, or to any employee benefits covered by ERISA or IRS Section 401(k), or to apply for continuation or conversion of insurance coverage to the extent that the Employer's insurance plans or applicable law provide for such continuation or conversion. In addition, the release set forth in paragraph 3.1 does not apply to any claim for workers' compensation under any federal or state workers' compensation or occupational disease law. Employee acknowledges that, at the present time, he has no actual knowledge of any claims for workers' compensation under any federal or state workers' compensation or occupational disease law. 3.3 The release set forth in paragraph 3.1 shall be effective upon the execution and delivery of this instrument and expiration of the revocation period provided in paragraph 19 hereof, and, subject to the provisions of paragraph 3.2, shall include, as indicated hereinabove, all released claims, causes of action, costs and demands which Employee may have against any of the parties being released hereby up to the time of the execution and delivery of this instrument, regardless of whether such released claims, causes of action, costs or demands have been stated, alleged or even suspected by Employee prior thereto. 3.4. Employee acknowledges and agrees that it is his intention that this instrument shall be effective as a full and final accord and satisfaction and settlement of and bar to each and every claim, demand, debt, account, reckoning, liability, obligation, cost, expense, lien, action and cause of action heretofore described and released herein. In connection with such waiver and relinquishment, Employee understands that the facts in respect of which the release made in this instrument may hereafter turn out to be other than or different from the facts in that connection now known or believed by Employee to be true, but it is his intention to fully, finally, absolutely and forever settle any and all claims, disputes and differences which do now exist or heretofore may have existed between Employee and the parties being released hereby, and he does hereby accept and assume the risk of the facts turning out to be different and agrees that this instrument shall be and remain in all respects effective and not subject to termination or rescission by virtue of any such difference in facts. 3.5 In order to achieve a full and complete waiver of all claims as set forth in paragraph 3.1 above, Employee expressly acknowledges that Employee intends to waive and relinquish all rights and benefits he may have under any statute, regulation or case law providing that a general release does not extend to claims which are unknown to the person giving the release at the time the release is given. 3.6 The release of unknown claims, demands and/or causes of action contained in paragraph 3.1 is a separate consideration for the covenants/actions set forth in Section 2 hereof and the release set forth in paragraph 3.4 hereof, and Employee understands that Employer would not accept this General Release and thereby so agree or act but for the release by Employee of unknown claims, demands and/or causes of action. 3.7 Nothing provided in this paragraph herein shall limit Employee's right to assert defenses and claims in response to any future suit asserted by Employer against Employee. 4. Agreement Not to Sue. Employee represents and warrants that he has not filed or caused to be filed any action or proceeding in any court, or before any administrative or arbitration agency, bureau or body against any of the parties being released herein with respect to any of the claims, disputes or causes of action herein released, and Employee promises never to file a lawsuit asserting any claims which are released by this Agreement. 5. Warranty of Non-Assignment. Employee represents and warrants that he has not heretofore assigned or transferred, or purported to assign or transfer, to any person, firm or corporation whomsoever any claim, debt, liability, demand, obligation, cost, expense, action or cause of action herein released. Employee agrees to defend, protect, indemnify and hold each of the parties being released hereby harmless from and against any claim, debt, liability, demand, obligation, cost, expense, action or cause of action based on, arising out of or in connection with any such transfer or assignment or purported transfer or assignment. 6. No Representations. Employee acknowledges, except as herein expressly set forth, that no representations of any kind or character have been made to him by Employer, or by any of Employer's agents, representatives or attorneys, to induce the execution of this instrument, and further acknowledges that he has relied solely on his own judgment, belief and knowledge, and on the advice of his own attorney as to the nature, extent and effect of the claimed damages he has allegedly suffered, and any liability therefor. 7. Future Employment. Employee acknowledges that no promise of future employment has been made by Employer or on its behalf. 8. Name and Reputation. Employer and Employee promise to refrain from engaging, directly or indirectly, in any action or omission which is, or is likely to be, detrimental to the reputation or goodwill of the other party or any of Employer's directors, officers, owners, employees, related or affiliated entities. 9. Confidential Information and Trade Secrets. 9.1 In the course of Employee's employment, Employee has acquired confidential and/or trade secret information, including, but not limited to, data regarding proposed or potential and/or existing hospital sites; market surveys, studies and analyses; information concerning the identity, location and qualifications of health care professionals and employees, existing or potential; information concerning reimbursement sources, insurers and other third party payors, such as but not limited to, PPO's, HMO's and other contractual arrangements with health care providers; tabulated and organized information concerning legislative, administrative, regulatory or zoning requirements, bodies or officials; any and all forms that Employer uses or is developing; any and all hospital policies and procedures, and treatment programs; any and all computer programs (whether or not completed or in use); any and all operating manuals or other similar materials which constitute the systems, policies and procedures and methods of doing business by Employer; any and all administrative, advertising or marketing techniques used by Employer; any and all financial information, records or data pertaining to the above- described hospital or Employer; any and all names and addresses of the patients and referral sources used by Employer to obtain patients; and any and all other relevant, important and private information utilized by Employer (hereinafter collectively referred to as the "protected materials"), all of which are unique assets of Employer, and Employee acknowledges that all of the protected materials are Employer's trade secrets, within the meaning of any and all appropriate and applicable federal and state statutes, rules and regulations, and constitute a part of Employer's principal assets, having been acquired and/or created through the outlay of considerable time and effort, and by the expenditure of large sums of money, and are a substantial basis and foundation upon which Employer's services are predicated. Employee hereby acknowledges, covenants and agrees that he/ she shall not, for a period of one (1) year from and after the date of this Agreement, in any form, fashion or manner, (i) disclose, divulge, or communicate to any person, firm or corporation, or for any personal or business purpose, other than under compulsion of law, directly or indirectly, or use in any way, the contents of patient's medical records, or any employee personnel records, or any of the other information pertaining to such persons, or any of the protected materials, whether given to Employee by Employer or created or prepared by Employee, or otherwise coming into the possession or knowledge of Employee, nor (ii) call on, solicit or take away, or attempt to call on solicit or take away, any of Employer's employees, patients, referral sources or payors, whether for Employee's own benefit or for the benefit of any other person, firm or corporation; 9.2 Employee shall not make any copies of any of the protected materials and will do everything reasonably possible to protect and maintain the inviolability of the protected materials from use or dissemination to anyone not entitled to receive and/or use such materials. 9.3 Employee shall immediately, upon execution of this Agreement, deliver to Employer all protected materials in Employee's possession or under Employee's control, in good condition, ordinary wear and tear, and damage by any cause beyond Employee's reasonable control excepted. Employee shall not copy or remove from Employer's premises any protected materials. 9.4 Employee acknowledges and agrees that the proprietary interests of Employer are of a special, unique, unusual and extraordinary character which gives them a peculiar value, the loss of which cannot reasonably or adequately be compensated for in damages, and, therefore, Employee agrees that Employer, in addition to any other remedy or rights Employer might have in law or in equity, shall be entitled to seek injunctive or other equitable relief in the event of a breach or a threatened breach of this Agreement. 9.5 The agreements set forth in paragraphs 9.1 through 9.4 shall survive the termination of other arrangements contained in this document. 10. Return of Employer's Property. Employee warrants that he has, with the exception of the automobile described in paragraph 2.3 and the computers described in paragraph 2.4 above, returned to Employer all promotional or marketing materials, files, records, patient, client and referral lists, credit cards, keys, access cards, and other documents, products, or property which Employee received from Employer in the course of Employee's employment, or which reflect in any way any confidential information in the possession or under the control of Employee. 11. Consequences of Violation of Promises. If either party violates any of the promises contained in herein, then in the event of any action or proceeding, at law or in equity, to interpret or enforce the terms of, or obligations arising out of this Agreement, or to recover damages for the breach hereof, or to compel performance hereunder, the party prevailing in any such action or proceeding shall be entitled to recover from the non-prevailing party all reasonable attorneys' fees, costs and expenses incurred by the prevailing party, whether incurred before or after the commencement of such action or proceeding. The attorney's fees shall include those incurred in bringing such suit and/or enforcing any judgment granted therein, all of which shall be deemed to have accrued upon the commencement of such action, and shall be paid whether or not such action is prosecuted to judgment. Any judgment or order entered in such action shall contain a specific provision providing for the recovery of attorney's fees and costs incurred in enforcing such judgment. For purposes of this paragraph, attorney's fees shall include, without limitation, fees incurred in the following: (a) post-judgment motions; (b) contempt proceedings; (c) garnishment, levy and debtor and third party examinations; (d) discovery; and (e) bankruptcy litigation. 12. Confidentiality. Employee and Employer both agree not to disclose the terms and conditions of this Agreement to any person or entity not a party hereto except members of Employee's immediate family and legal advisors who shall be informed of and bound by this confidentiality provision, unless such communication is required by law or is necessary to comply with the law (e.g., communications to a tax preparer for purposes of submitting an income tax return to the Internal Revenue Service), except to the extent such disclosure is necessary to enforce the terms of this Agreement. Notwithstanding the foregoing, the parties shall be entitled to state, or the equivalent, with regard to Employee's separation from employment by Employer, that "Mr. Weis resigned for personal reasons, and all matters relating to his resignation were resolved in a mutually satisfactory manner," and Employer shall, in response to any reference inquiries, state, or its equivalent, that "Mr. Weis was employed by CPC from December 7, 1991 until December 31, 1994, on which date he resigned voluntarily." 13. Amendments. No addition, modification, amendment or waiver of any part of this Agreement shall be binding or enforceable unless executed in writing by both parties hereto. 14. Severability. Should any part of this Agreement be declared invalid, void or unenforceable, all remaining parts shall remain in full force and effect and shall in no way be invalidated or affected. 15. Non-Admissions. Employer and Employee agree that neither this Agreement nor the consideration given shall be construed as an admission of any wrongdoing or liability by Employer, and Employee acknowledges that this instrument effects the release of claims and causes of action which are denied and contested by the parties being released hereby, and that nothing contained herein, nor the consideration given, shall be construed as an admission of liability by or on behalf of and of said parties by whom liability is expressly denied. 16. Entire Agreement. This instrument contains the entire agreement relating to the rights and obligations contained herein, and there are no other representations, warranties or commitments, except as are specifically set forth herein. This instrument supersedes any and all prior or contemporaneous representations, negotiations, promises, covenants, discussions or agreements between Employee and any of the parties being released hereby in connection with the matters contained herein, whether oral or written. No course of prior dealing among said parties, no usage of trade, and no parol or extrinsic evidence of any kind or nature shall be used to supplement, modify or vary any of the terms hereof. 17. Successors and Assigns. All the terms and conditions of this instrument shall be binding upon and inure to the benefit of each of the parties hereto and their respective heirs, representatives, affiliates, subsidiaries, successors and assigns. 18. Revocation Period. Employee may revoke this Agreement within seven (7) days of Employee's signing it. Revocation can be made by delivering a written notice of revocation to Ron Ooley, Sr. Vice President, Human Resources, 6600 West Charleston Boulevard #118, Las Vegas, Nevada 89102. For the revocation to be effective, written notice of same must be received by no later than the close of business on the seventh calendar day after Employee signs this Agreement. If Employee revokes this Agreement, it shall not be effective or enforceable, and Employee will not be entitled to receive any of the benefits described in Section 2 above. To the extent any documents or items have been delivered by Employer or any payment due under Section 2 has been made to or for the benefit of Employee prior to the date of his revocation of this Agreement, the revocation shall not be effective unless Employee delivers any documents or items so delivered and any monies so paid by Employer prior to the close of business on the seventh calendar day after Employee signs this Agreement. 19. Governing Law and Venue. Employer and Employee agree that the venue for any action brought to enforce the provisions of this Agreement will be brought in the State of Nevada and that any action that is brought in any other state will be removed to Nevada, upon proper motion to the Court, and the party having to file such a motion to remove the matter to Nevada, or otherwise dismiss the action, will be entitled to attorney fees from the party that filed the action in a state other than Nevada. This instrument shall be governed, construed, interpreted and enforced under and pursuant to the laws of the State of Nevada. 20. Availability. Employee shall make himself reasonably available to Employer to provide assistance and information until December 31, 1995. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS READ THIS AGREEMENT, THAT EMPLOYEE HAS BEEN GIVEN AMPLE OPPORTUNITY TO REVIEW IT AND TO CONSULT WITH A REPRESENTATIVE OR ATTORNEY OF EMPLOYEE'S CHOOSING CONCERNING ITS TERMS. EMPLOYEE FURTHER ACKNOWLEDGES THAT EMPLOYEE UNDERSTANDS THIS AGREEMENT AND IS VOLUNTARILY ENTERING INTO IT WITH THE INTENTION OF RELINQUISHING ALL CLAIMS AND RIGHTS OTHER THAN THOSE RESERVED IN THIS AGREEMENT. Dated: 12/30/94 /s/ Steve Weis ---------------------- ------------------------------ Steve Weis Dated: 12/30/94 ---------------------- Community Psychiatric Centers By: /s/ Richard Conte --------------------------- Richard Conte, Chief Executive Officer EX-10.15 6 EXHIBIT 10.15 FIRST AMENDMENT TO CREDIT AGREEMENT THIS FIRST AMENDMENT TO CREDIT AGREEMENT is made and dated as of December 14, 1994 (the "Amendment") among Community Psychiatric Centers, a Nevada corporation ("CPC"), Transitional Hospitals Corporation, a Delaware corporation ("THC"), and BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION, a United States national banking association ("Bank") and amends that certain Credit Agreement dated as of May 6, 1994 (as so amended or modified from time to time, the "Credit Agreement"). RECITALS WHEREAS, the Company has requested, and the Bank has agreed, on the terms and conditions set forth herein, to amend the Credit Agreement to extend the Termination Date. NOW, THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, the parties hereby agree as follows: 1. Terms. All terms used herein shall have the same meanings as in the Credit Agreement unless otherwise defined herein. All references to the Credit Agreement shall mean the Credit Agreement as hereby amended. 2. Amendment to Credit Agreement 2.1 The definition of "Termination Date" is amended by deleting "December 31, 1994" and inserting "February 28, 1995" in lieu thereof. 3. Representations and Warranties. Company represents and warrants to Bank that, on and as of the date hereof, and after giving effect to this Amendment: 3.1 Authorization. The execution, delivery and performance of this Amendment have been duly authorized by all necessary corporate action by the Company and this Amendment has been duly executed and delivered by the Company. 3.2 Binding Obligation. This Amendment is the legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. 3.3 No Legal Obstacle to Credit Agreement. The execution, delivery and performance of this Amendment will not (a) contravene the terms of the Company's certificate of incorporation, by-laws or other organization document; (b) conflict with or result in any breach or contravention of the provisions of any contract to which the Company is a party, or the violation of any law, judgment, decree or governmental order, rule or regulation applicable to Company, or (c) result in the creation under any agreement or instrument of any security interest, lien, charge, or encumbrance upon any of the assets of the Company. No approval or authorization of any governmental authority is required to permit the execution, delivery or performance by the Company of this Amendment, or the transactions contemplated hereby. 3.4 Incorporation of Certain Representations. The representations and warranties of the Company set forth in Section 5 of the Credit Agreement are true and correct in all respects on and as of the date hereof as though made on and as of the date hereof. 3.5 Default. No Default or Event of Default under the Credit Agreement has occurred and is continuing. 4. Conditions, Effectiveness. The effectiveness of this Amendment shall be subject to the compliance by the Company with its agreements herein contained, and to the delivery of the following to the Bank in form and substance satisfactory to the Bank: 4.1 Authorized Signatories. A certificate, signed by the Secretary or an Assistant Secretary of the Company and dated the date of this Amendment, as to the incumbency of the person or persons authorized to execute and deliver this Amendment and any instrument or agreement required hereunder on behalf of Company. 4.2 Amendment Fee. The Company shall pay to the Bank for the Bank's account an amendment fee in the amount of $10,000. 4.3 Other Evidence. Such other evidence with respect to the Company or any other person as the Bank may reasonably request in connection with this Amendment and the compliance with the conditions set forth herein. 5. Miscellaneous. 5.1 Effectiveness of the Credit Agreement and Loan Documents. Except as hereby expressly amended, the Credit Agreement and each other Loan Document shall each remain in full force and effect, and are hereby ratified and confirmed in all respects on and as of the date hereof. 5.2 Waivers. This Amendment is limited solely to the matters expressly set forth herein and is specific in time and in intent and does not constitute, nor should it be construed as, a waiver or amendment of any other term or condition, right, power or privilege under the Credit Agreement, the Loan Documents, or under any agreement, contract, indenture, document or instrument mentioned therein; nor does it preclude or prejudice any rights of the Bank thereunder, or any exercise thereof or the exercise of any other right, power or privilege, nor shall it require the Bank to agree to an amendment, waiver or consent for a similar transaction or on a future occasion, nor shall any future waiver of any right, power, privilege or default hereunder, or under any agreement, contract, indenture, document or instrument mentioned in the Credit Agreement, constitute a waiver of any other default of the same or of any other term or provision. 5.3 Counterparts. This Amendment may be executed in any number of counterparts and all of such counterparts taken together shall be deemed to constitute one and the same instrument. This Amendment shall not become effective until the Company and the Bank shall have signed a copy hereof, whether the same or counterparts, and the same shall have been delivered to the Bank. 5.4 Jurisdiction. This Amendment shall be governed by and construed under the laws of the State of California. IN WITNESS WHEREOF, the parties hereto have caused this Amendment to be duly executed and delivered as of the date first written above. COMMUNITY PSYCHIATRIC CENTERS By: /s/ Wendy Simpson ---------------------------- Name: Wendy Simpson Title: Chief Financial Officer TRANSITIONAL HOSPITALS CORPORATION By: /s/ Richard Conte ---------------------------- Name: Richard Conte Title: CEO/Chairman BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION By: /s/ J. A. Emslie ---------------------------- Name: J. A. Emslie Title: Managing Director CONSENT OF GUARANTORS The undersigned Guarantors hereby acknowledge that they have reviewed and consent to the foregoing First Amendment dated as of December 14, 1994 to Credit Agreement dated as of May 6, 1994, and hereby reaffirm their respective General Continuing General Guaranties, which continue in full force and effect on and as of the date hereof. Date: December 14, 1994 EACH OF THE GUARANTORS LISTED ON ANNEX A HERETO, INCORPORATED BY REFERENCE HEREIN By: /s/ Wendy Simpson ----------------------------- Title: Chief Financial Officer By: /s/ Richard Conte ----------------------------- Title: CEO/Chairman EX-10.16 7 EXHIBIT 10.16 BANK OF AMERICA Wyatt R. Ritchie Vice President U.S. Corporate Group-L.A. February 15, 1995 Wendy Simpson Community Psychiatric Centers 333 North Rancho Road, Suite 300 Las Vegas, NV 89106 Dear Wendy: Per our phone conversation today, this letter is to confirm Bank of America's approval to extend the $50 million Revolving Credit Facility made available to Community Psychiatric Centers. We will be extending the expiry of the Facility to February 28, 1996, as well as amending the pricing to be the same as the $25 million Revolver/Term Facility. This will reduce your cost from LIBOR +2.75% to LIBOR + 1.50% given the current leverage ratio. I will be following up with documentation to amend the facility within the next few days. Best regards, /s/ Wyatt R. Ritchie Wyatt R. Ritchie Vice President Bank of America National Trust and Savings Association 555 South Flower Street Los Angeles, California 90071 EX-11 8 EXHIBIT 11 Exhibit 11 Statements Re: Computation of Per Share Earnings Community Psychiatric Centers and Subsidiaries
Years Ended November 30, --------------------------------------------------- 1992 1993 1994 ---- ---- ---- Primary: Average shares outstanding during the period--treating as outstanding only the paid portion of shares portion of shares issued to employees for exercise of stock options 44,668,000 42,951,000 43,465,000 (a) Stock options granted to employees and unpaid portion of shares issued to employees for exercise of stock options, based on the treasury-stock method using average market price ** *** * ----------- ------------ ----------- TOTAL 44,668,000 42,951,000 43,465,000 ----------- ------------ ----------- ----------- ------------ ----------- Net earnings (loss) $23,137,000 $(24,892,000) $10,220,000 ----------- ------------ ----------- ----------- ------------ ----------- Earnings (loss) per share $ 0.52 $ (0.58) $ 0.24 ----------- ------------ ----------- ----------- ------------ ----------- Fully diluted: Average shares outstanding during the year--treating as outstanding only the paid portion of shares issued to employees for exercise of stock options 44,668,000 42,951,000 43,465,000 (a) Stock options granted to employees and unpaid portion of shares issued to employees for exercise of stock options, based on the treasury-stock method using the year-end market price, if higher than average market price ** *** * ----------- ------------ ----------- TOTAL 44,668,000 42,951,000 43,465,000 ----------- ------------ ----------- ----------- ------------ ----------- Net earnings (loss) $23,137,000 $(24,892,000) $10,220,000 ----------- ------------ ----------- ----------- ------------ ----------- Earnings (loss) per share $ 0.52 $ (0.58) $ 0.24 ----------- ------------ ----------- ----------- ------------ ----------- - ----------- * As the dilutive common stock equivalents are less than 3% of the weighted average outstanding shares, they have not been included in the 1994 computation of earnings per share as shown in the Consolidated Statement of Operations and Five Year Summary of Selected Financial Data. ** During the fiscal year ended November 30, 1992, there were no stock options outstanding at exercise prices above average or ending market price. *** The impact of stock options is excluded from earnings (loss) per share as the impact of stock equivalents is anti-dilutive.
EX-22 9 EXHIBIT 22 EXHIBIT 22 RE: SUBSIDIARIES OF THE REGISTRANT The Company's subsidiaries, the fictitious business names (if any) under which they do business, and the state or other jurisdiction of incorporation or organization of each are set forth below. All are wholly owned by the Company and included in the Consolidated Financial Statement.
State or Country Subsidiary Fictitious Business Name of Incorporation ---------- ------------------------ ---------------- Community Psychiatric Centers of California CPC Alhambra Hospital California CPC Belmont Hills Hospital CPC Brea Canyon Hospital (Closed) CPC Fairfax Hospital CPC Fremont Hospital CPC Heritage Oaks Hospital CPC Horizon Hospital CPC Laguna Hills Hospital CPC Rancho Lindo Hospital CPC Santa Ana Hospital CPC San Luis Rey Hospital CPC Sierra Vista Hospital CPC Vista Del Mar Hospital CPC Walnut Creek Hospital CPC Westwood Hospital (Closed) Community Psychiatric Centers of Florida,Inc. CPC Ft. Lauderdale Hospital Florida CPC Palm Bay Hospital CPC St. Johns River Hospital Community Psychiatric Centers of Idaho, Inc. CPC Intermountain Hospital of Boise Idaho Community Psychiatric Centers of Indiana,Inc. CPC Valle Vista Hospital Indiana Community Psychiatric Centers of Kansas, Inc. CPC College Meadows Hospital Kansas CPC Great Plains Hospital (Closed) Community Psychiatric Centers of Mississippi, Inc. CPC Sand Hill Hospital Mississippi Community Psychiatric Centers of Missouri,Inc. CPC Spirit of St. Louis Hospital Missouri Community Psychiatric Centers of North Carolina, Inc. CPC Cedar Spring Hospital North Carolina Community Psychiatric Centers of Oklahoma, Inc. CPC Southwind Hospital Oklahoma Community Psychiatric Centers of Oregon, Inc. CPC Cedar Hills Hsptl.(Closed) Oregon EXHIBIT 22 RE: SUBSIDIARIES OF THE REGISTRANT (CONTINUED) State or Country Subsidiary Fictitious Business Name of Incorporation ---------- ------------------------ ---------------- Community Psychiatric Centers of CPC Hospital San Juan Capestrano Puerto Rico, Inc. Puerto Rico Community Psychiatric Centers of Texas,Inc. CPC Afton Oaks Hospital (closed) Texas CPC Capital Hospital CPC Cypress Point Hospital (closed) CPC Millwood Hospital CPC Oak Bend Hospital (closed) Community Residential Centers of San Antonio (LLC) Texas Community Psychiatric Centers of Utah,Inc. CPC Olympus View Hospital Utah Community Psychiatric Centers of Wisconsin, Inc. CPC Greenbriar Hospital Wisconsin CPC of Georgia, Inc. Georgia C.P.C. of Louisiana, Inc. CPC Brentwood Hospital Louisiana CPC Coliseum Medical Center CPC East Lake Hospital CPC Meadow Wood Hospital Miami Valley Community Centers, Inc. Ohio Old Orchard Hospital, Inc. CPC Old Orchard Hospital Illinois CounterPoint Center of Old Orchard, Inc. CPC Streamwood Hospital Illinois Peachtree-Parkwood Hospital, Inc. CPC Parkwood Hospital Georgia Community Psychiatric Centers of Arkansas, Inc. CPC Pinnacle Pointe Hospital Arkansas Priory Hospitals Group Altrincham Priory United Kingdom Grovelands Priory Hayes-Grove Priory Heath House Priory Jacques Hall Lynbrook Priory Marchwood Priory The Priory The Woodbourne Clinic The Dukes Priory The Nottingham Clinic P.P.P., Inc. Georgia EXHIBIT 22 RE: SUBSIDIARIES OF REGISTRANT (CONTINUED) State or Country Subsidiary Fictitious Business Name of Incorporation ---------- ------------------------ ---------------- Community Psychiatric Hospitals Assoc., Inc. California Solutions Counseling & Treatment Center, Inc. Texas Community Behavioral Health Systems, Inc. Nevada Community Psychiatric Centers Properties Incorporated California CPC Properties of Illinois, Inc. Illinois CPC Properties of Indiana, Inc. Indiana CPC Properties of Kansas, Inc. Kansas CPC Properties of Louisiana, Inc. Louisiana CPC Properties of Mississippi, Inc. Mississippi CPC Properties of Missouri, Inc. Missouri CPC Properties of North Carolina, Inc. North Carolina CPC Properties of Arkansas, Inc. Arkansas CPC Properties of Oklahoma, Inc. Oklahoma CPC Properties of Wisconsin, Inc. Wisconsin Community Psychiatric Centers Properties of Texas, Inc. Texas Community Psychiatric Centers Properties of Utah, Inc. Utah Florida Hospital Properties Florida Psychiatric Hospital Consultants CPC Consultants California Belmedco Belmont Hills Pharmacy California CPC Pharmacy, Inc. California CPC Investment Corp. California Cottonwood Hill, Inc. Colorado CPC Laboratories, Inc. Georgia EXHIBIT 22 RE: SUBSIDIARIES OF THE REGISTRANT (CONTINUED) State or Country Subsidiary Fictitious Business Name of Incorporation ---------- ------------------------ ---------------- CalProp I, Inc. Delaware CalProp II, Inc. Delaware CPC (Londinium) Unlimited United Kingdom Community Psychiatric Centres Limited Canada CPC Managed Care Services, Inc. CPC Managed Care Delaware Harvard Medical Ltd. United Kingdom Michael A. Bell Agency West Germany Transitional Hospitals Corporation Delaware Transitional Hospitals Corporation of Louisiana, Inc. THC - New Orleans Louisiana Transitional Hospitals Corporation of Texas, Inc. THC - Arlington Texas THC - Seattle, Inc. THC - Seattle Washington Transitional Hospitals Corporation of Indiana, Inc. THC - Indianapolis Indiana THC - Minneapolis, Inc. THC - Minneapolis Minnesota Transitional Hospitals Corporation of Massachusetts, Inc. Massachusetts Transitional Hospitals Corporation of Nevada, Inc. THC - Las Vegas Nevada THC - Chicago, Inc. THC - Chicago Illinois Transitional Hospitals Corporation of New Mexico, Inc. THC - Albuquerque New Mexico Transitional Hospitals Corporation of Tampa, Inc. THC - Tampa Florida THC - Hollywood, Inc. THC - Hollywood Florida Transitional Hospitals Corporation of North Carolina, Inc. North Carolina THC - Houston, Inc. THC - Houston Texas EXHIBIT 22 RE: SUBSIDIARIES OF THE REGISTRANT (CONTINUED) State or Country Subsidiary Fictitious Business Name of Incorporation ---------- ------------------------ ---------------- J. B. Thomas Hospital, Inc. THC - Boston Massachusetts Transitional Hospitals Corporation of Wisconsin, Inc. THC - Milwaukee Wisconsin
EX-24 10 EXHIBIT 24 EXHIBIT 24 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in Registration Statement No. 33-37920 and Post-Effective Amendment No. 1 to Registration Statement No. 33-2-76435, both on Form S-8 and both dated November 21, 1990, Registration Statement No. 33-5485 on Form S-8 dated August 1, 1994 and Registration Statement No. 33-14747 on Form S-3 dated August 6, 1987 of our report dated January 27, 1995 with respect to the consolidated financial statements and schedule of Community Psychiatric Centers and Subsidiaries included in the Annual Report on Form 10-K for the year ended November 30, 1994. ERNST & YOUNG LLP Los Angeles, California February 27, 1995 EX-27 11 EXHIBIT 27
5 This schedule contains summary financial information extracted from SEC Form 10K and is qualified in its entirety by reference to such financial statements. 1,000 U.S. DOLLAR 12-MOS NOV-30-1994 DEC-01-1993 NOV-30-1994 1.5645 37,263 0 103,128 29,381 0 183,999 376,765 92,937 605,404 80,503 69,090 46,856 0 0 393,183 605,404 423,955 427,740 328,508 328,508 51,549 26,966 3,545 17,172 6,952 10,220 0 0 0 10,220 .24 .24
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