As filed with the Securities and Exchange Commission on October 27, 2000.
Registration No. 333-
Delaware 8093 23-2872718 (State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer of Incorporation or Classification Code Number) Identification No.) Organization) --------------- 4716 Old Gettysburg Road P.O. Box 2034 |
With copies to:
Christopher G. Karras, Esq. Michael W. Blair, Esq. Dechert Debevoise & Plimpton 4000 Bell Atlantic Tower 875 Third Avenue 1717 Arch Street New York, New York 10022 Philadelphia, Pennsylvania 19103 (215) 909-6775 (215) 994-4000 --------------- |
CALCULATION OF REGISTRATION FEE
Title of Each Class of Proposed Maximum Amount of Securities to be Registered Aggregate Offering Price (1) Registration Fee ------------------------------------------------------------------------------------ Common Stock, par value $.01 per share............................... $200,000,000 $52,800 |
EXPLANATORY NOTE
This registration statement contains two separate prospectuses. The first prospectus relates to a public offering in the United States and Canada of an aggregate of shares of common stock. The second prospectus relates to a concurrent offering outside the United States and Canada of an aggregate of shares of common stock. The prospectuses for each of the U.S. offering and the international offering will be identical with the exception of an alternative front cover page, an alternative back cover page and an alternative "Underwriting" section for the international offering. These alternative pages appear in this registration statement immediately following the complete prospectus for the U.S. offering. The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
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+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
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Subject to Completion
Preliminary Prospectus dated October 27, 2000
PROSPECTUS
Shares
[LOGO OF SELECT MEDICAL CORPORATION]
Common Stock
This is Select Medical Corporation's initial public offering. Select Medical Corporation is selling all of the shares. The U.S. underwriters are offering shares in the U.S. and Canada, and the international managers are offering shares outside the U.S. and Canada.
We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will trade on the Nasdaq National Market under the symbol "SLMC."
Investing in our common stock involves risks which are described in the "Risk Factors" section beginning on page 8 of this prospectus.
Per Share Total --------- ----- Public offering price................................... $ $ Underwriting discount................................... $ $ Proceeds, before expenses, to Select Medical Corporation............................................ $ $ |
The U.S. underwriters may also purchase up to an additional shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The international managers may similarly purchase up to an additional shares from us.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about , 2000.
Merrill Lynch & Co. Chase H&Q J.P. Morgan & Co. CIBC World Markets SG Cowen First Union Securities, Inc. ----------- The date of this prospectus is , 2000. |
[Inside front cover: Map of the United States and Canada showing the locations of Select Medical Corporation's specialty acute care hospitals and outpatient rehabilitation clinics.]
TABLE OF CONTENTS
Page ---- Prospectus Summary....................................................... 1 Risk Factors............................................................. 8 Forward-Looking Statements............................................... 13 Use of Proceeds.......................................................... 14 Dividend Policy.......................................................... 14 Capitalization........................................................... 15 Dilution................................................................. 16 Selected Consolidated Financial and Other Data........................... 17 Unaudited Pro Forma Consolidated Financial Information................... 21 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 24 Our Business............................................................. 37 Management............................................................... 55 Related Party Transactions............................................... 63 Principal Stockholders................................................... 67 Description of Capital Stock............................................. 69 Shares Eligible for Future Sale.......................................... 73 United States Federal Tax Considerations for Non-United States Holders... 74 Underwriting............................................................. 77 Legal Matters............................................................ 82 Experts.................................................................. 82 Where You Can Find More Information...................................... 82 Index to Consolidated Financial Statements............................... F-1 |
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized any other person to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.
PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus. You should read the entire prospectus carefully, including the financial data and related notes and the risks of investing discussed under "Risk Factors," before investing.
Select Medical Corporation
Overview of Our Company
We are the second largest operator of specialty acute care hospitals for long term stay patients in the United States based on the number of our facilities. We are also the second largest operator of outpatient rehabilitation clinics in the United States and the largest operator of outpatient rehabilitation clinics in Canada based on the number of our clinics. As of September 30, 2000, we operated 51 specialty acute care hospitals in 19 states and 676 outpatient rehabilitation clinics in 29 states, the District of Columbia and seven Canadian provinces.
We began operations in 1997 under the leadership of our current management team, including our co-founders, Rocco A. Ortenzio and Robert A. Ortenzio, both of whom have significant experience in the healthcare industry. Under this leadership, we have grown our business through strategic acquisitions and internal development initiatives. On a pro forma basis for the year ended December 31, 1999, we had net operating revenues of $720.1 million. Of this total, we earned 56.4% of our net operating revenues from our outpatient rehabilitation business and 43.6% from our specialty acute care hospitals.
Our Competitive Strengths
. Experienced Management Team. Our five senior operations executives have an average of 23 years of experience in the healthcare industry.
. Significant Scale. The scale of our business allows us to achieve cost efficiencies and gives us an advantage in negotiating contracts with commercial insurers.
. Multiple Business Lines and Geographic Diversity. Our geographic breadth and diversified business mix reduces our exposure to any single reimbursement source.
. Proven Operating Performance. We have established a track record of improving the financial performance of the hospitals and clinics we operate.
. Experience in Successfully Completing and Integrating Acquisitions. Since we began operations in 1997, we have completed and integrated three significant acquisitions, as well as a number of smaller acquisitions.
. Demonstrated Development Expertise. From inception to September 30, 2000, we have developed 15 new specialty acute care hospitals and 49 outpatient rehabilitation clinics.
. Significant Financial Resources. We have access to significant financial resources that give us the flexibility to pursue an active growth strategy.
Specialty Acute Care Hospitals
Our specialty hospitals treat patients with serious and often complex medical conditions such as respiratory failure, neuromuscular disorders, cardiac disorders, non-healing wounds, renal disorders and cancer.
These patients generally require longer stays and a higher level of clinical attention than patients admitted to general acute care hospitals.
The key elements of our specialty hospital strategy are to:
. Develop New Specialty Hospitals. Our goal is to open 10 to 12 new specialty hospitals each year.
. Provide High Quality and Cost Effective Care. To effectively address the complex nature of our patients' medical conditions, we have developed specialized treatment programs focused solely on their needs.
. Reduce Costs. We continually seek to improve operating efficiency and reduce costs at our hospitals by standardizing and centralizing key administrative functions.
. Increase Higher Margin Commercial Volume. We typically receive higher reimbursement rates from commercial insurers than we do from the federal Medicare program. As a result, we work to expand these relationships to increase commercial patient volume.
. Grow Through Acquisitions. In addition to our development initiatives, we intend to grow our network of specialty hospitals through strategic acquisitions.
Outpatient Rehabilitation
In our outpatient rehabilitation clinics, we provide physical, occupational and speech therapy. Our patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living. Our clinics are usually located in a freestanding facility in a highly visible medical complex or retail location. In addition to providing therapy in these clinics, we provide rehabilitation management services and staffing on a contract basis to hospitals, schools, nursing facilities and home health agencies.
The key elements of our outpatient rehabilitation strategy are to:
. Increase Market Share. Having a strong market share in our local markets allows us to benefit from heightened brand awareness, economies of scale and increased leverage when negotiating payor contracts.
. Optimize the Profitability of Our Payor Contracts. We continually review new and existing payor contracts to determine how each of the contracts affects our profitability. We create a retention strategy for each of our top performing contracts and a re-negotiation strategy for contracts that do not meet our defined criteria.
. Improve Margins. To improve operating margins we continually revise and streamline operational processes.
. Grow Through New Development and Disciplined Acquisitions. We intend to open new clinics in our current markets where we believe we can benefit from existing referral relationships. From time to time, we also intend to evaluate acquisitions that may increase the scale of our business and expand our geographic reach.
. Maintain Strong Employee Relations. We seek to retain, motivate and educate our employees whose relationships with referral sources are key to our success.
Industry Overview
According to the Health Care Financing Administration, total U.S. healthcare spending is estimated to grow at 7.1% in 2000 and at 6.5% annually from 2001 through 2008. By these estimates, healthcare expenditures will account for approximately $2.2 trillion, or 16.2% of the total U.S. gross domestic product by 2008.
We believe that the growth in spending will create opportunities for low cost, high quality healthcare providers like us. We believe that continued spending pressure will encourage efficiency by directing patients toward lower- cost settings such as our specialty acute care hospitals and outpatient rehabilitation clinics.
Our principal executive office is located at 4716 Old Gettysburg Road, Mechanicsburg, Pennsylvania 17055, and our telephone number is (717) 972-1100. We maintain a site on the World Wide Web at www.selectmedicalcorp.com. The information on our Web site is not part of this prospectus. Our Web site address is included in this prospectus as an inactive textual reference only.
The Offering
Common stock offered by Select Medical: U.S. offering.................................... shares International offering........................... shares Total........................................ shares Common stock to be outstanding after this offering.. shares (a) Use of proceeds..................................... We intend to use the net proceeds from the offering for repayment of a portion of our outstanding debt, redemption of preferred stock, payment of accrued dividends on our preferred stock, financing possible future acquisitions and general corporate purposes. Risk factors........................................ See "Risk Factors" and the other information included in this prospectus for a discussion of factors you should carefully consider before deciding to invest in shares of our common stock. Nasdaq National Market symbol....................... SLMC |
Unless we specifically state otherwise, the information in this prospectus does not take into account the sale of up to shares of common stock that the underwriters have the option to purchase from us to cover over- allotments. All information in this prospectus assumes the issuance and sale of common stock in the offering at an assumed initial public offering price of $ per share, the mid-point of the range of the initial public offering prices set forth on the cover page of this prospectus, and gives effect to the conversion of 16,000,000 shares of Class B Preferred Stock into 16,000,000 shares of our common stock upon the completion of this offering.
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the summary consolidated financial and other data below in conjunction with our consolidated financial statements and the accompanying notes. We derived the historical financial data for the periods ended December 31, 1997, 1998 and 1999 from our audited consolidated financial statements. We derived the historical financial data for the six months ended June 30, 1999 and June 30, 2000, and as of June 30, 2000, from our unaudited interim consolidated financial statements. You should also read "Selected Consolidated Financial and Other Data" and the accompanying "Management's Discussion and Analysis of Financial Condition and Results of Operations." All of these materials are contained later in this prospectus. The pro forma as adjusted consolidated statement of operations data for the year ended December 31, 1999 is pro forma for the acquisition of the NovaCare Physical Rehabilitation and Occupational Health Division and the conversion of our Class B Preferred Stock as if these events had been completed on January 1, 1999; and as adjusted for the offering as if it had been completed on January 1, 1999. The consolidated statement of operations should be read in conjunction with the "Unaudited Pro Forma Consolidated Financial Information" included elsewhere in this prospectus. The pro forma as adjusted consolidated balance sheet data for the six months ended June 30, 2000 are pro forma for the conversion of our Class B Preferred Stock and as adjusted to give effect to the offering as if these events had been completed on June 30, 2000. The pro forma as adjusted statement of operations data for the six months ended June 30, 2000 are pro forma for the conversion of our Class B Preferred Stock and as adjusted to give effect to the offering as if these events had been completed on January 1, 1999.
Year Ended December 31, Six Months Ended June 30, ----------------------------------------- ------------------------------- Pro Forma Pro Forma As Adjusted As Adjusted 1997 1998 1999 1999 1999 2000 2000(0) -------- -------- -------- ----------- -------- -------- ----------- (in thousands, except per share data) Consolidated Statement of Operations Data Net operating revenues.. $ 11,194 $149,043 $455,975 $720,116 $208,031 $397,422 $397,422 Operating expenses (a).. 13,740 145,450 413,731 698,974 187,076 349,819 349,819 Depreciation and amortization........... 285 4,942 16,741 31,363 6,825 14,095 14,095 Special charges (b)..... -- 10,157 5,223 28,298 -- -- -- -------- -------- -------- -------- -------- -------- -------- Income (loss) from operations............. (2,831) (11,506) 20,280 (38,519) 14,130 33,508 33,508 Other income............ 6,022 -- -- -- -- -- Interest expense (income), net.......... (64) 4,976 21,099 26,739 8,629 18,078 14,055 -------- -------- -------- -------- -------- -------- -------- Income (loss) before minority interests, income taxes and extraordinary items 3,255 (16,482) (819) (65,258) 5,501 15,430 19,453 Minority interests (c).. -- 1,744 3,662 3,768 2,144 2,178 2,178 -------- -------- -------- -------- -------- -------- -------- Income (loss) before income taxes and extraordinary item..... 3,255 (18,226) (4,481) (69,026) 3,357 13,252 17,275 Income tax provision (benefit).............. 1,308 (182) 2,811 1,497 3,430 6,228 8,119 -------- -------- -------- -------- -------- -------- -------- Net income (loss) before extraordinary item..... 1,947 (18,044) (7,292) (70,523) (73) 7,024 9,156 Extraordinary item (d).. -- -- 5,814 -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss)....... 1,947 (18,044) (13,106) (70,523) (73) 7,024 9,156 Less: Preferred dividends ............. (266) (2,540) (5,175) -- (2,122) (4,271) -- -------- -------- -------- -------- -------- -------- -------- Net income (loss) available to common stockholders .......... $ 1,681 $(20,584) $(18,281) $(70,523) $ (2,195) $ 2,753 9,156 ======== ======== ======== ======== ======== ======== ======== Net income (loss) per common share: Basic: Net income (loss) before extraordinary item................ $ 0.15 $ (0.95) $ (0.29) $ -- $ (0.05) $ 0.06 $ -- Extraordinary item... -- -- (0.14) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss).... $ 0.15 $ (0.95) $ (0.43) $ -- $ (0.05) $ 0.06 $ -- ======== ======== ======== ======== ======== ======== ======== Diluted: Net income (loss) before extraordinary item................ $ 0.15 $ (0.95) $ (0.29) $ -- $ (0.05) $ 0.06 $ -- Extraordinary item... -- -- (0.14) -- -- -- -- -------- -------- -------- -------- -------- -------- -------- Net income (loss).... $ 0.15 $ (0.95) $ (0.43) $ -- $ (0.05) $ 0.06 $ -- ======== ======== ======== ======== ======== ======== ======== Weighted average common shares outstanding (e): Basic.................. 11,383 21,731 42,633 -- 42,517 44,180 -- Diluted................ 11,395 21,731 42,633 -- 42,517 49,681 -- |
(footnotes begin on page 7)
As of June 30, 2000 ------------------------ Pro Forma Actual As Adjusted (f) -------- --------------- (in thousands) Consolidated Balance Sheet Data Cash and cash equivalents.............................. $ 5,096 $ 43,096 Working capital........................................ 114,726 152,726 Total assets........................................... 609,705 647,705 Total long term obligations............................ 295,212 222,262 Total stockholders' equity and preferred stock......... 179,228 290,178 |
Selected Operating Data
The following table sets forth operating statistics for our specialty acute care hospitals and our outpatient rehabilitation business for each of the periods presented. The data in the table reflect the changes in the number of specialty acute care hospitals and outpatient rehabilitation clinics we operate that resulted from acquisitions, start-up activities and closures. The operating statistics reflect data for the period of time these operations were managed by us. The same specialty hospital data include hospitals operated by us for the comparable periods. Further information on our acquisition activities can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the notes to our consolidated financial statements.
Year Ended Six Months Ended December 31, June 30, ----------------- ------------------ 1998 1999 1999 2000 ------- -------- -------- -------- (dollars in thousands) Specialty Hospital Data: Number of hospitals--start of period............................ -- 39 39 44 Number of hospitals acquired..... 37 -- -- -- Number of hospital start-ups..... 2 6 3 5 Number of hospitals closed/sold.. -- 1 -- -- ------- -------- -------- -------- Number of hospitals--end of period............................ 39 44 42 49 ------- -------- -------- -------- Available licensed beds (g)........ 1,428 1,649 1,570 1,838 Admissions (h)..................... 2,640 12,421 6,006 7,094 Patient days (i)................... 74,418 358,304 174,357 206,501 Average length of stay (j)......... 29 30 30 30 Occupancy rate (k)................. 52% 63% 63% 64% Percent patient days--Medicare (l)............................... 78% 78% 78% 76% EBITDA (m)......................... $ 3,147 $ 35,929 $ 17,168 $ 20,942 Same Specialty Hospital Data: Admissions (h)................... 11,796 5,771 6,440 Patient days (i)................. 342,417 168,173 188,460 Average length of stay (j)....... 30 30 29 Occupancy rate (k)............... 65% 65% 71% Percent patient days--Medicare (l)............................. 78% 78% 77% EBITDA (m)....................... $ 35,984 $ 18,133 $ 21,557 Outpatient Rehabilitation Data: Number of clinics--start of period............................ 66 94 94 620 Number of clinics acquired....... 21 516 10 3 Number of clinics start-ups...... 11 14 8 16 Number of clinics closed/sold.... 4 4 1 20 ------- -------- -------- -------- Number of clinics owned--end of period............................ 94 620 111 619 Number of clinics managed--end of period (n)........................ 21 38 23 43 ------- -------- -------- -------- Total number of clinics............ 115 658 134 662 ------- -------- -------- -------- EBITDA (m)......................... $12,598 $ 22,697 $ 10,991 $ 36,433 |
(footnotes on following page)
(a) Operating expenses include cost of services, general and administrative
expenses, and bad debt expenses.
(b) Reflects asset impairments of $6.3 million and litigation settlement costs
of $3.8 million in 1998 and asset impairments of $5.2 million in 1999. The
pro forma special charge consists of our 1999 special charge and a
provision for restructuring of $23.1 million recorded by the NovaCare
Physical Rehabilitation and Occupational Health Division.
(c) Reflects interests held by other parties in subsidiaries, limited liability
companies and limited partnerships owned and controlled by us.
(d) Reflects the write-off of deferred financing costs that resulted from the
refinancing of our credit facility in November 1999.
(e) For information concerning calculation of weighted average shares
outstanding, see note 14 to the consolidated financial statements.
(f) Reflects the application of the net proceeds from this offering, including
$69 million to redeem preferred stock and pay accrued preferred stock
dividends, $53 million to repay term loans under our credit facility, $25
million to repay senior subordinated debt and the remaining $38 million to
be used for future acquisitions and general corporate purposes.
(g) Available licensed beds are the number of beds that are licensed with the
appropriate state agency and which are readily available for patient use at
the end of the period indicated.
(h) Admissions represent the number of patients admitted for treatment.
(i) Patient days represent the total number of days of care provided to
patients.
(j) Average length of stay (days) represents the average number of days
patients stay in our hospitals per admission, calculated by dividing total
patient days by the number of discharges for the period.
(k) We calculate occupancy rate by dividing the average daily number of
patients in our hospitals by the weighted average number of available
licensed beds over the period indicated.
(l) We calculate percentage by dividing the number of Medicare patient days by
the total number of patient days.
(m) We define EBITDA as net income (loss) before interest, income taxes,
depreciation and amortization and special charges, other income, minority
interest, and extraordinary items. EBITDA should not be considered as a
measure of financial performance under generally accepted accounting
principles. Items excluded from EBITDA are significant components in
understanding and assessing financial performance. EBITDA is a measure used
by management to evaluate our operations, and we believe it provides useful
information to investors. EBITDA should not be considered in isolation or
as an alternative to net income, cash flows generated by operations,
investing or financing activities, or other financial statement data
presented in the consolidated financial statements as indicators of
financial performance or liquidity. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and
is susceptible to varying calculations, EBITDA as presented may not be
comparable to similarly titled measures of other companies.
(n) Managed clinics are clinics that we operate through long term management
arrangements and clinics operated through unconsolidated joint ventures.
(o) The as adjusted consolidated statement of operations for the six months
ended June 30, 2000 reflects the following adjustments as a result of this
offering:
. the reduction in interest expense of $4.0 million for the repayment of
$53.0 million of 10% senior debt under the term loan portion of our bank
credit facility and the repayment of $25.0 million of 10% senior
subordinated notes.
. additional tax expense of $1.9 million related to the $4.0 million
interest expense decrease in (i) above.
. the reversal of $1.8 million of preferred dividends on our Class B
Preferred Stock which would convert share for share into common stock
upon this offering.
RISK FACTORS
Our business involves a number of risks, some of which are beyond our control. You should carefully consider each of the risks and uncertainties we describe below and all of the other information in this prospectus before deciding to invest in our shares. The risks and uncertainties we describe below are not the only ones we face. Additional risks and uncertainties that we do not currently know or that we currently believe to be immaterial may also adversely affect our business.
If there are changes in the rates or methods of government reimbursements for our services, our net operating revenues and net income could decline.
Approximately one third of our net operating revenues come from the federal Medicare program, which is highly regulated and subject to changes. Long term acute care hospitals receive reimbursements from Medicare based on the actual costs incurred during the treatment of a patient, subject to a cap. Many other types of healthcare providers, including general acute care hospitals, are reimbursed by Medicare under prospective payment systems. These systems reimburse providers fixed amounts, subject to adjustments, based on each patient's expected cost of treatment. Congress has directed the Secretary of the U.S. Department of Health and Human Services to develop a prospective payment system applicable to long term acute care hospitals. The Secretary has not developed such a prospective payment system to date but may do so in the future. The application of a prospective payment system to long term acute care hospitals could reduce the level of reimbursement we receive from the Medicare program for our services and negatively affect our profit margins.
Our outpatient rehabilitation clinics receive payments from the Medicare program under a fee schedule. These payments were to be subject to annual limits, originally $1,500 per patient, effective January 1, 1999. Congress has imposed a moratorium on these limits through 2001. The Secretary of the Department of Health and Human Services is required to review this annual limit and make a proposal to Congress to revise the payment system for outpatient rehabilitation. Any changes adopted by Congress, which could include reduced annual limits or a new payment system, could have an adverse effect on our outpatient rehabilitation business. See "Our Business--Government Regulations-- Overview of U.S. and State Government Reimbursements."
If our hospitals fail to maintain their exemption from the Medicare prospective payment system or fail to maintain their status as a "hospital within a hospital," our profitability may decline.
As of September 30, 2000, 46 of our 51 hospitals were certified as Medicare long term acute care hospitals, and the remaining five were in the process of becoming certified as Medicare long term acute care hospitals. If our hospitals fail to meet or maintain the standards for certification as long term acute care hospitals, such as average minimum length of patient stay, they will not receive cost-based reimbursement but will instead receive predetermined payments applicable to general acute care hospitals under the prospective payment system. Such predetermined payments would likely result in our hospitals receiving less Medicare reimbursement than they currently receive for their patient services. Moreover, nearly all of our hospitals are subject to additional Medicare criteria because they operate under the "hospital within a hospital" model, such as limitations on services purchased from the host hospital and other requirements concerning separateness from the host hospital. As a result, if several of our hospitals were to lose their cost-based reimbursement status or failed to comply with the "hospital within a hospital" requirements, our profit margins would likely decrease. See "Our Business-- Government Regulations--Overview of U.S. and State Government Reimbursements-- Long Term Acute Care Hospital Medicare Reimbursement."
Our future net operating revenues and profitability may be constrained by future cost containment initiatives undertaken by private third party payors.
The profitability of our long term acute care hospitals and outpatient rehabilitation clinics is affected by initiatives undertaken by major insurers and managed care companies to contain healthcare costs. These payors attempt to control healthcare costs by contracting with hospitals and other healthcare providers to obtain services on a discounted basis. We believe that this trend may continue and may limit reimbursements for healthcare services. This may cause our profit margins to decline.
We conduct business in a heavily regulated industry, and changes in regulations or violations of regulations may result in increased costs or sanctions that reduce our net operating revenues and profitability.
The healthcare industry is subject to extensive federal, state and local laws and regulations relating to:
. facility and professional licensure, including certificates of need;
. conduct of operations, including financial relationships among healthcare providers, Medicare fraud and abuse, and physician self- referral;
. addition of facilities and services; and
. payment for services.
Recently, there have been heightened coordinated civil and criminal enforcement efforts by both federal and state government agencies relating to the healthcare industry, including the long term acute care hospital and outpatient rehabilitation clinic businesses. The ongoing investigations relate to, among other things, various referral practices, cost reporting, billing practices, physician ownership and joint ventures involving hospitals. In the future, different interpretations or enforcement of these laws and regulations could subject our current practices to allegations of impropriety or illegality or could require us to make changes in our facilities, equipment, personnel, services and capital expenditure programs, and increase our operating expenses. If we fail to comply with these extensive laws and government regulations, we could become ineligible to receive government program reimbursement, suffer civil or criminal penalties or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources responding to an investigation or other enforcement action under these laws or regulations. See "Our Business-- Government Regulations."
If we fail to cultivate new or maintain established relationships with the physicians in our markets, our net operating revenues may decrease.
Our success is, in part, dependent upon the admissions and referral practices of the physicians in the communities our hospitals and our outpatient rehabilitation clinics serve, and our ability to maintain good relations with these physicians. Physicians referring patients to our hospitals and clinics are generally not our employees and, in many of the markets that we serve, most physicians have admitting privileges at other hospitals and are free to refer their patients to other providers. If we are unable to successfully cultivate and maintain strong relationships with these physicians, our hospitals' admissions and clinics' businesses may decrease, and our net operating revenues may decline.
Future acquisitions may use significant resources, may be unsuccessful and could expose us to unforeseen liabilities.
As part of our growth strategy, we intend to pursue acquisitions of long term acute care hospitals and outpatient rehabilitation clinics. Acquisitions may involve significant cash expenditures, debt incurrence, additional operating losses, amortization of the intangible assets of acquired companies, dilutive issuances of
equity securities and expenses that could have a material adverse effect on our financial condition and results of operations. Acquisitions involve numerous risks, including:
. difficulties integrating acquired personnel and harmonizing distinct cultures into our business;
. diversion of management's time from existing operations;
. potential loss of key employees or customers of acquired companies; and
. assumption of the liabilities and exposure to unforeseen liabilities of acquired companies, including liabilities for failure to comply with healthcare regulations.
We cannot assure you that we will succeed in obtaining financing for acquisitions at a reasonable cost, or that such financing will not contain restrictive covenants that limit our operating flexibility. We also may be unable to operate acquired hospitals and outpatient rehabilitation clinics profitably or succeed in achieving improvements in their financial performance.
Competition may limit our ability to acquire hospitals and clinics and adversely affect our growth.
We have historically faced limited competition in acquiring long term acute care hospitals and outpatient rehabilitation clinics, but we may face heightened competition in the future. Our competitors may acquire or seek to acquire many of the hospitals and clinics that would be suitable candidates for us. This could limit our ability to grow by acquisitions or make our cost of acquisitions higher and less profitable.
If we fail to compete effectively with other hospitals, clinics and healthcare providers, our net operating revenues and profitability may decline.
The healthcare business is highly competitive, and we compete with other hospitals, rehabilitation clinics and other healthcare providers for patients. If we are unable to compete effectively in the long term acute care hospital and outpatient rehabilitation businesses, our net operating revenues and profitability may decline. More than half of our specialty hospitals operate in geographic areas where we compete with at least one other hospital that provides similar services. Our outpatient rehabilitation clinics face competition from a variety of local and national outpatient rehabilitation providers. Other outpatient rehabilitation clinics in markets we serve may have greater name recognition and longer operating histories than our clinics. The managers of these clinics may also have stronger relationships with physicians in their communities, which could give them a competitive advantage for patient referrals.
Shortages in qualified nurses could increase our operating costs significantly.
Our long term acute care hospitals are highly dependent on nurses for patient care. The availability of qualified nurses has declined in recent years, and the salaries for nurses has risen accordingly. We cannot assure you we will be able to attract and retain qualified nurses in the future. Additionally, the cost of attracting and retaining nurses may be higher than we anticipate, and as a result, our profitability could decline.
Significant legal actions could subject us to substantial uninsured liabilities.
In recent years, physicians, hospital and other healthcare providers have become subject to an increasing number of legal actions alleging malpractice, product liability or related legal theories. Many of these actions involve large claims and significant defense costs. To protect ourselves from the cost of these claims, we maintain professional malpractice liability insurance and general liability insurance coverage in amounts and with deductibles that we believe to be appropriate for our operations. However, our insurance coverage may not cover all claims against us or continue to be available at a reasonable cost. If we are unable to maintain adequate insurance coverage, we may be exposed to substantial liabilities. We are also subject to
lawsuits under a federal whistleblower statute designed to combat fraud and abuse in the healthcare industry. These lawsuits can involve significant monetary damages and award bounties to private plaintiffs who successfully bring the suits. See "Our Business--Legal Proceedings" and "Our Business-- Government Regulations--Other Healthcare Regulations."
We may experience difficulties with our outpatient rehabilitation information systems integration, which could cause business interruption.
During the next 18 months, we plan to transition gradually to a common system to manage all of our scheduling, billing, collecting and patient information for our outpatient rehabilitation clinics. If our systems integration fails or works improperly, we could face interruption in the segments of our business undergoing the transition while we correct the problem. The interruption in the affected segment of our business could include our inability to bill patients and payors for the services we provide. A sustained inability to bill and collect payments would have a material adverse effect on our cash flows and results of operations.
Because certain of our significant stockholders and our senior management control us, they will be able to determine the outcome of all matters submitted to our stockholders for approval, regardless of the preferences of the minority stockholders.
Following the offering, Welsh, Carson, Anderson & Stowe; GTCR Golder Rauner, LLC; Thoma Cressey Equity Partners and our directors and executive officers will together own a majority of our outstanding common stock. Accordingly, they will be able to:
. elect our entire board of directors;
. control our management and policies; and
. determine, without the consent of our other stockholders, the outcome of any corporate transaction or other matter submitted to our stockholders for approval, including mergers, consolidations and the sale of all or substantially all of our assets.
Welsh, Carson, Anderson & Stowe; GTCR Golder Rauner, LLC; Thoma Cressey Equity Partners and our management will also be able to prevent or cause a change in control of us and will be able to amend our certificate of incorporation and by-laws without the approval of any other of our stockholders. Their interests may conflict with the interests of our other stockholders.
If existing stockholders sell their common stock, the price of our common stock may decline.
If our existing stockholders sell substantial amounts of our common stock, including shares issued upon the exercise of outstanding options, in the public market following the offering, then the market price of our common stock could fall. Following the offering, there will be shares outstanding, including options and warrants exercisable within 60 days. Restrictions under the securities laws and certain lock-up agreements limit the number of shares of common stock available for sale in the public market. Our directors, executive officers and substantially all of our existing stockholders have agreed not to sell any of these securities for 180 days after the offering without the prior written consent of Merrill Lynch. However, Merrill Lynch may, in its sole discretion, release all or any portion of the securities subject to the lock-up agreements.
The holders of 58,374,341 shares of common stock and the holders of warrants to purchase shares of common stock have demand and piggy-back registration rights. We are not obligated to register any shares held by these stockholders upon their request for 180 days from the date of this prospectus. However, subject to the prior written consent of the underwriters, if we file a registration statement to register sales of our common stock (other than under our employee benefit plans) during that time, these stockholders will be entitled to
register any portion or all of their shares to be included in that offering. After the expiration of this 180 day period, these stockholders may demand that we register any portion or all of their shares at any time. We also may shortly file a registration statement to register all shares of common stock under our stock option plans. After such registration statement is effective, common stock issued upon exercise of stock options, except by our executive officers and directors, under our benefit plans will be eligible for resale in the public market without restriction.
If provisions in our corporate documents and Delaware law delay or prevent a change in control of our company, we may be unable to consummate a transaction that our stockholders consider favorable.
Our certificate of incorporation and by-laws may discourage, delay, or prevent a merger or acquisition involving us that our stockholders may consider favorable by:
. authorizing the issuance of preferred stock the terms of which may be determined at the sole discretion of the board of directors;
. providing for a classified board of directors with staggered three- year terms; and
. establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted on by stockholders at meetings.
Delaware law may also discourage, delay or prevent someone from acquiring or merging with us. See "Description of Capital Stock."
Because the initial public offering price of our common stock exceeds our net tangible book value per share, investors will experience immediate and substantial dilution.
As a result of this offering, purchasers of the common stock in the offering will experience dilution in the amount of $ per share, based on an assumed initial public offering price of $ per share, the midpoint of the range of prices shown on the front page of this prospectus. Our net tangible book value at June 30, 2000 was a deficit of $67.3 million, or $1.51 per share of common stock. Present stockholders will experience an immediate and substantial increase in net tangible book value in the amount of $ per share of common stock based on an assumed initial public offering price of $ .
If our stock price fluctuates after the initial offering, you could lose a significant part of your investment.
Prior to the offering, there has been no public market for our common stock. We plan to list our common stock on the Nasdaq National Market. We do not know if an active trading market will develop for our common stock or how the common stock will trade in the future. Negotiations between the underwriters and us will determine the initial public offering price. You may not be able to resell your shares at or above the initial public offering price due to fluctuations in the market price of our common stock as a result of changes in our operating performance or prospects. In addition, the stock market in general has experienced extreme volatility that often has been unrelated to the operating performance or prospects of particular companies.
FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements. We have based these forward-looking statements on our current expectations and projections about future events. These forward-looking statements are subject to risks, uncertainties and assumptions about us, including, among other things:
. general economic, demographic and business conditions, both nationally and in regions where we operate;
. the effect of existing or future governmental regulation and federal and state legislative and enforcement initiatives on our business, including the Balanced Budget Act of 1997;
. changes in Medicare reimbursement levels;
. our ability to implement successfully our acquisition and development strategies;
. the availability and terms of financing to fund the expansion of our business, including the acquisition of additional long term acute care hospitals and outpatient rehabilitation clinics;
. our ability to attract and retain qualified management personnel and to recruit and retain nurses and other healthcare personnel;
. our ability to enter into managed care provider arrangements on terms attractive to us;
. changes in generally accepted accounting principles that may affect our reported results of operations;
. the effect of liability and other claims asserted against us; and
. the effect of competition in the markets we serve.
In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "could," "would," "expect," "plan," "anticipate," "believe," "estimate," "continue," "intend," or the negative of such terms or other similar expressions. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements included in this prospectus. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur.
USE OF PROCEEDS
We estimate that our net proceeds from the offering will be approximately $185.0 million after deducting estimated expenses and underwriting discounts and commissions of $15.0 million. We will use these net proceeds to redeem $53.0 million of our Class A Preferred Stock and to pay $16.0 million in dividends accrued on our Class A and Class B Preferred Stock. We will also repay $53.0 million of our senior debt under the term loan portion of our bank credit facility. Our bank credit facility matures in September 2005 and bears interest at a fluctuating rate, which as of September 30, 2000, was a weighted average interest rate of 10.04%. We will also repay our $25.0 million Senior Subordinated Note, which was issued to WCAS Capital Partners III, L.P. in November 1999 to partially finance the NovaCare acquisition. The Senior Subordinated Note matures on November 19, 2009 and bears interest at 10% per year. The balance of the net proceeds will be used for future acquisitions and general corporate purposes. Pending use of the net proceeds for the above purposes, we intend to invest the net proceeds in short-term, investment-grade, interest bearing securities.
DIVIDEND POLICY
We have never declared or paid dividends on our common stock, and we do not intend to pay dividends in the foreseeable future. We are restricted by our current credit facility from declaring or paying dividends on our common stock. We also may not pay dividends on our common stock without the prior written consent of either Welsh, Carson, Anderson & Stowe or GTCR Golder Rauner, LLC. We plan to retain any earnings for use in the operation of our business and to fund future growth.
CAPITALIZATION
The following table sets forth our capitalization as of June 30, 2000 on an actual basis, a pro forma basis to give effect of the automatic conversion of the Class B Preferred Stock and pro forma as adjusted basis to give effect to the application of the net proceeds of this offering.
Common stock data also assumes that the underwriters' over-allotment option is not exercised and excludes shares of common stock reserved for issuance under our 1997 stock option plan, under which options to purchase 7,066,884 shares were outstanding as of September 30, 2000 at a weighted average exercise price of $ per share, and under warrants outstanding to purchase 3,252,223 shares at an exercise price of $ per share. You should read this table in conjunction with our "Selected Consolidated Financial and Other Data," our "Unaudited Pro Forma Consolidated Financial Information," our "Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this prospectus.
As of June 30, 2000 ------------------------------- Pro Pro Forma Actual Forma As Adjusted -------- -------- ----------- (dollars in thousands) Long term debt: Senior credit facility....................... $199,094 $199,094 $146,094 10% senior subordinated notes due 2008....... 56,390 56,390 56,390 10% senior subordinated note due 2009........ 19,950 19,950 -- Seller notes(a).............................. 40,049 40,049 40,049 Other........................................ 2,055 2,055 2,055 -------- -------- -------- Total debt..................................... 317,538 317,538 244,588 Less current portion......................... $(22,326) $(22,326) $(22,326) -------- -------- -------- Total long term debt....................... 295,212 295,212 222,262 -------- -------- -------- Preferred stock, $.01 par value Class A: 55,000 shares authorized, 52,848 shares issued and outstanding-- actual; no shares issued and outstanding--as adjusted................................... 62,854 62,854 -- Class B: 16,000,000 shares authorized, 16,000,000 shares issued and outstanding-- actual; no shares issued and outstanding-- as adjusted................................ 62,221 2,221 -- Stockholders' equity: Common stock, $.01 par value; 78,000,000 shares authorized, 44,559,930 shares issued and outstanding--actual; shares issued and outstanding--as adjusted.................... 446 606 Capital in excess of par....................... 77,195 137,095 Accumulated deficit............................ (22,445) (22,445) Treasury stock, at cost; 381,393 shares-- actual; 798,143 shares, as adjusted(b)........ (1,028) (1,028) Cumulative translation adjustment.............. (15) (15) -------- -------- -------- Total stockholders' equity..................... 54,153 114,153 -------- -------- -------- Total capitalization........................... $474,440 $474,440 $ ======== ======== ======== |
DILUTION
At June 30, 2000, we had a pro forma net tangible book deficit after giving effect to the conversion of Class B Preferred Stock of $138.3 million, or $2.28 per share. Net tangible book value per share is equal to our total tangible assets less our total liabilities, divided by the total number of shares of our common stock outstanding. After giving effect to the sale of shares of our common stock at an assumed initial public offering price of $ per share, the midpoint of the range of prices shown on the front page of this prospectus, and after deducting estimated underwriting discounts and commissions and estimated offering expenses, our as adjusted net tangible book value at June 30, 2000 would have been $ , or $ per share. This represents an immediate increase in net tangible book value of $ per share to existing stockholders and an immediate dilution of $ per share to new investors purchasing shares of our common stock in this offering. The following table illustrates the per share dilution to the new investors.
Assumed initial public offering price per share.......... $ Pro Forma net tangible book deficit per share at June 30, 2000.............................................. $(2.28) Increase per share attributable to this offering....... Pro Forma as adjusted net tangible book value per share after the offering...................................... ---- --- Dilution per share to new investors in this offering..... $ ==== === |
The following table summarizes on an as adjusted basis, as of June 30, 2000, the total number of shares of our common stock, the total cash consideration paid and the average price per share paid by the existing stockholders and by the new investors in this offering at an assumed initial public offering price of $ per share and before deducting estimated underwriting discounts and commissions and our estimated offering expenses:
Total Shares Purchased Consideration Average ------------------ ----------------- Price Per Number Percent Amount Percent Share ---------- ------- --------- ------- --------- Existing stockholders...... 44,228,538 % % $ New investors(1)........... ---------- ------ --------- ------ Total.................... 100.00% 100.00% ========== ====== ========= ====== |
The foregoing discussion and tables assume no exercise of any stock options outstanding as of June 30, 2000. As of June 30, 2000, there were options outstanding to purchase a total of 7,058,384 shares of our common stock at a weighted average exercise price of $ per share and 2,938,116 shares reserved for future grant under our 1997 Stock Option Plan. To the extent that any of these shares are issued, there will be further dilution to new investors. See "Capitalization," "Management--Select Medical Corporation Amended and Restated 1997 Stock Option Plan" and Note 8 to "Select Medical Corporation--Consolidated Financial Statements."
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
You should read the selected consolidated historical financial and other data below in conjunction with our consolidated financial statements and the accompanying notes. You should also read "Management's Discussion and Analysis of Financial Condition and Results of Operations." All of these materials are contained in this prospectus. We were formed in December 1996 however capitalization and operations did not commence until February 7, 1997 when we acquired our predecessor company, Sports and Orthopedic Rehabilitation Services, Inc. The predecessor company data as of December 31, 1995 and 1996 and for the periods ended December 31, 1995 and 1996 have been derived from unaudited consolidated financial statements, which are not included in this prospectus. We acquired all of the outstanding common stock of our predecessor company, Sports and Orthopedic Rehabilitation Services, Inc. Because of substantial differences in the predecessor company's capital structure, per share information for the predecessor company has been excluded. The data as of December 31, 1997, 1998 and 1999 and for the years ended December 31, 1997, 1998 and 1999 have been derived from consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants. Consolidated balance sheets at December 31, 1998 and 1999 and the related statements of operations, stockholders' equity and cash flows for the periods ended December 31, 1997, 1998 and 1999 and the related notes appear elsewhere in this prospectus. The data for the six months ended June 30, 1999 and 2000 have been derived from unaudited consolidated financial statements also contained in this prospectus and which, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the unaudited interim periods. The pro forma as adjusted consolidated statement of operations data for the year ended December 31, 1999 is pro forma for the acquisition of NovaCare Physical Rehabilitation and Occupational Health Division and the conversion of our Class B Preferred Stock as if these events had been completed on January 1, 1999; and as adjusted for the offering as if it had been completed on January 1, 1999. The Consolidated Statements of Operations should be read in conjunction with the "Unaudited Pro Forma Consolidated Financial Information" included elsewhere in this prospectus. The pro forma as adjusted consolidated balance sheet data for the six months ended June 30, 2000 are pro forma for the conversion of our Class B Preferred Stock and as adjusted to give effect to the offering as if these events had been completed on June 30, 2000. The pro forma as adjusted statement of operations data for the six months ended June 30, 2000 are pro forma for the conversion of our Class B Preferred Stock and as adjusted to give effect to the offering as if these events had been completed on January 1, 1999.
Predecessor Company -------------------------- Year Ended December 31, January 1, December 31, -------------- 1997 ---------------------------------------- Through Pro Forma February 6, As Adjusted 1995 1996 1997 1997 1998 1999 1999 ------ ------ ----------- ------- -------- -------- ----------- (in thousands, except per share data) Consolidated Statement of Operations Data Net operating revenues.. $3,023 $3,323 $ 456 $11,194 $149,043 $455,975 $720,116 Operating expenses (a).. 2,897 2,828 300 13,740 145,450 413,731 698,974 Depreciation and amortization........... 146 112 8 285 4,942 16,741 31,363 Special charge (b)...... -- -- -- -- 10,157 5,223 28,298 ------ ------ ------ ------- -------- -------- -------- Income (loss) from operations............. (20) 383 148 (2,831) (11,506) 20,280 (38,519) Other income............ -- 74 -- 6,022 -- -- -- Interest expense (income), net.......... 75 62 9 (64) 4,976 21,099 26,739 ------ ------ ------ ------- -------- -------- -------- Income (loss) before minority interests, income taxes and extraordinary item..... (95) 395 139 3,255 (16,482) (819) (65,258) Minority interests (c).. -- -- -- -- 1,744 3,662 3,768 ------ ------ ------ ------- -------- -------- -------- Income (loss) before income taxes and extraordinary item..... (95) 395 139 3,255 (18,226) (4,481) (69,026) Income tax provision (benefit).............. -- 195 38 1,308 (182) 2,811 1,497 ------ ------ ------ ------- -------- -------- -------- Net income (loss) before extraordinary item..... (95) 200 101 1,947 (18,044) (7,292) $(70,523) Extraordinary item (d).. -- -- -- -- -- 5,814 -- ------ ------ ------ ------- -------- -------- -------- Net income (loss)....... $ (95) $ 200 $ 101 1,947 (18,044) (13,106) ====== ====== ====== Less: Preferred dividends.............. (266) (2,540) (5,175) -- ------- -------- -------- -------- Net income (loss) available to common stockholders........... $ 1,681 $(20,584) $(18,281) $(70,523) ======= ======== ======== ======== Net income (loss) per common share: Basic: Net income (loss) before extraordinary item.................. $ 0.15 $ (0.95) $ (0.29) $ -- Extraordinary item..... -- -- (0.14) -- ------- -------- -------- -------- Net income (loss) per common share.......... $ 0.15 $ (0.95) $ (0.43) -- ======= ======== ======== ======== Diluted: Net income (loss) before extraordinary item.................. $ 0.15 $ (0.95) $ (0.29) $ -- Extraordinary item..... -- -- (0.14) -- ------- -------- -------- -------- Net income (loss) per common share.......... $ 0.15 $ (0.95) $ (0.43) $ -- ======= ======== ======== ======== Weighted average common shares outstanding (e): Basic.................. 11,383 21,731 42,633 -- Diluted................ 11,395 21,731 42,633 -- |
(footnotes begin on page 20)
Predecessor Company -------------- As of December 31, As of December 31, -------------- ------------------------- 1995 1996 1997 1998 1999 ------ ------ ------- -------- -------- (in thousands) Consolidated Balance Sheet Data Cash and cash equivalents........... $ 100 $ 15 $ 4,859 $ 13,001 $ 4,067 Working capital..................... (317) (331) 4,248 39,807 132,598 Total assets........................ 1,861 1,825 18,191 336,949 620,718 Total long term obligations......... 297 272 2,023 147,726 319,694 Total stockholders' equity and preferred stock.................... 56 207 10,769 116,337 170,241 |
Six Months Ended June 30, ---------------------------- ProForma As Adjusted 1999 2000 2000(f) -------- -------- -------- (in thousands, except per share data) Consolidated Statement of Operations Data Net operating revenues........................... $208,031 $397,422 $397,422 Operating expenses (a)........................... 187,076 349,819 349,819 Depreciation and amortization.................... 6,825 14,095 14,095 -------- -------- -------- Income from operations........................... 14,130 33,508 33,508 Interest expense, net............................ 8,629 18,078 14,055 -------- -------- -------- Income before minority interests, income taxes... 5,501 15,430 19,453 Minority interests (c)........................... 2,144 2,178 2,178 -------- -------- -------- Income before income taxes....................... 3,357 13,252 17,275 Income tax provision ............................ 3,430 6,228 8,119 -------- -------- -------- Net income (loss)................................ (73) 7,024 9,156 Less: Preferred dividends........................ (2,122) (4,271) -------- -------- -------- Net income (loss) available to common stockholders.................................... $ (2,195) $ 2,753 $ ======== ======== ======== Net income (loss) per common share: Basic........................................... $ (0.05) $ 0.06 Diluted......................................... $ (0.05) $ 0.06 Weighted average common shares outstanding (e): Basic........................................... 42,517 44,180 Diluted......................................... 42,517 49,681 |
As of June 30, ------------------------ ProForma As Adjusted 1999 2000 2000(f) ------- ------- -------- (in thousands) Consolidated Balance Sheet Data Cash and cash equivalents............................. $13,563 $ 5,096 $43,096 Working capital....................................... 69,651 114,726 152,726 Total assets.......................................... 402,626 609,705 647,705 Total long term obligations........................... 190,294 295,212 222,262 Total stockholders' equity and preferred stock........ 116,909 179,228 290,178 |
(footnotes begin on page 20)
Selected Operating Data
The following table sets forth operating statistics for our specialty acute care hospitals and our outpatient rehabilitation clinics for each of the periods presented. The data in the table reflect the changes in the number of specialty acute care hospitals and outpatient rehabilitation clinics we operate that resulted from acquisitions, start-up activities and closures. The same specialty hospital data include hospitals operated by us for the comparable periods. The operating statistics reflect data for the period of time these operations were managed by us. Further information on our acquisition activities can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the notes to our consolidated financial statements.
Year Ended Six Months Ended December 31 June 30, ----------------- ------------------ 1998 1999 1999 2000 ------- -------- -------- -------- (dollars in thousands) Specialty Hospital Data: Number of hospitals--start of period............................ -- 39 39 44 Number of hospitals acquired..... 37 -- -- -- Number of hospital start-ups..... 2 6 3 5 Number of hospitals closed/sold.. -- 1 -- -- ------- -------- -------- -------- Number of hospitals--end of period............................ 39 44 42 49 ------- -------- -------- -------- Available licensed beds (g)........ 1,428 1,649 1,570 1,838 Admissions (h)..................... 2,640 12,421 6,006 7,094 Patient days (i)................... 74,418 358,304 174,357 206,501 Average length of stay (j)......... 29 30 30 30 Occupancy rate (k)................. 52% 63% 63% 64% Percent patient days--Medicare (l)............................... 78% 78% 78% 76% EBITDA (m)......................... $ 3,147 $ 35,929 $ 17,168 $ 20,942 Same Specialty Hospital Data: Admissions (h)................... 11,796 5,771 6,440 Patient days (i)................. 342,417 168,173 188,460 Average length of stay (j)....... 30 30 29 Occupancy rate (k)............... 65% 65% 71% Percent patient days--Medicare (l)............................. 78% 78% 77% EBITDA (m)......................... $ 35,984 $ 18,133 $ 21,557 Outpatient Rehabilitation Data: Number of clinics--start of period............................ 66 94 94 620 Number of clinics acquired....... 21 516 10 3 Number of clinics start-ups...... 11 14 8 16 Number of clinics closed/sold.... 4 4 1 20 ------- -------- -------- -------- Number of clinics owned--end of period............................ 94 620 111 619 Number of clinics managed--end of period (n)........................ 21 38 23 43 ------- -------- -------- -------- Total number of clinics............ 115 658 134 662 ------- -------- -------- -------- EBITDA (m)......................... $12,598 $ 22,697 $ 10,991 $ 36,433 |
(footnotes on following page)
(a) Operating expenses include cost of services, general and administrative
expenses, and bad debt expenses.
(b) Reflects asset impairments of $6.3 million and litigation settlement costs
of $3.8 million in 1998 and asset impairments of $5.2 million in 1999. The
pro forma special charge consists of our 1999 special charge and a
provision for restructuring of $23.1 million recorded by the NovaCare
Physical Rehabilitation and Occupational Health Division.
(c) Reflects interests held by other parties in subsidiaries, limited liability
companies and limited partnerships owned and controlled by us.
(d) Reflects the write-off of deferred financing costs that resulted from the
refinancing of our credit facility in November 1999.
(e) For information concerning calculation of weighted average shares
outstanding, see note 14 to Select Medical Corporation's Consolidated
Financial Statements.
(f) Reflects the application of the net proceeds from this offering, including
$69 million to redeem preferred stock and pay accrued preferred stock
dividends, $53 million to repay term loans under our credit facility, $25
million to repay senior subordinated debt, and the remaining increase of
working capital of $38 million to be used for future acquisitions and
general corporate purposes.
(g) Available licensed beds are the number of beds that are licensed with the
appropriate state agency and which are readily available for patient use at
the end of the period indicated.
(h) Admissions represent the number of patient admitted for treatment.
(i) Patient days represent the total number of days of care provided to
patients.
(j) Average length of stay (days) represents the average number of days
patients stay in our hospitals per admission, calculated by dividing total
patient days by the number of discharges for the period.
(k) We calculate occupancy rate by dividing the average daily number of
patients in our hospitals by the weighted average number of available
licensed beds over the period indicated.
(l) We calculate percentage by dividing the number of Medicare patient days by
the total number of patient days.
(m) We define EBITDA as net income (loss) before interest, income taxes,
depreciation and amortization and special charges, other income, minority
interest, and extraordinary items. EBITDA should not be considered as a
measure of financial performance under generally accepted accounting
principles. Items excluded from EBITDA are significant components in
understanding and assessing financial performance. EBITDA is a measure used
by management to evaluate our operations, and we believe it provides useful
information to investors. EBITDA should not be considered in isolation or
as an alternative to net income, cash flows generated by operations,
investing or financing activities, or other financial statement data
presented in the consolidated financial statements as indicators of
financial performance or liquidity. Because EBITDA is not a measurement
determined in accordance with generally accepted accounting principles and
is susceptible to varying calculations, EBITDA as presented may not be
comparable to similarly titled measures of other companies.
(n) Managed clinics are clinics that we operate through long term management
arrangements and clinics operated through unconsolidated joint ventures.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
Our consolidated financial statements and the historical audited financial statements of the NovaCare Physical Rehabilitation and Occupational Health Division, which we acquired on November 19, 1999, are included elsewhere in this prospectus. The unaudited NovaCare Financial information for the year ended December 31, 1999 has been derived from internally prepared financial information. The unaudited pro forma consolidated financial information presented here should be read together with those financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
We adjusted our historical consolidated statement of operations for the year ended December 31, 1999 to arrive at the unaudited pro forma consolidated statement of operations for the year ended December 31, 1999 to reflect:
. the acquisition of the NovaCare Physical Rehabilitation and Occupational Health Division which we acquired on November 19, 1999, as if it had been completed on January 1, 1999;
. the removal of the Occupational Health Division, which was recorded as an asset held for sale since the time of acquisition; and
. a reduction in interest expense due to the recapitalization of NovaCare Physical Rehabilitation and Occupational Health Division under our ownership.
No adjustments have been made with respect to a number of small acquisitions made during 1999 since these acquisitions would not have a material impact on the pro forma results.
The acquisition of the NovaCare Physical Rehabilitation and Occupational Health Division has been accounted for using the purchase method of accounting, and the purchase price has been allocated to the tangible and identifiable intangible assets acquired and liabilities assumed on the basis of their fair values on the acquisition date. The historical carrying amounts of identified net tangible assets, including cash, accounts receivable, and accounts payable, approximated their fair values. Fixed assets, identifiable intangible assets and the purchase price in excess of identifiable intangible assets have been valued and recorded based upon the report of an independent third-party appraiser. Identifiable intangible assets consist of a trademark and the value of the assembled workforce. These identifiable intangible assets are being amortized over 40 and seven years, respectively. Goodwill is being amortized over 40 years.
We further adjusted our historical consolidated statement of operations for the year ended December 31, 1999 to arrive at the as adjusted pro forma consolidated statement of operations for the year ended December 31, 1999 to reflect:
. the application of net proceeds from this offering; and
. the automatic conversion of the Class B Preferred Stock.
Certain information normally included in financial statements prepared in accordance with generally accepted accounting principles has been omitted pursuant to the rules and regulations of the Securities and Exchange Commission.
The pro forma consolidated statement of operations is not necessarily indicative of results that would have occurred had the acquisition been completed on January 1, 1999 and should not be construed as being representative of future results of operations.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 1999 ---------------------------------------------- Adjustments As Select NovaCare For Adjusted Historical Historical Adjustments Pro Forma Offering Pro Forma ---------- ---------- ----------- --------- ----------- --------- (in thousands, except per share data) Net operating revenues.. $455,975 $298,563 $(34,423)(a) $720,116 -- 720,116 Operating Expenses...... 413,731 322,138 (36,894)(a) 698,974 -- 698,974 Depreciation and amortization........... 16,741 23,340 (8,718)(b) 31,363 -- 31,363 Special charge.......... 5,223 29,875 (6,800)(c) 28,298 -- 28,298 -------- -------- -------- -------- ------ -------- Total operating expenses............... 435,695 375,352 (52,413) 758,635 -- 758,635 -------- -------- -------- -------- ------ -------- Income (loss) from operations............. 20,280 (76,789) 17,990 (38,519) -- (38,519) Interest expense, net... 21,099 30,361 (16,675)(d) 34,785 (8,046)(f) 26,739 -------- -------- -------- -------- ------ -------- Loss before minority interests.............. (819) (107,150) 34,665 (73,304) 8,046 (65,258) Minority interests...... 3,662 106 -- 3,768 -- (3,768) -------- -------- -------- -------- ------ -------- Loss before income taxes.................. (4,481) (107,256) 34,665 (77,072) 8,046 (69,026) Income tax provision (benefit).............. 2,811 (15,500) 14,186 (b) 1,497 1,497 -------- -------- -------- -------- ------ -------- Net loss before extraordinary item..... (7,292) (91,756) 20,479 (78,569) (70,523) Less: Preferred dividends.............. (5,175) (2,887)(d) (8,062) 8,062 (f) -- -------- -------- -------- ------ -------- Net loss applicable to common stockholders.... $(12,467) $(86,631) $(70,523) ======== ======== ======== Basic loss per common share.................. $ (0.29) $ (1.78) $ -- ======== ======== ====== ======== Basic common shares outstanding (e)........ 42,633 1,528 (e) 44,161 16,000 (f) -- -------- -------- -------- ------ -------- Diluted loss per common share.................. $ (0.29) $ (1.78) $ -- ======== ======== ====== ======== Diluted common shares outstanding (e)........ 42,633 1,528 (e) 44,161 16,000 (f) -- -------- -------- -------- ------ -------- |
(footnotes on following page)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to our Consolidated Statement of Operations and the financial statements of the NovaCare Physical Rehabilitation and Occupational Health Division, which we acquired on November 19, 1999, to arrive at the Unaudited Pro Forma Consolidated Statement of Operations.
(a) We removed the revenues and cost of services of the Occupational Health Division of NovaCare, which we recorded as an asset held for sale upon acquisition.
(b) We reflected:
(i) the reversal of goodwill amortization recorded on the historical NovaCare statement of operations of $11.5 million;
(ii) the removal of depreciation related to the Occupational Health Division of NovaCare, which we recorded as an asset held for sale of $1.1 million;
(iii) the amortization related to the acquired identifiable intangible assets which consist of a trademark valued at $40.0 million and assembled workforce valued at $9.2 million. The trademark is being amortized over 40 years and the workforce over seven years. The annual pro forma amortization is $1.0 million and $1.3 million, respectively;
(iv) the amortization related to the remaining goodwill asset of $37.5 million that is being amortized over 40 years. The pro forma amortization is $938,000;
(v) the increased depreciation of $671,000 that results from a step-up in the asset basis of NovaCare's equipment by $3.4 million. The composite life is assumed to be 5 years; and
(vi) the reversal of the federal tax provision of $1.3 million we recorded in 1999 due to the increased loss of the combined company and the reversal of the NovaCare tax benefit of $15.5 million as such benefit would not be realized by the combined company.
(c) We reflected the removal of the Occupational Health Division's restructuring charge of $6.8 million that had been recorded by NovaCare in the statement of operations prior to the acquisition.
(d) We reflected:
(i) the reversal of $15.3 million of interest expense recorded by NovaCare, net of debt assumed in the acquisition, and the reversal of $15.1 million of intercompany royalty fees which will not continue under the combined entity;
(ii) the pro forma interest expense related to the credit facility borrowings of $83.7 million at 8.8% and senior subordinated debt borrowings of $25.0 million at 10% used to fund the acquisition; A 1/8 of 1% change in interest rates on our variable rate debt would have resulted in a $105,000 fluctuation in pro forma interest expense;
(iii) the amortization of deferred financing costs of $6.5 million over 5 years; and
(iv) the dividends on the Class B Preferred Stock as if it had been issued on January 1, 1999.
(e) The number of pro forma common shares outstanding reflects the 1,667,000 common shares that were issued in connection with the $25.0 of million senior subordinated debt as if they were outstanding for the entire period.
(f) We reflected:
(i) the reduction in interest expense of $8.0 million for the repayment of $53.0 million of 10% senior debt under the term loan portion of our bank credit facility and the repayment of $25.0 million of 10% senior subordinated notes due November 19, 2009;
(ii) the conversion of 16,000,000 shares of our Class B Preferred Stock which automatically converts share for share into common stock upon a public offering;
(iii) the reversal of preferred dividends on the Class A and Class B Preferred Stock which we recorded during 1999; and
(iv) the issuance of shares in the public offering.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read this discussion together with our consolidated financial statements and the accompanying notes and Selected Consolidated Financial and Other Data included elsewhere in this prospectus.
Overview
We are the second largest operator of specialty acute care hospitals for long term stay patients in the United States based on the number of our facilities. We are also the second largest operator of outpatient rehabilitation clinics in the United States and the largest operator of outpatient rehabilitation clinics in Canada based on the number of our clinics. As of September 30, 2000, we operated 51 specialty acute care hospitals in 19 states and 676 outpatient rehabilitation clinics in 29 states, the District of Columbia and seven Canadian provinces. We began operations in 1997 under the leadership of our current management team.
We operate through two business segments, our specialty acute care hospital segment and our outpatient rehabilitation segment. On a pro forma basis for the year ended December 31, 1999, we had net operating revenues of $720.1 million. Of this total, we earned 56.4% of our net operating revenues from our outpatient rehabilitation business and 43.6% from our specialty hospitals.
Our specialty acute care hospital segment consists of hospitals designed to serve the needs of long term stay acute patients. These patients typically suffer from serious and often complex medical conditions that require a high degree of care. Our outpatient rehabilitation business consists of clinics and contract services that provide physical, occupational and speech rehabilitation services. Our patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living.
Significant Acquisitions
Since our formation, we have completed three significant acquisitions for an aggregate consideration of $366.4 million, excluding subsequent purchase price adjustments for accounting purposes. As a result of these acquisitions, the results from period to period are not comparable.
On November 19, 1999, we acquired the Physical Rehabilitation and Occupational Health Division of NovaCare, Inc. for approximately $200 million. The purchase was funded through the issuance of Class B Preferred Stock, senior subordinated debt, the assumption of seller notes and borrowings under our credit facility. At the time of acquisition, NovaCare operated approximately 500 physical rehabilitation clinics and 35 occupational health centers. Following the completion of the acquisition, we sold 28 of these occupational health centers.
On December 15, 1998, we acquired Intensiva Healthcare Corporation for $103.6 million. The purchase was funded through the issuance of Class A preferred stock, senior subordinated debt and borrowings under our credit facility. At the time of acquisition, Intensiva Healthcare operated 22 specialty acute care hospitals and had others in development.
On June 30, 1998, we acquired American Transitional Hospitals, Inc., a wholly-owned subsidiary of Beverly Enterprises, Inc., for $62.8 million. We funded this purchase through borrowings under our credit facility. At the time of acquisition, American Transitional Hospitals operated 15 specialty acute care hospitals.
Development of New Specialty Acute Care Hospitals
Our goal is to open 10 to 12 new specialty acute care hospitals each year, utilizing our "hospital within a hospital" model. We internally developed and opened two hospitals in 1998, six hospitals in 1999 and five hospitals in the first six months of 2000. Each internally developed hospital has typically required
approximately $450,000 for leasehold improvements and approximately $250,000 for equipment. During the initial year of operations, each newly developed hospital has typically incurred losses of approximately $350,000 and required an additional investment of $2.0 million to fund working capital.
Sources of Revenue
Our net operating revenues are derived from a number of sources, including commercial, managed care, private and governmental payors. Our net operating revenues include amounts estimated by management to be reimbursable from each of the applicable payors and the federal Medicare program. Amounts we receive for treatment of patients are generally less than the standard billing rates. We account for the differences between the estimated reimbursement rates and the standard billing rates as contractual adjustments, which we deduct from gross revenues to arrive at net operating revenues.
Our specialty hospitals are paid by Medicare under a cost-based reimbursement methodology. These payments are subject to final cost report settlements based on administrative review and audit by third parties. An annual cost report is filed for each provider to report the cost of providing services and to settle the difference between the interim payments we receive and final costs. We record adjustments to the original estimates in the periods that such adjustments become known. Because our routine payments from Medicare are different than the final reimbursement due to us under the cost based reimbursement system, we record a receivable or payable for the difference. Net amounts due to Medicare were $6.1 million as of December 31, 1998, $17.6 million as of December 31, 1999 and $12.1 million as of June 30, 2000. We recorded these amounts as due to third party payors on our balance sheet. Substantially all Medicare cost reports are settled through 1997.
Net operating revenues generated directly from the Medicare program represented approximately 33.0% of net operating revenues for the six months ended June 30, 2000 and 48.1%, 37.9% and 25.0% for the years ended December 31, 1999, 1998 and 1997, respectively. The decline in the percentage of our net operating revenue coming from Medicare during the six months ended June 30, 2000 was principally related to the acquisition of the NovaCare Physical Rehabilitation and Occupational Health Division, which receives a comparatively lower percentage of its revenues from Medicare.
Legislative and regulatory action has resulted in continuing uncertainty about the Medicare reimbursement programs. Federal and state governments might, in the future, reduce the funds available under those programs or require more stringent utilization and quality reviews of hospital facilities. For example, because Congress has directed the Secretary of the Department of Health and Human Services to develop a prospective payment system for long term acute care hospitals, the way in which our specialty hospitals are reimbursed may change. The Secretary has not developed such a system to date, but may do so in the future. This change, if implemented, could reduce the reimbursements we receive from the Medicare program. Additionally, there may be a continued rise in managed care programs or future restructuring of the financing and delivery of healthcare in the United States. These events could have an adverse effect on our future financial results.
Other revenue primarily represents amounts the Medicare program reimburses us for a portion of our corporate expenses that are related to our specialty hospital operations.
Results of Operations
The following table outlines, for the periods indicated, selected operating data as a percentage of net operating revenues.
Year Ended Six Months Ended December 31, June 30, -------------------- ------------------ 1997 1998 1999 1999 2000 ----- ----- ----- -------- -------- Net operating revenues............. 100.0% 100.0% 100.0% 100.0% 100.0% Cost of services (a)............... 91.9 86.5 84.1 84.0 81.1 General and administrative......... 29.3 8.4 4.7 4.4 3.7 Bad debt expense................... 1.6 2.7 1.9 1.5 3.2 ----- ----- ----- -------- -------- EBITDA (b)......................... (22.8) 2.4 9.3 10.1 12.0 Depreciation and amortization...... 2.5 3.3 3.7 3.3 3.5 Special charges.................... -- 6.8 1.2 -- -- ----- ----- ----- -------- -------- Income (loss) from operations...... (25.3) (7.7) 4.4 6.8 8.5 Other income....................... 53.8 -- -- -- -- Interest expense, net.............. (0.6) 3.3 4.6 4.2 4.6 ----- ----- ----- -------- -------- Income (loss) before minority interests, income taxes and extraordinary item................ 29.1 (11.0) (0.2) 2.6 3.9 Minority interests................. -- 1.2 0.8 1.0 0.5 ----- ----- ----- -------- -------- Income (loss) before income taxes and extraordinary item............ 29.1 (12.2) (1.0) 1.6 3.4 Income tax (benefit)............... 11.7 (0.1) 0.6 1.6 1.6 ----- ----- ----- -------- -------- Net income (loss) before extraordinary item................ 17.4 (12.1) (1.6) -- 1.8 Extraordinary item................. -- -- (1.3) -- -- ----- ----- ----- -------- -------- Net income (loss).................. 17.4% (12.1)% (2.9)% -- % 1.8% ===== ===== ===== ======== ======== |
The following table summarizes selected financial data by business segment, for the periods indicated.
Year Ended December 31, Six Months Ended June 30, ---------------------------- ---------------------------- 1997 1998 1999 1999 2000 % Change ------- -------- -------- -------- -------- -------- (in thousands) Net operating revenues: Specialty hospitals.... $ -- $ 62,715 $307,464 $148,235 $178,309 20.3% Outpatient rehabilitation........ 11,079 83,059 141,740 56,292 214,110 280.4 Other.................. 115 3,269 6,771 3,504 5,003 42.8 ------- -------- -------- -------- -------- ----- Total company.......... $11,194 $149,043 $455,975 $208,031 $397,422 91.0% ======= ======== ======== ======== ======== ===== EBITDA: (b) Specialty hospitals.... $ (52) $ 3,147 $ 35,929 $ 17,168 $ 20,942 22.0% Outpatient rehabilitation........ 1,308 12,598 22,697 10,991 36,433 231.5 Other.................. (3,802) (12,150) (16,382) (7,204) (9,772) (35.6) ------- -------- -------- -------- -------- ----- Total company.......... $(2,546) $ 3,595 $ 42,244 $ 20,955 $ 47,603 127.2% ======= ======== ======== ======== ======== ===== Income (loss) from operations: Specialty hospitals.... $ (52) $ 1,182 $ 28,016 $ 13,910 $ 17,276 24.2% Outpatient rehabilitation........ 1,051 4,323 16,222 7,395 26,781 262.2 Other.................. (3,830) (17,010) (23,958) (7,175) (10,549) (47.0) ------- -------- -------- -------- -------- ----- Total company.......... $(2,831) $(11,505) $ 20,280 $ 14,130 $ 33,508 137.0% ======= ======== ======== ======== ======== ===== EBITDA margins: (b) Specialty hospitals.... NM 5.0% 11.7% 11.6% 11.7% NM Outpatient rehabilitation........ 11.8 15.2 16.0 19.5 17.0 NM Other.................. NM NM NM NM NM NM ------- -------- -------- -------- -------- ----- Total company.......... (22.7)% 2.4% 9.3% 10.1% 12.0% 18.9% ======= ======== ======== ======== ======== ===== Total assets: Specialty hospitals.... $ 219 $240,266 $250,034 $246,323 $246,297 Outpatient rehabilitation........ 17,453 90,267 350,419 125,901 350,453 Other.................. 519 6,416 20,265 17,276 12,955 ------- -------- -------- -------- -------- Total company.......... $18,191 $336,949 $620,718 $389,500 $609,705 ======= ======== ======== ======== ======== |
Special Charges
In 1999 we recorded a special charge of $5.2 million related to the impairment of goodwill, leasehold improvements and equipment that resulted from closures and relocations of certain hospitals and clinics in December 1999.
In 1998 we recorded a special charge of $10.2 million. This charge consisted of $6.3 million of impairment charges relating to assets acquired in two smaller acquisitions in 1998 that were identified in accordance with our policy on impairments, and based upon a review of the facts and circumstances related to those identified assets. The majority of the charge was determined based upon the comparison of the future discounted cash flows resulting from the assets and the carrying value of these assets. The remainder of the charge of $3.8 million related to the settlement of litigation. In May 1999, we participated in the settlement of litigation initiated during 1997 by Horizon/CMS Healthcare Corporation and certain of its affiliates against us and some of our officers. See Note 10 to Select Medical Corporation's Consolidated Financial Statements.
Six Months Ended June 30, 2000 Compared to the Six Months Ended June 30, 1999
Net Operating Revenues
Our net operating revenues increased 91.0% to $397.4 million for the six months ended June 30, 2000 compared to $208.0 million for the six months ended June 30, 1999. The percentage of our net operating revenues coming from Medicare declined to 33.0% during the six months ended June 30, 2000 from 51.0% for the comparable period of 1999. This decline was principally related to the addition of NovaCare, which receives a comparatively lower percentage of its revenue from Medicare.
Specialty Acute Care Hospitals. Our specialty hospital revenues increased 20.3% to $178.3 million for the six months ended June 30, 2000 compared to $148.2 million for the six months ended June 30, 1999. Net operating revenues for the specialty hospitals operated throughout both periods increased 7.8% to $157.1 million for the six months ended June 30, 2000 from $145.7 million for the six months ended June 30, 1999. This increase resulted from an improved occupancy rate and a higher non-Medicare payor mix. The remaining increase of $18.7 million resulted from the internal development of new specialty hospitals that commenced operations in 1999 and 2000.
Outpatient Rehabilitation. Our outpatient rehabilitation revenues increased 280.4% to $214.1 million for the six months ended June 30, 2000 compared to $56.3 million for the six months ended June 30, 1999. This increase was principally related to the acquisition of NovaCare in November 1999, which accounted for $150.9 million of the increase. The remaining increase resulted primarily from increased volume in existing businesses.
Other. Our other revenues increased 42.8% to $5.0 million for the six months ended June 30, 2000 compared to $3.5 million for the six months ended June 30, 1999. This increase was a result of higher corporate general and administrative costs.
Operating Expenses
Our operating expenses increased by $162.7 million to $349.8 million for the six months ended June 30, 2000 compared to $187.1 million for the six months ended June 30, 1999. As a percent of our net operating revenues, our operating expenses declined to 88.0% from 89.9% during the same time period. Our operating expenses include our cost of services, general and administrative expense and bad debt expense. Cost of services as a percent of net operating revenues declined to 81.1% during the six months ended June 30, 2000 from 84.0% during the six months ended June 30, 1999. These costs primarily reflect our labor expenses.
During the same time period, general and administrative expense as a percent of net operating revenues declined to 3.7% from 4.4%. The relative reductions in cost of services and general and administrative expense were primarily the result of our acquisition of NovaCare and the lower cost associated with providing outpatient rehabilitation services relative to our specialty hospital services. Bad debt expense as a percent of net operating revenues increased to 3.2% during the six months ended June 30, 2000 compared to 1.5% during the six months ended June 30, 1999. This increase was also the result of our acquisition of NovaCare, which had higher bad debt as a percentage of net operating revenues because of the large volume of relatively difficult to collect, smaller dollar accounts receivables generated in an outpatient environment.
EBITDA
Our total EBITDA increased 127.2% to $47.6 million for the six months ended June 30, 2000 compared to $21.0 million for the six months ended June 30, 1999. Our EBITDA margins increased to 12.0% for the six months ended June 30, 2000 compared to 10.1% for the six months ended June 30, 1999.
Specialty Acute Care Hospitals. EBITDA increased 22.0% to $20.9 million for the six months ended June 30, 2000 compared to $17.2 million for the six months ended June 30, 1999. Our EBITDA margins remained relatively constant in both periods. The hospitals we operated throughout both periods accounted for $3.4 million of the increase. This increase in same hospital EBITDA resulted from an increase in non-Medicare payor mix. The balance of the increase of $0.4 million resulted from our newly developed hospitals.
Outpatient Rehabilitation. EBITDA increased by 231.5% to $36.4 million for the six months ended June 30, 2000 compared to $11.0 million for the six months ended June 30, 1999. The major contributor to this increase was the NovaCare acquisition that accounted for $23.9 million of the increase. The remaining increase of $1.5 million resulted from growth in our existing business. Our EBITDA margins declined to 17.0% during the six months ended June 30, 2000 from 19.5% during the six months ended June 30, 1999. This decline resulted from the acquisition of NovaCare, which historically had lower margins than our existing outpatient rehabilitation business.
Other. EBITDA decreased by 35.6% to a loss of $9.8 million for the six months ended June 30, 2000 compared to a loss of $7.2 million for the six months ended June 30, 1999. This decrease resulted from the increase in general and administrative expenses associated with the growth of the organization, principally NovaCare and our new hospital development.
Income from Operations
The increase in income from operations resulted from EBITDA increases described above, offset by an increase in depreciation and amortization. Depreciation and amortization increased by 106.5% to $14.1 million for the six months ending June 30, 2000 compared to $6.8 million for the six months ended June 30, 1999. Approximately $6.0 million of the increase in the depreciation and amortization was related to the amortization of goodwill and identifiable intangibles resulting from the NovaCare acquisition and the depreciation of the NovaCare fixed assets. The remaining increase resulted from depreciation of new fixed assets.
Interest Expense
Interest expense increased to $18.3 million for the six months ended June 30, 2000 from $8.8 million for the six months ended June 30, 1999. The increase in interest expense resulted from higher debt levels outstanding in 2000 compared to 1999, including the debt assumed as a result of the NovaCare acquisition, and an increase in the average interest rate associated with borrowings.
Minority Interests
Minority interests were essentially unchanged over the comparative periods because the earnings from our operating subsidiaries that have a minority interest component have remained relatively constant between the respective six month periods.
Income Taxes
We recorded income tax expense of $6.2 million for the six months ended June 30, 2000. The expense represented an effective tax rate of 47% and exceeded statutory federal and state tax rates as a result of non-deductible goodwill. We recorded income tax expense of $3.4 million for the six months ended June 30, 1999. This expense represented an effective tax rate of 102%. We had a higher effective tax rate in this period as a result of non-deductible goodwill and state income taxes in the jurisdictions where we reported taxable income.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Operating Revenues
Our net operating revenues increased 206% to $456.0 million for the year ended December 31, 1999 compared to $149.0 million for the year ended December 31, 1998. The major reason for the increase was the significant acquisitions that occurred during 1998. The percentage of our revenue coming directly from Medicare increased to 48.1% in 1999 from 37.9% in 1998. This increase resulted from the full year effect of the acquisitions of specialty acute care hospitals that occurred during 1998. A specialty hospital has significantly higher Medicare utilization than operations in our outpatient rehabilitation segment. See "--Significant Acquisitions."
Specialty Acute Care Hospitals. Our specialty hospital revenues increased 390.3% to $307.5 million for the year ended December 31, 1999 compared to $62.7 million for the year ended December 31, 1998. This increase resulted from the expanded base of specialty hospitals that we operated as a result of the significant acquisitions during 1998, and, to a lesser extent, our new hospital development activity. We opened two hospitals in 1998 and six hospitals in 1999. We also closed one hospital in late 1999 that we acquired as part of our Intensiva Healthcare acquisition.
Outpatient Rehabilitation. Our outpatient rehabilitation revenues increased 70.6% to $141.7 million for the year ended December 31, 1999 compared to $83.1 million for the year ended December 31, 1998. Of this increase, $29.4 million resulted from the acquisition of NovaCare on November 19, 1999. The remaining increase of $29.2 million resulted principally from the effect of acquisitions that occurred in 1998 and early 1999.
Other. Our other revenues increased 107.1% to $6.8 million for the year ended December 31, 1999 compared to $3.3 million for the year ended December 31, 1998. This increase was a result of higher corporate general and administrative costs.
Operating Expenses
Our operating expenses increased by $268.3 million to $413.7 million for the year ended December 31, 1999 compared to $145.5 million for the year ended December 31, 1998. As a percentage of net operating revenues, our operating expenses decreased to 90.7% from 97.6% during the same time period. The decrease in operating expenses as a percentage of net operating revenues was largely the result of our increased efficiencies and cost saving initiatives. Cost of services as a percentage of net operating revenues decreased to 84.1% during the year ended December 31, 1999 compared to 86.5% during the year ended December 31,
1998. During the same time period and as a percentage of net operating revenues, general and administrative expense decreased to 4.7% from 8.4% and bad debt expense decreased to 1.9% from 2.7%.
EBITDA
Our total EBITDA increased by $38.7 million to $42.2 million for the year ended December 31, 1999 compared to $3.6 million for the year ended December 31, 1998. EBITDA margins increased to 9.3% in 1999 from 2.4% in 1998.
Specialty Acute Care Hospitals. EBITDA increased by $32.8 million to $35.9 million for the year ended December 31, 1999 compared to $3.1 million for the year ended December 31, 1998. This resulted from an expanded base of specialty hospitals that we operated as a result of the significant acquisitions in 1998 and an improvement in our EBITDA margins in 1999 to 11.7% from 5.0% in 1998. Our EBITDA margins improved as a result of operational changes that were implemented after the acquisitions and as a result of cost reduction initiatives.
Outpatient Rehabilitation. EBITDA increased by $10.1 million to $22.7 million for the year ended December 31, 1999 compared to $12.6 million for the year ended December 31, 1998. This resulted principally from 1998 acquisitions which accounted for approximately $7.0 million of the increase. An additional $1.0 million of the increase resulted from the operations of NovaCare and the balance resulted from our internal business development.
Other. EBITDA decreased by $4.2 million to a loss of $16.4 million for the year ended December 31, 1999 compared to a loss of $12.2 million for the year ended December 1998. This decrease resulted from higher administrative costs in 1999 to manage the increased size of our company.
Income from Operations
The increase in income from operations resulted from the EBITDA increase described above and from a reduction in the amount recorded as a special charge, offset by an increase in depreciation and amortization. Depreciation and amortization increased to $16.7 million for the year ended December 31, 1999 compared to $4.9 million for the year ended December 31, 1998. The increase resulted from the amortization of goodwill and identifiable intangibles resulting from the numerous acquisitions we made during these periods and the depreciation of fixed assets acquired in these acquisitions.
Interest Expense
Interest expense increased to $21.5 million for the year ended December 31, 1999 from $5.4 million for the year ended December 31, 1998 due to higher outstanding debt levels and an increase in the average interest rates associated with borrowing. Additional debt was incurred and assumed as a result of our acquisition activity.
Minority Interests
Minority interests increased by $2.0 million to $3.7 million for the year ended December 31, 1999 compared to $1.7 million for the year ended December 31, 1998. This increase resulted from acquisitions completed during 1998 that were structured with a minority interest component and from improved earnings in these businesses.
Income Taxes
We recorded income tax expense of $2.8 million for 1999. This tax expense reflects federal income taxes of $1.3 million and state income taxes of $1.5 million. Even though we had an overall pre-tax loss, we had a federal tax expense due to non-deductible goodwill and other permanent differences. We recorded a state tax expense as a result of taxable income generated in certain jurisdictions. For 1998, we recorded a benefit of $0.2 million as a result of our pre-tax loss.
Extraordinary Item
On November 19, 1999, we entered into a new $225 million credit facility as part of the NovaCare acquisition. This credit facility replaced our $155 million credit facility from February 9, 1999. The extraordinary item consists of the unamortized deferred financing costs of $5.8 million related to the February 9, 1999 credit facility.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Net Operating Revenue
Our net operating revenues increased by $137.8 million to $149.0 million for the year ended December 31, 1998 compared to $11.2 million for the year ended December 31, 1997. The percentage of our revenue coming directly from Medicare increased to 37.9% in 1998 from 25.0% in 1997. This increase resulted from the acquisitions of specialty acute care hospitals that occurred during 1998.
Specialty Acute Care Hospitals. Our specialty hospital revenues were $62.7 million in 1998. We recorded no revenue for this segment in 1997. This increase in revenues was a result of our significant acquisitions in 1998.
Outpatient Rehabilitation. Our outpatient rehabilitation revenues increased by $72.0 million to $83.1 million for the year ended December 31, 1998 compared to $11.1 million for the year ended December 31, 1997. Of this increase, approximately $53.0 million resulted from acquisitions occurring in 1998. The remainder of the increase was related to growth in the acquisitions completed in 1997 and internally developed operations.
Other. Our other revenue increased to $3.3 million for the year ended December 31, 1998 compared to $0.1 million for the year ended December 31, 1997.
Operating Expenses
Our operating expenses increased by $131.7 million to $145.5 million for the year ended December 31, 1998 compared to $13.7 million for the year ended December 31, 1997. As a percent of net operating revenues, our operating expenses decreased to 97.6% from 122% during the same period. The improvement in operating cost trends resulted from increased efficiencies and cost savings initiatives. Cost of services as a percent of net operating revenues decreased to 86.5% during the year ended December 31, 1998 compared to 91.9% during the year ended December 31, 1997. During the same period, and as a percent of net operating revenues, general and administrative expense decreased to 8.4% from 29.3%, and bad debt expense increased to 2.7% from 1.6%.
EBITDA
Our total EBITDA increased by $6.1 million to $3.6 million for the year ended December 31, 1998 compared to a loss of $2.5 million for the year ended December 31, 1997. EBITDA margins increased to 2.4% for the year ended December 31, 1998 from a negative margin of 22.8% for the year ended December 31, 1997.
Specialty Acute Care Hospitals. EBITDA increased by $3.2 million to $3.1 million for the year ended December 31, 1998 compared to a loss of $0.1 million for the year ended December 31, 1997. This increase resulted from the specialty hospitals we acquired in 1998, offset by losses in our newly developed hospitals.
Outpatient Rehabilitation. EBITDA increased by $11.3 million to $12.6 million for the year ended December 31, 1998 compared to $1.3 million for the year ended December 31, 1997. Of this increase, approximately $10.0 million related to the full year effect of acquisitions that occurred in 1998. The remainder of the increase was related to growth in the businesses acquired in 1997 and internally developed operations.
Other. EBITDA decreased by $8.4 million to a loss of $12.2 million for the year ended December 31, 1998 compared to a loss of $3.8 million for the year ended December 31, 1997. This decrease resulted from additional administrative expenses needed to support our larger organization. Our loss as a percentage of total net operating revenues declined in 1998 to 8.2% from 33.9% in 1997 as we achieved greater economies of scale.
Loss From Operations
Our loss from operations increased by $8.7 million to a loss of $11.5 million for year ended December 31, 1998 compared to a loss of $2.8 million for year ended December 31, 1997. The increased loss resulted from the special charge of $10.2 million, an increase in depreciation and amortization of $4.7 million offset by the EBITDA increase of $6.1 million described above. The increase in the depreciation and amortization related to the amortization of goodwill and identifiable intangibles resulting from the numerous acquisitions we made during these periods and the depreciation of fixed assets acquired in these acquisitions.
Other Income
In 1997 we had other non-operating income of $6.0 million that related principally to a break-up fee we received from a terminated acquisition.
Interest Expense
Interest expense increased to $5.4 million for the year ended December 31, 1998 from $0.2 million for the year ended December 31, 1997. The increase in interest expense was due to the higher debt levels outstanding in 1998. This resulted principally from the acquisition of American Transitional Hospitals on June 30, 1998, which was financed entirely with debt.
Minority Interest
Minority interest was $1.7 million for the year ended December 31, 1998. This increase resulted from acquisitions that were structured with a minority component. We recorded no minority interest for the year ended 1997.
Income Taxes
We recorded an income tax benefit of $0.2 million for the year ended December 31, 1998 as a result of our pre-tax loss. For the year ended December 31, 1997 we recorded a tax expense of $1.3 million as a result of our taxable income for the period.
Capital Resources and Liquidity
Six Months Ended June 30, 2000 Compared to Six Months Ended June 30, 1999
Operating activities generated $25.6 million in cash during the six months ended June 30, 2000 compared to a usage of cash of $32.9 million during the six months ended June 30, 1999. The increase in cash flow is attributable to increased earnings and improved working capital management.
Investing activities used $1.4 million and $8.2 million of cash for the six months ended June 30, 2000 and 1999, respectively. In the six months ended June 30, 2000, purchases of property and equipment of $10.2 million and earnout and acquisition payments of $2.9 million were partially offset by $11.8 million in proceeds from the sale of occupational health centers. These occupational health centers were an operating division of NovaCare. Property and equipment purchases in the six months ended June 30, 1999 were $2.4 million. The increase in property and equipment purchases reflects the growth in new hospital development during the first half of 2000.
Financing activities used $23.2 million of cash for the six months ended June 30, 2000. This was due principally to the repayment of debt. In the comparable period of 1999, we had cash inflows of $41.7 million from financing activities. This was the result of borrowing to fund the growth in receivables that we experienced after the Intensiva Healthcare acquisition.
Years Ended December 31, 1999, 1998 and 1997
Cash used to fund operating activities was $25.2 million and $24.7 million in the year ended December 31, 1999 and the year ended December 31, 1998, respectively. The use of cash was primarily attributable to net losses and an increase in accounts receivable that resulted from our growth. In 1997 we generated cash flow from operating activities of $3.7 million. This was attributable to net income generated in this period that resulted principally from a transaction break-up fee we received.
Investing activities used $181.3 million, $209.5 million and $6.7 million of cash flow in the years ended December 31, 1999, 1998 and 1997, respectively. The cash was used principally to fund acquisitions. Our investment in property and equipment during these periods was not material because our operations required minimal capital expenditures on an ongoing basis, and most of our locations were leased. Our investment in equipment is mostly related to development of new hospitals.
Financing activities provided $197.5 million, $242.3 million and $7.9 million of cash flow in the years ended December 31, 1999, 1998 and 1997, respectively. We raised capital through the issuance of common and preferred stock, senior subordinated debt and borrowings under our credit facility. We incurred debt in connection with the acquisitions of American Transitional Hospitals, Intensiva Healthcare and the NovaCare Physical Rehabilitation and Occupational Health Division. A description of these financing arrangements can be found in Note 6 to Select Medical Corporation's Consolidated Financial Statements included elsewhere in this prospectus.
Capital Resources
Net working capital was $114.7 million at June 30, 2000, compared to $132.6 million at December 31, 1999. The decrease in net working capital from December 31, 1999 to June 30, 2000 was attributable primarily to a reduction in our accounts receivable that resulted from improved collection activities and the proceeds from the sale of the occupational health assets that we acquired as part of the NovaCare acquisition. The cash generated from the reduction in accounts receivable and the sale of the occupational health assets were used to repay long term debt.
On September 22, 2000, we entered into a new credit agreement that refinanced our existing bank debt. The new credit agreement provides for $175.0 million in term loans, approximately 10% of which is denominated in Canadian dollars. The term debt begins quarterly amortization in September 2001, with a final maturity date of September 2005. The credit agreement also provides for a revolving facility of $55.0 million to be used for general corporate purposes. The revolving facility terminates in September 2005.
Borrowings under the facilities bear interest at a fluctuating rate of interest based upon financial covenant ratio tests. As of September 30, 2000, our weighted average interest rate under our credit agreement was 10.04%. As of September 30, 2000, we had borrowed all of our available loans under the U.S. and Canadian term loans and had availability to borrow an additional $46.4 million under our revolving facility.
We are required to pay a quarterly commitment fee at a rate that ranges from .375% to .500%, based upon financial covenant ratio tests. This fee applies to unused commitments under the revolving credit facility.
The terms of the credit agreement include various restrictive covenants. These covenants include:
. restrictions against incurring additional indebtedness,
. disposing of assets,
. incurring capital expenditures,
. making investments,
. engaging in transactions with affiliates,
. incurring contingent obligations, and
. allowing or causing fundamental changes.
The covenants also require us to maintain various financial ratios regarding total indebtedness, interest, fixed charges and net worth. The borrowings are secured by substantially all of our tangible and intangible assets, as well as all of the capital stock of our domestic subsidiaries and 65% of the capital stock of our direct foreign subsidiaries. In addition, the loans have been unconditionally guaranteed by our domestic subsidiaries.
We believe that existing cash balances, internally generated cash flows, proceeds from this offering and available borrowings under our revolving credit facility will be sufficient to finance acquisitions, capital expenditures and working capital requirements through at least twelve months following the date of this prospectus. We plan to open 10 to 12 specialty acute care hospitals in 2001, which have historically required approximately $3.1 million per hospital over the initial year of operations to fund leasehold improvements, equipment, start-up losses and working capital. If funds required for future acquisitions exceed existing sources of capital, we will need to increase our credit facilities or obtain additional capital by other means.
Inflation
The healthcare industry is labor intensive. Wages and other expenses increase during periods of inflation and when labor shortages occur in the marketplace. We have implemented cost control measures, including our case and resource management program, to curtail increases in operating costs and expenses. We have, to date, offset increases in operating costs by increasing reimbursement for services and expanding services. However, we cannot predict our ability to cover or offset future cost increases.
Recent Accounting Pronouncement Not Yet Adopted
During 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities." This statement
specifies how to report and display derivative instruments and hedging activities and is effective for fiscal years beginning after June 15, 2000. We are evaluating the impact, if any, of adopting SFAS No. 133.
Quantitative And Qualitative Disclosures About Market Risk
We are exposed to interest rate changes, primarily as a result of a floating interest rates on borrowings under our credit facility. We have not taken any action to hedge our exposure to interest rate market risk, and are not a party to any interest rate market risk management activities.
A 1% change in interest rates on variable rate debt would have resulted in interest expense fluctuating approximately $1.3 million for 1999, and $2.1 million for the six months ended June 30, 2000. We are required by our credit agreement to hedge our interest rate risk by December 21, 2000 and for at least four years thereafter. The terms and parties to the hedge are to be reasonably satisfactory to The Chase Manhattan Bank, the U.S. agent for the credit facility. Under the hedge, we are required to fix or limit our interest cost to at least 50% of the amount of the term loans outstanding.
Approximately 10% of our borrowings under our credit agreement are denominated in Canadian dollars. We are not required by our credit agreement to maintain a hedge on our foreign currency risk. We do not believe that we have material exposure to fluctuations in the exchange rate of Canadian currency.
Subsequent Events
In July, 2000 we received proceeds of approximately $29.9 million from an escrow account established in connection with our acquisition of NovaCare from NovaCare's former owner, NAHC, Inc. We also received $1.95 million of notes in satisfaction of certain severance and other obligations NAHC, Inc. had to us under the purchase agreement.
Purchase of Minority Interests
Some of our outpatient rehabilitation businesses have minority equity owners whom we do not control. These minority interests were retained by the previous owners of the businesses when we acquired them and typically are about 20% of the business. We consolidate these majority-owned entities' results of operations with our own.
The terms of our agreements with these minority owners allow some of them to sell their minority interests back to us. We have agreed to purchase most of these minority interests shortly after the completion of this offering. We will pay these minority owners approximately $ million for their ownership interests. About $ million of the purchase price for these ownership interests will be paid in cash, and about $ million of it will be paid in shares of our common stock. In determining the number of shares of common stock to be issued to the minority owners, we will value the shares at the price to the public of the common stock sold in this offering less a fixed discount of up to 20%. All these shares will be restricted securities eligible for resale under Rule 144 of the Securities Act.
OUR BUSINESS
Overview
We are the second largest operator of specialty acute care hospitals for long term stay patients in the United States based on the number of our facilities. We are also the second largest operator of outpatient rehabilitation clinics in the United States and the largest operator of outpatient rehabilitation clinics in Canada based on the number of our clinics. As of September 30, 2000, we operated 51 specialty acute care hospitals in 19 states and 676 outpatient rehabilitation clinics in 29 states, the District of Columbia and seven Canadian provinces. We began operations in 1997 under the leadership of our current management team, including our co-founders, Rocco A. Ortenzio and Robert A. Ortenzio, both of whom have significant experience in the healthcare industry. Under this leadership, we have grown our business through strategic acquisitions and internal development initiatives. On a pro forma basis for the year ended December 31, 1999, we had net operating revenues of $720.1 million. Of this total, we earned 56.4% of our net operating revenues from our outpatient rehabilitation business and 43.6% from our specialty acute care hospitals.
Competitive Strengths
. Experienced Management Team. Our five senior operations executives have an average of 23 years of experience in the healthcare industry. In addition, 16 members of our management team have worked together in previous healthcare companies, both public and private.
. Significant Scale. Our specialty acute care hospitals and outpatient rehabilitation clinics provide us with significant scale and advantages over many of our competitors. These advantages allow us to leverage our operating costs by centralizing administrative functions at our corporate office and spreading the costs of operating these functions over a large base of operations. We believe that our size also gives us an advantage in negotiating contracts with commercial insurers.
. Multiple Business Lines and Geographic Diversity. We have a leading presence in two segments of the healthcare industry. We believe that this operating strategy reduces our risk profile. Because we provide both inpatient care in our specialty acute care hospitals and outpatient care in our rehabilitation clinics, we do not rely exclusively on a single business line for our net operating revenues or EBITDA. Our geographic diversification and the mix of our business also reduces our exposure to any single governmental or commercial reimbursement source.
. Proven Operating Performance. We have established a track record of improving the financial performance of the hospitals and clinics we operate. Our EBITDA margin improved by 1.9 percentage points for the six months ended June 30, 2000 compared to the six months ended June 30, 1999. This improvement is the result, in part, of our ability to grow our revenues by expanding referral relationships and payor contracts as well as our ability to reduce costs by standardizing procedures and centralizing administrative functions. We also focus on working capital management and have decreased the number of accounts receivable days outstanding from 106 as of June 30, 1999 to 81 as of June 30, 2000.
. Experience in Successfully Completing and Integrating Acquisitions. Since we began operations in 1997, we have completed three significant acquisitions for approximately $365 million in aggregate consideration, as well as a number of smaller acquisitions. We are extremely selective in identifying and pursuing acquisitions, focusing on strategic opportunities where we can enhance operating performance.
. Demonstrated Development Expertise. From our inception through September 30, 2000, we developed 15 new specialty acute care hospitals and 49 outpatient rehabilitation clinics. These initiatives have demonstrated our ability to effectively identify new opportunities and implement start-up plans.
. Significant Financial Resources. We have access to significant financial resources that give us the flexibility to pursue an active growth strategy. As adjusted for the offering, as of June 30, 2000, we had $43.1 million in cash, and our total long term debt of $222.3 million represented % of our capitalization.
Specialty Acute Care Hospitals
As of September 30, 2000, we operated 51 specialty acute care hospitals that were certified by the federal Medicare program. These hospitals generally have 35 to 40 beds, and as of September 30, 2000, we operated a total of 1,913 available licensed beds. Our specialty acute care hospitals employ approximately 5,200 people, with the majority being registered or licensed nurses and respiratory therapists. In these specialty hospitals we treat patients with serious and often complex medical conditions such as respiratory failure, neuromuscular disorders, cardiac disorders, non-healing wounds, renal disorders and cancer.
Patients are admitted to our specialty acute care hospitals from general acute care hospitals in our markets. These general acute care hospitals are frequently not the optimum setting in which to treat these patients, because they require longer stays and a higher level of clinical attention than the typical acute care patient. Furthermore, general acute care hospitals' reimbursement rates usually do not adequately compensate them for the treatment of this type of patient. The differences in clinical expertise and reimbursement rates provide general acute care hospitals and their physicians with incentives to discharge longer stay, medically complex patients to our facilities. As a result of these dynamics, we continually seek to increase our admissions by expanding and improving our relationships with the physicians and general acute care hospitals in our markets that refer patients to our facilities.
Below is a table that shows the typical distribution by medical condition of patients in our hospitals.
Distribution Medical Condition of Patients ----------------- ------------ Respiratory failure................................................ 33% Neuromuscular disorder............................................. 23 Cardiac disorder................................................... 14 Wound care......................................................... 9 Renal disorder..................................................... 5 Cancer............................................................. 4 Other.............................................................. 12 --- Total............................................................ 100% === |
When a patient is referred to one of our hospitals by a physician, case manager, health maintenance organization or insurance company, a nurse liaison makes an assessment to determine the degree of care required and expected length of stay. This initial patient assessment is critical to our ability to provide the appropriate level of patient care. Based on the determinations reached in this clinical assessment, an admission decision is made by the attending physician.
Upon admission, an interdisciplinary team reviews a new patient's condition. The interdisciplinary team is comprised of a number of clinicians, including the attending physician, a specialty nurse, a dietician, a pharmacist and a case manager. Upon completion of an initial evaluation by each member of the treatment team, an individualized treatment plan is established and implemented. The case manager coordinates all aspects of the patient's hospital stay and serves as a liaison with the insurance carrier's case management staff when appropriate. The case manager communicates progress, resource utilization, and treatment goals between the patient, the treatment team and the payor.
Each of our specialty hospitals has an onsite management team consisting of a chief executive officer, a director of clinical services and a director of provider relations. These teams manage local strategy and day-to-day operations, including oversight of per patient costs and average length of stay. They also assume primary responsibility for developing relationships with the general acute care providers and clinicians in our markets that refer patients to our specialty hospitals. We provide our hospitals with centralized accounting, payroll, legal, reimbursement, human resources, compliance, management information systems, billing and collecting services. The centralization of these services improves efficiency and permits hospital staff to spend more time on patient care.
"Hospital within a Hospital" Model
Of the 51 specialty hospitals we operated as of September 30, 2000, two are freestanding facilities and 49 are located in leased space within a host general acute care hospital. These leased spaces are separately licensed and are commonly referred to as a "hospital within a hospital." We operate the largest number of specialty acute care hospitals operating with this "hospital within a hospital" model in the United States. We believe this model provides several advantages to patients, host hospitals, physicians and us.
. The host hospital's patients benefit from being admitted to a setting specialized to meet their unique medical needs without having the disruption of being transferred to another location.
. In addition to being provided with a place to transfer high-cost, long-stay patients, host hospitals benefit by receiving payments from us for rent and ancillary services.
. Physicians affiliated with the host hospital are provided with the convenience of being able to monitor the progress of their patients without traveling to another location.
. We benefit from the ability to operate specialty hospitals without the capital investment often associated with buying or building a freestanding facility. We also gain operating cost efficiencies by contracting with these host hospitals for selected services at discounted rates.
In addition, our specialty hospitals serve the broader community where they operate, treating patients from other general acute care hospitals in the local market. During the quarter ended September 30, 2000, 51% of the patients in our "hospital within a hospital" facilities were referred to us from general acute care hospitals other than the host hospitals.
Specialty Acute Care Hospital Strategy
Develop New Specialty Acute Care Hospitals
Our goal is to open 10 to 12 new specialty Acute Care hospitals each year using our "hospital within a hospital" model. We seek to lease space from general acute care hospitals with leadership positions in the markets in which they operate. We have successfully contracted with various types of general hospitals including for-profit, not-for-profit and university affiliated. Our relationships include hospitals operated by many of the leading names in the healthcare industry including HCA--The Healthcare Company, Health Management Associates, Mercy Health System, Tenet Healthcare, and Ohio State University Medical Center. We have a standardized approach to development that begins with the evaluation of new opportunities. We identify development opportunities by targeting host hospitals with:
. 250 beds or more;
. sufficient space available to lease;
. high patient volume; and
. market populations of at least 500,000 to 750,000.
We have a dedicated development team with significant market experience. When we target a host hospital, the development team conducts an extensive review of all of its discharges to determine the number of referrals we would have likely received from it on a historical basis. Next, we review the host hospital's contracts with commercial insurers to determine the market's general reimbursement trends and payor mix. Ultimately, when we sign a lease with a new host hospital, the project is transitioned to our start-up team, which is experienced in preparing a specialty hospital for opening. The start-up team oversees facility improvements, equipment purchases, licensure procedures, and the recruitment of a full-time management team. After the facility is opened, responsibility for its management is transitioned to this new management team and our corporate operations group.
From our inception through September 30, 2000, we had completed the development and opening of the following 15 specialty acute care hospitals:
Hospital Name City State Opening Date Licensed Beds ------------- ------------ ----- -------------- ------------- SSH-Biloxi Biloxi MS May 1998 42 SSH-West Columbus Columbus OH December 1998 37 SSH-Wilmington Wilmington DE January 1999 35 SSH-Milwaukee Milwaukee WI March 1999 34 SSH-Youngstown Youngstown OH April 1999 31 SSH-Mesa Mesa AZ September 1999 37 SSH-Battle Creek Battle Creek MI October 1999 32 SSH-Omaha Omaha NE October 1999 40 SSH-Gulfport Gulfport MS January 2000 38 SSH-Denver Denver CO February 2000 32 SSH-Tri-Cities* Bristol TN March 2000 25 SSH-St. Louis* St. Louis MO April 2000 33 SSH-Wichita* Wichita KS June 2000 35 SSH-San Antonio* San Antonio TX July 2000 34 SSH-Greensburg* Greensburg PA August 2000 31 --- Total 516 === |
Provide High Quality and Cost Effective Care
We believe that our patients benefit from our experience in addressing the complex medical needs of long term stay patients. A typical patient admitted to our specialty hospitals has multiple medical conditions and requires a high level of attention by our clinical staff. To effectively address the complex nature of our patients' medical conditions, we have developed specialized treatment programs focused solely on their needs. We have also implemented specific staffing models that are designed to ensure that patients have access to the necessary level of clinical attention. These staffing models also allow us to efficiently allocate our resources which reduces costs.
Our treatment and staffing programs benefit patients because they give our clinicians access to the regimens that we have found to be most effective in treating various conditions such as respiratory failure, non-healing wounds and neuromuscular disorders. In addition, we often combine or modify these programs to provide a treatment plan tailored to meet a patient's unique needs.
We continually monitor the quality of our patient care by several measures including patient, payor and physician satisfaction as well as clinical outcomes. Quality measures are collected monthly and reported quarterly and annually. In order to benchmark ourselves against other healthcare organizations, we have contracted with outside vendors to collect our clinical and patient satisfaction information and compare it to other healthcare organizations. The information collected is reported back to each hospital, to the corporate office, and directly to the Joint Commission on Accreditation of Healthcare Organizations. As of September 30, 2000, all but our two most recently opened hospitals had been accredited by the Joint Commission on Accreditation of Healthcare Organizations. See "--Government Regulations--Licensure--Accreditation."
Reduce Costs
We continually seek to improve operating efficiency and reduce costs at our hospitals by standardizing operations and centralizing key administrative functions. These initiatives include:
. optimizing staffing based on our occupancy and the clinical needs of our patients;
. centralizing administrative functions such as accounting, payroll, legal, reimbursement, compliance and human resources;
. standardizing management information systems to aid in financial reporting as well as billing and collecting; and
. participating in group purchasing arrangements to receive discounted prices for pharmaceuticals and medical supplies.
Increase Higher Margin Commercial Volume
We typically receive higher reimbursement rates from commercial insurers than we do from the federal Medicare program. As a result, we work to expand relationships with insurers to increase commercial patient volume. Each of our hospitals has employees who focus on commercial contracting initiatives within their regions. Contracting professionals in our central office work with these hospital employees to ensure that our corporate contracting standards are met. Our goal in commercial contracting is to give discounted rates to those commercial payors that we expect to add significant patient volume to our hospitals.
We believe that commercial payors seek to contract with our hospitals because we offer patients quality, cost effective care. Although the level of care we provide is complex and staff intensive, we typically have lower operating expenses than a freestanding general acute care facility's intensive care unit because of our "hospital within a hospital" operating model. As a result of our cost efficiencies, we can offer more attractive rates to commercial payors. Additionally, we provide their enrollees with customized treatment programs not offered in traditional acute care facilities.
Grow Through Acquisitions
In addition to our development initiatives, we intend to grow our network of specialty hospitals through strategic acquisitions. When we acquire a hospital or a group of hospitals, a team of our professionals is responsible for formulating and executing an integration plan. We have generally been able to increase margins at acquired facilities by centralizing administrative functions and implementing our standardized staffing models and resource management programs. Since 1997 we have acquired and integrated 37 hospitals which all share our centralized billing and purchasing programs and operate standardized management information systems.
Outpatient Rehabilitation
We are the second largest operator of outpatient rehabilitation clinics in the United States and the largest operator of outpatient rehabilitation clinics in Canada, based on the number of our clinics. As of September 30, 2000, we operated 590 clinics throughout 29 states and the District of Columbia and 86 clinics in seven provinces throughout Canada. Our outpatient division employs approximately 7,700 people. Typically, each of our clinics is located in a freestanding facility in a highly visible medical complex or retail location. In addition to providing therapy in our outpatient clinics, we provide rehabilitation management services and staffing on a contract basis to hospitals, schools, nursing facilities and home health agencies.
In our clinics and through our contractual relationships, we provide physical, occupational and speech rehabilitation programs and services. Our patients are typically diagnosed with musculoskeletal impairments that restrict their ability to perform normal activities of daily living. These impairments are often associated with accidents, sports injuries, strokes, heart attacks and other medical conditions. Our rehabilitation programs
and services are designed to help these patients minimize physical and cognitive impairments and maximize functional ability. We also design services to prevent short-term disabilities from becoming chronic conditions. Our rehabilitation services are provided by our professionals including licensed physical therapists, occupational therapists, certified athletic trainers, physiatrists, speech-language pathologists, respiratory therapists, exercise physiologists and physical rehabilitation counselors.
Patients are generally referred or directed to our clinics by a physician, employer or health insurer who believes that a patient, employee or member can benefit from the level of therapy we provide in an outpatient setting. Outpatient rehabilitation services not only seek to improve the patients' quality of life but also have been shown to result in overall savings in healthcare costs. A study by the Health Insurance Association of America conducted in December of 1999 concluded that $13 in savings is generated for every dollar spent on rehabilitation services. As a result of these cost savings we believe that our services are attractive to healthcare payors who are seeking to provide the most cost-effective level of care to their members. In our outpatient rehabilitation division, approximately 92% of our net operating revenues come from rehabilitation management services and commercial payors, including healthcare insurers, managed care organizations and workers' compensation programs. The balance of our reimbursement is derived from Medicare and other government sponsored programs.
We have grown our outpatient rehabilitation business through acquisitions and new development. Our most significant outpatient acquisition was the purchase of the Physical Rehabilitation and Occupational Health Division of NovaCare, Inc. in November of 1999 through which we added approximately 500 outpatient rehabilitation clinics.
Outpatient Strategy
Increase Market Share
Our goal is to be a leading provider of outpatient rehabilitation services in our local markets. Having a strong market share in our local markets allows us to benefit from heightened brand awareness, economies of scale and increased leverage when negotiating payor contracts. To increase our market share, we seek to expand the services and programs we provide and generate loyalty with patients and referral sources by providing high quality care and strong customer service.
. Expand Rehabilitation Programs and Services. We assess the healthcare needs of our markets and implement programs and services targeted to meet the demands of the local community. In designing these programs we benefit from the knowledge we gain through our national network of clinics. This knowledge is used to design programs that optimize treatment methods and measure changes in health status, clinical outcomes and patient satisfaction. Our programs and services include, among others, back care and rehabilitation; work injury management and prevention; sports rehabilitation and athletic training; and health, safety and prevention programs. Other services that vary by location include aquatic therapy, speech therapy, neurological rehabilitation and post-treatment care.
. Provide High Quality Care and Service. We believe that by focusing on quality care and offering a high level of customer service we develop brand loyalty in our markets. This loyalty allows us to retain patients and strengthen our relationships with the physicians, employers, and health insurers in our markets who refer or direct additional patients to us. We are focused on providing a high level of service to our patients throughout their entire course of treatment. To measure satisfaction with our service we have developed surveys for both patients and physicians. Our clinics utilize the feedback from these surveys to continuously refine and improve service levels.
Optimize the Profitability of Our Payor Contracts
Before we enter into a new contract with a commercial payor, we evaluate it with the aid of our contract management system. We assess potential profitability by evaluating past and projected patient volume, clinic capacity, and expense trends. Each contract we enter into is continually re-evaluated to determine how it is affecting our profitability. We create a retention strategy for each of the top performing contracts and a re-negotiation strategy for contracts that do not meet our defined criteria.
Improve Margins
To improve operating margins and efficiencies, we continually revise and streamline operational processes. We evaluate our clinical staff productivity monthly against specific benchmarks to ensure efficient utilization of labor for services provided. Furthermore, following our acquisition of NovaCare, Inc.'s Physical Rehabilitation and Occupational Health Division, we have implemented initiatives to reduce overhead costs. As part of those efforts we have reduced the number of central business offices we operate from seven to five during the first nine months of 2000. During the next six months we expect to further consolidate operations to enhance administrative efficiencies. We have also developed a phased plan that, in the course of the next two years, will link all of our clinics together via a wide area network. This linkage will provide us with the opportunity to implement centralized scheduling, improve the timing of billing transactions and provide a base for dissemination of clinical and contractual information to all of our clinics.
Grow Through New Development and Disciplined Acquisitions
We intend to open new clinics in our current markets where we believe that we can benefit from existing referral relationships and brand awareness to produce incremental growth. From time to time, we also intend to also evaluate acquisition opportunities that may enhance the scale of our business and expand our geographic reach. Potential acquisitions are closely evaluated and we seek to buy only those assets that are complementary to our business and that are expected to give us a strong return on our invested capital.
Maintain Strong Employee Relations
We believe that the relationships between our employees and the referral sources in their communities are critical to our success. Our referral sources, such as physicians and healthcare case managers, send their patients to our clinics based on three factors: the quality of our care, the service we provide and their familiarity with our therapists. We seek to retain and motivate our therapists by implementing a performance-based bonus program, a defined career path with the ability to be promoted from within, timely communication on company developments, and internal training programs. We also focus on empowering our employees by giving them a high degree of autonomy in determining local market strategy. This management approach reflects the unique nature of each market we operate in and the importance of encouraging our employees to assume responsibility for their clinic's performance.
Overview of Healthcare Spending
The U.S. Health Care Financing Administration estimated that in 1999, total U.S. healthcare expenditures grew 6.0% to $1.2 trillion. From 1995 to 1999, healthcare spending grew at a compounded annual rate of 5.4%, compared to 7.3% in the first half of the decade and 12.9% in the 1980s. The decline in spending growth during the latter half of the decade has been attributed to the result of increased membership in managed care plans which negotiated discounted rates with healthcare providers.
Growth in healthcare expenditures is expected to rebound during the current decade. According to the Health Care Financing Administration, total projected U.S. healthcare spending is estimated to grow at 7.1% in 2000 and at 6.5% annually from 2001 through 2008. By these estimates, healthcare expenditures will account for approximately $2.2 trillion, or 16.2% of the total U.S. gross domestic product by 2008.
We expect future spending to be influenced by various factors including:
. slower managed care enrollment growth and a movement towards less restrictive forms of managed care, or hybrids;
. increased state and federal regulation of health plans;
. proposed Medicare reimbursement relief for healthcare providers;
. continued increases in pharmaceutical expenditures; and
. continued technological advancement.
Demographic considerations also affect long term growth projections for healthcare spending. According to the U.S. Census Bureau, there are approximately 35 million Americans aged 65 or older in the U.S. today, who comprise approximately 13% of the total U.S. population. By the year 2030 the number of elderly is expected to climb to 69 million, or 20% of the total population. Due to the increasing life expectancy of Americans, the number of people aged 85 years and older is also expected to increase from 4.3 million to 8.5 million by the year 2030. We believe that this increase in life expectancy will increase demand for healthcare services and, as importantly, the demand for innovative, more sophisticated means of delivering those services.
Based on projections of future healthcare expenditures, according to the Health Care Financing Administration, payments to healthcare providers will increase by nearly $1.0 trillion in the next decade. Despite pressures from payors to reduce spending, we believe that the growth in spending will create opportunities for low cost, quality healthcare providers like us. Continued spending pressure will encourage efficiency by directing business toward lower- cost settings such as our outpatient rehabilitation clinics and specialty acute care hospitals.
Sources of Net Operating Revenues
The following table presents the approximate percentages by source of net operating revenue received for healthcare services we provided for the periods indicated.
Year ended December 31, ------------------- Six Months Ended Net Operating Revenues by Payor Source 1997 1998 1999 June 30, 2000 -------------------------------------- ----- ----- ----- ---------------- Commercial insurance (a).................. 40.9% 37.6% 34.6% 55.0% Medicare.................................. 25.0 37.9 48.1 33.0 Private and other(b)...................... 34.1 24.5 15.7 10.8 Medicaid (c).............................. -- -- 1.6 1.2 ----- ----- ----- ----- Total................................... 100.0% 100.0% 100.0% 100.0% ===== ===== ===== ===== |
Non-Government Sources
A majority of our net operating revenues come from private payor sources. These sources include insurance companies, workers' compensation programs, health maintenance organizations, preferred provider organizations, other managed care companies, and employers, as well as by patients directly. Patients are generally not responsible for any difference between customary charges for our services and amounts paid by
Medicare and Medicaid programs, insurance companies, workers' compensation companies, health maintenance organizations, preferred provider organizations, and other managed care companies, but are responsible for services not covered by these programs or plans, as well as for deductibles and co-insurance obligations of their coverage. The amount of these deductibles and co-insurance obligations has increased in recent years. Collection of amounts due from individuals is typically more difficult than collection of amounts due from government or business payors. To further reduce their healthcare costs, an increasing number of insurance companies, health maintenance organizations, preferred provider organizations, and other managed care companies are negotiating discounted fee structures or fixed amounts for hospital services performed, rather than paying healthcare providers the amounts billed. If an increased number of insurance companies, health maintenance organizations, preferred provider organizations, and other managed care companies succeed in negotiating discounted fee structures or fixed amounts, our results of operations may be negatively affected. See "--Government Reimbursement-- Overview of U.S. and State Government Reimbursements."
Government Sources
Medicare is a federal program that provides medical insurance benefits to persons age 65 and over, some disabled persons, and persons with end-stage renal disease. Medicaid is a federal-state funded program, administered by the states, which provides medical benefits to individuals who are unable to afford healthcare. All of our hospitals are certified as providers of Medicare, and our outpatient rehabilitation clinics regularly receive Medicare payments for their services. Additionally, our specialty hospitals participate in two state Medicaid programs. Amounts received under the Medicare and Medicaid programs are generally less than the customary charges for the services provided. In recent years, changes made to the Medicare and Medicaid programs have further reduced payment to healthcare providers. Since an important portion of our revenues comes from patients under the Medicare program, our ability to operate our business successfully in the future will depend in large measure on our ability to adapt to changes in the Medicare program.
Government Regulations
General
The healthcare industry is required to comply with many laws and regulations at the federal, state and local government levels. These laws and regulations require that hospitals and outpatient rehabilitation clinics meet various requirements, including those relating to the adequacy of medical care, equipment, personnel, operating policies and procedures, maintenance of adequate records, compliance with building codes and environmental protection. These laws and regulations are extremely complex and, in many instances, the industry does not have the benefit of significant regulatory or judicial interpretation. If we fail to comply with applicable laws and regulations, we could suffer civil or criminal penalties, including the loss of our licenses to operate and our ability to participate in the Medicare, Medicaid and other federal and state healthcare programs.
Licensure
Facility Licensure. Our healthcare facilities are subject to state and local licensing regulations ranging from the adequacy of medical care to compliance with building codes and environmental protection laws. In order to assure continued compliance with these various regulations, governmental and other authorities periodically inspect our facilities. We believe all of our hospitals are properly licensed under appropriate state laws. We believe that all of our outpatient rehabilitation clinics in states that require licensing of such facilities are properly licensed.
Some states still require us to get approval under certificate of need regulations when we create, acquire or expand our facilities or services. If we fail to show public need and obtain approval in these states for our facilities, we may be subject to civil or even criminal penalties, lose our facility license or become ineligible for reimbursement if we proceed with our creation or acquisition of the new facility or service.
Professional Licensure and Corporate Practice. Healthcare professionals at our hospitals and outpatient rehabilitation clinics are required to be individually licensed or certified under applicable state law. We take steps to ensure that our employees and agents possess all necessary licenses and certifications, and we believe that our employees and agents, including rehabilitation agency therapists, comply with all applicable state laws.
In some states, business corporations such as us are restricted from practicing therapy through the direct employment of therapists. In those states, in order to comply with the restrictions imposed, we either contract to obtain therapy services from an entity permitted to employ therapists, or we manage the physical therapy practice owned by licensed therapists through which the therapy services are provided.
Certification. In order to participate in the Medicare program and receive Medicare reimbursement, each facility must comply with the applicable regulations of the United States Department of Health and Human Services relating to, among other things, the type of facility, its equipment, its personnel and its standards of medical care, as well as compliance with all applicable state and local laws and regulations. All of our 51 hospitals participate in the Medicare program. In addition, the majority of our outpatient rehabilitation services are provided through Medicare-certified rehabilitation agencies or "rehab agencies."
Accreditation. Our hospitals receive accreditation from the Joint Commission on Accreditation of Healthcare Organizations, a nationwide commission which establishes standards relating to the physical plant, administration, quality of patient care and operation of medical staffs of hospitals. Generally, our hospitals have to be in operation for at least six months before they are eligible for accreditation. As of September 30, 2000, all but our two most recently opened hospitals had been accredited by the Joint Commission on Accreditation of Healthcare Organizations.
Overview of U.S. and State Government Reimbursements
Medicare. The Medicare program reimburses healthcare providers for services furnished to Medicare beneficiaries, which are generally persons age 65 and older, those who are chronically disabled, and those suffering from end stage renal disease. The program is governed by the Social Security Act of 1965 and is administered primarily by the Department of Health and Human Services and the Health Care Financing Administration. On a pro forma basis, giving effect to the acquisition of NovaCare, as of January 1, 1999, we received approximately one-third of our revenue from Medicare during 1999.
Long Term Acute Care Hospital Medicare Reimbursement. Our long-term acute care hospitals receive cost reimbursement, subject to a maximum cap. In contrast, Medicare inpatient costs for short-term acute care hospitals are reimbursed based upon a fixed payment amount per discharge using diagnosis related groups, commonly referred to as DRGs. The DRG payment under a prospective payment system is based upon the national average cost of treating a Medicare patient's condition. Although the average length of stay varies for each DRG, the average stay for all Medicare patients subject to prospective payment system is approximately six days. Thus, a prospective payment system creates an economic incentive for general short-term acute care hospitals to discharge medically complex Medicare patients as soon as clinically possible. We believe that the incentive for short-term acute care hospitals to discharge medically complex patients as soon as clinically possible creates a substantial referral source for our long term acute care hospitals.
Prior to qualifying as an exempt long-term acute care hospital, a new long-term acute care hospital initially receives payment under the acute care DRG-based reimbursement system. The long-term acute care hospital must continue to be paid DRGs for a minimum of six months while meeting certain Medicare long-term acute care hospital requirements, the most significant requirement being an average length of stay of 25 days or more. A "hospital within a hospital" facility must also establish itself as a hospital separate from its host by, among other things, obtaining separate licensure and certification, and limiting the services it purchases
directly from its host to 15% of its total operating costs, or limiting the number of patient admissions from its host to 25% of total admissions.
Once the hospital qualifies for exempt status, long-term acute care hospitals currently are paid on the basis of Medicare reasonable costs per case subject to limits. Under cost-based reimbursement, costs accepted for reimbursement depend on a number of factors, including necessity, reasonableness, related-party principles and relatedness to patient care. Qualifying costs under Medicare's cost-reimbursement system typically include all operating costs and also capital costs that include interest expense, depreciation, amortization, and rental expense. Non-qualifying costs include marketing costs.
The cost reimbursement received by a long-term acute care hospital is subject to per-discharge payment limits. During a long-term acute care hospital's initial operations, Medicare payment is capped at the average national target rate established by the Tax Equity and Fiscal Responsibility Act of 1982, commonly known as TEFRA. After the second year of operations, payment is subject to a target amount based on the lesser of the hospital's cost-per-discharge or the national ceiling in the applicable base year.
Congress has required the Secretary of the Department Health and Human Services to submit to Congress by October 1, 1999 a proposal to establish a prospective payment system for long-term acute care hospitals. This requirement was later extended until October 1, 2001. Current law provides that a prospective payment system is to be effective for cost reporting periods beginning on or after October 1, 2002.
Outpatient Rehabilitation Services Medicare Reimbursement. We provide the majority of our outpatient physical rehabilitation services in our rehabilitation clinics. Through our contract services agreements, we also provide outpatient rehabilitation services in the following settings:
. comprehensive outpatient rehabilitation facilities;
. rehabilitation agencies;
. schools;
. physician-directed clinics;
. hospitals; and
. skilled nursing facilities.
Essentially, all of our outpatient physical rehabilitation services are provided in rehabilitation agencies and are not provided through rehabilitation hospitals.
Prior to January 1, 1999, outpatient physical therapy, occupational therapy, and speech-language pathology services, which we refer to as outpatient therapy services, were reimbursed on the basis of the lower of 90% of reasonable costs or actual charges. Beginning January 1, 1999, outpatient rehabilitation services were reimbursed on a fee schedule, subject to annual limits. These outpatient rehabilitation providers receive a fixed fee for each procedure performed, which is adjusted by the geographical area in which the facility is located. Beginning on January 1, 1999, the following annual limits per Medicare beneficiary were to have become effective:
. $1,500 for outpatient rehabilitation services (including speech- language pathology services), and
. $1,500 for outpatient occupational health services.
In November 1999, the Balanced Budget Refinement Act provided some relief to providers by unbundling speech-language pathology services from other outpatient rehabilitation services. The following lists the new annual limits by services offered:
. $1,500 for outpatient physical therapy services
. $1,500 for speech-language pathology services, and
. $1,500 for outpatient occupational health services.
A moratorium has since been placed on these limits for the years 2000 and 2001 pending a review by the Secretary of the Department of Health and Human Services of the clinical needs of these patients and the appropriate level of limitations.
The Secretary of the U.S. Department of Health and Human Services is required to report the results of this review to Congress by June 30, 2001, together with any relevant legislative recommendations, potentially including revised coverage policies as an alternative to the therapy caps. Congress is considering legislation that would further extend the moratorium on the therapy limits and require additional studies by the Secretary regarding the application of the limits.
Historically, outpatient rehabilitation services have been subject to scrutiny by the Medicare program for, among other things, medical necessity for services, appropriate documentation for services, billing for group therapy, and Medicare billing practices by skilled nursing facilities. In addition, payment for rehabilitation services furnished to patients of skilled nursing facilities has been affected by the establishment of a Medicare prospective payment system and consolidated billing requirement for skilled nursing facilities. The resulting pressure on skilled nursing facilities to reduce their costs by negotiating lower payments to therapy providers, such as our contract therapy services, and the inability of the therapy providers to bill the Medicare program directly for their services have tended to reduce the amounts that rehabilitation providers can receive for services furnished to many skilled nursing facility residents.
Long Term Acute Care Hospital Medicaid Reimbursement. The Medicaid program is designed to provide medical assistance to individuals unable to afford care. The program is governed by the Social Security Act of 1965 and administered and funded jointly by each individual state government and the Health Care Financing Administration. Most state Medicaid payments are made under a prospective payment system or under programs that negotiate payment levels with individual hospitals. In addition, Medicaid programs are subject to statutory and regulatory changes, administrative rulings, interpretations of policy by the state agencies and certain government funding limitations, all of which may materially increase or decrease the level of program payments to our hospitals. Medicaid payments accounted for about 1.2% of our net operating revenues for the six months ended June 30, 2000.
Workers' Compensation. Workers' compensation programs account for approximately 21% of our revenue from outpatient rehabilitation services for the six months ended June 30, 2000. Workers' compensation is a state-mandated, comprehensive insurance program that requires employers to fund or insure medical expenses, lost wages and other costs resulting from work-related injuries and illnesses. Workers' compensation benefits and arrangements vary on a state-by-state basis and are often highly complex. In some states, payment for services covered by workers' compensation programs are subject to cost containment features, such as requirements that all workers' compensation injuries be treated through a managed care program, or the imposition of payment caps. In addition, these workers' compensation programs may impose requirements that affect the operations of our outpatient rehabilitation services.
Canadian Reimbursement
Approximately 70% of all funding for the Canadian healthcare system is derived from public sources. The Canada Health Act governs the Canadian healthcare system, and provides for federal funding to be transferred to provincial health systems. Our Canadian outpatient rehabilitation clinics receive funding primarily through workers' compensation benefits, which are administered by provincial workers' compensation boards. The workers' compensation boards assess employers' fees based on their industry and past claims history. These fees are then distributed independently by each provincial workers' compensation board as payments for healthcare services. Therefore, the payments each of our rehabilitation clinics receive for similar
services can vary substantially because of the different payment regulations in each province. For the six months ended June 30, 2000, we derived about 3.5% of our total net operating revenues from our operations in Canada.
Other Healthcare Regulations
Fraud and Abuse Enforcement. Various federal laws prohibit the submission of false or fraudulent claims, including claims to obtain payment under Medicare, Medicaid and other government healthcare programs. Penalties for violation of these laws include civil and criminal fines, imprisonment and exclusion from participation in federal and state healthcare programs. In recent years, federal and state government agencies have increased the level of enforcement resources and activities targeted at the healthcare industry. In addition, the federal False Claims Act allows an individual to bring lawsuits on behalf of the government, in what are known as qui tam or "whistleblower" actions, alleging false or fraudulent Medicare or Medicaid claims or other violations of the statute. The use of these private enforcement actions against healthcare providers has increased dramatically in the recent past, in part because the individual filing the initial complaint is entitled to share in a portion of any settlement or judgment.
From time to time, various federal and state agencies, such as the Department of Health and Human Services, issue a variety of pronouncements, including fraud alerts, the Office of Inspector General's Annual Work Plan and other reports, identifying practices that may be subject to heightened scrutiny. These pronouncements can identify issues relating to long-term acute care hospitals or outpatient rehabilitation services or providers. For example, the Office of Inspector General's 2001 Work Plan describes the government's intention to study providers' use of the "hospital within a hospital" model for furnishing long term acute care hospital services and the effectiveness of Health Care Financing Administration's payment safeguards relating to such services. We monitor these issuances to ensure that our resources are focused on compliance with areas targeted for enforcement.
We endeavor to conduct our operations in compliance with applicable laws, including healthcare fraud and abuse laws. If we identify any practices as being potentially contrary to applicable law, we will take appropriate action to address the matter, including, where appropriate, disclosure to the proper authorities.
Remuneration, Fraud and Anti-dumping Measures. The federal "anti- kickback" statute prohibits some business practices and relationships under Medicare, Medicaid and other federal healthcare programs. These practices include the payment, receipt, offer or solicitation of money in connection with the referral of patients covered by a federal or state healthcare program. Violations of the anti-kickback law may be punished by a criminal fine of up to $50,000 or imprisonment for each violation, civil monetary penalties of $50,000 and damages of up to three times the total amount of remuneration, and exclusion from participation in federal or state health care programs.
Section 1877 of the Social Security Act, commonly known as the "Stark Law," was amended in 1995 to prohibit referrals for designated health services by physicians under the Medicare and Medicaid programs to other healthcare providers in which the physicians have an ownership or compensation arrangement unless an exception applies. Sanctions for violating the Stark Law include civil monetary penalties of up to $15,000 per prohibited service provided, assessments equal to twice the dollar value of each such service provided and exclusion from the Medicare and Medicaid programs. The statute also provides a penalty of up to $100,000 for a circumvention scheme. In addition, many states have adopted or may adopt similar anti-kickback or anti-self-referral statutes. Some of these statutes prohibit the payment or receipt of remuneration for the referral of patients, regardless of the source of the payment for the care. Final regulations implementing the 1995 amendment to the Stark Law have not yet been adopted.
Medicare-participating hospitals are also subject to the Emergency Treatment and Active Labor Act, an "anti-dumping" statute commonly referred to as EMTALA. If a patient with an emergency condition enters
a hospital with an emergency department, this federal law requires the hospital to stabilize a patient suffering from this emergency condition or make an appropriate transfer of the patient to a facility that can handle the condition. There are severe penalties under EMTALA if a hospital refuses to screen or appropriately stabilize or transfer a patient or if the hospital delays appropriate treatment in order to first inquire about the patient's ability to pay. Although none of our hospitals operate emergency departments, the government has interpreted EMTALA broadly to cover situations in which any type of hospital inpatient is transferred in an unstable condition.
Provider-based Status. The designation "provider-based" refers to circumstances in which a subordinate facility (e.g., a separately-certified Medicare provider, a department of a provider or a satellite facility) is treated as part of a provider for Medicare payment purposes. In these cases, the services of the subordinate facility are included on the "main" provider's cost report and overhead costs of the main provider can be allocated to the subordinate facility, to the extent that they are shared. We operate four long term acute care hospitals that are treated as provider-based satellites of certain of our other facilities and we provide rehabilitation management and staffing services to hospital rehabilitation departments that may be treated as provider-based. On April 7, 2000, the Health Care Financing Administration finalized new regulatory standards for determinations that a facility or service has provider-based status. The new standards finalized by the Health Care Financing Administration on April 7, 2000 will become effective on January 10, 2001 and providers must comply with them for provider cost reporting periods beginning on or after January 10, 2001.
Health Information Practices. In addition to broadening the scope of the fraud and abuse laws, the Health Insurance Portability and Accountability Act also mandates, among other things, the adoption of standards for the exchange of electronic health information in an effort to encourage overall administrative simplification and enhance the effectiveness and efficiency of the healthcare industry. Among the standards that the Department of Health and Human Services will adopt pursuant to the Health Insurance Portability and Accountability Act are standards for the following:
. electronic transactions and code sets;
. unique identifiers for providers, employers, health plans and individuals;
. security and electronic signatures;
. privacy; and
. enforcement.
Although the Health Insurance Portability and Accountability Act was intended ultimately to reduce administrative expenses and burdens faced within the healthcare industry, we believe the law will initially bring about significant and, in some cases, costly changes. Rules issued by the Department of Health and Human Services to date mandate the use of new standards for common healthcare transactions, including healthcare claims information, plan eligibility, referral certification and authorization, claims status, plan enrollment and disenrollment, payment and remittance advice, plan premium payments and coordination of benefits, as well as the use of electronic signatures.
Pursuant to the Health Insurance Portability and Accountability Act, the Department of Health and Human Services has also proposed new standards relating to the privacy and security of individually identifiably health information. As proposed, these standards not only require our compliance with rules governing the use and disclosure of protected health information, but they also require us to impose those rules, by contract, on any business partner to whom such information is disclosed. Under the Department of Health and Human Services current proposed privacy standards, patients would be required to be made third-party beneficiaries of our contracts with business partners, which would, in many states, entitle them to sue either us or the business partner for improper uses or disclosures of their protected health information. The final forms of the security and privacy standards may be modified materially from the Department of Health and Human Services proposals, particularly with respect to the requirements for business partner arrangements.
The Department of Health and Human Services finalized the new transaction standards on August 17, 2000, and we will be required to comply with them by August 16, 2002. The security and privacy under the Health Insurance Portability and Accountability Act are currently scheduled to be finalized by the Department of Health and Human Services prior to the end of 2000. Once these security and privacy regulations are issued in final form, we will have approximately two years to be fully compliant. Sanctions for failing to comply with the Health Insurance Portability and Accountability Act include criminal penalties and civil sanctions.
We are evaluating the effect of the Health Insurance Portability and Accountability Act and have recently developed a task force to address the Health Insurance Portability and Accountability Act regulations as they have been adopted to date and as additional standards are adopted in the coming months. At this time, we anticipate that we will be able to fully comply with those Health Insurance Portability and Accountability Act requirements that have been adopted. However, we cannot at this time estimate the cost of such compliance, nor can we estimate the cost of compliance with standards that have not yet been finalized by the Department of Health and Human Services. Although the new and proposed health information standards are likely to have a significant effect on the manner in which we handle health data and communicate with payors, based on our current knowledge, we believe that the cost of our compliance will not have a material adverse effect on our business, financial condition or results of operations.
Employees
As of September 30, 2000 we employed approximately 13,400 people throughout the United States and Canada. A total of approximately 8,000 of our employees are full-time and the remaining approximately 5,400 are part-time employees. Outpatient, contract therapy and physical rehabilitation and occupational health employees totaled approximately 8,200 and inpatient employees totaled approximately 5,200.
Legal Proceedings
On June 9, 1998, a complaint was filed naming our subsidiary, American Transitional Hospitals, Inc., and its former parent, Beverly Enterprises, Inc., as defendants. This qui tam action seeks triple damages and penalties under the False Claims Act against American Transitional Hospitals. The Department of Justice did not intervene in this action. It is alleged in the complaint that prior to the acquisition, American Transitional Hospitals fraudulently billed Medicare for services that were not rendered and supplies and medications that were not needed. Beverly Enterprises has agreed to fully indemnify us against all losses that result from liabilities that occurred before we acquired American Transitional Hospitals, which includes this litigation. Beverly Enterprises is undertaking the legal defense in this case.
On August 10, 1998 a complaint was filed that named NovaCare, Inc. (now known as NAHC, Inc.), other named defendants and 100 defendants who were to be named at a later time. This qui tam action seeks triple damages and penalties under the False Claims Act against NAHC. The Department of Justice did not intervene in this action. The allegations involve, among other things the distinction between individual and group billing in physical rehabilitation clinics that we acquired from NovaCare. On February 1, 2000 the unnamed defendants were dismissed with prejudice, however the relator plaintiff has recently made a motion to name us as a defendant in this case. NAHC has agreed to fully indemnify us for any losses which could result from this case. NAHC has sold all of its operating entities. Based on our review of the complaint, we do not believe that this lawsuit is meritorious, and if we or any of the NovaCare companies we acquired are named as a defendant, we intend to vigorously defend against this action. However, because of the uncertain nature of the litigation, we cannot predict the outcome of this matter.
In addition, as part of our business, we are subject to legal actions alleging liability on our part. To cover claims arising out of the operations of our hospitals and outpatient rehabilitation facilities, we generally maintain professional malpractice liability insurance and general liability insurance on a claims made basis in amounts and with deductibles that we believe to be sufficient for our operations. We also maintain umbrella
liability coverage covering claims which, due to their nature or amount, are not covered by our insurance policies. We cannot assure you that professional liability insurance will cover all claims against us or continue to be available at reasonable costs for us to maintain adequate levels of insurance. See "Risk Factors--Significant legal actions could subject us to substantial uninsured liabilities."
Competition
We compete primarily on the basis of pricing and quality of the patient services we provide. Our specialty acute care hospitals face competition principally from general acute care hospitals in the communities in which we operate. General acute care hospitals often have the capability to provide the same services we provide. Our hospitals also face competition from large national operators of similar facilities, such as Vencor, Inc.
Our outpatient rehabilitation clinics face competition principally from locally owned and managed outpatient rehabilitation clinics in the communities they serve. Many of these clinics have longer operating histories and greater name recognition in these communities than our clinics, and they may have stronger relations with physicians in these communities on whom we rely for patient referrals. In addition, HealthSouth Corporation, which operates more outpatient rehabilitation clinics in the United States than we do, competes with us in many of our markets.
Compliance Program
Our Compliance Program
In late 1998, we voluntarily adopted our code of conduct, which is the basis for our company-wide compliance program. Our written code of conduct provides guidelines for principles and regulatory rules that are applicable to our patient care and business activities. These guidelines are implemented by a compliance officer, a director of compliance who assists the compliance officer, a compliance committee and sub-committees, and employee education and training. We also have established a reporting system, auditing and monitoring programs, and a disciplinary system as a means for enforcing the code's policies.
Operating Our Compliance Program
We focus on integrating compliance responsibilities with operational functions. We recognize that our compliance with applicable laws and regulations depends upon individual employee actions as well as company operations. We therefore have adopted an operations team approach to compliance, and we utilize corporate experts for the program design efforts of our compliance committee. We use facility leaders in our compliance sub- committees for employee-level implementation of our code of conduct. This approach is intended to enforce our company-wide commitment to operate in accordance with the laws and regulations that govern our business.
Compliance Committee
Our compliance committee is made up of members of our senior management and in-house counsel. The compliance committee meets on a quarterly basis and reviews the activities, reports and operation of our compliance program. In addition, the compliance sub-committees meet on a regular basis and review compliance for each of our business divisions.
Compliance Issue Reporting
In order to facilitate our employees' ability to report known, suspected or potential violations of our code of conduct, we have developed a system of anonymous reporting. This anonymous reporting may be
accomplished through our toll-free compliance hotline or our compliance post office box. Each compliance incident is reviewed by the compliance officer and the compliance committee and is investigated in accordance with the compliance department's investigation policy.
Compliance Monitoring and Auditing/Comprehensive Training and Education
Monitoring reports and the results of compliance for each of our business divisions are reported to the compliance committee on a quarterly basis. We regularly train and educate our employees regarding the code of conduct, as well as the legal and regulatory requirements relevant to each employee's work environment. All new and current employees are required to sign a compliance certification form, certifying that the employee has read, understood, and has agreed to abide by the code of conduct.
Policies and Procedures Reflecting Compliance Focus Areas
We review our current policies and procedures for our compliance program, and we intend to continue to review them on an annual basis in order to improve operations and to ensure compliance with requirements of standards, laws and regulations and to reflect the on-going compliance focus areas which have been identified by the compliance committee.
Facilities
We currently lease most of our facilities, including clinics, offices, long term acute care hospitals and the corporate headquarters. We lease all of our clinics and related offices, which, as of September 30, 2000, included approximately 632 outpatient rehabilitation clinics throughout the United States and Canada. The outpatient rehabilitation clinics generally have a five- year lease term with two three-year renewals.
We also lease all of our hospital facilities except for one 176,000 square foot facility located in Houston, Texas. As of September 30, 2000, we had 49 hospital within a hospital leases and one freestanding building lease.
We generally seek a five-year lease for our hospitals, with an additional five-year renewal at our option. We lease our corporate headquarters, which is approximately 56,000 square feet, located in Mechanicsburg, Pennsylvania. We lease several other administrative spaces related to administrative and operational support functions. As of September 30, 2000, this was comprised of 13 locations throughout the U.S. with approximately 106,000 square feet in total.
MANAGEMENT
Directors and Executive Officers
Our directors and executive officers, their ages and their positions are as follows:
Name Age Position ---- --- -------- Rocco A. Ortenzio................... 68 Chairman and Chief Executive Officer Director, President and Chief Robert A. Ortenzio.................. 43 Operating Officer Russell L. Carson................... 57 Director Bryan C. Cressey.................... 51 Director Donald J. Edwards................... 34 Director Meyer Feldberg...................... 58 Director Director and Executive Vice LeRoy S. Zimmerman.................. 65 President-Public Policy Executive Vice President of Patricia A. Rice.................... 53 Operations Senior Vice President and Chief David W. Cross...................... 53 Development Officer Senior Vice President, Human S. Frank Fritsch.................... 49 Resources Senior Vice President and Chief Martin F. Jackson................... 46 Financial Officer Senior Vice President, General Michael E. Tarvin................... 40 Counsel and Secretary President, NovaCare Rehabilitation Edward R. Miersch................... 44 Division |
Rocco A. Ortenzio co-founded our company and has served as Chairman and Chief Executive Officer since February 1997. In 1986, he co-founded Continental Medical Systems, Inc., a provider of comprehensive medical rehabilitation services, and served as its Chairman and Chief Executive Officer until July 1995, when it merged with Horizon Healthcare Corporation. In 1979, Mr. Ortenzio founded Rehab Hospital Services Corporation, a hospital chain acquired by National Medical Enterprises, Inc. (now called Tenet Healthcare Corporation) in January 1985, and served as its Chairman and Chief Executive Officer until June 1986. In 1969, Mr. Ortenzio founded Rehab Corporation and served as its Chairman and Chief Executive Officer until 1974, when it merged with American Sterilizer Company. From 1996 to 1999, he served on the Board of Governors of the Pennsylvania State System of Higher Education. Mr. Ortenzio serves as a director of Quorum Health Group Inc., and PHICO Insurance Company, and is a fund advisor to HLM Partners, Inc., a venture capital firm located in Boston, Massachusetts, and Dauphin Capital Partners, a venture capital fund located in Locust Valley, New York. Mr. Ortenzio is the father of Robert A. Ortenzio, our President and Chief Operating Officer.
Robert A. Ortenzio co-founded our company and has served as a director and President and Chief Operating Officer since February 1997. He was an Executive Vice President and a director of Horizon/CMS Healthcare Corporation from July 1995 until July 1996. Mr. Ortenzio co-founded Continental Medical Systems, Inc. and served as its President and Chief Executive Officer from May 1989 and July 1995, respectively, until August 1996. Prior to that time, he served as Chief Operating Officer of Continental Medical Systems, Inc. from April 1988 to July 1995. Mr. Ortenzio joined Continental Medical Systems, Inc. as a Senior Vice President in February 1986. Before then, he was a Vice President of Rehab Hospital Services Corporation. Mr. Ortenzio serves as a director of U.S. Oncology, Inc. Mr. Ortenzio is the son of Rocco A. Ortenzio, our Chief Executive Officer.
Russell L. Carson has been a director since February 1997. He co-founded Welsh, Carson, Anderson & Stowe in 1978 and has focused on healthcare investments. Welsh, Carson, Anderson & Stowe has created eleven institutionally funded limited partnerships with total capital of $8 billion and has invested in more than 200 companies. Before co-founding Welsh, Carson, Anderson & Stowe, Mr. Carson was employed by Citicorp Venture Capital Ltd., a subsidiary of Citigroup, Inc., and served as its Chairman and Chief Executive Officer from 1974 to 1978. Mr. Carson serves as a director of Quorum Health Group, Inc. and U.S. Oncology, Inc.
Bryan C. Cressey has been a director since February 1997. He has been a principal at Thoma Cressey Equity Partners since June 1998 and a principal at Golder, Thoma, and Cressey and Rauner, the predecessor of GTCR Golder Rauner, LLC, prior to 1995. He serves as a director of Clarion Technologies Inc. and Cable Design Technologies Corp.
Donald J. Edwards has been a director since February 1997. He has been a principal at GTCR Golder Rauner, LLC since 1996 and was an associate there from 1994 to 1996. He serves as a director of American Habilitation Services, Dynacare, American Medical Laboratories, CompDent Corporation, PSINet Consulting Solutions, Inc., LifeCare Management Services, Park City Solutions, Inc., AccounTEC Inc. and Wallace Theater Corporation.
Meyer Feldberg has been a director since September 2000. He has served as professor of management and the dean of Columbia Business School since 1989. He serves as a director of Federated Department Stores, Revlon, Inc., Primedia Inc. and PaineWebber Mutual Funds.
LeRoy S. Zimmerman has served as Executive Vice President of Public Policy since September 2000 and as a director since October 1998. He was an equity member of the law firm Eckert Seamans Cherin & Mellott, LLC, from April 1989 to September 2000. At Eckert Seamans, he served as Chairman of the Board of Directors from January 1994 to September 2000, and Chairman of its Executive Committee from June 1997 to September 2000. Before joining Eckert Seamans, Mr. Zimmerman served as Pennsylvania's first elected Attorney General from January 1981 to January 1989, and District Attorney of Dauphin County, Pennsylvania from to 1965 to 1980.
Patricia A. Rice has served as Executive Vice President of Operations since November 1999. She served as Senior Vice President of Hospital Operations from December 1997 to November 1999. She was Executive Vice President of the Hospital Operations Division for Horizon/CMS Healthcare Corporation from August 1996 until December 1997. Prior to that time, she served in various management positions at Horizon/CMS Healthcare Corporation from 1987 to 1996.
David W. Cross has served as Senior Vice President & Chief Development Officer since December 1998. Before joining us, he was President and Chief Executive Officer of Intensiva Healthcare Corporation from 1994 until we acquired it. Mr. Cross was a founder, the President and Chief Executive Officer, and a director of Advanced Rehabilitation Resources, Inc., and served in each of these capacities from 1990 to 1993. From 1987 to 1990, he was Senior Vice President of Business Development for RehabCare Group, Inc., a publicly traded rehabilitation care company, and in 1993 and 1994 served as Executive Vice President and Chief Development Officer of RehabCare Group, Inc.
S. Frank Fritsch has served as Senior Vice President of Human Resources since November 1999. He served as our Vice President of Human Resources from June 1997 to November 1999. Prior to June 1997, he was Senior Vice President-- Human Resources for Integrated Health Services from May 1996 until June 1997. Prior to that time, Mr. Fritsch was Senior Vice President--Human Resources for Continental Medical Systems from August 1992 to April 1996. From 1980 to 1992, Mr. Fritsch held senior human resources positions with Mercy Health Systems, Rorer Pharmaceuticals, ARA Mark and American Hospital Supply Corporation.
Martin F. Jackson has served as Senior Vice president and Chief Financial Officer since May 1999. Mr. Jackson previously served as a Managing Director of the Health Care Investment Banking Group for CIBC Oppenheimer from January 1997 to May 1999. Prior to that time, he served as Senior Vice President, Health Care Finance with McDonald & Company Securities, Inc. from January 1994 to January 1997. Prior to 1994, Mr. Jackson held senior financial positions with Van Kampen Merritt, Touche Ross, Honeywell and L'Nard Associates.
Michael E. Tarvin has served as Senior Vice President, General Counsel and Secretary since November 1999. He served as our Vice President, General Counsel and Secretary from February 1997 to November 1999. He was Vice President--Senior Counsel of Continental Medical Systems from February 1993 until February 1997. Prior to that time, he was Associate Counsel of Continental Medical Systems from March 1992. Mr. Tarvin was an associate at the Philadelphia law firm of Drinker Biddle & Reath, LLP from September 1985 until March 1992.
Edward R. Miersch has served as President of our NovaCare Rehabilitation Division since January 2000. Prior to that time, Mr. Miersch was Vice President of Ambulatory Services of Mercy Health System from December 1998 to October 1999. From 1997 until 1998, Mr. Miersch was Senior Vice President and Chief Operating Officer of U.S. Physicians, Inc., an integrator and manager of physician practices, which declared bankruptcy in November 1998. From 1996 until 1997, Mr. Miersch served as Vice President -- Operations of U.S. Physicians, Inc. From 1993 until 1996, Mr. Miersch served as Eastern Region President of the Outpatient Rehabilitation Division of the former NovaCare, Inc. He served as President of Sports Physical Therapists, Inc. from 1980 until September 1993, when that company was acquired by RehabClinics, Inc., a company which was itself in turn acquired by NovaCare, Inc. in early 1994. Mr. Miersch also served as Director of Physical Therapy and Sports Medicine at Haverford Community Hospital from 1980 to 1986.
Classes of the Board
Our board of directors is divided into three classes that serve staggered three-year terms as follows:
Class Expiration Member ------------------------ ---------- ------- Class I Messrs. Class II Messrs. Class III Messrs. |
Board Committees
The compensation committee reviews and makes recommendations to the board regarding the compensation to be provided to our Chief Executive Officer and our directors. In addition, the compensation committee reviews compensation arrangements for our other executive officers. The compensation committee also administers our equity compensation plans. The current members of the compensation committee are Messrs. Carson and Cressey.
The audit committee reviews and monitors our corporate financial reporting, external audits, internal control functions and compliance with laws and regulations that could have a significant effect on our financial condition or results of operations. In addition, the audit committee has the responsibility to consider and recommend the appointment of, and to review fee arrangements with, our independent auditors. Mr. Feldberg is currently the sole member of our audit committee. We intend to name two additional independent directors to our audit committee within 90 days following the completion of the offering.
Director Compensation and Other Arrangements
We do not pay cash compensation to our employee directors, however they are reimbursed for the expenses they incur in attending meetings of the board or board committees. Non-employee directors, other than non-employee directors appointed by Welsh, Carson, Anderson & Stowe; GTCR Golder Rauner, LLC and Thoma Cressey Equity Partners, receive cash compensation in the amount of $5,000 per quarter and $1,250 per board meeting attended. All non-employee directors are also reimbursed for the expenses they incur in attending meetings of the board or board committees. In addition, non-employee directors are eligible to receive options to purchase common stock awarded under our 1997 Stock Option Plan. See "Select Medical Corporation 1997 Amended and Restated Stock Option Plan."
Compensation Committee Interlocks and Insider Participation
Upon completion of this offering, our compensation committee will make all compensation decisions regarding our executives. Messrs. Carson and Cressey have served as the only members of the compensation committee since we formed the committee in 1997.
Executive Compensation
The following table provides summary information concerning the compensation earned by our Chief Executive Officer and our four most highly paid executive officers other than our Chief Executive Officer employed by us during the fiscal year ended December 31, 1999.
Summary Compensation Table
Long-Term Annual Compensation Compensation ---------------------------------- ------------ Securities Other Underlying Name and Principal Position Salary Bonus Compensation (a) Options/SARs --------------------------- -------- -------- ---------------- ------------ Rocco A. Ortenzio Chairman and Chief Executive Officer....................... $387,222 $193,611 $ -- 1,137,230 Robert A. Ortenzio (b) President and Chief Operating Officer....................... 334,669 165,446 3,976 758,154 Patricia A. Rice (b) Executive Vice President of Operations.................... 233,450 90,000 4,611 -- David W. Cross (c) Senior Vice President and Chief Development Officer..... 190,000 76,000 687,150 -- S. Frank Fritsch Senior Vice President of Human Resources (b)................. 183,041 72,000 4,931 -- |
Option Grants During the Year Ended December 31, 1999
The following tables set forth certain information concerning grants to purchase shares of our common stock of each of the officers named in the summary compensation table above during the year ended December 31, 1999.
Potential Realizable Value at Number of Percentage of Exercise Assumed Annual Rates of Stock Securities Total Options Price Price Appreciation for Underlying Granted to per Option Term (c) Options Employees in Share Expiration ------------------------------ Name Granted (a) 1999 (b) Date 5% 10% ---- ---------- ------------- -------- ---------- -------------- --------------- Rocco A. Ortenzio....... 1,137,230 51.9% $ 11/18/09 Robert A. Ortenzio...... 758,154 34.6% $ 11/18/09 |
shares are subject to a right of repurchase upon termination of employment.
Options expire ten years from the date of grant.
(b) We granted options at an exercise price equal to the fair market value of
our common stock on the date of grant, as determined by our board of
directors.
(c) These amounts represent hypothetical gains that could be achieved for the
respective options if exercised at the end of the option term. These gains
are based on assumed rates of stock price appreciation of 5% and 10%
compounded annually from the date the respective options were granted to
their expiration dates based upon an assumed initial public offering price
of $ per share, the midpoint of the range of initial public offering
prices set forth on the cover page of this prospectus. These assumptions
are not intended to forecast future appreciation of our stock price. The
potential realizable value computation does not take into account federal
or state income tax consequences of option exercises or sales of
appreciated stock.
Year End December 31, 1999 Option Values
The following table sets forth certain information concerning option exercises by each of the officers named in the above summary compensation table.
Number of Securities Underlying Unexercised Value of Unexercised In- Options at Fiscal Year The Money Options at Shares End Fiscal Year End (a) Acquired on Value ------------------------- ------------------------- Name Exercise Realized Exercisable Unexercisable Exercisable Unexercisable ---- ----------- -------- ----------- ------------- ----------- ------------- Rocco A. Ortenzio....... 0 $ 0 2,787,230 0 Robert A. Ortenzio...... 0 0 1,308,154 0 David W. Cross.......... 0 0 50,000 50,000 |
Employment Agreements
In March 2000, we entered into three-year employment agreements with three of our executive officers, Mr. Rocco A. Ortenzio, Mr. Robert A. Ortenzio and Ms. Patricia A. Rice. Under these agreements, which were amended on August 8, 2000, the executives officers are to be paid an annual salary of $800,000, $700,000 and $500,000, respectively, subject to adjustment by our board of directors. In addition, these executives are eligible for bonus compensation. The employment agreements also provide that the executive officers will receive long term disability insurance. In the event Mr. Rocco A. Ortenzio's employment is terminated due to his disability, we must make salary continuation payments to him equal to 100% of his annual base salary for ten years after his date of termination or until he is physically able to become gainfully employed in an occupation consistent with his education, training and experience. We are also obligated to make disability payments to Mr. Robert A. Ortenzio and Ms. Patricia A. Rice for the same period, however, payments to them must equal 50% of their annual base salary. In addition, Mr. Rocco A. Ortenzio and Mr. Robert A. Ortenzio are each entitled to six weeks paid vacation. Ms. Patricia A. Rice is entitled to four weeks paid vacation.
Under the terms of each of these executive officers' employment agreements, their employment term begins on March 1, 2000 and expires on March 1, 2003. At the end of each 12-month period beginning March 1, 2000, the term of each employment agreement automatically extends for an additional year unless one of the executives or we give written notice to the other not less than three months prior to the end of that 12-month period that we or they do not want the term of the employment agreement to continue. Thus, in the absence of written notice given by one of the executives or us, the remaining term of each employment agreement will be three years from each anniversary of March 1, 2000.
These three employment agreements also contain a change of control provision. If, in connection with change of control of Select, we terminate Mr. Rocco A. Ortenzio, Mr. Robert A. Ortenzio or Ms. Patricia A. Rice without cause, Mr. Rocco A. Ortenzio or Mr. Robert A. Ortenzio terminates his employment agreement for any reason, or Ms. Patricia A. Rice terminates her employment agreement for certain specified reasons, we are obligated to pay them a lump sum cash payment equal to their base salary plus bonus for the previous three completed calendar years. In addition, all of their unvested and unexercised stock options will vest. A change in control means, in general, the acquisition by a person or group (other than our current stockholders who own 12% or more of the common stock) of more than 50% of our common stock; a business combination following which 50% or more of our voting power is transferred to the stockholders of the other entity; or our current directors cease to constitute at least a majority of our board. Notwithstanding the foregoing, no change in control will be deemed to have occurred unless the transaction provides our stockholders with consideration equal to or greater than $ per share of common stock. Otherwise, if any of the executives' services are terminated by us other than for cause or they terminate their employment for good reason, we are obligated to pay them a pro-rated bonus for the year of termination equal to the product of the bonus paid or payable to them for the year prior to their termination, multiplied by the fraction of the year of termination they were employed.
Under amendments to Mr. Rocco A. Ortenzio's senior management and employment agreements, we are obligated to pay premiums on life insurance policies held in the Rocco A. Ortenzio Irrevocable Trust, provided that Mr. Ortenzio remains employed by us. We are obligated under these arrangements to pay approximately $2.0 million in premiums in 2000, and $1.25 million for each of the years 2001 through 2010. Under a related collateral assignment agreement, upon Mr. Ortenzio's death, or if the trust surrenders these policies, we are entitled to be repaid, at our election, by the trust for the amount of the premiums we have paid over the life of the policies. We can be paid with the proceeds of a loan, the partial surrender or withdrawal of the policy.
We have also entered into a deferred compensation agreement with Mr. Rocco A. Ortenzio, pursuant to which Mr. Ortenzio has deferred all of his compensation, including his salary and bonus, since March 1, 1997. This amount accrued interest at a rate of 6% from March 1, 1997 to December 31, 1999, and no interest thereafter. We will pay these funds to his spouse or his estate within 60 days after his death. The agreement does not apply to compensation earned after December 31, 2000.
In December 1998, we entered into a two year employment agreement with David W. Cross, which was extended until December 31, 2001. Under this agreement, we granted him options to purchase 100,000 shares of our common stock at an exercise price of $ per share with 50% of the options vesting on December 16, 1999 and the other 50% vesting on December 16, 2000. In addition, Mr. Cross was given a one-time opportunity to purchase up to 75,000 shares of our common stock on or before December 31, 1998 at a purchase price of $ per share. Mr. Cross is entitled to receive an annual salary of $190,000 and incentive compensation at the discretion of our chairman or president. Further, Mr. Cross is entitled to any employment and fringe benefits under our policies as they exist from time to time and which are no less favorable than those received by our senior vice presidents. If we terminate Mr. Cross' employment services other than for cause, we are obligated to pay to him one-year of his base salary in a lump sum as severance pay.
In March 2000, we entered into a change of control agreement with Mr. S. Frank Fritsch, which provides that if, in connection with a change of control, we terminate Mr. Fritsch without cause or Mr. Fritsch terminates his employment for good reason, we are obligated to pay him a lump sum cash payment equal to his base salary plus his bonus for the previous three completed calendar years. In addition, the agreement provides that all unvested stock options will vest upon termination. A change in control means in general, the acquisition by a person or group (other than our current stockholders who own 12% or more of the common stock) of more than 50% of our common stock; a business combination in which 50% or more of our voting power is transferred to the stockholders of the other entity; or our current directors cease to constitute at least a majority of our board. In June 1997, we entered into a senior management agreement with Mr. Fritsch, which will
continue in effect until termination by either us or Mr. Fritsch. Under this agreement, Mr. Fritsch is employed as our Vice President of Human Resources at an annual base salary of $130,000, subject to adjustment by our board of directors.
Select Medical Corporation Amended and Restated 1997 Stock Option Plan
The board of directors adopted the Select Medical Corporation 1997 Stock Option Plan effective as of October 30, 1997 and amended and restated as of October 26, 2000. The plan provides for the grant of stock options to designated officers, key employees, non-employee directors and consultants of ours and our subsidiaries.
Purpose. The purpose of the plan is to promote our interests and the interests of our stockholders by attracting and retaining valued officers, key employees, non-employee directors and consultants, and to motivate these persons to exercise their best efforts on our behalf.
Administration. A committee comprised of at least two non-employee, outside directors, has been appointed by the board of directors to administer the plan. The committee has full authority, subject to the terms of the plan, to do the following:
. interpret and administer the plan;
. select who among the eligible individuals will participate in the plan;
. determine the terms, conditions and types of awards given under the plan; and
. resolve all controversies and claims arising under the plan.
All determinations made by the committee are conclusive and binding on all persons.
Eligibility. Any officer, key employee (including any director who is also an employee), non-employee director or consultant providing services to us or our subsidiaries is eligible to participate in the plan, provided that non- employee directors and consultants are not be eligible to receive incentive stock options.
Number of Shares. The plan provides for the issuance of up to a total of 10,000,000 shares of our common stock, plus any additional amount (the additional amount will be calculated each year) necessary to make the total shares available for issuance under the plan equal to the sum of 10,000,000 plus 14% of the total issued and outstanding common stock in excess of 60,000,000 shares, subject to adjustments for stock splits, stock dividends and similar changes in our capitalization. If any awards expire or otherwise terminate prior to being exercised, then the shares of common stock subject to the awards will be available again for grants under the plan. In addition, when an option is exercised, the number of shares issued in connection with the option will be added to the amount available under the plan, so that the total number of shares available for awards under the plan will never be less than 14% of our total outstanding common stock. No individual employee may receive awards covering more than 10,000,000 shares under the plan during any calendar year.
Types of Awards. The plan provides for the grant of stock options. A
stock option is a grant by us of the right to purchase a specified number of
shares of our common stock for a specified time period at a fixed price.
Options may be either incentive stock options meeting the requirements of
Section 422 of the Internal Revenue Code or non-qualified stock options. All
options are evidenced by written option agreements containing the term and
conditions of the options.
The exercise price of an option is determined by the committee, but, in the case of incentive stock options, the exercise price will not be less than the fair market value of a share of common stock on the date of grant (or 110% of such fair market value if the option is granted to a person who owns more than 10% of the voting power of the company at the time the option is granted to him). The term of an option may not be
greater than ten years (or five years for an incentive stock option granted to a person who owns more than 10% of the voting power of the company). Options are generally not transferable during the optionee's lifetime, but the committee may provide in an option agreement that a non-qualified stock option is transferable pursuant to limitations and conditions determined by the committee.
Options may be exercised in several ways, including by payment of the exercise price in cash or its equivalent, by delivery of qualified shares of our common stock, or any combination of such methods, or, if permitted by the committee, with the proceeds of a loan from us. Any such loan could be secured by the stock acquired pursuant to the exercise of the option or by any other security as determined by the committee.
Amendment and Termination. The plan will terminate on midnight of October 29, 2007, unless terminated earlier by the board of directors. The board of directors has authority to amend, suspend or terminate the plan at any time. However, no termination or amendment of the plan may materially impair the rights of an option holder without the consent of the holder. In addition, the following amendments will require prior stockholder approval:
. any amendment that would, if it were not approved by the stockholders, cause the plan to fail to comply with any requirement of applicable law or regulation;
. any amendment that requires stockholder approval under the rules and regulations of the Nasdaq National Market System or any securities exchange that are applicable to us;
. any amendment that would, if it were not approved by the stockholders, cause us, under the Internal Revenue Code, to be unable to grant incentive stock options under the plan; or
. any amendment for which shareholder approval is required pursuant to Treas. Reg. Section 1.162-27(e)(4)(vi) or its successor.
RELATED PARTY TRANSACTIONS
Rocco A. Ortenzio and Robert A. Ortenzio, two of our directors and
executive officers, Golder, Thoma, Cressey, Rauner Fund V L.P. ("Golder Thoma")
and Welsh, Carson, Anderson & Stowe ("Welsh Carson"), were involved in our
founding and organization and may be considered our promoters. In December of
1998 Rocco A. Ortenzio and Robert A. Ortenzio received options under our 1997
Stock Option Plan to purchase 1,650,000 and 550,000 shares of our common stock,
respectively, at an exercise price of $ per share. In November 1999, Rocco
A. Ortenzio and Robert A. Ortenzio received additional options to purchase
1,137,230 and 758,154 shares of our common stock, respectively, at an exercise
price of $ per share.
Rocco A. Ortenzio, Robert A. Ortenzio, Golder Thoma and Welsh Carson participated in our initial funding and from time to time since our founding have each purchased common and preferred stock from us. The following table sets forth the number of shares of our common and preferred stock (as adjusted for subsequent stock splits) purchased by Rocco A. Ortenzio, Robert A. Ortenzio, Golder Thoma and its affiliates, and Welsh Carson and its affiliates, the date of each purchase and the amounts received by us from each of the purchases of our capital stock. As adjusted for stock splits, our common stock was sold for $ per share until December 15, 1998, $ per share until November 19, 1999 and for $ per share thereafter. Our Class A Preferred Stock was sold for $1,000 per share, and our Class B Preferred Stock was sold for $ per share.
Shares of Shares of Shares of Class A Class B Amount Common Preferred Preferred Received Stock Stock Stock by Name Date Purchased Purchased Purchased Select ---- -------- --------- --------- --------- -------- Rocco A. Ortenzio (a).......... 2/5/97 2,255,251 -- -- $ 5/7/97 256,221 128 -- 6/18/97 -- 109 -- 2/9/98 -- 502 -- 4/29/98 -- 355 -- 6/3/98 -- 563 -- 6/30/98 -- 173 -- 7/20/98 244,511 -- -- 10/21/98 -- 468 -- 12/16/98 630,615 -- -- 2/29/00 67,000 -- -- Robert A. Ortenzio (b)......... 2/5/97 1,379,114 -- -- 5/7/97 153,247 66 -- 6/18/97 -- 56 -- 2/9/98 -- 257 -- 4/29/98 -- 182 -- 6/3/98 -- 288 -- 6/30/98 -- 89 -- 10/21/98 -- 239 -- 12/16/98 138,654 -- -- 2/29/00 33,400 -- -- |
Shares of Shares of Shares of Class A Class B Common Preferred Preferred Amount Stock Stock Stock Received by Name Date Purchased Purchased Purchased Select ---- -------- ---------- --------- --------- ----------- Welsh, Carson Anderson & 2/5/97 5,185,740 -- -- $ Stowe.................. 5/7/97 1,949,760 1,254 -- 6/18/97 -- 1,069 -- 2/9/98 -- 4,940 -- 4/29/98 -- 3,494 -- 6/3/98 -- 5,535 -- 6/30/98 -- 1,704 -- 10/21/98 -- 4,603 -- 12/16/98 10,698,058(c) -- -- 11/19/99 1,667,000(d) -- 7,531,424 GTCR Golder Rauner, 2/5/97 5,450,640 -- -- LLC.................... 5/7/97 2,049,360 1,319 -- 6/18/97 -- 1,123 -- 2/9/98 -- 5,193 -- 4/29/98 -- 3,671 -- 6/3/98 -- 5,819 -- 6/30/98 -- 1,791 -- 10/21/98 -- 4,837 -- 12/16/98 4,260,714 -- -- 11/19/99 -- -- 1,983,333 |
In 1997 we entered into a shareholders agreement with our principal stockholders, including Welsh Carson, Golder Thoma, Mr. Rocco A. Ortenzio and Mr. Robert A. Ortenzio. The shareholders agreement terminates by its terms upon the completion of this offering. Members of our management have also been granted preemptive rights with respect to our capital stock. These arrangements will be terminated prior to or upon completion of this offering.
Pursuant to the Warrant Agreement dated June 30, 1998, as amended on February 9, 1999 and amended and restated on November 19, 1999, to induce our financial sponsors, Welsh Carson and Golder Thoma to partially guarantee our senior debt, Rocco A. Ortenzio and Robert A. Ortenzio each agreed to make contributions to those financial sponsors if those guarantees were enforced by our senior lenders. In exchange
for the promise of these guarantees by our financial sponsors and the promise of contributions by Rocco A. Ortenzio and Robert A. Ortenzio, we have issued warrants to purchase shares of our common stock to Golder Thoma, Rocco A. Ortenzio, Robert A. Ortenzio and two affiliates of Welsh Carson. The following table sets forth the dates of the grants and the number of shares issuable on exercise of the warrants. All warrants expire on June 30, 2003 and are exercisable at $ per share.
Golder, Thoma, Welsh, Carson, WCAS Capital Cressey, Date of Anderson & Stowe, Partners, III, Rauner Fund Rocco A. Robert A. Issue VII, L.P. L.P. V, L.P. Ortenzio Ortenzio ------- ----------------- -------------- -------------- -------- --------- 06/30/98 376,370 -- 376,370 -- 78,080 07/11/98 -- -- -- 169,180 -- 10/31/98 188,185 -- 188,185 84,590 39,040 01/29/99 188,185 -- 188,185 84,590 39,040 04/30/99 17,923 3,238 21,161 9,512 4,390 07/31/99 38,610 6,975 45,585 20,490 9,457 10/31/99 38,837 7,015 45,852 20,610 9,512 01/31/00 82,957 15,644 98,601 32,228 15,203 04/30/00 94,710 18,040 112,750 33,550 15,950 07/31/00 94,710 18,040 112,750 33,550 15,950 09/22/00 54,561 10,393 64,954 19,328 9,188 --------- ------ --------- ------- ------- 1,175,048 79,345 1,254,393 507,628 235,810 |
On December 15, 1998, we issued an aggregate of 21,224,489 shares of our common stock. Of this amount, 4,067,857 common shares were purchased by Thoma Cressey Fund VI, L.P., 142,857 shares were purchased by Bryan C. Cressey and 119,151 common shares were purchased by Russell L. Carson. Also, Select Healthcare Investors, L.P., in which the general partner is partially owned by Rocco A. Ortenzio and Robert A. Ortenzio, purchased 428,572 common shares. WCAS Capital Partners III, L.P. purchased 2,653,060 of these shares and a 10% Senior Subordinated Note for an aggregate purchase price of $35 million. WCAS Capital Partners III, L.P. then purchased an additional $30 million principal amount of Senior Subordinated Notes from us for $30 million in cash. These 10% Senior Subordinated Notes are due December 15, 2008. We paid Welsh Carson, Golder Thoma, Mr. Rocco A. Ortenzio and Mr. Robert A. Ortenzio an investment fee equal to 1% of the cash consideration they and their affiliates paid for the securities purchased in this offering.
On November 19, 1999, in connection with the NovaCare acquisition, we issued an aggregate of 16,000,000 shares of our Class B Preferred Stock at a price of $ per share. Of this amount, 7,531,424 shares were purchased by affiliates of Welsh Carson, 111,216 shares were purchased by Russell L. Carson, 1,983,333 shares were purchased by affiliates of Golder Thoma and 5,950,000 shares were purchased by Thoma Cressey. At the same time, WCAS Capital Partners III, L.P. purchased 1,667,000 shares of our common stock and a 10% Senior Subordinated Note for an aggregate purchase price of $25 million. The Note is due November 19, 2009, however, if we repay the principal amount and all accrued and unpaid interest in full by November 19, 2001, WCAS Capital Partners III, L.P. will transfer 416,750 shares of our common stock to us. We plan to repay this Note in full with the proceeds of this offering. We paid Welsh Carson and Golder Thoma an investment fee equal to 1% of the cash consideration they and their affiliates paid for the securities purchased in this offering.
On May 5, 1999 we loaned $120,000 to Martin F. Jackson, our Chief Financial Officer, to assist him in purchasing 34,286 shares of our common stock at a price of $ per share. The loan is interest-free, and will be forgiven in principal amounts of $20,000 every six months from the date of the loan. As of the date of this prospectus, $80,000 remains outstanding on this loan.
In April 2000, we sold all of the assets of Georgia Health Group, Inc. to Concentra Health Services, Inc. for $5 million. Welsh Carson beneficially owns a majority of the capital stock of Concentra Health Services. We believe the terms of this transaction were no less favorable to us than they would have been in an arm's length transaction with a third party.
In 1997, in connection with a terminated acquisition, we were entitled to a break-up fee of $19,415,000. Of this amount, in consideration of their financing commitment, $9,120,400 was paid to Welsh Carson, $1,884,480 was paid to Golder Thoma, $89,170 was paid to Rocco A. Ortenzio, $55,089 was paid to Robert A. Ortenzio and $121,500 was paid to partnerships owned partially owned by Rocco A. Ortenzio and Robert A. Ortenzio, which have since been liquidated.
We currently lease our corporate office space in Mechanicsburg, Pennsylvania from Old Gettysburg Associates I and Old Gettysburg Associates III, two general partnerships that are partially owned by Rocco A. Ortenzio and Robert A. Ortenzio, our Chairman and Chief Executive Officer, and our President and Chief Operations Officer, respectively. Our lease for 43,919 square feet of office space at 4716 Old Gettysburg Road expires on December 31, 2014, and our lease for 12,400 square feet of office space at 4718 Old Gettysburg Road expires on May 31, 2004. We pay approximately $992,000 per year in rent for this office space. We believe that these leases are on terms no less favorable to us than those that would be available to us in an arm's length transaction with a third party.
We also lease office equipment and furnishings from Select Capital Corporation, a company in which Rocco A. Ortenzio and Robert A. Ortenzio are stockholders and each own 25%. This lease commenced on April 1, 1997, and terminates on March 31, 2002. We have the option to extend the lease for an additional year on the same terms. We pay approximately $58,000 per under the agreement. We believe that the lease is on terms no less favorable to us than those that would be available to us in an arm's length transaction with a third party.
On December 1, 1999, we purchased all of the stock of Select Air Corporation, a Delaware corporation, from Rocco A. Ortenzio for $2.7 million. The only asset of Select Air Corporation was one HS 125 400-731 aircraft. We obtained an appraisal at the time of purchase that supported the price we paid for Select Air. In October 2000, we sold the airplane to an unaffiliated third party. Pursuant to a Cost Sharing Agreement also dated December 1, 1999, we pay $3,250 each month to Select Transport, Inc., a company owned by Rocco A. Ortenzio, for expenses relating to the storage, maintenance and operation of the aircraft. Rocco A. Ortenzio also pays us fees from time to time under this agreement, for the use of pilots who are our employees.
We also have entered into compensatory and other employment-related contracts with Mr. Rocco A. Ortenzio and Mr. Robert A. Ortenzio. See "Management--Employment Agreements."
The law firm of Eckert Seamans Cherin & Mellot, LLC, of which LeRoy S. Zimmerman was formerly a member, has in the past provided, and may continue to provide, legal services to us and our subsidiaries.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding beneficial ownership of our common stock as of September 30, 2000, and as adjusted to reflect the sale of common stock pursuant to the offering. The table includes:
. each person (or group of affiliated persons) who is known by us to own more than five percent of the outstanding shares of our common stock;
. each of our executive officers and directors; and
. all of our executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless otherwise noted, we believe that all persons named in the table have sole voting and sole investment power with respect to all shares beneficially owned by them. All share amounts include shares of common stock issuable upon the exercise of options or warrants exercisable within 60 days of the date of this prospectus. Options or warrants that are exercisable for common stock and other ownership rights in common stock that vest within 60 days of the date of this prospectus are deemed to be outstanding and to be beneficially owned by the person holding such options or warrants for the purpose of computing the percentage ownership of such person but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. The table below also assumes that all of the Class A Preferred Stock will be redeemed upon the completion of this offering and gives effect to the conversion of all of the Class B Preferred Stock into shares of common stock upon the completion of this offering.
Number and Percent of Shares ------------------------------------------ Number and Percent Class A Preferred Class B Preferred of Shares Common Stock Shares Beneficially Shares Outstanding After Beneficially Owned Owned Beneficially Owned the Offering ------------------ ---------------------- ------------------ ------------------ Number Percent Number Percent Number Percent Number Percent ---------- ------- ----------- ---------- ---------- ------- ---------- ------- 5% Beneficial Owners, Directors, Nominees for Director and Named Executive Officers Entities affiliated with Welsh, Carson, Anderson & Stowe (a)............ 20,338,201 45.1% 22,596 42.8% 7,531,424 47.1% 27,869,625 Entities affiliated with GTCR Golder, Rauner, LLC (b)................ 13,015,107 28.9 23,750 44.9 1,983,333 12.4 14,998,440 Entities affiliated with Thoma Cressey Fund VI, L.P. (c)............... 4,067,857 9.3 -- -- 5,950,000 37.2 10,017,857 Rocco A. Ortenzio (d)... 7,177,027 15.2 2,295 4.3 -- -- 7,177,027 Robert A. Ortenzio (e).. 3,676,950 8.1 1,734 2.2 -- -- 3,676,950 Russell L. Carson (f)... 20,562,352 45.6 22,929 43.4 7,642,640 47.8 28,204,992 Bryan C. Cressey (g).... 4,210,714 9.6 -- -- 5,950,000 37.2 10,160,714 Donald J. Edwards (h)... 13,015,107 28.9 23,750 44.9 1,983,333 12.4 14,998,440 Meyer Feldberg.......... -- -- -- -- -- -- -- -- LeRoy S. Zimmerman (i).. 24,200 * -- -- -- -- 24,200 * Patricia A. Rice (j).... 424,796 * 143 * -- -- 424,796 * S. Frank Fritsch (k).... 145,925 * 95 * -- -- 145,925 * David W. Cross (l)...... 209,200 * -- -- -- -- 209,200 * ---------- ---- ----------- -------- ---------- ---- ---------- --- All executive officers and directors as a group.................. 49,777,096 96.6% 504,078 95.4% 15,575,973 97.3% 65,353,069 ========== ==== =========== ======== ========== ==== ========== === |
Partners, L.P. Class B Preferred Shares held include 7,284,932 shares held
by WCAS Capital Partners III, L.P. and 246,492 shares held by Welsh,
Carson, Anderson & Stowe Healthcare Partners, L.P. Excludes 416,750 shares
of common stock currently owned by WCAS Capital Partners III, L.P. that
must be transferred to us if we repay in full the $25 million 10% senior
Subordinated Note due November 19, 2009, which we intend to do with the
proceeds of this offering. The general partners of Welsh, Carson, Anderson
& Stowe VII, L.P. and WCAS Capital Partners III, L.P. are Bruce K.
Anderson, Russell L. Carson, Anthony J. DeNicola, Thomas E. McInerney,
Robert A. Minicucci, Paul B. Queally, Rudolph E. Rupert, Lawrence B.Sorrel
and Patrick J. Welsh. The general partners of WCAS Healthcare Partners,
L.P. are Russell L. Carson and Patrick J. Welsh. Accordingly, each of the
individuals listed above may be deemed the beneficial owners of the shares
owned by these entities. Welsh, Carson, Anderson & Stowe's business
address is 320 Park Avenue, Suite 2500, New York, New York 10022.
(b) Common shares held include 18,069 shares held by GTCR Associates V, L.P.,
3,148 shares held by GTCR Associates VI, L.P., 1,390,455 shares held by
GTCR Fund VI, L.P., 9,968 shares held by GTCR VI Executive Fund L.P. and
10,339,074 shares and warrants to purchase 1,254,393 shares owned by
Golder, Thoma, Cressey, Rauner Fund V, L.P. Class A Preferred shares held
include 42 shares held by GTCR Associates V, L.P. and 23,709 shares held
by Golder, Thoma, Cressey, Rauner Fund V, L.P. Class B Preferred shares
held include 4,449 shares held by GTCR Associates VI, L.P., 1,964,799
shares held by GTCR Fund VI, L.P. and 14,085 shares held by GTCR VI
Executive Fund, L.P. GTCR Golder Rauner, LLC's business address is 6100
Sears Tower, 233 S. Wacker Drive, Chicago, IL 60606-6402.
(c) Common shares held include 4,027,585 shares held by Thoma Cressey Fund VI,
L.P. and 40,272 shares held by Thoma Cressey Friends Fund VI, L.P. Class B
Preferred Shares held include 5,891,095 shares owned by Thoma Cressey Fund
VI, L.P. and 58,905 shares held by Thoma Cressey Friends Fund VI, L.P.
Thoma Cressey Fund VI, L.P.'s business address is Sears Tower, 44th Floor,
233 S. Wacker Drive, Chicago, IL 60606-6402.
(d) Includes options to purchase 2,787,230 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus,
warrants to purchase 507,628 common shares and 428,572 common shares owned
by Select Healthcare Investors I, L.P. Select Capital Corporation, of
which Mr. Ortenzio is a 25% owner, Director and Chief Executive Officer,
is the general partner of Select Healthcare Investors I, L.P. Mr. Ortenzio
disclaims beneficial ownership of the shares held by Select Healthcare
Investors I, L.P. Rocco A. Ortenzio's business address is 4716 Old
Gettysburg Road, P.O. Box 2034, Mechanicsburg, PA 17055.
(e) Includes options to purchase 1,308,154 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus
and warrants to purchase 235,810 common shares. Also includes 57,142
common shares owned by the Ortenzio Family Partnership, L.P., of which
Robert A. Ortenzio is the general partner, and 428,572 common shares owned
by Select Healthcare Investors I, L.P. Select Capital Corporation, of
which Mr. Ortenzio is a 25% owner, Director and President, is the general
partner of Select Healthcare Investors I, L.P. Mr. Ortenzio disclaims
beneficial ownership of the shares held by Select Healthcare Investors I,
L.P.
(f) Includes 20,338,201 common shares, 22,596 Class A Preferred shares and
27,869,655 Class B Preferred shares owned by affiliates of Welsh, Carson,
Anderson & Stowe. Mr. Carson can be considered an affiliate of Welsh,
Carson, Anderson & Stowe.
(g) Includes 4,067,857 common shares and 5,950,000 Class B Preferred shares
owned by Thoma Cresssey Fund VI, L.P. and its affiliates. Mr. Cressey can
be considered an affiliate of Thoma Cressey Fund VI, L.P. Mr. Cressey
disclaims beneficial ownership of any shares that exceed his pecuniary
interest therein.
(h) Includes 13,015,107 common shares, 23,750 Class A Preferred shares and
1,983,333 Class B Preferred shares owned by affiliates of GTCR Golder,
Rauner, LLC. Mr. Edwards can be considered an affiliate of GTCR Golder
Rauner, LLC. Mr. Edwards disclaims beneficial ownership of any shares that
exceed his pecuniary interest therein.
(i) Includes options to purchase 10,000 common shares which are currently
exercisable or exercisable within 60 days of the date of this prospectus.
(j) Includes 28,572 common shares issued to Patricia A. Rice and Jesse W. Rice
as Trustees under the Patricia Ann Rice Living Trust, 57,000 common shares
held in an I.R.A. with Mellon PSFS as custodian for the benefit of
Patricia A. Rice and options to purchase 60,000 common shares that are
currently exercisable or exercisable within 60 days of the date of this
prospectus.
(k) Includes 20,000 common shares held in an I.R.A. with Mellon PSFS as
custodian for the benefit of S. Frank Fritsch and options to purchase
30,000 common shares that are currently exercisable or exercisable within
60 days of the date of this prospectus.
(l) Includes options to purchase 130,000 common shares which are currently
exercisable or exercisable within 60 days of the date of this prospectus.
DESCRIPTION OF CAPITAL STOCK
General
Our authorized capital stock consists of 78,000,000 shares of common stock, par value $.01 per share, and 16,055,000 shares of preferred stock. We currently have Class A Preferred Stock and Class B Preferred Stock outstanding. Simultaneously with the completion of this offering, we intend to redeem all of the outstanding shares of Class A Preferred Stock. The 16,000,000 shares of Class B Preferred Stock outstanding will automatically convert into 16,000,000 shares of our common stock. Upon completion of this offering, we will have approximately shares ( shares if the underwriters' over-allotment option is exercised in full) of common stock and no shares of preferred stock issued and outstanding.
The following is qualified in its entirety by reference to our certificate of incorporation and bylaws, copies of which are filed as exhibits to the registration statement of which this prospectus is a part.
Common Stock
As of September 30, 2000, there were 44,228,138 shares of our common stock issued and outstanding. Upon completion of the offering, there will be shares of common stock issued and outstanding.
The holders of our common stock are entitled to dividends as our board of directors may declare from funds legally available therefor, subject to the preferential rights of the holders of our preferred stock, if any, and any contractual limitations on our ability to declare and pay dividends. The holders of our common stock are entitled to one vote per share on any matter to be voted upon by stockholders. Our certificate of incorporation does not provide for cumulative voting in connection with the election of directors, and accordingly, holders of more than 50% of the shares voting will be able to elect all of the directors. No holder of our common stock will have any preemptive right to subscribe for any shares of capital stock issued in the future.
Upon any voluntary or involuntary liquidation, dissolution, or winding up of our affairs, the holders of our common stock are entitled to share ratably in all assets remaining after payment of creditors and subject to prior distribution rights of our preferred stock, if any. All of the outstanding shares of common stock are, and the shares offered by us will be, fully paid and non-assessable.
Preferred Stock
As of the closing of this offering, no shares of our preferred stock will be outstanding. Our certificate of incorporation provides that our board of directors may by resolution establish one or more classes or series of preferred stock having the number of shares and relative voting rights, designation, dividend rates, liquidation, and other rights, preferences, and limitations as may be fixed by them without further stockholder approval. The holders of our preferred stock may be entitled to preferences over common stockholders with respect to dividends, liquidation, dissolution, or our winding up in such amounts as are established by our board of directors' resolutions issuing such shares.
The issuance of our preferred stock may have the effect of delaying, deferring or preventing a change in control of us without further action by the holders and may adversely affect voting and other rights of holders of our common stock. In addition, issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate purposes, could make it more difficult for a third party to acquire a majority of the outstanding shares of voting stock. At present, we have no plans to issue any shares of preferred stock.
Registration Rights
Welsh Carson, Golder Thoma, Thoma Cressey, Rocco A. Ortenzio, Robert A. Ortenzio and certain other stockholders possess registration rights with respect to our common stock. These stockholders who are currently the holders of 58,374,341 shares of our common stock after the completion of this offering have the right to demand that we register the resale of their shares under the Securities Act. We are not obligated to register any shares held by these stockholders upon their request for 180 days from the date of this prospectus. Subject to the terms of lock-up agreements between these stockholders and the underwriters, however, if we file a registration statement to register sales of our common stock (other than under our employee benefit plans) during that time, these stockholders will be entitled to register any portion or all of their shares to be included in that offering. After the expiration of this 180 day period, these stockholders may demand that we register any portion or all of their shares at any time. At any time, if we propose to register any of our securities under the Securities Act, these stockholders are entitled to notice of the registration and, subject to customary conditions and limitations, are entitled to include their shares in our registration. These stockholders may request up to four registrations on Form S-1 or any similar long-form registration in which we shall pay all registration expenses. These stockholders may also request at their own expense an unlimited number of additional long-form registrations, as well as registrations on Forms S-2 or S- 3 or any similar short-form registrations, if we are able to register securities on those forms at that time. We are required to use our best efforts to effect these registrations, subject to customary conditions and limitations.
Section 203 of the Delaware General Corporation Law; Certain Anti Takeover, Limited Liability and Indemnification Provisions
The following is a description of certain provisions of the Delaware General Corporation Law, and our certificate of incorporation and bylaws. This summary does not purport to be complete and is qualified in its entirety by reference to the Delaware General Corporation Law, and our certificate of incorporation and bylaws.
Section 203 of the Delaware General Corporation Law
We are subject to the provisions of Section 203 of the Delaware General Corporation Law. Section 203 of the Delaware General Corporation Law prohibits a publicly held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an "interested stockholder," unless the business combination is approved in a prescribed manner. A "business combination" includes certain mergers, asset sales, and other transactions resulting in a financial benefit to the "interested stockholder." Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within the past three years did own, 15% of the corporation's voting stock.
Certificate of Incorporation and Bylaws
Certain provisions of our certificate of incorporation and bylaws could have anti-takeover effects. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our corporate policies formulated by our board of directors. In addition, these provisions also are intended to ensure that our board of directors will have sufficient time to act in what the board of directors believes to be in the best interests of us and our stockholders. These provisions also are designed to reduce our vulnerability to an unsolicited proposal for our takeover that does not contemplate the acquisition of all of our outstanding shares or an unsolicited proposal for the restructuring or sale of all or part of us. The provisions are also intended to discourage certain tactics that may be used in proxy fights. However, these provisions could delay or frustrate the removal of incumbent directors or the assumption of control of us by the holder of a large block of common stock, and could also discourage or make more difficult a merger, tender offer, or proxy contest, even if such event would be favorable to the interest of our stockholders.
Classified Board of Directors. Our certificate of incorporation provides for our board of directors to be divided into three classes of directors, with each class as nearly equal in number as possible, serving staggered three-year terms (other than directors which may be elected by holders of preferred stock). As a result, approximately one-third of our board of directors will be elected each year. The classified board provision will help to assure the continuity and stability of our board of directors and our business strategies and policies as determined by our board of directors. The classified board provision could have the effect of discouraging a third party from making an unsolicited tender offer or otherwise attempting to obtain control of us without the approval of our board of directors. In addition, the classified board provision could delay stockholders who do not like the policies of our board of directors from electing a majority of our board of directors for two years.
No Stockholder Action by Written Consent; Special Meetings. Our certificate of incorporation provides that stockholder action can only be taken at an annual or special meeting of stockholders and prohibits stockholder action by written consent in lieu of a meeting. Our bylaws provide that special meetings of stockholders may be called only by our board of directors or our Chief Executive Officer. Our stockholders are not permitted to call a special meeting of stockholders or to require that our board of directors call a special meeting.
Advance Notice Requirements for Stockholder Proposals and Director Nominees. Our bylaws establish an advance notice procedure for our stockholders to make nominations of candidates for election as directors or to bring other business before an annual meeting of our stockholders. The stockholder notice procedure provides that only persons who are nominated by, or at the direction of, our board of directors or its Chairman, or by a stockholder who has given timely written notice to our Secretary or any Assistant Secretary prior to the meeting at which directors are to be elected, will be eligible for election as our directors. The stockholder notice procedure also provides that at an annual meeting only such business may be conducted as has been brought before the meeting by, or at the direction of, our board of directors or its Chairman or by a stockholder who has given timely written notice to our Secretary of such stockholder's intention to bring such business before such meeting. Under the stockholder notice procedure, if a stockholder desires to submit a proposal or nominate persons for election as directors at an annual meeting, the stockholder must submit written notice to us not less than 90 days nor more than 120 days prior to the first anniversary of the previous year's annual meeting. In addition, under the stockholder notice procedure, a stockholder's notice to us proposing to nominate a person for election as a director or relating to the conduct of business other than the nomination of directors must contain certain specified information. If the chairman of a meeting determines that business was not properly brought before the meeting, in accordance with the stockholder notice procedure, such business shall not be discussed or transacted.
Number of Directors; Removal; Filling Vacancies. Our certificate of incorporation and bylaws provide that our board of directors will consist of not less than five or more than nine directors (other than directors elected by holders of our preferred stock), the exact number to be fixed from time to time by resolution adopted by our directors. Further, subject to the rights of the holders of any series of our preferred stock, if any, our certificate of incorporation and bylaws authorize our board of directors to elect additional directors under specified circumstances and fill any vacancies that occur in our board of directors by reason of death, resignation, removal, or otherwise. A director so elected by our board of directors to fill a vacancy or a newly created directorship holds office until the next election of the class for which such director has been chosen and until his successor is elected and qualified. Subject to the rights of the holders of any series of our preferred stock, if any, our certificate of incorporation and bylaws also provide that directors may be removed only for cause and only by the affirmative vote of holders of a majority of the combined voting power of our then outstanding stock. The effect of these provisions is to preclude a stockholder from removing incumbent directors without cause and simultaneously gaining control of our board of directors by filling the vacancies created by such removal with its own nominees.
Indemnification. We have included in our certificate of incorporation and bylaws provisions to (i) eliminate the personal liability of our directors for monetary damages resulting from breaches of their fiduciary duty to the extent permitted by the Delaware General Corporation Law and (ii) indemnify our directors and officers to the fullest extent permitted by Section 145 of the Delaware General Corporation Law, including circumstances in which indemnification is otherwise discretionary. We believe that these provisions are necessary to attract and retain qualified persons as directors and officers.
Amendments to Certificate of Incorporation. The provisions of our certificate of incorporation that could have anti-takeover effects as described above are subject to amendment, alteration, repeal, or rescission either by (i) our board of directors without the assent or vote of our stockholders or (ii) the affirmative vote of the holder of not less than two-thirds (66 2/3%) of the outstanding shares of voting securities. This requirement makes it more difficult for stockholders to make changes to the provisions in our certificate of incorporation which could have anti-takeover effects by allowing the holders of a minority of the voting securities to prevent the holders of a majority of voting securities from amending these provisions of our certificate of incorporation.
Amendments to Bylaws. Our certificate of incorporation provides that our bylaws are subject to adoption, amendment, alteration, repeal, or rescission either by (i) our board of directors without the assent or vote of our stockholders or (ii) the affirmative vote of the holders of not less than two- thirds (66 2/3%) of the outstanding shares of voting securities. This provision makes it more difficult for stockholders to make changes in our bylaws by allowing the holders of a minority of the voting securities to prevent the holders of a majority of voting securities from amending our bylaws.
Transfer Agent and Registrar
The Transfer Agent and Registrar for our common stock is ChaseMellon Shareholder Services, L.L.C. The Transfer Agent's address is 85 Challenger Road, Ridgefield Park, New Jersey 07660, and its telephone number is (800) 756- 3353.
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this offering, there will be shares of our common stock outstanding (assuming no exercise of the underwriters' over-allotment option and no exercise of outstanding options and warrants). Of these shares, the shares sold in this offering will be freely transferable without restriction or further registration under the Securities Act, except for any shares held by an existing "affiliate" of ours, as that term is defined by the Securities Act (an "Affiliate"), which shares will be subject to the resale limitations of Rule 144 adopted under the Securities Act.
Upon completion of this offering, 59,811,388 "restricted shares" as defined in Rule 144 will be outstanding. None of these shares will be eligible for sale in the public market as of the effective date of this registration statement. Beginning 180 days after the date of this prospectus approximately additional shares will become eligible for sale subject to compliance with Rule 144 upon the expiration of agreements not to sell such shares entered into between the underwriters and certain of our stockholders, including the officers and directors. Restrictions pursuant to such agreements not to sell may be waived by Merrill Lynch, Pierce, Fenner & Smith Incorporated. See "Underwriting."
In general, under Rule 144 as currently in effect, beginning 90 days after the offering, a person (or persons whose shares are aggregated) who owns shares that were purchased from us (or any Affiliate) at least one year previously, including a person who may be deemed our Affiliate, is entitled to sell within any three-month period a number of shares that does not exceed the greater of (i) 1% of the then outstanding shares of our common stock (approximately shares immediately after the offering) or (ii) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Securities and Exchange Commission. Sales under Rule 144 are also subject to certain manner of sale provisions, notice requirements and the availability of current public information about us. Any person (or persons whose shares are aggregated) who is not deemed to have been our Affiliate at any time during the 90 days preceding a sale, and who owns shares within the definition of "restricted securities" under Rule 144 under the Securities Act that were purchased from us (or any Affiliate) at least two years previously, would be entitled to sell such shares under Rule 144(k) without regard to the volume limitations, manner of sale provisions, public information requirements or notice requirements.
We have agreed not to offer, sell or otherwise dispose of any shares of our common stock or any securities convertible into or exercisable or exchangeable for our common stock or any rights to acquire our common stock for a period of 180 days after the date of this prospectus, without the prior written consent of the representatives of the underwriters, subject to certain limited exceptions. See "Underwriting."
The holders of 58,374,341 shares of our common stock have demand and piggy-back registration rights. We are not obligated to register any shares held by these stockholders upon their request for 180 days from the date of this prospectus. However, subject to the prior written consent of the underwriters, if we file a registration statement to register sales of our common stock (other than under our employee benefit plans) during that time, these stockholders will be entitled to register any portion or all of their shares to be included in that offering. After the expiration of this 180 day period, these stockholder may demand that we register any portion or all of their shares at any time.
After such period, if such holders cause a large number of shares to be registered and sold in the public market, such sales could have an adverse effect on the market price for the common stock.
UNITED STATES FEDERAL TAX CONSIDERATIONS FOR NON-UNITED STATES HOLDERS
The following is a general discussion of the principal United States federal income and estate tax consequences of the ownership and disposition of our common stock by a non-U.S. holder. As used in this discussion, the term "non-U.S. holder" means a beneficial owner of our common stock that is not, for U.S. federal income tax purposes:
. an individual who is a citizen or resident of the United States;
. a corporation or other entity taxable as a corporation created or organized in or under the laws of the United States or of any political subdivision of the United States;
. an estate whose income is includible in gross income for U.S. federal income tax purposes regardless of its source; or
. a trust, in general, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons have authority to control all substantial decisions of the trust.
An individual may be treated as a resident of the United States in any calendar year for U.S. federal income tax purposes, instead of a nonresident, by, among other ways, being present in the United States on at least 31 days in that calendar year and for an aggregate of at least 183 days during a three- year period ending in the current calendar year. For purposes of this calculation, you would count all of the days present in the current year, one- third of the days present in the immediately preceding year and one-sixth of the days present in the second preceding year. Residents are taxed for U.S. federal income purposes as if they were U.S. citizens. If a partnership holds our common stock, the United States federal income tax treatment of a partner generally will depend upon the status of the partner and upon the activities of the partnership. Partners of partnerships holding common stock should consult their tax advisors.
This discussion does not consider:
. U.S. state and local or non-U.S. tax consequences;
. specific facts and circumstances that may be relevant to a particular non-U.S. holder's tax position, such as being an expatriate;
. the tax consequences for the shareholders or beneficiaries of a non- U.S. holder;
. special tax rules that may apply to particular non-U.S. holders, such as financial institutions, insurance companies, tax-exempt organizations, broker-dealers, and traders in securities; or
. special tax rules that may apply to a non-U.S. holder that holds our common stock as part of a "straddle," "hedge," "conversion transaction," "synthetic security" or other integrated investment.
The following discussion is based on provisions of the U.S. Internal Revenue Code of 1986, as amended, applicable U.S. Treasury regulations and administrative and judicial interpretations, all as in effect on the date of this prospectus, and all of which are subject to change, retroactively or prospectively. The following summary assumes that a non-U.S. Holder holds our common stock as a capital asset. Each non-U.S. holder should consult a tax advisor regarding the U.S. federal, state, local and non-U.S. income and other tax consequences of acquiring, holding, and disposing of shares of our common stock.
Dividends
We do not anticipate paying cash dividends on our common stock in the foreseeable future. See "Dividend Policy." In the event, however, that we pay dividends on our common stock, we will have to withhold a U.S. federal withholding tax at a rate of 30%, or a lower rate under an applicable income tax treaty, from the gross amount of the dividends paid to a non-U.S. holder. Non-U.S. holders should consult their tax advisors regarding their entitlement to benefits under a relevant income tax treaty.
Dividends paid prior to 2001 to an address in a foreign country are presumed, absent actual knowledge to the contrary, to be paid to a resident of such country for purposes of the withholding discussed above and for purposes of determining the applicability of a tax treaty rate. For dividends paid after 2000:
. a non-U.S. holder who claims the benefit of an applicable income tax treaty rate generally will be required to satisfy applicable certification and other requirements;
. in the case of common stock held by a foreign partnership as determined under U.S. Treasury regulations, the certification requirement will generally be applied to the partners of the partnership and the partnership will be required to provide certain information, including a U.S. employer identification number, if applicable; and
. look-through rules will be applied for tiered partnerships.
A non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by filing an appropriate claim for a refund with the U.S. Internal Revenue Service.
Dividends paid to a non-U.S. holder that are effectively connected with a non-U.S. holder's conduct of a trade or business in the United States or, if an income tax treaty applies, attributable to a permanent establishment in the United States, are taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons. In that case, we will not have to withhold U.S. federal withholding tax if the non-U.S. holder complies with applicable certification and disclosure requirements. In addition, a "branch profits tax" may be imposed at a 30% rate, or a lower rate under an applicable income tax treaty, on dividends received by a foreign corporation that are effectively connected with the conduct of a trade or business in the United States.
Gain On Disposition of Common Stock
A non-U.S. holder generally will not be taxed on gain recognized on a disposition of our common stock unless:
. the gain is effectively connected with the non-U.S. holder's conduct of a trade or business in the United States or, alternatively, if an income tax treaty applies, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States; in these cases, the gain will be taxed on a net income basis at the regular graduated rates and in the manner applicable to U.S. persons and, if the non-U.S. holder is a foreign corporation, the "branch profits tax" described above may also apply; or
. the non-U.S. holder is an individual who holds our common stock as a capital asset, is present in the United States for 183 or more days in the taxable year of the disposition and meets other requirements.
Federal Estate Tax
Common stock owned or treated as owned by an individual who is a non-U.S. holder at the time of death will be included in the individual's gross estate for U.S. federal estate tax purposes, unless an applicable estate tax or other treaty provides otherwise and, therefore, may be subject to U.S. federal estate tax.
Information Reporting and Backup Withholding Tax
We must report annually to the U.S. Internal Revenue Service and to each non-U.S. holder the amount of dividends paid to that holder and the tax withheld from those dividends. Copies of the information returns reporting those dividends and withholding may also be made available to the tax authorities in the country in which the non-U.S. holder is a resident under the provisions of an applicable income tax treaty or agreement.
Under some circumstances, U.S. Treasury regulations require additional information reporting and backup withholding at a rate of 31% on some payments on common stock. Under currently applicable law, non-U.S. holders generally will be exempt from these additional information reporting requirements and from backup withholding on dividends paid prior to 2001 if we either were required to withhold a U.S. federal withholding tax from those dividends or we paid those dividends to an address outside the United States. After 2000, however, the gross amount of dividends paid to a non-U.S. holder that fails to certify its non-U.S. holder status in accordance with applicable U.S. Treasury regulations generally will be reduced by backup withholding at a rate of 31%.
The payment of the proceeds of the disposition of common stock by a non- U.S. holder to or through the U.S. office of a broker or a non-U.S. office of a U.S. broker generally will be reported to the U.S. Internal Revenue and reduced by backup withholding at a rate of 31% unless the non-U.S. holder either certifies its status as a non-U.S. holder under penalties of perjury or otherwise establishes an exemption and the broker has no actual knowledge to the contrary. The payment of the proceeds of the disposition of common stock by a non-U.S. holder to or through a non-U.S. office of a non-U.S. broker will not be reduced by backup withholding or reported to the U.S. Internal Revenue Service unless the non-U.S. broker has certain enumerated connections with the United States. In general, the payment of proceeds from the disposition of common stock by or through a non-U.S. office of a broker that is a U.S. person or has certain enumerated connections with the United States will be reported to the U.S. Internal Revenue Service and, after 2000, may be reduced by backup withholding at a rate of 31%, unless the broker receives a statement from the non-U.S. holder, signed under penalty of perjury, certifying its non-U.S. status or the broker has documentary evidence in its files that the holder is a non-U.S. holder and the broker has no actual knowledge to the contrary.
Non-U.S. holders should consult their own tax advisors regarding the application of the information reporting and backup withholding rules to them, including changes to these rules that will become effective after 2000.
Any amounts withheld under the backup withholding rules from a payment to a non-U.S. holder will be refunded, or credited against the holder's U.S. federal income tax liability, if any, provided that the required information is furnished to the U.S. Internal Revenue Service.
UNDERWRITING
We intend to offer the shares in the U.S. and Canada through the U.S. underwriters and elsewhere through the international managers. Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc., J.P. Morgan Securities Inc., CIBC World Markets Corp., SG Cowen Securities Corporation and First Union Securities, Inc. are acting as U.S. representatives of the U.S. underwriters named below. Subject to the terms and conditions described in a U.S. purchase agreement between us and the U.S. underwriters, and concurrently with the sale of shares to the international managers, we have agreed to sell to the U.S. underwriters, and the U.S. underwriters severally have agreed to purchase from us, the number of shares listed opposite their names below.
Number U.S. Underwriter of Shares ---------------- --------- Merrill Lynch, Pierce, Fenner & Smith, Incorporated.............................................. Chase Securities Inc. ............................................. J.P. Morgan Securities Inc. ....................................... CIBC World Markets Corp. .......................................... SG Cowen Securities Corporation.................................... First Union Securities, Inc. ...................................... --------- Total......................................................... ========= |
We have also entered into an international purchase agreement with the international managers for sale of the shares outside the U.S. and Canada for whom Merrill Lynch International, Chase Manhattan International Limited, J.P. Morgan Securities Ltd., CIBC World Markets Corp., SG Cowen Securities Corporation and First Union Securities, Inc. are acting as lead managers. Subject to the terms and conditions in the international purchase agreement, and concurrently with the sale of shares to the U.S. underwriters pursuant to the U.S. purchase agreement, we have agreed to sell to the international managers, and the international managers severally have agreed to purchase shares from us. The initial public offering price per share and the total underwriting discount per share are identical under the U.S. purchase agreement and the international purchase agreement.
The U.S. underwriters and the international managers have agreed to purchase all of the shares sold under the U.S. and international purchase agreements if any of these shares are purchased. If an underwriter defaults, the U.S. and international purchase agreements provide that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings for the sale of shares to be purchased by the U.S. underwriters and the international managers are conditioned on one another.
We have agreed to indemnify the U.S. underwriters and the international managers against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the U.S. underwriters and international managers may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as, and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreements, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel, or modify offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The U.S. representatives have advised us that the U.S. underwriters propose initially to offer the shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price less a concession not in excess of $ per share. The U.S. underwriters may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount and proceeds before our expenses. The information assumes either no exercise or full exercise by the U.S. underwriters and the international managers of their over-allotment options.
Without Per Share Option With Option --------- ------- ----------- Public offering price... $ $ $ Underwriting discount... $ $ $ Proceeds before expenses to Select Medical...... $ $ $ |
The expenses of the offering, not including the underwriting discount, are estimated at $1.5 million and are payable by us.
Over-Allotment Option
We have granted options to the U.S. underwriters to purchase up to additional shares at the public offering price less the underwriting discount. The U.S. underwriters may exercise these options for 30 days from the date of this prospectus solely to cover any overallotments. If the U.S. underwriters exercise these options, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional shares proportionate to that U.S. underwriter's initial amount reflected in the above table.
We have also granted options to the international managers, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares to cover any over-allotments on terms similar to those granted to the U.S. underwriters.
Intersyndicate Agreement
The U.S. underwriters and the international managers have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the intersyndicate agreement, the U.S. underwriters and the international managers may sell shares to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the intersyndicate agreement, the U.S. underwriters and any dealer to whom they sell shares will not offer to sell or sell shares to persons who are non-U.S. or non-Canadian persons or to persons they believe intend to resell to persons who are non-U.S. or non-Canadian persons, except in the case of transactions under the intersyndicate agreement. Similarly, the international managers and any dealer to whom they sell shares will not offer to sell or sell shares to U.S. persons or Canadian persons or to persons they believe intend to resell to U.S. or Canadian persons, except in the case of transactions under the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered for sale in the offering for sale to some of our directors, officers, employees, business associates, and related persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. There is no expectation or requirement that any person who purchases reserved shares will refer, either directly or indirectly, any patients to our specialty acute care hospitals or outpatient rehabilitation clinics.
No Sales of Similar Securities
We and our executive officers and directors and substantially all of our existing stockholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other individuals have agreed not to directly or indirectly
. offer, pledge, sell or contract to sell any common stock;
. sell any option or contract to purchase any common stock;
. purchase any option or contract to sell any common stock;
. grant any option, right or warrant for the sale of any common stock;
. lend or otherwise dispose of or transfer any common stock;
. request or demand that we file a registration statement related to the common stock; or
. enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. This lockup provision does not limit our ability to grant options to purchase common stock under stock option plans or to issue common stock under our employee stock purchase plan.
Nasdaq National Market Listing
We expect the shares to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "SLMC."
Before the offering, there has been no public market for our common stock. The initial public offering price will be determined through negotiations among us and the U.S. representatives and lead managers. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are:
. the valuation multiples of publicly traded companies that the U.S. representatives and the lead managers believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, us and the industry in which we compete;
. an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.
NASD Regulations
It is anticipated that more than ten percent of the proceeds of the offering will be applied to pay down debt obligations owed to affiliates of Chase Securities Inc., CIBC World Markets Corp., First Union Securities, Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and SG Cowen Securities Corporation. Because more than ten percent of the net proceeds of the offering may be paid to members or affiliates of members of the National Association of Securities Dealers, Inc. participating in the offering, the offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8). This rule requires that the public offering price of an equity security be no higher than the price recommended by a qualified independent underwriter which has participated in the preparation of the registration statement and performed its usual standard of due diligence with respect to that registration statement. has agreed to act as qualified independent underwriter for the offering. The price of the shares will be no higher than that recommended by .
Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common stock is completed, SEC rules may limit the underwriters from bidding for or purchasing our common stock. However, the representatives may engage in transactions that stabilize the price of the common stock, such as bids or purchases that peg, fix or maintain that price.
The underwriters may purchase and sell the common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common shares in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common shares made by the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common stock may be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the representatives make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us. They have
received customary fees and commissions for these transactions. In particular, an affiliate of Chase Securities Inc. acts as administrative agent, and affiliates of Chase Securities Inc., CIBC World Markets Corp., First Union Securities, Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated and SG Cowen Securities Corporation are lenders under our credit facility. We will use a portion of the proceeds from this offering to repay amounts outstanding under this credit facility.
Internet Delivery of Prospectus
Merrill Lynch will be facilitating internet distribution for the offering to some of its internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the website maintained by Merrill Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch website relating to the offering is not a part of this prospectus.
LEGAL MATTERS
The validity of our common stock offered hereby will be passed upon for us by Dechert, Philadelphia, Pennsylvania. Debevoise & Plimpton, New York, New York, will pass upon certain legal matters for the underwriters.
EXPERTS
The financial statements of Select Medical Corporation as of December 31, 1999 and December 31, 1998 and for each of the three years in the period ended December 31, 1999 included in this prospectus have been so included in reliance on the reports of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.
The combined financial statements of NovaCare Physical Rehabilitation and Occupational Health Group as of November 19, 1999, June 30, 1999 and 1998 and for the period from July 1, 1999 to November 19, 1999 and the years ended June 30, 1999, 1998 and 1997 included in this prospectus have been included in reliance of the reports of PricewaterhouseCoopers LLP, independent certified public accountants, upon the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Intensiva Healthcare Corporation and subsidiaries as of December 15, 1998 and December 31, 1997 and for the period from January 1, 1998 to December 15, 1998 and the year ended December 31, 1997 included in this prospectus have been included in reliance on the report of KPMG LLP, independent certified public accountants, upon the authority of said firm as experts in auditing and accounting.
The consolidated financial statements of American Transitional Hospitals, Inc. as of June 29, 1998 and for the period from January 1, 1998 to June 29, 1998 included in this prospectus have been included in reliance on the report of Ernst & Young LLP, independent auditors, given on the authority of said firm as experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Commission, Washington, D.C. 20549, a Registration Statement on Form S-1 under the Securities Act with respect to our common stock offered hereby. This prospectus does not contain all of the information set forth in the registration statement and the exhibits and schedules to the registration statement. For further information with respect to Select Medical Corporation and our common stock offered hereby, reference is made to the Registration Statement and the exhibits and schedules filed as a part of the Registration Statement. Statements contained in this prospectus concerning the contents of any contract or any other document are not necessarily complete; reference is made in each instance to the copy of such contract or any other document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by such reference to such exhibit. The registration statement, including exhibits and schedules thereto, may be inspected without charge at the Commission's principal office in Washington, D.C., and copies of all or any part thereof may be obtained from the Public Reference Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices located at Citicorp Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and at 7 World Trade Center, 13th Floor, New York, New York 10048 after payment of fees prescribed by the Commission. The Commission also maintains a World Wide Web site which provides online access to reports, proxy and information statements and other information regarding registrants that file electronically with the Commission at the address http://www.sec.gov.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page ---- SELECT MEDICAL CORPORATION Consolidated Financial Statements: Report of Independent Accountants....................................... F-2 Consolidated Balance Sheets............................................. F-3 Consolidated Statements of Operations................................... F-4 Consolidated Statements of Changes in Stockholder's Equity.............. F-5 Consolidated Statements of Cash Flows................................... F-6 Notes to Consolidated Financial Statements.............................. F-7 NOVACARE PHYSICAL REHABILITATION AND OCCUPATIONAL HEALTH GROUP Combined Financial Statements as of November 19, 1999 and for the Period July 1, 1999 to November 19, 1999....................................... Report of Independent Accountants...................................... F-29 Combined Balance Sheet................................................. F-30 Combined Statement of Operations....................................... F-31 Combined Statement of NovaCare, Inc. Net Investment.................... F-32 Combined Statement of Cash Flows....................................... F-33 Notes to Consolidated Financial Statements............................. F-34 NOVACARE PHYSICAL REHABILITATION AND OCCUPATIONAL HEALTH GROUP Combined Financial Statements as of June 30, 1999 and for June 30, 1998 and for the Three Years Ended June 30, 1999............................. Report of Independent Accountants...................................... F-46 Combined Balance Sheets................................................ F-47 Combined Statements of Operations...................................... F-48 Combined Statements of NovaCare, Inc. Net Investment................... F-49 Combined Statements of Cash Flows...................................... F-50 Notes to Consolidated Financial Statements............................. F-51 INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES Independent Auditors' Report............................................. F-63 Consolidated Balance Sheets.............................................. F-64 Consolidated Statements of Operations.................................... F-65 Consolidated Statements of Stockholders' Equity.......................... F-66 Consolidated Statements of Cash Flows.................................... F-67 Notes to Consolidated Financial Statements................................ F-68 AMERICAN TRANSITIONAL HOSPITALS, INC. Report of Independent Auditors........................................... F-78 Consolidated Balance Sheet............................................... F-79 Consolidated Statement of Operations..................................... F-80 Consolidated Statement of Changes in Equity of Parent.................... F-81 Consolidated Statement of Cash Flows..................................... F-82 Notes to Consolidated Financial Statements............................... F-83 |
Report of Independent Accountants
To the Board of Directors and Stockholders of Select Medical Corporation
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, changes in stockholders' equity and cash flows present fairly, in all material respects, the financial position of Select Medical Corporation and its subsidiaries (the Company) at December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1999, in conformity with accounting principles generally accepted in the United States of America. These consolidated financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP Harrisburg, Pennsylvania October 26, 2000 |
Select Medical Corporation
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31, Proforma ------------------ June 30, June 30, 1998 1999 2000 2000 -------- -------- ----------- ----------- (unaudited) (unaudited) Assets Current Assets: Cash and cash equivalents........ $ 13,001 $ 4,067 $ 5,096 Escrow receivable................ -- 29,948 29,948 Accounts receivable, net of allowance for doubtful accounts of $15,701, $69,492 and $65,076 (unaudited) in 1998, 1999 and 2000, respectively.............. 85,640 184,148 177,681 Prepaid income taxes............. 588 283 -- Assets held for sale............. -- 13,000 1,250 Other current assets............. 6,537 21,264 24,810 -------- -------- -------- Total Current Assets.............. 105,766 252,710 238,785 Property and equipment, net....... 51,104 85,072 86,846 Intangible assets................. 171,378 258,079 252,415 Other assets...................... 8,701 24,857 31,659 -------- -------- -------- Total Assets...................... $336,949 $620,718 $609,705 ======== ======== ======== Liabilities and Stockholders' Equity Current Liabilities: Bank overdrafts.................. $ 2,073 $ 6,966 $ 9,315 Current portion of long-term debt and notes payable............... 8,354 21,127 22,326 Accounts payable................. 21,490 27,489 25,379 Accrued payroll.................. 6,302 17,865 21,009 Accrued vacation................. 2,407 4,065 7,275 Accrued restructuring............ 7,648 9,357 5,291 Accrued other.................... 11,545 15,621 21,293 Due to third party payors........ 6,140 17,622 12,171 -------- -------- -------- Total Current Liabilities......... 65,959 120,112 124,059 Long-term debt, net of current portion........................... 147,726 319,694 295,212 -------- -------- -------- Total liabilities................. 213,685 439,806 419,271 Commitments and Contingencies (Note 15) Minority interest in consolidated subsidiary companies.............. 6,927 10,671 11,206 Preferred stock--Class A, non- voting, $1,000 per share redemption value Authorized shares--55,000, Issued and outstanding shares--52,848.. 55,843 60,398 62,854 Convertible preferred stock--Class B, non-voting, $3.75 per share redemption value Authorized shares--16,000,000, Issued and outstanding shares--16,000,000 shares in 1999 and 2000.......... -- 60,406 62,221 Stockholders' Equity: Common stock--$.01 per value: Authorized shares--63,000,000 in 1998, 78,000,000 in 1999 and 2000 respectively, Issued and outstanding shares--42,349, 44,314,000 and 44,560,000 (unaudited) in 1998, 1999 and 2000, respectively.............. 423 443 446 606 Capital in excess of par......... 76,509 79,314 77,195 137,035 Accumulated deficit.............. (16,363) (29,469) (22,445) (22,445) Treasury stock, at cost--28,000, 328,000 and 381,000 (unaudited) shares in 1998, 1999 and 2000, respectively.................... (48) (829) (1,028) (1,028) Cumulative translation adjustment...................... (27) (22) (15) (15) -------- -------- -------- ------- Total Stockholders' Equity........ 60,494 49,437 54,153 114,153 -------- -------- -------- ------- Total Liabilities and Stockholders' Equity.............. $336,949 $620,718 $609,705 ======== ======== ======== |
The accompanying notes are an integral part of these financial statements.
Select Medical Corporation
Consolidated Statements of Operations
(in thousands, except per share amounts)
For the Year Ended Six Months Ended December 31, June 30, --------------------------- ------------------ 1997 1998 1999 1999 2000 ------- -------- -------- -------- -------- (unaudited) Net operating revenues....... $11,194 $149,043 $455,975 $208,031 $397,422 ------- -------- -------- -------- -------- Costs and expenses: Cost of services........... 10,285 128,910 383,453 174,732 322,418 General and administrative............ 3,276 12,526 21,420 9,277 14,768 Bad debt expense........... 179 4,014 8,858 3,067 12,633 Depreciation and amortization.............. 285 4,942 16,741 6,825 14,095 Special charge............. -- 10,157 5,223 -- -- ------- -------- -------- -------- -------- Total costs and expenses..... 14,025 160,549 435,695 193,901 363,914 ------- -------- -------- -------- -------- Income (loss) from operations................... (2,831) (11,506) 20,280 14,130 33,508 Other income and expense: Other income................. (6,022) -- -- -- -- Interest income.............. (247) (406) (362) (199) (222) Interest expense............. 183 5,382 21,461 8,828 18,300 ------- -------- -------- -------- -------- Income (loss) before minority interests and income taxes.. 3,255 (16,482) (819) 5,501 15,430 Minority interest in consolidated subsidiary companies................... -- 1,744 3,662 2,144 2,178 ------- -------- -------- -------- -------- Income (loss) before income taxes........................ 3,255 (18,226) (4,481) 3,357 13,252 Income tax expense (benefit).................... 1,308 (182) 2,811 3,430 6,228 ------- -------- -------- -------- -------- Net income (loss) before extraordinary item........... 1,947 (18,044) (7,292) (73) 7,024 Extraordinary item........... -- -- 5,814 -- -- ------- -------- -------- -------- -------- Net income (loss)............ $ 1,947 $(18,044) $(13,106) $ (73) $ 7,024 Less: Preferred dividends.... (266) (2,540) (5,175) (2,122) (4,271) ------- -------- -------- -------- -------- Net income (loss) available to common stockholders....... $ 1,681 $(20,584) $(18,281) $ (2,195) $ 2,753 ======= ======== ======== ======== ======== Net income (loss) per common share: Basic: Net income (loss) before extraordinary item...... $ 0.15 $ (0.95) $ (0.29) $ (0.05) $ 0.06 Extraordinary item....... -- -- (0.14) -- -- ------- -------- -------- -------- -------- Net income (loss)........ $ 0.15 $ (0.95) $ (0.43) $ (0.05) $ 0.06 Diluted: Net income (loss) before extraordinary item...... $ 0.15 $ (0.95) $ (0.29) $ (0.05) $ 0.06 Extraordinary item....... -- -- (0.14) -- -- ------- -------- -------- -------- -------- Net income (loss)........ $ 0.15 $ (0.95) $ (0.43) $ (0.05) $ 0.06 Weighted average shares outstanding: Basic...................... 11,383 21,731 42,633 42,517 44,180 Diluted.................... 11,395 21,731 42,633 42,517 49,681 |
The accompanying notes are an integral part of these financial statements.
Select Medical Corporation
Consolidated Statements of Changes in Stockholders' Equity
Common Retained Stock Capital Earnings/ Cumulative Common Par in Excess (Accumulated Treasury Translation Comprehensive Stock Value of Par Deficit) Stock Adjustment Income (Loss) ------ ------ --------- ------------ -------- ----------- ------------- Balance at December 31, 1996.................... -- $ -- $ -- $ -- $ -- $ -- Net income............. -- -- -- 1,947 -- -- $ 1,947 Cumulative translation adjustment............ -- -- -- -- -- -- -- -------- Total comprehensive income................ -- -- -- -- -- -- $ 1,947 ======== Issuance of common stock................. 5,000 50 2,450 -- -- -- Two-for-one stock split................. 5,000 50 (50) -- -- -- Issuance of common stock................. 3,524 35 846 -- -- -- Three-for-two stock split................. 6,762 68 (68) -- -- -- Preferred stock dividends............. -- -- -- (266) -- -- ------ ---- ------- -------- ------- ---- Balance at December 31, 1997.................... 20,286 $203 $ 3,178 $ 1,681 $ -- $ -- Net loss............... -- -- -- (18,044) -- -- (18,044) Cumulative translation adjustment............ -- -- -- -- -- (27) (27) -------- Total comprehensive loss.................. -- -- -- -- -- -- $(18,071) ======== Issuance of common stock................. 22,063 220 74,785 -- -- -- Issuance of warrants... -- -- 1,086 -- -- -- Purchase of treasury stock................. -- -- -- -- (48) -- Preferred stock dividends............. -- -- (2,540) -- -- -- ------ ---- ------- -------- ------- ---- Balance at December 31, 1998.................... 42,349 $423 $76,509 $(16,363) $ (48) $(27) Net loss............... -- -- -- (13,106) -- -- (13,106) Cumulative translation adjustment............ -- -- -- -- -- 5 5 -------- Total comprehensive loss.................. -- -- -- -- -- -- $(13,101) ======== Issuance of common stock................. 1,965 20 6,230 -- -- -- Accretion of preferred stock issuance costs.. -- -- (639) -- -- -- Issuance of warrants... -- -- 2,389 -- -- -- Purchase of treasury stock................. -- -- -- -- (781) -- Preferred stock dividends............. -- -- (5,175) -- -- -- ------ ---- ------- -------- ------- ---- Balance at December 31, 1999.................... 44,314 443 79,314 (29,469) (829) (22) Unaudited ------------------------ Net income............. -- -- -- 7,024 -- -- 7,024 Cumulative translation adjustment............ -- -- -- -- -- 7 7 -------- Total comprehensive income................ -- -- -- -- -- -- $ 7,031 ======== Issuance of common stock................. 246 3 919 -- (199) -- Valuation of non- employee options...... -- -- 91 -- -- -- Preferred stock dividends............. -- -- (4,271) -- -- -- ------ ---- ------- -------- ------- ---- Balance at June 30, 2000.................... 44,560 $446 $76,053 $(22,445) $(1,028) $(15) ====== ==== ======= ======== ======= ==== Unaudited ------------------------ Balance at December 31, 1998.................... 42,349 $423 $76,509 $(16,363) $ (48) $(27) Net loss............... -- -- -- (73) -- -- (73) Cumulative translation adjustment............ -- -- -- -- -- 5 5 -------- Total comprehensive loss.................. -- -- -- -- -- -- $ (68) ======== Issuance of common stock................. 202 2 778 -- -- -- Purchase of treasury stock................. -- -- -- -- (140) -- Preferred stock dividends............. -- -- (2,122) -- -- -- ------ ---- ------- -------- ------- ---- Balance at June 30, 1999.................... 42,551 $425 $75,165 $(16,436) $ (188) $(22) |
The accompanying notes are an integral part of these financial statements.
Select Medical Corporation
Consolidated Statements of Cash Flows
For the Year Ended Six Months Ended December 31, June 30, ----------------------------- ------------------ 1997 1998 1999 1999 2000 ------- --------- --------- -------- -------- (unaudited) Operating activities Net income (loss).......... $ 1,947 $ (18,044) $ (13,106) $ (73) $ 7,024 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization............. 285 4,942 16,741 6,825 14,095 Provision for bad debts... 179 4,014 8,858 3,067 12,633 Special charge............ -- 10,157 5,223 -- -- Extraordinary item........ -- -- 5,814 -- -- Gain on sale of assets.... -- -- (215) (215) -- Break-up fee.............. (6,022) -- -- -- -- Deferred income taxes..... (790) -- -- (179) -- Minority interests........ -- 1,744 3,662 2,144 2,178 Changes in operating assets and liabilities, net of effects from acquisition of businesses: Accounts receivable..... (866) (17,513) (47,290) (43,189) (6,786) Other current assets.... 190 3,229 (1,728) (107) (3,247) Other assets............ (57) (1,539) (10,868) (7,918) (3,583) Accounts payable........ 103 (2,591) 29 (4,932) (2,109) Due to third-party payors................. 367 (1,279) 8,715 14,746 (5,701) Accrued expenses........ 1,061 (5,535) (2,688) (3,543) 5,392 Income taxes............ 1,236 (2,287) 1,696 431 5,659 ------- --------- --------- -------- -------- Net cash provided by (used in) operating activities... (2,367) (24,702) (25,157) (32,943) 25,555 ------- --------- --------- -------- -------- Investing activities Purchases of property and equipment, net............. (1,319) (6,423) (10,896) (2,366) (10,183) Proceeds from disposal of assets held for sale....... -- -- -- -- 11,750 Proceeds from disposal of assets..................... 5 -- 988 988 -- Earnout payments........... -- -- -- -- (1,959) Break-up fee............... 6,022 -- -- -- -- Acquisition of businesses, net of cash acquired....... (5,379) (203,058) (171,354) (6,780) (965) ------- --------- --------- -------- -------- Net cash used in investing activities................. (671) (209,481) (181,262) (8,158) (1,357) ------- --------- --------- -------- -------- Financing activities Proceeds from issuance of debt....................... -- 135,071 154,849 44,325 -- Principal payments on debt....................... (924) (6,482) (10,064) (5,592) (25,152) Net proceeds from issuance of Class A redeemable preferred stock............ 5,440 47,616 -- -- -- Net proceeds from issuance of Class B convertible preferred stock............ -- -- 59,361 -- -- Proceeds from issuance of common stock............... 3,381 65,719 1,041 780 922 Purchase of treasury stock...................... -- (48) (781) (140) (199) Redemption of preferred stock...................... -- (19) (214) -- -- Proceeds from (repayment of) bank overdrafts........ -- 2,073 4,893 4,679 2,348 Payment of deferred financing costs............ -- (1,314) (10,883) (1,852) -- Distributions to minority interests.................. -- (318) (722) (542) (1,095) ------- --------- --------- -------- -------- Net cash (used in) provided by financing activities.... 7,897 242,298 197,480 41,658 (23,176) ------- --------- --------- -------- -------- Effect of exchange rate changes on cash and cash equivalents................ -- 27 5 5 7 ------- --------- --------- -------- -------- Net increase (decrease) in cash and cash equivalents.. 4,859 8,142 (8,934) 562 1,029 Cash and cash equivalents at beginning of period..... -- 4,859 13,001 13,001 4,067 ------- --------- --------- -------- -------- Cash and cash equivalents at end of period........... $ 4,859 $ 13,001 $ 4,067 $ 13,563 $ 5,096 ======= ========= ========= ======== ======== |
The accompanying notes are an integral part of these financial statements.
Select Medical Corporation
Notes to Consolidated Financial Statements
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
1. Organization and Accounting Policies
Business Description
Select Medical Corporation and its subsidiaries (the "Company") was formed in December 1996 and commenced operations during February 1997 upon the completion of its first acquisition. The Company provides long-term acute care hospital services through its Select Specialty Hospital division and provides physical, occupational, and speech rehabilitation services through its outpatient divisions. Select Specialty Hospital division owns and operates long-term acute care hospitals. These hospitals, which average approximately 35 to 40 beds in size, operate generally in space leased within general acute care hospitals. These hospitals offer intensive nursing care, vent weaning, and therapy services to high acuity patients who require long lengths of hospital care before being discharged to a nursing home or home care environment. At December 31, 1998, December 31, 1999 and June 30, 2000, the Company operated 39, 44 and 49 long-term acute care hospitals, respectively. The Company's outpatient divisions provide rehabilitation services in outpatient clinics owned or managed by the Company and under therapy contracts with nursing homes, schools, hospitals, and home care agencies. At December 31, 1998, December 31, 1999 and June 30, 2000, the Company had operations in Canada and 19, 33 and 37 states, respectively.
The financial information presented as of and for the periods ending June 30, 2000 and 1999 has been prepared from the books and records without audit. Such financial information does not include all disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments, consisting of normal recurring adjustments necessary for a fair presentation of financial information for any interim periods presented have been included. The results of the Company's operations for any interim period are not necessarily indicative of the results attained for a full fiscal year. The data disclosed in these notes to the consolidated financial statements related to the interim periods are also unaudited.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, its majority owned subsidiaries, limited liability companies and limited partnerships the Company and its subsidiaries control through ownership of general and limited partnership interests. All significant intercompany balances and transactions are eliminated in consolidation. The Company does not consolidate professional corporations where it has a long-term management contract because the Company does not have a long-term controlling interest in the affiliated practices as defined in "Emerging Issues Task Force No 97-2." Instead the Company reports management services revenue earned under the terms of the agreements.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less when purchased to be cash equivalents. Cash equivalents are stated at cost which approximates market.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
1. Organization and Accounting Policies (continued)
Property and Equipment
Property and equipment are stated at cost net of accumulated depreciation. Depreciation and amortization are computed using the straight- line method over the estimated useful lives of the assets or the term of the lease, as appropriate. The general range of useful lives is as follows:
Leasehold improvements....................................... 5 years Furniture and equipment...................................... 2--10 years Buildings.................................................... 40 years |
Unamortized software costs totaled $1,416,000, $2,541,000 and $2,319,000 at December 31, 1998, December 31, 1999 and June 30, 2000, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash balances and trade receivables. The Company invests its excess cash with large banks.
Assets Held for Sale
Assets held for sale are stated at their net realizable value. The results of operations related to the assets held for sale are excluded from the Company's operating results and will be reflected as an adjustment to the purchase price when the assets are sold. No depreciation or amortization is recognized on the assets held for sale.
Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Management provides a valuation allowance for net deferred tax assets when it is more likely than not that a portion of such net deferred tax assets will not be recovered.
Intangible Assets
Identifiable assets and liabilities acquired in connection with business combinations accounted for under the purchase method are recorded at their respective fair values. Deferred taxes have been recorded to the extent of differences between the fair value and the tax basis of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of tangible net assets acquired is amortized on a straight-line basis over the estimated useful life of the intangible assets. Company management performed allocation of intangible assets between identifiable intangibles and goodwill with the assistance of independent appraisers. Intangible assets other than goodwill primarily consist of the values assigned to trademarks and assembled work force. Management Service Agreements ("MSA's") represent consideration paid to therapists groups for entering into MSA's with the Company. The Company's MSA's are for a term of 20 years with renewal options. Intangible assets are amortized over an average of 37 years. Management believes that the estimated useful lives established at the dates of each transaction were reasonable based on the economic factors applicable to each of the businesses.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
1. Organization and Accounting Policies (continued)
The Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"), which establishes accounting standards for the impairment of long-lived assets, certain identified intangible assets and goodwill related to those assets to be held and used and for long-lived assets and certain intangible assets to be disposed. In accordance with SFAS 121, the Company reviews the realizability of long-lived assets, certain intangible assets and goodwill whenever events or circumstances occur which indicate recorded costs may not be recoverable. In addition, the Company also analyzes the recovery of long-lived assets on an enterprise basis.
If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the Company recognizes an impairment loss for the difference between the carrying amount of the assets and their estimated fair value (Note 9).
Due to Third-Party Payors
Due to third-party payors represents the difference between amounts received under interim payment plans from third-party payors for services rendered and amounts estimated to be reimbursed by those third-party payors upon settlement of cost reports.
Minority Interests
The interests held by other parties in subsidiaries, limited liability companies and limited partnerships owned and controlled by the Company are reported on the consolidated balance sheets as minority interests. Minority interests reported in the consolidated statements of operations reflect the respective interests in the income or loss of the subsidiaries, limited liability companies and limited partnerships attributable to the other parties.
Treasury Stock
Treasury stock is carried at cost, determined by the first-in, first-out method.
Revenue Recognition
Net operating revenues consists of patient, contract therapy, and management services revenues and are recognized as services are rendered.
Patient service revenue is reported at the net realizable amounts from patients and third party payors. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported at the estimated net realizable amounts from patients, third-party payors, and others for services rendered, including retroactive adjustments under reimbursement agreements with third-party payors. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Net operating revenues generated directly from the Medicare program represented approximately 25%, 38%, 48%, 50% and 33% of the Company's consolidated net operating
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
1. Organization and Accounting Policies (continued)
revenues for the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively. Approximately 42% and 33% of the Company's gross accounts receivable at December 31, 1998 and December 31, 1999, respectively, are from this payor source.
Management services revenues represent revenues earned under management service agreements with professional corporations and associations in the business of providing physical, occupational, and speech therapy.
Significant reductions in the patient service revenues generated in a hospital may occur if the Company is unable to maintain the certification of the hospital as a long-term acute care hospital (LTACH) in accordance with Medicare regulations. Additionally, the majority of the Company's hospitals operate in space leased from general acute care hospitals (host hospitals); consequently, these hospitals are also subject to Medicare "Hospital within Hospital" (HIH) regulations in addition to the general LTACH regulations. The HIH regulations are designed to ensure that the hospitals are organizationally and functionally independent of their host hospital. If an LTACH located in a host hospital fails to meet the HIH regulations it also loses its status as an LTACH. These determinations are made on an annual basis. Management believes its LTACH's are in compliance with the Medicare regulations regarding HIH's and LTACH's and that it will be able to meet the tests to maintain the future status of its hospitals as LTACH's under the current Medicare regulations.
Other Income
Other income in 1997 consists principally of a transaction break-up fee.
Foreign Currency Translations
The Company uses the local currency as the functional currency for its Canadian operations. All assets and liabilities of foreign operations are translated into U.S. dollars at year-end exchange rates. Income statement items are translated at average exchange rates prevailing during the year. The resulting translation adjustments impacting comprehensive income (loss) are recorded as a separate component of stockholders' equity.
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per common share is based on the weighted average number of shares of common stock outstanding during each year. Diluted net income (loss) per common share is based on the weighted average number of shares of common stock outstanding during each year, adjusted for the effect of common stock equivalents arising from the assumed exercise of stock options, warrants and convertible preferred stock, if dilutive.
Derivatives and Hedging Activities
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement for financial position and measure those instruments at fair value. SFAS No. 137, issued by the FASB in July 1999, establishes a new effective date for SFAS No. 133. This statement, as amended by SFAS No. 137, is effective for all fiscal quarters of fiscal years beginning after June 15, 2000 and is therefore effective for the Company beginning with its fiscal quarter ending March 31, 2001. Based upon the nature of the financial
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
1. Organization and Accounting Policies (continued)
instruments and hedging activities in effect as of the date of this filing, this pronouncement would require the Company to reflect the fair value of its derivative instruments on the consolidated balance sheet. Changes in fair value of these instruments will be reflected as a component of comprehensive income. In June 2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Hedging Activities--an amendment of FASB Statement No. 133." SFAS No.138 addresses a limited number of issues causing implementation difficulties for SFAS No. 133. SFAS No. 138 is required to be adopted concurrently with SFAS No. 133 and is therefore effective for the Company beginning with its fiscal quarter ending March 31, 2001. Management is currently evaluating the impact of SFAS No. 133 and SFAS No. 138 on the consolidated financial statements.
2. Acquisitions, Disposal and Management Services Agreements
For the year ended December 31, 1997
On February 7, 1997, the Company acquired all of the outstanding stock of Sports and Orthopedic Rehabilitation Services, P.A. (SORS). SORS owns and operates outpatient clinics that provide sports and orthopedic rehabilitation services.
On May 7, 1997, the Company acquired all of the outstanding stock of West Penn Rehabilitation Services, Inc. (WPRS) and Physio Associates, Ltd. (PAL). WPRS owns and operates outpatient clinics, which provide sports and orthopedic rehabilitation services, and provides therapy services to patients in one long- term care facility. PAL provides contract therapy services to hospitals, long- term care facilities, health clinics and home health providers.
Effective June 30, 1997, the Company and a wholly owned subsidiary acquired a combination of assets and stock and assumed certain liabilities of a group of six business entities providing outpatient and contract rehabilitation services and doing business under the name RehabSolutions. The acquisition consisted of assets of Allegany Rehabilitation Associates, LLC, Haystack Holding Company, and Enhanced Rehab, LLC, 90% of the outstanding stock of Allegany Hearing and Speech, Inc., 90% of the membership interests of Mountain Top Rehab, LLC, and all the membership interests of Allegany Sports Medicine, LLC (ASM).
For the year ended December 31, 1998
On January 16, 1998, the Company acquired an 80% undivided interest in certain assets of NW Rehabilitation Associates, Inc. and Medical Temporary Specialists, Inc. These and the remaining 20% undivided interests were then contributed to NW Rehabilitation Associates, LLC (NW Rehab), which is 80% owned by the Company. NW Rehab provides rehabilitation services to third parties on a contract basis and to various homecare providers.
On February 28, 1998, the Company acquired approximately 73% of the outstanding stock of Canadian Back Institute Limited (CBIL). CBIL provides rehabilitation services in clinics across Canada. CBIL carries on these activities through various limited partnerships and corporations. In some cases CBIL is the general partner only (through its wholly owned subsidiaries), in certain other cases CBIL is also a limited partner (either directly or through its wholly owned subsidiaries) and in other cases CBIL carries on its activities through wholly owned or partially-owned subsidiaries.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
2. Acquisitions, Disposal and Management Services Agreements (continued)
On June 4, 1998, the Company acquired 80% of the outstanding common stock of PT Services, Inc. (PTS). PTS operates rehabilitation clinics and provides contract therapy services.
On June 30, 1998, the Company acquired 100% of the outstanding stock of American Transitional Hospitals (ATH), a wholly-owned subsidiary of Beverly Enterprises, Inc., for $62,800,000 cash and $14,944,000 liabilities assumed. ATH provides long-term acute care hospital services.
On December 16, 1998, the Company completed a public tender of the outstanding stock of Intensiva Healthcare Corporation (Intensiva) for $103,600,000 cash. The purchase was funded through the issuance of 18,571,429 shares of Select common stock and subordinate and bank debt. As part of the acquisition, the Company accrued $7.6 million of costs related principally of severance and other restructuring costs. Intensiva provides long-term acute care hospital services.
During 1998, the Company acquired controlling interests in two outpatient therapy businesses. The Company also acquired the non-medical assets of three outpatient therapy businesses and executed long-term Management Services Agreements (MSA) with the related professional corporations. Outpatient therapy acquisitions consisted of The Summit Group on May 1, 1998 and Avalon Rehabilitation on October 30, 1998. MSA's were executed with H&M Hecker, P.T, P.C. on January 31, 1998, Professional Management Bureau, Inc. on February 28, 1998 and Cedar Bridge Physical Therapy, P.C., Cedar Bridge Rehab Services, Inc., and KC Services, Inc. (collectively Cedar Bridge) on May 1, 1998.
For the Year Ended December 31, 1999
On January 8, 1999, the Company acquired 80% of the undivided interest in the business and certain assets of Kentucky Orthopedic Rehab Team, PSC (KORT). KORT operates rehabilitation clinics.
On November 19, 1999, the Company acquired 100% of the outstanding stock of NovaCare Physical Rehabilitation and Occupational Health Group (NovaCare) for $160,416,000 cash and $64,734,000 of liabilities assumed. The purchase was funded through the issuance of 16,000,000 shares of Select Class B Convertible Preferred stock and subordinate and bank debt. The Company is indemnified against certain risks including receivables collection and certain joint venture agreements through a $36,800,000 escrow account (see Note 19). In November 1999, the Company recorded a $29,948,000 receivable related to the receivable collection indemnification. As a part of the acquisition, the Company accrued $5.7 million of costs related to the planned closure of approximately 60 outpatient rehab clinics, the downsizing and relocation of the NovaCare corporate headquarters and transaction-related expenses. NovaCare provides outpatient physical therapy and rehabilitation services.
The Company planned to divest the Occupational Health segment of NovaCare with total sale proceeds estimated at $13,000,000. Sales completed as of June 30, 2000 totaled $11,750,000. The sale of the remaining clinics is expected to be completed in 2000. The expected net proceeds of this sale and the cash flows of this segment until it is sold were allocated to assets held for sale in the allocation of the NovaCare purchase price. Differences between the actual and expected amount will result in an adjustment of goodwill unless there is a difference caused by a post-acquisition event.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
2. Acquisitions, Disposal and Management Services Agreements (continued)
During 1999, the Company acquired controlling interests in four outpatient therapy businesses. Outpatient therapy acquisitions consisted of Sports Rehabilitation and Physical Therapy Center, P.A. on March 1, 1999, Senior Rehab, Inc. on March 31, 1999, Central Jersey Rehabilitation Services, Inc. on May 15, 1999 and Hunsel Physical Therapy Services, Inc. on July 15, 1999.
The acquisitions were accounted for using the purchase method of accounting, and results of operations from acquired companies are included in these financial statements from the dates of acquisition.
The following unaudited results of operations have been prepared assuming all acquisitions consummated on or before December 31, 1999 had occurred as of the beginning of the periods presented. These results are not necessarily indicative of results of future operations nor of the results that would have occurred had the acquisitions been consummated as of the beginning of the periods presented.
For the year ended December 31, ---------------------------------------- 1997 1998 1999 ------------ ------------ ------------ (unaudited) (unaudited) (unaudited) Revenues.............................. $535,637,000 $572,021,000 $720,116,000 Loss before extraordinary items....... (11,198,000) (26,764,000) 78,569,000 Net loss.............................. (11,198,000) (26,764,000) 84,383,000 |
Information with respect to businesses acquired in purchase transactions is as follows:
For the year ended December 31, ------------------------------------- 1997 1998 1999 ----------- ------------ ------------ Cash paid (net of cash acquired)......... $ 5,379,000 $203,058,000 $171,354,000 Notes issued............................. 2,540,000 18,343,000 7,783,000 Other consideration...................... -- 785,000 -- ----------- ------------ ------------ 7,919,000 222,186,000 179,137,000 Liabilities assumed...................... 3,830,000 105,286,000 65,744,000 ----------- ------------ ------------ 11,749,000 327,472,000 244,881,000 Fair value of assets acquired, principally accounts receivable and property and equipment.................. 5,528,000 159,554,000 144,623,000 Trademarks............................... -- -- 40,000,000 Management services agreements........... -- 8,829,000 1,520,000 Assembled workforce...................... -- 8,480,000 9,200,000 ----------- ------------ ------------ Cost in excess of fair value of net assets acquired......................... $ 6,221,000 $150,609,000 $ 49,538,000 =========== ============ ============ |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
3. Property and Equipment
Property and equipment consists of the following:
December 31, -------------------------- June 30, 1998 1999 2000 ------------ ------------ ------------ Land................................ $ 1,488,000 $ 501,000 $ 501,000 Leasehold improvements.............. 14,331,000 19,800,000 24,697,000 Buildings........................... 17,000,000 17,000,000 17,000,000 Furniture and equipment............. 23,047,000 64,572,000 70,821,000 Construction in progress............ 602,000 661,000 519,000 ------------ ------------ ------------ 56,468,000 102,534,000 113,538,000 Less: accumulated depreciation and amortization....................... 5,364,000 17,462,000 26,692,000 ------------ ------------ ------------ Total property and equipment........ $ 51,104,000 $ 85,072,000 $ 86,846,000 ============ ============ ============ 4. Intangible Assets Intangible assets consist of the following: December 31, -------------------------- June 30, 1998 1999 2000 ------------ ------------ ------------ Goodwill............................ $156,056,000 $198,254,000 $195,383,000 Trademarks.......................... -- 40,000,000 40,000,000 Management services agreements...... 8,829,000 10,343,000 10,343,000 Assembled workforce................. 8,480,000 17,544,000 17,544,000 ------------ ------------ ------------ 173,365,000 266,141,000 263,270,000 Less: accumulated amortization...... 1,987,000 8,062,000 10,855,000 ------------ ------------ ------------ Total intangible assets............. $171,378,000 $258,079,000 $252,415,000 ============ ============ ============ The following summarizes the Company's intangible asset activity: December 31, -------------------------- June 30, 1998 1999 2000 ------------ ------------ ------------ Beginning balance of intangibles, net................................ $ 5,907,000 $171,378,000 $258,079,000 Intangibles recorded for companies purchased in current year.......... 167,918,000 100,258,000 3,212,000 Intangibles adjusted for companies purchased in prior year for: Asset impairments................... -- (3,691,000) -- Income tax benefits recognized...... -- (1,314,000) (5,375,000) Translation adjustment.............. (676,000) 671,000 (267,000) Other............................... -- (3,471,000) 691,000 Earn out payments, net.............. -- -- 687,000 Amortization........................ (1,771,000) (5,752,000) (4,612,000) ------------ ------------ ------------ Net increase (decrease) in intangibles........................ 165,471,000 86,701,000 (5,664,000) ------------ ------------ ------------ Ending balance of intangibles, net.. $171,378,000 $258,079,000 $252,415,000 ============ ============ ============ |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
5. Restructuring Charges
During 1998, the Company recorded a $7,648,000 restructuring reserve in connection with the acquisition of Intensiva. The Company also recorded a restructuring reserve in 1999 related to the NovaCare acquisition of $5,743,000. The reserves primarily included costs associated with workforce reductions of 25 and 162 employees in 1998 and 1999, respectively, and lease buyouts in accordance with the Company's qualified restructuring plan. These reserves were recorded as part of the purchase price under EITF 95-3. Additionally, $3,187,000 of lease termination liabilities were assumed through acquisitions.
The following summarizes the Company's restructuring activity:
Lease Termination Costs Severance Other Total ----------- ----------- ----------- ----------- January 1, 1998........... $ -- $ -- $ -- $ -- 1998 acquisition restructuring costs...... 536,000 5,914,000 1,198,000 7,648,000 ----------- ----------- ----------- ----------- December 31, 1998......... 536,000 5,914,000 1,198,000 7,648,000 Amounts paid in 1999...... (109,000) (5,914,000) (1,198,000) (7,221,000) 1999 restructuring liabilities assumed...... 3,187,000 -- -- 3,187,000 1999 acquisition restructuring costs...... 3,600,000 700,000 1,443,000 5,743,000 ----------- ----------- ----------- ----------- December 31, 1999......... 7,214,000 700,000 1,443,000 9,357,000 Amounts paid in 2000...... (2,482,000) (150,000) (1,434,000) (4,066,000) ----------- ----------- ----------- ----------- June 30, 2000............. $ 4,732,000 $ 550,000 $ 9,000 $ 5,291,000 =========== =========== =========== =========== |
Management expects to pay out the remaining restructuring reserves through 2003.
6. Long-Term Debt and Notes Payable
The components of long-term debt and notes payable are shown in the following table:
December 31, ------------------------- June 30, 1998 1999 2000 ------------ ------------ ------------ Credit facility......................... $ 98,338,000 $209,076,000 $199,094,000 10% Senior Subordinated Notes, net of discount of $9,286,000, $14,096,000 and $13,660,000 in 1998, 1999 and 2000, respectively........................... 25,714,000 75,904,000 76,340,000 Seller notes............................ 19,299,000 53,702,000 40,049,000 Assumed Intensiva debt.................. 10,554,000 -- -- Other................................... 2,175,000 2,139,000 2,055,000 ------------ ------------ ------------ Total debt.............................. 156,080,000 340,821,000 317,538,000 Less: current maturities................ 8,354,000 21,127,000 22,326,000 ------------ ------------ ------------ Total long-term debt.................... $147,726,000 $319,694,000 $295,212,000 ============ ============ ============ |
On November 19, 1999, the Company entered into a $225 million credit facility which expires on November 19, 2002. This credit facility replaced the Company's U.S. Credit Facility and its Canadian Credit
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
6. Long-Term Debt and Notes Payable (continued)
Facility dated February 9, 1999. Proceeds from the facility were used for acquisitions and hospital development activities. The facility consists of a $200 million Term Commitment and a $25 million Revolving Commitment. Borrowings bear interest at LIBOR plus 3.5% or Base Rate (approximately 10% at December 31, 1999) as defined in the agreement. The unused portion of the Revolving Commitment at December 31, 1999 was approximately $12 million. The credit facility included restrictions on certain payments by the Company including dividend payments, minimum net worth requirements and other covenants. The Term Commitment decreases by $3,861,413 quarterly beginning on December 31, 2000 until December 31, 2001, and $5,516,304 per quarter from March 31, 2002 through September 30, 2002. The Revolving Commitment is payable in full on November 19, 2002. A commitment fee of .5% per annum is charged on the unused portion of the credit facility. The Company is authorized to issue up to $10,000,000 in letters of credit. Letters of credit reduce the capacity under the Revolving Commitment and bear interest at 3.5%. Approximately $2,700,000 in letters of credit was available at December 31, 1999.
The Senior Subordinated Notes were issued to a principal stockholder of the Company and have common shares attached which were recorded at the estimated fair market value on the date of issuance. The common shares issued were recorded as a discount to the Senior Subordinated Notes and will be amortized over the life of the debt using the interest method. Senior Subordinated Notes were issued as follows during 1999 and 1998:
Shares Share Date of issuance Principal issued value Discount Maturity ---------------- ----------- --------- ----- ----------- ----------------- December 16, 1998.... $35,000,000 2,653,060 $3.50 $ 9,285,710 December 31, 2008 February 9, 1999..... 30,000,000 -- -- -- December 31, 2008 November 19, 1999.... 25,000,000 1,667,000 3.75 5,209,375 November 19, 2009 ----------- --------- ----- ----------- Total................ $90,000,000 4,320,060 $3.75 $14,495,085 |
In the event the Company repays the November 19, 1999 promissory notes on or before November 19, 2001, 416,750 shares of common stock attached to the notes will be transferred back to the Company.
The Company's obligations under its current and previous credit agreements are collateralized by guarantees of two of the Company's principal stockholders. In connection with the debt guarantees, the Company and certain shareholders entered into a warrant agreement. The Company issued 799 and 1,500 warrants to these shareholders in 1999 and 1998, respectively, that entitle the holder of each warrant to purchase one share of common stock at an exercise price of $3.50 per share or at a price equal to the lowest selling price of common shares sold by the Company after June 30, 1998. The warrants expire on June 30, 2003. The value of the warrants is being accounted for as financing costs and the related amortization is included as a component of interest expense.
The Seller Notes relate to the acquisition of related businesses and require periodic payments of principal, generally over three years, and interest through maturity. Also, certain of the notes contain minimum net worth requirements. Interest rates are at 6% to 9% per annum.
In connection with the Intensiva acquisition, the Company assumed $10,554,000 of bank notes. The note agreement had a change of ownership provision which resulted in the entire balance becoming
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
6. Long-Term Debt and Notes Payable (continued)
immediately payable due to the change in ownership. This note was refinanced through the Company's credit facility on January 13, 1999.
Maturities of long-term debt for the years after 2000 are approximately as follows:
2001........................................................ $ 26,202,000 2002........................................................ 211,608,000 2003........................................................ 3,198,000 2004........................................................ 1,478,000 2005 and beyond............................................. 77,208,000 |
The Company refinanced its existing credit facility in September 2000. The new credit agreement consists of a $175 million term commitment and a $55 million revolving commitment. The term debt begins quarterly amortization in September 2001, with a final maturity date of September 2005. The revolving commitment, which also matures in September 2005, can be increased at the Company's discretion by $20 million before November 21, 2001. Borrowings under the facility bear interest at either LIBOR or Prime rate, plus applicable margins based on financial covenant ratio tests. Deferred financing costs of approximately $6,000,000 will be charged to expense as an extraordinary item in the quarter ending September 30, 2000.
Maturities of long-term debt at December 31, 1999 modified under the new credit agreement for the years after 2000 are approximately as follows:
2001........................................................ $ 22,702,000 2002........................................................ 32,661,000 2003........................................................ 43,245,000 2004........................................................ 51,421,000 2005 and beyond............................................. 169,665,000 |
7. Redeemable Preferred Stock and Stockholders' Equity
Class A Preferred Stock
The Company is authorized to issue 55,000 shares of cumulative, non- voting Class A Preferred Stock (53,000 shares outstanding at December 31, 1999 and 1998). The Company sold 48,000 shares of Class A Preferred Stock during 1998 with total proceeds of $47,616,000 used primarily to fund acquisitions and provide working capital. The Class A Preferred Stock ranks senior to the Common Stock as to dividends, liquidation, and redemption rights. The Company may at any time and from time to time redeem all or any portion of the shares of Class A Preferred Stock. The Company is required to redeem 50% of the outstanding shares of Class A Preferred Stock on December 31, 2004 and 50% on December 31, 2005. At the request of the holders of a majority of the Class A Preferred Stock, the Company is required to (i) apply the net cash proceeds from any Public Offering to redeem shares of Class A Preferred Stock and (ii) redeem shares of Class A Preferred Stock upon a change in control or other events as defined. The redemption price per share is $1,000 plus all accrued and unpaid dividends thereon. The Class A Preferred Stock has an annual cash dividend rate of 8% per share, which accrues on a daily basis. Included in the Class A Preferred Stock amount at December 31, 1998,
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
7. Redeemable Preferred Stock and Stockholders' Equity (continued)
December 31, 1999 and June 30, 2000 are $2,805,000, $7,550,000 and $10,007,000, respectively, of accrued and undeclared dividends.
Class B Preferred Stock
In connection with the NovaCare acquisition (Note 2), the Company sold 16,000 shares of Class B Preferred Stock at a price of $3.75 per share for net proceeds of $59,361. The Class B Preferred Stock ranks senior to the Class A Preferred Stock and Common Stock as to dividends, liquidation, and redemption rights. The Company may at any time and from time to time redeem all or any portion of the shares of Class B Preferred Stock. At the request of the holders of a majority of the Class B Preferred Stock, the Company is required to (i) apply the net cash proceeds from any Public Offering to redeem shares of Class B Preferred Stock and (ii) redeem shares of Class B Preferred Stock upon a change in control or other events as defined. The redemption price per share is $3.75 plus all accrued and unpaid dividends thereon. Each share of Class B preferred stock is convertible at any time, at the option of the stockholder, into one share of common stock. The Class B Preferred Stock has an annual cash dividend rate of 6% per share, which accrues on a daily basis. Included in the Class B Preferred Stock amount at December 31, 1999 and June 30, 2000 are $406,000 and $2,221,000, respectively, of accrued and undeclared dividends.
If at any time the Company effects a public offering of its Common Stock in which (i) the price per share paid by the public is at least $5.63 and (ii) the aggregate price paid for such shares is at least $25,000,000 (Qualified Public Offering), each share of the outstanding Class B Preferred Stock automatically converts into one share of Common Stock. Since the Company expects that the proceeds and per share price of the planned public offering will be a Qualified Public Offering. The effects of the mandatory conversion have been reflected as pro forma unaudited amounts in the accompanying Consolidated Balance Sheet.
Common Stock
Shares of common stock issued during 1997 totaled 20,286,000. The shares were issued to management at $.17 (adjusted for stock splits) for proceeds totaling $3,381,000. The Certificate of Incorporation was amended on February 7, 1997 to allow for a two-for-one split in the shares of common stock and again on July 24, 1997 to allow for a three-for-two split of the shares of common stock.
In order to raise proceeds for the Intensiva acquisition in December 1998, the Company sold 18,571,429 shares of common stock at a price of $3.50 for proceeds, net of issuance costs of $685,000 totaling $64,362,000. In addition, 2,653,000 shares of common stock were issued in conjunction with the Senior Subordinated Notes to fund the acquisition of Intensiva (Note 6). Other shares of common stock issued in 1998 totaled 839,000. These shares were issued to management at prices ranging from $.17 (adjusted for stock splits) to $3.50 cash for proceeds totaling $1,357,000.
Shares of common stock sold in 1999 totaled 297,000. The shares were issued to management at prices ranging from $3.50 to $3.75 for proceeds totaling $1,041,000. The Company purchased 300,000 shares as treasury stock during 1999 for $781,000. In addition, 1,667,000 shares of common stock were issued in conjunction with the Senior Subordinated Notes dated November 19, 1999 (Note 6).
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
7. Redeemable Preferred Stock and Stockholders' Equity (continued)
A Restated Certificate of Incorporation was amended on August 28, 1998, December 15, 1998, and November 19, 1999 to increase the authorized shares of common stock to 24,000,000, 63,000,000 and 78,000,000, respectively. The November 19, 1999 amendment also authorized the issuance of 16,000,000 shares of Class B Preferred Stock.
8. Stock Option Plan
The Company has a 1997 Stock Option Plan that provides for the granting of options to purchase shares of Company stock to certain executives, employees and directors.
Under the 1997 Stock Option Plan, options to acquire up to 10,000,000 shares of the stock may be granted. Options under the plan carry various restrictions. Under the Plan, certain options granted to employees will be qualified incentive stock options within the meaning of Section 422A of the Internal Revenue Code and other options will be considered nonqualified stock options. Both incentive stock options and nonqualified stock options may be granted for no less than market value at the day of the grant and expire no later than ten years after the date of the grant.
Transactions and other information related to the Stock Option Plan are as follows:
Price Per Share Shares ------------- --------- Balance, December 31, 1997............................. $ 1.00 71,000 Granted.............................................. 3.50 2,721,000 Exercised............................................ -- -- Forfeited............................................ 1.00 to 3.50 (51,000) ------------- --------- Balance, December 31, 1998............................. 1.00 to 3.50 2,741,000 Granted.............................................. 3.50 to 3.75 2,608,000 Exercised............................................ -- -- Forfeited............................................ 1.00 to 3.50 (153,000) ------------- --------- Balance, December 31, 1999............................. 1.00 to 3.75 5,196,000 Granted.............................................. 3.75 1,920,000 Exercised............................................ 3.50 (4,000) Forfeited............................................ 1.00 to 3.75 (79,000) ------------- --------- Balance, June 30, 2000................................. $1.00 to 3.75 7,033,000 ============= ========= |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
8. Stock Option Plan (continued)
Additional information with respect to the outstanding options as of December 31, 1997, 1998 and 1999 and the six months ended June 30, 2000 is as follows:
Range of Exercise Prices ----------------------------- 0.00-1.00 1.01-3.50 3.51-3.75 --------- --------- --------- Number outstanding at December 31, 1997......... 71,000 -- -- Options outstanding weighted average remaining contractual life............................... 9.83 -- -- Weighted average exercise price................. $1.00 -- -- Number outstanding at December 31, 1998......... 31,000 2,710,000 -- Options outstanding weighted average remaining contractual life............................... 8.86 9.91 -- Weighted average exercise price................. $1.00 $3.50 -- Number outstanding at December 31, 1999......... 31,000 2,841,000 2,324,000 Options outstanding weighted average remaining contractual life............................... 7.86 8.97 9.90 Weighted average exercise price................. $1.00 $3.50 $3.75 Number of exercisable........................... 11,400 2,300,700 2,324,000 Unaudited --------- Number outstanding at June 30, 2000............. 30,000 2,806,000 4,197,000 Options outstanding weighted average remaining contractual life............................... 7.36 8.48 9.49 Weighted average exercise price................. $1.00 $3.50 $3.75 |
The Company adopted Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" (SFAS 123). As permitted by SFAS 123, the Company has chosen to apply APB Opinion No 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its Plan. Had compensation costs for the Plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the method of SFAS 123, approximately $1,300,000, $1,020,000 and $351,000 of additional compensation expense, net of tax, would have been recognized during the years ended December 31, 1998 and 1999 and the six months ended June 30, 2000, respectively.
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option pricing model assuming no dividend yield or volatility, an expected life of four years from the date of vesting and a risk free interest rate of 4.6%.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma net earnings and earnings per share were as follows:
Six months ended June 30, 1997 1998 1999 2000 ------ -------- -------- ---------- Net income (loss)--as reported.......... $1,947 $(18,044) $(13,106) $7,024 Net income (loss)--pro forma............ 1,947 (19,344) (14,126) 6,673 Basic earnings (loss) per share--as reported............................... 0.15 (0.95) (0.43) 0.06 Basic earnings (loss) per share--pro forma.................................. 0.15 (1.01) (0.45) 0.05 Diluted earnings (loss) per share--as reported............................... 0.15 (0.95) (0.43) 0.06 Diluted earnings (loss) per share--pro forma.................................. 0.15 (1.01) (0.45) 0.05 |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
9. Income Taxes
Significant components of the Company's tax provision (benefit) for the years ended December 31, 1997, 1998 and 1999 are as follows:
1997 1998 1999 ---------- --------- ---------- Current: Federal.................................... $1,244,000 $ -- $1,314,000 State and local............................ 318,000 755,000 1,497,000 Foreign.................................... -- -- -- ---------- --------- ---------- Total current................................ 1,562,000 755,000 2,811,000 Deferred: Federal.................................... (202,000) (937,000) -- State and local............................ (52,000) -- -- ---------- --------- ---------- Total deferred............................... (254,000) (937,000) -- ---------- --------- ---------- Total income tax provision (benefit)......... $1,308,000 $(182,000) $2,811,000 ========== ========= ========== |
The difference between the expected income tax provision at the federal statutory rate of 34% and the income tax benefit recognized in the financial statements is as follows:
1997 1998 1999 ---- ----- ----- Expected federal tax rate................................. 34.0% (34.0%) (34.0%) State taxes, net of federal benefit....................... 5.4 2.7 22.1 Non-deductible goodwill................................... -- 2.0 36.4 Other permanent differences............................... 0.8 0.4 5.2 Foreign taxes............................................. -- 1.0 (1.1) Valuation allowance....................................... -- 26.6 32.6 Other..................................................... -- 0.3 1.5 ---- ----- ----- Total..................................................... 40.2% (1.0%) 62.7% ==== ===== ===== |
Undistributed earnings of the Company's foreign subsidiary are permanently reinvested. Accordingly, no deferred taxes have been provided on these earnings.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
9. Income Taxes (continued)
A summary of deferred tax assets and liabilities is as follows:
1997 1998 1999 --------- ------------ ------------ Deferred tax assets (liabilities)-- current Allowance for doubtful accounts........ $ 292,000 $ 8,516,000 $ 13,735,000 Compensation and benefit related accruals.............................. 125,000 877,000 2,972,000 Expenses not currently deductible for tax................................... (440,000) 2,014,000 -- --------- ------------ ------------ Net deferred tax asset (liability)-- current............................... (23,000) 11,407,000 16,707,000 --------- ------------ ------------ Deferred tax assets (liabilities)--non current Expenses not currently deductible for tax................................... 61,000 2,899,000 2,786,000 Net operating loss carry forwards...... -- 9,128,000 18,698,000 Depreciation and amortization.......... (60,000) (3,630,000) 1,687,000 Other.................................. 1,000 -- -- --------- ------------ ------------ Net deferred tax asset--non current.... 2,000 8,397,000 23,171,000 --------- ------------ ------------ Net deferred tax asset (liability) before valuation allowance............ (21,000) 19,804,000 39,878,000 Valuation allowance.................... -- (18,867,000) (38,941,000) --------- ------------ ------------ $ (21,000) $ 937,000 $ 937,000 ========= ============ ============ |
The Company provided, in 1998 and 1999, a valuation allowance for substantially all net deferred tax assets. This was based on management's judgement, after weighing the negative historical information and the positive future information, that it is more likely than not that such deferred tax assets will not be realized.
The increase in the valuation allowance in 1999 is related to the increase in deferred tax assets primarily related to acquisitions. The Company has approximately $33,800,000 in federal net operating loss carry forwards. Such carry forwards expire as follows:
2001......................................................... $ 441,000 2002......................................................... 461,000 2003......................................................... -- 2004......................................................... -- Thereafter through 2019...................................... 32,898,000 |
As a result of the acquisition of Intensiva, ATH and NovaCare, the Company is subject to the provisions of Section 382 of the Internal Revenue Code which provide for annual limitations on the deductibility of acquired net operating losses and certain tax deductions. These limitations apply until the earlier of utilization or expiration of the net operating losses. Additionally, if certain substantial changes in the Company's ownership should occur, there would be an annual limitation on the amount of the carryforwards that can be utilized.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
10. Special Charge
The special charge consists of the following components:
1998 1999 ----------- ---------- Asset impairments................................. $ 6,331,000 $5,223,000 Litigation settlement............................. 3,826,000 -- ----------- ---------- Total special charge.............................. $10,157,000 $5,223,000 =========== ========== |
The 1998 impaired asset charge of $6,331,000 resulted from assets that were identified in accordance with the Company's policy on impairments based upon a review of the facts and circumstances related to the assets. The amount of the charge was determined based upon the comparison of the future discounted cash flows resulting from the assets and the carrying value of these assets. The impairment related to assets acquired in May 1998. These assets were adversely affected by changes in the composition of the businesses at and immediately subsequent to the acquisitions.
During May 1999, the Company and two of its subsidiaries participated in the settlement of litigation related to the alleged breach of non-compete agreements initiated during 1997 by Horizon/CMS Healthcare Corporation and certain of its affiliates against the Company, Messrs. Rocco Ortenzio, Chairman and CEO, and Robert Ortenzio, President and COO, and certain other officers and employees of the Company. The Company's portion of the settlement was $3,000,000 and its share of the related legal costs was $826,000, both of which were recognized as a special charge in December 1998 and were paid in 1999.
The 1999 special charge consists of asset impairments of $5,223,000. The charge relates to the impairment of goodwill, leasehold improvements and equipment that resulted from closures and relocations of certain hospitals and clinics in December 1999.
11. Extraordinary item
On November 19, 1999, the Company entered into a new $225 million credit facility as part of the NovaCare acquisition (Note 6). This credit facility replaced the Company's $155 million credit facility from February 9, 1999. The extraordinary item consists of the unamortized deferred financing costs of $5,814,000 related to the February 9, 1999 credit facility.
12. Retirement Savings Plan
Beginning March 1, 1998, the Company sponsored a defined contribution retirement savings plan for substantially all of its employees. Employees may elect to defer up to 15% of their salary. The Company matches 50% of the first 6% of compensation employees contribute to the plan. The employees vest in the employer contributions over a three-year period beginning on employee hire date. The expense incurred by the Company related to this plan was $620,000, $1,728,000, $805,000 and $2,073,000 during the years ended December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively.
A subsidiary sponsored a noncontributory defined contribution retirement plan for its employees. The subsidiary contributed 9.25% and 7.60% of employee salaries up to a maximum contribution of $15,000 and
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
12. Retirement Savings Plan (continued)
$13,000 per employee in 1998 and 1999, respectively. Approximately $700,000, $560,000, $131,000 and $175,000 of contributions related to this plan were expensed during the years ended December 31, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively.
13. Segment Information
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," establishes standards for reporting information about operating segments and related disclosures about products and services, geographic areas and major customers. The adoption of SFAS No. 131 did not affect the Company's results of operations or financial position.
The Company's segments consist of (i) inpatient hospitals and (ii) outpatient rehabilitation. The inpatient hospitals were acquired beginning July 1, 1998 and therefore, the Company consisted of only one segment for the year ended December 31, 1997.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates performance based on EBITDA of the respective business units. EBITDA is defined as earnings before interest, minority interest, income taxes, extraordinary items, special charges, depreciation and amortization. All segment revenues are from external customers.
The following table summarizes selected financial data for the Company's reportable segments:
Year Ended December 31, 1998 ------------------------------------------------------ Inpatient Outpatient Hospitals Rehabilitation All Other Total ------------ -------------- ------------ ------------ Net revenue.............. $ 62,715,000 $ 83,059,000 $ 3,269,000 $149,043,000 EBITDA................... 3,147,000 12,598,000 (12,150,000) 3,595,000 Total assets............. 240,266,000 90,267,000 6,416,000 336,949,000 Year Ended December 31, 1999 ------------------------------------------------------ Inpatient Outpatient Hospitals Rehabilitation All Other Total ------------ -------------- ------------ ------------ Net revenue.............. $307,464,000 $141,740,000 $ 6,771,000 $455,975,000 EBITDA................... 35,929,000 22,697,000 (16,382,000) 42,244,000 Total assets............. 250,034,000 350,419,000 20,265,000 620,718,000 Six Months Ended June 30, 1999 ------------------------------------------------------ Inpatient Outpatient Hospitals Rehabilitation All Other Total ------------ -------------- ------------ ------------ Net revenue.............. $148,235,000 $ 56,292,000 $ 3,504,000 $208,031,000 EBITDA................... 17,168,000 10,991,000 (7,204,000) 20,955,000 Total assets............. 246,323,000 125,901,000 17,276,000 389,500,000 |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
13. Segment Information (continued)
Six Months Ended June 30, 2000 ---------------------------------------------------- Inpatient Outpatient Hospitals Rehabilitation All Other Total ------------ -------------- ---------- ------------ Net revenue................ $178,309,000 $214,110,000 $5,003,000 $397,422,000 EBITDA..................... 20,942,000 36,433,000 (9,772,000) 47,603,000 Total assets............... 246,297,000 350,453,000 12,955,000 609,705,000 |
A reconciliation of EBITDA to net income is as follows:
Six months Six months ended ended June 30, June 30, 1998 1999 1999 2000 ------------ ------------ ----------- ------------ EBITDA.................. $ 3,593,000 $ 42,244,000 $20,955,000 $ 47,603,000 Depreciation and amortization........... (4,942,000) (16,741,000) (6,825,000) (14,095,000) Special charge.......... (10,157,000) (5,223,000) -- -- Interest income......... 406,000 362,000 199,000 222,000 Interest expense........ (5,382,000) (21,461,000) (8,828,000) (18,300,000) Minority interest....... (1,744,000) (3,662,000) (2,144,000) (2,178,000) Income tax (expense) benefit................ 182,000 (2,811,000) (3,430,000) (6,228,000) Extraordinary item...... -- (5,814,000) -- -- ------------ ------------ ----------- ------------ Net income (loss)....... $(18,044,000) $(13,106,000) $ (73,000) $ 7,024,000 ============ ============ =========== ============ |
14. Net Income per Share
Under SFAS No. 128, "Earnings per Share" (EPS), the Company's granting of certain stock options, warrants and convertible preferred stock resulted in potential dilution of basic EPS. The following table sets forth for the periods indicated the calculation of net income (loss) per share in the Company's consolidated Statement of Operations and the differences between basic weighted average shares outstanding and diluted weighted average shares outstanding used to compute diluted EPS:
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
14. Net Income per Share (continued)
The following table sets forth for the periods indicated the calculation of net income (loss) per share in the Company's consolidated Statement of Operations.
For the year ended December 31, June 30, -------------------------------------- ------------------------ 1997 1998 1999 1999 2000 ----------- ------------ ------------ ----------- ----------- Numerator: Income (loss) before extraordinary item..... $ 1,947,000 $(18,044,000) $ (7,292,000) $ (73,000) $ 7,024,000 Extraordinary item...... -- -- (5,814,000) -- -- ----------- ------------ ------------ ----------- ----------- Net income (loss)...... 1,947,000 (18,044,000) (13,106,000) (73,000) 7,024,000 Less: Preferred stock dividends............. 266,000 2,540,000 5,175,000 2,122,000 4,271,000 ----------- ------------ ------------ ----------- ----------- Numerator for basic earnings per share- income (loss) available to common stockholders.......... $ 1,681,000 $(20,584,000) $(18,281,000) $(2,195,000) $ 2,753,000 =========== ============ ============ =========== =========== Denominator: Denominator for basic earnings per share- weighted average shares................ 11,383,000 21,731,000 42,633,000 42,517,000 44,180,000 Effect of dilutive securities: a) Stock options....... 12,000 -- -- -- 2,778,000 b) Warrants............ -- -- -- -- 2,723,000 ----------- ------------ ------------ ----------- ----------- Denominator for diluted earnings per share- adjusted weighted average shares and assumed conversions.... 11,395,000 21,731,000 42,633,000 42,517,000 49,681,000 =========== ============ ============ =========== =========== Basic earnings (loss) per share: Income (loss) before extraordinary item..... $ 0.15 $ (0.95) $ (0.29) $ (0.05) $ 0.06 Extraordinary item..... -- -- (0.14) -- -- ----------- ------------ ------------ ----------- ----------- Income (loss) per common share.......... $ 0.15 $ (0.95) $ (0.43) $ (0.05) $ 0.06 =========== ============ ============ =========== =========== Diluted earnings (loss) per share.............. $ 0.15 $ (0.95) $ (0.43) $ (0.05) $ 0.06 =========== ============ ============ =========== =========== |
Although the amounts are excluded from the computation in loss years since their inclusion would be anti-dilutive they are shown here for informational and comparative purposes only:
For the year ended December 31, June 30, ---------------------- -------------------- 1997 1998 1999 1999 2000 ---- ------- --------- --------- ---------- a) Stock options............. -- 22,000 213,000 22,000 -- b) Warrants.................. -- 708,000 2,133,000 2,028,000 -- c) Convertible preferred stock....................... -- -- 1,973,000 -- 16,000,000 |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
15. Fair Value of Financial Instruments
Financial instruments include cash and cash equivalents, notes payable, long-term debt and preferred stock. The carrying amount of cash and cash equivalents approximates fair value because of the short-term maturity of these instruments.
The fair market value of the Company's notes payable and long-term debt approximates its carrying value and was based on borrowing rates currently available to the Company for bank loans and similar items and maturities.
16. Related Party Transactions
The Company has been party to various rental and other agreements with companies affiliated through common ownership. The Company made rental and other payments aggregating $390,000, $463,000, $1,228,000, $320,000 and $589,000 during the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000, respectively, to the affiliated companies.
As of December 31, 1999, future rental commitments under outstanding agreements with the affiliated companies are approximately as follows:
2000......................................................... $ 912,000 2001......................................................... 912,000 2002......................................................... 912,000 2003......................................................... 912,000 2004......................................................... 828,000 Thereafter................................................... 7,686,000 ----------- $12,162,000 =========== |
In December 1999, the Company acquired Select Air Corporation from a related party for consideration of $2,700,000, net of cash acquired.
17. Commitments and Contingencies
Leases
The Company leases facilities and equipment from unrelated parties under operating leases. Minimum future lease obligations on long-term non-cancelable operating leases in effect at December 31, 1999 are approximately as follows:
2000........................................................ $ 46,786,000 2001........................................................ 39,834,000 2002........................................................ 29,284,000 2003........................................................ 16,777,000 2004........................................................ 9,624,000 Thereafter.................................................. 9,142,000 ------------ $151,447,000 ============ |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
(Information as of June 30, 2000 and for the six months ended June 30, 1999 and 2000 is unaudited)
17. Commitments and Contingencies (continued)
Total rent expense for operating leases for the years ended December 31, 1997, 1998 and 1999 and the six months ended June 30, 1999 and 2000 was approximately $1,572,000, $11,132,000, $35,929,000, $16,853,000 and $33,027,000, respectively.
Other
A subsidiary of the Company has entered into a naming, promotional and sponsorship agreement in which the subsidiary pays $900,000 per year until the complex officially opens. The naming, promotional and sponsorship agreement is in effect for 25 years after the opening of the complex. The subsidiary is required to make payments in accordance with the contract terms over 25 years ranging from $1,400,000 to $1,963,000 per year and provide physical therapy and training services after the official opening. The official opening of the complex is currently scheduled for February 2001. The subsidiary also has various other contracts that require the subsidiary to provide physical therapy services in exchange for promotion rights.
Litigation
The Company is subject to legal proceedings and claims that have arisen in the ordinary course of its business and have not been finally adjudicated, which include malpractice claims covered under the Company's insurance policy. In the opinion of management, the outcome of these actions will not have a material effect on the financial position or results of operations of the Company.
Laws and regulations governing the Medicare program are complex and subject to interpretation. The Company believes that it is in compliance with all applicable laws and regulations through the year ended December 31, 1999. Compliance with such laws and regulations can be subject to government review and interpretation as well as significant regulatory action including fines, penalties, and exclusion from the Medicare program.
18. Supplemental Disclosures of Cash Flow Information
Non-cash investing and financing activities are comprised of the following for the nine months ended December 31, 1998 and the year ended December 31, 1999:
For the six Months ended June 30, Description of Transaction 1997 1998 1999 2000 -------------------------- ---------- ------------ ----------- ------------ Acquisitions paid for in stock (Note 2).............. $ -- $ 785,000 $ -- $ -- Liabilities assumed with acquisitions (Note 2)....... $3,830,000 $105,286,000 $65,744,000 $ 50,000 Long-term debt discount (Note 6).......................... $ -- $ 9,286,000 $ 5,209,000 $ -- Issuance of warrants (Note 6).......................... $ -- $ 1,086,000 $ 2,389,000 $1,142,000 Intensiva bank note refinancing (Note 6)........ $ -- $ -- $10,554,000 $ -- Related party acquisition (Note 2).................... $ -- $ -- $ 2,700,000 $ -- |
19. Subsequent Event
On July 6, 2000, the Company received proceeds of $29,948,000 from an escrow account established in connection with its acquisition of NovaCare from NovaCare's former parent, NAHC, Inc. The Company also received $1.95 million in notes in satisfaction of certain severance and other obligations NAHC, Inc. had to the Company under the purchase agreement.
Report of Independent Accountants
To the Board of Directors of
NovaCare, Inc.
In our opinion, the accompanying combined balance sheet and the related combined statements of operations, of NovaCare, Inc. net investment and of cash flows present fairly, in all material respects, the financial position of NovaCare Physical Rehabilitation and Occupational Health Group ("the Group") at November 19, 1999 and the results of their operations and their cash flows for the period July 1, 1999 to November 19, 1999, in conformity with accounting principles which are generally accepted in the United States. These financial statements are the responsibility of the Group's management; our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit of these statements in accordance with generally accepted auditing standards in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for the opinion expressed above.
As discussed in Note 13, NovaCare, Inc. completed the sale of the Group to Select Medical Corporation on November 19, 1999.
/s/ PricewaterhouseCoopers LLP Philadelphia Pennsylvania July 6, 2000 |
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Balance Sheet
(In thousands)
As of November 19, 1999 ------------ Assets Current assets: Cash and cash equivalents....................................... $ 1,705 Accounts receivable, net of allowance of $53,493................ 69,357 Deferred income taxes........................................... 9,996 Other current assets............................................ 11,294 -------- Total current assets.......................................... 92,352 Property and equipment, net....................................... 37,848 Excess cost of net assets acquired, net........................... 386,389 Investment in joint ventures...................................... 14,419 Other assets...................................................... 2,338 -------- $533,346 ======== Liabilities and NovaCare, Inc. Net Investment Current liabilities: Current portion of financing arrangements--third parties........ $ 13,307 Current portion of financing arrangements--related parties...... 166,743 Accounts payable and accrued expenses--related parties.......... 279,797 Accounts payable and accrued expenses--third parties............ 30,785 -------- Total current liabilities..................................... 490,632 Deferred income tax: Financing arrangements, net of current portion-third parties...... 23,578 Deferred income taxes............................................. 14,767 Other............................................................. 1,190 -------- Total liabilities............................................. 530,167 Commitments and contingencies..................................... -- NovaCare, Inc. net investment..................................... 3,179 -------- Total liabilities of NovaCare, Inc. Net Investment................ $538,117 ======== |
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Statement of Operations
(In thousands)
For the Period July 1, 1999 to November 19, 1999 ----------------- Net revenues................................................ $127,481 Cost of services............................................ 84,792 -------- Gross profit.............................................. 42,689 Selling, general and administrative expenses................ 28,105 Selling, general and administrative allocated from related party...................................................... 3,554 Provision for uncollectible accounts........................ 41,964 Amortization of excess cost of net asset acquired........... 4,583 -------- Loss from operations...................................... (35,517) Interest expense-related party.............................. 5,366 Interest expense-third parties.............................. 1,233 Royalty expense-related party............................... 5,596 -------- Loss before income taxes.................................. (47,712) Income taxes................................................ -------- Net loss.................................................. $(47,712) ======== |
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Statement of NovaCare, Inc. Net Investment
(In thousands)
NovaCare, Inc. net investment -------------- Balance at June 30, 1999......................................... $ 43,751 Net contributions from NovaCare, Inc. ......................... 7,140 Net loss....................................................... (47,712) -------- Balance at November 19, 1999..................................... $ 3,179 ======== |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
Novacare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Statement of Cash Flows
(In thousands)
For the Period July 1, 1999 to November 19, 1999 --------------- Cash flows from operating activities: Net loss...................................................... $(47,712) Adjustments to reconcile net loss to net cash flows used in operating activities: Loss from joint ventures.................................... 100 Depreciation and amortization............................... 9,350 Provision for uncollectible accounts........................ 41,964 Minority interest........................................... 37 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable....................................... (12,259) Other current assets...................................... (2,275) Accounts payable and accrued expenses--third parties...... 2,702 Other, net................................................ (69) -------- Net cash flows used in operating activities............... (8,162) -------- Cash flows from investing activities: Payments for businesses acquired, net of cash acquired........ (7,159) Additions to property and equipment........................... (2,302) Other, net.................................................... 238 -------- Net cash flows used in investing activities................. (9,223) -------- Cash flows from financing activities: Payment of long-term debt and credit arrangements--third parties...................................................... (7,359) Net advances from related party............................... 20,657 -------- Net cash flows provided by financing activities............. 13,298 -------- Net decrease in cash and cash equivalents................... (4,087) Cash and cash equivalents, beginning of period.............. 5,792 -------- Cash and cash equivalents, end of period.................... $ 1,705 ======== |
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements
November 19, 1999
(In thousands)
1. Summary of Significant Accounting Policies
Nature of Operations: NovaCare Physical Rehabilitation and Occupational Health Group includes RehabClinics, Inc., NovaCare Outpatient Rehabilitation East, Inc., NovaCare Outpatient Rehabilitation West, Inc., NovaCare Occupational Health Services, Inc., CMC Center Corporation and Industrial Health Care Company (collectively "the Group") all of which are wholly-owned subsidiaries of NC Resources, Inc., a Delaware holding company and a wholly- owned subsidiary of NovaCare, Inc., a Delaware corporation ("Parent").
Business Profile: The Group is a provider of freestanding outpatient physical therapy and rehabilitation services and occupational health services. Outpatient physical therapy and rehabilitation services include: (i) general physical rehabilitation, which is designed to return injured and post-operative patients to their optimal functional capacity, (ii) sports medicine, which is designed to minimize the "downtime" of injured sports participants and safely return them to sports activities, (iii) enhanced performance training, which is designed to improve the muscular and cardiovascular performance of both professional caliber athletes and "weekend warriors" as well as the "senior citizen" population, (iv) industrial rehabilitation, which is designed to reduce work-related injuries and rehabilitate and strengthen injured patients to allow a rapid, safe and productive return to normal job activities and (v) hospital-based services, which involve providing inpatient and outpatient rehabilitation services on a contract basis to acute care hospitals. Occupational health services comprise treatment for work-related injuries and illnesses, physical and occupational rehabilitation therapy, pre-placement physical examinations and evaluations, case management, diagnostic testing and other employer-requested or government-mandated work related health care services.
Basis of Presentation: The financial statements of the Group include the combined financial position, results of operations and cash flows of the Group. The Parent's historical cost basis of assets and liabilities has been reflected in the Group's financial statements. The financial information in these financial statements is not necessarily indicative of results of operations, financial position and cash flows that would have occurred if the Group had been a separate stand-alone entity during the periods presented or of future results.
Principles of Combination: The combined financial statements include the accounts of the Group companies. Investments of 20% to 50% of the voting interest of affiliates are accounted for using the equity method. All significant intercompany accounts and transactions between the companies comprising the Group have been eliminated. The Group recognizes a minority interest in its balance sheet and statement of operations for the portion of majority-owned subsidiaries attributable to its minority owners.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. During the period July 1, 1999 to November 19, 999, the Company recorded a $29,358 charge as a change in estimate to increase the allowance for doubtful accounts to record the accounts receivable at its net realizable value.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
Concentration of Credit Risks: Financial instruments which subject the Group to concentrations of credit risk consist primarily of trade receivables from workers' compensation programs, health and managed care companies, self- pay individuals, Medicare, Medicaid and litigation settlements from various payors located throughout the United States. The Group generally does not require collateral from its customers. Such credit risk is considered by management to be limited due to the Group's broad customer base.
Statement of Cash Flows: The Group considers its holdings of highly liquid debt and money-market instruments to be cash equivalents if the securities mature within 90 days from the date of acquisition. These investments are carried at cost, which approximates fair value. There were no non-cash investing and financing activities for the period July 1, 1999 to November 19, 1999. There were no non-cash contributions for the period July 1, 1999 to November 19, 1999.
Net Revenues: Net revenues are reported at the net realizable amounts from customers and third-party payors and includes estimated retroactive revenue adjustments due to future audits, reviews, and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews, and investigations. Net revenues generated directly from Medicare and Medicaid reimbursement programs represented 8% of the Group's combined net revenues for the period July 1, 1999 to November 19, 1999
Property and Equipment: Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which range principally from three to seven years for property and equipment and 30 to 40 years for buildings. Leasehold improvements are amortized over the lesser of the lease term or the asset's estimated useful life. Property and equipment also include external and incremental internal costs incurred to develop major computer systems. Costs for computer software developed or purchased for internal use are capitalized and amortized over an estimated useful life ranging from five to ten years. Costs of software maintenance and training, as well as the cost of software that does not add functionality to existing systems are expensed as incurred.
Excess Cost of Net Assets Acquired: Assets and liabilities acquired in connection with business combinations accounted for under the purchase method are recorded at their respective fair values. Deferred taxes have been recorded to the extent of the difference between the fair value and the tax basis of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired consists of non-compete agreements, customers lists and goodwill and is amortized on a straight-line basis over the estimated useful lives of the assets which range from five to 40 years, with an average life of approximately 37 years.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
Impairment of Long Lived Assets: Effective July 1, 1997, the Group adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which establishes accounting standards for the impairment of long- lived assets, certain identified intangible assets and goodwill related to those assets to be held and used and for long-lived assets and certain intangible assets to be disposed of. In accordance with SFAS No. 121, the Group reviews the realizability of long-lived assets, certain intangible assets and goodwill whenever events or circumstances occur which indicate recorded cost may not be recoverable. The Group also reviews the overall recoverability of goodwill on an annual basis. The analyses are based primarily on estimated future undiscounted cash flows.
If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the Group recognizes an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. In estimating future cash flows for determining whether an asset is impaired, and in measuring assets that are impaired, assets are grouped by geographic region, which is the lowest level of operational reporting used by management.
Other Assets: Other assets consist principally of non-compete agreements and security deposits. Non-compete agreements are principally agreements with former owners not to compete with the Group within a specified geographical area for a specified period of time. The asset is amortized over the life of the agreement.
Income Taxes: The Group is included in the consolidated Federal income tax return of the Parent. All tax payments are made by the Parent on behalf of the Group. The Group includes its portion of tax obligations in accounts payable and accrued expenses-related parties. Current and deferred tax benefit, included in these statements, was calculated as if the Group had filed consolidated income tax returns on a stand alone basis. Under a tax sharing agreement with the Parent, the Group is entitled to the tax benefits, attributable to the Group's losses, which are used in the Parent's consolidated return.
2. Related Party Transactions
The Group entered into several arrangements with the Parent where fees are charged to the Group for services provided. These services included selling, general and administrative and financing services. Upon a change of control of the Group, certain of these arrangements may be voided and the Group will no longer be subject to the related fees. The Group will, however, be responsible for obtaining independent financing and will incur selling, general and administrative expenses.
Trademarks: The Group is charged a fee of approximately 5.0% of revenues for the use of the "NovaCare" name and trademark. Fees are settled with the Parent on a quarterly basis in accordance with the trademark agreement.
Advances and Financing Arrangements: The Group participates in the Parent's centralized cash management system to finance operations and acquisitions. The Group's cash deposits are transferred to the Parent on a daily basis. The Parent funds the Group's disbursement bank accounts as required. When disbursements exceed deposits, the Parent advances the difference to the Group through an interest-free intercompany account. Assuming a LIBOR plus 1.5% borrowing rate, which approximates the Parent's borrowing rate, interest expense on net advances from the Parent would have been $8,826 for the period July 1, 1999 to November 19, 1999.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
In addition, certain advances from the Parent to the Group are funded through a line of credit arrangement. The annual interest rate on the line of credit is the prime rate of the Parent's lending bank plus 1.5%. As of November 19, 1999, the interest rate for the Group was 9.25%. Interest due to the Parent is settled quarterly in accordance with the loan agreement. Interest expense related to this financing arrangement was $5,366 for the period July 1, 1999 to November 19, 1999.
Selling, General and Administrative Expenses Allocated from Related Party: During fiscal 1999 and 1998, the Parent provided certain selling, general and administrative services to the Group, that included shared management, legal, information systems, finance and human resource services and leased office space. These costs were allocated to the Group from the Parent, based on number of personnel or fiscal 1999's net revenues. While Novacare has divested of certain of its businesses since June 30, 1999, the level of effort required by the Parent for each of the businesses was essentially the same for period July 1, 1999 to November 19, 1999 as it was in fiscal 1999. During the period July 1, 1999 to November 19, 1999, these allocated costs were $3,554.
The expenses allocated to the Group are not necessarily indicative of amounts that would have been incurred if the Group had been a separate, independent entity that either managed these functions or contracted the services from an unrelated third party. Allocations were based on methodologies considered reasonable by management.
Benefits and Payroll Service Fees: Beginning in February 1997, the Group contracted with NovaCare Employee Services (NCES), a majority owned subsidiary of the Parent, to provide payroll and benefit services. Under the agreement, the Group reimburses NCES for all payroll and related benefit costs, in addition to an administrative fee. Administrative fees incurred, related to this agreement, were $1,963 for the period July 1, 1999 to November 19, 1999. The amount for the period July 1, 1999 to November 19, 1999, is included in selling, general and administrative expenses. Additionally, payroll and related benefits expense disbursed by NCES for PROH approximated $65,932 for the period July 1, 1999 to November 19, 1999. As of November 19, 1999 the Group owed NCES $1,337 for payroll and related benefit costs. These amounts are included in accounts payable and accrued expenses--related parties.
Insurance Reserves: The Parent maintains insurance coverage for the Group, including workers' compensation and general business insurance. Insurance reserves have been specifically allocated to the Group and the amounts owed to the Parent for such reserves are included in accounts payable and accrued expenses--related parties. As of November 19, 1999, the Group owed the Parent $225 for general business insurance.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
3. Provision for Restructure
During fiscal 1999, the Group recorded a provision for restructure totaling $30,225 consisting of:
Writedown of excess cost of net assets acquired, net.............. $28,300 Employee severance and related costs.............................. 1,925 ------- Total........................................................... $30,225 ======= |
During fiscal 1999, the Group decided to exit certain non-strategic markets. The markets consisted of 40 clinics. This decision resulted in a write-down of the value of the related assets to estimated net realizable value as these were held for disposal. The estimated net realizable value of the Group's assets held for disposal (principally excess cost of net assets acquired, net) was determined by reference to the Group's experience with purchases and sales of comparable assets over the past several years and in consultation with financial advisors. The clinics to be disposed of had annualized net revenues of approximately $16,600 and annualized operating profit of approximately $200. At November 19, 1999, five of the clinics have been sold for proceeds totaling $923. The net book value of the remaining assets to be sold is approximately $4,991. The decision to dispose of these clinics is being evaluated in light of the sale of the Group.
In addition, the Group implemented a revised physical therapist staffing model to provide therapist services at lower costs while maintaining quality care. The new staffing model calls for an estimated reduction of 364 physical therapists. At November 19, 1999, a reduction of 267 physical therapists has taken place, 193 through attrition and 74 through severance arrangements.
The activity in the Group's reserves for restructure is as follows:
Period July 1, 1999 to November 19, 1999 --------------- Beginning balance.......................................... $ 625 Payments................................................... (532) ----- Ending balance............................................. $ 93 ===== |
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
4. Acquisition Transactions
Information with respect to businesses acquired in purchase transactions was as follows:
As of November 19, 1999 ------------ Excess cost of net assets acquired............................ $431,446 Less: accumulated amortization................................ (45,057) -------- $386,389 ======== |
Certain purchase agreements require additional payments to the former owners if specific financial targets are met. At November 19, 1999 aggregate contingent payments in connection with all acquisitions of approximately $24,529, in cash, have not been included in the initial determination of cost of the businesses acquired since the amount of such contingent consideration that may be paid in the future, if any, is not presently determinable. In connection with businesses acquired in prior years, the Group paid $7,110 cash in the period July 1, 1999 to November 19, 1999.
5. Property and Equipment
The components of property and equipment were as follows:
As of November 19, 1999 ------------ Buildings..................................................... $ 1,232 Property, equipment and furniture............................. 43,558 Capitalized software.......................................... 22,637 Leasehold improvements........................................ 18,008 -------- 85,435 Less: accumulated depreciation and amortization............... (47,587) -------- $ 37,848 ======== |
Depreciation expense, including depreciation expense allocated by the Parent, for the period July 1, 1999 to November 19, 1999, was $4,767.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
6. Investment in Joint Ventures
The Group has 50% ownership interests in GP Therapy, Inc., LLC (a joint venture with Columbia/HCA Healthcare Corp), Mercy Joyner Associates (a joint venture with Mercy Regional Health Systems), Gill Balsano Consulting, LLC (a joint venture with a Health Care consulting firm), Langhorne PC (a joint venture with Delaware Valley Medical Corporation), and South Philadelphia PC (a joint venture with Mt. Sinai Hospital).
At November 19, 1999 the Group's investment in joint venture for GP Therapy, Inc., LLC was $10,644. The Group's investment in Mercy Joyner Associates, was acquired as part of a larger acquisition in fiscal year 1998. At November 19, 1999 the Group's investment in joint venture for Mercy Joyner Associates was $455. The Group's investment in Gill Balsano Consulting, LLC was transferred from the Parent in fiscal year 1999. At November 19, 1999 the Group's investment in Gill Balsano was $1,596. The Group's investment in the Langhorne PC and South Philadelphia PC were acquired as part of a larger acquisition in fiscal year 1998. At November 19, 1999 the Group's investment in joint venture for both the Langhorne PC and South Philadelphia PC was $1,724.
7. Accounts Payable and Accrued Expenses--Third Parties
Accounts payable and accrued expenses are summarized as follows:
As of November 19, 1999 ------------ Accrued contingent earn-outs.................................. $ 3,077 Accrued compensation and benefits............................. 6,480 Accounts payable.............................................. 7,072 Bank overdraft................................................ 4,864 Accrued acquisition costs..................................... 3,748 Accrued interest.............................................. 1,198 Accrued restructure costs..................................... 93 Other......................................................... 4,253 ------- $30,785 ======= |
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
8. Financing Arrangements
Financing arrangements consisted of the following:
As of November 19, 1999 ------------ Line of credit--related party, due November 30, 1999........ $ 166,743 Subordinated promissory notes (6% to 9%), Payable through 2007....................................................... 35,277 Other....................................................... 1,608 --------- 203,628 Less: current portion of financing arrangements--related parties.................................................... (166,743) Less: current portion of financing arrangements--third parties.................................................... (13,307) --------- $ 23,578 ========= |
Subordinated promissory notes consist primarily of notes to former owners of businesses acquired. The carrying values of the notes approximate fair value.
Financing arrangements with related party is comprised of a $180,000 line of credit with a subsidiary of the Parent. The Group periodically draws from the line and is charged interest at a rate of the Parent's lending bank's prime rate plus 1.5% on the daily outstanding balance (See Note 2). As of November 19, 1999, the interest rate for the Group was 9.25%. As of November 19, 1999 the Group had $13,257 available under this line of credit.
At November 19, 1999, aggregate annual maturities of financing arrangements were as follows for the next five fiscal years and thereafter:
Fiscal Year ----------- 2000............................................................. $180,050 2001............................................................. 12,731 2002............................................................. 5,163 2003............................................................. 2,976 2004............................................................. 1,404 Thereafter....................................................... 1,304 -------- $203,628 ======== |
Interest paid on debt during the period July 1, 1999 to November 19, 1999 was $11,460.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
9. Leases
The Group rents office and clinical space and transportation and therapy equipment under non-cancelable operating leases.
Future minimum lease commitments for all non-cancelable leases as of November 19, 1999 are as follows:
Operating Fiscal Year Leases ----------- --------- 2000............................................................ $26,553 2001............................................................ 21,036 2002............................................................ 15,281 2003............................................................ 8,571 2004............................................................ 3,693 Thereafter...................................................... 4,608 ------- Total minimum lease payments.................................... $79,742 ======= |
Total rent expense for all operating leases during the period July 1, 1999 to November 19, 1999 was $12,308.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
10. Income Taxes
The components of income tax benefit were as follows:
Period July 1, 1999 to November 19, 1999 ----------------- Current: Federal................................................ $-- State.................................................. -- --- -- --- Deferred: Federal................................................ -- State.................................................. -- --- -- --- -- === |
The components of net deferred tax assets (liabilities) as of November 19, 1999 were as follows:
As of November 19, 1999 ------------ Accruals and reserves not currently deductible for tax purposes.................................................. $ 12,054 Restructure reserves....................................... 6,557 Federal and state net operating loss....................... 13,784 -------- 32,395 Less: valuation allowance.................................. (22,399) Total deferred tax assets, net of valuation allowance.... 9,996 Gross deferred tax liabilities, depr. & cap. leases........ (14,767) -------- Net deferred tax liability............................... $ (4,771) ======== |
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
The reconciliation of the expected tax benefit (computed by applying the Federal statutory tax rate to income before income taxes) to the actual tax benefit was as follows:
Period July 1, 1999 to November 19, 1999 ----------------- Expected Federal income tax benefit.................... $(16,699) State income tax benefit, less Federal benefit......... (2,691) Non-deductible nonrecurring items...................... 25 Non-deductible amortization of excess cost of net assets acquired....................................... 574 Increase in valuation allowance........................ 18,923 Other, net............................................. (132) -------- $ -- ======== |
The deferred tax consequences of temporary differences in reporting items for financial statement and income tax purposes are recognized, if appropriate. Realization of the future tax benefits related to the deferred tax assets is dependent on many factors, including the Group's ability to generate taxable income within the net operating loss carryforward period. Management has considered these factors in reaching its conclusion as to the valuation allowance for financial reporting purpose and the Group has recorded a full valuation allowance to reflect the estimated amount of deferred tax assets which may not be realized.
11. Benefit Plans
Retirement Plans: Through the Parent, the Group participates in defined contribution 401(k) plans covering substantially all of its employees. The Group's portion of contributions made to the plans by the Parent for the period July 1, 1999 to November 19, 1999 were $442.
Stock Option Plans: Certain employees of the Group participate in the Parent's employee stock option plans. Under the plans, substantially all of the options granted under the plan vest ratably over five years and are granted for a term of up to ten years. The exercise price of the options equals the fair value of the Parent's common stock at the date of grant. The Parent has adopted the disclosure-only provision of SFAS 123. Accordingly, no compensation expense has been recognized for option grants under the plans by the Parent or the Group. Had compensation cost for options granted been determined based on the fair value at the date of grant awards consistent with the provisions of SFAS 123, the Group's net loss would not have been materially different from the amounts reported in these financial statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
November 19, 1999
(In thousands)
12. Commitments and Contingencies
The Group is subject to legal proceedings and claims that arise in the ordinary course of business. Management believes that the amount of any liability related to these matters will not have a material adverse effect on the Group's financial position or results of operations.
The Group has entered into a naming, promotional and sponsorship agreement in which the Group pays $900 per year until the complex officially opens. The naming, promotional and sponsorship agreement is in effect for 25 years after the opening of the complex. The Group is required to make payments in accordance with the contract terms over 25 years ranging from $1,400 to $1,963 per year after the official opening. At this time the Group cannot estimate the date of the official opening of the complex.
The Group has various other promotional exchange contracts that require the Group to provide physical therapy services in exchange for promotional rights.
13. Sale of the Group
On November 19, 1999, the Parent completed the sale of the Group to Select Medical Corporation ("Select"). The sales price for the Group was $200,000, the cash proceeds of which were reduced by the amount of Group debt assumed by Select. Of the remainder, $36,800 of the purchase price was placed in escrow for two years in support of representations relating to minimum working capital, collectibility of accounts receivable, and certain contingent earnout payments and litigation matters. Following the closing of the Group sale and continuing through June 2000, Select presented to the Parent claims for disbursement of portions of the escrowed funds to Select. The Parent and Select disagreed on certain of these claims. On July 6, 2000, the Parent entered into a settlement agreement with regard to the accounts receivable representation, contingent earnout obligations and certain other differences and disagreements between the Parent and Select related to the Group purchase and sale agreement and the escrows established as part of that agreement. As a result of the settlement, the remaining funds in escrow accounts, including interest, were disbursed to the parties with $4.5 million being returned to the Parent. In addition, as part of the settlement, the Parent agreed to reimburse Select approximately $1.3 million in respect of certain of its obligations set forth in the purchase and sale agreement and up to $1.8 million for Medicare liabilities, if any, that relate to periods prior to the Group sale. The Parent collateralized certain future payments to Select with the Parent's accounts receivable that pertain primarily to the Parent's former long-term care services business. Also as part of the settlement agreement, certain of the representations, warranties and indemnifications in the Group purchase and sale agreement were released by the parties and certain provisions, principally relating to tax obligations, remain binding on the parties. In conjunction with the Group sale, the "NovaCare" name was also sold and the Parent changed its name to NAHC, Inc. effective March 28, 2000.
Report of Independent Accountants
To the Board of Directors of
NovaCare, Inc.
In our opinion, the accompanying combined balance sheets and the related combined statements of operations, of NovaCare, Inc. net investment and of cash flows present fairly, in all material respects, the financial position of NovaCare Physical Rehabilitation and Occupational Health Group ("the Group") at June 30, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended June 30, 1999, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Group's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above.
The accompanying combined financial statements have been prepared assuming that the Group will continue as a going concern. The Group has historically been dependent on NovaCare, Inc. (the "Parent") for financial support. Additionally, the Group is indebted to the Parent for significant currently payable amounts. As discussed in Note 13 to the combined financial statements, the Parent has $175 million of convertible subordinated debentures due on January 15, 2000. To enable the Parent to generate sufficient funds to make the required payment on the convertible debentures, the Parent's Board of Directors on August 5, 1999 voted to seek approval from its shareholders for the sale of the Parent's two remaining business units, including the Group, and the adoption of a restructuring proposal. In a proxy statement dated August 13, 1999 (as amended through September 10, 1999) the Parent's shareholders have been asked to consider and vote upon these proposals at a special meeting of shareholders to be held on September 21, 1999. All of the proposals were adopted by the shareholders at the special meeting. The adoption of these proposals could result in the ultimate liquidation of the Parent. Should these matters not be approved, or should the transactions not be consummated as set forth in the proxy statement, the Parent's management would need to seek other means to obtain sufficient funds to repay the convertible debentures when due. These matters, coupled with the Group's continuing operating losses, raise substantial doubt about the Group's ability to continue as a going concern. Management's plans in regard to these matters are described in Note 13. The combined financial statements do not include any adjustments that might result from the outcome of these uncertainties.
/s/ PricewaterhouseCoopers LLP Philadelphia, PA September 21, 1999 |
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Balance Sheets
(In thousands)
As of June 30, ----------------- 1999 1998 -------- -------- Assets Current assets: Cash and cash equivalents.................................. $ 5,792 $ 2,037 Accounts receivable, net of allowance at June 30, 1999 and 1998 of $32,891 and $23,864, respectively................. 99,060 93,156 Deferred income taxes...................................... 8,561 439 Other current assets....................................... 8,498 9,498 -------- -------- Total current assets..................................... 121,911 105,130 Property and equipment, net.................................. 40,065 40,422 Excess cost of net assets acquired, net...................... 387,180 356,044 Investment in joint ventures................................. 15,120 13,062 Other assets................................................. 2,948 3,376 -------- -------- $567,224 $518,054 ======== ======== Liabilities and NovaCare, Inc. Net Investment Current liabilities: Current portion of financing arrangements--third parties... $ 14,706 $ 13,620 Current portion of financing arrangements--related parties................................................... 165,202 -- Accounts payable and accrued expenses--related parties..... 268,128 186,330 Accounts payable and accrued expenses--third parties....... 31,399 25,532 -------- -------- Total current liabilities................................ 479,435 225,482 Financing arrangements--related party........................ -- 165,507 Financing arrangements, net of current portion--third parties..................................................... 29,226 35,319 Deferred income taxes........................................ 13,332 9,865 Other ....................................................... 1,480 2,052 -------- -------- Total liabilities........................................ 523,473 438,225 Commitments and contingencies................................ -- -- NovaCare, Inc. net investment................................ 43,751 79,829 -------- -------- $567,224 $518,054 ======== ======== |
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Statements of Operations
(In thousands)
For the Years Ended June 30, ---------------------------- 1999 1998 1997 -------- -------- -------- Net revenues.................................... $339,708 $281,550 $214,936 Cost of Services................................ 234,350 193,860 152,860 -------- -------- -------- Gross profit.................................. 105,358 87,690 62,076 Selling, general and administrative expenses.... 56,743 40,360 29,947 Selling, general and administrative allocated from related party............................. 27,444 20,823 8,882 Provision for uncollectible accounts............ 24,130 14,806 10,091 Amortization of excess cost of net assets acquired....................................... 11,865 9,138 6,464 Provision for restructure....................... 30,225 -- -- -------- -------- -------- (Loss) income from operations................. (45,049) 2,563 6,692 Interest expense-related party.................. 15,518 15,990 27,568 Interest expense-third parties.................. 3,157 2,435 1,081 Royalty expense-related party................... 17,059 14,293 10,660 -------- -------- -------- Loss before income taxes...................... (80,783) (30,155) (32,617) Income tax benefit.............................. (21,564) (7,618) (10,726) -------- -------- -------- Net loss...................................... $(59,219) $(22,537) $(21,891) ======== ======== ======== |
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Statements of NovaCare, Inc. Net Investment
(In thousands)
NovaCare, Inc. net investment -------------- Balance at June 30, 1996......................................... $(34,135) Net contributions from NovaCare, Inc. ......................... 143,134 Net loss....................................................... (21,891) -------- Balance at June 30, 1997......................................... 87,158 Net contributions from NovaCare, Inc. ......................... 15,208 Net loss....................................................... (22,537) -------- Balance at June 30, 1998......................................... 79,829 Net contributions from NovaCare, Inc. ......................... 23,141 Net loss....................................................... (59,219) -------- Balance at June 30, 1999......................................... $ 43,751 ======== |
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Combined Statements of Cash Flows
(In thousands)
For the Years Ended June 30, ----------------------------- 1999 1998 1997 -------- --------- -------- Cash flows from operating activities: Net loss....................................... $(59,219) $ (22,537) $(21,891) Adjustments to reconcile net loss to net cash flows used in operating activities: (Income) loss from joint ventures............ 514 (16) 78 Depreciation and amortization................ 25,974 20,697 15,487 Provision for restructure.................... 30,225 Provision for uncollectible accounts......... 24,130 14,806 10,091 Minority interest............................ 117 69 105 Deferred income taxes........................ (4,432) 6,251 3,849 Changes in assets and liabilities, net of effects from acquisitions: Accounts receivable........................ (26,050) (29,417) (24,946) Other current assets....................... 417 (1,722) (66) Accounts payable and accrued expenses-- third parties............................. (13,982) (5,289) (8,427) Other, net................................. (3,309) (196) (1,048) -------- --------- -------- Net cash used in operating activities...... (25,615) (17,354) (26,768) -------- --------- -------- Cash flows from investing activities: Payments for businesses acquired, net of cash acquired...................................... (48,038) (94,357) (58,685) Additions to property and equipment............ (19,906) (8,170) (17,269) Proceeds from sale of property and equipment... 913 -- 52 Other, net..................................... 452 85 569 -------- --------- -------- Net cash flows used in investing activities.. (66,579) (102,442) (75,333) -------- --------- -------- Cash flows from financing activities: Payment of long-term debt and credit arrangements--third parties................... (14,878) (6,591) (5,015) Net advances from related party................ 110,827 122,363 110,143 -------- --------- -------- Net cash flows provided by financing activities.................................. 95,949 115,772 105,128 -------- --------- -------- Net increase (decrease) in cash and cash equivalents................................... 3,755 (4,024) 3,027 Cash and cash equivalents, beginning of year... 2,037 6,061 3,034 -------- --------- -------- Cash and cash equivalents, end of year......... $ 5,792 $ 2,037 $ 6,061 ======== ========= ======== |
The accompanying Notes to Combined Financial Statements are an integral part of these statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements
June 30, 1999
(In thousands)
1. Summary of Significant Accounting Policies
Nature of Operations: NovaCare Physical Rehabilitation and Occupational Health Group includes RehabClinics, Inc., NovaCare Outpatient Rehabilitation East, Inc., NovaCare Outpatient Rehabilitation West, Inc., NovaCare Occupational Health Services, Inc., CMC Center Corporation and Industrial Health Care Company (collectively "the Group") all of which are wholly-owned subsidiaries of NC Resources, Inc., a Delaware holding company and a wholly- owned subsidiary of NovaCare, Inc., a Delaware corporation ("Parent").
Business Profile: The Group is a provider of freestanding outpatient physical therapy and rehabilitation services and occupational health services. Outpatient physical therapy and rehabilitation services include: (i) general physical rehabilitation, which is designed to return injured and post-operative patients to their optimal functional capacity, (ii) sports medicine, which is designed to minimize the "downtime" of injured sports participants and safely return them to sports activities, (iii) enhanced performance training, which is designed to improve the muscular and cardiovascular performance of both professional caliber athletes and "weekend warriors" as well as the "senior citizen" population, (iv) industrial rehabilitation, which is designed to reduce work-related injuries and rehabilitate and strengthen injured patients to allow a rapid, safe and productive return to normal job activities and (v) hospital-based services, which involve providing inpatient and outpatient rehabilitation services on a contract basis to acute care hospitals. Occupational health services comprise treatment for work-related injuries and illnesses, physical and occupational health services comprise treatment for work-related injuries and illnesses, physical and occupational rehabilitation therapy, pre-placement physical examinations and evaluations, case management, diagnostic testing and other employer-requested or government-mandated work related health care services.
Basis of Presentation: The financial statements of the Group include the combined financial position, results of operations and cash flows of the Group. The Parent's historical cost basis of assets and liabilities has been reflected in the Group's financial statements. The financial information in these financial statements is not necessarily indicative of results of operations, financial position and cash flows that would have occurred if the Group had been a separate stand-alone entity during the periods presented or of future results.
Principles of Combination: The combined financial statements include the accounts of the Group companies. Investments of 20% to 50% of the voting interest of affiliates are accounted for using the equity method. All significant intercompany accounts and transactions between the companies comprising the Group have been eliminated. The Group recognizes a minority interest in its balance sheets and statements of operations for the portion of majority-owned subsidiaries attributable to its minority owners.
Use of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentration of Credit Risks: Financial instruments which subject the Group to concentrations of credit risk consist primarily of trade receivables from workers' compensation programs, health and managed care companies, self- pay individuals, Medicare, Medicaid and litigation settlements from various payors located
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
1. Summary of Significant Accounting Policies (continued)
throughout the United States. The Group generally does not require collateral from its customers. Such credit risk is considered by management to be limited due to the Group's broad customer base.
Statement of Cash Flows: The Group considers its holdings of highly liquid debt and money-market instruments to be cash equivalents if the securities mature within 90 days from the date of acquisition. These investments are carried at cost, which approximates fair value. Non-cash investing and financing activities in fiscal years 1999 and 1998 of $10,355 and $24,875, respectively, consist principally of acquired debt and subordinated promissory notes issued to former owners at closing. There were no non-cash investing and financing activities in fiscal 1997. Non-cash contributions from the Parent in fiscal year 1997 were $102,595 for forgiveness of debt. There were no non-cash contributions in fiscal years 1999 and 1998.
Net Revenues: Net revenues are reported at the net realizable amounts from customers and third-party payors and includes estimated retroactive revenue adjustments due to future audits, reviews and investigations. Retroactive adjustments are considered in the recognition of revenue on an estimated basis in the period the related services are rendered, and such amounts are adjusted in future periods as adjustments become known or as years are no longer subject to such audits, reviews and investigations. Net revenues generated directly from Medicare and Medicaid reimbursement programs represented 8%, 9% and 10% of the Group's combined net revenues for fiscal years 1999, 1998 and 1997 respectively.
Property and Equipment: Property and equipment are stated at cost. Depreciation is provided on a straight-line basis over the estimated useful lives of the assets, which range principally from three to seven years for property and equipment and 30 to 40 years for buildings. Leasehold improvements are amortized over the lesser of the lease term or the asset's estimated useful life. Property and equipment also include external and incremental internal costs incurred to develop major computer systems. Costs for computer software developed or purchased for internal use are capitalized and amortized over an estimated useful life ranging from five to ten years. Costs of software maintenance and training, as well as the cost of software that does not add functionality to existing systems are expensed as incurred.
Excess Cost of Net Assets Acquired: Assets and liabilities acquired in connection with business combinations accounted for under the purchase method are recorded at their respective fair values. Deferred taxes have been recorded to the extent of the difference between the fair value and the tax basis of the assets acquired and liabilities assumed. The excess of the purchase price over the fair value of net assets acquired consists of non-compete agreements, customers lists and goodwill and is amortized on a straight-line basis over the estimated useful lives of the assets which range from five to 40 years, with an average life of approximately 37 years.
Impairment of Long Lived Assets: Effective July 1, 1997, the Group adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of" which establishes accounting standards for the impairment of long- lived assets, certain identified intangible assets and goodwill related to those assets to be held and used and for long-lived assets and certain intangible assets to be disposed of. In accordance with SFAS No. 121, the Group reviews the realizability of long-lived assets, certain intangible assets and goodwill whenever events or circumstances occur which indicate recorded cost may not be recoverable. The Group also reviews the overall recoverability of goodwill on an annual basis. These analyses are based primarily on estimated future undiscounted cash flows.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
1. Summary of Significant Accounting Policies (continued)
If the expected future cash flows (undiscounted) are less than the carrying amount of such assets, the Group recognizes an impairment loss for the difference between the carrying amount of the assets and their estimated fair value. In estimating future cash flows for determining whether an asset is impaired, and in measuring assets that are impaired, assets are grouped by geographic region, which is the lowest level of operational reporting used by management.
Other Assets: Other assets consist principally of non-compete agreements and security deposits. Non-compete agreements are principally agreements with former owners not to compete with the Group within a specified geographical area for a specified period of time. The asset is amortized over the life of the agreement.
Income Taxes: The Group is included in the consolidated Federal income tax return of the Parent. All tax payments are made by the Parent on behalf of the Group. The Group includes its portion of tax obligations in accounts payable and accrued expenses--related parties. Current and deferred tax benefit, included in these statements, was calculated as if the Group had filed consolidated income tax returns for the Group on a stand alone basis. Under a tax sharing agreement with the Parent, the Group is entitled to the income tax benefits, attributable to the Group's losses, which are used in the Parent's consolidated return. Were the Group to apply the separate company tax return method the income taxes would have been an expense of $641, $2,192 and $1,182 and net loss as adjusted would have been $81,424, $32,347 and $33,799 for the years ended June 30, 1999, 1998 & 1997, respectively.
2. Related Party Transactions
The Group entered into several arrangements with the Parent where fees are charged to the Group for services provided. These services included selling, general and administrative and financing services. Upon a change of control of the Group, certain of these arrangements may be voided and the Group will no longer be subject to the related fees. The Group will, however, be responsible for obtaining independent financing and will incur selling, general and administrative expenses.
Trademarks: The Group is charged a fee of approximately 5.0% of revenues for the use of the "NovaCare" name and trademark. Fees are settled with the Parent on a quarterly basis in accordance with the trademark agreement.
Advances and Financing Arrangements: The Group participates in the Parent's centralized cash management system to finance operations and acquisitions. The Group's cash deposits are transferred to the Parent on a daily basis. The Parent funds the Group's disbursement bank accounts as required. When disbursements exceed deposits, the Parent advances the difference to the Group through an interest-free intercompany account. Assuming a LIBOR plus 1.5% borrowing rate, which approximates the Parent's borrowing rate, interest expense on net advances from the Parent would have been $17,284, $10,137 and $4,242 for the years ended June 30, 1999, 1998 and 1997, respectively.
In addition, certain advances from the Parent to the Group are funded through a line of credit arrangement. The annual interest rate on the line of credit is the prime rate of the Parent's lending bank plus 1.5%. As of June 30, 1999, the interest rate for the Group was 9.25%. Interest due to the Parent is settled quarterly in accordance with the loan agreement. Interest expense related to this financing arrangement was $15,518, $15,990 and $27,568 for fiscal 1999, 1998, and 1997, respectively.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
2. Related Party Transactions (continued)
Selling, General and Administrative Expenses Allocated from Related Party: During fiscal 1999, 1998 and 1997, the Parent provided certain selling, general and administrative services to the Group, that included shared management, legal, information systems, finance and human resource services and leased office space. These costs were allocated to the Group from the Parent, based on specific identification, net revenue or utilization. During 1999, 1998 and 1997, these allocated costs were $15,671, $16,294 and $7,306, respectively.
The expenses allocated to the Group are not necessarily indicative of amounts that would have been incurred if the Group had been a separate, independent entity that either managed these functions or contracted the services from an unrelated third party. Allocations were based on methodologies considered reasonable by management.
Benefits and Payroll Service Fees: Beginning in February 1997, the Group contracted with NovaCare Employee Services (NCES), a 67% owned subsidiary of the Parent, to provide payroll and benefit services. Under the agreement, the Group reimburses NCES for all payroll and related benefit costs, in addition to an administrative fee. Administrative fees incurred, related to this agreement, were $10,957, $3,986 and $952 for fiscal 1999, 1998 and 1997, respectively. These amounts are included in Selling, General and Administrative Expenses Allocated from Related Party. Additionally, payroll and related benefits expense disbursed by NCES for PROH approximated $175,000, $141,000 and $108,000 for fiscal 1999, 1998 and 1997, respectively. As of June 30, 1999 and 1998 the Group owed NCES $5,222 and $3,839 for payroll and related benefit costs. These amounts are included in accounts payable and accrued expenses--related parties.
Insurance Reserves: The Parent maintains insurance coverage for the Group, including workers' compensation and general business insurance. Insurance reserves have been specifically allocated to the Group and the amounts owed to the Parent for such reserves are included in accounts payable and accrued expenses--related parties. As of June 30, 1999 and 1998, the Group owed the Parent the following amounts:
As of June 30, --------- 1999 1998 ---- ---- Workers compensation.................................................. $421 $273 General business...................................................... 274 226 ---- ---- $695 $499 ==== ==== |
3. Provision for Restructure
During fiscal 1999, the Group's operations recorded a provision for restructure totaling $30,225 consisting of:
Writedown of excess cost of net assets acquired, net............ $28,300 Employee severance and related costs............................ 1,925 ------- Total........................................................... $30,225 ======= |
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
3. Provision for Restructure (continued)
During fiscal 1999, the Group decided to exit certain non-strategic markets. The markets consisted of 40 clinics. This decision resulted in a write-down of the value of the related assets to estimated net realizable value as these were considered held for disposal. The estimated net realizable value of the Group's assets held for disposal (principally excess cost of net assets acquired, net) was determined by reference to the Company's experience with purchases and sales of comparable assets over the past several years and in consultation with financial advisors. The clinics to be disposed of had annualized net revenues of approximately $16,600 and annualized operating profit of approximately $200. At June 30, 1999, five of the clinics have been sold for proceeds totaling $923. The net book value of the remaining assets to be sold is approximately $4,991. The decision to dispose of these clinics is being evaluated in light of the possible sale of the Group.
In addition, the Group has implemented a revised physical therapist staffing model to provide therapist services at lower costs while maintaining quality care. The new staffing model calls for an estimated reduction of 364 physical therapists. At June 30, 1999, a reduction of 231 physical therapists has taken place, 173 through attrition and 58 through severance arrangements. The Group's plan will be fully implemented by December 31, 1999, utilizing the remaining restructure reserve.
The activity in the Group's reserves for restructure is as follows:
Years Ended June 30, ----------------- 1999 1998 -------- ------- Beginning balance............................................ $ 1,137 $ 3,217 Provision for restructure.................................... 30,225 -- Payments..................................................... (2,437) (2,080) Non-cash reductions, principally asset write-offs............ (28,300) -- -------- ------- Ending balance............................................... $ 625 $ 1,137 ======== ======= |
4. Acquisition Transactions
During the years ended June 30, 1999 and 1998 the Group acquired five and 48 businesses, respectively. The following unaudited pro forma combined results of the operations of the Group give effect to each of the acquisitions as if they occurred on July 1, 1997:
Years Ended June 30, ------------------ 1999 1998 -------- -------- Net Revenues............................................... $339,889 $344,277 ======== ======== Loss before income taxes................................... $(80,734) $(29,945) ======== ======== Net loss................................................... $(59,170) $(22,327) ======== ======== |
The above pro forma information is not necessarily indicative of the results of operations that would have occurred had the acquisition been made as of July 1, 1997, or the results that may occur in the future.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
4. Acquisition Transactions (continued)
Information with respect to businesses acquired in purchase transactions was as follows:
As of June 30, ------------------ 1999 1998 --------- -------- Excess cost of net assets acquired......................... $ 427,654 $384,653 Less: accumulated amortization............................. (40,474) (28,609) --------- -------- $ 387,180 $356,044 ========= ======== Years Ended June 30, ------------------ 1999 1998 --------- -------- Cash paid (net of cash acquired)........................... $ 40,089 $ 78,164 Notes issued............................................... 4,825 24,875 Other consideration........................................ 2,238 6,920 --------- -------- 47,152 109,959 Liabilities assumed........................................ 17,342 36,751 --------- -------- 64,497 146,710 Fair value of assets acquired, principally accounts receivable and property and equipment..................... (5,091) (29,488) --------- -------- Cost in excess of fair value of net assets acquired........ $ 59,403 $117,222 ========= ======== |
Certain purchase agreements require additional payments to the former owners if specific financial targets are met. Aggregate contingent payments in connection with all acquisitions at June 30, 1999 of approximately $34,884, in cash, have not been included in the initial determination of cost of the businesses acquired since the amount of such contingent consideration that may be paid in the future, if any, is not presently determinable. In connection with businesses acquired in prior years, the Group paid $5,711 and $10,423 cash in fiscal years ended June 30, 1999 and 1998 respectively. Additionally, the Parent issued 43 and 130 shares of its common stock on behalf of the Group during the fiscal years ended June 30, 1999 and 1998, respectively, in settlement of earn-out payments to former owners.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
5. Property and Equipment
The components of property and equipment were as follows:
As of June 30, ------------------ 1999 1998 -------- -------- Buildings................................................... $ 1,232 $ 1,232 Property, equipment and furniture........................... 46,752 41,808 Capitalized software........................................ 16,066 12,916 Leasehold improvements...................................... 17,314 14,927 -------- -------- 81,364 70,883 Less: accumulated depreciation and amortization............. (41,299) (30,441) -------- -------- $ 40,065 $ 40,442 ======== ======== |
Depreciation expense, including depreciation expense allocated by the Parent, for the fiscal years 1999, 1998 and 1997 was $14,109, $11,559 and $9,023, respectively.
6. Investment in Joint Ventures
The Group has 50% ownership interests in GP Therapy, Inc., LLC (a joint venture with Columbia/HCA Healthcare Corp), Mercy Joyner Associates (a joint venture with Mercy Regional Health Systems), Gill Balsano Consulting, LLC (a joint venture with a Health Care consulting firm), Langhorne PC (a joint venture with Delaware Valley Medical Corporation), and South Philadelphia PC (a joint venture with Mt. Sinai Hospital).
At June 30, 1999 and 1998, the Group's investment in joint venture for GP Therapy, Inc., LLC was $10,728 and $10,889, respectively. The Group's investment in Mercy Joyner Associates, was acquired as part of a larger acquisition in fiscal year 1998. At June 30, 1999 and 1998, the Group's investment in joint venture for Mercy Joyner Associates was $378 and $231, respectively. The Group's investment in Gill Balsano Consulting, LLC was transferred from the Parent in fiscal year 1999. At June 30, 1999 the Group's investment in Gill Balsano was $2,078. The Group's investment in the Langhorne PC and South Philadelphia PC were acquired as part of a larger acquisition in fiscal year 1998. At June 30, 1999 and 1998, the Group's investment in joint venture for both the Langhorne PC and South Philadelphia PC was $1,936 and $1,942, respectively.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
7. Accounts Payable and Accrued Expenses--Third Parties
Accounts payable and accrued expenses are summarized as follows:
As of June 30, --------------- 1999 1998 ------- ------- Accrued contingent earn-outs................................... $ 7,256 $ 3,294 Accrued compensation and benefits.............................. 5,809 5,034 Accounts payable............................................... 4,397 4,407 Bank overdraft................................................. 4,206 2,216 Accrued acquisition costs...................................... 3,842 394 Accrued interest............................................... 2,026 1,843 Accrued restructure costs...................................... 625 1,137 Other.......................................................... 3,238 7,207 ------- ------- $31,399 $25,532 ======= ======= |
8. Financing Arrangements
Financing arrangements consisted of the following:
As of June 30, ------------------- 1999 1998 --------- -------- Line of credit--related party, due November 30, 1999..... $ 165,202 $165,507 Subordinated promissory notes (6% to 9%), Payable through 2007.................................... 41,615 47,291 Other.................................................... 2,317 1,648 --------- -------- 209,134 214,446 Less: current portion of financing arrangements-related parties................................................. (165,202) -- Less: current portion of financing arrangements-third parties................................................. (14,706) (13,620) --------- -------- $ 29,226 $200,826 ========= ======== |
Subordinated promissory notes consist primarily of notes to former owners of businesses acquired. The carrying values of the notes approximate fair value.
Financing arrangements with related party is comprised of a $180,000 line of credit with a subsidiary of the Parent. The Group periodically draws from the line and is charged interest at a rate of the Parent's lending bank's prime rate plus 1.5% on the daily outstanding balance (See Note 2). As of June 30, 1999, the interest rate for the Group was 9.25%. As of June 30, 1999 the Group had $14,798 available under this line of credit.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
8. Financing Arrangements (continued)
At June 30, 1999, aggregate annual maturities of financing arrangements were as follows for the next five fiscal years and thereafter:
Fiscal Year ----------- 2000............................................................ $179,908 2001............................................................ 13,157 2002............................................................ 10,040 2003............................................................ 3,333 2004............................................................ 1,494 Thereafter...................................................... 1,202 -------- $209,134 ======== |
Interest paid on debt during the fiscal years 1999, 1998 and 1997 was $18,132, $17,518 and $10,537, respectively.
9. Leases
The Group rents office and clinical space and transportation and therapy equipment under non-cancelable operating leases.
Future minimum lease commitments for all non-cancelable leases as of June 30, 1999 are as follows:
Operating Fiscal Year Leases ----------- --------- 2000........................................................... $27,807 2001........................................................... 21,378 2002........................................................... 16,557 2003........................................................... 10,191 2004........................................................... 4,208 Thereafter..................................................... 5,341 ------- Total minimum lease payments................................... $85,482 ======= |
Total rent expense for all operating leases during fiscal years 1999, 1998 and 1997 was $29,610, $22,071 and $16,514 respectively.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
10. Income Taxes
The components of income tax benefit were as follows:
Years Ended June 30, ---------------------------- 1999 1998 1997 -------- -------- -------- Current: Federal......................................... $(17,500) $(14,676) $(15,143) State........................................... 950 776 260 -------- -------- -------- (16,500) (13,900) (14,883) -------- -------- -------- Deferred: Federal......................................... (4,705) 4,890 3,235 State........................................... (309) 1,392 922 -------- -------- -------- (5,014) 6,282 4,157 -------- -------- -------- $(21,564) $ (7,618) $(10,726) ======== ======== ======== |
The components of net deferred tax assets (liabilities) as of June 30, 1999 and 1998 were as follows:
As of June 30, ----------------- 1999 1998 -------- ------- Accruals and reserves not currently deductible for tax purposes.................................................. $ (1,113) $ 439 Restructure reserves....................................... 6,775 -- Federal and state net operating loss....................... 2,899 -- -------- ------- Gross deferred tax assets................................ 8,561 439 Depreciation and capital leases............................ (13,332) (9,865) -------- ------- Gross deferred tax liabilities........................... (13,332) (9,865) -------- ------- Net deferred tax liability............................... $ (4,771) $(9,426) ======== ======= |
The reconciliation of the expected tax benefit (computed by applying the Federal statutory tax rate to income before income taxes) to actual tax expense was as follows:
Years Ended June 30, ---------------------------- 1999 1998 1997 -------- -------- -------- Expected Federal income tax benefit ............ $(28,274) $(10,554) $(11,416) State income taxes benefit, less Federal benefit........................................ 416 1,679 870 Non-deductible nonrecurring items............... 95 428 61 Non-deductible amortization of excess cost of net assets acquired.................... 6,025 1,358 988 Other, net...................................... 174 (529) (1,229) -------- -------- -------- $(21,564) $ (7,618) $(10,726) ======== ======== ======== |
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
11. Benefit Plans
Retirement Plans: Through the Parent, the Group participates in defined contribution 401(k) plans covering substantially all of its employees. The Group's portion of contributions made to the plans by the Parent for fiscal 1999, 1998 and 1997 were $1,189, $1,056 and $841, respectively.
Stock Option Plans: Certain employees of the Group participate in the Parent's employee stock option plans. Under the plans, substantially all of the options granted under the plan vest ratably over five years and are granted for a term of up to ten years. The exercise price of the options equal the fair value of the Parent's common stock at the date of grant. The Parent has adopted the disclosure-only provision of SFAS 123. Accordingly, no compensation expense has been recognized for option grants under the plans by the Parent or the Group. Had compensation cost for options granted been determined based on the fair value at the date of grant awards consistent with the provisions of SFAS 123, the Group's net loss would not have been materially different from the amounts reported in these financial statements.
12. Commitments and Contingencies
The Group is subject to legal proceedings and claims that arise in the ordinary course of business. Management believes that the amount of any liability related to these matters will not have a material adverse effect on the Group's financial position or results of operations.
13. Parent's Restructure Proposal
The accompanying combined financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the combined financial statements for the three years ended June 30, 1999, the Group has reported substantial net operating losses; has significant excess of current liabilities over current assets at June 30, 1999; and, is dependent on the Parent to provide financial support.
The Parent has $175,000 of convertible subordinated debentures due on January 15, 2000. The Parent's ability to make its scheduled debt payments when due is dependent on a number of future actions, the outcome of which are uncertain. The Parent's management has proposed a financial restructuring plan to its shareholders in a proxy statement dated August 13, 1999, as amended through September 10, 1999. A special meeting of the Parent's shareholders was held on September 21, 1999 (the "Special Meeting") and the shareholders voted to approve (i) the sale of the Group, (ii) the sale of the Parent's interest in an affiliated company and (iii) the adoption of a restructuring proposal.
The Parent is in the process of seeking buyers for the Group. While to date no definitive agreement has been entered into with respect to the sale of the Group, the Parent received shareholder approval at the Special Meeting to proceed with the sale when a suitable buyer is identified and a definitive agreement (which meets all of the conditions of the proposal included in the proxy) is negotiated with such buyer. The sale of the Group could result in material adjustments to the assets and liabilities reflected in the accompanying combined financial statements.
NovaCare Physical Rehabilitation and Occupational Health Group
(Wholly-owned by NovaCare, Inc.)
Notes to Combined Financial Statements--(Continued)
June 30, 1999
(In thousands)
13. Parent's Restructure Proposal (continued)
The Parent's ability to repay the $175,000 convertible subordinated debentures is dependent on the sale of the Group or the Parent's ability to secure refinancing in the event the Group is not sold. The Parent is unable to predict the sale of the Group as set forth in the proxy or likelihood of successfully concluding any other available alternative. As a result, the Company is unable to predict the Parent's ability to continue to provide financial support to the Group.
Independent Auditors' Report
The Board of Directors and Stockholders
Intensiva HealthCare Corporation:
We have audited the accompanying consolidated balance sheets of Intensiva HealthCare Corporation and subsidiaries as of December 15, 1998 and December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from January 1, 1998 through December 15, 1998 and the year ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 financial position of Intensiva HealthCare Corporation and subsidiaries as of December 15, 1998 and December 31, 1997, and the results of their operations and their cash flows for the period from January 1, 1998 through December 15, 1998 and the year ended December 31, 1997, in conformity with auditing standards generally accepted in the United States of America.
/s/ KPMG LLP St. Louis, Missouri April 9, 1999 |
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 15, 1998 and December 31, 1997
December 15, December 31, 1998 1997 ------------ ------------ Assets Current assets: Cash and cash equivalents ......................... $ -- 1,433,812 Accounts receivable, less allowance for doubtful accounts of $2,767,735 and $1,736,367, respective- ly................................................ 52,138,563 31,876,315 Inventories ....................................... 1,023,466 781,317 Prepaid expenses .................................. 848,937 855,429 ----------- ---------- Total current assets ............................ 54,010,966 34,946,873 Property and equipment, net ......................... 10,531,377 6,882,957 Organizational and preopening costs, net ............ 751,864 382,777 Other assets ........................................ 673,620 1,047,842 ----------- ---------- $65,967,827 43,260,449 =========== ========== Liabilities and Stockholders' Equity Current liabilities: Bank overdraft .................................... $ 1,769,407 -- Current portion of long-term obligations .......... 748,283 781,315 Current portion of revolving credit facility ...... 10,884,847 1,649,394 Accounts payable and accrued expenses ............. 9,413,078 7,589,180 Accrued salaries, wages, and benefits ............. 5,155,739 2,245,741 Estimated third-party payor settlements ........... 21,534,681 2,652,585 ----------- ---------- Total current liabilities ....................... 49,506,035 14,918,215 ----------- ---------- Long-term obligations, less current portion ......... 1,533,641 1,312,234 Revolving credit facility, less current portion ..... -- 1,935,575 Deferred rent expense ............................... 1,516,001 1,301,984 ----------- ---------- Total liabilities ............................... 52,555,677 19,468,008 Commitments and contingencies Stockholders' equity: Convertible preferred stock, $0.001 par value: Series A, 3,465,000 shares authorized, none outstanding in 1998 and 1997...................... -- -- Series B, 2,232,962 shares authorized, none outstanding in 1998 and 1997...................... -- -- Common stock, $0.001 par value, 70,000,000 shares authorized, 10,086,079 and 9,969,045 shares issued and outstanding, respectively..................... 10,086 9,969 Additional paid-in capital ........................ 30,251,901 30,193,647 Accumulated deficit ............................... (16,849,837) (6,411,175) ----------- ---------- Total stockholders' equity ...................... 13,412,150 23,792,441 ----------- ---------- $65,967,827 43,260,449 =========== ========== |
See accompanying notes to consolidated financial statements.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Period from January 1, 1998 through December 15, 1998 and year ended December 31, 1997
Period from January 1, 1998 through Year ended December 15, December 31, 1998 1997 --------------- ------------ Net patient service revenues ...................... $ 98,848,514 69,589,496 Costs and expenses: Operating expenses .............................. 95,099,777 59,913,263 General and administrative ...................... 7,485,093 4,605,961 Provision for doubtful accounts ................. 1,818,152 1,951,890 Depreciation and amortization ................... 2,835,004 1,565,004 ------------- ---------- Total costs and expenses ...................... 107,238,026 68,036,118 ------------- ---------- Operating income (loss) ....................... (8,389,512) 1,553,378 Interest income ................................... -- 412,706 Interest expense .................................. (1,203,126) (235,171) ------------- ---------- Income (loss) before income taxes ............. (9,592,638) 1,730,913 Provision for income taxes ........................ 846,024 93,557 ------------- ---------- Net income (loss) ............................. $ (10,438,662) 1,637,356 ============= ========== |
See accompanying notes to consolidated financial statements.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Period from January 1, 1998 through December 15, 1998 and year ended December 31, 1997
Common stock ------------------ Preferred stock Additional Total ----------------- Number of paid-in Accumulated stockholders' Series A Series B shares Amount capital deficit equity -------- -------- ---------- ------- ---------- ----------- -------------- Balance at December 31, 1996 .................. $ -- -- 9,905,062 $ 9,905 30,184,544 (8,048,531) 22,145,918 Issuance of shares of common stock in connection with exercise of stock options ............... -- -- 63,983 64 9,103 -- 9,167 Net income ............. -- -- -- -- -- 1,637,356 1,637,356 ------ ----- ---------- ------- ---------- ----------- ----------- --- Balance at December 31, 1997 .................. -- -- 9,969,045 9,969 30,193,647 (6,411,175) 23,792,441 Issuance of shares of common stock in connection with exercise of stock options ............... -- -- 117,034 117 58,254 -- 58,371 Net loss ............... -- -- -- -- -- (10,438,662) (10,438,662) ------ ----- ---------- ------- ---------- ----------- ----------- Balance at December 15, 1998 .................. $ -- -- 10,086,079 $10,086 30,251,901 (16,849,837) 13,412,150 ====== ===== ========== ======= ========== =========== =========== |
See accompanying notes to consolidated financial statements.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Period from January 1, 1998 through December 15, 1998 and year ended December 31, 1997
Period from January 1, 1998 through Year ended December 15, December 31, 1998 1997 ------------ ------------ Cash flows from operating activities: Net income (loss) ................................ $(10,438,662) 1,637,356 Adjustments to reconcile net income (loss) to net cash used in operating activities: Depreciation and amortization .................. 2,835,004 1,565,004 Provision for doubtful accounts ................ 1,818,152 1,951,890 Increase in accounts receivable ................ (22,580,074) (25,344,570) Increase in inventories, prepaid expenses, and other assets .................................. (363,816) (784,274) Increase in accounts payable and accrued expenses ...................................... 1,823,898 4,511,854 Increase in accrued salaries, wages, and benefits ...................................... 2,909,998 1,209,670 Increase in estimated third-party payor settlements ................................... 19,381,770 1,748,872 Increase in accrued rent differential .......... 214,017 216,684 ------------ ----------- Net cash used in operating activities ........ (4,399,713) (13,287,514) ------------ ----------- Cash flows from investing activities: Additions to property and equipment .............. (4,318,103) (3,323,707) Organizational and preopening costs .............. (965,436) (542,742) Maturities of short-term investments ............. -- 12,987,220 ------------ ----------- Net cash provided by (used in) investing activities .................................. (5,283,539) 9,120,771 ------------ ----------- Cash flows from financing activities: Bank overdraft ................................... 1,769,407 -- Proceeds from exercise of stock options .......... 58,371 9,167 Net borrowings under revolving credit facility ... 7,299,878 3,584,969 Debt issuance costs incurred ..................... -- (140,322) Payments on long-term obligations ................ (878,216) (738,236) ------------ ----------- Net cash provided by financing activities .... 8,249,440 2,715,578 ------------ ----------- Decrease in cash and cash equivalents ........ (1,433,812) (1,451,165) Cash and cash equivalents, beginning of period ..... 1,433,812 2,884,977 ------------ ----------- Cash and cash equivalents, end of period ........... $ -- 1,433,812 ============ =========== Supplemental cash flow information: Cash paid for interest ........................... $ 1,203,126 235,171 Cash paid for income taxes ....................... 644,246 43,000 ============ =========== Supplemental information--noncash investing and financing activities: Acquisition of software license through long- term obligation ............................... $ -- 555,034 Acquisition of equipment through capital leases ............................................... 1,066,591 1,156,824 ============ =========== |
See accompanying notes to consolidated financial statements.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 15, 1998 and December 31, 1997
(1) Business and Summary of Significant Accounting Policies and Practices
(a) Description of Business
Intensiva HealthCare Corporation and subsidiaries (the Company) was incorporated in Delaware on July 18, 1994. The Company operates a network of long-term care hospitals in certain health care markets across the United States.
On November 10, 1998, Select Medical Corporation of Mechanicsburg (a wholly owned subsidiary of Select Medical Corporation) (Select) initiated a cash tender offer of $9.625 per outstanding share of the Company's common stock. On December 15, 1998, Select acquired approximately 95% of the Company's outstanding common stock. The remaining 5% of the outstanding stock was acquired on December 18, 1998. Total cash tendered by Select for the Company's common stock was $97,078,511. Additionally, Select paid $4,688,712 to retire options vested under the Intensiva HealthCare Corporation Stock Option Plan and Intensiva HealthCare Corporation Directors Stock Option Plan and to retire warrants held by a third party. Approximately $1.8 million of costs incurred by the Company related to the sale of the Company's common stock to Select are included in general and administrative expense in the accompanying consolidated statement of operations for the period from January 1, 1998 through December 15, 1998. Effective December 16, 1998, the Company became part of the Select consolidated group of subsidiaries.
(b) Principles of Consolidation
The consolidated financial statements of the Company include all of its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation.
(c) Cash and Cash Equivalents
Cash and cash equivalents consist of interest-bearing money market accounts and debt instruments with original maturities of three months or less.
(d) Depository Receipts Account
The Company maintains a depository receipts account at a local financial institution to which substantially all cash receipts are received. In accordance with the terms of the revolving credit facility, the balance of the depository receipts account is swept daily by the lender to reduce the balance outstanding on the Company's revolving credit facility.
(e) Financial Instruments
Financial instruments, consisting of cash and cash equivalents, accounts receivable, current liabilities, long-term obligations, and revolving credit facility are reported at amounts in the accompanying consolidated balance sheets that approximate fair value at the balance sheet dates.
(f) Inventories
Inventories, which consist principally of medical supplies, are stated at the lower of cost or market. Cost is determined using the first-in, first-out method.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
(g) Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases is stated at the present value of minimum lease payments. Property and equipment of the Company are reviewed for impairment whenever events or circumstances indicate that the asset's undiscounted expected cash flows are not sufficient to recover its carrying amount. The Company measures an impairment loss by comparing the fair value of the asset to its carrying amount. Fair value of an asset is estimated using the present value of expected future cash flows.
Depreciation and amortization is calculated using the straight-line method over the estimated useful lives of the assets. Useful lives for equipment range from 3-15 years. Leasehold improvements are amortized over the shorter of the lease term or estimated useful life of the asset, approximately five years.
(h) Organizational and Preopening Costs
Organizational and preopening costs consist of legal, consulting, and other costs incurred by the Company during the development phase of a new hospital. These costs are capitalized and amortized to expense over a period of twelve months beginning when the new hospital is opened and begins to admit patients. Costs related to marketing and development of new hospitals at the corporate level are expensed as incurred.
(i) Other Assets
Other assets primarily consist of software license agreements with a book value of approximately $487,000 and $879,000 at December 15, 1998 and December 31, 1997, respectively. The software licenses are being amortized into expense over the three-year estimated useful lives of the licenses.
(j) Bank Overdraft
The balance of the bank overdraft at December 15, 1998 represents outstanding checks written on the Company's operating and payroll bank accounts in excess of the cash balance of those accounts. Subsequent to the balance sheet date, sufficient funds were transferred to the Company's operating and payroll bank accounts from the revolving credit facility to satisfy outstanding obligations.
(k) Deferred Rent Expense
Certain of the leases on the Company's health care facilities include scheduled base rent increases over the terms of the leases. The total base rent payments are being charged to expense on the straight-line method over the term of the leases. Deferred rent expense represents the excess of rent expense over cash payments since inception of the leases.
(l) Income Taxes
Deferred taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates in effect for the year in which those differences are expected to be recovered or settled.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
(m) Revenue Recognition
The Company recognizes revenue as services are provided to patients.
The Company has agreements with third-party payors that provide for patient care reimbursement at rates that may differ from the customary charges for such care. During the qualification period to become certified as a long-term care hospital (which historically has been approximately six to seven months from the opening of the facility for the Company), the Medicare program reimburses the Company under either the Prospective Payment System, which provides for payment at predetermined amounts based on the discharge diagnosis, or under a cost- based methodology. Upon obtaining certification as a long-term care hospital, the Company's hospitals receive cost-based reimbursement, subject to certain limitations specific to long-term care hospitals, from the Medicare program. Payment for patient services covered by certain commercial insurance carriers, health maintenance organizations, and preferred provider organizations are based upon reimbursement agreements which include negotiated rates for specific services, discounts from established charges, and prospectively determined per diem rates.
Net patient service revenues and related accounts receivable are reported at the estimated net realizable amounts from patients, third- party payors, and others for services rendered. Retroactive adjustments are accrued on an estimated basis in the period the related services are rendered and adjusted in future periods as final settlements are determined. Final settlements are determined after submission of annual cost reports by the Company and audits thereof by the Medicare fiscal intermediary.
(n) Medicare Credit Risk and Payor Concentration
Approximately 69% and 77% of the Company's net patient service revenues for the period from January 1, 1998 through December 15, 1998 and the year ended December 31, 1997, respectively, were derived from funds under the Medicare program, and approximately 68% and 75% of the Company's net accounts receivable at December 15, 1998 and December 31, 1997, respectively, are from this payor source.
Sixteen of the Company's facilities, which have been certified by Medicare as long-term care hospitals at December 15, 1998, accounted for approximately $96 million of net patient services revenues in the period from January 1, 1998 through December 15, 1998. Significant reductions in the level of revenues attributable to these facilities may occur if the Company is unable to maintain the certification of these facilities as long-term care hospitals in accordance with Medicare rules and regulations, including the maintenance of an average length of stay of at least 25 days at each individual facility. Also, the Company's facilities operate in space leased from general acute care hospitals (host hospitals), consequently, all of its 22 facilities in operation at December 15, 1998 are subject to Medicare "hospital within hospitals" (HIH) rules and regulations. These rules and regulations are designed to ensure that the Company's facilities are organizationally and functionally independent of their host hospitals. For purposes of measuring independence, the Medicare rules and regulations include requirements that the Company's facilities either purchase no more than 15% of their total operating expenses from the host hospitals or receive no more than 25% of patient referrals from the host hospitals. Significant reductions in the Company's level of revenues attributable to its facilities may occur if the Company is unable to maintain its facilities' status as HIH's in accordance with Medicare rules and regulations.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
Management believes that all its facilities are in compliance with the Medicare rules and regulations covering long-term care hospitals and HIH facilities. However, in light of the lack of regulatory guidance and scarcity of case law interpreting these regulations, there can be no assurance that the Company's facilities will have been found to be in compliance with these regulations and, if so, whether any sanctions imposed would have a material adverse effect on the consolidated financial position or results of operations of the Company.
(o) Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the period. Actual results may differ from those estimates.
(p) Net Income (Loss) Per Share
In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, (SFAS 128). SFAS 128 replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented to conform to SFAS 128 requirements.
Basic and diluted income (loss) per share was computed using net income
(loss) and the weighted average number of shares of common stock and
common stock equivalents, if dilutive. The weighted average numbers of
shares of common stock used in the computation of basic and diluted loss
per share for the period from January 1, 1998 through December 15, 1998
was 10,019,679. Common stock equivalents totaling 685,117 at December
15, 1998 are not included in the computation of diluted loss per share
because they have an anti-dilutive effect. The weighted average numbers
of shares of common stock and common stock equivalents used in the
computation of basic and diluted income per share for the year ended
December 31, 1997 were 9,929,598 and 10,463,800, respectively. The
difference between the two amounts relates to the effect of dilutive
stock options and warrants.
(q) Stock-Based Compensation
The Company uses the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB 25), and related interpretations in accounting for its stock options. The Company has adopted the pro forma disclosures-only provisions of SFAS No. 123, Accounting for Stock-Based Compensation.
(r) Recent Accounting Pronouncements
The Company adopted the provisions of SFAS No. 130, Reporting Comprehensive Income, on January 1, 1998, which requires reporting of comprehensive income (earnings) and its components in the statements of operations and statements of equity, including net income as a component. Comprehensive income is the change in equity of a business from transactions and other events and circumstances from nonowner sources.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
In April 1998, the American Institute of Certified Public Accountants issued Statement of Position (SOP) 98-5, Reporting on the Costs of Start-up Activities. SOP 98-5 requires costs of start-up activities and organizational costs to be expensed as incurred. The Company is required to adopt SOP 98-5 on January 1, 1999 as a cumulative effect of a change in accounting principle. The total amount of unamortized organizational and preopening costs at December 15, 1998 was $751,864.
(2) Allowance for Doubtful Accounts
Activity in the allowance for doubtful accounts is as follows:
Period from January 1, 1998 through Year ended December 15, December 31, 1998 1997 --------------- ------------ Balance at beginning of period................... $1,736,367 1,270,478 Provision for doubtful accounts.................. 1,818,152 1,951,890 Accounts written-off............................. (786,784) (1,486,001) ---------- ---------- Balance at end of period......................... $2,767,735 1,736,367 ========== ========== |
(3) Property and Equipment Property and equipment are as follows:
December 15, December 31, 1998 1997 ------------ ------------ Leasehold improvements.............................. $ 6,207,343 4,329,372 Equipment........................................... 3,740,547 1,954,120 Equipment under capital leases...................... 3,825,685 2,109,393 ----------- --------- 13,773,575 8,392,885 Less accumulated depreciation and amortization...... 3,242,198 1,509,928 ----------- --------- Property and equipment, net $10,531,377 6,882,957 =========== ========= |
(4) Sale Leaseback Agreement
In 1996, the Company entered into a sale leaseback agreement with a third party to take advantage of favorable borrowing rates and maintain liquidity. This third party received warrants to purchase 15,950 shares of the Company's common stock. As part of this agreement, the Company obtained a $1 million commitment from the third party to finance additional capital expenditures. In November 1998, this agreement was amended to extend an additional commitment of $500,000 through February 15, 1999. The long-term obligations under this arrangement are secured by certain equipment, bear interest at 8%, and are repayable monthly through July 2002. Borrowings outstanding of approximately $645,500 and $820,000 are included in capital lease obligations at December 15, 1998 and December 31, 1997, respectively. The unutilized borrowing capacity under the additional commitment was approximately $219,000 and $413,000 at December 15, 1998 and December 31, 1997, respectively. The warrants were retired by the Company in connection with the acquisition of the Company's common stock by Select (see note 1).
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
(5) Long-term Obligations
Long-term obligations consist of the following:
December 15, December 31, 1998 1997 ------------ ------------ Capital lease obligations, interest rates ranging from 8% to 15%, payable monthly through 2002.................... $2,129,603 1,645,218 Notes payable, interest at 6.5%, payable monthly through June 1999............... 152,321 448,331 ---------- --------- 2,281,924 2,093,549 Less current portion............................. 748,283 781,315 ---------- --------- $1,533,641 1,312,234 ========== ========= |
Capital lease obligations are secured by various medical equipment at each facility, such as ventilators, x-ray machines, IV pumps, and cardiac monitors. The net book value of equipment under capital leases was approximately $2,400,000 and $1,700,000 at December 15, 1998 and December 31, 1997, respectively. The notes payable relate to software license agreements.
The aggregate maturities of long-term obligations at December 15, 1998 are as follows:
1999 $1,000,244 2000 769,946 2001 524,037 2002 327,746 2003 and thereafter 160,247 ---------- 2,782,220 Less interest on capital lease obligations 500,296 ---------- $2,281,924 ========== |
(6) Revolving Credit Facility
In November 1997, the Company entered into a Loan and Security Agreement (Initial Loan Agreement) to obtain a $20 million revolving credit facility that was secured by a first security interest in the Company's accounts receivable and other assets. The Initial Loan Agreement provided for maximum borrowings up to the lesser of the activated loan amount or the borrowing base as defined in the Initial Loan Agreement, and bore interest at either the higher of (i) the prime rate or federal funds rate (whichever was greater) plus .25%, or (ii) the 30-day LIBOR rate plus 2.5%. The Initial Loan Agreement included restrictive covenants involving limitations on capital expenditures and other borrowings, adherence to certain financial measurements, and restrictions on the payment of dividends. The unused availability on the Initial Loan Agreement at December 31, 1997 was approximately $8,212,000. The Initial Loan Agreement was terminated in April 1998, upon the execution of a second revolving credit facility with another lender.
The Second Loan and Security Agreement (Second Loan Agreement) was for a $20 million revolving credit facility with a term of three years. Under the Second Loan Agreement, the Company pays a monthly loan management fee of $2,000 as well as a monthly usage fee of 0.24% per annum on the average amount by which the available loan amount, as defined by the agreement, exceeds the outstanding principal balance. The
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
unused availability on the Second Loan Agreement at December 15, 1998 was approximately $9,115,000. The Second Loan Agreement includes restrictive covenants on other borrowings and transfer of ownership provisions. Advances under the New Loan agreement bear interest at 1% above the prime rate (8.75% at December 15, 1998), and are secured by a first security interest in the Company's accounts receivable and other assets.
As a result of the acquisition of the Company's common stock by Select, an event of default occurred under the Second Loan Agreement, with the lender electing to terminate the agreement. Accordingly, the balance outstanding on the Second Loan Agreement at December 15, 1998 of $10,884,847 was classified as a current liability in the accompanying consolidated balance sheets. In January 1999, Select rendered payment in full to the lender including a termination fee of $600,000.
The Company paid interest at a weighted average interest rate of 11% and 8.75% for the period from January 1, 1998 through December 15, 1998 and the year ended December 31, 1997, respectively.
(7) Stockholders' Equity
The Company has two stock option plans which provide for the issuance of options to key employees .and directors. Under the Intensiva HealthCare Corporation Stock Option Plan (1995 Plan), established in 1995, up to 785,400 options to purchase common shares may be issued to employees and directors. Under the Intensiva HealthCare Corporation Directors Stock Option Plan (1997 Plan), established in 1997, up to 60,000 options to purchase common shares may be issued to directors. Both plans require that the exercise price of options issued must be at least equal to the fair market value of the shares of stock at the date of grant and the term of the options may not exceed 10 years.
Aggregate information relating to stock option activity under the 1995 Plan and the 1997 Plan is as follows:
Period from January 1, 1998 through Year ended December 15, December 31, 1998 1997 --------------- ------------ Number of shares under stock options: Outstanding at beginning of period............... 687,367 575,850 Granted.......................................... 140,500 181,000 Exercised........................................ (117,034) (63,983) Forfeited........................................ (25,716) (5,500) -------- ------- Outstanding at end of period..................... 685,117 687,367 Exercisable at end of period..................... 353,766 267,973 ======== ======= Weighted average exercise price: Granted.......................................... $ 5.97 7.21 Exercised........................................ 0.50 0.14 Forfeited........................................ 7.08 6.00 Outstanding at end of period..................... 3.09 2.21 Exercisable at end of period..................... 2.01 0.70 |
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
In accordance with the stock option plans, all employees were to become fully vested in their options upon a change in ownership. The vested options under the 1995 Plan and the 1997 Plan were settled by Select for $4,688,712 in connection with their acquisition of the Company (see note 1).
No compensation expense relating to stock option grants was recorded in 1998 and 1997 as the option exercise prices were equal to fair value of the Company's common stock at the respective dates of grant.
Pro forma information regarding net loss is required by SFAS No. 123, and has been determined as if the Company had accounted for its stock options under the fair value method of SFAS No. 123. The fair value was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions:
December 15, December 31, 1998 1997 ------------ ------------ Risk-free interest rate............................. 4.7% 5.8% Dividend yield...................................... -- -- Volatility factor................................... 0.64 0.77 Weighted average expected life...................... 5 years 5 years ======= ======= |
The Company's pro forma income (loss) compared to reported amounts are as follows:
Period from January 1, 1998 through Year ended December 15, December 31, 1998 1997 --------------- ------------ Net income (loss): As reported................................... $ (10,438,662) 1,637,356 Pro forma..................................... (11,598,489) 1,509,944 Basic and diluted income (loss) per share: As reported................................... (1.04) 0.16 Pro forma: Basic....................................... (1.16) 0.15 Diluted..................................... (1.16) 0.14 Weighted average fair value of options granted during the period.............................. 3.47 4.77 ============= ========= |
(8) Employee Benefits
The Company sponsors a voluntary defined contribution 401(k) plan (the Plan) that is available to substantially all employees. Each participant may make an annual contribution to their account of an amount not to exceed 15% of their compensation, subject to certain limitations. The Company makes a matching contribution of 25% of participant contributions, and may make additional annual discretionary contributions to the Plan not to exceed 15% of the total compensation of all plan participants. Participants vest in the Company's matching portion at a rate of 20% per year. Expense for this Plan totaled approximately $250,000 and $106,500 for the period from January 1, 1998 through December 15, 1998 and the year ended December 31, 1997, respectively.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
(9) Income Taxes
The provision for income taxes for the period from January 1, 1998 through December 15, 1998 and for the year ended December 31, 1997 consisted primarily of current state income taxes.
The difference between the effective income tax rate for financial statement purposes and the U.S. federal income tax rate of 34% is as follows:
Period from January 1, 1998 through Year ended December 15, December 31, 1998 1997 --------------- ------------ Expected provision (benefit) at statutory tax rate........................................... $ (3,261,496) 588,510 State taxes, net of federal tax benefit......... 514,955 93,557 Transaction costs incurred by the Company re- lated to the acquisition by Select............ 617,055 -- Change in valuation allowance................... 2,875,722 (623,050) Other........................................... 99,788 34,540 ------------ --------- $ 846,024 93,557 ============ ========= The tax effects of temporary differences that give rise to significant portions of deferred tax assets are as follows: December 15, December 31, 1998 1997 --------------- ------------ Net operating loss carryforwards................ $ 2,331,659 936,032 Allowance for doubtful accounts and contractual allowances..................................... 3,543,120 590,365 Accrued expenses................................ 242,098 198,581 Difference between book and tax basis deprecia- tion and amortization.......................... 354,314 276,330 ------------ --------- 6,471,191 2,001,308 Less valuation allowance........................ 6,471,191 2,001,308 ------------ --------- $ -- -- ============ ========= |
A valuation allowance is necessary for deferred tax assets if, based on the weight of available evidence, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the period in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. The Company has approximately $6,900,000 of net operating loss carryforwards for income tax purposes, which, if unused, will begin to expire in the year 2009.
Compensation expense related to stock options in excess of amounts recognized for financial reporting purposes resulted in a $1,594,162 increase in net operating loss carryforwards with a corresponding increase in additional paid-in capital. A corresponding increase in the valuation allowance was recorded by the Company and charged to additional paid-in capital.
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 15, 1998 and December 31, 1997
(10) Commitments and Contingencies
The Company's health care facilities are located in space leased from acute care health care providers (host hospitals) under operating lease agreements with Host Hospitals of initial terms of five or more years, with varying renewal terms. The Company leases corporate office space under a noncancellable operating lease which expires in the year 2002.
Minimum annual lease payments on noncancellable operating leases with maturities in excess of one year are as follows: $8,889,280 in 1999, $9,043,049 in 2000, $8,779,123 in 2001, $6,939,253 in 2002, and $3,518,510 thereafter. Total rent expense was approximately $10,989,000 and $7,381,000 for the period from January 1, 1998 through December 15, 1998 and the year ended December 31, 1997, respectively.
(11) Year 2000
The Year 2000 issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a "00" date" as the year 1900 rather than the year 2000. This could result in system failures or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions or engage in normal business activities. The Company has developed a Year 2000 remediation plan and has begun testing and converting its computer systems and applications in order to identify and solve significant Year 2000 issues. In addition, the Company is discussing with its vendors the possibility of any communication difficulties or other disruptions that may affect the Company.
Report of Independent Auditors
Board of Directors
American Transitional Hospitals, Inc.
We have audited the accompanying consolidated balance sheet of American Transitional Hospitals, Inc. (the "Company"), a wholly-owned subsidiary of Beverly Enterprises, Inc., as of June 29, 1998, and the related consolidated statements of operations, changes in equity of Parent, and cash flows for the period from January 1, 1998 to June 29, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Transitional Hospitals, Inc. at June 29, 1998, and the consolidated results of their operations and their cash flows for the period from January 1, 1998 to June 29, 1998 in conformity with accounting principles generally accepted in the United States.
November 18, 1998
Nashville, Tennessee
/s/ Ernst & Young LLP |
American Transitional Hospitals, Inc.
Consolidated Balance Sheet
June 29, 1998
(In Thousands)
Assets Current assets: Cash and cash equivalents............................................ $ 677 Accounts receivable--less allowance for doubtful accounts of $11,937............................................................. 19,670 Due from Parent's affiliate.......................................... 4,002 Inventories.......................................................... 1,447 Prepaid expenses and other........................................... 141 ------- 25,937 Property and equipment, net............................................ 20,162 Pre-opening costs...................................................... 3,366 Other assets, net...................................................... 540 ------- $50,005 ======= Liabilities and equity of Parent Current liabilities: Accounts payable..................................................... $ 9,547 Accrued wages and related liabilities................................ 5,101 Other accrued liabilities............................................ 227 Current portion of long-term obligations............................. 247 ------- 15,122 Long-term obligations.................................................. 2,110 Equity of Parent....................................................... 32,773 ------- $50,005 ======= |
See accompanying notes.
American Transitional Hospitals, Inc.
Consolidated Statement of Operations
Period from January 1, 1998 to June 29, 1998
(In Thousands)
Net operating revenues................................................ $53,341 Operating and administrative expenses: Wages and related................................................... 30,026 Other............................................................... 25,190 Depreciation and amortization......................................... 1,577 Management fees....................................................... 835 Interest.............................................................. 91 ------- 57,719 Loss before provision for income taxes................................ (4,378) ------- Provision for income taxes............................................ -- ------- Net loss.............................................................. $(4,378) ======= |
See accompanying notes.
American Transitional Hospitals, Inc.
Consolidated Statement of Changes in Equity of Parent
Period from January 1, 1998 to June 29, 1998
(In Thousands)
Balance at January 1, 1998............................................. $31,427 Cash management activity--net........................................ 2,666 Allocation of Parent costs........................................... 3,058 Net loss............................................................. (4,378) ------- Balance at June 29, 1998............................................... $32,773 ======= |
See accompanying notes.
American Transitional Hospitals, Inc.
Consolidated Statement of Cash Flows
Period from January 1, 1998 to June 29, 1998
(In Thousands)
Cash flows from operating activities Net loss............................................................. $(4,378) Adjustments to reconcile net income to net cash used in operating activities: Depreciation and amortization...................................... 1,577 Changes in operating assets and liabilities: Accounts receivable, net.......................................... (7,423) Inventories....................................................... (214) Prepaid expenses and other current assets......................... (5) Accounts payable and other accrued expenses....................... 7,875 ------- Net cash used in operating activities................................ (2,568) Cash flows from investing activities Capital expenditures................................................. (3,462) Other, net........................................................... (1,239) ------- Net cash used in investing activities................................ (4,701) Cash flows from financing activities Payments on long-term obligations.................................... (130) Net transfers from Parent............................................ 5,724 ------- Net cash provided by financing activities............................ 5,594 ------- Decrease in cash and cash equivalents................................ (1,675) Cash and cash equivalents at beginning of period..................... 2,352 ------- Cash and cash equivalents at end of period........................... $ 677 ======= Supplemental information Interest payments.................................................. $ 96 ======= |
See accompanying notes.
American Transitional Hospitals, Inc.
Notes to Consolidated Financial Statements
Period from January 1, 1998 to June 29, 1998
1. Summary of Significant Accounting Policies
Basis of Presentation
The consolidated financial statements include the accounts of those entities comprising American Transitional Hospitals, Inc. (the Company) at June 29, 1998. All significant intercompany transactions have been eliminated. The Company is a wholly-owned subsidiary of Beverly Enterprises, Inc. (Beverly or Parent). Beverly provides long-term healthcare in 31 states and the District of Columbia.
As more fully described in Note 9, the Company was acquired on June 30, 1998 by Select Medical Corporation.
The Company provides long-term acute care to chronically ill patients. The Company receives payment for patient services from the federal government primarily under the Medicare program, health maintenance organizations, preferred provider organizations and other private insurers and directly from patients.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Highly liquid investments with original maturities of three months or less when purchased are considered to be cash equivalents.
Inventories
Inventory consists principally of pharmaceuticals and other supplies and are stated at the lower of cost (first-in, first-out) or market.
Property and Equipment
Property and equipment is stated at cost less accumulated depreciation. Depreciation is computed by the straight-line method over the estimated useful lives of the assets.
Pre-opening Costs
Pre-opening costs (stated at cost less accumulated amortization of $2,133,000) is being amortized over 5 years using the straight-line method. On an ongoing basis, the Company reviews the carrying value of its intangible assets in light of any events or circumstances that indicate they may be impaired or that the amortization period may need to be adjusted. If such circumstances suggest the intangible value cannot be recovered, calculated based on undiscounted cash flows over the remaining amortization period, the carrying value of the intangible will be reduced by such shortfall.
American Transitional Hospitals, Inc.
Notes to Consolidated Financial Statements--(Continued)
1. Summary of Significant Accounting Policies (continued)
In April 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 98-5, "Reporting on the Costs of Start-Up Activities," (SOP 98-5) which is required to be adopted in financial statements for periods beginning after December 15, 1998. SOP 98-5 requires costs of start-up activities and organization costs to be expensed as incurred. Initial application of SOP 98-5 will require the Company to report all previously capitalized pre-opening costs as a cumulative effect of a change in accounting principle. Upon adoption the Company will be required to write-off all unamortized pre-opening costs.
Insurance
Beverly insures auto liability, general liability and workers' compensation risks, in most states, through insurance policies with third parties, some of which may be subject to reinsurance agreements between the insurer and Beverly Indemnity, Ltd., a wholly-owned subsidiary of Beverly. Beverly maintains reserves for estimated incurred losses not covered by third parties and charges premiums to the Company. Accordingly, no reserve for liability risks is recorded on the accompanying consolidated balance sheet.
Income Taxes
The Company files as part of the consolidated federal tax return of Beverly. The Company accounts for income taxes under the liability method. Under this method, deferred tax assets and liabilities are determined based upon differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax laws that will be in effect when the differences are expected to reverse.
Revenues
The Company's revenues are derived primarily from providing long-term healthcare services. Approximately 67% of the Company's net operating revenues for the period from January 1, 1998 to June 29, 1998 were derived from funds under federal medical assistance programs, and approximately 43% of the Company's net accounts receivable at June 29, 1998 are due from such programs. These revenues and receivables are reported at their estimated net realizable amounts and are subject to audit and retroactive adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered and are adjusted in the period of settlement. In the opinion of management, adequate provision has been made for any adjustments that may result from such audits.
Equity of Parent and Transactions with Parent
Equity of parent represents the net investment in and advances to the Company by Beverly. It includes common stock, additional paid-in-capital, net earnings(loss) and net intercompany accounts with Beverly. There are no settlement terms or interest charges associated with intercompany account balances. Generally, this balance is increased by cash transfers from Beverly, management fees (allocated based on a percentage of revenues), certain direct expenses paid by Beverly such as payroll and net earnings. The balance is decreased by daily cash deposits to Beverly's bank accounts.
During the period from January 1, 1998 to June 29, 1998, the Company provided services to certain nursing homes affiliated with Beverly. The net revenue recognized for these services was $4,618,000.
American Transitional Hospitals, Inc.
Notes to Consolidated Financial Statements--(Continued)
1. Summary of Significant Accounting Policies (continued)
Concentration of Credit Risk
The Company has significant accounts receivable whose collectibility or realizability is dependent upon the performance of certain governmental programs, primarily Medicare. These receivables represent the only concentration of credit risk for the Company. The Company does not believe there are significant credit risks associated with these governmental programs. The Company believes that an adequate provision has been made for the possibility of these receivables proving uncollectible and continually monitors and adjusts these allowances as necessary.
2. Property and Equipment
Following is a summary of property and equipment and related accumulated depreciation, by major classification, at June 29, 1998 (in thousands):
Land............................................................ $ 1,204 Buildings and improvements...................................... 12,052 Furniture and equipment......................................... 11,670 Construction in progress........................................ 1,463 ------- 26,389 Less accumulated depreciation................................... (6,227) ------- $20,162 ======= |
The Company provides depreciation using the straight-line method over the following estimated useful lives:
Estimated Lives ----------- Land improvements............................................ 10 years Buildings.................................................... 35 years Building improvements........................................ 3--15 years Furniture and equipment...................................... 3--15 years |
Depreciation expense related to property and equipment for the period from January 1, 1998 to June 29, 1998 was $1,104,000.
3. Long-Term Obligations
Long-term obligations consist of the following at June 29, 1998 (in thousands):
7.75% Secured Promissory Note, $106 payable quarterly............ $2,346 Other............................................................ 11 ------ 2,357 Less amounts due within one year................................. (247) ------ $2,110 ====== |
American Transitional Hospitals, Inc.
Notes to Consolidated Financial Statements--(Continued)
3. Long-Term Obligations (continued)
In connection with the purchase of one of the Company's facilities in September 1994, the Company entered into a $2,941,000 promissory note. The note bears interest at a fixed rate of 7.75% over 11 years and is secured by the property and equipment purchased. These assets had a carrying value of $7,463,000 at June 29, 1998.
The Company, along with certain other Beverly affiliates, guarantees various long-term obligations of Beverly. In the event Beverly is unable to make repayments, the guarantors are obligated for the borrowings. At June 29, 1998 there is $195 million outstanding under these obligations. The Company's guarantee of these obligations was released effective June 30, 1998 in connection with the acquisition of the Company by Select Medical Corporation (Select).
Maturities of long-term obligations are as follows (in thousands): $247 in 1999, $280 in 2000, $303 in 2001, $327 in 2002, $353 in 2003 and $600 thereafter.
4. Operating Leases
Future minimum rental commitments required by all noncancelable operating leases with initial or remaining terms in excess of one year as of June 29, 1998, are as follows (in thousands):
1999............................................................ $ 5,965 2000............................................................ 3,748 2001............................................................ 2,517 2002............................................................ 2,093 2003............................................................ 233 Thereafter...................................................... -- ------- Total minimum rental commitments................................ $14,556 ======= |
Rental expense for the period from January 1, 1998 to June 29, 1998 was approximately $3,070,000.
American Transitional Hospitals, Inc.
Notes to Consolidated Financial Statements--(Continued)
5. Income Taxes
Deferred income taxes reflect the impact of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The tax effects of temporary differences giving rise to the Company's deferred tax assets and liabilities at June 29, 1998 are as follows (in thousands):
Deferred Compensation............................................ $ 5 Capital leases................................................... (151) Developmental costs.............................................. (792) Bad debt expenses................................................ 5,364 Depreciation and amortization.................................... (743) Operating supplies............................................... (322) Prepaid expenses................................................. (4) Net operating loss carryforwards................................. 5,935 ------ Net deferred tax asset........................................... 9,292 Valuation allowance.............................................. (9,292) ------ Net deferred tax asset........................................... $ -- ====== |
As of June 29, 1998, the Company had federal and state net operating loss carryforwards of $14,148,000 which expire between 2001 and 2018. The use of any federal net operating loss carryforwards will be limited by Internal Revenue Code Section 382.
The Company had an annual effective tax rate of 0% for the period from January 1, 1998 to June 29, 1998. A reconciliation of the provision for income taxes, computed at the statutory rate, to the Company's annual effective tax rate is summarized as follows (in thousands):
Federal tax.................................................... $(1,532) State income taxes (net of federal)............................ (217) Net operating loss utilized by parent.......................... -- Other.......................................................... 13 Change in valuation allowance.................................. 1,736 ------- $-- ======= |
6. Retirement Plans
The Company participates in Beverly's defined contribution retirement plans, which cover substantially all employees. Benefits are determined primarily as a percentage of a participant's earned income. In addition, Beverly may make profit sharing contributions on behalf of certain employees. Retirement expense for the period from January 1, 1998 to June 29, 1998 was approximately $48,000.
7. Commitments and Contingencies
In May 1998, the Parent was served with a subpoena which was issued by the Office of the Inspector General (OIG) in Texas in a qui tam case, which is under seal. The purpose of the subpoena was to allow the government to perform an investigation prior to making a decision as to whether it will intervene as a plaintiff
American Transitional Hospitals, Inc.
Notes to Consolidated Financial Statements--(Continued)
7. Commitments and Contingencies (continued)
in the case. The Parent has shared information voluntarily and cooperated with the OIG in its investigation. In addition, the Parent has been notified that a federal grand jury in San Francisco is currently investigating practices which are the subject of the above civil investigation. To date, five current employees of the Parent have appeared as witnesses before the grand jury. While it is not possible to predict the outcome of this investigation, a determination that the Parent has violated these regulations could have a material adverse effect on the Parent's and Company's business or operating results. If the outcome were unfavorable, the Parent and Company could be subject to fines, penalties and damages and also could be excluded from Medicare and other government reimbursement programs which could have a material adverse effect on the Parent's and Company's financial condition or results of operations.
The Company currently has capital projects underway at various facilities. Total estimated expenditures for these capital projects are $2,489,000. Funds expended to date for the projects total approximately $1,358,000.
8. Impact of Year 2000 (Unaudited)
As with most other industries, hospitals use information systems that may misidentify dates beginning January 1, 2000 and result in system or equipment failures or miscalculations. Information systems include computer programs, building infrastructure components and computer-aided biomedical equipment. The Company has a Year 2000 strategy that includes phases for education, inventory and assessment of applications and equipment at risk, analysis and planning, testing, conversion/remediation/replacement and post-implementation. The Company can provide no assurance that applications and equipment the Company believes to be Year 2000 compliant will not experience difficulties or that the Company will not experience difficulties obtaining resources needed to make modifications to or replace the Company affected systems and equipment. Failure by the Company or third parties on which it relies to resolve Year 2000 issues could have a material adverse effect on the Company's results of operations and its ability to provide health care services. Consequently, the Company can give no assurances that issues related to Year 2000 will not have a material adverse effect on the Company's financial condition or results of operations.
9. Subsequent Event
Effective June 30, 1998, Select purchased the Company for cash of approximately $65,300,000 and assumed debt of approximately $2,400,000. In connection with this transaction, Beverly has indemnified Select for previously filed cost reports and any pending litigation or legal proceedings.
[Inside back cover: Various photographs depicting some of Select Medical Corporation's specialty acute care hospitals and patients receiving therapy.]
Through and including , 2001 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to the unsold allotments or subscriptions.
Shares
[LOGO OF SELECT MEDICAL CORPORATION]
Common Stock
Merrill Lynch & Co.
Chase H&Q
J.P. Morgan & Co.
CIBC World Markets
SG Cowen
First Union Securities, Inc.
, 2000
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+The information in this prospectus is not complete and may be changed. We may +
+not sell these securities until the registration statement filed with the +
+Securities and Exchange Commission is effective. This prospectus is not an +
+offer to sell these securities and it is not soliciting an offer to buy these +
+securities in any state where the offer or sale is not permitted. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion Preliminary Prospectus dated October 27, 2000
PROSPECTUS
Shares
[LOGO OF SELECT MEDICAL CORPORATION]
Common Stock
This is Select Medical Corporation's initial public offering. Select Medical Corporation is selling all of the shares. The international managers are offering shares outside of the U.S. and Canada and the U.S. underwriters are offering shares in the U.S. and Canada.
We expect the public offering price to be between $ and $ per share. Currently, no public market exists for the shares. After pricing of the offering, we expect the shares will trade on the Nasdaq National Market under the symbol "SLMC."
Investing in our common stock involves risks which are described in the "Risk Factors" section beginning on page 8 of this prospectus.
Per Share Total --------- ----- Public offering price................................. $ $ Underwriting discount................................. $ $ Proceeds, before expenses, to Select Medical Corporation.......................................... $ $ |
The international mangers may also purchase up to an additional shares from us at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover over-allotments. The U.S. underwriters may similarly purchase up to an additional shares from us.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The shares will be ready for delivery on or about , 2000.
The date of this prospectus is , 2000.
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the international managers and in the U.S. and Canada through the U.S. Underwriters. Merrill Lynch International, Chase Manhattan International Limited, J.P. Morgan Securities Ltd., CIBC World Markets Corp., SG Cowen Securities Corporation and First Union Securities, Inc. are acting as lead managers for the international managers named below. Subject to the terms and conditions described in an international purchase agreement between us and the international managers, and concurrently with the sale of shares to the U.S. underwriters, we have agreed to sell to the international managers, and the international managers severally have agreed to purchase from us, the number of shares listed opposite their names below.
Number of International Managers Shares ---------------------- ------ Merrill Lynch International........................................... Chase Manhattan International Limited................................. J.P. Morgan Securities Ltd. .......................................... CIBC World Markets Corp. ............................................. SG Cowen Securities Corporation....................................... First Union Securities, Inc. ......................................... ----- Total............................................................ ===== |
We have also entered into a U.S. purchase agreement with the U.S. underwriters for sale of the shares in the U.S. and Canada for whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Chase Securities Inc., J.P. Morgan Securities Inc., CIBC World Markets Corp., SG Cowen Securities Corporation and First Union Securities, Inc. are acting as U.S. representatives. Subject to the terms and conditions in the U.S. purchase agreement, and concurrently with the sale of shares to the international managers pursuant to the international agreement, we have agreed to sell to the U.S. underwriters, and the U.S. underwriters severally have agreed to purchase shares from us. The initial public offering price per share and the total underwriting discount per share are identical under the international purchase agreement and the U.S. purchase agreement.
The international managers and the U.S. underwriters and have agreed to purchase all of the shares sold under the international and U.S. purchase agreements if any of these shares are purchased. If an underwriter defaults, the international and U.S. purchase agreements provide that the purchase commitments of the nondefaulting underwriters may be increased or the purchase agreements may be terminated. The closings for the sale of shares to be purchased by the international managers and the U.S. underwriters are conditioned on one another.
We have agreed to indemnify the international managers and the U.S. underwriters against certain liabilities, including liabilities under the Securities Act, or to contribute to payments the international managers and the U.S. underwriters may be required to make in respect of those liabilities.
The underwriters are offering the shares, subject to prior sale, when, as, and if issued to and accepted by them, subject to approval of legal matters by their counsel, including the validity of the shares, and other conditions contained in the purchase agreements, such as the receipt by the underwriters of officer's certificates and legal opinions. The underwriters reserve the right to withdraw, cancel, or modify offers to the public and to reject orders in whole or in part.
Commissions and Discounts
The lead managers have advised us that the international managers propose initially to offer the shares to the public at the initial public offering price on the cover page of this prospectus and to dealers at that price
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less a concession not in excess of $ per share. The international managers may allow, and the dealers may reallow, a discount not in excess of $ per share to other dealers. After the initial public offering, the public offering price, concession and discount may be changed.
The following table shows the public offering price, underwriting discount and proceeds before our expenses. The information assumes either no exercise or full exercise by the international managers and the U.S. underwriters of their over-allotment options.
Without Per Share Option With Option --------- ------- ----------- Public offering Price... $ $ $ Underwriting Discount... $ $ $ Proceeds before expenses to Select Medical...... $ $ $ |
The expenses of the offering, not including the underwriting discount, are estimated at $1.5 million and are payable by us.
Over-Allotment Option
We have granted options to the international managers to purchase up to additional shares at the public offering price less the underwriting discount. The international managers may exercise these options for 30 days from the date of this prospectus solely to cover any overallotments. If the international managers exercise these options, each will be obligated, subject to conditions contained in the purchase agreements, to purchase a number of additional shares proportionate to that international manager's initial amount reflected in the above table.
We have also granted options to the U.S. underwriters, exercisable for 30 days from the date of this prospectus, to purchase up to additional shares to cover any over-allotments on terms similar to those granted to the international managers.
Intersyndicate Agreement
The international managers and the U.S. underwriters have entered into an intersyndicate agreement that provides for the coordination of their activities. Under the intersyndicate agreement, the international managers and the U.S. underwriters may sell shares to each other for purposes of resale at the initial public offering price, less an amount not greater than the selling concession. Under the intersyndicate agreement, the international managers and any dealer to whom they sell shares will not offer to sell or sell shares to persons who are U.S. or Canadian persons or to persons they believe intend to resell to persons who are U.S. or Canadian persons, except in the case of transactions under the intersyndicate agreement. Similarly, the U.S. underwriters and any dealer to whom they sell shares will not offer to sell or sell shares to non-U.S. persons or non-Canadian persons or to persons they believe intend to resell to non-U.S. or non-Canadian persons, except in the case of transactions under the intersyndicate agreement.
Reserved Shares
At our request, the underwriters have reserved for sale, at the initial public offering price, up to 5% of the shares offered for sale in the offering for sale to some of our directors, officers, employees, business associates, and related persons. If these persons purchase reserved shares, this will reduce the number of shares available for sale to the general public. Any reserved shares that are not orally confirmed for purchase within one day of the pricing of the offering will be offered by the underwriters to the general public on the same terms as the other shares offered by this prospectus. There is no expectation or requirement that any person who purchases reserved shares will refer, either directly or indirectly, any patients to our specialty acute care hospitals or outpatient rehabilitation clinics.
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No Sales of Similar Securities
We and our executive officers and directors and substantially all of our existing stockholders have agreed, with exceptions, not to sell or transfer any common stock for 180 days after the date of this prospectus without first obtaining the written consent of Merrill Lynch. Specifically, we and these other individuals have agreed not to directly or indirectly
. offer, pledge, sell or contract to sell any common stock;
. sell any option or contract to purchase any common stock;
. purchase any option or contract to sell any common stock;
. grant any option, right or warrant for the sale of any common stock;
. lend or otherwise dispose of or transfer any common stock;
. request or demand that we file a registration statement related to the common stock; or
. enter into any swap or other agreement that transfers, in whole or in part, the economic consequence of ownership of any common stock whether any such swap or transaction is to be settled by delivery of shares or other securities, in cash or otherwise.
This lockup provision applies to common stock and to securities convertible into or exchangeable or exercisable for or repayable with common stock. It also applies to common stock owned now or acquired later by the person executing the agreement or for which the person executing the agreement later acquires the power of disposition. This lockup provision does not limit our ability to grant options to purchase common stock under stock option plans or to issue common stock under our employee stock purchase plan.
Nasdaq National Market Listing
We expect the shares to be approved for quotation on the Nasdaq National Market, subject to notice of issuance, under the symbol "SLMC."
Before the offering, there has been no public market for our common stock. The initial public offering price was determined through negotiations among us and the U.S. representatives and lead managers. In addition to prevailing market conditions, the factors to be considered in determining the initial public offering price are
. the valuation multiples of publicly traded companies that the U.S. representatives and the lead managers believe to be comparable to us;
. our financial information;
. the history of, and the prospects for, us and the industry in which we compete;
. an assessment of our management, its past and present operations, and the prospects for, and timing of, our future revenues;
. the present state of our development; and
. the above factors in relation to market values and various valuation measures of other companies engaged in activities similar to ours.
An active trading market for the shares may not develop. It is also possible that after the offering the shares will not trade in the public market at or above the initial public offering price.
The underwriters do not expect to sell more than 5% of the shares in the aggregate to accounts over which they exercise discretionary authority.
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Price Stabilization, Short Positions and Penalty Bids
Until the distribution of the common shares is completed, SEC rules may limit the underwriters from bidding for or purchasing our common shares. However, the representatives may engage in transactions that stabilize the price of the common shares, such as bids or purchases that peg, fix or maintain that price.
The underwriters may purchase and sell the common shares in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the sale by the underwriters of a greater number of shares than they are required to purchase in the offering. "Covered" short sales are sales made in an amount not greater than the underwriters' option to purchase additional shares from the issuer in the offering. The underwriters may close out any covered short position by either exercising their option to purchase additional shares or purchasing shares in the open market. In determining the source of shares to close out the covered short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. "Naked" short sales are any sales in excess of such option. The underwriters must close out any naked short position by purchasing shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there may be downward pressure on the price of the common stock in the open market after pricing that could adversely affect investors who purchase in the offering. Stabilizing transactions consist of various bids for or purchases of common stock made by the underwriters in the open market prior to the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the representatives have repurchased shares sold by or for the account of such underwriter in stabilizing or short covering transactions.
Similar to other purchase transactions, the underwriters' purchases to cover the syndicate short sales may have the effect of raising or maintaining the market price of the common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of the common shares may be higher than the price that might otherwise exist in the open market.
Neither we nor any of the underwriters make any representation or prediction as to the direction or magnitude of any effect that the transactions described above may have on the price of the common stock. In addition, neither we nor any of the representatives make any representation that the representatives will engage in these transactions or that these transactions, once commenced, will not be discontinued without notice.
UK Selling Restrictions
Each international manager has agreed that
. it has not offered or sold and will not offer or sell any shares of common stock to persons in the United Kingdom, except to persons whose ordinary activities involve them in acquiring, holding, managing, or disposing of investments (as principal or agent) for the purposes of their businesses or otherwise in circumstances which do not constitute an offer to the public in the United Kingdom with the meaning of the Public Offers of Securities Regulations 1995;
. it has complied and will comply with all applicable provisions of the Financial Services Act 1986 with respect to anything done by it in relation to the common stock in, from, or otherwise involving the United Kingdom; and
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. it has only issued or passed on and will only issue or pass on in the United Kingdom any document received by it in connection with the issuance of common stock to a person who is of a kind described in Article 11(3) of the Financial Services Act 1986 (Investment Advertisements)(Exemptions) Order 1996 as amended by the Financial Services Act of 1986 (Investment Advertisements)(Exemptions) Order 1997 or is a person to whom such document may otherwise lawfully be issued or passed on.
No Public Offering Outside The United States
No action has been or will be taken in any jurisdiction (except in the United States) that would permit a public offering of the shares of common stock, or the possession, circulation, or distribution of this prospectus or any other material relating to our company, or shares of our common stock in any jurisdiction where action for that purpose is required. Accordingly, the shares of our common stock may not be offered or sold, directly or indirectly, and neither this prospectus nor any other offering materials or advertisements in connection with the shares of common stock may be distributed or published, in or from any country or jurisdiction except in compliance with any applicable rules and regulations or any such country or jurisdiction.
Purchasers or the shares offered by this prospectus may be required to pay stamp taxes and other charges in accordance with the laws and practices of the country of purchase in addition to the offering price on the cover page of this prospectus.
NASD Regulations
It is anticipated that more than ten percent of the proceeds of the offering will be applied to pay down debt obligations owed to affiliates of Chase Securities Inc., CIBC World Markets Corp., First Union Securities, Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated and SG Cowen Securities Corporation. Because more than ten percent of the net proceeds of the offering may be paid to members or affiliates of members of the National Association of Securities Dealers, Inc. participating in the offering, the offering will be conducted in accordance with NASD Conduct Rule 2710(c)(8). This rule requires that the public offering price of an equity security be no higher than the price recommended by a qualified independent underwriter which has participated in the preparation of the registration statement and performed its usual standard of due diligence with respect to that registration statement. has agreed to act as qualified independent underwriter for the offering. The price of the shares will be no higher than that recommended by .
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking and other commercial dealings in the ordinary course of business with us. They have received customary fees and commissions for these transactions. In particular, an affiliate of Chase Securities Inc. acts as administrative agent, and affiliates of Chase Securities Inc., CIBC World Markets Corp., First Union Securities, Inc., J.P. Morgan Securities Inc., Merrill Lynch, Pierce Fenner & Smith Incorporated and SG Cowen Securities Corporation are lenders under our credit facility. We will use a portion of the proceeds from this offering to repay amounts outstanding under this credit facility.
Internet Delivery of Prospectus
Merrill Lynch will be facilitating Internet distribution for this offering to certain of its internet subscription customers. Merrill Lynch intends to allocate a limited number of shares for sale to its online brokerage customers. An electronic prospectus is available on the website maintained by Merrill Lynch. Other than the prospectus in electronic format, the information on the Merrill Lynch website relating to this offering is not a part of this prospectus.
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Through and including , 2001 (the 25th day after the date of this prospectus), all dealers effecting transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to the unsold allotments or subscriptions.
Shares
Common Stock
Merrill Lynch International
Chase H&Q
J.P. Morgan & Co.
CIBC World Markets
SG Cowen
First Union Securities, Inc.
, 2000
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution
The expenses to be paid by Select Medical Corporation in connection with the distribution of the securities being registered, other than underwriting discounts and commissions, are as follows:
Amount (1) ---------- Securities and Exchange Commission Registration Fee............ $ 52,800 NASD Filing Fee................................................ 20,500 Nasdaq National Market Listing Fee............................. 95,000 Accounting Fees and Expenses................................... 400,000 Blue Sky Fees and Expenses..................................... 10,000 Legal Fees and Expenses........................................ 350,000 Transfer Agent and Registrar Fees and Expenses................. 25,000 Printing and Engraving Expenses................................ 250,000 Miscellaneous Fees and Expenses................................ 296,700 ---------- Total...................................................... $1,500,000 ========== |
Item 14. Indemnification of Directors and Officers
Under Section 145 of the General Corporate Law of the State of Delaware, Select Medical Corporation has broad powers to indemnify its directors and officers against liabilities they may incur in such capacities, including liabilities under the Securities Act of 1933, as amended (the "Securities Act"). Select Medical Corporation's bylaws (Exhibit 3.2) also provide for mandatory indemnification of its directors and executive officers, and permissive indemnification of its employees and agents, to the fullest extent permissible under Delaware law.
Select Medical Corporation's certificate of incorporation (Exhibit 3.1) provides that the liability of its directors for monetary damages shall be eliminated to the fullest extent permissible under Delaware law. Pursuant to Delaware law, this includes elimination of liability for monetary damages for breach of the directors' fiduciary duty of care to Select Medical Corporation and its stockholders. These provisions do not eliminate the directors' duty of care and, in appropriate circumstances, equitable remedies such as injunctive or other forms of non-monetary relief will remain available under Delaware law. In addition, each director will continue to be subject to liability for breach of the director's duty of loyalty to Select Medical Corporation, for acts or omissions not in good faith or involving intentional misconduct, for knowing violations of law, for any transaction from which the director derived an improper personal benefit, and for payment of dividends or approval of stock repurchases or redemptions that are unlawful under Delaware law. The provision also does not affect a director's responsibilities under any other laws, such as the federal securities laws or state or federal environmental laws.
Select Medical Corporation maintains a policy of directors' and officers' liability insurance that insures the Company's directors and officers against the cost of defense, settlement or payment of a judgment under certain circumstances.
The U.S. and International purchase agreements (Exhibits 1.1 and 1.2) provide for indemnification by the underwriters of Select Medical Corporation and its officers and directors for certain liabilities arising under the Securities Act or otherwise.
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Item 15. Recent Sales of Unregistered Securities
In the past three years, the Registrant has issued and sold unregistered securities in the transactions described below.
In January of 1998, the Registrant sold to two employees 215,170.5 shares of common stock, par value $.01 per share ("Common Stock"), and 15.63 shares of Class A Preferred Stock for an aggregate purchase price of $ .
On February 9, 1998, the Registrant sold to certain investors and employees 11,600.01 shares of Class A Preferred Stock for an aggregate purchase price of $ .
On April 29, 1998, the Registrant sold to certain investors and employees 8,200 shares of Class A Preferred Stock for an aggregate purchase price of $ .
On June 3, 1998, the Registrant sold to certain investors and employees 13,000.03 shares of Class A Preferred Stock for an aggregate purchase price of $ .
On June 30, 1998, the Registrant sold to certain investors and employees 3,999.98 shares of Class A Preferred Stock for an aggregate purchase price of $ .
On July 20, 1998 the Registrant sold to Rocco A. Ortenzio 244,510.50 shares of Common Stock for an aggregate purchase price of $ .
On October 21, 1998 the Registrant sold to certain investors and employees 10,800.43 shares of Class A Preferred Stock for an aggregate purchase price of $ .
On November 9, 1998 the Registrant sold to certain employees 379,370 shares of Common Stock for an aggregate purchase price of $ .
On December 15, 1998, in connection with the Intensiva Healthcare Corporation acquisition, the Registrant issued an aggregate of 21,224,489 shares of its common stock, par value $.01 per share for a price of $ per share. Of this amount, 8,044,998 shares were purchased by affiliates of Welsh, Carson, Anderson & Stowe (other than WCAS Capital Partners III, L.P.), 4,260,714 shares were purchased by affiliates of GTCR Golder Rauner, LLC and 4,067,857 shares were purchased by Thoma Cressey Equity Partners. The aggregate amount issued also included 2,653,060 shares of common stock that were purchased by WCAS Capital Partners III, L.P. and a 10% Senior Subordinated Note for an aggregate purchase price of $35 million. WCAS Capital Partners III, L.P. then purchased an additional $30 million principal amount of Senior Subordinated Notes from the Registrant for $30 million in cash. These 10% Senior Subordinated Notes are due December 15, 2008.
On January 31, 1999 the Registrant sold to certain investors and employees 222,859 shares of Common Stock for an aggregate purchase price of $ .
On August 20, 1999 the Registrant sold to Martin F. Jackson 74,286 shares of Common Stock for an aggregate purchase price of $ . The Registrant loaned Mr. Jackson $120,000 to purchase these shares.
Pursuant to the Warrant Agreement dated June 30, 1998, as amended on
February 9, 1999 and amended and restated on November 19, 1999, the Registrant
has issued warrants to purchase shares of Common Stock to Golder Thoma, Rocco
A. Ortenzio, Robert A. Ortenzio and two affiliates of Welsh Carson. On January
31, 2000 and for each three months thereafter, the Registrant has issued or
will issue additional warrants to each of these parties, for so long as any of
the Registrant's loans are guaranteed or supported by these parties. Under this
agreement to date, the Registrant has issued warrants to purchase
1,254,392.50 common shares. All warrants expire on June 30, 2003 and are
exercisable at $ per share.
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On November 19, 1999, in connection with the NovaCare acquisition, the Registrant issued an aggregate of 16,000,000 shares of Class B Preferred Stock at a price of $ per share. Of this amount, 7,531,424 shares were purchased by affiliates of Welsh Carson, 1,983,333 shares were purchased by affiliates of Golder Thoma and 5,950,000 shares were purchased by Thoma Cressey. At the same time, WCAS Capital Partners III, L.P. purchased 1,667,000 shares of Common Stock and a 10% Senior Subordinated Note for an aggregate purchase price of $25 million. The Note is due November 19, 2009. However if the Registrant repays the principal amount and all unpaid and accrued interest in full by November 19, 2001, WCAS Capital Partners III, L.P. will transfer 416,750 Common Shares to the Registrant.
On February 29, 2000 the Registrant sold to certain employees 242,514 shares of Common Stock for an aggregate purchase price of $ .
On June 20, 2000 the Registrant sold to certain employees 50,000 shares of Common Stock for an aggregate purchase price of $ .
Employees of the Company have exercised options to purchase 6,100 shares of our Common Stock under our 1997 Stock Option Plan for an aggregate exercise price of $ .
The sale and issuance of securities in the transactions described above were exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act or Regulation D promulgated thereunder as transactions by an issuer not involving a public offering, where the purchasers were sophisticated investors who represented their intention to acquire securities for investment only and not with a view to distribution and received or had access to adequate information about the Registrant.
Appropriate restrictive legends were affixed to the stock certificates issued in the above transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. No underwriters were employed in any of the above transactions.
Item 16. Exhibits and Financial Statement Schedules
(a) Exhibits
Exhibit Number Document ------- -------- 1.1* Form of U.S. Purchase Agreement. 1.2* Form of International Purchase Agreement. 2.1 Stock Purchase Agreement dated as of May 29, 1998 by and among Select Medical Corporation, Beverly Enterprises, Inc. and American Transitional Hospitals, Inc. 2.2 Agreement and Plan of Merger dated as of November 9, 1998 by and among Select Medical Corporation, Select Medical of Mechanicsburg, Inc. and Intensiva HealthCare Corporation. 2.3 Stock Purchase Agreement dated as of October 1, 1999 by and among Select Medical Corporation, NC Resources, Inc. and NovaCare, Inc. 2.4 First Amendment dated as of November 14, 1999 to Stock Purchase Agreement dated as of October 1, 1999 by and among Select Medical Corporation, NC Resources, Inc. and NovaCare, Inc. 3.1* Restated Certificate of Incorporation. 3.2* Amended and Restated Bylaws. 4.1 10% Senior Subordinated Note due December 15, 2008, dated as of December 15, 1998. 4.2 10% Senior Subordinated Note due December 15, 2008, dated as of February 9, 1999. |
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Exhibit Number Document ------- -------- 5.1* Opinion of Dechert as to the legality of the shares of Common Stock being registered. 10.1 Registration Agreement dated as of February 5, 1997 by and among Select Medical Corporation; Golder, Thoma, Cressey, Rauner Fund V, L.P.; Welsh, Carson, Anderson & Stowe VII, L.P., Rocco A. Ortenzio and Robert A. Ortenzio. 10.2 Amendment No. 1 dated as of December 15, 1998 to Registration Agreement dated as of February 5, 1997 by and among Select Medical Corporation; Golder, Thoma, Cressey, Rauner Fund V, L.P.; Welsh, Carson, Anderson & Stowe VII, L.P., Rocco A. Ortenzio and Robert A. Ortenzio. 10.3 Amendment No. 2 dated as of November 19, 1999 to Registration Agreement dated as of February 5, 1997 by and among Select Medical; Golder, Thoma, Cressey, Rauner Fund V, L.P.; Welsh, Carson, Anderson & Stowe VII, L.P., Rocco A. Ortenzio and Robert A. Ortenzio. 10.4 Credit Agreement dated as of September 22, 2000 among Select Medical Corporation, Canadian Back Institute Limited, The Chase Manhattan Bank, The Chase Manhattan Bank of Canada, Banc of America Securities, LLC and CIBC, Inc. 10.5 Securities Purchase Agreement dated as of December 15, 1998 by and among Select Medical Corporation; Welsh, Carson, Anderson & Stowe VII, L.P.; WCAS Capital Partners III, L.P.; GTCR Fund VI, L.P., Golder, Thoma, Cressey, Rauner Fund V, L.P.; GTCR Associates V, Thoma Cressey Fund VI, L.P.; GTCR Associates VI; and GTCR VI Executive Fund, L.P. 10.6 Securities Purchase Agreement dated as of November 19, 1999 by and among Select Medical Corporation; Welsh, Carson, Anderson & Stowe VII, L.P.; WCAS Capital Partners III, L.P.; Thoma Cressey Fund VI, L.P.; and GTCR Fund VI, L.P. 10.7 Professional Services Agreement dated as of November 19, 1999 by and among Select Medical Corporation; Golder, Thoma, Cressey, Rauner, Inc.; Thoma Cressey Equity Partners, Inc.; and WCA Management Corporation. 10.8 Employment Agreement dated as of December 16, 1998 between Select Medical Corporation and David W. Cross. 10.9 Other Senior Management Agreement dated as of June 2, 1997 between Select Medical Corporation and Frank Fritsch. 10.10 Change of Control Agreement dated as of March 1, 2000 between Select Medical Corporation and S. Frank Fritsch. 10.11 Change of Control Agreement dated as of March 1, 2000 between Select Medical Corporation and Martin F. Jackson. 10.12 Employment Agreement dated as of December 21, 1999 between RehabClinics, Inc. and Edward R. Miersch. 10.13 Change of Control Agreement dated as of March 1, 2000 between Select Medical Corporation and Edward R. Miersch. 10.14 Employment Agreement dated as of March 1, 2000 between Select Medical Corporation and Robert A. Ortenzio. 10.15 Amendment dated as of August 8, 2000 to Employment Agreement dated as of March 1, 2000 between Select Medical Corporation and Robert A. Ortenzio. 10.16 Employment Agreement dated as of March 1, 2000 between Select Medical Corporation and Rocco A. Ortenzio. 10.17 Amendment dated as of August 8, 2000 to Employment Agreement dated as of March 1, 2000 between Select Medical Corporation and Rocco A. Ortenzio. 10.18 Split Dollar Agreement dated as of October 6, 2000 between Select Medical Corporation, Michael E. Salerno and Rocco A. Ortenzio. |
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Exhibit Number Document ------- -------- 10.19 Employment Agreement dated as of March 1, 2000 between Select Medical Corporation and Patricia A. Rice. 10.20 Amendment dated as of August 8, 2000 to Employment Agreement dated as of March 1, 2000 between Select Medical Corporation and Patricia A. Rice. 10.21 Other Senior Management Agreement dated as of March 28, 1997 between Select Medical Corporation and Michael E. Tarvin. 10.22 Change of Control Agreement dated as of March 1, 2000 between Select Medical Corporation and Michael E. Tarvin. 10.23 Employment Agreement dated as of May 22, 2000 between Select Medical Corporation and LeRoy S. Zimmerman. 10.24 Office Lease Agreement dated as of May 18, 1999 between Select Medical Corporation and Old Gettysburg Associates I. 10.25 First Addendum dated June 1999 to Office Lease Agreement dated as of May 18, 1999 between Select Medical Corporation and Old Gettysburg Associates I. 10.26 Second Addendum dated as of February 1, 2000 to Office Lease Agreement dated as of May 18, 1999 between Select Medical Corporation and Old Gettysburg Associates I. 10.27 Office Lease Agreement dated as of June 17, 1999 between Select Medical Corporation and Old Gettysburg Associates III. 10.28 Equipment Lease Agreement dated as of April 1, 1997 between Select Medical Corporation and Select Capital Corporation. 10.29 First Amendment dated as of December 8, 1997 to Equipment Lease Agreement dated as of April 1, 1997 between Select Medical Corporation and Select Capital Corporation. 10.30 Second Amendment dated as of January 28, 2000 to Equipment Lease Agreement dated as of April 1, 1997 between Select Medical Corporation and Select Capital Corporation. 10.31* Amended and Restated 1997 Stock Option Plan. 10.32 Second Amended and Restated Warrant Agreement dated as of November 19, 1999 by and among Select Medical Corporation, Welsh, Carson, Anderson & Stowe, VII, L.P., WCAS Capital Partners III, L.P., Golder, Thoma, Cressey, Rauner Fund V, L.P., Mr. Rocco A. Ortenzio and Mr. Robert A. Ortenzio. 10.33 First Amendment dated as of October 15, 2000 to Employment Agreement dated as of December 16, 1998 between Select Medical Corporation and David W. Cross 10.34 Amended and Restated Senior Management Agreement dated as of May 7, 1997 between Select Medical Corporation, John Ortenzio, Martin Ortenzio, Select Investments II, Select Partners, L.P. and Rocco Ortenzio. 10.35 Amendment No. 1 dated as of January 1, 2000 to Amended and Restated Senior Management Agreement dated May 7, 1997 between Select Medical Corporation and Rocco Ortenzio. 10.36* Naming, Promotional and Sponsorship Agreement dated as of October 1, 1997 between NovaCare, Inc. and the Philadelphia Eagles Limited Partnership, assumed by Select Medical Corporation in a Consent and Assumption Agreement dated November 19, 1999 by and among NovaCare, Inc., Select Medical Corporation and the Philadelphia Eagles Limited Partnership. 21.1 Subsidiaries of Select Medical Corporation. 23.1 Consent of PricewaterhouseCoopers LLP. 23.2 Consent of Ernst & Young LLP. |
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23.3 Consent of KPMG LLP. 23.4* Consent of Dechert, included in Exhibit 5.1. 23.5 Report of Independent Accountants 23.6 Consent of PriceWaterhouseCoopers LLP 24.1 Power of Attorney, included on the signature page hereof. 27.1 Financial Data Schedule. |
(b) Financial Statement Schedule
Report of Independent Accountants on Financial Statement Schedule
To the Board of Directors
of Select Medical Corporation:
Our audits of the consolidated financial statements referred to in our report dated October 26, 2000 appearing in this Registration Statement on Form S 1 also included an audit of the financial statement schedule listed in Item 16(b) of this Form S 1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP Harrisburg, Pennsylvania October 27, 2000 |
Schedule II-Valuation and Qualifying Accounts
Balance Balance at Charged to at Beginning Cost and Acquisi End of Description of Year Expenses tions (A) Write off Year Year ended December 31, 1999 allowance for doubtful accounts $ 15,701 $ 8,858 $ 53,989 $ (9,056) $69,492 Year ended December 31, 1998 allowance for doubtful accounts $ 773 $ 4,014 $ 16,431 $ (5,517) $15,701 Year ended December 31, 1997 allowance for doubtful accounts $ - $ 179 $ 722 $ (128) $ 773 |
(A) Represents opening balance sheet reserves resulting from purchase accounting entries.
None.
Item 17. Undertakings
(a) The undersigned Registrant hereby undertakes to provide the underwriters at the closing specified in the purchase agreements, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue.
(c) The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
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SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Philadelphia, Commonwealth of Pennsylvania on the 27th day of October, 2000.
Select Medical Corporation
/s/ Robert A. Ortenzio By: _________________________________ Robert A. Ortenzio President and Chief Operating Officer |
POWER OF ATTORNEY
KNOW BY ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Rocco A. Ortenzio, Robert A. Ortenzio and Michael E. Tarvin, and each of them, as his true and lawful attorneys-in- fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement and sign any registration statement for the same offering covered by the Registration Statement that is to be effective upon filing pursuant to Rule 462 promulgated under the Securities Act of 1933, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in- fact and agents, or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities and on the dates indicated.
Signature Title Date --------- ----- ---- /s/ Rocco A. Ortenzio Chairman, Chief Executive October 27, 2000 ______________________________________ Officer (principal Rocco A. Ortenzio executive officer) /s/ Robert A. Ortenzio Director, Chief Operating October 27, 2000 ______________________________________ Officer Robert A. Ortenzio /s/ Martin F. Jackson Chief Financial Officer October 27, 2000 ______________________________________ (principal financial Martin F. Jackson officer) /s/ Scott A. Romberger Controller (principal October 27, 2000 ______________________________________ accounting officer) Scott A. Romberger /s/ Russell L. Carson Director October 27, 2000 ______________________________________ |
Signature Title Date --------- ----- ---- /s/ Bryan C. Cressey Director October 27, 2000 ______________________________________ Bryan C. Cressey /s/ Donald J. Edwards Director October 27, 2000 ______________________________________ Donald J. Edwards /s/ Meyer Feldberg Director October 27, 2000 ______________________________________ Meyer Feldberg /s/ LeRoy S. Zimmerman Director October 27, 2000 ______________________________________ LeRoy S. Zimmerman |
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EXHIBIT 2.1
Execution Copy
STOCK PURCHASE AGREEMENT
By and Among
SELECT MEDICAL CORPORATION
As Buyer
AND
BEVERLY ENTERPRISES, INC.
As Seller
AND
AMERICAN TRANSITIONAL HOSPITALS, INC.
Dated as of May 29, 1998
TABLE OF CONTENTS
Tab --- ARTICLE I THE TRANSACTION........................................................... 2 1.1. Sale and Purchase of Stock and Notes................................ 2 1.2. Purchase Price; Payment; Adjustment................................. 2 1.3. Closing............................................................. 3 ARTICLE II REPRESENTATIONS AND WARRANTIES OF SELLER AND ATH......................... 4 2.1. Organization........................................................ 4 2.2. Capitalization and Ownership; Power and Authority................... 4 2.3. Subsidiaries........................................................ 5 2.4. Qualification; Location of Business and Assets...................... 5 2.5. Authorization and Enforceability.................................... 5 2.6. No Violation of Laws or Agreements.................................. 6 2.7. Financial Statements................................................ 6 2.8. No Undisclosed Liabilities.......................................... 7 2.9. No Changes.......................................................... 7 2.10. Taxes............................................................... 9 2.11. Leasehold Improvements, Inventory and Equipment..................... 11 2.12. Accounts Receivable................................................. 11 2.13. No Pending Litigation or Proceedings................................ 11 2.14. Contracts; Compliance............................................... 12 2.15. Compliance With Laws................................................ 13 2.16. Consents............................................................ 15 2.17. Title............................................................... 15 |
2.18. Real Estate......................................................... 15 2.19. Transactions with Related Parties................................... 16 2.20. Condition of Assets................................................. 16 2.21. Compensation Arrangements; Bank Accounts; Officers and Directors.... 17 2.22. Labor Relations..................................................... 17 2.23. Insurance........................................................... 17 2.24. Patents and Intellectual Property Rights............................ 18 2.25. Employee Retirement Income Security Act of 1974, as amended......... 19 2.26. Brokerage........................................................... 21 2.27. Indebtedness........................................................ 21 2.28. Third-Party Payment Contracts....................................... 21 2.29. Billing; Gratuitous Payments........................................ 21 2.30. Reimbursement Matters............................................... 21 2.31. Federal Health Care Programs........................................ 22 2.32. No Criminal Proceedings............................................. 23 2.33. PRO Denials......................................................... 23 ARTICLE III REPRESENTATIONS AND WARRANTIES OF BUYER................................. 23 3.1. Organization........................................................ 23 3.2. Power and Authority................................................. 23 3.3. Authorization and Enforceability.................................... 23 3.4. Brokerage........................................................... 24 3.5. No Violation of Laws or Agreements.................................. 24 3.6. No Pending Litigation or Proceedings................................ 24 ARTICLE IV CERTAIN OBLIGATIONS...................................................... 24 |
4.1. Conduct of Business Pending Closing................................. 24 4.2. Insurance........................................................... 26 4.3. Fulfillment of Agreements........................................... 27 4.4. Access, Information and Documents................................... 27 4.5. Resignations........................................................ 27 4.6. No Transfers or Pledges of Stock.................................... 27 4.7. Lender and Lessor Consents.......................................... 28 4.8. Delivery of May Financial Statements................................ 28 4.9. Information Systems Support......................................... 28 4.10. Negotiations........................................................ 28 4.11. Assumed Debt........................................................ 29 4.12. Buyer's Knowledge................................................... 29 4.13. Delivery of Schedules............................................... 29 4.14. Delivery of Exhibits................................................ 29 4.15. Receivable Reserve.................................................. 30 4.16. Pharmerica Agreements............................................... 30 4.17. Medicare Cost Reports............................................... 30 ARTICLE V CONDITIONS TO CLOSING; TERMINATION........................................ 31 5.1. Conditions Precedent to Obligations of Buyer........................ 31 5.2. Conditions Precedent to the Obligations of the Seller............... 33 5.3. Termination......................................................... 34 ARTICLE VI CERTAIN ADDITIONAL COVENANTS............................................. 35 6.1. Costs, Expenses and Taxes........................................... 35 6.2. Indemnification By the Seller....................................... 35 |
6.3. Indemnification by Buyer............................................ 36 6.4. Limitations and Conditions of Indemnification....................... 36 6.5. Indemnification Procedures.......................................... 37 6.6. Payment of Indemnification.......................................... 39 6.7. No Right of Contribution or Subrogation............................. 39 6.8. Hart-Scott-Rodino Antitrust Improvements Act of 1976................ 39 6.9. Confidentiality..................................................... 39 6.10. Cooperation......................................................... 40 6.11. Books and Records................................................... 40 6.12. Employee Matters.................................................... 41 6.13. Intellectual Property............................................... 42 ARTICLE VII TAX MATTERS............................................................. 42 7.1. Termination of Tax Sharing.......................................... 42 7.2. Seller's Taxes...................................................... 42 7.3. Buyer's Taxes....................................................... 43 7.4. Tax Cooperation..................................................... 43 7.5. Indemnification..................................................... 44 7.6. Notification of Proceedings; Control................................ 44 7.7. Tax Effect of Payments.............................................. 45 ARTICLE VIII CERTAIN DEFINITIONS.................................................... 45 8.1. Certain Definitions................................................. 45 ARTICLE IX MISCELLANEOUS............................................................ 46 9.1. Nature and Survival of Representations.............................. 46 9.2. Notices............................................................. 46 |
9.3. Successors and Assigns.............................................. 48 9.4. Governing Law....................................................... 48 9.5. Headings............................................................ 48 9.6. Counterparts........................................................ 49 9.7. Further Assurances.................................................. 49 9.8. Amendment and Waiver................................................ 49 9.9. Entire Agreement.................................................... 49 9.10. Risk of Loss........................................................ 49 9.11. Post-Closing Mergers................................................ 49 |
Schedule 2.2 Capitalization and Ownership Schedule 2.4 States of Qualification; Location of Business and Assets Schedule 2.6 Violations of Laws or Agreements Schedule 2.7 Financial Statements Schedule 2.8 No Undisclosed Liabilities Schedule 2.9 Changes Since Balance Sheet Date Schedule 2.9(e) Bonus, Severance and Similar Payments Schedule 2.9(f) New Hospitals Schedule 2.10 Taxes Schedule 2.12 List and Aging of Accounts Receivable Schedule 2.13 Pending Litigation or Proceedings Schedule 2.14 Contracts; Unfilled Firm Purchase Orders Schedule 2.15(b) Approvals Schedule 2.15(c) Certain Exceptions; Medicare and/or Medicaid Provider Number Schedule 2.15(d) Violation of Law, Permits and Licenses Schedule 2.15(g) Accredited Hospitals Schedule 2.16 Consents Schedule 2.17 Permitted Liens And Encumbrances Schedule 2.18 Real Estate Schedule 2.19 Transactions With Related Parties Schedule 2.20 Computer Software -vi- |
Schedule 2.21 Compensation Arrangements, Bank Accounts and Officers and Directors Schedule 2.22 Labor Relations Schedule 2.23 Insurance Schedule 2.24 Patents, Trademarks, Etc. Schedule 2.25 Employee Benefit Plans Schedule 2.28 Third-party Payment Contracts Schedule 2.29 Billing; Gratuitous Payments Schedule 2.30 Reimbursement Matters Schedule 2.31 Federal Health Care Programs Schedule 2.33 Pro Denials Schedule 3.2 Capitalization and Ownership Schedule 3.6 Pending Litigation or Proceedings Schedule 4.6 Transfers and Pledges of Stock Schedule 4.7 Required Lender and Lessor Consents Schedule 8.1(a) Accounting Principles |
Exhibit A Hospitals Exhibit B Subsidiaries Exhibit C-1 Opinion of Seller's General Counsel Exhibit C-2 Opinion of Latham & Watkins Exhibit D Opinion of Dechert Price & Rhoads Exhibit E Description of Transition Services Exhibit F Joint Venture Agreement Exhibit G Noncompete Agreement |
This is a Stock Purchase Agreement (the "Agreement") dated as of May 29, 1998, by and among SELECT MEDICAL CORPORATION, a Delaware corporation ("Buyer"), BEVERLY ENTERPRISES, INC., a Delaware corporation ("Seller") and AMERICAN TRANSITIONAL HOSPITALS, INC., a Delaware corporation ("ATH").
ATH is, among other things, a leading nationwide long-term care "hospital within a hospital" company providing quality long-term acute care to chronically ill patients. ATH operates the hospitals listed on Exhibit A hereto (the "Hospitals").
Seller owns all of the issued and outstanding capital stock (the "Stock") of ATH.
Seller has made certain loans and advances to ATH and the Subsidiaries (defined below) in an aggregate amount, net of loans and advances made by ATH and the Subsidiaries to Seller. At Closing, ATH and each Subsidiary, as applicable, will execute promissory notes (the "Notes") in an aggregate amount equal to such inter-company debt, as adjusted to reflect any increase or decrease through the Closing Date ("Intercompany Debt").
ATH, ATH Heights, Inc. or Synergos, Inc. owns all of the issued and outstanding capital stock (the "Subsidiary Stock") of the corporations identified on Exhibit B (the "Subsidiaries") as noted therein.
Buyer desires to purchase, and Seller desires to sell, the Stock and the Notes, on the terms and subject to the conditions set forth in this Agreement.
Following the acquisition of the Stock and Notes, Buyer intends to consummate one or more mergers pursuant to which ATH and/or the Subsidiaries which own the Hospitals will be merged with and into Buyer and/or its subsidiaries, and the corporate existence of ATH and/or the Subsidiaries shall thereupon cease and Buyer and/or its subsidiaries shall be the successors or surviving corporations. The purpose of such post-closing mergers is to fulfill Buyer's intention to acquire the assets of ATH and the Subsidiaries.
In consideration of the mutual covenants contained herein and intending to be legally bound hereby, the parties hereto agree as follows:
At the Closing referred to in Section 1.3 below, the Seller will sell and assign to Buyer, and Buyer will purchase from the Seller, the Stock and the Notes.
(b) It is the intention and agreement of the parties that the
Consolidated Net Working Capital (as hereinafter defined) of ATH and its
Subsidiaries be not less than the Consolidated Net Working Capital as of
December 31, 1997 based on the December 31, 1997 balance sheet included in the
Financial Statements (as hereinafter defined) (the "Threshold Amount"). On the
Closing Date, an estimate of the Consolidated Net Working Capital based on
financial statements as of, and for the period ending on, the last day of the
full month immediately preceding the month in which the Closing occurs (the
"Estimated Closing Consolidated Net Working Capital") shall be mutually agreed
to by Buyer and Seller. If the Estimated Closing Consolidated Net Working
Capital is less than the Threshold Amount by greater than $50,000 (the
"Designated Amount"), the Purchase Price otherwise due pursuant to Section
1.2(a) shall be reduced by the difference between the Estimated Closing
Consolidated Net Working Capital and the Threshold Amount. If the Estimated
Closing Consolidated Net Working Capital is greater than the Threshold Amount by
at least the Designated Amount, the Purchase Price otherwise due pursuant to
Section 1.2(a) shall be increased by the difference between the Estimated
Closing Consolidated Net Working Capital and the Threshold Amount. The Estimated
Closing Consolidated Net Working Capital shall be subject to final adjustment as
provided in this Section 1.2(b). Buyer shall prepare (in cooperation with
Seller) and deliver to Seller within thirty (30) days after the Closing an
unaudited consolidated balance sheet of ATH and its Subsidiaries as of Closing
(the "Closing Balance Sheet") prepared in accordance with the Accounting
Principles and applying the methodology contemplated in Section 4.15 hereof.
Buyer shall determine the Consolidated Net Working Capital using the information
reflected on the Closing Balance Sheet. The Closing Balance Sheet and Buyer's
determination of Consolidated Net Working Capital shall be subject to
verification by Seller within thirty (30) days of the date of delivery of such
information to Seller, during which period Seller shall have access to the
workpapers and such other documents and information relating to the preparation
of
the Closing Balance Sheet and the determination of the Consolidated Net Working Capital as it shall request. Within that thirty (30) day period, Seller shall notify Buyer of any dispute with respect to the Closing Balance Sheet or the determination of the Consolidated Net Working Capital. Any such dispute which cannot be resolved after good faith negotiations within thirty (30) days from the date Buyer is so notified shall be referred to a nationally recognized firm of certified public accountants who has not previously rendered services to Buyer or Seller or an affiliate thereof chosen by the certified public accountants of Seller and Buyer, whose determination on such matters shall be final and binding on the parties and whose fees and expenses shall be shared equally by the parties. For purposes of this Agreement, the final Consolidated Net Working Capital (and the calculation of the final Purchase Price) shall be reflected on (and made from) the Closing Balance Sheet as modified by resolution of the Seller and Buyer or by the aforesaid independent accounting firm, or if the Seller fails to notify Buyer in writing of any disputed items within the prescribed thirty (30) day period, the Closing Balance Sheet as previously delivered by Buyer. If the Consolidated Net Working Capital is so determined to be less than the Estimated Closing Consolidated Net Working Capital by greater than the Designated Amount, the amount of the shortfall from the Estimated Closing Consolidated Net Working Capital shall be paid by the Seller to Buyer. If the Consolidated Net Working Capital is so determined to be greater than the Estimated Closing Consolidated Net Working Capital by greater than the Designated Amount, the amount of the overage from the Estimated Closing Consolidated Net Working Capital shall be paid by Buyer to Seller. Any amount due pursuant to this Section 1.2(b) shall be paid by Seller to Buyer or Buyer to Seller, as the case may be, within ten (10) days after (i) as to any undisputed portion, the determination of such undisputed portion of such amount, and (ii) as to any disputed portion, the final determination of the Consolidated Net Working Capital (taking into account any amounts previously paid pursuant hereto). Buyer (in cooperation with Seller) shall prepare and deliver to Seller within fifteen (15) days of Closing the profit and loss statement for such month through the Closing Date; provided, however, that in the event Closing occurs on the first or last business day of a month, such profit and loss statement shall be prepared and delivered within twelve (12) days of Closing.
(c) As used herein, the "Consolidated Net Working Capital" of ATH and its Subsidiaries shall mean the excess of the "current assets" of ATH and its Subsidiaries over the "current liabilities" (excluding the current portion of long-term debt) of ATH and its Subsidiaries, on a consolidated basis, in each case as such assets and liabilities are properly accrued and reflected on the books and records of ATH and its Subsidiaries in accordance with the Accounting Principles.
such other time, date or place as the parties shall mutually agree; provided, however, such date shall not be later than July 31, 1998. The date on which Closing occurs is sometimes referred to herein as the "Closing Date."
The Seller and ATH hereby, jointly and severally, represent and warrant to Buyer as follows:
Each of Seller, ATH and the Subsidiaries is a corporation duly organized, validly existing and in good standing under the laws of the state of its incorporation. Each of Seller, ATH and the Subsidiaries has all requisite power and authority to own or lease its properties and assets as now owned or leased and to carry on its business as and where now being conducted. Copies of the articles of incorporation and bylaws of ATH and each of the Subsidiaries, as amended to date, have been delivered to Buyer, and are correct, complete and in full force and effect.
Schedule 2.2 sets forth the authorized capital stock of ATH and each of the Subsidiaries including the number of shares of common stock, par value per share, and the number of shares which are presently issued and outstanding or held in its treasury. All of such outstanding shares have been duly authorized, validly issued and are fully paid and nonassessable, were not issued in violation of the terms of any agreement or other understanding binding upon ATH or the Subsidiaries, and were issued in compliance with all applicable federal
and state securities or "blue-sky" laws and regulations. Except as set forth on Schedule 2.2, there are no outstanding options, warrants, rights, agreements, calls, commitments or demands of any character relating to the capital stock of ATH or the Subsidiaries and no securities convertible into or exchangeable for any of such capital stock. Seller (a) is the sole record and beneficial owner of the shares of Stock, free and clear of any lien, security interest, restriction, encumbrance or claim except as set forth in Schedule 2.2, and (b) has full legal right, power and authority to enter into this Agreement, transfer such Stock to Buyer in accordance with this Agreement and to perform its other obligations hereunder, without the need for the consent of any other person or entity, other than those set forth on Schedule 2.16 and as required under the HSR Act. ATH, ATH Heights, Inc. or Synergos, Inc. is the sole record and beneficial owner of the shares of Subsidiary Stock, free and clear of any lien, security interest, restriction, encumbrance or claim except as set forth in Schedule 2.2. ATH has full legal right, power and authority to enter into this Agreement and to perform its other obligations hereunder, without the need for the consent of any other person or entity, other than those set forth on Schedule 2.16 and as required under the HSR Act.
Except for the Subsidiary Stock, ATH does not, directly or indirectly, own any stock of, or any other interest in, any other corporation, partnership, joint venture or business entity.
Each of ATH and the Subsidiaries is duly qualified and in good standing as a foreign corporation, duly authorized to do business in the jurisdictions set forth on Schedule 2.4, which jurisdictions are the only jurisdictions wherein the character of the properties owned or leased or the nature of activities conducted by it makes such qualification necessary. Set forth on Schedule 2.4 is each location (specifying state, county and city) where ATH and each of the Subsidiaries (a) has a place of business, and (b) owns or leases real property.
The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of the Seller and ATH. This Agreement has been duly executed and delivered by the Seller and ATH and constitutes the legal, valid and binding obligation of the Seller and ATH, enforceable against each of them in accordance with its terms. Upon delivery to Buyer at the Closing of certificates representing the Stock in accordance herewith, Buyer will acquire good and valid title to such Stock, free and clear of all liens, claims, security interests, pledges, charges, equities, options, restrictions and encumbrances of whatever nature.
Except as set forth on Schedule 2.6, the execution and delivery of
this Agreement do not, and the consummation of the transactions contemplated by
this Agreement and the compliance with the terms, conditions and provisions of
this Agreement by the Seller and ATH, will not (a) contravene any provision of
the Seller's, ATH's or any Subsidiary's articles of incorporation or bylaws; (b)
conflict with or result in a breach of or constitute a default (or an event
which might, with the passage of time or the giving of notice or both,
constitute a default) under any of the terms, conditions or provisions of any
indenture, mortgage, loan or credit agreement or any other agreement or
instrument to which the Seller, ATH or any Subsidiary is a party or by which any
of them or any of their assets may be bound or affected, or any judgment or
order of any court or governmental department, commission, board, agency or
instrumentality, domestic or foreign, or any applicable law, rule or regulation;
(c) result in the creation or imposition of any lien, charge or encumbrance of
any nature whatsoever upon any of ATH's or any Subsidiary's assets or upon the
Stock or give to others any interests or rights therein; (d) result in the
maturation or acceleration of any liability or obligation of ATH or any
Subsidiary (or give others the right to cause such a maturation or
acceleration); or (e) result in the termination of or loss of any right (or give
others the right to cause such a termination or loss) under any agreement or
contract to which ATH or any Subsidiary is a party or by which any of them may
be bound; except with respect to those matters set forth in clauses (b), (d) and
(e) above which would not have a Material Adverse Effect.
The books of account and related records of ATH and each Subsidiary fairly present its assets, liabilities and transactions in accordance with Accounting Principles. Attached as Schedule 2.7 hereto are the following unaudited financial statements which have previously been delivered by Seller and ATH to Buyer (the "Financial Statements"):
(a) consolidated and consolidating statements of the results of operations of ATH and the Subsidiaries for the fiscal years ended December 31, 1995 through December 31, 1997, inclusive, and consolidated and consolidating balance sheets of ATH and the Subsidiaries as at each of such dates, certified by a financial officer of Seller and ATH.
(b) consolidated and consolidating statement of the results of operations of ATH and the Subsidiaries for the fiscal quarter ended March 31, 1998 and a consolidated and consolidating balance sheet of ATH and the Subsidiaries as at such date, certified by a financial officer of Seller and ATH.
The Financial Statements (i) are correct and complete and in accordance with the books and records of ATH, (ii) fairly present the consolidated financial condition, assets and liabilities of ATH and the Subsidiaries and the results of their operations for the periods covered thereby, and
(iii) have been prepared in accordance with Accounting Principles. All references in this Agreement to the "Balance Sheet" shall mean the balance sheet of ATH, as at March 31, 1998 included in the Financial Statements and all references to the "Balance Sheet Date" shall mean March 31, 1998.
Neither ATH, to its knowledge, nor any Subsidiary, to its knowledge, has any liability or obligation of any nature, whether due or to become due required to be disclosed by Accounting Principles, except (a) liabilities disclosed on the consolidated and consolidating Balance Sheet, and (b) liabilities disclosed on Schedule 2.8.
Except as disclosed on Schedule 2.9, since March 31, 1998, ATH and each of its Subsidiaries has conducted its business only in the ordinary course. Without limiting the generality of the foregoing sentence, except as disclosed on Schedule 2.9, since March 31, 1998, there has not been:
(a) any change in the financial condition, assets, liabilities, net worth or business of ATH or any Subsidiary, except changes in the ordinary course of business, none of which, individually or in the aggregate, has or is reasonably likely to have a Material Adverse Effect;
(b) any damage, destruction or loss, whether or not covered by insurance, which has or is reasonably likely to have a Material Adverse Effect;
(c) any mortgage, pledge or subjection to lien, charge or encumbrance of any kind of any of ATH's or any Subsidiary's assets, tangible or intangible, other than Permitted Encumbrances (as hereinafter defined);
(d) except for the payment of cash dividends, any declaration, setting aside or payment of a dividend or other distribution in respect of any of the capital stock of ATH or any Subsidiary, or any direct or indirect redemption, purchase or other acquisition of any capital stock of ATH or any Subsidiary or any rights to purchase such capital stock or securities convertible into or exchangeable for such capital stock;
(e) except for stay, retention, successful completion or other bonuses, or severance, parachute or similar payments which are set forth on Schedule 2.9(e) and have been or will be paid in connection with the transactions contemplated hereby and for which ATH has established a full current reserve or accrual on the Closing Balance Sheet or the payment of which is otherwise Seller's responsibility, any increase in the salaries or other compensation payable or to become payable to, or any advance (excluding advances for ordinary business expenses) or loan to, any officer, director, employee or shareholder of ATH or any Subsidiary (except normal annual merit increases made in the ordinary course of business and consistent
with past practice for employees), or any increase in, or any addition to, other benefits (including without limitation any bonus, profit-sharing, pension or other plan) to which any of ATH's or any Subsidiary's officers, directors, employees or shareholders may be entitled, or any payments to any pension, retirement, profit-sharing, bonus or similar plan except payments in the ordinary course of business and consistent with past practice made pursuant to the employee benefit plans described on Schedule 2.25, or any other payment of any kind to or on behalf of any such officer, director, employee or shareholder other than payment of base compensation and reimbursement for reasonable business expenses in the ordinary course of business;
(f) any making or authorization of any capital expenditures in excess of $50,000 individually or $200,000 in the aggregate except for capital expenditures incurred in connection with the opening of new hospitals currently under contract and which are set forth on Schedule 2.9(f);
(g) any cancellation or waiver of any right material to the operation of ATH's or any Subsidiary's business, including, without limitation, any leases, licenses or certifications relating to the operation of the Hospitals, or any cancellation or waiver of any debts or claims of substantial value or any cancellation or waiver of any debts or claims against any Related Party;
(h) any sale, transfer or other disposition of the Stock or any assets of ATH or any Subsidiary other than sales, transfers or other dispositions of assets in the ordinary course of business;
(i) any payment, discharge or satisfaction of any liability or obligation (whether accrued, absolute, contingent or otherwise) by ATH or any Subsidiary, other than the payment, discharge or satisfaction, in the ordinary course of business, of liabilities or obligations shown or reflected on the Balance Sheet or incurred in the ordinary course of business since the Balance Sheet Date including intercompany debt (but excluding the Assumed Debt);
(j) any adverse change or, to Seller's and ATH's knowledge, any threat of any adverse change in ATH's or any Subsidiary's relations with, or any loss or, to Seller's and ATH's knowledge, threat of loss of, any of ATH's or any Subsidiary's third-party payors (including, but not limited to, Title XVIII ("Medicare") of the Social Security Act and Title XIV ("Medicaid") of the Social Security Act), suppliers, clients or customers, the loss of which would have a Material Adverse Effect;
(k) any write-offs as uncollectible of any notes or accounts receivable of ATH or any Subsidiary or write-downs of the value of any assets or inventory by ATH or any Subsidiary other than those for which reserves or accruals have been established on the Balance Sheet or those in immaterial amounts;
(l) any change by ATH or any Subsidiary in any method of accounting or keeping its books of account or accounting practices;
(m) any creation, incurrence, assumption or guarantee by ATH or any Subsidiary of any obligations or liabilities (whether absolute, accrued, contingent or otherwise and whether due or to become due), except in the ordinary course of business including intercompany debt, or any creation, incurrence, assumption or guarantee by ATH or any Subsidiary of any indebtedness for money borrowed other than intercompany debt;
(n) any payment, loan or advance of any amount to or in respect of, or the sale, transfer or lease of any properties or assets (whether real, personal or mixed, tangible or intangible) to, or entering into of any agreement, arrangement or transaction with, any Related Party, except for compensation to the officers and employees of ATH or any Subsidiary at rates not exceeding the rates of compensation disclosed on Schedule 2.21 hereto; or
(o) any transaction or agreement outside the ordinary course of ATH's or any Subsidiary's business or inconsistent with past practice which has or is reasonably likely to have a Material Adverse Effect.
(a) ATH and each Subsidiary has (i) timely filed or will timely file all returns required to be filed by it for all taxable periods up to and including the Closing Date with respect to all federal, state and local income, payroll, withholding, excise, sales, use, real and personal property, use and occupancy, business and occupation, mercantile, real estate, capital stock and franchise or other tax (all the foregoing taxes, including interest and penalties thereon and including estimated taxes, being hereinafter individually called a "Tax" and collectively called "Taxes"), (ii) paid all Taxes shown to have become due pursuant to such returns, and (iii) paid all other Taxes for which a notice of or assessment or demand for payment has been received. All Tax returns have been prepared in accordance with all applicable laws and requirements and accurately reflect the taxable income (or other measure of tax) of ATH and each Subsidiary.
(b) The accruals for Taxes contained in the Balance Sheet are adequate to cover all liabilities for Taxes of ATH and each Subsidiary for all periods ending on or before the Balance Sheet Date and include adequate provision for all deferred Taxes, and nothing has occurred subsequent to that date to make any of such accruals inadequate. All Taxes for periods beginning after the Balance Sheet Date have been paid or are the subject of an adequate current reserve on the books of ATH and each Subsidiary. ATH and each Subsidiary has timely filed all information returns or reports, including forms 1099, which are required to be filed and has accurately reported all information required to be included on such returns or reports. True copies of federal and state income tax returns of ATH and each Subsidiary for each of the fiscal years ended December 31, 1992 through December 31, 1996 have been delivered to Buyer. There are no proposed assessments of Taxes against ATH or any Subsidiary or proposed adjustments to any Tax return filed, pending against ATH or any Subsidiary or any proposed adjustments to the manner in which any Taxes of ATH or any Subsidiary are determined. Except as disclosed on Schedule 2.10, each Tax return of ATH and the Subsidiaries has been audited by the relevant authorities (and all deficiencies or proposed deficiencies resulting from
such audits have been paid or are adequately provided for in the Financial Statements), or the statute of limitations with respect to each Tax return has expired, and no Tax return is under examination by any taxing authority.
(c) Except as disclosed on Schedule 2.10, neither ATH nor any Subsidiary has with respect to any open Tax period (i) filed any consent agreement under section 341(f) of the Internal Revenue Code of 1986, as amended (the "Code"), (ii) executed a waiver or consent extending any statute of limitation for any Tax liability which remains outstanding, (iii) joined in or been required to join in filing a consolidated or combined federal income Tax return, (iv) applied for a Tax ruling, (v) entered into a closing agreement with any taxing authority, or (vi) filed an election under section 338(g) or section 338(h)(10) of the Code or caused a deemed election under section 338(e) thereof.
(d) None of ATH, Seller or the Subsidiaries are "foreign persons" within the meaning of the Code and regulations promulgated thereunder.
(e) Schedule 2.10 reflects the separate net operating loss carryovers of ATH and the Subsidiaries and the portion of the Group's consolidated net operating loss carryovers allocable to ATH and its Subsidiaries allocated in accordance with Treasury Regulation (S)1.1502-21T(b) as reported for federal income tax purposes as of the close of the taxable year ended December 31, 1997; the year of origination of such net operating loss carryforwards; the portion of any such net operating loss carryforward arising in a separate return limitation year with respect to the Group; the portion of any such net operating losses subject to limitation under Section 382 of the Code, the date of any applicable change of ownership under Section 382 of the Code and the annual limitation of such net operating losses under Section 382 of the Code. Except as set forth on Schedule 2.10, none of such net operating losses are subject to limitation (i) under Section 382 of the Code by virtue of a direct or indirect "ownership change" of ATH or a Subsidiary within the meaning of Section 382 of the Code on or before the Closing Date or (ii) by reason of a consolidated return change of ownership under Treasury regulations (S)1.1502-21A on or before January 1, 1998. None of such net operating losses has been the subject of an election under Treasury regulations (S)1.1502-20(g) to have such losses reattributed to another corporation. The portion of the consolidated net operating losses of the Group allocable to ATH and the Subsidiaries in accordance with Treas. Reg. (S)1.1502- 21T(b) as of the Closing Date will not be less than $5,000,000. For purposes of this Section 2.10, "Group" means the consolidated group of corporations filing consolidated federal income tax returns of which Seller is the common parent ("Seller Parent").
(f) ATH and its Subsidiaries currently utilize the accrual method of accounting for income tax purposes and such method has not changed within the past five years. ATH and its Subsidiaries have not been required to make any adjustments under Section 481(a) of the Code as a result of a change in a tax accounting method.
All of the inventory of ATH and each Subsidiary, including that reflected in the Balance Sheet, is valued at the lower of cost or market, the cost thereof being determined on a first-in, first-out basis, except as disclosed in the Financial Statements. All of the equipment and leasehold improvements of ATH and each Subsidiary reflected in the Balance Sheet is valued at its acquisition cost less accumulated depreciation. All of the inventory and equipment of ATH and each Subsidiary reflected in the Balance Sheet and all inventory and equipment acquired since the Balance Sheet Date is maintained in quality and quantity consistent with past practice. There has been no material reduction in the level of inventory or equipment from the level set forth in the December 31, 1997 balance sheet included in the Financial Statements.
All of the accounts and notes receivable (including any amounts due from affiliates or any Related Party) of ATH and each Subsidiary represent amounts receivable for merchandise actually delivered or services actually provided (or, in the case of non-trade accounts or notes, represent amounts receivable in respect of other bona-fide business transactions), have arisen in the ordinary course of business, have been billed and are generally due within 30 days after such billing and, to Seller's and ATH's knowledge, are not subject to any counterclaims or offsets. On March 31, 1998, ATH and the Subsidiaries each had accounts receivable, net of reserves for contractual allowances and doubtful accounts (as calculated in a manner consistent with Section 4.15 hereof) equal to or greater than the dollar amount set forth on Schedule 2.12 opposite its name. Schedule 2.12 sets forth for ATH and each Subsidiary (a) the total amount of accounts receivable outstanding as of the last day of the month immediately preceding the present month and (b) the agings of such receivables based on a schedule containing the ranges of number of days outstanding from the bill date thereof used historically by ATH and each Subsidiary.
Except as set forth on Schedule 2.13, there are no actions, suits, investigations, or proceedings pending or, to the best of Seller's and ATH's knowledge, threatened against or affecting ATH, any Subsidiary or any of their assets or affecting the Stock or the Seller's rights thereto, at law or in equity, by or before any court or governmental department, agency or instrumentality, and, to Seller's and ATH's knowledge, there is no basis for any such action, suit, investigation or proceeding which is reasonably likely to cause a Material Adverse Effect. There are presently no outstanding judgments, decrees or orders of any court or any governmental or administrative agency against or affecting ATH, any Subsidiary or any of their assets or businesses or affecting the Stock or the Seller's rights thereto.
(a) Except as listed on Schedule 2.14, neither ATH nor any Subsidiary is a party to or bound by any material lease, contract or commitment, oral or written, formal or informal, including, without limitation, the following leases, contracts or commitments:
i. mortgages, indentures, security agreements or other agreements and instruments relating to the borrowing of money, the extension of credit or the granting of liens or encumbrances;
ii. employment and consulting agreements;
iii. union or other collective bargaining agreements;
iv. powers of attorney;
v. sales agency, manufacturers representative and distributorship agreements or other distribution or commission arrangements;
vi. material licenses of patent, trademark and other intellectual property rights;
vii. agreements, orders or commitments for the purchase of equipment, services, raw materials, supplies or finished products from any one supplier for an amount in excess of $35,000;
viii. agreements, orders or commitments for the rental, lease or sale of equipment, products or services for more than $50,000 to any single purchaser or lessee;
ix. contracts or options relating to the rental, sale or lease by ATH of any material asset, other than in the ordinary course of business;
x. bonus, profit-sharing, compensation, stock option, pension, retirement, deferred compensation, accrued vacation pay, group insurance, welfare agreements or other plans, agreements, trusts or arrangements for the benefit of employees;
xi. agreements or commitments for capital expenditures in excess of $50,000 for any single project;
xii. partnership or joint venture agreements;
xiii. agreements, arrangements or understandings with any Related Party;
xiv. material rental or lease agreements under which it is either lessor or lessee;
xv. material agreements, contracts or commitments for any charitable or political contribution; or
xvi. other agreements, contracts and commitments which are material to the business of ATH or any Subsidiary which involve payments or receipts of more than $50,000 in any single year, or which were entered into other than in the ordinary course of business.
(b) Except as listed in Schedule 2.14, all such agreements, leases, contracts and other commitments are in full force and effect; Seller and ATH and, to Seller's and ATH's knowledge, all other parties to such agreements, leases, contracts and other commitments have complied with the provisions thereof; no such party is in default under any of the terms thereof; no event has occurred that with the passage of time or the giving of notice or both would constitute a default by ATH or any Subsidiary, or to Seller's and ATH's knowledge, any other party thereto under any provision thereof; and neither Seller, ATH nor any Subsidiary has received, or has any knowledge of the existence of, any written notice of termination or other election by a lessor under any such agreement.
(a) Each of ATH, any Subsidiary and any of their current or former shareholders, directors, officers, agents, employees and other persons acting on behalf of them, has complied, in all material respects, with all applicable federal, state and municipal statutes, rules, regulations and orders and other requirements of all courts and other governmental or regulatory authorities having jurisdiction over ATH, including without limitation those relating to third party reimbursement (including, but not limited to, Medicare, Medicaid, CHAMPUS and other Federal Health Care Programs), fraudulent or abusive practices (including but not limited to the State Health Care Programs Anti- Fraud and Abuse Amendments of the Social Security Act, as amended, commonly known as the "Anti-Kickback Statute," and the amendments to Section 1877 of the Social Security Act (42 U.S.C.(S)1395nn), enacted as part of the Omnibus Budget Reconciliation Act of 1993, commonly known as "Stark II"), health care industry regulation, environmental protection, occupational safety and health, equal employment practices and fair trade practices.
(b) ATH and all professional employees or agents of ATH hold and are in compliance with all permits, certificates (including, without limitation, certificates of need), licenses, orders, registrations, franchises, authorizations and other approvals from all federal, state, local and foreign governmental and regulatory bodies (collectively, "Approvals") which are required pursuant to all laws, rules and regulations to enable ATH to own, operate and manage its business and the failure of which to possess or be in compliance with has not had and is not reasonably likely to have a Material Adverse Effect. All such Approvals are in full force and effect. Schedule 2.15(b) sets forth a true and correct list of those Approvals held by ATH which are required to operate the Hospital facilities.
(c) All services provided by Seller, ATH, the Subsidiaries or any professional employee or agent acting on behalf of any of them or for which Seller, ATH and/or the Subsidiaries directly or indirectly receive payment under Medicare, Medicaid or other Federal Health Care Programs are, to the extent required by law, certified for participation or enrollment in all such Federal Health Care Programs, have a current and valid provider contract with such Federal Health Care Programs, are in compliance with the conditions of participation or enrollment of such Federal Health Care Programs, and, to the extent required by law, have received all approvals or qualifications necessary for capital reimbursement, except for such certifications, contracts, compliances, approvals and qualifications which are set forth on Schedule 2.15(c) or which, individually or in the aggregate, would not have a Material Adverse Effect. Seller and ATH have delivered to the Buyer true and complete copies of all Medicare and Medicaid cost reports for any period after December 31, 1994 for each location of ATH or any Subsidiary for which there is a Medicare or Medicaid provider number. Schedule 2.15(c) sets forth the applicable Medicare and/or Medicaid provider number utilized by ATH and each Subsidiary and a true and correct list of the applicable TEFRA limitation with respect to each such provider.
(d) Except as set forth on Schedule 2.15(d), none of Seller, ATH or the Subsidiaries has received, or has knowledge of the existence, of any notice, citation, summons, order, complaint or penalty, and, to the Seller's or ATH's knowledge, no investigation or review is pending or threatened by any governmental or other entity (i) with respect to any alleged violation by ATH or any Subsidiary of any law, ordinance, rule, regulation or order of any governmental entity, or (ii) with respect to any alleged failure by ATH or any Subsidiary to have any permit, certificate, license, approval, registration or authorization required in connection with its business, or (iii) with respect to any generation, treatment, storage, recycling, transportation or disposal of any hazardous or toxic or polluting substances generated by ATH or any Subsidiary.
(e) Neither ATH nor any Subsidiary has treated, stored, recycled, disposed of or released any hazardous, toxic or polluting substances on any property now or previously owned or leased by ATH or any Subsidiary, nor, to Seller's and ATH's knowledge, has anyone else treated, stored, recycled, disposed of or released any hazardous, toxic or polluting substances on any property now or previously owned or leased by ATH or at any other property which has resulted in any condition for which ATH is or could be responsible, including under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"). Neither ATH nor any Subsidiary has transported any hazardous, toxic or polluting substances or arranged for the transportation of such substances to any location which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims against ATH, any Subsidiary or the Buyer for clean-up costs, remedial work, damages to natural resources or for personal injury claims, including, but not limited to, claims under CERCLA. ATH's and each Subsidiary's Standard Industry Code ("SIC") number is listed on Schedule 2.15(e).
(f) ATH has correctly maintained in all material respects all records (whether financial, medical or otherwise) required by state and federal agencies and pursuant to the requirements of Medicare, Medicaid and other Federal Health Care Programs.
(g) Each Hospital set forth on Schedule 2.15(g) has been surveyed for and has received accreditation by the Joint Commission for Accreditation of Health Care Organizations ("JCAHO") and such accreditation by JCAHO remains in full force and effect and has not been modified, revoked or suspended as of the Closing Date.
Except for such consents as are set forth on Schedule 2.16 or those which arise under categories of contracts not described on such Schedule and except as required under the HSR Act, no consent, approval or authorization of, or registration or filing with, any person, including any governmental authority or other regulatory agency, is required in connection with the execution and delivery of this Agreement or the consummation of the transactions contemplated hereby, except where the failure to obtain any of the foregoing would not have a Material Adverse Effect.
Each of ATH and the Subsidiaries has good and, in the case of real property, marketable title (fee or leasehold) to all of its properties and assets (including equipment), including the properties and assets reflected in the Balance Sheet (except those disposed of in the ordinary course of business since the Balance Sheet Date), free and clear of any mortgage, pledge, lien, restriction, encumbrance, tenancy, license, encroachment, covenant, condition, right of way, easement, claim, security interest, charge or any other matter affecting title, except (a) minor imperfections of title, none of which, individually or in the aggregate, materially detracts from the value of or impairs the use of the affected properties and assets or impairs the operations of ATH or the Subsidiaries, (b) liens for current taxes not yet due and payable, and (c) as disclosed on Schedule 2.17 (collectively "Permitted Encumbrances").
Schedule 2.18 contains a correct list and summary description of all real properties owned (beneficially or of record) or leased by ATH or any Subsidiary and identifies all title insurance policies covering any of, and all leases relating to, such properties; and the construction, use and operation of all real properties owned or leased by ATH or any Subsidiary conform to all applicable building, zoning, safety, environmental, subdivision, and other laws, ordinances, regulations, codes, permits, licenses and certificates and all restrictions and conditions affecting title, except for any nonconformance that does not have a Material Adverse Effect. Neither ATH nor any Subsidiary has received any written, or has knowledge of the existence of any written or oral, notice for assessments for public improvements against any of such real properties which remains unpaid and no such assessment has been proposed. Neither ATH nor any Subsidiary has received any written, or has knowledge of the existence of any
written or oral, notice or order by any governmental or other public authority, any insurance company which has issued a policy with respect to any of such properties or any board of fire underwriters or other body exercising similar functions which (a) relates to violations of building, safety, fire or other ordinances or regulations, (b) claims any defect or deficiency with respect to any of such properties, or (c) requests the performance of any repairs, alterations or other work to or in any of such properties or in the streets bounding the same. Neither Seller, ATH nor any Subsidiary has received notice or has any knowledge of the existence of any pending condemnation, expropriation, eminent domain or similar proceeding affecting all or any portion of any of such properties and, to the best knowledge of the Seller and ATH, no such proceeding is contemplated.
Except such transactions as are disclosed on Schedule 2.19, no Related Party:
(a) has borrowed money or loaned money to ATH or any Subsidiary which has not been repaid, other than Seller;
(b) has any contractual or other claim, express or implied, of any kind whatsoever against ATH or any Subsidiary, other than claims of employees, those incurred in the ordinary course of business and disclosed in the Schedules hereto;
(c) had, since the Balance Sheet Date, any interest in any property or assets used by ATH or any Subsidiary in its business; or
(d) has been engaged, since the Balance Sheet Date, in any other transaction with ATH or any Subsidiary (other than employment relationships at the salaries disclosed in Schedule 2.21).
(a) The buildings, machinery, inventory, equipment, furniture, improvements and other assets, properties and rights of ATH and the Subsidiaries, including those reflected in the Balance Sheet, are sufficient to operate the business of ATH and the Subsidiaries as currently operated.
(b) ATH and the Subsidiaries own or license all computer hardware, software and data processing systems or other electronic data transmission, storage or computation programs used in connection with the operation of the Hospitals (collectively, the "Computer Software") which are listed on Schedule 2.20. Certain services described in Schedule 2.20 are provided by Seller to ATH and its Subsidiaries using computer hardware, software and other electronic data processing and transmission services which are not listed on Schedule 2.20, are not owned by ATH or the Subsidiaries and ATH and the Subsidiaries have no rights to their use except to the extent contemplated by Exhibit E. Except as provided for in Exhibit E, other than the Computer Software, no other computer hardware, software and data
processing systems or other electronic data transmission is currently used by ATH or any Subsidiary to operate its business as presently conducted. To the best knowledge of the Seller and ATH, there are no material malfunctions or design failures with respect to the Computer Software and related items of systems hardware.
Schedule 2.21 sets forth the following information:
(a) the names and current annual salary, including any bonus, if applicable, of all present officers and employees of ATH and each Subsidiary whose current annual salary, including any promised, expected or customary bonus, equals or exceeds $75,000, together with a statement of the full amount of all remuneration paid by ATH and each Subsidiary to each such person, during the twelve-month period preceding the date hereof;
(b) the name of each bank in which ATH and each Subsidiary has an account or safe deposit box, the identifying numbers or symbols thereof and the names of all persons authorized to draw thereon or have access thereto; or
(c) the names and titles of all directors and officers of ATH and each Subsidiary.
Except as disclosed on Schedule 2.22, (a) no employee of ATH or any Subsidiary is represented by any union or other labor organization; (b) neither Seller, ATH nor any Subsidiary has received notice, or has knowledge of the existence, of any unfair labor practice complaint against ATH or any Subsidiary pending or threatened before the National Labor Relations Board; (c) there is no labor strike, dispute, slow down or stoppage actually pending or, to the best knowledge of the Seller and ATH, threatened against or involving ATH or any Subsidiary; (d) no grievance which might have a Material Adverse Effect is pending; (e) no private agreement restricts ATH or any Subsidiary from relocating, closing or terminating any of its operations or facilities; and (f) neither ATH nor any Subsidiary has in the past three years experienced any work stoppage.
(a) Attached hereto as Schedule 2.23 is a complete and correct list of all policies of insurance of which ATH and each Subsidiary is the owner, insured or beneficiary, or covering any of its property, indicating for each policy the carrier, risks insured, the amounts of coverage, deductible, premium rate, cash value if any, expiration date and any pending claims thereunder. All such policies are outstanding and in full force and effect. There is no default with respect to any provision contained in any such policy, nor has there been any failure to give any notice or present any claim under any such policy in a timely fashion or in the manner or detail required by the policy. Except as set forth on Schedule 2.23, there are no outstanding
unpaid premiums or claims under such policies. No notice of cancellation or non- renewal with respect to, or disallowance of any claim under, any such policy has been received by ATH or any Subsidiary.
(b) Neither ATH nor any Subsidiary has been refused any insurance, nor has any of their coverage been limited by any insurance carrier to which any of them has applied for insurance or with which any of them has carried insurance during the last five years. Since June 1, 1987, all products liability and general liability policies maintained by or for the benefit of ATH or any Subsidiary have been "occurrence" policies and not "claims made" policies.
(a) Schedule 2.24 contains a complete and accurate list of all patents and patent applications, industrial design registrations, copyright registrations, trademarks, service marks, trade names, and registrations and applications for registration of trademarks, service marks, trade names, trade dress and domain names used in the conduct of ATH's and each Subsidiary's business specifying as to each such item, as applicable: (i) the owner of the item, (ii) the jurisdictions in which the item is issued or registered or in which any application for issuance or registration has been filed, (iii) the respective issuance, registration, or application number of the item, and (iv) the date of application and issuance or registration of the item.
(b) Schedule 2.24 contains a complete and accurate list of all material licenses, sublicenses, consents and other agreements (whether written or otherwise) (i) pertaining to any patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, trade secrets, computer software programs (other than standard, commercially available programs), or other intellectual property used in the conduct of ATH's or each Subsidiary's business, and (ii) by which ATH and each Subsidiary licenses or otherwise authorizes a third party to use such intellectual property. None of ATH, the Subsidiaries or any other party is in material breach of or default under any such license or other agreement and each such license or other agreement is now and immediately following the Closing will be valid and in full force and effect.
(c) Except as explicitly indicated in Schedule 2.24, ATH and each Subsidiary owns or is licensed or otherwise has the right to use all patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, inventions, technology, know-how, designs, formulae, trade secrets, confidential and proprietary information, computer software programs (other than standard, commercially available programs), domain names, and other intellectual property used in the operation of ATH's and each Subsidiary's business as it is currently conducted.
(d) The operation of ATH's and each Subsidiary's business does not, to the best knowledge of the Seller and ATH, infringe on the patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, trade secrets or other intellectual property rights of any third party, and no claim has been made, notice given, or dispute arisen to
that effect. Neither ATH nor any Subsidiary has any pending claims that a third party has violated or infringed any of ATH's and any Subsidiary's patents, industrial design rights, trademarks, service marks, trade names, trade dress, copyrights, trade secrets or other proprietary rights.
(e) Except as explicitly indicated in Schedule 2.24, all of the patents, industrial design registrations, trademark and service mark registrations, copyright registrations and domain name registrations indicated in Schedule 2.24 are valid and in full force, are held of record in ATH's or a Subsidiary's name, free and clear of all liens, encumbrances and other claims, and are not the subject of any cancellation or reexamination proceeding or any other proceeding challenging their extent or validity. Except as explicitly indicated in Schedule 2.24, ATH or a Subsidiary is the applicant of record in all patent applications, and applications for trademark, service mark, trade dress, industrial design, and copyright registration indicated in Schedule 2.24, and no opposition, extension of time to oppose, interference, rejection, or refusal to register has been received in connection with any such application.
(f) Prior to or at Closing, all patents, patent applications or other intellectual property rights used exclusively in the business of ATH and the Subsidiaries and held by any Related Party shall be transferred to ATH and the Subsidiaries.
(a) The only employee pension benefit plans (as defined in
Section 3(2) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), welfare benefit plans (as defined in Section 3(1) of ERISA), bonus,
stock purchase, stock ownership, stock option, deferred compensation, incentive
or other compensation plan or arrangement, and other material employee fringe
benefit plans presently maintained by, or contributed to by ATH or any other
employer (an "ERISA Affiliate") that is, or at any relevant time was, together
with ATH, treated as a "single employer" under section 414(b), 414(c) or 414(m)
of the Code, other than a multiemployer plan as defined in Section 3(37) of
ERISA, are those listed in Schedule 2.25 (the "Benefit Plans"), a true and
complete copy of each of which and, where applicable, a copy of the most recent
IRS Determination Letter received, and the three most recent IRS Forms 5500
filed, with respect to each such Benefit Plan, has been made available to Buyer.
(b) Except as specifically designated on Schedule 2.25(b), all of the Benefit Plans are sponsored or maintained by the Seller or another ERISA Affiliate other than ATH or the Subsidiaries. No Benefit Plan designated on Schedule 2.25(b) is an employee pension benefit plan as defined in Section 2.25(a).
(c) Except as indicated on Schedule 2.25, all of the Benefit Plans which are pension benefit plans have received determination letters from the Internal Revenue Service ("IRS") to the effect that such plans are qualified and exempt from federal income taxes under Sections 401(a) and 501(a), respectively, of the Code, as amended; and no determination letter with respect to any Benefit Plan has been revoked nor, to the best of Seller's and ATH's knowledge, has revocation been threatened, nor has any Benefit Plan been amended since the
date of its most recent determination letter or application therefor in any respect which would adversely affect its qualification.
(d) ATH and each ERISA Affiliate have complied with the notice and continuation coverage requirements of section 4980B of the Code and the regulations thereunder with respect to each Benefit Plan that is, or was during any taxable year of ATH or any ERISA Affiliate for which the statute of limitations on the assessment of federal income taxes remains open, by consent or otherwise, a group health plan within the meaning of section 5000(b)(1) of the Code.
(e) Set forth on Schedule 2.25 are the unfunded liabilities and projected costs, as of the date of this Agreement, of (1) the amount of any unfunded deferred compensation for which ATH or any Subsidiary is or is reasonably likely to be liable, (2) the actuarially determined present value of any obligation to provide retiree medical or life insurance benefits under any Benefit Plan and (3) any payment that will be required to be made to any Benefit Plan participant or beneficiary by ATH or any ERISA Affiliate as a direct result of the transactions contemplated by this Agreement.
(f) At no time since September 2, 1974 has Seller, ATH or any ERISA Affiliate incurred any liability which could subject Buyer to liability under Section 4062, 4063 or 4064 of ERISA.
(g) At no time since September 26, 1990, has Seller, ATH, or any ERISA Affiliate, (i) been required to contribute to, or incurred any withdrawal liability, within the meaning of Section 4201 of ERISA to any multiemployer pension plan, within the meaning of Section 3(37) of ERISA, which liability has not been fully paid as of the date hereof, or (ii) announced an intention to withdraw, but not yet completed such withdrawal, from any multiemployer plan. Neither Seller, ATH nor any ERISA Affiliate has incurred any potential withdrawal liability arising from a transaction described in Section 4204 of ERISA.
(h) Neither ATH nor any Subsidiary has incurred or is reasonably likely to incur any liability with respect to any plan or arrangement that would be included within the definition of "Benefit Plan" hereunder but for the fact that such plan or arrangement was terminated before the date of this Agreement.
(i) Except as listed on Schedule 2.25, no payment which is or may be made by from or with respect to any Benefit Plan, to any employee, former employee, director or agent of ATH or any ERISA Affiliate, either alone or in conjunction with any other payment, will or could properly be characterized as an excess parachute payment under section 280G of the Code.
(j) There are no material pension, welfare, bonus, stock purchase, stock ownership, stock option, deferred compensation, incentive, severance, termination or other compensation plan or arrangement, or other material employee fringe benefit plan presently maintained by, or contributed to by ATH or any ERISA Affiliate for the benefit of any employee
of ATH or any ERISA Affiliate, including any such plan required to be maintained or contributed to by the law of the relevant jurisdiction, which would be described in (a) above, but for the fact that such plans are maintained outside the jurisdiction of the United States.
None of the Seller, ATH or any Subsidiary has made any agreement or taken any other action which might cause anyone to become entitled to a broker's fee or commission as a result of the transactions contemplated hereunder.
Other than the Intercompany Debt and the senior secured promissory note issued by ATH Heights, Inc. to West Houston Healthcare Group, Ltd. dated September 21, 1994 in the original principal amount of $2,941,000 (the "Assumed Debt"), neither ATH nor any Subsidiary has any indebtedness or other obligations with respect to borrowed money.
ATH and each Subsidiary is approved as a participating provider of services in and under the third-party payment programs listed on Schedule 2.28. To the knowledge of the Seller and ATH, no action is pending to suspend, limit, terminate, or revoke the status of ATH or any Subsidiary as a provider in any such program, and neither ATH nor any Subsidiary has been provided notice by any such third-party payor of its intention to suspend, limit, terminate, revoke, or fail to renew any contractual arrangement with ATH or any Subsidiary as a participating provider of services in whole or in part.
Except as set forth in Schedule 2.29, all billing by, or on behalf of, the Seller, ATH or any Subsidiary to third-party payors, including, but not limited to, Medicare, Medicaid and private insurance companies has been true and correct in all material respects. None of Seller, ATH or any Subsidiary has received any notice from any third-party payor, including but not limited to, Medicare or Medicaid, that indicates that Buyer could not continue to bill in substantially the same manner and structure as ATH or any Subsidiary is billing on the date hereof.
Except as disclosed on Schedule 2.30, for the previous three years,
(a) Seller, ATH and the Subsidiaries have not received any written notice of
denial of payment or overpayment of a material nature from a Federal Health Care
Program or any other third party reimbursement source (inclusive of managed care
organizations) with respect to items or services provided by Seller, ATH and/or
any Subsidiary, other than those which have been finally resolved in any
settlement for an amount less than $1,000,000, (b) to the Seller's and ATH's
knowledge, there is no basis for the assertion after the Closing of any such denial or overpayment claim, and (c) none of Seller, ATH or any Subsidiary has received written notice from a Federal Health Care Program or any other third party reimbursement source (inclusive of managed care organizations) of any pending or threatened claims, proceedings, investigations or surveys specifically with respect to, or arising out of, items or services provided by the Seller, ATH or any Subsidiary, and to the Seller's and ATH's knowledge, no such investigation or survey is pending, threatened or imminent.
(a) Neither Seller, ATH, any affiliate nor any person who has a direct or indirect ownership interest (as those terms are defined in 42 C.F.R. (S)1001.1001(a)(2)) in ATH of 5% or more, or who has an ownership or control interest (as defined in Section 1124(a)(3) of the Social Security Act or any regulations promulgated thereunder) in ATH, or who is an officer, director, agent or managing employee (as defined in 42 C.F.R. (S)1001.1001(a)(i): (a) has had a civil monetary penalty assessed against it under Section 1128A of the Social Security Act or any regulations promulgated thereunder; (b) has been excluded from participation under any Federal Health Care Program; or (c) has been convicted (as that term is defined in 42 C.F.R. (S)1001.2) of any of the categories of offenses as described in the Social Security Act Section 1128(a) and (b)(1), (2), (3) or any regulations promulgated thereunder.
(b) All cost reports to be filed under Medicare and Medicaid or any other applicable governmental or private provider regulations for the Hospitals were filed by the required filing dates. Such cost reports were prepared and filed in good faith in accordance with applicable, laws, rule and regulations and ATH and each Subsidiary has made provision to pay any net liability on all Notices of Program Reimbursement (or similar documents) received from Medicare, Medicaid or other governmental or private payors for the periods ended prior to December 31, 1994. Schedule 2.31 lists the Medicare and Medicaid cost reports duly filed by ATH and each Subsidiary covering the periods noted and which of such cost reports has been audited but not fully settled, has been settled or has not been audited or settled. Neither ATH nor any Subsidiary has received notice, or has knowledge of the existence, of any pending dispute between ATH and/or any Subsidiary and governmental authorities or the Medicare fiscal intermediary regarding such cost reports for the remaining unaudited cost reports, other than with respect to adjustments thereto made in the ordinary course of business which do not involve amounts in excess of $20,000 in the aggregate. All home office cost reports filed by Seller and ATH are true and correct and the costs contained in such reports are appropriately included therein and have been properly allocated among Seller and its subsidiaries and businesses in accordance with Medicare and Medicaid rules and regulations. The home office cost report of Seller covering the period January 1, 1998 through and including Closing will include costs incurred by Seller in an amount at least equal to the Seller's home office costs reflected on the consolidated balance sheet of ATH and the Subsidiaries for the corresponding period.
There are no pending actions, charges, indictments, or investigations of ATH, any Subsidiary or, with respect to their employment with ATH or any Subsidiary, their agents, officers or employees which involve allegations of criminal violations by ATH, any Subsidiary or their agents, officers or employees acting on behalf of ATH or any Subsidiary of any federal, state, or local statute, law, or ordinance, including without limitation, Medicare or Medicaid.
Set forth on Schedule 2.33 is a list of all Peer Review Organization denials which Seller, ATH or the Subsidiaries have received with respect to the operation of the Hospitals during the last five years, including a description of the basis therefor and of the action, if any, taken by Seller, ATH or the Subsidiaries to appeal the same and the status and/or outcome of any such appeals.
Buyer represents and warrants to the Seller as follows:
Buyer is a corporation duly organized, validly existing and in good standing under the laws of Delaware. Buyer has all requisite power and authority to own or lease its properties and assets as now owned or leased and to carry on its business as and where now being conducted.
Buyer has full legal right, power and authority to enter into this Agreement and to perform its other obligations hereunder, without the need for the consent of any other person or entity, other than as required under the HSR Act.
The execution, delivery and performance of this Agreement and the transactions contemplated hereby have been duly authorized by all necessary corporate action on the part of Buyer. This Agreement has been duly executed and delivered by Buyer and constitutes the legal, valid and binding obligation of Buyer, enforceable against it in accordance with its terms.
Buyer has not made any agreement or taken any other action which might cause anyone to become entitled to a broker's fee or commission as a result of the transactions contemplated hereunder.
The execution and delivery of this Agreement do not, and the consummation of the transactions contemplated by this Agreement and the compliance with the terms, conditions and provisions of this Agreement by Buyer, will not (a) contravene any provision of Buyer's articles of incorporation or bylaws; (b) conflict with or result in a breach of or constitute a default (or an event which might, with the passage of time or the giving of notice or both, constitute a default) under any of the terms, conditions or provisions of any indenture, mortgage, loan or credit agreement or any other agreement or instrument to which Buyer is a party or by which it or any of its assets may be bound or affected, or any judgment or order of any court or governmental department, commission, board, agency or instrumentality, domestic or foreign, or any applicable law, rule or regulation, except with respect to those matters set forth in this clause (b) which would not have a material adverse effect on Buyer; (c) result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon Buyer's assets or give to others any interests or rights therein except for any financing entered into by Buyer in connection with the transactions contemplated hereby.
Except as set forth on Schedule 3.6, there are no actions, suits, investigations, or proceedings pending or, to the best of Buyer's knowledge, threatened against or affecting Buyer or any of its assets which would adversely affect Buyer's ability to consummate this Agreement and the transactions contemplated herein, at law or in equity, by or before any court or governmental department, agency or instrumentality, and, to Buyer's knowledge, there is no basis for any such action, suit, investigation or proceeding. There are presently no outstanding judgments, decrees or orders of any court or any governmental or administrative agency against Buyer which would adversely affect Buyer's ability to consummate this Agreement and the transactions contemplated herein.
From and after the date hereof and pending Closing, and unless Buyer shall otherwise consent or agree in writing, the Seller and ATH covenant and agree that:
Subsidiary and to preserve for Buyer the good will of the suppliers, customers and others having business relations with ATH and each Subsidiary.
i. amend its Articles of Incorporation or Bylaws;
ii. change its authorized or issued capital stock or issue any rights or options to acquire shares of its capital stock;
iii. enter into any rental, lease, contract or commitment the performance of which may extend beyond the Closing, except those made in the ordinary course of business the terms of which are consistent with past practice and reasonable in light of current conditions;
iv. enter into any employment or consulting contract or arrangement with any person which is not terminable at will, without penalty or continuing obligation;
v. sell, transfer, rent, lease or otherwise dispose of any of their assets other than in the ordinary course of business and consistent with past practice;
vi. incur, create, assume or suffer to exist any mortgage, pledge, lien, restriction, encumbrance, tenancy, encroachment, covenant, condition, right-of-way, easement, claim, security interest, charge or other matter affecting title on any of its assets or other property, except Permitted Encumbrances;
vii. make, change or revoke any tax election or make any agreement or settlement with any taxing authority;
viii. declare or pay any dividend or other distribution in respect of any class of its capital stock, or make any payment to redeem, purchase or otherwise acquire, or call for redemption, any of such stock or any securities convertible into or exchangeable for such stock except for the payment of cash dividends which would not cause the Consolidated Net Working Capital to be less than the Threshold Amount; provided, it shall not be deemed a violation of this covenant if Seller and ATH continue normal working capital practices consistent with past practice;
ix. increase or otherwise change the compensation payable or to become payable to any officer, employee or agent except for stay, retention, successful completion or other bonuses, or severance, parachute or similar payments which are set forth on Schedule 2.9(e) and have been or will be paid in connection with the transactions contemplated hereby and for which ATH has established a full current reserve or accrual on the Closing Balance Sheet or the payment of which is otherwise Seller's responsibility;
x. make or authorize the making of any capital expenditure in excess of $50,000 individually or $200,000 in the aggregate except for capital expenditures incurred in connection with the opening of new hospitals currently under contract and which are set forth on Schedule 2.9(f);
xi. incur any debt or other obligation for money borrowed or any lease obligations required to be capitalized and reflected on the balance sheet of ATH or any Subsidiary under Accounting Principles other than intercompany debt;
xii. incur any other obligation or liability, absolute or contingent except in the ordinary course of business and consistent with past practice;
xiii. guarantee or become a co-maker or accommodation maker or otherwise become or remain contingently liable in connection with any liability or obligation of any person other than ATH or the applicable Subsidiary;
xiv. loan, advance funds or make an investment in or capital contribution to any person other than ATH or the applicable Subsidiary;
xv. take any action or permit to occur any event set forth in subparagraphs (c) through (i) and (k) through (n) of Section 2.9;
xvi. take any action or omit to take any action which will result in a violation of any applicable law or cause a breach of any agreements, contracts or commitments that would result in a Material Adverse Effect; or
xvii. enter into any agreement to do any of the foregoing.
ATH and each Subsidiary shall maintain in full force and effect the policies of insurance listed on Schedule 2.23, subject only to variations required by the ordinary operations of its business, or else will obtain, prior to the lapse of any such policy, substantially similar coverage with insurers of recognized standing and approved in writing by the Buyer. Each of the Seller and ATH shall promptly advise the Buyer in writing of any change of insurer or type of coverage in respect of the policies listed on Schedule 2.23.
(a) Each of the Seller and ATH shall use its respective commercially reasonable efforts to cause all of the conditions to the obligations of the Buyer under Section 5.1 of this Agreement to be satisfied on or prior to the Closing. Each of the Seller and ATH shall use its commercially reasonable efforts, and Seller and ATH shall cause ATH and each Subsidiary, respectively, to use its commercially reasonable efforts, to conduct its business in such a manner that at the Closing the representations and warranties of the Seller and ATH
contained in this Agreement shall be true and correct as though such representations and warranties were made on, as of, and with reference to such date. The Seller and ATH will promptly notify Buyer in writing of any event or fact which represents a breach of any of its representations, warranties, covenants or agreements. Each of the Seller and ATH shall promptly advise Buyer in writing of the occurrence of any condition or development (exclusive of general economic factors affecting business in general) of a nature that will result in a Material Adverse Effect.
(b) Buyer shall use its commercially reasonable efforts to cause all of the conditions to the obligations of the Seller under Section 5.2 of this Agreement to be satisfied on or prior to the Closing. Buyer shall use its commercially reasonable efforts to conduct its business in such a manner that at the Closing the representations and warranties of Buyer contained in this Agreement shall be true and correct as though such representations and warranties were made on, as of, and with reference to such date. Buyer will promptly notify Seller in writing of any event or fact which represents a breach of any of its representations, warranties, covenants or agreements.
ATH will give, and the Seller and ATH will cause ATH and each Subsidiary, respectively, to give, to Buyer and to Buyer's counsel, accountants and other representatives access during normal business hours to all of ATH's and the Subsidiaries' properties, books, tax returns, contracts, commitments, records, officers, personnel and accountants and will furnish to Buyer all such documents and copies of documents (certified to be true copies if requested) and all information with respect to the affairs of ATH or any Subsidiary as Buyer may request.
At the Closing, the Seller will deliver written resignations of ATH's and each Subsidiary's directors and officers and of the trustees, plan administrators and fiduciaries of the Benefit Plans.
Except as set forth on Schedule 4.6, the Seller shall not sell, transfer, assign, mortgage, pledge, encumber or otherwise dispose of the Stock and shall not incur, create, assume or suffer to exist any mortgage, pledge, loan, encumbrance, claim or security or other interest in, or affecting title to, the Stock.
Promptly after the execution of this Agreement and prior to the Closing, the Seller and ATH shall use their commercially reasonable efforts, and shall cause the Subsidiaries to use their commercially reasonable efforts, to obtain from each lender, lessor or other party to the agreements set forth on Schedule 4.7, in a form reasonably satisfactory to Buyer, the consent,
estoppel certificate or other appropriate agreement of such lender, lessor or other party to the transactions contemplated by this Agreement. Seller's and ATH's agreement to use commercially reasonable efforts pursuant to this Section 4.7 shall not be deemed to require Seller or ATH to (i) incur any material out- of-pocket expenses, (ii) amend any loan agreement to change any material terms thereof, including, without limitation, any payment term, amortization schedule, or termination date, or (ii) amend any material provision in any other contract.
The Seller and ATH shall promptly deliver to Buyer a consolidated and consolidating statement of income for ATH and the Subsidiaries for the five months ending May 31, 1998 and a consolidated and consolidating balance sheet of ATH and the Subsidiaries as at such date (the "May Financial Statements"). Delivery of the May Financial Statements to the Buyer shall constitute the Seller's and ATH's representation and warranty to Buyer that the May Financial Statements (a) are correct and complete and in accordance with the books and records of ATH, (b) fairly present the financial condition, assets and liabilities of ATH and the Subsidiaries as at May 31, 1998 and the results of their operations for the five-month period then ended, and (c) have been prepared in accordance with Accounting Principles.
The parties hereto acknowledge that the information systems used to operate the businesses of ATH and the Subsidiaries are, in many instances, linked to the information systems used generally by Seller. To facilitate the orderly transition of the operations of ATH and the Subsidiaries, Seller shall provide transitional data processing and related support services as described on Exhibit E attached hereto to Buyer for the specified period after Closing and the cost to Buyer, if any, set forth on such Exhibit.
Between the date of this Agreement and the earlier of the date this Agreement is terminated or the Closing Date, none of Seller, ATH, or any of their affiliates, officers, directors, employees, stockholders, agents or advisors, shall solicit, initiate, furnish information relating to or participate in any discussions or negotiations with any person or entity concerning the sale or other disposition of any or all of ATH or any Subsidiary, or a merger, consolidation, or sale of all or substantially all of the assets, or any material assets, of ATH or any Subsidiary. The Seller and ATH shall promptly notify Buyer if any such discussion or negotiations are sought to be initiated with, any such information is requested from, or any proposal is received by, the Seller or ATH.
At Closing, the Assumed Debt shall remain an outstanding obligation of ATH Heights, Inc., and immediately following the Closing (and as part of a closing escrow) either (i) Buyer will cause ATH Heights, Inc. to fully refinance the Assumed Debt such that the existing
debt is fully paid and released, or (ii) Buyer shall obtain and deliver to Seller an unconditional release of Seller's guarantee of the Assumed Debt.
Seller acknowledges that the results of Buyer's investigation and due
diligence of ATH's and the Subsidiaries' businesses will not affect the
representations and warranties provided by the Seller and ATH herein except as
expressly set forth below. Notwithstanding the foregoing, in the event that the
Buyer obtains actual knowledge prior to Closing of a material inaccuracy in, or
breach of, any of such representations and warranties of the Seller or ATH, the
Buyer agrees promptly to notify Seller and ATH, whereupon the Seller and ATH
shall promptly use their best efforts to cure such material inaccuracy or
breach. If such material inaccuracy or breach is not cured, as aforesaid, the
Buyer shall have the option to: (y) terminate this Agreement, in accordance with
Section 5.3 hereof and to receive reimbursement from Seller of the out-of-pocket
costs and expenses incurred by the Buyer from and after the date of execution of
this Agreement in connection with the transaction contemplated by this
Agreement, including without limitation, reasonable attorneys' and accounting
fees, or (z) to waive such inaccuracy or breach and proceed to Closing in
accordance with the terms hereof without a reduction in the Purchase Price;
provided, however, Seller shall not have the cure or termination right provided
in this sentence (and, accordingly, will remain fully liable to the Buyer in
respect of such inaccuracy or breach) if (i) Seller had intentionally or
knowingly attempted to conceal from the Buyer such inaccuracy or breach, or (ii)
after execution of this Agreement, Seller volitionally creates or permits to
occur such inaccuracy or breach. No termination of this Agreement under clause
(y) shall be effective until all fees and expenses contemplated by that clause
have been paid in full.
As soon as practicable following execution of this Agreement, Seller shall deliver to Buyer the Schedules required hereunder.
As soon as practicable following execution of this Agreement, Buyer and/or Seller, as applicable, shall deliver to each other the Exhibits required hereunder.
For the purposes of this Agreement, no party shall contest the amount of the accounts receivable reserve for contractual allowances and doubtful accounts as of December 31, 1997 or the Balance Sheet Date, or the methodology underlying such reserve, which methodology shall be applied in the preparation of the Closing Balance Sheet (including without limitation consistent aging percentages) and shall be deemed adequate for the purposes of this Agreement to the extent used in the preparation of any Financial Statement as of and following December 31, 1997.
Buyer acknowledges that Seller is contractually obligated to execute and deliver pharmaceutical provider agreements with Pharmerica to replace existing agreements with Pharmacy Corporation of America. With respect to the facilities set forth on Schedule 4.16 hereto, Buyer agrees to cause ATH or its successor to execute pharmaceutical provider agreements with Pharmerica in substantially the form attached in Schedule 4.16.
The obligations of Buyer to proceed with the Closing under this Agreement are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of
which may be waived in whole or in part by Buyer at Buyer's option and, upon Closing, shall be deemed satisfied or waived):
former owner of any capital stock or equity interest in ATH or any Subsidiary (whether through a derivative action or otherwise) against ATH, any Subsidiary or any officer, director or shareholder of ATH or any Subsidiary or in his capacity as such, or (iii) which is reasonably likely to have a Material Adverse Effect.
The obligations of the Seller to proceed with the Closing hereunder are subject to the fulfillment prior to or at Closing of the following conditions (any one or more of which may be waived in whole or in part by the Seller at the Seller's option and, upon Closing, shall be deemed satisfied or waived):
required by this Agreement to be performed or complied with by it on or before the Closing and Buyer shall have delivered to the Seller a certificate, signed by its President or a Vice President, to such effect.
i. By mutual consent of Buyer and the Seller;
ii. By Buyer if there has been a breach by the Seller or ATH of any of their representations, warranties, covenants or agreements;
iii. By the Seller if there has been a breach by Buyer of any of its representations, warranties, covenants or agreements;
iv. By Buyer or the Seller if Closing shall not have occurred prior to July 31, 1998; provided, that Buyer or the Seller may terminate this Agreement pursuant to this subparagraph (iv) only if such party is not in material breach hereof;
v. By Buyer or Seller in the event that one or more of the following is not acceptable to such party in its sole discretion: (x) an exhibit not attached hereto at the time of signing, or (y) a schedule not attached hereto at the time of signing and not prepared by the terminating party. Prior to any such termination pursuant to this subsection, the terminating party must give written notice of its intention to the other party stating in detail its objections to the exhibit(s) or schedule(s) objected to, and in the event the other party agrees in writing within fifteen (15) days to remedy such objections, the right to terminate based on such objections shall expire.
vi. By Buyer in the event that the schedules and exhibits are not delivered within three weeks from the date of this Agreement.
Except as set forth in Sections 6.3, 6.8 and 7.7, Seller will pay all costs and expenses, including legal fees, in connection with its and ATH's performance of and compliance with this Agreement, and all transfer, documentary and similar taxes in connection with the delivery of the shares of Stock to be made hereunder. Except as set forth in Sections 6.2, 6.8 and 7.7, Buyer will pay all costs and expenses, including legal fees, of Buyer's performance of and compliance with this Agreement.
In accordance with the procedures in Section 6.5, if applicable, the Seller and ATH hereby agree to jointly and severally indemnify and hold harmless Buyer from and against:
(a) any loss, liability, claim, obligation, damage or deficiency
of or to Buyer, ATH or any Subsidiary arising out of or resulting from (i) any
inaccuracy in, or breach of, any representation, warranty, covenant or
nonfulfillment of any agreement on the part of the Seller or ATH contained in
this Agreement or in any statement or certificate furnished or to be furnished
to Buyer pursuant hereto or in connection with the transactions contemplated
hereby, or (ii) any and all liabilities of Seller, ATH or any Subsidiary related
to ATH's or any Subsidiary's business first arising before the Closing Date,
including, without limitation, (A) the payment of retrospective or retroactive
premium adjustments provided for in the insurance policies set forth on Schedule
2.23, (B) any liability, obligation or costs arising from matters set forth on
Schedules 2.15(d) hereto, (C) any claim or loss as provided in Section 4.17, and
(D) any liability, obligation or costs arising from the Vencor litigation
including, without limitation, severance expense, lease payments and relocation
expenses incurred by ATH or any Subsidiary in connection with the elimination or
modification of services at the applicable Hospitals; provided, that Seller
shall control any matters set forth on (B) above, and the defense of the Vencor
litigation process (including any settlements or appeals) as set forth in
Section 6.5 and, in addition to attorneys' fees, court costs, severance expense,
lease payments and relocation expenses as noted above, shall be solely
responsible for any resulting judgment or award (including any lost profits or
consequential damages, if any, awarded therein to a third party) (Seller shall
have no liability to Buyer or ATH for matters in (B), (C) and (D) above except
to the extent of judgments owed to third parties), and
(b) any actions, judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident to any of the foregoing or the enforcement of this Section.
For purposes for this Agreement, the aggregate amount of such losses, liabilities, claims, obligations, damages, deficiencies, costs, expenses and fees, net of all insurance proceeds, shall be hereinafter referred to as "Damage" or "Damages."
In accordance with the procedures in Section 6.5, if applicable, Buyer hereby agrees to indemnify and hold harmless the Seller from and against:
(a) any Damages arising out of or resulting from (i) any inaccuracy in, or breach, of any representation or warranty or covenant or nonfulfillment of any agreement on the part of Buyer contained in this Agreement or in any statement or certificate furnished or to be furnished to the Seller in connection with the transactions contemplated hereby, or (ii) any and all liabilities related to ATH's business first arising after the Closing Date, and
(b) any actions, judgments, costs and expenses (including reasonable attorneys' fees and all other expenses incurred in investigating, preparing or defending any litigation or proceeding, commenced or threatened) incident to any of the foregoing or the enforcement of this Section.
Notwithstanding any provision of this Agreement to the contrary:
(a) Neither Seller, ATH nor Buyer shall be responsible for lost profits or consequential damages; provided, however, with respect to Seller's and ATH's indemnity obligations, Seller and ATH shall be responsible for lost profits or consequential damages awards to third parties as provided in Section 6.2(a)(ii)(B), (C) and (D).
(b) If and to the extent any Damages for which indemnification is sought relate to events or circumstances occurring both prior to and after the Closing Date or are from both a cause that is indemnified and one that is not so indemnified, (i) Seller's and ATH's obligations hereunder shall extend only to the Damages attributable to events or circumstances prior to the Closing Date or the indemnified event, circumstances or cause, and (ii) Buyer's obligations hereunder shall extend only to the Damages attributable to events or circumstances subsequent to the Closing Date or the indemnified event, circumstances or cause.
(c) No action or claim for Damages resulting from any misrepresentation or breach of warranty shall be brought or made after the survival period set forth in Section 9.1 hereof.
(d) The aggregate Damages indemnified hereunder (i) resulting
from a claim under Section 6.2(a)(i)(other than for misrepresentation or breach
of warranty) or 6.2(a)(ii) shall not exceed, in the aggregate, the Purchase
Price, and (ii) resulting from any misrepresentation or breach of warranty shall
not exceed, in the aggregate, $20,000,000. Any adjustment made pursuant to
Section 1.2 hereof shall not apply toward the foregoing limitation.
(e) No party shall be entitled to receive an indemnification payment with respect to any Damages in respect of any misrepresentation or breach of warranty unless the aggregate payments claimed by such party hereunder with respect to all Damages equal or exceed Two Hundred Fifty Thousand Dollars ($250,000). Any adjustment made pursuant to Section 1.2 shall not apply toward the foregoing limitation.
(f) After the Closing Date, to the extent permitted by law, the provisions of Sections 6.2 through 6.5, as applicable, shall be the sole and exclusive remedy of (i) Buyer for any breach by Seller or ATH of the representations, warranties and covenants contained in this Agreement (or any other document delivered by Seller or ATH at the Closing) and Buyer waives all other remedies, and (ii) Seller for any breach by Buyer of the representations, warranties and covenants contained in this Agreement (or any other document delivered by Buyer at the Closing) and Seller waives all other remedies.
(g) Notwithstanding anything to the contrary herein, no limitation or condition of liability provided in this Section 6.4 shall apply to any misrepresentation or breach of warranty contained herein if such misrepresentation or breach of warranty resulted from fraud, any securities violation or was made willfully or with intent to deceive.
(h) For purposes of calculating the amount of any Damages incurred in connection with any such misrepresentation, breach of warranty, or nonfulfillment of any covenant or agreement, any and all references to material or Material Adverse Effect (or other correlative terms) or dollar qualifiers herein shall be disregarded.
(i) Notwithstanding anything to the contrary herein, no limitation or condition of liability (other than subsection (d) above) shall apply with respect to any liability under any Benefit Plan retained by Seller or any Benefit Plan pursuant to Section 6.12.
(a) A party seeking indemnification pursuant to this Agreement (an "Indemnified Party") shall give prompt notice to the party from whom such indemnification is sought (the "Indemnifying Party") of the assertion of any claim, or the commencement of any action, suit or proceeding by a third party which is not an affiliate of any party hereto in respect of which indemnity may be sought hereunder (a "Third Party Claim"), and will give the Indemnifying Party such information with respect thereto as the Indemnifying Party may reasonably request, but failure to give such notice shall not relieve the Indemnifying Party of any liability hereunder except to the extent that the Indemnifying Party is actually prejudiced thereby.
(b) The Indemnifying Party shall have the right, exercisable by
written notice to the Indemnified Party within 30 days of receipt of notice from
the Indemnified Party of the commencement or assertion of any Third Party Claim
in respect of which indemnity may be sought hereunder, to assume and conduct the
defense of such Third Party Claim with counsel selected by the Indemnifying
Party and reasonably acceptable to the Indemnified Party; provided that (i) the
defense of such Third Party Claim by the Indemnifying Party will not, in the
judgment of the Indemnified Party, have a material adverse effect on the
Indemnified Party; and (ii) the Indemnifying Party has sufficient financial
resources, in the judgment of the Indemnified Party, to satisfy the amount of
any adverse monetary judgment that is reasonably likely to result; and (iii) the
Third Party Claim solely seeks (and continues to seek) monetary damages; and
(iv) the Indemnifying Party expressly agrees in writing that as between the
Indemnifying Party and the Indemnified Party, the Indemnifying Party shall be
solely obligated to satisfy and discharge the Third Party Claim (the conditions
set forth in clauses (i) through (iv) are collectively referred to as the
"Litigation Conditions"). If the Indemnifying Party does not assume the defense
of such Third Party Claim in accordance with this Section 6.5, the Indemnified
Party may continue to defend the Third Party Claim. If the Indemnifying Party
has assumed the defense of a Third Party Claim as provided in this Section 6.5,
the Indemnifying Party will not be liable for any legal expenses subsequently
incurred by the Indemnified Party in connection with the defense thereof;
provided, however, that if (i) the Litigation Conditions cease to be met, or
(ii) the Indemnifying Party fails to take reasonable steps necessary to defend
diligently such Third Party
Claim, the Indemnified Party may assume its own defense, and the Indemnifying Party will be liable for all reasonable costs or expenses paid or incurred in connection therewith.
(c) The Indemnifying Party or the Indemnified Party, as the case may be, shall have the right to participate in (but not control), at its own expense, the defense of any Third Party Claim which the other is defending as provided in this Agreement.
(d) The Indemnifying Party, if it shall have assumed the defense of any Third Party Claim as provided in this Agreement, shall not, without the prior written consent of the Indemnified Party, consent to a settlement of, or the entry of any judgment arising from, any such Third Party Claim (i) which does not include as an unconditional term thereof the giving by the claimant or the plaintiff to the Indemnified Party a complete release from all liability in respect of such Third Party Claim, or (ii) which grants any injunctive or equitable relief, or (iii) which may reasonably be expected to have a material adverse effect on the affected business of the Indemnified Party. The Indemnified Party shall have the right to settle any Third Party Claim, the defense of which has not been assumed by the Indemnifying Party, with the written consent of the Indemnifying Party, which consent shall not be unreasonably withheld or delayed.
(e) Amounts payable in respect of indemnification obligations of the parties shall be treated as an adjustment to the Purchase Price unless otherwise required by law. Whether or not the Indemnifying Party chooses to defend or prosecute any Third Party Claim, all the parties hereto shall cooperate in the defense or prosecution thereof and shall furnish such records, information and testimony, and attend such conferences, discovery proceedings, hearings, trials and appeals, as may be reasonably requested in connection therewith.
The obligations of the parties pursuant to Section 6.2 and 6.3 to pay Damages shall be satisfied by the indemnifying party within five business days after demand for payment by the party entitled to such indemnification. Interest will accrue on unpaid Damages at the prime rate plus two percent (2%) per annum.
Following the Closing, the Seller waives and releases (i) any and all claims for contribution or other payment from ATH or any Subsidiary which Seller may have with respect to the payment by the Seller of any amounts pursuant to Sections 6.2 or 6.5 of the Agreement or for any breach by ATH of its representations, warranties, covenants or agreements contained herein, or (ii) any right of subrogation against ATH or any Subsidiary. The Seller acknowledges that its liability under Sections 6.2 and 6.5 is joint and several with ATH and that Buyer may seek indemnification, in its sole discretion, from any and all such parties, including the Seller exclusively.
Promptly after the date hereof, Buyer and the Seller will file the required notifications with the Federal Trade Commission ("FTC") and the Antitrust Division of the Department of Justice ("Department") pursuant to and in compliance with the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act"). The parties hereto shall not intentionally or negligently delay submission of information requested by FTC and Department under the HSR Act and shall use their respective best efforts promptly to supply, or cause to be supplied, such information and shall use their best efforts to obtain early termination of the applicable waiting period. Buyer and the Seller shall share equally the cost of the filing fee required by the HSR Act.
(a) Each of Seller and Buyer shall, and shall cause their respective employees and representatives, and their affiliates (and the employees and representatives of such affiliates) to, keep confidential and not disclose to any other person or entity or use for its own benefit or the benefit of any other person or entity any trade secrets or other confidential proprietary information in its or their possession or control regarding the other party or their businesses and operations and, specifically with respect to Seller or its affiliates, any trade secrets or confidential information regarding ATH or its Subsidiaries or their businesses or operations. In the event that this Agreement is terminated or the transactions contemplated hereby otherwise fail to close, Buyer and its affiliates and their respective representatives shall promptly return to Seller all written materials provided to Buyer or its affiliates or their representatives by Seller, ATH or their affiliates or representatives.
(b) The obligations of the parties under this Section 6.9 shall not apply to information which (i) is or becomes generally available to the public without breach of the commitment provided for in this Section; or (ii) is required to be disclosed by law, order or regulation of a court or tribunal or governmental authority; provided, however, in any such case, that the disclosing party subject to such requirement shall notify the affected party as early as practicable prior to disclosure to allow the affected party to take appropriate measures to preserve the confidentiality of such information.
Each party shall cooperate with the other in connection with (i) the filing of any Medicare and/or Medicaid cost reports required to be filed after the Closing Date; (ii) the determination of any liability or right relating to such reports, and (iii) the conduct or defense of any investigation, audit or other proceeding related to such reports. Buyer, ATH, the Subsidiaries and Seller, and their respective affiliates, shall preserve all information, returns, books, records and documents relating to any Medicare and/or Medicaid cost reports and supporting materials with respect to an applicable period, and shall provide access to employees and former employees, until the later of the expiration of all applicable statutes of limitation and
extensions thereof, or the conclusion of all litigation with respect to the applicable reports for such period.
For a period of five (5) years from and after the Closing Date:
(a) Neither party shall dispose of or destroy any of its books and records relating to the business of ATH and any Subsidiary for periods prior to the Closing (whether on paper, electronic or other form or media) ("Books and Records") without first offering to turn over possession thereof to the other party by written notice given to the other party at least thirty (30) days prior to the proposed date of such disposition or destruction.
(b) Each party shall allow the other party and its agents access to all Books and Records (to the extent that they relate to periods prior to the Closing) during normal working hours at its principal place of business or, at such party's option, at any location where any such Books and Records are stored, and the requesting party shall have the right to make copies of any Books and Records (to the extent that they relate to periods prior to the Closing) at its own expense; provided, however, that any such access or copying shall be had or done in such a manner so as not to interfere unreasonably with the normal conduct of the business of the party to whom the request was made.
(c) Each party shall make available to the other party upon reasonable written request: (i) copies of any Books and Records (to the extent that they relate to periods prior to the Closing), or (ii) such personnel as are reasonably required to assist in locating and obtaining any such Books and Records.
plans as defined in Section 2.25(a). Seller and the Benefit Plans shall retain responsibility under those Benefit Plans for all costs and coverages and all amounts payable by reason of claims incurred by or on behalf of the ATH Participants through the Closing Date, including claims submitted after the Closing Date. A claim shall be deemed to have occurred on the date of (i) death or dismemberment in the case of claims under life insurance or accidental death and dismemberment insurance, (ii) the date of initial disability in the case of disability claims, or (iii) in the case of all other claims including medical claims, the date on which the charge or expense giving rise to such claim is incurred in the case of all other claims. Seller and the Benefit Plans shall be responsible for all legally mandated continuation coverage for ATH Participants who had or have a loss of coverage due to a "qualifying event" within the meaning of Section 603 of ERISA that occurred before the Closing Date.
As soon as reasonably practicable but in no event later than one year following Closing, ATH shall, and shall cause its Subsidiaries to, remove all of Seller's logos that are
displayed in the Hospitals or on other real and personal property or otherwise used in the business of ATH and its Subsidiaries. It is understood by the parties that, except as provided in Section 2.24 hereof, no logo, trademark, tradename, or other item of intellectual property owned by Seller or any of its subsidiaries or affiliates, other than ATH and the Subsidiaries, and no right to use such, shall be transferred in connection with the transactions contemplated hereby.
Except as otherwise provided in this Article VII, all tax sharing agreements, arrangements, policies and guidelines, formal or informal, express or implied, that may exist between ATH and/or the Subsidiaries and Seller or any of its affiliates and all obligations thereunder shall terminate as of the Closing Date and neither ATH nor any Subsidiary shall have any liability thereunder for any amounts due in respect of periods ending prior to or on the Closing Date.
ATH and the Subsidiaries shall continue to be included for all taxable periods ending on or before the Closing Date in the consolidated federal income Tax Return of which Seller is the common parent and any required state or local consolidated, combined or unitary income or franchise Tax Returns that include ATH and the Subsidiaries for any period ending prior to or on the Closing Date (all such Tax Returns including taxable periods of ATH and the Subsidiaries ending prior to or on the Closing Date being hereinafter referred to as "Pre- Closing Consolidated Returns"). Seller shall timely prepare and file or cause to be prepared and filed all Pre-Closing Consolidated Returns, all other income Tax Returns of ATH and the Subsidiaries for taxable periods ending on or prior to the Closing Date and all other Tax Returns of ATH and the Subsidiaries required to be filed on or prior to the Closing Date ("Seller's Returns"). Seller shall timely pay or cause to be paid all Taxes shown as due and payable on Seller's Returns ("Seller's Taxes"). If ATH and the Subsidiaries are permitted under any applicable state or local income tax law to treat the Closing Date as the last day of a taxable period, Buyer and Seller shall treat (and cause their respective affiliates to treat) the Closing Date as the last day of a taxable period.
Buyer shall timely prepare and file or cause to be prepared and filed all Tax Returns required by law of ATH and the Subsidiaries that are not required to be prepared and filed by Seller pursuant to Section 7.2 ("Buyer's Returns"). Buyer shall timely pay or cause to be paid all Taxes relating to Buyer's Returns ("Buyer's Taxes"). In the event a taxable period reflected in a Buyer's Return includes a period prior to the Closing Date (a "Straddle Return"), (i) such Return shall be prepared in a manner consistent with Seller's past practice and (ii) Seller shall be liable for amounts unpaid net of amounts prepaid representing the portion of Buyer's Taxes allocable to the period up to and including the Closing Date ("Sellers' Accrued Taxes").
Such allocable portion shall, in the case of real and personal property Taxes,
be apportioned ratably on a per diem basis and, in the case of other Taxes, be
apportioned based on the actual operations of ATH and the Subsidiaries, provided
that federal income Taxes shall be allocated in accordance with the provisions
of Treasury regulations (S)1.1502-76(b), determined without regard to the
ratable allocation provision of Treasury regulations (S)1.1502-76(b)(2)(ii) or
(iii). At least 21 days prior to the filing of any Straddle Return, Buyer shall
deliver a copy of such Return to Seller, together with Buyer's reasonably
detailed computation of Seller's Accrued Taxes for such Return, for Seller's
review and comment. Seller shall within ten days following receipt of the
Return, deliver to Buyer any objections regarding the calculation of Taxes or
Seller's Accrued Taxes with respect to the Return. Seller and Buyer shall
attempt in good faith to resolve any disputes regarding such calculations,
provided that if they are unable to resolve such disputes within thirty days
after delivery of Seller's objections, the dispute shall be submitted to Coopers
& Lybrand LLP ("Arbiter") for final resolution, with the costs of Arbiter to be
borne equally by Buyer and Seller.
(a) After the Closing Date, Seller shall submit to Buyer blank Tax Return workpaper packages reasonably necessary for Seller (or its parent) to prepare any Sellers' Returns. Buyer shall cause ATH to prepare completely and accurately all information that Seller shall reasonably request in such workpaper packages and shall submit to Seller such packages within the later of 90 days after Buyer's receipt thereof or 90 days after the close of the taxable period to which a workpaper package relates.
(b) Each party shall cooperate with the other in connection with
(i) the filing of any Tax Return, amended Tax Return or claim for refund; (ii)
the determination of any Tax liability or right to claim a refund, or (iii) the
conduct or defense of any investigation, audit or other proceeding related to
Taxes. Buyer, ATH, the Subsidiaries and Seller and their respective affiliates
shall preserve all information, returns, books, records and documents relating
to any liabilities for Taxes with respect to a taxable period until the later of
the expiration of all applicable statutes of limitation and extensions thereof,
or the conclusion of all litigation with respect to Taxes for such period.
(a) After the Closing Date, Seller shall indemnify and hold
harmless Buyer from and against any Tax liability with respect to (i) any
Seller's Taxes; (ii) Buyer's Taxes, to the extent of Seller's Accrued Taxes; and
(iii) any increase in Tax liability resulting from ATH and the Subsidiaries
being severally liable for any Taxes of Seller's consolidated group or any other
consolidated group of which ATH and the Subsidiaries were members prior to the
Closing Date pursuant to Treasury Regulations (S)1.1502-6 or any analogous state
or local tax provision. Seller shall pay such amounts as they are obligated to
pay to Buyer under the preceding sentence within 15 days after payment of any
applicable Tax liability by Buyer, ATH or any Subsidiary and to the extent not
paid by Seller or Seller Parent within such 15-day period such unpaid amounts
shall thereafter include interest thereon at prime rate plus 2% per annum.
(b) After the Closing Date, Buyer shall indemnify and hold harmless Seller and their affiliates from and against any Tax liability with respect to (i) Buyer's Taxes that are allocable to or apportioned to a period after the Closing Date. Buyer shall pay such amounts within 15 days after payment of any such Tax liability by Seller, Seller Parent or any affiliate and to the extent not paid by Buyer within such 15-day period such unpaid amounts shall thereafter include interest thereon at the prime rate plus 2% per annum.
(a) In the event that Buyer, ATH or any Subsidiary receives notice, whether orally or in writing, of any pending or threatened federal, state, local, municipal or foreign examinations, claims settlements, proposed adjustments, assessments or reassessments or related matters with respect to Taxes that could affect Seller or any affiliate, or if Seller or any affiliate receives notice of matters that could affect Buyer, ATH or any Subsidiary, the party receiving notice shall promptly notify in writing the potentially affected party. The failure of any party to give the notice required by this paragraph shall not impair that party's rights under this Agreement except to the extent that the other parties demonstrate that they have been damaged thereby.
(b) Seller or Buyer, as applicable (the "Controlling Party"), shall have the right, at its own expense, to control any audit or examination by any taxing authority, initiate any claim for refund, file any amended Return, contest, resolve and defend against any assessment, notice of deficiency or other adjustment or proposed adjustment relating to or with respect to any Taxes for which the Controlling Party is required to indemnify any other party pursuant to Section 7.5; provided, that, in the event that any such adjustment could have an adverse effect on the Tax liability of the other party (or affect Buyer by having an effect on the Tax liability of ATH and the Subsidiaries) (the "Affected Party"), the Controlling Party shall (i) give the Affected Party written notice of any such adjustment, (ii) permit the Affected Party to participate in the proceeding to the extent the adjustment may affect the Tax liability of the Affected Party and (iii) not settle or otherwise compromise such proceeding without the prior written consent of the Affected Party, which consent shall not be unreasonably withheld.
Any indemnification payments made pursuant to this Article VII shall be treated for tax purposes as an adjustment to the Purchase Price unless otherwise required by applicable law.
As used in this Agreement, in addition to the terms defined elsewhere, the following terms shall have the meanings set forth below:
(a) "Accounting Principles" means generally accepted accounting principles, subject to Schedule 8.1(a).
(b) "Federal Health Care Programs" means the Federal Health Care Programs as defined in Section 1128B of the Social Security Act or any regulations promulgated thereunder.
(c) "knowledge," "actual knowledge," "best knowledge," and similar phrases shall mean the actual knowledge of Seller, ATH or Buyer, as the case may be, based on the knowledge of the persons set forth as follows:
i. For Seller: T. Jerald Moore, Executive Vice President, Scott Tabakin, Executive Vice President and Chief Financial Officer, David Merrell, Vice President Financial Planning and Robert Pommerville, General Counsel;
ii. For ATH: T. Jerald Moore, President, Steve Munroe, Vice President and Chief Financial Officer, Jane Chambers, Vice President Human Resources, Greg Sassman, Vice President Development, Patrick Gandy, Group Vice President of Operations, Patricia McCullough, Group Vice President of Operations, Terri Votava, Group Vice President of Operations (and any person with a higher title in such area) and Caroline Fears, Vice President of Marketing (and any person with a higher title in such area);
iii. For Buyer: the President, Chief Executive Officer, or any officer whose title includes "Vice President" of Buyer.
(d) "Material Adverse Effect" means an event, change or effect (or series of related events, changes or effects) that is materially adverse to the financial condition, properties, assets, liabilities (contingent or otherwise), businesses or operations of ATH and its Subsidiaries, taken as a whole.
(e) "Related Party" means the Seller, any of the officers or directors of ATH or any Subsidiary, any affiliate, associate or relative of the Seller, ATH or any Subsidiary, or any of their respective officers or directors, or any business or entity in which the Seller, ATH, any Subsidiary or any affiliate, associate or relative of any such person has any material direct or indirect interest.
The representations, warranties, covenants and agreements of Buyer and the Seller and ATH contained in this Agreement, and all statements contained in this Agreement or any exhibit or schedule hereto or any certificate, financial statement or report or other document delivered pursuant to this Agreement or in connection with the transactions contemplated hereby,
shall be deemed to constitute representations, warranties, covenants and agreements of the respective party delivering the same. All such representations and warranties shall survive the Closing for a period of fifteen months; provided, however, that the foregoing time limitation shall not apply to: (i) any of the representations and warranties contained in Sections 2.1, 2.2, 2.5 and 2.17, each of which shall survive indefinitely; (ii) the representations and warranties contained in Sections 2.10, 2.15, 2.25, 2.28, 2.29, 2.30, 2.31 and 2.32, each of which shall survive until thirty days following expiration of the applicable statute of limitations; and (iii) any such claims which have been the subject of a good faith written notice prior to the expiration of the applicable survival period, which notice asserts such claim and specifies in reasonable detail the nature and basis for such claim. The covenants and agreements under this Agreement or in any statement or certificate furnished or to be furnished pursuant hereto or in connection with the transactions contemplated hereby shall survive without limitation.
All notices, requests, demands and other communications hereunder shall be in writing and shall be deemed to have been duly given if personally delivered or, if sent by telecopy, when received or, if sent by nationally recognized overnight delivery service, when delivered or, if mailed, three business days after being mailed by United States first-class, certified or registered mail, postage prepaid, to the other party at the following addresses (or at such other address as shall be given in writing by any party to the other):
If to Buyer at any time or to ATH after the Closing, to:
with a required copy to:
If to the Seller:
Beverly Enterprises, Inc.
5111 Rogers Avenue
Suite 40A
Fort Smith, AR 72919
with a copy to:
with an additional required copy to:
If to ATH prior to the Closing, to:
with a copy to:
With an additional required copy to:
This Agreement, and all rights and powers granted hereby, will bind and inure to the benefit of the parties hereto and their respective successors and assigns. This Agreement may not be assigned, whether by contract or operation of law, by any party hereto without the prior written consent of the other parties except that Buyer may assign all or part of its rights hereunder without such consent to a wholly-owned subsidiary.
This Agreement shall be governed by and construed in accordance with the internal laws of the State of Tennessee without giving effect to principles of conflicts of laws.
The headings preceding the text of the sections and subsections hereof are inserted solely for convenience of reference, and shall not constitute a part of this Agreement, nor shall they affect its meaning, construction or effect.
This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but which together shall constitute one and the same instrument.
Each party shall cooperate and take such action as may be reasonably requested by another party in order to carry out the provisions and purposes of this Agreement and the transactions contemplated hereby.
The parties may by mutual agreement amend this Agreement in any respect, and any party, as to such party, may (a) extend the time for the performance of any of the obligations of any other party, (b) waive any inaccuracies in representations by any other party, (c) waive compliance by any other party with any of the agreements contained herein and performance of any obligations by such other party, and (d) waive the fulfillment of any condition that is precedent to the performance by such party of any of its obligations under this Agreement. To be effective, any such amendment or waiver must be in writing and be signed by the party against whom enforcement of the same is sought.
This Agreement and the Schedules and Exhibits hereto, each of which is hereby incorporated herein, set forth all of the promises, covenants, agreements, conditions and
undertakings between the parties hereto with respect to the subject matter hereof, and supersede all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written.
The parties agree and acknowledge that the risk of loss with respect to the Stock and the assets and business of ATH and each Subsidiary remains with the Seller and ATH prior to the Closing.
Buyer acknowledges that no representation or warranty set forth herein of Seller or ATH shall be breached because of the consummation of the contemplated post-Closing mergers set forth in the Background section hereof.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
SELECT MEDICAL CORPORATION
By: /s/ Robert A. Ortenzio ---------------------------------- Name: Title: |
BEVERLY ENTERPRISES, INC.
By: /s/ David G. Merrell ---------------------------------- Name: Title: |
AMERICAN TRANSITIONAL HOSPITALS, INC.
By: /s/ David G. Merrell ---------------------------------- Name: Title: |
Exhibit 2.2
AGREEMENT AND PLAN OF MERGER
By and Among
SELECT MEDICAL CORPORATION
SELECT MEDICAL OF MECHANICSBURG, INC.
and
INTENSIVA HEALTHCARE CORPORATION
Dated as of November 9, 1998
TABLE OF CONTENTS
Page ARTICLE I THE OFFER...................................................... 1 1.1. The Offer........................................................ 1 1.2. Conditions to the Offer.......................................... 2 1.3. Waivers of Conditions............................................ 3 1.4. Schedule 14D-1................................................... 5 1.5. Company Action................................................... 6 ARTICLE II THE MERGER 7 2.1. The Merger....................................................... 7 2.2. Effective Time; Closing.......................................... 7 2.3. Effect of the Merger............................................. 7 2.4. Certificate of Incorporation; By-laws............................ 7 2.5. Directors and Officers........................................... 8 2.6. Conversion of Securities......................................... 8 2.7. Dissenting Shares................................................ 8 2.8. Employee Stock Options........................................... 9 2.9. Surrender of Shares; Stock Transfer Books........................ 10 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY................ 11 3.1. Organization and Qualification; Subsidiaries.................... 11 3.2. Certificate of Incorporation and By-laws........................ 12 3.3. Capitalization.................................................. 12 3.4. Authority Relating to this Agreement............................ 12 3.5. No Conflict; Required Filings and Consents...................... 13 3.6. SEC Filings; Financial Statements............................... 13 3.7. Absence of Certain Changes or Events............................ 14 3.8. Absence of Litigation........................................... 15 3.9. Labor Matters; Employee Benefit Plans........................... 15 3.10. Offer Documents; Schedule 14D-9; Proxy Statement................ 17 3.11. Taxes........................................................... 17 3.12. Compliance with Laws............................................ 19 3.13. Exclusion....................................................... 20 3.14. Accounts Receivable............................................. 20 3.15. Brokers......................................................... 20 3.16. Real Property and Leases........................................ 20 3.17. Environmental Matters........................................... 21 3.18. State Takeover Statutes......................................... 22 |
3.19. Vote Required................................................... 22 3.20. Certain Contracts............................................... 22 3.21. Intellectual Property........................................... 23 3.22. Opinion of Financial Advisor.................................... 23 3.23. Affiliate Transactions.......................................... 23 3.24. Prior Negotiations.............................................. 23 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER........................................................... 24 4.1. Corporate Organization.......................................... 24 4.2. Authority Relating to this Agreement............................ 24 4.3. No Conflict; Required Filings and Consents...................... 24 4.4. Financing....................................................... 25 4.5. Offer Documents; Proxy Statement................................ 25 4.6. Brokers......................................................... 26 4.7. Ownership of Company Common Stock............................... 26 ARTICLE V CONDUCT OF BUSINESS PENDING THE MERGER......................... 26 5.1. Conduct of Business by the Company Pending the Merger........... 26 5.2. Additional Covenants............................................ 29 ARTICLE VI ADDITIONAL AGREEMENTS......................................... 29 6.1. Stockholders Meeting............................................ 29 6.2. Proxy Statement................................................. 30 6.3. Company Board Representation; Section 14(1)..................... 30 6.4. Access to Information; Confidentiality.......................... 31 6.5. No Solicitation of Transactions................................. 32 6.6. Employee Matters................................................ 34 6.7. Directors' and Officers' Indemnification and Insurance.......... 34 6.8. Further Action; Reasonable Best Efforts......................... 35 6.9. Public Announcements............................................ 36 6.10. SEC and Stockholder Filings..................................... 36 6.11. Takeover Statutes............................................... 36 6.12. Advice of Breaches.............................................. 37 ARTICLE VII CONDITIONS TO THE MERGER..................................... 37 7.1. Conditions to the Merger........................................ 37 7.2. Parent and Purchaser Conditions to the Merger................... 37 7.3. Company Conditions to the Merger................................ 38 |
ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER........................... 39 8.1. Termination..................................................... 39 8.2. Effect of Termination........................................... 41 8.3. Fees and Expenses............................................... 42 8.4. Amendment....................................................... 43 8.5. Waiver.......................................................... 43 ARTICLE IX GENERAL PROVISIONS............................................ 43 9.1. Non-Survival of Representations, Warranties and Agreements...... 43 9.2. Notices......................................................... 43 9.3. Definitions..................................................... 45 9.4. Severability.................................................... 48 9.5. Entire Agreement; Assignment.................................... 48 9.6. Parties in Interest............................................. 49 9.7. Governing Law................................................... 49 9.8. Headings........................................................ 49 9.9. Counterparts.................................................... 49 9.10. Specific Performance............................................ 49 9.11. Costs of Enforcement............................................ 49 |
THIS AGREEMENT AND PLAN OF MERGER, dated as of November 9, 1998 (the "Agreement"), is by and among SELECT MEDICAL CORPORATION, a Delaware corporation ("Parent"), SELECT MEDICAL OF MECHANICSBURG, INC., a Delaware corporation and a wholly owned subsidiary of Parent ("Purchaser"), and INTENSIVA HEALTHCARE CORPORATION, a Delaware corporation (the "Company").
(a) The Boards of Directors of Parent, Purchaser and the Company have each determined that it is in the best interests of their respective stockholders for Parent to acquire the Company upon the terms and subject to the conditions set forth herein.
(b) In furtherance of such acquisition, Parent, Purchaser and the Company have agreed that Purchaser shall make a cash tender offer to acquire all the outstanding shares of common stock of the Company, on the terms and subject to the conditions of this Agreement.
(c) The Board of Directors of the Company has approved the making of such offer and has agreed to recommend that holders of Shares tender their Shares under such offer.
(d) The Boards of Directors of Parent, Purchaser and the Company have approved the merger of Purchaser with and into the Company following the consummation of the Offer and on the terms and subject to the conditions set forth herein.
(e) Parent and Purchaser have entered into agreements with certain holders of the Shares under which such holders agree to tender such Shares in the Offer and/or vote in favor of the Offer and the Merger (the "Stockholder Agreements").
(f) Certain capitalized terms used herein are defined in Section 9.3.
In consideration of the foregoing and the mutual covenants and agreements herein contained, and intending to be legally bound hereby, Parent, Purchaser and the Company hereby agree as follows:
ARTICLE I
THE OFFER
1.1. The Offer.
Upon the terms and subject to the conditions of this Agreement, Purchaser shall commence a cash tender offer (the "Offer") to acquire all the issued and outstanding shares (the "Shares") of Common Stock, par value $0.001 per share, of the Company ("Common Stock'). The purchase price under the Offer shall be $9.625 per Share (such amount, or any greater amount per Share paid pursuant to the Offer, being hereinafter referred to as the "Per Share
Amount"), net to the seller in cash, on the terms and subject to the conditions set forth herein. Purchaser shall commence the Offer as promptly as reasonably practicable after the date hereof, but in no event later than five Business Days after the initial public announcement of Purchaser's intention to commence the Offer. Subject to the terms and conditions of the Offer and in accordance with the terms of this Agreement, Purchaser shall accept for payment and pay for, as promptly as practicable after expiration of the Offer, all Shares validly tendered and not withdrawn.
1.2. Conditions to the Offer.
The obligation of the Purchaser to accept for payment and pay for Shares tendered pursuant to the Offer shall be subject to the following conditions:
(a) At least the number of Shares that, when added to the Shares already owned by Parent, shall constitute 90% of the then outstanding Shares on a fully diluted basis (including, without limitation, all Shares issuable upon the conversion of any convertible securities or upon the exercise of any options, warrants or rights), shall have been validly tendered and not withdrawn prior to the expiration of the Offer (the "Minimum Condition");
(b) any applicable (i) waiting period under the HSR Act or (ii) period during which Parent or Purchaser shall have consented or otherwise be barred from purchasing Shares pursuant to the Offer as part of any agreement or other arrangement with any Governmental Authority involving the HSR Act or any other applicable antitrust laws has expired or been terminated prior to the expiration of the Offer (as it may be extended hereunder);
(c) the Company shall have received any required consent or approval
of any Governmental Authority and there shall not be pending or threatened any
action or proceeding before any court or Governmental Authority, domestic or
foreign, (i) challenging or seeking to directly or indirectly restrain or
prohibit, the transactions contemplated hereby including the Merger, the Offer
and the Stockholders Agreements (the "Transactions"); (ii) seeking to prohibit
or limit materially the ownership or operation by the Company, Parent or any of
their Subsidiaries of all or any material portion of the business or assets of
the Company, (iii) seeking to impose limitations on the ability of the Parent,
the Purchaser or any other Affiliate of Parent to exercise effectively full
rights of ownership of any Shares, (iv) seeking to require divestiture by
Parent, Purchaser or any other Affiliate of Parent of any Shares, (v) seeking to
prohibit Parent or any of its Subsidiaries from effectively controlling in any
material respect the business or operations of the Company or its Subsidiaries,
(vi) seeking to obtain from the Company, Parent or Purchaser any damages or
otherwise imposing financial burdens, penalties or fines that are material in
relation to the Company and its Subsidiaries, or Parent and its Subsidiaries, in
each case taken as a whole, or (vii) which is otherwise reasonably likely to
have a Material Adverse Effect on the Company;
(d) there shall not have been any statute, rule, regulation, judgment, order or injunction enacted, entered, issued, enforced, promulgated or deemed applicable, or any other action taken, by any Government Authority other than the routine application of the waiting
period provisions of the HSR Act to the Offer, or the Merger, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (vii) of the preceding paragraph;
(e) there shall not have occurred, and be continuing, any change, condition, event or other development that has had a Material Adverse Effect;
(f) the representations and warranties of the Company in this Agreement shall be true and correct (for all purposes of this paragraph (f) without giving effect to any material or Material Adverse Effect qualifiers or other qualifiers based on materiality that are contained in this Agreement) as of such time (except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date), except to the extent that the failure or failures to be true or correct do not, in the aggregate, have a Material Adverse Effect;
(g) the Company shall have performed in all material respects its obligations under this Agreement which, by their terms, are to be performed prior to such date;
(h) this Agreement shall not have been terminated in accordance with its terms; and
(i) all of the holders of outstanding Company Stock Options which have not been exercised or tendered in the Offer shall have agreed to the cancellation of such Company Stock Options as described in Section 2.8 in consideration for the receipt of the Option Spread.
The obligations of the Purchaser to purchase shares pursuant to the Offer and engage in the Merger are not contingent upon the obtaining of financing by the Parent or Purchaser, and no such condition shall be implied by the conditions contained in this Section 1.2.
1.3. Waivers of Conditions.
(a) The conditions in Section 1.2 are for the sole benefit of Purchaser and Parent and may be waived by Purchaser or Parent in whole or in part at any time and from time to time in their sole discretion and Purchaser expressly reserves the right to modify the terms of the Offer, except that, without the prior written consent of the Company:
(i) the Minimum Condition may not be waived, provided that Parent and Purchaser may reduce the Minimum Condition to 66-2/3% of the outstanding Shares on a fully-diluted basis;
(ii) no change may be made which (A) decreases the price per Share payable in the Offer, (B) reduces the maximum number of Shares to be purchased in the Offer, (C) imposes conditions to the Offer other than as set forth above, or (D) is otherwise materially adverse to the Company's stockholders.
(b) The Purchaser may, without the consent of the Company, (i) extend
the Offer on one or more occasions beyond the then scheduled expiration date
(the initial scheduled expiration date being 20 Business Days following the
commencement of the Offer computed in accordance with SEC Rules) if, at the then
scheduled expiration date of the Offer, any of the conditions to Purchaser's
obligation to accept for payment, and to pay for, the Shares, shall not be
satisfied or waived, (ii) extend the Offer for the minimum period required by
the SEC Rules applicable to the Offer including in connection with any increase
in consideration or waiver of a condition which is permitted to be waived under
Section 1.3(a), (iii) extend the Offer as provided in Section 1.3(c) or (iv)
extend the Offer on one or more occasions for an aggregate period of not more
than 10 Business Days beyond the initial expiration date or the latest
expiration date that would otherwise be permitted (or, in the case of clause
(iii), required) under clause (i), (ii) or (iii) of this sentence; provided,
that, in the case of such an extension under clause (iv), the Purchaser and the
Parent shall have irrevocably waived the conditions contained in Section 1.2
other than the conditions set forth in Section 1.2(a), 1.2(h) and, with respect
to willful breaches, Section 1.2(g).
(c) If on the then scheduled expiration date of the Offer, any
condition to the Offer set forth in Section 1.2(b)-(d) is not satisfied or
waived, and all of the conditions to the Offer other than those set forth in
Section 1.2(b)-(d) have been satisfied or waived, the Purchaser shall, if
requested by the Company in writing prior to the then scheduled expiration date
(which notice shall describe in reasonable detail the circumstances resulting in
the failure of such condition to be satisfied), extend the Offer to the extent
necessary to permit such condition to be satisfied, provided that Purchaser
shall not be required to extend the Offer under this Section 1.3(c) beyond the
date specified in Section 8.1(b)(i) or (ii) if the conditions to the Offer
specified herein cannot be satisfied on or prior to such date.
(d) If on the then scheduled expiration date of the Offer, the Minimum
Condition shall not have been satisfied or waived but more than 66-2/3% of the
outstanding Shares on a fully-diluted basis have been tendered and not
withdrawn, then Purchaser may, in addition to or in lieu of extending the Offer
pursuant to Section 1.3(b), deliver to the Company a written notice (the "Merger
Notice") directing the Company to proceed with the Merger and to call and hold
the Stockholders Meeting and disseminate the Proxy Statement as soon as
reasonably practicable. In the event (i) Purchaser elects not to deliver a
Merger Notice to the Company pursuant to the preceding sentence, (ii) the
Minimum Condition shall not have been satisfied or waived but more than 66-2/3%
of the outstanding Shares on a fully-diluted basis have been tendered and not
withdrawn and (iii) all of the conditions to the Offer other than the Minimum
Condition and those conditions set forth in Section 1.2(b)-(d) have been
satisfied or waived, Purchaser shall extend the Offer for one or more periods of
time to permit the Minimum Condition and the other conditions to be satisfied as
provided in Section 1.3(b); provided that Purchaser shall not be required to
extend the Offer under this Section 1.3(d) (x) beyond the date specified in
Section 8.1(b)(i) or (y) if the conditions to the Offer specified herein cannot
be satisfied on or prior to such date.
(e) If at any time on or after January 15, 1999, (i) the Offer shall not have expired or terminated in accordance with its terms, (ii) the Minimum Condition shall not have been satisfied or waived but more than 66-2/3% of the outstanding Shares on a fully-diluted basis have been tendered and not withdrawn, and (iii) all of the conditions to the Offer other than the Minimum Condition and those conditions set forth in Section 1.2(b)-(d) have been satisfied or waived, then at such time the Company may deliver to Parent and Purchaser a written Merger Notice informing Parent and Purchaser that the Company has elected to call and hold the Stockholders Meeting and disseminate the Proxy Statement as soon as reasonably practicable.
(f) The Per Share Amount has been calculated based on the information set forth in Section 3.3. If the number of outstanding Shares or Shares issuable upon the exercise of, or subject to, options or other agreements is, at the date of acceptance of Shares under the Offer, more or less than the amounts specified in Section 3.3 by more than 10,000 Shares (including, without limitation, as a result of any stock split, reverse stock split, stock dividend, including any dividend or distribution of securities convertible into Shares, recapitalization or other like change occurring after the date of this Agreement), the Per Share Amount shall be appropriately adjusted. The provisions of this subsection (f) shall not, however, be deemed to modify the representation set forth in Section 3.3.
1.4. Schedule 14D-1.
On the date of commencement of the Offer, Parent and Purchaser shall file with the SEC a Tender Offer Statement on Schedule 14D-1 (together with all amendments and supplements thereto, the "Schedule 14D-J") with respect to the Offer, which shall contain or shall incorporate by reference an offer to purchase (the "Offer to Purchase") and forms of the related letter of transmittal and any related summary advertisement (the Schedule 14D-1, the Offer to Purchase and such other documents, together with all supplements and amendments thereto, being referred to herein collectively as the "Offer Documents"). The Offer Documents will comply in all material respects with the Securities Exchange Act of 1934, as amended (the "Exchange Act") and other applicable laws and will contain (or will be amended in a timely manner so as to contain) all information which is required to be included therein in accordance with the Exchange Act and the rules and regulations thereunder and other applicable laws. Parent, Purchaser and the Company agree to correct promptly any information provided by any of them for use in the Offer Documents which were or shall have become false or misleading, and Parent and Purchaser further agree to take all steps necessary to cause the Schedule 14D-1 as so corrected to be filed with the SEC and the other Offer Documents as so corrected to be disseminated to holders of Shares, in each case as and to the extent required by applicable federal securities laws. Parent and Purchaser will afford the Company and its counsel a reasonable opportunity to review and comment on the Offer Documents and any amendments thereto prior to the filing thereof with the SEC. Parent and Purchaser will provide the Company and its counsel in writing any comments that they or their counsel may receive from the SEC or its staff with respect to the Offer Documents promptly after receipt thereof.
1.5. Company Action.
(a) The Company hereby consents to the Offer and represents and warrants that (i) the Board, at a meeting duly called and held on November 9, 1998, by unanimous action has (A) determined that this Agreement and the Transactions, including the Offer and the Merger, are fair to and in the best interests of the holders of Shares, (B) approved and adopted this Agreement and the Transactions (such approval and adoption having been made in accordance with the provisions of (S) 203 of Delaware Law) and (C) resolved to recommend that the stockholders of the Company accept the Offer and approve and adopt this Agreement and the Merger, and (ii) Wasserstein Perella & Co. Inc. ("WP&Co.") has delivered to the Board its oral opinion (to be confirmed in writing promptly following execution of this Agreement) that, based on, and subject to, the various assumptions and qualifications set forth in such opinion, as of the date thereof, the consideration to be received by the holders of Shares pursuant to each of the Offer and the Merger is fair to the holders of Shares from a financial point of view. Unless the recommendation of the Board has been withdrawn in accordance with Section 6.5, the Company consents to the inclusion in the Offer Documents of the recommendation of the Board and the written opinion described in the immediately preceding sentence and agrees to request WP&Co. to consent to the inclusion of its written opinion in the offering documents forming a part of the Schedule 14D-9.
(b) On the date of commencement of the Offer, the Company shall file
with the SEC a Solicitation/Recommendation Statement on Schedule 14D-9 (together
with all amendments and supplements thereto, the Schedule 14D-9") containing,
unless the recommendation of the Board has been withdrawn in accordance with
Section 6.5, the recommendation of the Board described in Section 1.5(a) and
shall disseminate the Schedule 14D-9 to the extent required by Rule 14d-9
promulgated under the Exchange Act, and any other applicable federal securities
laws. The Company will afford the Parent and its counsel a reasonable
opportunity to review and comment on the Schedule 14D-9 and its exhibits prior
to the filing thereof with the SEC or dissemination to stockholders of the
Company. The Company will provide Parent and its counsel in writing any comments
that the Company or its counsel may receive from the SEC or its staff with
respect to the Schedule 14D-9 promptly after receipt thereof. The Company
represents and warrants that Schedule 14D-9 will comply in all material respects
with the Exchange Act and any other applicable laws and will contain (or will be
amended in a timely manner so as to contain) all information which is required
to be included therein in accordance with the Exchange Act and the rules and
regulations thereunder and other applicable laws. The Company, Parent and
Purchaser agree to correct promptly any information provided by any of them for
use in the Schedule 14D-9 which has or shall have become false or misleading,
and the Company further agrees to take all steps necessary to cause the Schedule
14D-9 as so corrected to be filed with the SEC and disseminated to holders of
Shares, in each case as and to the extent required by applicable federal
securities laws.
(c) The Company shall promptly furnish Purchaser with mailing labels and any available listing or computer file containing the names and addresses of all record holders of Shares and with security position listings of Shares held in stock depositories, each as of a recent
date, and furnish Purchaser with such information and assistance as Purchaser or its agents may reasonably request in communicating the Offer to the holders of Shares. Subject to the requirements of applicable law, and except for such steps as are necessary to disseminate the Offer Documents and any other documents necessary to consummate the Offer or the Merger, Parent and Purchaser shall hold in strict confidence the information contained in such labels, listings and files, shall use such information only in connection with the Offer and the Merger, and, if this Agreement shall be terminated in accordance with Section 8.1, shall promptly deliver to the Company all copies of such information then in their possession.
ARTICLE II
THE MERGER
2.1. The Merger.
Upon the terms and subject to the conditions set forth in Article VII, and in accordance with Delaware Law, at the Effective Time (as hereinafter defined), Purchaser shall be merged with and into the Company (the "Merger"). As a result of the Merger, the separate corporate existence of Purchaser shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation").
2.2. Effective Time; Closing.
As promptly as practicable after the satisfaction or, if permissible, waiver of the conditions set forth in Article VII, the parties hereto shall cause the Merger to be consummated by filing a certificate of merger or certificate of ownership and merger (in either case, the "Certificate of Merger") with the Secretary of State of the State of Delaware, in such form as is required by, and executed in accordance with the relevant provisions of, Delaware Law. The Merger shall become effective at the time of such filing or such later time as may be specified in the Certificate of Merger (the date and time when the Merger shall become effective being the "Effective Time").
2.3. Effect of the Merger.
At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of Delaware Law. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time all the property, rights, privileges, powers and franchises of the Company and Purchaser shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of the Company and Purchaser shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation.
2.4. Certificate of Incorporation; By-laws.
(a) At the Effective Time, the Certificate of Incorporation of Purchaser shall be the Certificate of Incorporation of the Surviving Corporation until thereafter amended as
provided by law and such Certificate of Incorporation; provided, that such
Certificate of Incorporation shall be in accordance with the provisions of
Section 6.7 hereof.
(b) The By-laws of Purchaser, as in effect immediately prior to the Effective Time, shall be the By-laws of the Surviving Corporation until thereafter amended as provided by law, the Certificate of Incorporation of the Surviving Corporation and such By-laws.
2.5. Directors and Officers.
The directors of Purchaser immediately prior to the Effective Time shall be the directors of the Surviving Corporation at and after the Effective Time, each to hold office in accordance with the Certificate of Incorporation and By-laws of the Surviving Corporation, and the officers of the Purchaser at the Effective Time shall be the officers of the Surviving Corporation at and after the Effective Time, in each case until their respective successors are duly elected or appointed and qualified.
2.6. Conversion of Securities.
At the Effective Time, by virtue of the Merger and without any action on the part of Purchaser, the Company or the holders of any of the following securities:
(a) Each Share issued and outstanding immediately prior to the Effective Time (other than any Shares to be canceled pursuant to Section 2.6(b)) shall be converted automatically into the right to receive an amount equal to the Per Share Amount in cash (the 'Merger Consideration ") payable after reduction for any applicable tax withholding, without interest, to the holder of such Share, upon surrender, in the manner provided in Section 2.9, of the certificate that formerly evidenced such Share;
(b) Each Share held in the treasury of the Company and each Share owned by Purchaser, Parent or any direct or indirect wholly owned Subsidiary of Parent or of the Company immediately prior to the Effective Time shall be canceled and retired and shall cease to exist without any conversion thereof and no payment or distribution shall be made with respect thereto; and
(c) Each share of common stock of Purchaser issued and outstanding immediately prior to the Effective Time shall be converted into and exchanged for one validly issued, fully paid and nonassessable share of Common Stock, par value $.001 per share, of the Surviving Corporation.
2.7. Dissenting Shares.
Notwithstanding anything in this Agreement to the contrary, those Shares
which are held by stockholders who have properly complied with the provisions of
Section 262 of the Delaware Law with respect to appraisal rights ("Dissenting
Shares") shall not be converted into the right to receive the Merger
Consideration as provided in Section 2.6(a) hereof, but the holders of
Dissenting Shares shall be entitled to receive such consideration as shall be determined pursuant to Section 262 of the Delaware Law; provided, that, if, pursuant to the Delaware Law, any such holder shall have failed to perfect or shall withdraw or lose such holder's right to appraisal and payment in accordance with the Delaware Law, such holder's Shares shall thereupon be deemed to have been converted as of the Effective Time into the right to receive the Merger Consideration, without any interest thereon, as provided in Section 2.6(a), and such Shares shall no longer be Dissenting Shares. The Company (and after the Effective Time, the Surviving Corporation) shall give Parent and Purchaser (A) prompt notice of any written demands for appraisal, withdrawals of demands for appraisal and any other related instruments received by the Company or the Surviving Corporation, as the case may be, and (B) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal. The Company (and, after the Effective Time, the Surviving Corporation) will not voluntarily make any payment with respect to any demands for appraisals and will not, without the prior written consent of Parent, settle or offer to settle any such demand.
2.8. Employee Stock Options.
The Company will use its reasonable best efforts to obtain from each holder of a stock option (a "Company Stock Option") outstanding, whether or not exercisable at the Effective Time under the Company's Stock Option Plan and Directors Stock Option Plan (the "Company Stock Option Plans"), such holder's agreement that such option shall be canceled by the Company immediately prior to the Effective Time. Each holder of a canceled Company Stock Option shall be entitled to receive at the Effective Time or as soon as practicable thereafter from the Company in consideration for the cancellation of such Company Stock Option an amount (the "Option Spread") equal to the product of (i) the number of Shares previously subject to such Company Stock Option and (ii) the excess, if any, of the Per Share Amount over the exercise price per share of Company Common Stock previously subject to such Company Stock Option. Each holder of a Company Stock Option shall also be given the right to tender such options, whether or not exercisable, pursuant to the Offer and to receive the Option Spread pursuant to the Offer; and each holder of Warrants referred to in Section 3.3 shall also be given the right to tender such Warrants pursuant to the Offer and to receive an amount equal to the product of(i) the number of Shares which may be purchased on exercise of the Warrants and (ii) the excess, if any, of the Per Share Amount over the per share exercise price of the Warrants. In any such case, such payment, after reduction for applicable tax withholding, if any, shall be made in cash. Each holder of a Company Stock Option or Warrants shall be given an opportunity to submit a Form W-9 and/or whatever other forms may be necessary to prevent any tax from being withheld from the amounts otherwise payable to such holder hereunder. The Company shall take all actions necessary and appropriate so that all stock option or other equity based plans maintained with respect to the Shares, including the Company Plans, shall terminate as of the Effective Time and the provisions in any other Benefit Plan providing for the issuance, transfer or grant of any capital stock of the Company shall be deleted as of the Effective Time.
2.9. Surrender of Shares; Stock Transfer Books.
(a) Prior to the Effective Time, Purchaser shall designate a bank to act as its paying agent, who shall be reasonably satisfactory to the Company (the "Paying Agent"), who shall also act as agent for the holders of Shares in connection with the Merger to receive the funds to which holders of Shares shall become entitled pursuant to Section 2.6(a). Prior to the Effective Time, Purchaser shall deposit with the Paying Agent sufficient funds to pay the Merger Consideration in respect of all of the Shares. Such funds may be invested by the Paying Agent as directed by the Surviving Corporation only in overnight or other investments which are available on demand, which are obligations of or guaranteed by the United States of America or of any agency thereof and backed by the full faith and credit of the United States of America, or in funds the assets of which consist only of such investments.
(b) Promptly after the Effective Time, the Surviving Corporation shall
cause to be mailed to each person who was, at the Effective Time, a holder of
record of Shares entitled to receive the Merger Consideration pursuant to
Section 2.6(a) a form of letter of transmittal (which shall specify that
delivery shall be effected, and risk of loss and title to the Certificates shall
pass, only upon proper delivery of the Certificates to the Paying Agent) and
instructions for use in effecting the surrender of the certificates evidencing
the certificates evidencing the Shares (the "Certificates") pursuant to such
letter of transmittal. Upon surrender to the Paying Agent of a Certificate,
together with such letter of transmittal, duly completed and validly executed in
accordance with the instructions thereto, and such other documents as may be
required pursuant to such instructions in accordance with standard market
practices, the holder of such Certificate shall be entitled to receive in
exchange therefor the Merger Consideration for each Share formerly evidenced by
such Certificate, after reduction of any applicable withholding tax and such
Certificate shall then be canceled. No interest shall accrue or be paid on the
Merger Consideration payable upon the surrender of any Certificate for the
benefit of the holder of such Certificate as long as the Merger Consideration is
made available as provided in this Section. If payment of the Merger
Consideration is to be made to a person other than the person in whose name the
surrendered Certificate is registered on the stock transfer books of the
Company, it shall be a condition of payment that the Certificate so surrendered
shall be endorsed properly or otherwise be in proper form for transfer and that
the person requesting such payment shall have paid all transfer and other taxes
required by reason of the payment of the Merger Consideration to a person other
than the registered holder of the Certificate surrendered or shall have
established to the reasonable satisfaction of the Surviving Corporation that
such taxes either have been paid or are not applicable.
(c) At any time following six months after the Effective Time, the Surviving Corporation shall be entitled to require the Paying Agent to deliver to it any funds which were deposited with the Paying Agent and not disbursed to holders of Shares (including interest and other income received by the Paying Agent in respect of all funds made available to it), and thereafter such holders shall be entitled to look to the Surviving Corporation (subject to abandoned property, escheat and other similar laws) only as general creditors thereof with respect to any Merger Consideration that may be payable upon due surrender of the Certificates
held by them. Notwithstanding the foregoing, none of Parent, the Surviving Corporation or the Paying Agent shall be liable to any holder of a Share for any Merger Consideration delivered in respect of such Share to a public official pursuant to any abandoned property, escheat or other similar law.
(d) At the close of business on the day of the Effective Time, the stock transfer books of the Company shall be closed and thereafter there shall be no further registration of transfers of Shares on the records of the Company. From and after the Effective Time, the holders of Shares outstanding immediately prior to the Effective Time shall cease to have any rights with respect to such Shares except as otherwise provided herein or by applicable law.
(e) Parent and/or the Surviving Corporation shall be entitled to deduct and withhold from the consideration otherwise payable pursuant to this Agreement to any holder of shares of Company Common Stock such amounts, if any, as Parent and/or the Surviving Corporation is required to deduct and withhold with respect to the making of such payment under the Code, or any provision of state or local tax law. To the extent that amounts are so withheld by Parent and/or the Surviving Corporation and properly paid over to the appropriate tax authorities, such withheld amounts shall be treated for all purposes of this Agreement as having been paid to the holder of the shares of Company Common Stock in respect of which such deduction and withholding was made by Parent and/or the Surviving Corporation.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to Parent and Purchaser that, except as set forth in a disclosure schedule of the Company dated as of the date hereof and referencing this Agreement ("Company Disclosure Schedule"):
3.1. Organization and Qualification; Subsidiaries.
Each of the Company and each Subsidiary of the Company is duly organized, validly existing and in good standing under the laws of its jurisdiction of organization and has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Each of the Company and each Subsidiary is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not, individually or in the aggregate, have a Material Adverse Effect. A true and complete list of all the Subsidiaries, together with the jurisdiction of incorporation of each Subsidiary and the percentage of the outstanding capital stock of each Subsidiary owned by the Company and each other Subsidiary, is set forth in the Company Disclosure Schedule. Except as disclosed in such Schedule, the Company and its Subsidiaries do not directly or indirectly own any equity or similar interest in, or any interest convertible into or
exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, joint venture or other business association or entity.
3.2. Certificate of Incorporation and By-laws.
The Company has heretofore furnished to Parent a complete and correct copy of the Certificate of Incorporation and the By-laws or equivalent organizational documents, each as amended to date, of the Company and each Subsidiary. Such Certificates of Incorporation and By-Laws or equivalent organizational documents are in full force and effect, and neither the Company nor any Subsidiary is in violation of any provision thereof.
3.3. Capitalization.
The authorized capital stock of the Company consists of 70,000,000 Shares of common stock and 30,000,000 shares of undesignated preferred stock. As of the date hereof, (i) 10,078,838 Shares are issued and outstanding, all of which are duly authorized, validly issued, fully paid and nonassessable and free of preemptive rights, (ii) no shares of preferred stock of the Company are issued or outstanding and (iii) 692,358 shares of Common Stock are issuable on exercise of outstanding stock options granted pursuant to the Company's Plans, and (iv) 15,950 shares of Common Stock are issuable upon exercise of warrants (the "Warrants"). Except as set forth above, no shares of capital stock or other equity securities of the Company are issued or outstanding. There are no bonds, debentures, notes or other indebtedness or other securities of the Company having the right to vote (or convertible into, or exchangeable for, securities having the right to vote) on any matters on which stockholders of the Company may vote. Except as contemplated by this Agreement, there are no shareholder, voting trust, or other agreements or understandings to which the Company or any of its Subsidiaries is a party or to which any of them are bound, or, to the knowledge of the Company, any irrevocable proxies, relating to the voting of any shares of the capital stock or other equity securities of the Company or any of its Subsidiaries. Except as set forth in this Section or in the Company Disclosure Schedule, there are no options, warrants or other rights relating to the capital stock of the Company or any Subsidiary obligating the Company or any Subsidiary to issue or sell any shares of capital stock of, or other equity interests in, the Company or any Subsidiary. All shares of Common Stock subject to issuance as aforesaid, upon issuance on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. There are no commitments, understandings, restrictions or arrangements obligating the Company to purchase, redeem or acquire, nor is the Company party to any agreement granting preemptive or registration rights relating to, shares of capital stock of the Company.
3.4. Authority Relating to this Agreement.
The Company has all necessary power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Transactions. The execution and delivery of this Agreement by the Company and the consummation by the Company of the Transactions have been duly and validly authorized by all necessary corporate
action and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement and to consummate the Transactions (other than, with respect to the Merger, the approval and adoption of this Agreement by the holders of two-thirds of the then outstanding Shares if and to the extent required by applicable law, and the filing and recording of appropriate merger documents as required by Delaware Law). This Agreement has been duly and validly executed and delivered by the Company and, assuming the due authorization, execution and delivery by Parent and Purchaser, constitutes the legal, valid and binding obligation of the Company.
3.5. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement and the consummation of the Transactions by the Company will not, (i) conflict with or violate the Certificate of Incorporation or By-laws or equivalent organizational documents of the Company or any Subsidiary, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to the Company or any Subsidiary or by which any property or asset of the Company or any Subsidiary is bound or affected or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any right of termination, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any Subsidiary pursuant to, any note, bond, mortgage, indenture, contract, agreement, license, permit, franchise or other instrument or obligation, other than any such conflicts, violations, breaches or defaults that would not, individually or in the aggregate, have a Material Adverse Effect.
(b) The execution and delivery of this Agreement by the Company do not, and the performance of this Agreement and the consummation of the Transactions by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Authority, except for applicable requirements, if any, of (i) the Exchange Act (including the filing of a Schedule 14d-9), (ii) state securities or "blue sky" laws ("Blue Sky Laws"), (iii) the pre-merger notification requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HSR Act"), (iv) filing and recording of appropriate merger documents as required by Delaware Law, and (v) other filings, consents, approvals, authorizations or permits, the absence of which will not materially affect the ability of the parties to carry out the Transactions on the terms contemplated hereby or otherwise prevent the Company from performing its obligations under this Agreement or result in a Material Adverse Effect.
3.6. SEC Filings; Financial Statements.
(a) The Company has filed all forms, reports and documents required to be filed by it with the SEC since December 31, 1996 and has heretofore made available to Parent, in the form filed with the SEC, (i) its Annual Reports on Form 10-K for the fiscal years ended December 31, 1996 and 1997, (ii) all proxy statements relating to the Company's meetings of stockholders (whether annual or special) held since December 31, 1996 and (iii) all other forms
and reports filed by the Company with the SEC since December 31, 1996 (the forms, reports and other documents referred to in clauses (i), (ii) and (iii) above being referred to herein, collectively, as the "SEC Reports"). The SEC Reports filed prior to the date of this Agreement complied, and the SEC Reports filed with the SEC on or after the date of this Agreement (the "Subsequent SEC Reports") will comply, with the requirements of the Exchange Act, as applicable, and the rules and regulations thereunder. None of the SEC Reports (including the financial statements included therein) as of such dates contained, and none of the Subsequent SEC Reports (including the financial statements to be included therein) will contain, any untrue statement of a material fact or omitted or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. No Subsidiary is required to file any form, report or other document with the SEC.
(b) Each of the consolidated financial statements (including, in each case, any notes thereto) contained in the SEC Reports comply as to form in all material respects with applicable accounting requirements and the published rules and regulations of the SEC with respect thereto, was prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated and each fairly presented the consolidated financial position, results of operations and changes in financial position of the Company and the Subsidiaries as at the respective dates thereof and for the respective periods indicated therein (except as otherwise noted therein and subject, in the case of unaudited statements, to the absence of footnotes and normal and recurring year-end adjustments).
(c) Except as and to the extent set forth on the consolidated balance
sheet of the Company and its Subsidiaries as at December 31, 1997, including the
notes thereto (the "1997 Balance Sheet"), or the interim unaudited balance sheet
of the Company and its Subsidiaries as at June 30, 1998 (the "Interim Balance
Sheet"), the Company nor any Subsidiary has any liability or obligation of any
nature (whether accrued, absolute, contingent or otherwise), whether or not
required to be reflected on a balance sheet and the notes thereto prepared in
accordance with generally accepted accounting principles, except for liabilities
and obligations (i) incurred in the ordinary course of business consistent with
past practice since June 30, 1998 and not in contravention of this Agreement or
(ii) that would not, individually or in the aggregate, have a Material Adverse
Effect.
3.7. Absence of Certain Changes or Events.
From December 31, 1997 through the date hereof, except as disclosed in any SEC Report or reflected in the Interim Balance Sheet, there has not been (i) a Material Adverse Effect, (ii) any material change by the Company in its accounting methods, principles or practices, except as may have been required by a change in generally accepted accounting principles, (iii) any entry by the Company or any Subsidiary into any contract material to the Company and the Subsidiaries, taken as a whole, except for contracts relating to the establishment of new locations by the Company, copies of which have been made available to the Purchaser, or contracts otherwise entered into in the ordinary course of business consistent with past practice, (iv) any
declaration, setting aside or payment of any dividend or distribution in respect of any capital stock of the Company or any redemption, purchase or other acquisition of any of its securities, (v) any increase in or establishment of any bonus, insurance, severance, deferred compensation, pension, retirement, profit sharing, stock option, stock purchase or other employee benefit plan, or any other increase in the compensation payable or to become payable to any officers or key employees of the Company or any Subsidiary, except in the ordinary course of business consistent with past practice, (vi) any adjustment, split, combination or reclassification any of its capital stock or issuance or authorization for the issuance of any other securities as a dividend on, in lieu of or in substitution for shares of its capital stock; (vii) any event, any condition, event or occurrence which, individually or in the aggregate, would have a Material Adverse Effect, (viii) any condition, event or occurrence in respect of the Company which could reasonably be expected to prevent the Company from consummating the transactions contemplated by this Agreement; (ix) any event which, if it had taken place following the execution of this Agreement, would not otherwise have been permitted by Section 5.1 without the prior consent of Parent.
3.8. Absence of Litigation.
Except as disclosed in the SEC Reports, as of the date hereof, there is no claim, action, proceeding or investigation pending or, to the knowledge of the Company, threatened against the Company or any Subsidiary, or any property or asset of the Company or any Subsidiary, before any court, arbitrator or administrative, governmental or regulatory authority or body that, individually or in the aggregate, is reasonably likely to have a Material Adverse Effect or prevent the Company from consummating the transactions contemplated by this Agreement. Neither the Company nor any Subsidiary nor any property or asset of the Company or any Subsidiary is subject to any order, writ, judgment, injunction, decree, determination or award having, individually or in the aggregate, a Material Adverse Effect.
3.9. Labor Matters; Employee Benefit Plans.
(a) Except as disclosed in the Company Disclosure Schedule, (1) neither the Company nor any of its Subsidiaries is a party to, or bound by, any collective bargaining agreement, contract or other agreement or understanding with a labor union or labor organization representing any of its employees, (2) there is no (A) arbitration, unfair labor practice, investigation, employment discrimination or other labor or employment related charge, complaint or claim against the Company or any of its Subsidiaries pending or, to the knowledge of the Company, threatened before any Governmental Authority that would have a Material Adverse Effect, or (B) adjudication on such matters by any Governmental Authority that has or would have a Material Adverse Effect, and (3) there is no labor strike, dispute, slowdown or stoppage, or, to the knowledge of the Company, any union organizational efforts pending or threatened against or involving any employees of the Company or any of its Subsidiaries.
(b) The Company Disclosure Schedule sets forth each agreement, arrangement, plan, or policy maintained or required to be contributed to by the Company or any Subsidiary that involves (i) any pension, retirement, deferred compensation, bonus, stock option,
restricted stock, stock purchase, health, welfare, or incentive plan, or (ii) welfare or "fringe" benefits, including vacation, severance, disability, medical, dental, life and other insurance, sick leave or family leave, or other employee benefits (the "Plans'). Copies of all documents creating or evidencing such Plans have been delivered to Purchaser.
(c) Each Plan has been administered in material compliance with its terms and, to the extent applicable, with the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or other law applicable to any Plan. Each Plan that is intended to qualify under Section 401(a) or Section 501(c)(9) of the Code has received a favorable determination letter from the Internal Revenue Service or is a standardized prototype plan which has received a verification letter from the Internal Revenue Service (a copy of which has been provided to Purchaser) and related trusts have been determined to be exempt from taxation. Nothing has occurred that would cause and no action or proceeding is pending or threatened which, to the knowledge of Company, would be likely to result in the loss of such exemption or qualification
(d) There has been no prohibited transaction (within the meaning of
Section 406 of ERISA or Section 4975 of the Code) with respect to any Plan that
could reasonably be expected to result in a material liability to the Company or
any Subsidiary. Neither the Company nor any Subsidiary is currently liable or
has previously incurred any liability for any material tax or penalty arising
under Section 4971, 4972, 4979, 4980 or 4980B of the Code or Section 502(c) of
ERISA, and no fact or event exists which could reasonably be expected to give
rise to any such liability. The Company has not incurred any material liability
under, arising out of or by operation of Title IV of ERISA (other than liability
for premiums to the Pension Benefit Guaranty Corporation arising in the ordinary
course), including any material liability in connection with the termination or
reorganization of any employee pension benefit plan subject to Title IV of
ERISA, and no fact or event exists which is reasonably expected to give rise to
any such liability. No complete or partial termination has occurred within the
five years preceding the date hereof with respect to any Plan. No reportable
event (within the meaning of Section 4043 of ERISA) has occurred or is expected
to occur with respect to any Plan subject to Title IV of ERISA (other than a
reportable event with respect to which the 30 day notice requirement has been
waived.)
(e) No Plan is or at any time within the seven calendar years preceding the date of this Agreement has been a "multiemployer plan" within the meaning of Section 3(37) of ERISA. No Plan has been subject to Title IV of ERISA.
(f) There is no contract, agreement, plan or arrangement covering any employee or former employee of the Company or any Subsidiary that, individually or collectively, (i) may give rise to the payment of any amount that would not be deductible pursuant to the terms of Section 280G of the Code, or (ii) which creates or accrues benefits or payments by virtue of a change of control of the Company or any Subsidiary, including, without limitation, as a result of the transactions contemplated by this Agreement, except, in the case of clause (ii) of this subparagraph, as provided in the Company Stock Option Plans.
3.10. Offer Documents; Schedule 14D-9; Proxy Statement.
The information to be included in the Schedule 14D-9 and any information
supplied by the Company in writing expressly for inclusion or incorporation by
reference in the Offer Documents shall not, at the respective times the Schedule
14D-9, the Offer Documents or any amendments or supplements thereto are filed
with the SEC or are first published, sent or given to stockholders of the
Company or at the expiration date or the date of purchase, contain any untrue
statement of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements made therein, in the
light of the circumstances under which they are made, not misleading. The
information included or incorporated by reference in the proxy statement to be
sent to the stockholders of the Company in connection with the Stockholders
Meeting (as hereinafter defined) will not, and the information statement to be
sent to such stockholders, as appropriate (such proxy statement or information
statement, as amended or supplemented, being referred to herein as the "Proxy
Statement"), will not, at the date the Proxy Statement (or any amendment or
supplement thereto) is first mailed to stockholders of the Company, at the time
of the Stockholders Meeting and at the Effective Time, contain any statement
which, at such time and in light of the circumstances under which it is made, is
false or misleading with respect to any material fact, or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein not false or misleading or necessary to correct any statement
in any earlier communication with respect to the solicitation of proxies for the
Stockholders Meeting which shall have become false or misleading.
Notwithstanding the foregoing, the Company makes no representation or warranty
with respect to information supplied by Parent or Purchaser in writing expressly
for inclusion in the Schedule 14D-9 or Proxy Statement. The Schedule l4D-9 and
the Proxy Statement shall comply in all material respects with the requirements
of the Exchange Act and the rules and regulations thereunder.
3.11. Taxes.
(a) The Company and each Subsidiary and any consolidated, combined, unitary or aggregate group for Tax purposes of which the Company or a Subsidiary is or has been a member (a "Consolidated Group") (i) has filed or caused to be filed with the appropriate Government entity all income Tax Returns and all other material Tax Returns which have been required to be filed prior to the date of this Agreement (taking into account any extensions of the time for filing such tax returns) and (ii) has paid in full all material Taxes due and payable (whether or not shown on such Tax Returns), except to the extent such liabilities are reflected on the Interim Balance Sheet. All income and other Tax Returns filed or caused to be filed by the Company or a Subsidiary or a Consolidated Group are correct and complete, and accurately reflect taxable income (or other measure of Tax), in all material respects.
(b) The Company and each Subsidiary has complied with all laws relating to the withholding of Taxes and the payment thereof and has timely and properly withheld from employee wages and paid over to the proper government entity all amounts required to be
withheld and paid over under applicable law, except to the extent that failure to do so would not have a Material Adverse Effect.
(c) Neither the Company nor any Subsidiary has waived any statute of limitations in respect of any material Tax Returns or agreed to any extension of time with respect to a material Tax assessment or deficiency.
(d) True, correct and complete copies of the federal and state income Tax Returns of the Company and the Subsidiaries for each of the fiscal years ended December 31, 1994 through December 31, 1997 have been delivered to Parent.
(e) The accruals for Taxes reflected in the Interim Balance Sheet adequately reflect, in accordance with generally accepted accounting principles, the Company's estimates of the liability of the Company and the Subsidiaries for Taxes for periods prior to the date of such Interim Balance Sheet.
(f) Except as disclosed in the Company Disclosure Schedule:
(i) no material claim for unpaid Taxes has become a lien against the property of the Company or any of its Subsidiaries or is being asserted against the Company or any of its Subsidiaries.
(ii) no audit, examination or similar proceeding with respect to Taxes or Tax Returns (a "Tax Proceeding") of the Company or any of its Subsidiaries is being conducted by a Tax authority and neither the Company nor any Subsidiary has received any notice of any threatened Tax Proceeding;
(iii) no consent under Section 341(f) of the Code has been filed with respect to the Company or any of its Subsidiaries;
(iv) neither the Company nor any of its Subsidiaries has made a payment, is obligated to make a payment or is a party to any agreement, option or arrangement that would result, separately or in the aggregate, in the actual or deemed payment (or other compensatory event) by the Company or a Subsidiary that would be classified as an "excess parachute payments" within the meaning of Section 2800 of the Code;
(v) none of the Company or its Subsidiaries has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii) of the Code; and
(vi) neither the Company nor any Subsidiary is a party to any agreement providing for the allocation or sharing of Taxes with any person other than the Company or a Subsidiary;
3.12. Compliance with Laws.
(a) Each of the Company and its Subsidiaries holds or has received such certificates (including certificates of need), provider agreements, certifications, permits, consents, approvals, orders, clearances, licenses and authorizations (the "Company Licenses") as are necessary to conduct their respective businesses in the manner currently conducted, all of which are valid and in full force and effect, except to the extent that failure to so have or to maintain in full force and effect would not have, individually or in the aggregate, a Material Adverse Effect. The Company and its Subsidiaries are in compliance with their respective obligations under the Company Licenses, with only such exceptions as, individually or in the aggregate, would not have a Material Adverse Effect.
(b) The Company and its Subsidiaries are, to the extent applicable to
their operations, (i) eligible to receive payment under Titles XVIII and XIX of
the Social Security Act, (ii) providers under existing provider agreements with
the Medicare program through applicable intermediaries and with each state
Medicaid program under which they have been providers at any time since December
31, 1996 and (iii) in compliance with the conditions of participation in the
Medicare program, except where such inability in the case of either items (i) or
(ii) or non-compliance in item (iii) does not have a Material Adverse Effect.
(c) The Company and each of its Subsidiaries have filed all required cost reports and other required claims and governmental filings with respect to Medicare and each state Medicaid program in which they participate, all of which were, when filed or as they have been subsequently amended, complete and correct, except to the extent that such failure to file or failure to be complete and correct would not have a Material Adverse Effect. The Company has made available to Parent complete and correct copies of all such cost reports, claims, governmental filings, audits and schedules prepared or issued by, or filed with, any Governmental Authority or private payor with respect to the operations of the Company and its Subsidiaries since December 31, 1996.
(d) Except as set forth in the Company Disclosure Schedule, there is no suit, proceeding, investigation or review pending or, to the knowledge of the Company, threatened, by any Governmental Authority or any other Person (including, without limitation, any qui tam suit) which relates to or which, if determined adversely to the Company, would adversely affect any Company License or which alleges any violation by the Company or any of its Subsidiaries of any law, ordinance, regulation or court ruling governing the operation of the Company and its Subsidiaries as health care providers.
(e) To the knowledge of the Company, the businesses of the Company and its Subsidiaries are not being conducted in violation of any law, ordinance, regulation or court ruling of any Governmental Authority (including, without limitation, laws, rules and manual
provisions pertaining to reimbursement of the Company and it Subsidiaries for services rendered, the federal False Claims Act (31 U.S.C. (S)3729) or any other applicable federal or state false claim or fraud law, the federal anti-kickback statute (42 U.S.C. (S)1320a-7b(b)), any applicable state anti-kickback law, the federal Ethics in Patient Referrals Act (42 U.S.C. (S)1395nn, commonly known as the Stark Act) or any applicable state self-referral law), except for violations which would not, individually or in the aggregate, have a Material Adverse Effect.
3.13. Exclusion.
To the knowledge of the Company, neither the Company nor any of its Subsidiaries employs or contracts with any Person who or which has been excluded from participation in a Federal Health Care Program (as defined in 42 U.S.C. (S)1320a-7b(f)) where such action could reasonably serve as a basis for the Company's or any of its Subsidiaries' suspension or exclusion from the Medicare or any state Medicaid program.
3.14. Accounts Receivable.
Since December 31, 1997, the Company has not changed any material principle or practice with respect to the recordation of accounts receivable or the calculation of reserves therefor, or any material collection, discount or write- off policy or procedure.
3.15. Brokers.
No broker, finder or investment banker (other than WP&Co.) is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of the Company. The fees and expenses of WP&Co. will be paid by the Company pursuant to a fee agreement between the Company and WP&Co., a copy of which has been provided to the Parent.
3.16. Real Property and Leases.
Except for any matters which would not have a Material Adverse Effect:
(a) The Company and its Subsidiaries have good, valid and marketable title to, or valid leasehold interests in, all of their properties and assets as reflected on the Interim Balance Sheet or acquired thereafter, except for assets sold in the ordinary course of business since the date of the such Balance Sheet, free and clear of all mortgages, pledges, liens, security interests, conditional and installment sale agreements, encumbrances, charges or other claims of third parties of any kind (collectively, "Liens"), other than (A) Liens for current taxes and assessments not yet past due, (B) inchoate mechanics' and materialmen's Liens for construction in progress, (C) workmen's, repairmen's, warehousemen's and carriers' Liens arising in the ordinary course of business of the Company or such Subsidiary consistent with such practice, and (D) all immaterial matters of record, Liens and other imperfections of title and encumbrances (collectively, "Permitted Liens"). To the Company's knowledge, no such real property leased by the Company or any Subsidiary is subject to any governmental decree or
order to be sold nor is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to the best knowledge of the Company, has any such condemnation, expropriation or taking been proposed.
(b) The Company has provided to the Parent true and complete copies of each of its Long Term Acute Care Hospital Leases, as in effect on the date of this agreement pursuant to which it operates its health care facilities (the "LTAC Leases",), all of which are in full force and effect. To the knowledge of the Company, the Company is in compliance with all of its obligations under each of the LTAC Leases.
(c) All other leases of real property leased for the use or benefit of the Company or any Subsidiary to which the Company or any Subsidiary is a party requiring rental payments in excess of $150,000 during any calendar year, and all amendments and modifications thereto, are in full force and effect and have not been modified or amended, and there exists no default under any such lease by the Company or any Subsidiary, nor any event which with notice or lapse of time or both would constitute a default hereunder by the Company or any Subsidiary.
(d) Each of the Company and its Subsidiaries has all permits necessary to own or operate its properties, and no such permits will be required, as a result of the Merger or the other transactions contemplated hereby, to be issued after the Closing in order to permit the Company, following the Merger, to continue to own or operate such properties, other than any such permits which are ministerial in nature.
3.17. Environmental Matters.
Except for such matters as would not individually or in the aggregate have a Material Adverse Effect, to the knowledge of the Company:
(a) the Company is in compliance with all applicable Environmental Laws, and the Company has not received any formal notice or demand from a government entity, citizens' group or other Person which is currently pending, alleging a violation of or liability or responsibility under any Environmental Law;
(b) the Company has all permits and other authorizations required under Environmental Laws, and the Company is in compliance with such permits and other authorizations;
(c) no conditions were created by the Company at any facility currently or formerly owned, leased or operated by the Company during the period of the Company's ownership, lease or operation of such facility that require remediation under any Environmental Law;
(d) the Company has not received any formal notice, demand or request for information which is currently pending under any Environmental Law as a result of the offsite disposal of any hazardous material or waste by the Company;
(e) the Company has not entered into or agreed to any consent decree, order or agreement under any Environmental Law, and the Company is not subject to any material judgment, decree, order or other material requirement relating to compliance with any Environmental Law or to investigation, cleanup, remediation or removal of regulated substances under any Environmental Law;
(f) the Company has provided Parent and Purchaser copies of all environmental inspections, investigations, studies, audits, tests, reviews or other analysis conducted in relation to the Company and any properties now or previously-owned or leased by tile Company or its Subsidiaries or the operation of its respective businesses which are in the possession or control of he Company.
3.18. State Takeover Statutes.
The Board of Directors of the Company has approved the Offer, the Merger, this Agreement and other Transactions including agreements with certain holders of Shares as described in Subsection (e) under "Background" above, and no provision of any Takeover Statute will prevent, impair, impede or prevent, any Transaction. Section 203 of Delaware Law is and shall be inapplicable to the Offer, the Merger and, this Agreement and other Transactions, including the Stockholder Agreements.
3.19. Vote Required.
The affirmative vote of the holders of two-thirds of the outstanding Common Stock is the only vote of the holders of any class or series of Company capital stock necessary to approve the Merger, this Agreement or any of the other Transactions, including the Stockholder Agreements.
3.20. Certain Contracts.
(a) The Company Disclosure Schedule includes a list of each contract, agreement, lease, indenture or evidence of indebtedness to which the Company or any Subsidiary is a party (the "Material Contracts") which involves outstanding, contingent, or continuing liability or obligation of or to the Company or a Subsidiary and which (i) involves (A) a guarantee or indemnity involving an obligation in excess of $1,000,000, (B) a power of attorney, (C) a sharing of payments or joint venture, (D) material limitations on the ability of the Company directly or through any of its Subsidiaries to compete in or enter into any line of business or with any person in any geographic area during any period of time (other than limitations set forth in the LTAC Leases), (E) collective bargaining or union representation, (F) a payment obligation in excess of $500,000, or (ii) is not in the ordinary course of business.
(b) Each of the Material Contracts is a valid, binding and
enforceable obligation of the Company and, to the knowledge of the Company, the
other parties thereto. Except as indicated on the Company Disclosure Schedule,
(1) the Company and its Subsidiaries are not, and (ii) to the knowledge of
Company, no other party to a Material Contract is, in material default under or
in material breach or violation of any Material Contract, and no event
has occurred that, through the passage of time or the giving of notice, or both, would constitute, such a material default, breach or violation.
3.21. Intellectual Property.
(a) The Company Disclosure Schedule includes a list of all registered trademarks, service marks, copyrights and patents, and all applications therefor, included in the Intellectual Property of the Company and its Subsidiaries, specifying as to each, as applicable: (i) the nature of such Intellectual Property; (ii) the owner of such Intellectual Property; and (iii) the jurisdictions by o in which such Intellectual Property has been issued or registered or in which an application for such issuance or registration has been filed, including the respective registration or application numbers. Such Schedule contains a list of all material licenses, sublicenses and other agreements as to which the Company or its Subsidiaries is a party and pursuant to which any Person is authorized to use the Intellectual Property or any other material rights of the Company or its Subsidiaries with respect to intellectual property.
(b) Except as disclosed on the Company Disclosure Schedule, (i) there has been no claim made against the Company or any of its Subsidiaries or, to the Company and its Subsidiaries' knowledge, threatened asserting the invalidity, misuse or unenforceability of any of the Intellectual Property; (ii) the Company is not aware of any infringement or misappropriation of any of the Intellectual Property; and (iii) to its knowledge, the Company has not infringed or misappropriated any intellectual property or proprietary right of any other entity.
3.22. Opinion of Financial Advisor.
The Company has received the opinion of WP&Co. dated the date of this Agreement, to the effect that, based on, and subject to, the various assumptions and qualifications set forth in such opinion, as of the date thereof, the consideration to be received by the holders of Shares pursuant to each of the Offer and the Merger is fair to the holders of Shares from a financial point of view. The Company has delivered a copy of such opinion to the Parent.
3.23. Affiliate Transactions.
Except as disclosed in the Company Disclosure Schedule, no Related Party has borrowed money from or loaned money to the Company which remains outstanding in an aggregate amount in excess of $50,000, or entered into any material contractual arrangements with the Company which remains in effect. As used herein, a "Related Party" means any of the officers or directors of the Company, or any business or entity in which the Company or, to the knowledge of the Company, any such person or any affiliate or associate of any such persons has any direct or indirect material interest.
3.24. Prior Negotiations.
The Company, WP&Co. and the Company's other advisors and representatives have not been involved in substantive discussions with any group or person (or any of their respective
affiliates or associates) or their representatives, or furnished material
confidential information to any such group or persons (or any of their
respective affiliates or associates) or their representatives, in connection
with a possible takeover proposal except for such groups or persons which have
executed and delivered to the Company a customary confidentiality agreement. The
Company will not waive its rights under any standstill agreements entered into
with any such persons except in connection with actions taken in accordance with
Section 6.5(b).
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER
Parent and Purchaser hereby, jointly and severally, represent and warrant to the Company that:
4.1. Corporate Organization.
Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite power and authority and all necessary governmental approvals to own, lease and operate its properties and to carry on its business as it is now being conducted, except where the failure to be so organized, existing or in good standing or to have such power, authority and governmental approvals would not, individually or in the aggregate, have a material adverse effect on the ability of Parent or Purchaser to perform their obligations hereunder, or prevent or materially delay the consummation of the Transactions.
4.2. Authority Relating to this Agreement.
Each of Parent and Purchaser has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to consummate the Transactions. The execution and delivery of this Agreement by Parent and Purchaser and the consummation by Parent and Purchaser of the Transactions have been duly and validly authorized by all necessary corporate action and no other corporate proceedings on the part of Parent or Purchaser are necessary to authorize this Agreement or to consummate the Transactions (other than, with respect to the Merger, the filing and recording of appropriate merger documents as required by Delaware Law). This Agreement has been duly and validly executed and delivered by Parent and Purchaser and, assuming the due authorization, execution and delivery by the Company, constitutes the legal, valid and binding obligations of each of Parent and Purchaser enforceable against each of Parent and Purchaser in accordance with their terms.
4.3. No Conflict; Required Filings and Consents.
(a) The execution and delivery of this Agreement by Parent and Purchaser do not, and the performance of this Agreement by Parent and Purchaser will not, (i) conflict with or violate the Certificate of Incorporation or By- laws of either Parent or Purchaser, (ii) conflict with or violate any law, rule, regulation, order, judgment or decree applicable to Parent ~r Purchaser
or by which any property or asset of either of them is bound or affected, or
(iii) result in any breach of or constitute a default (or an event which with
notice or lapse of time or both would become a default) under, or give to others
any rights of termination, amendment, acceleration or cancellation of, or result
in the creation of a lien or other encumbrance on any property or asset of
Parent or Purchaser pursuant to, any note, bond, mortgage, indenture, contract,
agreement, lease, license, permit, franchise or other instrument or obligation
to which Parent or Purchaser is a party or by which Parent or Purchaser or any
property or asset of either of them is bound or affected, except for any such
violations, breaches, defaults or other occurrences which would not,
individually or in the aggregate, have a material adverse effect on the ability
of Parent or Purchaser to perform their obligations hereunder, or prevent or
materially delay the consummation of the Transactions.
(b) The execution and delivery of this Agreement by Parent and Purchaser do not, and the performance of this Agreement by Parent and Purchaser will not, require any consent, approval, authorization or permit of, or filing with or notification to, any governmental or regulatory authority, except for applicable requirements, if any, of (i) the Exchange Act and rules and regulations thereunder, (ii) Blue Sky Laws (iii) the pre-merger notification requirements of the HSR Act, (iv) filing and recording of appropriate merger documents as required by Delaware Law and (v) other filings, consents, approvals, authorizations or permits, the absence of which will not materially effect the ability of Parent or Purchaser to carry out the transactions on the terms contemplated hereby or otherwise prevent Parent or Purchaser from performing their obligations hereunder.
4.4. Financing.
Purchaser has sufficient cash or other sources of available funds to enable it to make payment of the aggregate Per Share Amount, Merger Consideration and any other amounts to be paid by it hereunder. The Purchaser has provided to the Company a written commitment confirming the availability of such funds. At the request of the Company from time to time, the Purchaser will provide to the Company further written confirmation of the availability of such funds and such related information as the Company may reasonably request.
4.5. Offer Documents; Proxy Statement.
The information to be included in the Offer Documents and any information supplied by Parent and Purchaser in writing expressly for inclusion in the Schedule 14D-9, shall not, at the time the Offer Documents, the Schedule 14D-9 or any amendments or supplements thereto are filed with the SEC or are first published, sent or given to stockholders of the Company or at the expiration date or date of purchase, as the case may be, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements made therein, in the light of the circumstances under which they are made, not misleading. The information supplied by Parent for inclusion in the Proxy Statement will not, on the date the Proxy Statement (or any amendment or supplement thereto) is first mailed to stockholders of the Company, at the time of the Stockholders Meeting and at the Effective Time, contain any statement which, at such time and in light of the circumstances
under which it is made, is false or misleading with respect to any material fact, or omits to state any material fact required to be stated therein or necessary in order to make the statements therein not false or misleading or necessary to correct any statement in any earlier communication with respect to the solicitation of proxies for the Stockholders Meeting which shall have become false or misleading. Notwithstanding the foregoing, Parent and Purchaser make no representation or warranty with respect to information supplied by the Company in writing expressly for inclusion in, or information derived from the Company's public SEC filings which is incorporated by reference in, the Offer Documents. The Offer Documents shall comply in all material respects as to form with the requirements of the Exchange Act and the rules and regulations thereunder.
4.6. Brokers.
No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Transactions based upon arrangements made by or on behalf of Parent or Purchaser.
4.7. Ownership of Company Common Stock.
Except for Shares owned by Plans maintained by Parent or contributed to by
Parent to any of its subsidiaries (the "Parent Benefit Plans"), neither Parent
nor, to its knowledge, any of its affiliates (i) beneficially owns (as such term
is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, or
(ii) is party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, in each case, shares of capital
stock of the Company.
ARTICLE V
CONDUCT OF BUSINESS PENDING THE MERGER
5.1. Conduct of Business by the Company Pending the Merger.
Except as contemplated by this Agreement, neither the Company nor any Subsidiary shall, between the date of this Agreement and the Effective Time do any of the following without the prior written consent of Parent:
(a) amend or otherwise change its Certificate of Incorporation or By- laws or equivalent organizational documents;
(b) issue any shares of capital stock of any class of the Company or any Subsidiary, or any options, warrants, convertible securities or other rights of any kind to acquire any shares of such capital stock of the Company or any Subsidiary (except for the issuance of Shares issuable pursuant to employee stock options outstanding on the date hereof and except in connection with the establishment of new wholly owned subsidiaries for new locations by the Company);
(c) sell, transfer or encumber in any material respect any assets of the Company or any Subsidiary for consideration in excess of $1,000,000 in the aggregate except for transactions relating to the establishment of new locations or modifications or improvements to its existing locations by the Company in the ordinary course of its business, and except for other transactions in the ordinary course of business consistent with past practice provided, however, that the Company shall not sell, transfer or encumber any assets for consideration which, in the opinion of the board, is less than fair value;
(d) declare or pay any dividend or other distribution with respect to any of its capital stock;
(e) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire any of its capital stock;
(f) (i) acquire any corporation, partnership, other business organization or any division thereof, except for the establishment of new wholly owned subsidiaries for new locations by the Company; (ii) except for borrowings under existing credit facilities, incur any indebtedness for borrowed money or issue any debt securities, guarantee any indebtedness for borrowed money or debt securities of another person, issue or sell any warrants or other rights to acquire any debt securities of the Company or any of its Subsidiaries, enter into any "keep well" or other agreement to maintain any financial statement condition of another person (except a Subsidiary) or enter into any arrangement having the economic effect of any of the foregoing, except in the ordinary course of business consistent with past practice, or make any loans, advances or capital contributions to, or investments in, any other person, other than to the Company or any Subsidiary; (iii) authorize capital expenditures which are, in the aggregate, in excess of $500,000 for the Company and the Subsidiaries, except for capital expenditures relating to the establishment of new locations by the Company in the ordinary course of its business, and other capital expenditures in the ordinary course of business consistent with past practice; or (iv) enter into any agreement with respect to any matter set forth in this Section;
(g) except as provided in Section 2.8, increase the compensation payable or to become payable to its current and former officers, directors or employees, except for increases in compensation (including bonuses) of employees of the Company or any Subsidiary of the Company in accordance with past practices, or, other than in accordance with past practices and policies, grant any severance or termination pay to, or enter into any employment or severance agreement with, any current or former director, officer or other employee of the Company or any Subsidiary, or establish, adopt, enter into or materially amend any collective bargaining agreement or benefit plans;
(h) other than as required by generally accepted accounting principles, make any material change to its accounting policies or procedures;
(i) make any material elections or changes in elections for Tax purposes except in accordance with past practice;
(j) pay, discharge or satisfy any claims (including claims of stockholders), liabilities or obligations (absolute, accrued, asserted or unasserted, contingent or otherwise), except for the payment, discharge or satisfaction (x) of liabilities or obligations in the ordinary course of business consistent with past practice or in accordance with their terms as in effect on the date hereof or (y) of claims settled or compromised to the extent permitted by Section 5.1(k), or waive, release, grant, or transfer any rights of material value or modify or change in any material respect any existing license, lease, contract or other document, other than in the ordinary course of business consistent with past practice;
(k) settle or compromise any litigation (whether or not commenced prior to the date of this Agreement) other than settlements or compromises of litigation (i) where the amount paid in settlement or compromise does not exceed $100,000 and (ii) potential settlements or compromises which are described in the Company Disclosure Schedule;
(l) establish any new lines of credit or other credit facilities or replace any existing credit facilities;
(m) take any action which would make any representation or warranty of the Company in this Agreement subject to a material qualifier untrue or incorrect and any representation or warranty of the Company in this Agreement that is not so qualified untrue or incorrect in any material respect;
(n) adopt a plan of complete or partial liquidation or resolutions providing for or authorizing such a liquidation or a dissolution, merger, consolidation, restructuring, recapitalization or reorganization (subject to the Company's right to take action specifically permitted by Section 6.5(b));
(o) enter into any new collective bargaining agreement or any successor collective bargaining agreement to any collective bargaining agreement disclosed in the Company Disclosure Schedule except in the ordinary course of business;
(p) agree to any modifications to any of the LTAC Leases, or waive any rights under the LTAC Leases, in any respect which would materially and adversely affect the rights of the Company thereunder;
(q) take any action to exempt under or make not subject to (x) Section 203 of Delaware Law or (y) any other Takeover Statute or state law that purports to limit or restrict business combinations or the ability to acquire or vote shares, any person or entity (other than Parent, Purchaser and their affiliates) or any action taken thereby, which person, entity or action would have otherwise been subject to the restrictive provisions thereof and not exempt therefrom except to the extent specifically permitted pursuant to Section 6.5(b);
(r) authorize any of, or commit or agree to take any of, the foregoing actions; or
(s) take any action which would result in the conditions to the Offer or the merger not being satisfied, subject to the Company's right to take such actions specifically permitted by Section 6.5(b).
5.2. Additional Covenants.
After the date hereof and prior to the Effective Time or the earlier termination of this Agreement, unless Parent shall otherwise agree, the Company shall, and shall cause each of its Subsidiaries to:
(a) Conduct their respective businesses in the ordinary and usual course of business consistent with past practice;
(b) Confer with Parent's designated representatives on a regular basis during normal business hours regarding operational matters of a material nature and the general status of the ongoing business of the Company, including matters relating to billing and collections;
(c) Promptly notify Parent of any significant changes in the business, financial condition or results of operation of the Company or its Subsidiaries taken as a whole;
(d) Maintain, with financially responsible insurance companies, insurance on its tangible assets and its business in such amounts and against such risks and losses as are consistent with past practice; and
(e) Use all reasonable best efforts to preserve the business of the Company and .its Subsidiaries and preserve the current relationships of the Company and its Subsidiaries with customers, employees, suppliers and other persons with which the Company or any Subsidiary has material business relations.
ARTICLE VI
ADDITIONAL AGREEMENTS
6.1. Stockholders Meeting.
(a) If required by applicable law in order to consummate the Merger, the Company, acting through the Board, shall, promptly after consummation of the Offer (or promptly after delivery of a Merger Notice as provided in Section 1.3(d) or (e), in accordance with applicable law and the Company's Certificate of Incorporation and By-laws, (i) hold an annual or special meeting of its stockholders as soon as practicable following consummation of the Offer for the purpose of considering and taking action on this Agreement and the Merger (the "Stockholders Meeting") and (ii) in the event a Merger Notice has been delivered and, otherwise, subject to its fiduciary duties under applicable law after receiving the advice of independent counsel, include in the Proxy Statement the recommendation of the Board that the stockholders of the Company approve and adopt this Agreement and the Merger, and use its best efforts to solicit from holders of Shares proxies in favor of this Agreement and the Merger, and
take all other appropriate action to request the vote of the holders of Shares required by Delaware Law to effect the Merger. At the Stockholders Meeting, Parent and Purchaser shall cause all Shares then owned by them and their Subsidiaries to be voted in favor of the approval and adoption of this Agreement and the Merger.
(b) Notwithstanding the foregoing, if the Purchaser shall acquire at least 90 percent of the then outstanding Shares, the parties shall, at the request of Purchaser, subject to Article VII, take all necessary and appropriate action to cause the Merger to become effective, in accordance with Section 253 of Delaware Law, as soon as reasonably practicable after such acquisition, without a meeting of the stockholders of the Company.
6.2. Proxy Statement.
If required by applicable law, as soon as practicable following
consummation of the Offer (or the delivery of a Merger Notice as provided in
Section 1.3(d) or (e)), the Company shall file the Proxy Statement with the SEC
under the Exchange Act, and shall use all reasonable efforts to have the Proxy
Statement cleared by the SEC. Parent, Purchaser and the Company shall cooperate
in the preparation of the Proxy Statement, and the Company shall notify Parent
of the receipt of any comments of the SEC with respect to the Proxy Statement
and of any requests by the SEC for any amendment or supplement thereto or for
additional information and shall provide to Parent promptly copies of all
correspondence between the Company or any representative of the Company and the
SEC. The Company shall (i) give Parent and its counsel the opportunity to review
the Proxy Statement prior to its being filed with the SEC; (ii) give Parent and
its counsel the opportunity to review all amendments and supplements to the
Proxy Statement and all responses to requests for additional information and
replies to comments prior to their being filed with, or sent to, the SEC; and
(iii) consider in good faith the comments and information provided by Parent,
Purchaser and their counsel with respect thereto. Each of the Company, Parent
and Purchaser shall use all reasonable efforts, after consultation with the
other parties hereto, to respond promptly to all such comments of and requests
by the SEC and to cause the Proxy Statement and all required amendments and
supplements thereto to be mailed to the holders of Shares entitled to vote at
the Stockholders Meeting at the earliest practicable time.
6.3. Company Board Representation; Section 14(f).
(a) Concurrently with the purchase by Purchaser of Shares pursuant to the Offer, and from time to time thereafter, Purchaser shall be entitled to designate up to such number of directors, rounded up to the next whole number, on the Board of the Company as shall give Purchaser representation on the Board of the Company equal to the product of the total number of directors on the Board of the Company (giving effect to the directors elected pursuant to this sentence) multiplied by the percentage that the aggregate number of Shares purchased by Purchaser in the Offer bears to the total number of Shares then outstanding, and the Company shall, at such time, promptly take all actions necessary to cause Purchaser's designees to be appointed as directors of the Company, including increasing the size of the Board of the Company or securing the resignations of incumbent directors or both.
(b) The Company shall promptly take all actions required pursuant to
Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder in order
to fulfill its obligations under this Section 6.3 and shall include in the
Schedule 14D-9 such information with respect to the Company and its officers and
directors as is required under Section 14(f) and Rule 14f-1 to fulfill such
obligations. Parent or Purchaser shall supply to the Company and be solely
responsible for any information with respect to either of them and their
nominees, officers, directors and Affiliates required by such Section 14(f) and
Rule 14f-l. In conjunction with the foregoing, the Company will, at the request
the Parent, either increase the size of the Board and/or obtain the resignation
of such number of its current directors as is necessary to enable Purchaser's
designees to be elected or appointed to the Board.
(c) Following the election of designees of Purchaser pursuant to this
Section 6.3, prior to the Effective Time, any amendment of this Agreement or the
Certificate of Incorporation or By-laws of the Company, any termination of this
Agreement by the Company, any extension by the Company of the time for the
performance of any of the obligations or other acts of Parent or Purchaser or
waiver of any of the Company's rights hereunder shall require the concurrence of
a majority of the directors of the Company then in office who neither were
designated by Purchaser nor are employees of the Company (the "Independent
Directors"), or if there is only one Independent Director, the concurrence of
such Independent Director. The Company shall use its best efforts to ensure
that at least one Independent Director shall remain on the Board until the
Effective Time.
6.4. Access to Information; Confidentiality.
(a) From the date hereof to the Effective Time, subject to compliance by the Parent and the Purchaser with paragraph (c) below, the Company shall, and shall cause the Subsidiaries and the officers, directors, employees, auditors and agents of the Company and the Subsidiaries to, afford the officers, employees and agents of Parent and Purchaser, and (subject to such confidentiality arrangements) representatives of entities which have committed or are being asked to commit to provide financing for the Transactions reasonable access at all reasonable times during normal business hours to the officers, employees, agents, properties, offices, plants and other facilities, books and records of the Company and each Subsidiary, and permit Parent and Purchaser to make such inspections as it may reasonably request (including environmental inspections), and shall furnish Parent and Purchaser all financial, operating and other data and information as Parent or Purchaser, through its officers, employees or agents, may reasonably request.
(b) The Company, Parent and Purchaser each agree to promptly advise each other of any information required to update or correct any documents filed, published or issued by such parties pursuant to the Offer or pursuant to Sections 6.1 or 6.2.
(c) All requests for information and access pursuant to this Section 6.4 shall be directed to David W. Cross, President and Chief Executive Officer of the Company, or to such other persons as he shall specify.
(d) All information obtained by Parent or Purchaser pursuant to this
Section 6.4 shall be kept confidential in accordance with the confidentiality
agreement, executed October 7, 1998 (the "Confidentiality Agreement"), between
Parent and the Company, which Confidentiality Agreement shall terminate upon the
earlier to occur of the acceptance for payment of the shares pursuant to the
Offer or the Effective Time.
6.5. No Solicitation of Transactions.
(a) The Company shall, and shall direct and cause its officers,
directors, employees, representatives and agents to, immediately cease any
discussions or negotiations with any parties that may be ongoing with respect to
an Acquisition Proposal (as hereinafter defined). The Company shall not, nor
shall it permit any of its Subsidiaries to, nor shall it authorize or permit any
of its officers, directors or employees or any representative retained by it or
any of its Subsidiaries to, directly or indirectly, (1) solicit, initiate or
encourage (including by way of furnishing information), or take any other action
designed or reasonably likely to facilitate, any inquiries or the making of any
proposal which constitutes, or may reasonably be expected to lead to, any
Acquisition Proposal or (ii) participate in any discussions or negotiations
regarding any Acquisition Proposal, provided, that, at any time prior to the
earlier to occur of(1) the acceptance for payment of the Shares pursuant to the
Offer or (2) the Stockholders Meeting, the Company may, upon receipt by the
Company of a written Acquisition Proposal which was not solicited after the date
hereof and after consulting with outside counsel, subject to compliance with
Section 6.5(b) and (c),
(x) furnish information with respect to the Company to any person pursuant to a customary confidentiality agreement (as determined by the Company after receipt of written advice from its outside counsel), and
(y) participate in negotiations regarding an Acquisition Proposal,
if the Board determines in good faith that such Acquisition Proposal is reasonably likely to result in a Superior Proposal and the Company notifies the Parent and Purchaser in writing that it is taking such action.
(b) Except as set forth in this Section 6.5, neither the Board nor any committee thereof shall (i) withdraw or modify in a manner adverse to Parent or Purchaser, or publicly propose or announce an intention to withdraw or modify adversely, or fail to make the approval or recommendation by the Board or such committee of the Offer, the Merger, the Transactions or this Agreement, (ii) approve or recommend any Acquisition Proposal or (iii) cause the Company to enter into any letter of intent, agreement in principle, acquisition agreement or other similar agreement related to any Acquisition Proposal with any Person other than the Parent or its Affiliates. Notwithstanding the foregoing, if, prior to the Stockholders Meeting, the Board determines in good faith (after consulting with outside counsel) that the fiduciary duties of the Board require it to do so, in respect of an Acquisition Proposal, which is unsolicited and received following the date hereof, the Board may (A) withdraw or modify its recommendation of the Offer, the Merger, the Transactions or this Agreement, or (B) approve or
recommend a Superior Proposal or (C) terminate this Agreement and, if it so chooses, cause the Company to enter into any agreement with respect to such Acquisition Proposal. The Company may take any of the foregoing actions pursuant to the preceding sentence only if (i) Purchaser shall not have accepted Shares for payment pursuant to the Offer, (ii) the Company is not in material breach of its obligations under this Section 6.5, (iii) the Company shall have terminated this Agreement pursuant to Section 8.1(f)(ii) and (iv) the Company has paid to Parent the amounts required under Section 8.3(a). Any withdrawal or modification of the recommendation of this Agreement by the Board shall not change the approval of the Board for purposes of causing Section 203 of the Delaware Code or any other Takeover Statute to be inapplicable to the Offer, the Merger, the Shareholder Agreements or the purchase of shares under this Agreement.
(c) Subject to compliance with subsection (b) above, nothing contained in this Section 6.5 shall prohibit the Company from complying with Rule 14e-2 promulgated under the Exchange Act.
(d) If the Board receives an Acquisition Proposal or any inquiry regarding the making of an Acquisition Proposal including any request for information, then the Company shall promptly inform Parent and Purchaser, orally and in writing, of the terms and conditions of such proposal request or inquiry and the identity of the Person making it. The Company will keep Parent and Purchaser informed of the status and principal terms of any such Acquisition Proposal request, or inquiry in a manner that will provide Parent and Purchaser with sufficient and timely knowledge of such status and terms and permit Parent and Purchaser to respond meaningfully thereto.
(e) Without limiting the foregoing, it is understood that any violation of the restrictions set forth in this Section 6.5 by any director or officer of the Company or by any of its Subsidiaries or by any investment banker, financial advisor, attorney, accountant or other representative of the Company and its Subsidiaries acting on behalf of the Company of its Subsidiaries, shall be deemed to be a breach of this Section by the Company
(f) (i) "Acquisition Proposal" means any inquiry, proposal or offer from any Person relating to any direct or indirect acquisition or purchase of 25% or more of the assets of the Company and its Subsidiaries taken as a whole or 25% or more of any class of equity securities of the Company, any tender offer or exchange offer that if consummated would result in any person beneficially owning 25% or more of any class of equity securities of the Company, or any merger, consolidation, share exchange, business combination, recapitalization, liquidation, dissolution or similar transaction involving the Company, other than the Transactions; and (ii) "Superior Proposal" means any bona fide Acquisition Proposal made by a third party to acquire, directly or indirectly, for consideration consisting of cash and/or securities (and without any financing contingency), all of the shares of the Company's Common Stock then outstanding or all or substantially all the assets of the Company and its Affiliates, which proposal the Board determines in its good faith judgment (following consultation with WP& Co. or other
financial advisor of nationally recognized reputation) to be materially more favorable to the Company's stockholders than the Offer and the Merger.
6.6. Employee Matters.
(a) For a period of at least one year following the Effective Time, Parent shall, or shall cause the Surviving Corporation and its Subsidiaries to, maintain employee benefit and welfare plans, programs, contracts, agreements, severance plans, policies and executive perquisites, for the benefit of active and retired employees of the Company and its Subsidiaries which in the aggregate provide benefits that are at least equal, on an overall basis, to those provided by Parent's Subsidiaries to their other employees of comparable status and seniority.
(b) Parent and Purchaser shall honor, without modification, and after the purchase of Shares pursuant to the Offer Parent shall cause the Company and its Subsidiaries to honor, all contracts, agreements, arrangements, policies, plans and commitments of the Company (or any of its Subsidiaries) in effect as of the date hereof which are applicable to any employee or former employee or any director or former director of the Company (or any of its Subsidiaries) set forth in the Company Disclosure Schedule, including the agreements of the Company (whether or not in writing) to pay commissions to employees or representatives of the Company, in accordance with the Company's prior practice, in respect of LTAC Leases which may be entered into following the date of this Agreement and which are scheduled on the Company's development plan as of October 30, 1998 (a copy of which has been provided to Parent by the Company) in respect of which such employees or representatives have provided services to the Company prior to the Effective Time.
6.7. Directors' and Officers' Indemnification and Insurance.
(a) The Certificate of Incorporation of the Surviving Corporation shall contain provisions no less favorable with respect to indemnification than are set forth in Article VII of the Certificate of Incorporation of the Company, which provisions shall not be amended, repealed or otherwise modified for a period of six years from the Effective Time in any manner that would materially and adversely affect the rights thereunder of individuals who at the Effective Time were directors, officers, employees, fiduciaries or agents of the Company, unless such modification shall be required by law.
(b) The Company shall, to the fullest extent permitted under applicable law and regardless of whether the Merger becomes effective, indemnify and hold harmless, and, after the Effective Time, Parent and the Surviving Corporation shall, jointly and severally, to the fullest extent permitted under applicable law, indemnify and hold harmless, each present and former director, officer, employee, fiduciary and agent of the Company and each Subsidiary (collectively, the "Indemnified Parties") against all costs and expenses (including reasonable attorneys' fees), judgments, fines, losses, claims, damages, liabilities and settlement amounts paid in connection with any claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), whether civil, administrative or investigative, arising out of or pertaining to any action or omission in their capacity as an officer, director, employee,
fiduciary or agent, whether occurring before or after the Effective Time, for a period of six years after the date hereof (a "Claim"), provided, however, that no Indemnified Party shall be entitled to payment of any amount in respect of any Claim arising from willful misconduct, self dealing or the commission of an intentional tort by such Indemnified Person. In the event of any such claim, action, suit, proceeding or investigation, Parent or the Surviving Corporation, as the case may be, shall assume the defense thereof, and neither Parent nor the Surviving Corporation will be liable to such Indemnified Parties for any legal expenses of other counsel incurred subsequent to such assumption by such Indemnified Parties in connection with the defense thereof, provided that (i) the Parent and the Surviving Corporation shall have acknowledged in writing that their indemnity obligations hereunder are applicable in respect of the matter in issue unless and until a court of competent jurisdiction ultimately determines, and such determination becomes final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by law, (ii) no settlement shall be effected without the written consent of an Indemnified Party which does not include a full and unconditional release of such Indemnified Party and (iii) the Indemnified Parties shall cooperate in the defense of any such matter. None of the Company, Parent or the Surviving Corporation shall be liable for any settlement effected without its written consent (which consent shall not be unreasonably withheld). None of the Company, Parent nor the Surviving Corporation shall be obligated pursuant to this Section 6.7(b) to pay the fees and expenses of more than one counsel for all Indemnified Parties (who shall in any event be reasonably acceptable to the Parent) in any single action except to the extent that the named parties to any such proceeding include both the Indemnified Party and the Company or Parent, or their respective successors, and the representation of such parties by the same counsel would be proscribed under applicable standards of professional conduct and provided further that, in the event that any claim for indemnification is asserted or made within such six-year period, all rights to indemnification in respect of such claim shall continue until the disposition of such claim.
(c) Parent and the Surviving Corporation shall use their respective reasonable best efforts to maintain in effect for six years from the Effective Time, if available, the current directors' and officers' liability insurance policies maintained by the Company (provided that Parent and the Surviving Corporation may substitute therefor policies of at least the same coverage containing terms and conditions which are not materially less favorable) with respect to matters occurring prior to the Effective Time; provided, that (1) if the existing policies expire, are terminated or canceled during such period Parent or the Surviving Corporation will use its reasonable best efforts to obtain substantially similar policies and (2) Parent or the Surviving Corporation shall not be required to spend as an annual premium therefor an amount in excess of $280,000.
6.8. Further Action; Reasonable Best Efforts.
Upon the terms and subject to the conditions hereof, each of the parties hereto shall (i) make promptly its respective filings, and thereafter make any other required submissions, under the HSR Act with respect to the Transactions, provided that no material divestiture or undertaking to make such a material divestiture shall be made without the consent of the Parent,
which will not unreasonably be withheld, and (ii) use its reasonable best efforts to take, or cause to be taken, all appropriate action, and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the Transactions, including, without limitation, using all reasonable efforts to obtain all licenses, permits, consents, approvals, authorizations, qualifications and orders of Governmental Authorities and parties to contracts with the Company and the Subsidiaries as are necessary for the consummation of the Transactions and to fulfill the conditions to the Offer and the Merger. The filing fee payable under the HSR Act shall be paid by the Purchaser. In case at any time after the Effective Time any further action is necessary or desirable to carry out the purposes of this Agreement, the proper officers and directors of each party to this Agreement shall use their reasonable best efforts to take all such action. In furtherance of its agreement in this Section, Parent shall retain a nationally-recognized information agent to assist in soliciting the shareholders of the Company to tender their Shares in the offer and/or, in the event a Merger Notice has been delivered pursuant to Section 1.3, to vote in favor of the Merger.
6.9. Public Announcements.
Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statements with respect to this Agreement or any Transaction and shall not issue any such press release or make any such public statement without the prior consent of the other parties, except as may be required by law or any listing agreement with a national securities exchange to which Parent or the Company is a party.
6.10. SEC and Stockholder Filings.
The Company shall deliver to Parent a copy of all material public reports and materials as and when it sends the same to its stockholders, the SEC or any state or foreign securities commission.
6.11. Takeover Statutes.
The Company and the Board shall take all reasonable action necessary to
ensure that no "fair price," "moratorium," "control share acquisition" or other
similar antitakeover statute or regulation enacted under state or federal laws
in the United States (each a "Takeover Statute"), including, without limitation,
Section 203 of the Delaware Code, is or becomes applicable to the Offer, the
Merger, this Agreement, or any Transaction, the Company and the members of its
Board of Directors (or any required and duly constituted Committee thereof) will
grant such approvals, and take such actions as are necessary so that the
transactions contemplated by this Agreement may be consummated as promptly as
practicable on the terms contemplated hereby and thereby and otherwise act to
eliminate or minimize the effects of any Takeover Statute on any of the
transactions contemplated hereby or thereby.
6.12. Advice of Breaches.
Parent and Purchaser, on the one hand, and the Company, on the other, shall promptly advise each other if they become aware of breaches or any event or occurrence which would be likely to cause a breach of its own representations, warranties or covenants herein.
ARTICLE VII
CONDITIONS TO THE MERGER
7.1. Conditions to the Merger.
The respective obligations of each party to effect the Merger shall be subject to the satisfaction at or prior to the Effective Time of the following conditions:
7.2. Parent and Purchaser Conditions to the Merger.
The obligations of the Parent and Purchaser to effect the Merger shall be subject to the condition that, at or prior to the Effective Time, the Company shall have performed in all material respects all obligations required to be performed by it under this Agreement, or such performance shall have been waived; provided, that this condition shall not apply in respect of any obligation of the Company arising after designees or representatives of Parent or Purchaser shall represent a majority of the Board. After such designees or representatives so constitute a majority of the Board, the obligations of the Parent and the Purchaser to proceed with the Transactions may not be waived, terminated or modified except as expressly permitted under the other provisions of this Agreement.
If a Merger Notice is delivered pursuant to Section 1.3(d) or (e), the obligations of Parent and Purchaser to effect the Merger shall also be subject to the satisfaction or waiver, at the Effective Time, of the following conditions:
(a) any applicable (i) waiting period under the HSR Act or (ii) period during which Parent or Purchaser shall have consented or otherwise be barred from consummating the Merger as part of any agreement or other arrangement with any Governmental Authority involving the HSR Act or any other applicable antitrust laws has expired or been terminated prior to the Effective Time;
(b) the Company shall have received any required consent or approval of any Governmental Authority and there shall not be pending or threatened any action or proceeding before any court or Governmental Authority, domestic or foreign, having any of the consequences referred to in clauses (i) through (vii) of Section 1.2(c);
(c) there shall not have been any statute, rule, regulation, judgment, order or injunction enacted, entered, issued, enforced, promulgated or deemed applicable, or any other action taken, by any Governmental Authority other than the routine application of the waiting period provisions of the HSR Act to the Merger, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (vii) of Section 1.2(c);
(d) there shall not have occurred, and be continuing, any change, condition, event or other development that has had a Material Adverse Effect;
(e) the representations and warranties of the Company in this Agreement shall be true and correct (for all purposes of this paragraph (e) without giving effect to any material or Material Adverse Effect qualifiers or other qualifiers based on materiality that are contained in this Agreement) as of such time (except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date), except to the extent that the failure or failures to be true or correct do not, in the aggregate, have a Material Adverse Effect,
(f) the number of Dissenting Shares shall not exceed 10% of the outstanding Shares.
7.3. Company Conditions to the Merger.
The obligation of the Company to effect the Merger shall be subject to the condition that, at or prior to the Effective Time, the Parent and Purchaser shall have performed in all material respects all obligations required to be performed by them under this Agreement, or such performance shall have been waived by a majority of the members of the Board of Directors of the Company who are not designees or representatives of Parent or Purchaser.
If a Merger Notice is delivered pursuant to Section 1.3(d) or (e), the obligations of the Company to effect the Merger shall also be subject to the satisfaction or waiver, at the Effective Time, of the following conditions:
(a) any applicable (i) waiting period under the HSR Act or (ii) period during which Parent or Purchaser shall have consented or otherwise be barred from consummating the Merger as part of any agreement or other arrangement with any Governmental Authority involving the HSR Act or any other applicable antitrust laws has expired or been terminated prior to the Effective Time;
(b) the Company shall have received any required consent or approval of any Governmental Authority, the absence of which could subject any of the directors, officers or other representatives of the Company to any personal liability;
(c) the representations and warranties of the Parent and the Purchaser in this Agreement shall be true and correct in all material respects as of such time (except to the extent such representations and warranties expressly relate to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date), except to the extent that failure or failures to be true and correct do not, in the aggregate, materially impair the ability of Parent and Purchaser to consummate the Merger.
ARTICLE VIII
TERMINATION, AMENDMENT AND WAIVER
8.1. Termination.
This Agreement may be terminated and the Merger and the other Transactions may be abandoned at any time prior to the Effective Time, notwithstanding any approval and adoption of this Agreement and the Transactions by the stockholders of the Company:
(a) By mutual written consent duly authorized by the Boards of Directors of Parent, Purchaser and the Company, provided, that any such consent by the Board of the Company shall include at least a majority of the members of the Board who are not designees or representatives of the Parent or the Purchaser; or
(b) By either Parent, Purchaser or the Company by written notice to the other parties if
(i) The Offer (x) shall be terminated or expire in accordance with its terms without the purchase of any Shares pursuant thereto or (y) Purchaser shall not have accepted for payment any Shares pursuant to the Offer on or before January 31, 1999; provided, gnat the right to terminate this Agreement under this clause (i) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure to complete the Offer on or before such
date and provided further that the right to terminate this Agreement under this clause (i) shall not be available to any of the parties to this Agreement if a Merger Notice has been delivered pursuant to Sections 1.3(d) or (e);
(ii) the Effective Time shall not have occurred on or before May 31, 1999; provided, that the right to terminate this Agreement under this clause (ii) shall not be available to any party whose failure to fulfill any obligation under this Agreement has been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; or
(iii) any court of competent jurisdiction or other Governmental Authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the Offer or Merger and such order, decree, ruling or other action shall have become final and nonappealable;
(c) By Parent or Purchaser, by written notice to the Company, if (i) the Board or any committee thereof shall have (1) withdrawn or modified in a manner adverse to Purchaser or Parent its approval or recommendation of the Offer, this Agreement, the Merger or any other Transaction or (2) shall have approved or recommended any Acquisition Proposal or (ii) WP&Co. shall have withdrawn, revoked, amended or modified its opinion referred to in Section 3.22 in any manner adverse to Parent or Purchaser, unless (A) at the time of or promptly following such withdrawal, revocation, amendment or modification the Board shall have publicly reaffirmed its approval and recommendation of the Transactions and (B) within 10 Business Days following such withdrawal, revocation, amendment or modification the Board shall have received a written opinion, from another financial advisor of nationally recognized reputation reasonably acceptable to Parent and Purchaser, that the Offer is fair to the shareholders of the Company from a financial point of view, a copy of which shall have been delivered to the Parent;
(d) By Parent and Purchaser, by written notice to the Company, if the Company shall have (1) exercised a right specified in Section 6.5(a) with respect to any Acquisition Proposal and the Board of Directors shall not, within 10 Business Days following a written request from the Parent to do so, have reaffirmed its recommendation of the Transactions; (ii) taken any action described in Section 6.5(b), or (iii)(1) an Acquisition Proposal that is publicly disclosed shall have been commenced, publicly proposed or communicated to the Company which contains a proposal as to price (without regard to the specificity of such price proposal) and (2) the Company shall not have rejected such proposal within 10 business days of its receipt or the date its existence first becomes publicly disclosed, if sooner;
(e) By Parent and Purchaser, by written notice to the Company:
(i) if the Company shall have breached or failed to perform in any material respect any of its representations, warranties or covenants required to be performed by it under this Agreement or the Offer, and, in
the case of any breach other than an intentional material breach, such breach or failure to perform has continued unremedied for 30 days or is not reasonably capable of being cured by the expiration date of the Offer; or
(ii) if the Company shall violate its obligations under
Section 6.5; or
(f) By the Company by written notice to the Parent and the Purchaser:
(i) if Purchaser shall have failed to publicly announce and commence the Offer (within the meaning of Rule 14d-2 under the Exchange Act) within five Business Days following the date of this Agreement; provided, that the Company may not terminate this Agreement pursuant to this subparagraph (i) if the Company is in material breach under this Agreement;
(ii) in accordance with Section 6.5 and subject to the limitations set forth therein, provided that Parent or Purchaser does not make, within 3 Business Days of receipt of the notice of termination required to be delivered pursuant to Section 6.5, an offer that the Company's Board believes in good faith, after consultation with its legal counsel and financial advisors, is at least as favorable to the holders of the Shares as such other bidder's offer, and provided, further, that no termination under this subparagraph (ii) shall be effective unless the termination fee and expense fee required under Section 8.3 is paid at the time notice of such termination is delivered;
(iii) if Parent or Purchaser shall have breached or failed to perform in any material respect any of its representations, warranties or covenants required to be performed by them under this Agreement at or prior to such date, and, in the case of any breach other than an intentional material breach, such breach or failure to perform has continued unremedied for 30 days or is not reasonably capable of being cured by the expiration date of the Offer.
8.2. Effect of Termination.
In the event of the termination of this Agreement pursuant to Section 8.1, this Agreement shall forthwith become void, and there shall be no liability on the part of any party hereto, except (i) as set forth in Sections 6.4, 8.3 and 9.1 and (ii) nothing herein shall relieve any party from liability for any breach hereof. Any attempted termination of this Agreement not in accordance with Section 8.1 shall not be effective and shall not affect the rights or obligations of the parties set forth herein.
8.3. Fees and Expenses.
(a) If this Agreement is terminated pursuant to Section 8.1(c)(i),
8.1(c)(ii) (when Parent or Purchaser's right to terminate arises as a result of
the failure of the Board to publicly reaffirm its approval and recommendation of
the Transactions), 8.1(d), 8.1(e)(ii) or 8.1(f)(ii), then the Company shall pay
Parent $4,000,000 plus up to $1,000,000 in reimbursement of actual, verifiable
expenses (the "Expenses") incurred by the Parent in connection with the
negotiation, execution and delivery of this Agreement and the other documents
contemplated hereby and the anticipated completion of the Transactions.
(b) If this Agreement is terminated pursuant to Section 8.1(b) (on
account of the failure of the Company to satisfy the condition set forth in
Section 1.2(f)), 8.1(c)(ii) (except in the case where Parent or Purchaser's
right to terminate arises as a result of the failure of the Board to publicly
reaffirm its approval and recommendation of the Transactions) or 8.1(e)(i), then
the Company shall pay Parent up to $1,000,000 in reimbursement of Expenses, and
if, at any time within one year of the date of such termination, the Company
enters into an agreement with respect to or consummates any direct or indirect
acquisition or purchase by any person of 25% or more of the assets of the
Company and its Subsidiaries taken as a whole or the issuance of 25% or more of
any class of equity securities of the Company, any tender offer or exchange
offer that if consummated would result in any person beneficially owning 25% or
more of any class of equity securities of the Company, or any merger,
consolidation, share exchange, business combination, recapitalization,
liquidation, dissolution or similar transaction involving the Company, other
than the Transactions (collectively, a "Subsequent Transaction"), the Company
shall pay Parent $4,000,000.
(c) If this Agreement is terminated by the Parent or the Purchaser pursuant to Section 8.1(b) on account of the failure of the Company to satisfy the condition set forth in Section 1.2(i), then the Company shall pay Parent, in consideration for the expenses incurred in anticipation of the completion of the Transactions, up to $1,000,000 in reimbursement of Expenses.
(d) If this Agreement is terminated by the Parent or the Purchaser pursuant to Section 8.1(b) (other than on account of the failure of the Company to satisfy the condition set forth in Section 1.2(f) or 1.2(i), which are addressed in subparagraphs (b) and (c) above), and if the Company enters into an agreement with respect to or consummates a Subsequent Transaction within six months following such termination, then the Company shall pay Parent $4,000,000 plus up to $1,000,000 in reimbursement of Expenses.
(e) Any amounts payable under paragraphs (a)-(d) above shall be paid within five Business Days after demand by the Parent or the Purchaser or at such earlier time as may be required under Section 6.5 or Section 8.1(f)(ii).
(f) The payment called for in paragraphs (a)-(d) above shall be in lieu of any other claims by the Parent or the Purchaser in respect of its costs, expenses, damages and losses incurred by the Parent or the Purchaser in respect of the matters referred to in such paragraphs.
The Company acknowledges that the agreements contained in this Section 8.3 are an integral part of the transactions contemplated by this Agreement, and that, without these agreements, Parent and Purchaser would not enter into this Agreement.
(g) Except as set forth in this Section 8.3, all fees and expenses incurred in connection with the Offer, the Merger, this Agreement and the Transactions will be paid by the party incurring such fees or expenses, whether or not the Merger is consummated.
8.4. Amendment.
Subject to Section 6.3, this Agreement may be amended by the parties hereto by action taken by or on behalf of their respective Boards of Directors at any time prior to the Effective Time; provided, that, after the approval and adoption of this Agreement and the Transactions by the stockholders of the Company, no amendment may be made which would reduce the amount or change the type of consideration into which each Share shall be converted upon consummation of the Merger. This Agreement may not be amended except by an instrument in writing signed by the parties hereto.
8.5. Waiver.
At any time prior to the Effective Time, any party hereto may (i) extend the time for the performance of any obligation or other act of any other party hereto, (ii) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto and (iii) waive compliance with any agreement or condition contained herein.
ARTICLE IX
GENERAL PROVISIONS
9.1. Non-Survival of Representations, Warranties and Agreements.
The representations, warranties and agreements in this Agreement shall
terminate at the Effective Time or upon the termination of this Agreement
pursuant to Section 8.1, except that the agreements set forth in Article II and
Sections 6.6 and 6.7 shall survive the Effective Time indefinitely, and those
set forth in Sections 6.4(c), 6.7 and 8.3 and in the last clause of Section
1.5(d), shall survive termination of this Agreement indefinitely. The expiration
of a representation, warranty or agreement in this Agreement pursuant to this
Section 9.1 shall not affect the rights or remedies of any party arising from a
breach thereof occurring prior to such expiration.
9.2. Notices.
All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by fax or by registered or certified mail (postage prepaid, return receipt
requested) to the respective parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section):
if to Parent or Purchaser:
Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Attn: Rocco A. Ortenzio
Chairman and Chief Executive Officer
with a copy to:
Dechert Price & Rhoads
1717 Arch Street
Philadelphia, PA 19103-2793
Attn: Henry N. Nassau
if to the Company:
Intensiva HealthCare Corporation
7733 Forsyth Boulevard, Suite 800
St. Louis, MO 63105
Attn: David W. Cross
President and Chief Executive Officer
with a copy to:
Suelthaus & Walsh, P.C.
7733 Forsyth Boulevard, Twelfth Floor,
St. Louis, Missouri 63105
Fax: (314) 727-7166
Attn: Thomas M. Walsh
and
Bryan Cave LLP
211 North Broadway
Suite 3600
St. Louis, Missouri 63102
Fax: (314)259-2020
Attn: Denis P. McCusker
9.3. Definitions.
For purposes of this Agreement, the term:
(1) "Acquisition Proposal" is defined in Section 6.5(f).
(2) "Affiliate" of a specified person means a person who directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such specified person;
(3) "Beneficial Owner" with respect to any Shares means a person who shall
be deemed to be the beneficial owner of such Shares (i) which such person or any
of its Affiliates or associates (as such term is defined in Rule 12b-2
promulgated under the Exchange Act) beneficially owns, directly or indirectly,
(ii) which such person or any of its Affiliates or associates has, directly or
indirectly, (A) the right to acquire (whether such right is exercisable
immediately or subject only to the passage of time), pursuant to any agreement,
arrangement or understanding or upon the exercise of consideration rights,
exchange rights, warrants or options, or otherwise, or (B) the right to vote
pursuant to any agreement, arrangement or understanding or (iii) which are
beneficially owned, directly or indirectly, by any other persons with whom such
person or any of its Affiliates or associates or person with whom such person or
any of its Affiliates or associates has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of any
Shares;
(4) "Blue Sky Laws" is defined in Section 3.5(b).
(5) "Business Day" means any day on which the principal offices of the SEC in Washington, D.C. are open to accept filings, or, in the case of determining a date when any payment is due, any day on which banks are not required or authorized to close in the City of New York.
(6) "Board" means the Board of Directors of the Company.
(7) "Claim" shall have the meaning set forth in Section 6.7.
(8) "Code" means the Internal Revenue Code of 1986, as amended.
(9) "Common Stock" is defined in Section 1.1.
(10) "Company Disclosure Schedule" is defined in the first paragraph of Article III.
(11) "Confidentiality Agreement" is defined in Section 6.4(c).
(12) "Control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, as trustee or executor, by contract or credit arrangement or otherwise.
(13) "Delaware Law" means the General Corporation Law of the State of Delaware.
(14) "Dissenting Shares" is defined in Section 2.7.
(15) "Effective Time" is defined in Section 2.2
(16) "Environmental Laws" means any federal, state, or local statute, rule, regulation or order, as in effect on the date of this Agreement, relating to the protection of the environment or to the regulation of any toxic, radioactive, ignitable, corrosive, reactive, biomedical or otherwise hazardous substances, materials, contaminants, pollutants or wastes.
(17) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(18) "Governmental Authority" means any agency, instrumentality, department, commission, court, tribunal or board of any government, whether foreign or domestic and whether national, federal, state, provincial or local.
(19) "HSR Act" is defined in Section 3.5(b).
(20) "Indemnified Parties" is defined in Section 6.7(b).
(21) "Intellectual Property" means all of the following (in whatever form
or medium) which are owned by or licensed to the Company or any of its
Subsidiaries for use in connection with the operation of its business: (i)
patents, trademarks, service marks, tradedress, logos, designs and copyrights,
(ii) applications for patents and for registration of trademarks, service marks
and copyrights, (iii) trade secrets and trade names, and (iv) all other items of
proprietary know-how or intellectual property.
(22) "Interim Balance Sheet" is defined in Section 3.6(c).
(23) "knowledge" means, in respect of the Company, the actual knowledge of the persons listed on Exhibit A hereto.
(24) "Liens" is defined in Section 3.16(a).
(25) "LTAC Leases" is defined in Section 3,16(b).
(26) "Material Adverse Effect" means any change, effect, condition, event or circumstance that is, or is reasonably likely to be, materially adverse to the business, financial condition, assets, properties, or results of operations of the Company and the Subsidiaries, taken as a whole; provided, that "Material Adverse Effect" shall not include any change, effect, condition, event or circumstance arising out of or attributable to (i) any decrease in the market price of the Shares (but not any change, effect, condition, event or circumstance underlying such decrease to the extent that it would otherwise constitute a Material Adverse Effect), (ii) changes, effects, conditions, events or circumstances that generally affect the industries in which the
Company operates (including legal and regulatory changes), (iii) general economic conditions or change, effects, conditions or circumstances affecting the securities markets generally, (iv) changes arising from the consummation of the Transactions or the announcement of the execution of this Agreement, including changes resulting from the exercise by other parties to the LTAC Leases of any contractual rights they may have (if any) under the express terms of the LTAC Leases as a result of the Transactions or the announcement of the Transactions; or (v) any matter expressly disclosed in this Agreement or the Company's Disclosure Schedule; and provided, further that, subject to the foregoing, a Material Adverse Effect shall be deemed to have occurred if the Company and its Subsidiaries shall have lost their accreditation to continue participation in the Medicare and Medicaid programs in respect of one or more of the Company's locations which represented, in the aggregate, in excess of 15% of the Company's net revenues for the most recent four fiscal quarters preceding the date of such event.
(27) "Merger" is defined in Section 2.1.
(28) "Merger Consideration" is defined in Section 2.6(a).
(29) "Merger Notice" is defined in Section 1.3(d).
(30) "1997 Balance Sheet" is defined in Section 3.6(c).
(31) "Per Share Amount" is defined in Section 1.1
(32) "Person" means an individual, corporation, partnership, limited partnership, syndicate, person (including, without limitation, a "person" as defined in Section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government.
(33) "Plans" is defined in Section 3.9.
(34) "Proxy Statement" is defined in Section 3.10.
(35) "Returns" shall mean all returns, declarations, reports, statements, and other documents required to be filed with any government or taxing authority in respect of Taxes, and the term "Return" shall mean any one of the foregoing Returns.
(36) "SEC" means the Securities and Exchange Commission.
(37) "SEC Rules" means the rules, regulations or interpretations of the SEC or the staff thereof.
(38) "Stockholders Meeting" is defined in Section 6.1.
(39) "Subsidiary" or "Subsidiaries" of the Company, the Surviving Corporation, Parent or any other person means an Affiliate controlled by such person, directly or indirectly, through one or more intermediaries.
(40) "Superior Proposal" is defined in Section 6.5(f).
(41) "Surviving Corporation" is defined in Section 2.1.
(42) "Takeover Statute" is defined in Section 6.11.
(43) "Tax" or "Taxes" shall mean (A) all federal, state and local and foreign taxes and assessments of any nature whatsoever, based on the laws and regulations in effect from time to time through the Closing Date, including, without limitation, all income, profits, franchise, gross receipts, capital, sales, use, withholding, value added, ad valorem, transfer, employment, social security, disability, occupation, property, severance, production, excise, environmental and other taxes, duties and other similar governmental charges and assessments imposed by or on behalf of any government or taxing authority, including all interest, penalties and additions imposed with respect to such amounts, and (B) any obligations under any agreements or arrangements with respect to any Taxes described in clause (A) above.
(44) "Tax Returns" means any returns required to be filed with Federal, state or other applicable taxing authorities in respect of any Taxes.
(45) "Transactions" is defined in Section 1.2(c).
(46) "Warrants" is defined in Section 3.3.
9.4. Severability.
If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of law, or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect so long as the economic or legal substance of the Transactions is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the parties as closely as possible in a mutually acceptable manner in order that the Transactions be consummated as originally contemplated to the fullest extent possible. The parties confirm that, if they are unable to reach such agreement, it is their intention that the provisions of this Agreement be enforced to the maximum extent permissible.
9.5. Entire Agreement; Assignment.
Except for the. Confidentiality Agreement and the Letter Agreement, this Agreement constitutes the entire agreement among the parties with respect to the subject matter hereof and supersedes, all prior agreements and undertakings, both written and oral, among the parties, or
any of them, with respect to the subject matter hereof. This Agreement shall not be assigned by operation of law or otherwise, except that Parent and Purchaser may assign all or any of their rights and obligations thereunder to any wholly- owned Subsidiary of Parent provided that no such assignment shall relieve the assigning party of its obligations hereunder if such assignee does not perform such obligations.
9.6. Parties in Interest.
This Agreement shall be binding upon and inure solely to the benefit of
each party hereto, and nothing in this Agreement (including, without limitation,
Section 6.6), express or implied, is intended to or shall confer upon any other
person any right, benefit or remedy of any nature whatsoever under or by reason
of this Agreement, other than Section 6.7 (which is intended to be for the
benefit of the persons covered thereby and may be enforced by such persons).
9.7. Governing Law.
This Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware.
9.8. Headings.
The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement.
9.9. Counterparts.
This Agreement may be executed in one or more counterparts, and by the different parties hereto in separate counterparts, each of which when executed shall be deemed to be an original but all of which taken together shall constitute one and the same agreement.
9.10. Specific Performance.
Nothing in this Agreement shall preclude a party from seeking specific performance, injunctive relief or any other remedies not involving the payment of monetary damages in the event of any breach or violation (or threatened breach or violation) of any provision of this Agreement by the other party and each party acknowledges that, in light of the unique benefit to it of its rights under this Agreement, such remedies shall be available in respect of any such breach or violation by it in any suit properly instituted in a court of competent jurisdiction and shall be in addition to any other remedies available at law or in equity to such party.
9.11. Costs of Enforcement.
In any action, claim, suit or proceeding to enforce its rights under this Agreement, the prevailing party shall be entitled to prompt reimbursement of its reasonable costs and expenses of obtaining such enforcement, including attorneys' fees.
IN WITNESS WHEREOF, Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized.
SELECT MEDICAL CORPORATION
By /s/ Rocco A. Ortenzio ------------------------ Name: Title: |
SELECT MEDICAL OF
MECHANICSBURG, INC
By /s/ Rocco A. Ortenzio ------------------------ Name: Title: |
INTENSIVA HEALTHCARE
CORPORATION
By /s/ David W. Cross ------------------------ Name: Title: |
Exhibit 2.3
STOCK PURCHASE AGREEMENT
By and Among
NovaCare, Inc.,
NC Resources, Inc.
and
Select Medical Corporation
As of October 1, 1999
SECTION I PURCHASE AND SALE OF THE SHARES........................................................................... 1 1.01. Purchase and Sale of the Shares........................................................................... 1 1.02. Purchase Price............................................................................................ 1 1.03. Delivery of the Shares.................................................................................... 2 1.04. Intercompany Account Obligations.......................................................................... 2 1.05. Guaranties................................................................................................ 2 SECTION II REPRESENTATIONS AND WARRANTIES OF THE PARENT AND THE SELLER............................................... 3 2.01. Organization and Qualification: Subsidiaries: Managed Companies........................................... 3 2.02. Conflicts................................................................................................. 3 2.03. Capitalization............................................................................................ 4 2.04. Financial Statements: No Undisclosed Liabilities.......................................................... 4 2.05. Accounts Receivable....................................................................................... 5 2.06. Absence of Certain Chances................................................................................ 6 2.07. Taxes..................................................................................................... 6 2.08. Real Property Owned or Leased............................................................................. 8 2.09. Title to Assets........................................................................................... 8 2.10. Contractual and Other Obligations......................................................................... 8 2.11. Compensation.............................................................................................. 10 2.12. Employee Benefit Plans.................................................................................... 10 2.13. Labor Relations........................................................................................... 11 2.14. Insurance................................................................................................. 11 2.15. Litigation................................................................................................ 12 2.16. Permits: Compliance with Environmental Law: Compliance.................................................... 12 2.17. Bank Accounts............................................................................................. 15 2.18. Trademarks................................................................................................ 15 2.19. Transactions with Certain Persons......................................................................... 16 2.20. Authority................................................................................................. 16 2.21. Ownership of Shares....................................................................................... 17 2.22. Consents.................................................................................................. 17 2.23. Foreign Person............................................................................................ 17 2.24. Year 2000................................................................................................. 17 2.25. Medicare Participation!................................................................................... 17 2.26. Exclusion................................................................................................. 18 2.27. Federal Health Care Programs.............................................................................. 18 2.28. No Criminal Proceeding.................................................................................... 19 2.29. Third-Party Payment Contracts............................................................................. 19 2.30. Billing; Gratuitous Payments.............................................................................. 19 |
2.31. Reimbursement Matters..................................................................................... 19 2.32. Solvency.................................................................................................. 20 2.33. Opinion of Financial Advisor.............................................................................. 20 2.34. Disclosure................................................................................................ 20 SECTION III REPRESENTATIONS AND WARRANTIES OF THE PURCHASER........................................................... 20 3.01. Organization.............................................................................................. 20 3.02. Authority................................................................................................. 20 3.03. Conflicts................................................................................................. 20 3.04. Litigation; Disputes...................................................................................... 21 3.05. Consents.................................................................................................. 21 3.06. Investment Purpose........................................................................................ 21 3.07. Financing................................................................................................. 21 SECTION IV. THE CLOSING............................................................................................... 21 4.01. Time and Place of the Closing............................................................................. 21 4.02. Termination............................................................................................... 22 4.03. Effect on Obligations..................................................................................... 22 4.04. Return of Documentation................................................................................... 23 4.05. Sole and Exclusive Remedy................................................................................. 23 SECTION V CONDITIONS TO THE SELLER'S OBLIGATIONS TO CLOSE........................................................... 23 5.01. Certificates.............................................................................................. 23 5.02. Opinion of the Purchaser's Counsel........................................................................ 24 5.03. Representations, Warranties and Covenants................................................................. 24 5.04. No Litigation............................................................................................. 24 5.05. HSR Act Approval.......................................................................................... 24 SECTION VI. CONDITIONS TO THE PURCHASER'S OBLIGATION TO CLOSE......................................................... 24 6.01. Certificates.............................................................................................. 24 6.02. Opinion of the Parent's Counsel........................................................................... 25 6.03. Representations; Warranties and Covenants................................................................. 25 6.04. No Litigation............................................................................................. 26 6.05. Approvals................................................................................................. 26 6.06. HSR Act Approval.......................................................................................... 26 6.07. Resignations.............................................................................................. 26 6.08. Escrow Agreement.......................................................................................... 26 6.09. Third Party Consents...................................................................................... 26 6.10. PNC Liens................................................................................................. 26 |
SECTION VII CONDUCT OF THE BUSINESS.................................................................................... 27 7.01. Limitations on Conduct.................................................................................... 27 7.02. Preparation and Filing of Tax Returns..................................................................... 28 7.03. Access; Information and Documents......................................................................... 28 7.04. Preparation and Filing of Medicare and Medicaid Cost Reports.............................................. 29 7.05. Payment of Sellers' Notes and Earn Out Amounts............................................................ 29 SECTION VIII OTHER AGREEMENTS OF THE PARTIES........................................................................... 29 8.01. Announcements............................................................................................. 29 8.02. Employee Matters.......................................................................................... 29 8.03. Labor Relations........................................................................................... 31 8.04. Access to Information..................................................................................... 31 8.05. Intentionally left blank.................................................................................. 33 8.06. Tax Matters............................................................................................... 33 8.07. [Intentionally omitted]................................................................................... 36 8.08. Agreement by the Purchaser Regarding No Other Representations or Warranties by the Parent or the Seller... 36 8.09. Use of NovaCare Name...................................................................................... 36 8.10. Employee Obligations...................................................................................... 37 8.11. Non-Competition; Nonsolicitation.......................................................................... 38 8.12. No Solicitation........................................................................................... 39 8.13. Confidentiality........................................................................................... 39 8.14. Acquisition of Rights to Confidentiality.................................................................. 39 8.15. Accounts Receivable....................................................................................... 40 8.16. NCES Subscriber Agreement................................................................................. 40 8.17. NCES Office Support Services Agreement.................................................................... 41 8.18. Transition Services Agreement............................................................................. 41 8.19. Transition Obligations.................................................................................... 41 8.20. Representations regarding Working Capital, Long-Term Liabilities and Tax Basis................................................................................. 41 8.21. Contribution of Assets.................................................................................... 43 8.22. Notice of Distributions................................................................................... 43 8.23. Updated Financial Information............................................................................. 43 8.24. Furniture, Fixtures....................................................................................... 43 SECTION IX INDEMNIFICATION............................................................................................. 44 9.01. Indemnification by the Parent and the Seller.............................................................. 44 9.02. Indemnification by the Group Members...................................................................... 44 9.03. Procedure for Indemnification............................................................................. 45 9.04. Limits on the Liability of the Parent and Seller.......................................................... 48 9.05. Other Limits on Indemnification........................................................................... 48 9.06. Losses Net................................................................................................ 48 |
9.07. Sole and Exclusive Remedy................................................................................. 48 9.08. Limitation on indemnification............................................................................. 49 9.09. Limitation on Materiality................................................................................. 49 SECTION X BROKERS AND FINDERS.......................................................................................... 49 10.01. The Parent's and the Seller's Obligations................................................................. 49 10.02. The Purchaser's Obligations............................................................................... 49 SECTION XI MISCELLANEOUS............................................................................................... 50 11.01. Notices................................................................................................... 50 11.02. Assignment................................................................................................ 50 11.03. Further Action............................................................................................ 50 11.04. Binding Effect............................................................................................ 50 11.05. Expenses.................................................................................................. 50 11.06. Arbitration............................................................................................... 51 11.07. Schedules and Exhibits.................................................................................... 51 11.08. Invalidity................................................................................................ 51 11.09. Headings.................................................................................................. 51 11.10. Governing Law............................................................................................. 52 11.11. Counterparts.............................................................................................. 52 11.12. Construction.............................................................................................. 52 11.13. Assignment of Parent Agreements........................................................................... 52 SECTION XII DEFINITIONS................................................................................................ 52 12.01. Certain Definitions....................................................................................... 52 |
Schedule 1.02 Allocation of Purchase Price Among Companies Schedule 1.02A Seller Notes and Other Third Party Indebtedness Schedule 1.04 Intercompany Account Obligations Schedule 1.05 Seller Guaranteed Obligations Schedule 2.01 Subsidiaries, Capital Stock, Managed Companies Schedule 2.02 Group Member Conflicts Schedule 2.03 Capitalization Schedule 2.04 Liabilities; Financial Statements Schedule 2.04A Cash Receipts and Disbursements Schedule 2.04G 1999 Cash Collection Analysis Schedule 2.06 Certain Changes Schedule 2.07 Taxes Schedule 2.08 Real Property Schedule 2.09 Title; Liens Schedule 2.11 Compensation iv |
Schedule 2.11A Employee Contractual Severance Schedule 2.12 Benefit Plans Schedule 2.13 Labor Relations Schedule 2.14 Insurance Schedule 2.15 Litigation Schedule 2.16 Permits: Environmental Schedule 2.16(g) Facility Approvals Schedule 2.16(h) Medicare Participation - Exceptions Schedule 2.18 Intellectual Property Schedule 2.19 Transactions with Certain Persons Schedule 2.22 Consents Schedule 2.24 Year 2000 Schedule 2.25 Medicare Provider Numbers Schedule 2.30 Billing Schedule 2.31 Reimbursement Matters Schedule 7.01 Conduct of the Business Schedule 8.02(e) Non-PROH COBRA Individuals Schedule 8.10 Mountain Contract Schedule 8.20(b)-1 Consolidated Net Working Capital Schedule 9.02 Parent Agreements EXHIBITS Exhibits 1.02 Escrow Agreements |
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT (this "Agreement"), made as of October 1, 1999, by and among NovaCare, Inc., a Delaware corporation (the "Parent"), NC Resources, Inc., a Delaware corporation (the "Seller"), and Select Medical Corporation, a Delaware corporation (the "Purchaser"). Capitalized terms used herein and not defined in the specific Section in which they are used, shall have the meanings assigned to such terms in Section XII hereof.
WHEREAS, the Seller is the holder of all of the issued and outstanding shares of common stock, $.01 par value per share (the "Common Stock"), of each of RehabClinics, Inc., a Delaware corporation ("RehabClinics"), NovaCare Occupational Health Services, Inc., a Delaware corporation ("NOHS"), Industrial Health Care Company, Inc., a Delaware corporation ("IHCC"), CMC Center Corporation, a Delaware corporation ("CMC"), and NovaMark, Inc., a Delaware corporation ("NM") (each of RehabClinics, NOHS, IHCC, CMC, and NM hereinafter referred to, individually, as a "Company" and, collectively, as the "Companies");
WHEREAS, the Parent is the holder of all of the outstanding capital stock of the Seller; and
WHEREAS, the Purchaser desires to acquire from the Seller, and the Seller desires to sell to the Purchaser, for the consideration hereinafter provided, all of the outstanding shares of the Common Stock of the Companies (collectively, the "Shares").
NOW, THEREFORE, in consideration of the foregoing premises and the mutual covenants and agreements hereinafter set forth, the parties hereto, intending to be legally bond, hereby agree as follows:
In connection with the purchase and sale of the Shares hereunder, the Parent and the Seller, jointly and severally, hereby represent and warrant to the Purchaser, as of the date hereof and as of the Closing Date, that:
of any contract or other obligation to which the Parent or the Seller is subject except where such violation, conflict, breach, termination or Lien is not reasonably likely to have a Material Adverse Effect.
(i) audited combined statements of the results of operations and cash flows of the Companies and their subsidiaries for the fiscal years ended June 30, 1999, 1998 and 1997 and combined balance sheets of the Companies and their subsidiaries as at June 30, 1999 and 1998 together with the footnotes thereto; and
(ii) unaudited combined statement of the results of operations of the Companies and their subsidiaries for the fiscal quarter ended June 30, 1999.
(b) The Financial Statements set forth in subsection (a)(i) above have been audited by PricewaterhouseCoopers, independent public accountants. The Financial Statements (i) have been prepared from and are in accordance with the books and records of the Companies, (ii) fairly present in all material respects the consolidated financial condition of the Companies and the Subsidiaries and the results of their operations and cash flows as of the date and for the periods specified therein, and iii) have been prepared in accordance with GAAP .A11 references
in this Agreement to the "Balance Sheet" shall mean the combined balance sheet of the Companies and their subsidiaries as at June 30, 1999 included in the Financial Statements. The Financial Statements include the results of operations of, and assets and liabilities of, the Managed Companies, as if they were subsidiaries of the Companies.
(i) liabilities and obligations set forth or reserved against in the Financial Statements;
(ii) liabilities and obligations incurred in the ordinary course of business subsequent to the date of the Financial Statements and reflected on the Closing Balance Sheet (as defined herein); and
(iii) liabilities and obligations described or otherwise disclosed on, or which may arise out of or with respect to the matters or Contracts described or otherwise disclosed on, the Schedules to this Agreement.
(e) Except for indebtedness to be cancelled or otherwise eliminated as set forth in Section 1.04 hereof and except for indebtedness among Group Members, no Group Member has or has guaranteed any indebtedness for borrowed funds.
which have arisen since June 30, 1999, are valid and have arisen only from bona fide arm's length transactions in the ordinary course of the business of the Group Members. .A11 of such accounts receivable have been billed and are generally due within 30 days after such billing and, to the Knowledge of Parent, are not subject to any counterclaims or offsets. The accounts receivable, net of reserves, set forth on the Balance Sheet are presented fairly on such Balance Sheet in accordance with GAAP.
(a) The Parent has filed or caused to be filed on a timely basis all returns, reports or other declarations relating to Taxes required to be filed with respect to each Group Member (the "Tax Returns"), and the Parent has timely paid or caused to be paid all Federal, state, local and foreign taxes (including, but not limited to, income, franchise, property (real, tangible and intangible), sales, use, unemployment, withholding, gross receipts, business license, transfer, capital, net worth, gains, excise, social security, workers' compensation and other taxes of any kind whatsoever and estimated income and franchise tax payments, and penalties, interest and fines with respect to any thereof) (collectively, "Taxes") set forth on such Tax Returns as due and payable with respect to the periods covered by such Tax Returns and all other taxes of any Group Members that are due and payable, whether or not reflected on a Tax Return. Since their respective dates of acquisition, the taxable income of each of the Group Members has been included in the consolidated Federal income Tax Returns of the Parent to the extent required to be included under the Code and in the consolidated, combined, unitary or individual state income Tax Returns of the Parent or an Affiliate to the extent required to be included under applicable state income Tax rules.
(b) With respect to any Taxes of any Group Member not due and payable as of June 30, 1999, adequate reserves and accruals for such Taxes have been made :n the Financial Statements and nothing has occurred subsequent to the date of such Financial Statements to make any of such reserves and accruals inadequate. All Taxes of the Group Members for periods after June 30, 1999 have been paid or are adequately reserved against on the books and records of the Companies.
(c) Neither the Seller, nor the Parent, nor any Group Member has received written notice from any taxing authority of any material deficiency, claim or other dispute relating to the payment or assessment of any Taxes for any period which remains unsettled at the date hereof, and the Parent has no reasonable basis to believe that any such deficiency exists materially in excess of reserves and accruals set forth in the Financial Statements or in the books and records of the applicable Group Member.
(d) Neither the Seller, nor the Parent, nor any Group Member has executed any waiver of any statute of limitations on the assessment or collection of Taxes with respect to any Group Member or executed any agreement now in effect extending the period of time to assess or collect any Taxes with respect to any Group Member.
(e) There are no Liens for Taxes (other than Permitted Liens) upon or, to the Knowledge of the Parent, threatened against any assets of the Group.
(f) None of the Seller, the Parent or any Group Member is a party to any pending or, to the Knowledge of the Parent, threatened examination, action, proceeding or assessment by any taxing authority, foreign or domestic, relating to any Group Member.
(g) Except for the Tax Sharing Agreement, which shall be cancelled as of the Closing Date without any effect whatsoever on any Group Member for any taxable year, no Group Member is a party to any tax sharing agreement.
(h) No election under Section 341(f) of the Code has been or will be made to treat any Group Member as a "consenting corporation" as defined in such Section 341(f).
(i) No Group Member is or has been a United States real property holding corporation within the meaning of Section 897(c)(2) of the Code.
(j) None of the Group Members has ever (i) been the subject of a ruling with respect to Taxes that has a continuing effect or (ii) been the subject of a closing agreement with a taxing authority with respect to Taxes that has a continuing effect.
(k) None of the Group Members has agreed to make nor is it required' to make any adjustment under Section 481 of the Code by reason of a change in accounting method or otherwise.
(l) The Parent has made available to Purchaser true, correct and complete copies of the federal and state income tax returns of each of the Group Members (prepared in the case of any consolidated or combined returns that include any entities other than the Group Members on a pro forma basis reflecting the operations of the Group Members for all taxable years beginning on or after January 1, 1995.
(m) No Group Member is party to any agreement, arrangement or understanding that, individually or in the aggregate with any other agreements, arrangements or understandings could result in the payment of any amounts that would be non-deductible under Section 280G of the Code.
(n) Following the Closing Date, the sale of any Group Member or Managed Company or any of their assets will not result in the Purchaser or any of its Affiliates having to take into account items of income or gain arising from or related to intercompany transactions within the meaning of Treas. Reg. (S)1.1502-13, that occurred with respect to such Group Member or Managed Company or assets while owned directly or indirectly by Parent on or prior to the Closing Date.
a. notes, mortgages, indentures, security agreements or other agreements
and instruments relating to the borrowing of money, the extension of
credit or the granting of Liens or encumbrances;
b. employment and consulting agreements;
c. union or other collective bargaining agreements;
d. material powers of attorney;
e. material licenses of patent, trademark and other intellectual property
rights;
f. agreements, orders or commitments for the purchase of services, raw
materials, supplies or finished products from any one supplier for an
amount in excess of $50,000;
g. agreements, orders or commitments for the rental, lease or sale of
equipment, products or services for more than $100,000 to any single
purchaser or lessee;
h. contracts or options relating to the rental, sale or lease by a Group
Member of any material asset, other than in the ordinary course of
business;
i. bonus, profit-sharing, compensation, stock option, pension,
retirement, deferred compensation, accrued vacation pay, group
insurance, welfare agreements or other plans, agreements, trusts or
arrangements for the benefit of employees;
j. agreements or commitments for capital expenditures in excess of
$100,000 for any single project, other than with respect to start-ups
or other facility consolidations planned in the ordinary course of
business and as are otherwise listed on Schedule 2.06;
k. partnership or joint venture agreements;
l. agreements, arrangements or understandings with any Affiliate of the
Seller, the Parent or a Group Member;
m. material rental or lease agreements under which it is either lessor or
lessee;
n. material agreements, contracts or commitments for any charitable or
political contribution;
o. other agreements, contracts and commitments which are material to the
business of any Group Member or any Subsidiary or which involve
payments or receipts of more than $100,000 in any single year, or
which were entered into other than in the ordinary course of business;
p. agreement to acquire all or substantially all the business of another
entity or person;
q. agreements containing any "earn-out" obligations; or
r. indebtedness issued or assumed in connection with any acquisition of
another business.
To the Knowledge of the Parent neither any Group Member nor any other party to a Contract is in default in performance of any Contract nor done any act or failed to do any required act which would result in a default, no written notice of such a default has been received by any Group Member, Seller or the Parent and none of the Seller, the Parent or any Group Member has received written notice of an event or occurrence of which with the giving of notice or the lapse of time would constitute a default which is reasonably likely to have a Material Adverse Effect. Except as set forth on Schedule 2.10 or Schedule
------------- -------- 2.22 hereto, no consents are ---- |
required (except for any consents as shall have been obtained prior to the Closing Date), and no event of default will occur, under any Contract as a result of the sale and transfer of the Shares from the Seller to the Purchaser, and the change in control of the Group Members as a result of the sale and transfer of the Shares from the Seller to the Purchaser will not give any person or entity the right to negotiate, change or void any terms of, or accelerate any amounts under, any Contract, any Seller Notes or any non-competition agreement or clause to which any Group member is a party.
(a) No Group Member maintains or sponsors, nor is it required to make contributions to, any pension, profit-sharing, bonus, incentive, welfare or other employee benefit plan within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") (such plans and related trusts, insurance and annuity contracts, funding media and related agreements and arrangements, other than any "multiemployer plan" (within the meaning of Section 3(37) or Section 4001(a)(3) of ERISA), being hereinafter referred to as the "Benefit Plans" and such multiemployer plans being hereinafter referred to as the "Multiemployer Plans");
(b) Each Benefit Plan complies in all respects with all requirements of ERISA and the Code except where the failure to so comply would not have a Material Adverse Effect;
(c) Each Benefit Plan that is intended to be qualified under
Section 401(a) of the Code has received a favorable determination letter from
the Internal Revenue Service as to such qualification within the period of time
prescribed by law;
(d) No Group Member maintains, sponsors or contributes to nor is required to contribute to) any Multiemployer Plan;
(e) No Benefit Plan is a "defined benefit plan" (within the meaning of Section 3(35) of ERISA); and
(f) None of the Parent, the Seller or any Group Member has engaged in, and the Parent has no knowledge of any fiduciary or other "disqualified person or party in interest" of any Benefit Plan of any Group Member that has engaged in, any "prohibited transaction within the meaning of Section 406 of ERISA or Section 4975c) of the Code).
(g) No Group Member, nor any other employer (an "ERISA Affiliate") that is, or at any relevant time was, together with any of the Companies, treated as a "single employer" under section 414(b), 414(c) or 414(m) of the Code, has at any time since January 1,1993 incurred any liability which could subject any Group Member or Purchaser to material liability under Section 4062, 4063 or 4064 of ERISA or (2) , been required to contribute to, or incurred any withdrawal liability, within the meaning of Section 4201 of ERISA to any multiemployer pension plan, within the meaning of Section 3(37) of ERISA nor does any Group Member or any ERISA Affiliate have any potential withdrawal liability arising from a transaction described in Section 4204 of ERISA
(h) All contributions to, and payments from, the Non-PEO Benefit Plans which have been required to be made in accordance with the Non-PEO Benefits Plans have been timely made. All such contributions to the Non-PEO Benefits Plans, and all payments under the Non-PEO Benefit Plans, except those to be made from a trust qualified under section 401(a) of the Code, for any period ending on or before June 30, 1999 that were not yet, but will be, required to be made are properly accrued and reflected on the Financial Statements.
(i) Parent has satisfied its obligations under the Parent NCES Agreement with respect to the Benefit Plans in all material respects.
(j) No payment which is or may be made by, from or with respect to any Benefit Plan, to any employee, former employee, director or agent of any Group Member, either alone or in conjunction with any other payment, will or could properly be characterized as an excess parachute payment under section 280G of the Code.
(k) Each employee of each Group Member is employed in a co- employment arrangement between that Group Member and NovaCare Employee Services, Inc. ("NCES").
(ii) Each Group Member has obtained all required Federal, state and local permits, licenses, certificates and approvals (the "Environmental Permits") relating to (A) air emissions, (B) discharges to surface water or ground water, (C) noise emissions, (D) solid, liquid or medical waste disposal, and (E) the use, generation, storage, transportation or disposal of toxic or hazardous substances or wastes (intended hereby and hereafter to include any and all such materials listed in any Environmental Law, as hazardous or potentially hazardous (including, without limitation, (1) any chemical,
compound, material or substance that is defined, listed in, or otherwise classified pursuant to, any of the Environmental Laws as a hazardous substance", "hazardous material", "hazardous waste", "toxic substance" or "toxic pollutant", "contaminant", "pollutant" or "waste" and (2) petroleum, natural gas, natural gas liquids, liquefied natural gas, and synthetic gas) (collectively, "Hazardous Substances")), and all such Environmental Permits are in full force and effect, except where the failure to have obtained or maintained any such Environmental Permit would not have a Material Adverse Effect. Each Group Member is in, and has been in, compliance with all such Environmental Permits, except where the failure to be in compliance is not reasonably likely to have a Material Adverse Effect.
(iii) No Group Member has received or has knowledge of the existence of any notice of violations citations, Summons, orders, complaints or penalties of or relating to any Environmental Law or Environmental Permit which have not been cured, and to the Knowledge of the Parent, no investigation or review is pending or threatened by any governmental or other entity or person, relating to the use, ownership or occupancy of any of the Premises or the conduct of the business of the Group Members, except for any violations referred to in any such notice which would not have a Material Adverse Effect.
(iv) No Group Member has engaged in the generation, storage, treatment, recycling, transportation or disposal of any Hazardous Substance, except in compliance with applicable Environmental Laws, except where the failure to be in compliance would not have a Material Adverse Effect.
(v) No Group Member has, nor, to the Knowledge of the Parent, has any other party for which any Group Member is or could be responsible directly or indirectly, transported or arranged for the transportation of any Hazardous Substances, is listed on the National Priorities List promulgated pursuant to the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended ("CERCLA"), on CERCLIS (as defined in CERCLA) or on any similar Federal, state or foreign list of sites requiring investigation or cleanup.
(vi) No Group Member has nor, to the knowledge of the Parent, has anyone else generated, treated, stored, recycled, disposed of or released any Hazardous Substance on any Premises or any property previously owned or leased by any Group Member or at any other property which has resulted in any condition for which any Group Member is or is reasonably likely to be responsible, including under CERCLA or any similar Environmental Law, except for such condition which would not have a Material Adverse Effect.
(c) Each Group Member and each Subsidiary is, to the extent
applicable to their operations, (i) eligible to receive payment under Titles
XVIII and XIX of the Social Security Act, (ii) providers under existing provider
agreements with the Medicare program through applicable intermediaries and with
each state Medicaid program under which they are to have been providers and
(iii) in compliance with the conditions of participation in the Medicare
program, except where such inability in the case of either items (i) or (ii) or non-compliance in the case of item (iii) is not reasonably likely to have a Material Adverse Effect.
(d) Each Group Member and each Subsidiary has tiled all required cost reports and other required claims and governmental filings with respect to Medicare and each state Medicaid program in which they participate, all of which were, when filed or as they have been subsequently amended, complete and correct, except to the extent that such failure to file or failure to be complete and correct is not reasonably likely to have a Material Adverse Effect. Each Group Member and each Subsidiary has made available to Purchaser complete and correct copies of all such cost reports, claims, governmental filings, audits and schedules prepared or issued by, or filed with, any governmental authority or private payor with respect to the operations of each of the Group Members and each Subsidiary with respect to the prior three years.
(e) The businesses of each Group Member and each Subsidiary have not been and are not being conducted in violation of any law, ordinance, regulation or court ruling of any governmental authority (including, without limitation, laws, rules and manual provisions pertaining to reimbursement of each Group Member and each Subsidiary for services rendered, the federal False Claims Act (31 U.S.C. (S)3729) or any other applicable federal or state false claim or fraud law, the federal anti-kickback statute (42 U.S.C. (S)1320a- 7b(b)), any applicable state anti-kickback law, the federal Ethics in Patient Referrals Act (42 U.S.C. (S)1 395nn, commonly known as the Stark Act) or any applicable state self-referral law), except for violations which are not reasonably likely to, individually or in the aggregate, have a Material Adverse Effect.
(f) Each of any Company, any Subsidiary and any of their current or
former shareholders, directors, officers, agents, employees and other persons
acting on behalf of them, has complied, in all material respects, with all
applicable federal, state and municipal statutes, rules, regulations and orders
and other requirements of all courts and other governmental or regulatory
authorities having jurisdiction over any Group Member, including without
limitation those relating to third party reimbursement (including, but not
limited to, Medicare, Medicaid, CHAMPUS and other federal health care programs),
fraudulent or abusive practices (including but not limited to the state health
care programs, Anti-Fraud and Abuse Amendments of the Social Security Act, as
amended, commonly known as the "Anti-Kickback Statute." and the amendments to
Section 1877 of the Social Security Act (42 U.S.C. (S)1395nn), enacted as part
of the Omnibus Budget Reconciliation Act of 1993, commonly known as "Stark II"),
environmental protection, occupational safety and health, equal employment
practices and fair trade practices., except where the failure to comply is not
likely to, individually or in the aggregate have a Material Adverse Effect.
(g) The Group Members and all professional employees or agents of the Group Members hold and are in compliance with all permits, certificates (including without limitation, certificates of need), licenses, orders, registrations, franchises, authorizations and other approvals from all federal, state, local and foreign governmental and regulatory bodies
For purposes of Sections 2.04, 2.05, 2.06, 2.07, 2.08, 2.09, 2.10, 2.11, 2.14, 2.15, 2.16(c) through 2.16(i), 2.17, 2.25, 2.26, 2.27, 2.28, 2.29, 2.30, 2.31, the terms Group Members, Companies and Subsidiaries include the Managed Companies.
None of the Group Members or, to the knowledge of any Group Member, the Parent or the Seller, any other party is in breach of or default under any such license or other agreement and each such license or other agreement is now and immediately following the Closing shall be valid and in full force and effect.
contemplated hereby have been duly authorized by all necessary corporate action including, without limitation, shareholder approval. This Agreement has been duly executed and delivered by the Parent and the Seller and constitutes a valid arid legally binding obligation of the Parent and the Seller, enforceable against the Parent and the Seller in accordance with its terms.
(a) Neither Seller, any Group Member, any affiliate nor any person who has a direct or indirect ownership interest (as those terms are defined in 42 C.F.R. (S)1001.100 1(a)(2)) in any Group Member of 5% or more, or who has an ownership or control interest (as defined in Section 1 l24(a)(3) of the Social Security Act or any regulations promulgated thereunder) in any Group Member, or who is an officer, director, agent or managing employee (as defined in 42 C.F.R. 1001, 100 1(a)(i): (a) has had a civil monetary penalty assessed against it under Section 1 128A of the Social Security Act or any regulations promulgated thereunder; (b) has been excluded from participation under any federal health care program; or (c) has been convicted (as that term is defined in 42 C.F.R. (S) 1001.2) of any of the categories of offenses as described in the Social Security Act Section 1128(a) and (b)(l), (2), (3) or any regulations promulgated thereunder.
(b) All cost reports to be filed under Medicare and Medicaid or any other applicable governmental or private provider regulations for the Company Facilities were filed by the required filing dates. Such cost reports were prepared and filed in good faith in accordance with applicable, laws, rules and regulations and each Group Member has made provision to pay any net liability on all Notices of Program Reimbursement (or similar documents) received from Medicare, Medicaid or other governmental or private payors for the periods ended prior to December 31, 1998. Neither any Company nor any Subsidiary has received notice, or has
knowledge of the existence, of any pending dispute between any Company and/or any Subsidiary and governmental authorities or the Medicare fiscal intermediary regarding such cost reports for the remaining unaudited cost report periods other than with respect to adjustments thereto made in the ordinary course of business which do not involve amounts in excess of S20.000 in the aggregate. All home office cost reports tiled by the Seller and all Group Members, it' any, are true and correct in all material respects and the costs contained in such reports are appropriately included therein and have been properly allocated among the Seller, the Companies and the Subsidiaries and businesses in accordance with Medicare and Medicaid rules and regulations. The home office cost report of Seller and the Group Members, if any, covering the period June 30, 1998 through and including Closing will only include costs that are allowable under applicable reimbursement regulations.
In connection with the purchase and sale of the Shares hereunder, the Purchaser hereby represents and warrants to the Parent and the Seller, as of the date hereof and as of the Closing Date, that:
Purchaser or (b) constitutes a violation of any Applicable Law. Neither the execution and delivery of this Agreement by the Purchaser nor the consummation of the transactions contemplated hereby to be consummated by the Purchaser violates, conflicts with, results in any breach of any of the terms of or results in the termination of or the creation of any material lien pursuant to the terms of any material contract, commitment, agreement, or lease of any and to which the Purchaser is a party or by which the Purchaser or any of its assets are bound.
days after the expiration of the HSR thirty day waiting period, or 'ii' the date which is ten (10) business days after the receipt of early termination of the HSR waiting period, or such other time, place and date as the Purchaser and the Seller may agree (such date upon which the Closing occurs is herein referred to as the "Closing Date".
(a) at any time before the Closing, by written agreement of the Seller and the Purchaser;
(b) unless extended by written agreement of the Seller and the Purchaser, at any time after January 15, 2000 (the "Termination Date"), by either the Seller or the Purchaser in writing, if the transactions contemplated by this Agreement have not been consummated on or before such date and such terminating party is not then in material breach of this Agreement;
(c) at any time before the Closing, by the Purchaser or the Seller in writing, in the event that any Governmental Authority shall have issued an order, decree, ruling or taken any other action restraining, enjoining or otherwise prohibiting the transactions contemplated by this Agreement and such order, decree, ruling or other action shall have become final and nonappealable; and
(d) at any time before the Closing, by either the Purchaser or the Seller in writing, without liability to the terminating party on account of such termination, if such terminating party is not then in material breach of this Agreement and the nonterminating party shall (i) fail to perform in any material respect its agreements contained herein required to be performed on or prior to the Closing Date which failure is reasonably likely to have a Material Adverse Effect and such nonterminating party has not cured in all material respects such breach on or prior to the date which is 30 days after such nonterminating party has received written notice from the terminating party of such failure to perform or such longer period in the event that such breach cannot reasonably be expected to be cured within such 30-day period and such nonterminating party is diligently pursuing such cure, but in no event later than the Termination Date or (ii) breach any of its representations or warranties contained herein which breach is reasonably likely to have a Material Adverse Effect and such nonterminating party has not cured in all material respects such breach on or prior to the date which is 30 days after such nonterminating party has received written notice from the terminating party of such breach or such longer period in the event that such breach cannot reasonably be expected to be cured within such 30-day period and such nonterminating party is diligently pursuing such cure, but in no event later than the Termination Date.
subsection 4.02(d) above under circumstances where the nonterminating party has breached its obligation to close the transactions contemplated hereby (notwithstanding that the nonterminating party's conditions to such obligation to close contained in Section V or VI, as the case may be, have been satisfied or that the terminating parry stands ready, willing and able to satisfy such conditions but for such breach, the terminating party may exercise all available rights and remedies at law.
The obligation of the Seller to sell the Shares and otherwise to consummate the transactions contemplated by this Agreement at the Closing is subject to the following conditions precedent, any or all of which may be waived by the Seller in the Seller's sole discretion, and each of which the Purchaser hereby agrees to use its best efforts to satisfy at or prior to the Closing:
(a) Certificates of incumbency executed by the Secretary of the Purchaser in form and substance reasonably acceptable to the Seller;
(b) Certificate of the Secretary of the Purchaser certifying as to a true and correct copy of the duly adopted resolutions of the board of directors of the Purchaser, in form
and substance reasonably acceptable to the Seller, with respect to the consummation of the transactions contemplated by this Agreement and that such resolutions continue in full force and effect, without amendment, as of the Closing Date: and
(c) Such other certificates, instruments and other documents, in form and substance reasonably satisfactory to the Seller and counsel for the Seller, as the Seller shall have reasonably requested in connection with the transactions contemplated hereby.
The obligation of the Purchaser to purchase the Shares and otherwise to consummate the transactions contemplated by this Agreement at the Closing is subject to the following conditions precedent, any or all of which may be waived by the Purchaser in its sole discretion, and each of which the Seller and the Parent hereby agree to use their respective best efforts to satisfy at or prior to the Closing:
(a) A true and correct copy of the certificate of incorporation of each. Company, certified as true and correct by the Secretary of State or other appropriate governmental official of its jurisdiction of organization, and a copy of the by-laws of each Company, certified as true and correct by its Secretary:
(b) Certificate of incumbency executed by the Secretary to' the Seller in form and substance reasonably acceptable to the Purchaser:
(c) Certificate of incumbency executed by the Secretary of the Parent in form and substance reasonably acceptable to the Purchaser;
(d) Certificate of the Secretary of the Seller certifying as to a true and correct copy of the duly adopted resolutions of the board of directors and the duly adopted resolutions of the sole stockholder of the Seller and a certificate of the Secretary of the Parent certifying as to a true and correct copy of the duly adopted resolutions of the board of directors of the Parent, each in form and substance reasonably acceptable to the Purchaser, with respect to the consummation of the transactions contemplated by this Agreement and that such resolutions continue in full force and effect, without amendment, as of the Closing Date; and
(e) Such other certificates, instruments and other documents, in form and substance reasonably satisfactory to the Purchaser and counsel for the Purchaser, as the Purchaser shall have reasonably requested in connection with the transactions contemplated hereby.
(a) The representations and warranties of the Parent and Seller contained herein (without regard to any materiality or Material Adverse Effect qualifications contained therein) shall be true and correct at and as of the Closing Date with the same effect as though all such representations and warranties were made at and as of the Closing Date, except to the extent that any of such representations and warranties are, by their terms, made expressly as of the date of this Agreement or another date, in which case such representations and warranties shall have been true and correct as of the date hereof or such other date, as applicable, except where the failure to be true and correct (without giving effect to any materially qualification in any particular representation) shall not, individually or in the aggregate, have or be reasonably likely to have a Material Adverse Effect.
(b) The Parent and Seller shall have complied ~n all material respects with its covenants and agreements contained herein required to be compiled with on or prior to the Closing Date.
(c) On the Closing Date, the Parent and Seller shall deliver to the Purchaser a certificate dated as of the Closing Date to the effects of paragraph a and b of this section.
(1) amend its Articles of Incorporation or Bylaws;
(2) change its authorized or issued capital stock or issue any rights or options to acquire shares of its capital stock or securities convertible into or exchangeable for such Shares;
(3) enter into or renew any employment or consulting contract or arrangement with any person which is not terminable at will, without penalty or continuing obligation:
(4) make, change or revoke any Tax election or make any agreement or settlement with any taxing authority:
(5) guarantee or become a co-maker or accommodation maker or otherwise become or remain continently liable in connection with any liability or obligation of any person (other than the endorsement of checks in the ordinary course of business); or
(6) open any new clinic or purchase any clinic or close or sell any clinic (except capital expenditures consistent with the year-to-date capital budget);
(7) enter into or renew any real property lease, except clinic leases not having a term of greater than five (5) years or which provide for monthly base rent in excess of $10,000 per month;
(8) enter into any agreement which requires payments of more than $100,000 in a single year.
(j) enter into any agreement to do any of the foregoing.
documents (certified to be true copies if requested) and all information with respect to the affairs of any Group Member as the Purchaser may reasonably request.
(a) Except as specifically provided for herein, effective as of the Closing Date, Parent and Seller shall have no obligation to provide benefits to any Employee, former Employee or Beneficiary under the Parent NCES Agreement, or otherwise, and Purchaser and the Group Members shall be responsible for and shall promptly discharge all of Parent's liabilities under the Parent NCES Agreement with respect to the PEO Benefit Plans. Effective as of the Closing Date, Parent and Seller shall cease to have any liability with respect to the NonPEO Benefits Plans.
(b) Effective as of the Closing Date, Parent shall take, or cause to be taken, all such action as is necessary to terminate its co-sponsorship of the PEO Benefit Plans.
coverage of Employees, Former Employees or Beneficiaries under the Seller's Health Plan through the Effective Time within 30 days after receipt of an invoice or statement relating to the same. The amount of such premiums and charges shall be calculated in accordance with the Parent's and the Group Member's prior practices regarding such premiums and charges in accordance with Code (S)4980B. The Purchaser agrees to notify all Employees, Former Employees and their Beneficiaries of the manner in which pre-Effective Time Expenses under the Seller's Health Plan are to be submitted for reimbursement and to request that all such expenses be submitted within 60 days after the Closing Date.
(c) Effective as of the Closing Date, active participation of the
Employees in the NCES/NovaCare, Inc. 40 1(k) Retirement Savings Plan ("Parent's
40 1(k) Plan") shall cease and Purchaser shall establish a defined contribution
retirement plan qualified under Section 401(a) of the Code for the benefit of
all employees of the Group Members who continue employment with the Purchaser or
any Group Member thereafter (the "Retained Employees") (the "Purchaser's 40 1(k)
Plan"). Within 180 days after the Closing Date, Purchaser shall provide Parent
with an opinion letter of counsel acceptable to the Parent that the Purchaser's
40 1(k) Plan satisfies the requirements for qualification under Section 40 1(a)
of the Code or deliver to Parent a current favorable determination letter issued
by the IRS that the Purchaser's 40 1(k) Plan satisfies the requirements for
qualification under Section 401(a) of the Code. As soon as practicable after
the latest of(i) the expiration of 30 days following the filing of Forms 5310
with the IRS, if required and (ii) the receipt by Parent of the opinion or
determination letter prescribed above, Parent shall cause the trustee of
Parent's 40 1(k) Plan to transfer to the trust forming a part of the Purchaser's
401(k) Plan cash and/or securities reasonably acceptable to Purchaser (including
participant notes) equal to the aggregate account balances (including loan
balances) of the Retained Employees as of such transfer date.
(d) Purchaser agrees that each Retained Employee will be given credit for all service with any Group Member, the Subsidiaries and any affiliates thereof in determining such Retained Employee's eligibility to participate and vest in any employee benefits, as well as the amount of vacation and severance, if service is applicable under Purchaser's plans, offered by
Purchaser or any affiliate of Purchaser to the same extent as if that service had been performed for Purchaser. In addition, Purchaser will grant credit under its vacation, sick leave and paid time off programs for all accrued vacation, sick leave and paid time off to which the Retained Employees are entitled under comparable Benefit Plans maintained by Parent on the Closing Date.
(f) No covenant or agreement by any party hereto to indemnify any other party hereto shall release, or be deemed to release, any insurer or indemnitor of any Damages which might be the basis for any Indemnification Matter.
(g) Effective as of the Closing Date, active participation of the Employees in the NovaCare Employee Stock Purchase Plan shall cease.
businesses or operations for any and all periods prior to or including the Closing Date which another party (or any of its Affiliates) requires with respect to any reasonable business purpose, and shall (and, in the case of the Purchaser, shall cause each of the Group Members to cooperate fully with the Parent and its representatives (including, without limitation, its counsel and independent auditors) in connection with the foregoing, including, without limitation, by making tax, accounting and financial personnel and other appropriate employees and officers of the Seller, the Parent or each Group Member, as the case may be, reasonably available to the other parties and their representatives (including, without limitation, counsel and independent auditors), with regard to any reasonable business purpose.
(b) Without limiting the generality of Section 8.04(a) but subject to Section 8.04(c), from and after the Closing Date, the Purchaser shall (and shall cause each of the Group Members to) cooperate fully with, and shall cause its officers and employees (and the officers and employees of the Group Members to cooperate fully with the Parent and its representatives) (including, without limitation, its counsel and independent auditors) in connection with
(i) the Parent's preparation of the Group Members' (or any Group Member's) Federal, state or local income Tax Return, report or declaration, for any Seller Tax Period, and to that end following the Closing Date, the Parent shall submit to the Purchaser blank Tax Return workpaper packages reasonably necessary to enable the Parent to prepare such Tax Returns and the Purchaser shall cause the Group Members to prepare for and to deliver to the Parent, within 90 days following the later of receipt of such workpaper packages and the Closing Date completed workpaper packages, and shall cause the officers and employees of the Group Members to cooperate and assist the Parent in the Parent's review and verification of the same;
(ii) any Tax audit, examination or proposed or final assessment or the like (including without limitation any Tax Claim) relating to the Seller, the Parent, the Group or any Group Member, and to any Seller Tax Period;
(iii) the preparation of any financial statements of the Group Members
(or any Group Member) for (or including) any period (or portion thereof)
ending on or before the Effective Time, and to that end the Purchaser shall
cause each Group Member to prepare for and to deliver to the Parent any
financial information of the type historically prepared by any Group Member
for all periods (or portions thereof) ending on or before the Effective
Time and to cause the officers and employees of any Group Member to
cooperate fully and assist the Parent in its review and verification of the
same;
(iv) the Parent's preparation of any statement, report, notice, response or other document for filing with the Securities and Exchange Commission, any state or foreign securities commission or authority, any other Governmental Authority or any securities exchange or market, domestic or foreign, including, without limitation, in connection with any comments, requests for information, inquiries, investigations or proceedings, formal or informal, by any of the foregoing;
(v) the investigation, prosecution or defense of or response to any
Actions, claims or inquiries commenced by any Purchaser Indemnified Party,
or by any Governmental Authority or any other person or entity, against the
Parent or the Seller (or any other Seller Indemnified Party or any
Affiliate thereof), or by the Parent or the Seller (or any Affiliate
thereof) against the Purchaser or any other Purchaser Indemnified Party),
including in any case relating to any Indemnification Matter under Sections
8.03. IX or X hereof.
(c) The cooperation and assistance of the Purchaser and the Group Members and their respective officers and employees under this Section 8.04 shall be rendered during normal business hours and in a manner which does not disrupt the business and operations of the applicable Group Member or interfere with the performance by employees of the Group Members of their normal duties, and subject to the foregoing the Purchaser shall use its best efforts in the case of the Parent's preparation of any Tax Return, report or declaration and any financial statements, to cause such cooperation and assistance to be rendered without adverse consequences to the Seller or the Parent during the period that each of the Group Members has normally assisted the Seller or the Parent in the Parent's preparation of Tax Returns, reports or declarations and financial statements. The Parent shall reimburse the Group Members for any out- of-pocket expenses paid by them in the cooperation and assistance by Purchaser with the Parent's preparation of any such Tax Returns, reports or declarations and any such financial statements.
(d) Purchaser and Group Member shall not in any case be required to spend more than 300 employee hours for the assistance and cooperation described herein; hours spent in excess of 300 shall be charged at Purchaser's and Group Member's fully burdened cost per hour.
(e) Without limiting the generality of subsection (a) of this
Section 8.04, following the Closing, no party shall (and no party shall cause
their Affiliates to) destroy any information, files, documents or records
(written and computer) relating to any Group Member or any of its businesses or
operations on or before the Closing Date without giving at least 30 days' prior
written notice to the other parties hereto and shall (and shall cause their
Affiliates to) permit the other parties hereto to examine, duplicate (at the
expense of the other parties hereto) and/or transfer (at the expense of the
other parties hereto) to the other parties hereto or their representatives any
of such information, files, documents or records (written and computer).
such returns. To the extent permitted by law, the Parent and the Purchaser agree to cause a taxable period of each Group Member to close on the Closing Date for state and local income Tax purposes. Except to the extent expressly permitted by the Purchaser or as specified in this Agreement, all Tax Returns prepared by the Parent with respect to the Group Members pursuant to this Section 8.06(a) shall be prepared in a manner consistent with past practice and no Tax elections shall be made or Tax accounting methods shall be applied except in a manner consistent with past practice. Parent shall provide to Purchaser a reasonable right to review and comment upon any such Tax Returns prior to the filing thereof.
(b) Except as provided in clause (a) of this Section 8.06. the
Purchaser agrees to cause the Group Members to file all Tax Returns, reports and
declarations required to be riled by any of them after the Closing Date and to
pay all Taxes due and payable by any of them after the Closing Date, including
any Taxes (other than income Taxes) that accrued prior to the Closing Date or
that are otherwise allocable to any Seller Tax Period that does not end on or
before the Closing Date. Without limiting the generality of Section 8.04 or
this Section 8.06, the Parent and Purchaser shall be given the opportunity to
review, comment upon and suggest changes or corrections to, any income Tax
Returns, reports and declarations prepared by the other party covered by this
Section 8.06(a) and (b) which include any Seller Tax Period (and the work papers
of the Group Members and Parent and their accountants used in the preparation
thereof), in each case prior to the filing thereof (but in no event less than 30
days prior to such filing). In the event of any dispute regarding the matters
set forth in the immediately preceding sentence, then PricewaterhouseCoopers (or
if PricewaterhouseCoopers shall decline to arbitrate such dispute, then another
nationally recognized accounting firm selected by the Parent) shall be requested
to make a determination resolving any such dispute; and the determination by
PricewaterhouseCoopers (or such other accounting firm) of any such dispute shall
be final and binding on the parties hereto. The fees and expenses of
PricewaterhouseCoopers (or such other accounting firm) in resolving such dispute
shall be borne fifty percent (50%) by the Parent and fifty percent (50%) by the
Purchaser.
(c) Any refunds or credits of income Taxes of any Group Member for any Seller Tax Period shall be for the account of the Parent to the extent not reflected in the calculation of Consolidated Net Working Capital reflected on the Closing Balance Sheet, and to the extent not attributable to the carryback from a taxable period following the Closing Date ("Parent's Refunds"). Applications for Parent's Refunds of Taxes, and the filing of amended Tax Returns with respect to any Seller Tax Period resulting in Parent's Refunds shall be made and prosecuted only by the Parent or the Seller. Without limiting the provisions of Section 8.04, the Purchaser shall provide and shall cause each Group Member to provide to the Parent full cooperation and assistance in connection with any application for refund or amendment made or proposed to be made by the Parent or the Seller as shall be requested by the Parent, including by causing each Group Member to authorize by appropriate powers of attorney such person as the Parent shall designate to represent such Group Member with respect to such refund claim, without charge for any cost or expense for assistance rendered by officers and employees of the Group Members in connection therewith. Neither the Parent nor the Seller shall seek any Tax refund, or amend any Tax Return, which would have the effect of increasing the Taxes of any
Group Member for any taxable period (or portion thereof) beginning after the Closing Date; however, the foregoing shall not apply to any amended Tax Return which may be required by law following resolution of a Tax dispute. Neither the Purchaser nor any Group Member shall amend, or take any similar action with respect to, any Tax Return filed by the Parent, the Seller or by any Group Member with respect to any Seller Tax Period without the prior written consent of the Parent: provided that the foregoing shall not apply to any amended Tax Return which may be required by law following resolution of a Tax dispute conducted in accordance with this Agreement. The Purchaser shall or shall cause each Group Member to forward to the Parent any Parent's Refund of income Taxes of any Group Member within five days after such refund is received or reimburse the Parent for any credit within five days after the credit is allowed or applied against other Tax liability). Notwithstanding the foregoing, the control of the prosecution of a claim for refund of Taxes paid pursuant to a deficiency assessed subsequent to the Closing Date as a result of an audit shall be governed by the provisions of 9.03(d) hereof.
(d) The Purchaser shall not file an election (or cause a deemed election) under Section 33 8(h)(l0) of the Code with respect to its acquisition of the Group Members or any Group Member hereunder. The Purchaser shall consent to the election under Treasury Regulation (S)1.1502-20(g)(l) to re-attribute any net operating losses and/or net capital losses of any Group Member to the Seller or the Parent, except for an amount of such losses as is necessary to offset the Tax liability of any Group Member arising pursuant to (S)481 of the Code, and shall cause the Group Members to execute and file such statements as may be necessary or appropriate to effect such election.
(e) All Taxes with respect to the income, property or operations of the Group Members that relate to any taxable year or period beginning before and ending after the Closing Date shall be apportioned between the Seller Tax Period and the period beginning the day after the Closing Date as follows: (A) in the case of Taxes other than income and sales or use Taxes, on a per diem basis, and (B) in the case of income Taxes (including income Taxes based on capital or other alternative bases) and sales or use Taxes, as determined from the books and records of the Parent and the Group Member in question, as though the taxable year of the Group Member terminated on the Closing Date, and based on the accounting methods, elections and conventions used by the Parent and/or the relevant Group Member in prior years.
(f) Following the Closing, and without regard to any of the limitations set forth in Section IX, the Parent and the Seller shall fully indemnify and hold harmless the Purchaser and each of the Group Members from and against any liability for any Damages that relate to Taxes (i) of the Group Members that are attributable to any taxable period or portion thereof that ends on or before the Closing Date to the extent the liability therefor exceeds the amount expressly reflected as a liability in the calculation of Consolidated Net Working Capital reflected on the Closing Balance Sheet or (ii) of any person other than a Group Member for which a Group Member may become liable (A) by reason of being a member of a consolidated or combined Tax Return that includes such other person on or before the Closing Date. B by reason of being a successor to such other person by merger, liquidation or otherwise on or before
the Closing Date or (C) by reason of being a party to a Tax sharing or Tax allocation agreement on or before the Closing Date.
(g) Except as otherwise provided in this Agreement, on or before the Closing Date, the Parent shall cause all Tax sharing agreements or arrangements that may exist between any Group Member and the Parent, the Seller or their Affiliates to be terminated and all obligations thereunder to be terminated as of the Closing Date, and none of the Group Members shall have any liability thereunder for any and all amounts due in respect of periods up to and, including the Closing Date.
(i) any projections, estimates or budgets contained in that certain Confidential Information Memorandum relating to the Group Members or otherwise heretofore or hereafter delivered to or made available to the Purchaser or its counsel, accountants, advisors, lenders, representatives or Affiliates of future revenues, expenses or expenditures, future results of operations (or any component thereof), future cash flows (or any component thereof) or future financial condition (or any component thereof) of the Group or any Group Member or the future business, operations or affairs of the Group or any Group Member; and
(ii) any other information, statements or documents heretofore or hereafter delivered to or made available to the Purchaser or its counsel, accountants, advisors, lenders, representatives or Affiliates (including, without limitation, the Confidential Information Memorandum relating to the Group Members) with respect to the Group or any Group Member or the business, operations or affairs of the Group or any Group Member.
with the Purchaser. At the end of such six month period, Parent shall promptly take such steps as are necessary to change its name to a name not including the word "NovaCare."
(b) The parties agree that, notwithstanding anything else herein, James W. McLane shall not become an employee of Purchaser and, if employed by any Group Member, shall be terminated by such Group Member as of the Closing Date. Parent shall be fully responsible for any and all payments or other obligations due or payable to Mr. McLane at or after Closing arising from his employment with Parent and the Group Members prior to the Closing Date. Parent shall indemnify and hold Purchaser harmless, as further provided in Section IX, for any and all liabilities relating thereto.
(c) Parent shall be fully responsible for any and all incentive payment obligations to any employees relating to the consummation of the transactions contemplated by this Agreement. Parent shall indemnify and hold Purchaser harmless, as further provided in Section IX, for any and all liabilities relating thereto.
hold Purchaser harmless, as further provided in Section IX, for any and all liabilities relating thereto. Parent further covenants that, if any potential obligations of Parent under this subsection "(d)" remain unsatisfied as of the date Parent intends to make any distribution of assets to shareholders or a liquidation trustee, Parent shall provide security sufficient to satisfy any such remaining obligation, to Purchaser's reasonable satisfaction.
(a) For a period of five years from and after the Closing Date, neither the Parent, the Seller nor any of their respective Affiliates (other than individuals who are officers, directors and/or controlling stockholders) (collectively, the "Restricted Parties") shall, directly or indirectly, (i) own, manage, operate, join, control or participate in the ownership, management, operation or control of, or provide any financing or lease any assets to, any entity that engages in, or that the Restricted Party knows intends to engage in, a Competing Business, or (ii) solicit, retain as a consultant, interfere with or attempt to entice away from the Purchaser, the Group or their respective Affiliates, any Protected Employee, or (iii) solicit, interfere with or attempt to entice away from the Purchaser, the Group or their respective Affiliates, any person, firm or corporation which has been or is during the two-year period commencing on the Closing Date a customer of the Purchaser or any Group Member. Ownership of not more than 2% of the outstanding stock of any publicly traded company shall not be a violation of this Section 8.11 so long as the Restricted Parties do not participate in the management of such company.
(b) The length of time for which this covenant not to compete shall be in force shall not include any period of violation or any other period required for litigation during which Purchaser or any Group Member seeks to enforce this Section 8.11. In the event that any of the covenants contained in this Section 8.11 shall be determined by any court of competent jurisdiction to be unenforceable by reason of its extending for too long a period of time or over too large a geographical area or by reason of its being too extensive in any other respect, it shall be interpreted to extend only over the longest period of time for which it may be enforceable, and/or over the largest geographical area as to which it may be enforceable and/or to the maximum extent in all other respects as to which it may be enforceable, all as determined by such court in such action.
(c) The restrictive covenants contained in this Section 8.11 are each covenants independent of any other provision of this Agreement, and the existence of any claim which any party may allege against any other party to this Agreement, whether based on this Agreement or otherwise, shall not prevent the enforcement on these covenants. The Seller and the Parent acknowledge that the Purchaser is purchasing the Companies in reliance on the goodwill of the
businesses of the Group and the covenants contained in this Section 8.11 are essential to the protection of the Purchaser's purchase of the Companies and that the Purchaser would not purchase the Companies but for these covenants. The Seller and the Parent agree that a breach by any of them of this Section 8.11 shall cause irreparable harm to the Purchaser and the Group -and that the Purchaser's and the Group's remedies at law for any breach or threat of breach of the provisions of this Section 8.11 shall be inadequate, and that the Purchaser and the Group shall be entitled to an injunction or injunctions to prevent breaches of this Section 8.11 and to enforce specifically the terms and provisions hereof, in addition to any other remedy to which the Purchaser or the Group may be entitled at law or in equity.
(b) In the event that despite the parties best efforts, NCES does not enter into the Purchaser NCES Agreement at or before Closing, at the Closing, Parent shall assign to Purchaser and, subject to subsection "(d)" herein, Purchaser shall assume from Parent, the Parent's rights and obligations under the Parent NCES Agreement; provided that in the event Purchaser breaches the Parent NCES Agreement by delivering a termination notice to NCES as of any date on or after the 18 months after the Closing Date or by failing or refusing to perform its obligations under the Parent NCES Agreement accruing on or after such date, Parent and Seller shall, without regard to any limitations or conditions on indemnification contained in Section IX, jointly and severally indemnify and hold harmless the Purchaser Indemnified Parties from and against all Damages arising out of such termination and breach of the Parent NCES Agreement (it being understood that Purchaser shall remain obligated to NCES with respect to any and all obligations and damages relating to the period from the Closing Date through the date of such termination); the intention of the parties being that Purchaser shall be responsible to NCES as if it had entered into the Purchaser NCES Agreement, and Parent shall be responsible for all other obligations to NCES.
(c) In the event that following the Closing, Purchaser and NCES enter into the Purchaser NCES Agreement, the assignment and assumption of the Parent NCES Agreement provided for in Section 8.16(b) shall be null and void and of no further force or effect.
(d) Purchaser's obligations under 3.16b) to assume the Parent NCES Agreement shall be conditioned on Parent having complied with its obligations under Section 5.12 of the Merger Agreement dated as of September 3, 1999 between NCES and Parent regarding the provision of a guarantee by Parent of the Minimum Fee Guarantee to be received by NCES under the Parent NCES Agreement and the posting of sufficient security to secure such guarantee, to Purchaser's reasonable satisfaction.
(a) Parent represents and warrants to Purchaser that (i) the Consolidated Net Working Capital (as defined herein) as of the Closing Date, as determined in accordance herewith, will be at least $85.8 million; (ii) the Long-Term Liability Amount (as defined herein) will be zero, and (iii) the Tax Liability Amount (as defined herein) will be zero.
(b) The Purchaser shall prepare and deliver to the Parent within one hundred twenty (120) days after the Closing a consolidated balance sheet of the Companies and its Subsidiaries as of Closing (the "Closing Balance Sheet") prepared in accordance with GAAP, applied on a basis consistent with the preparation of the audited Financial Statements, and
(c) As used herein, the "Consolidated Net Working Capital" of the Companies and their Subsidiaries shall mean the excess of the "current assets" of the Companies and their Subsidiaries (excluding deferred income taxes) over the "current liabilities" (excluding the current portion of Seller Notes and other third-party indebtedness, deferred income taxes, accrued contingent earnouts, accrued interest and intercompany accounts payable and accrued liabilities, except insurance reserves and payroll and related benefit costs) on a consolidated basis, in each case as such assets and liabilities are properly accrued and reflected on the books and records of the Companies and their Subsidiaries in accordance with GAAP applied on a basis consistent with the preparation of the audited Financial Statements. For avoidance of doubt
such insurance reserves shall be reflected as a liability on the Closing Balance Sheet. As used herein, the 'Tax Basis" shall mean the aggregate Tax basis of the assets owned by the Group Members (exclusive of Tax basis in the stock of other Group Members). As used herein the "Tax Liability Amount" shall mean 35% of the aggregate amount by which the Tax Basis is less than $240 million. As used herein, the "Long-Term Liability Amount" shall mean the amount, if any, by which the long-term liabilities (other than the long-term portion of Seller notes and other third-party indebtedness and deferred taxes) reflected on the Closing Balance Sheet are greater than the long-term liabilities (other than the long- term portion of Seller notes and other third-party indebtedness and deferred taxes) as reflected on the Balance Sheet.
(d) For purposes of this Agreement, the final Tax Liability Amount
shall be based on the Tax Liability Amount reported by Purchaser or if disputed
by Parent within such thirty (30) day period, the amount as modified by
resolution of the Parent and Purchaser or by the aforesaid Independent
Accountants. If the Consolidated Net Working Capital is so determined to be less
than $85.8 million resulting in a breach of the representation set forth in
8.20(a)(i), the amount of the shortfall shall be paid by Parent to Purchaser as
complete damages in respect of such breach. If the Long-Term Liability Amount is
so determined to be greater than zero resulting in a breach of the
representation set forth in 8.20(a)(ii), the amount of such excess shall be paid
by the Parent to the Purchaser as complete damages in respect of such breach. If
the Tax Liability Amount is so determined to be greater than zero resulting in a
breach of the representation set forth in 8.20(a)(iii), the amount of the Tax
Liability Amount, multiplied by fifty-nine percent (59%) (present value discount
factor), shall be paid by the Parent to the Purchaser as complete damages in
respect of such breach. Any amount due pursuant to this Section 8.20(d) shall be
paid by Parent to Purchaser within fifteen (15) days after (i) as to any
undisputed portion, the determination of such undisputed portion of such amount,
(ii) as to any disputed portion, the final determination of such matter in
accordance with the procedures outlined herein.
(b) The indemnitor shall have the right, exercisable by written notice to the Indemnitee within 30 days of receipt of notice from the Indemnitee of the commencement or assertion of any third party claim in respect of which indemnity may be sought hereunder (the "Indemnity Notice Claim"), to assume and conduct the defenses of such third party claim with counsel selected by the Indemnitor and reasonably acceptable to the Indemnitee; provided that (i) the defense of such third party claim by the Indemnitor will not, in the judgment for the Indemnitee, have a material adverse effect of the Indemnitee; and (ii) the Indemnitor has sufficient financial resources (including amounts held in escrow pursuant to the Escrow
Agreement), in the reasonable judgment of the Indemnitee, to satisfy the amount
of any adverse monetary judgement that is reasonably likely to result: and (iii)
the third parry claim solely seeks (and continues to seek) monetary damages: and
(iv) the Indemnitor expressly agrees :n writing that as between the Indemnitor
and the Indemnitee, the Indemnitor shall be solely obligated to satisfy and
discharge the third parry claim (the conditions set forth in clauses i through
iv) collectively referred to as the "Litigation Conditions"). If the Indemnitor
does nor assume the defense of such third parry claim in accordance with this
Section 9.03, the Indemnitee may continue to defend the third party claim. If
the Indemnitor has assumed the defense of' a third party claim as provided in
this Section 9.03. the Indemnitor will not be liable for any legal expenses
subsequently incurred by the Indemnitee in connection with the defense thereof
provided, however, that if(i) the Litigation Conditions cease to be met, or (ii)
the Indemnitor fails to take reasonable steps necessary to defend diligently
such third party claim, the Indemnitee may assume its own defense, and the
Indemnitor will be liable for all reasonable costs or expenses paid or incurred
in connection therewith. The Indemnitor or the Indemnitee, as the case may be,
shall have the right to participate in (but to control) at its Own expense, the
defense of any third party claim which the other is defending as provided in
this Agreement. The Indemnitor, if it shall have assumed the defense of any
third party claim as provided in this Agreement, shall not, without the prior
written consent of the Indemnitee, consent to a settlement of, or the entry of
any judgment arising from, any such third party claim (i) which does not include
as a unconditional term thereof the giving by the claimant or the plaintiff to
the Indemnitee a complete release from all liability in respect of such third
party claim, or (ii) which grants any injunctive or equitable relief, or (iii)
which may reasonably be expected to have a material adverse effect on the
affected business of the Indemnitee. The Indemnitee shall have the right to
settle any third party claim, the defense of which has not been assumed by the
Indemnitor, with the written consent of the Indemnitor, which consent shall not
be unreasonably withheld or delayed. Within 30 days after the Determination Date
with respect to a third parry claim, the Indemnitor shall pay the Indemnitee the
amount of Damages sustained or incurred by the Indemnitee, Interest will accrue
on unpaid Damages at the prime rate plus two percent (2%) per annum.
(c) In the event that liability hereunder does not involve a third
party claim, the Indemnitor shall within 30 days after the date of receipt of an
Indemnity Notice respond in writing to the Indemnitee (the "Indemnity Response")
and set forth with reasonable specificity those items in the Indemnity Notice to
which the Indemnitor does not agree as well as the summary basis upon which such
disagreement is founded. Within 30 days following the receipt of the Indemnity
Response by the Indemnitee, representatives of the Indemnitor and the Indemnitee
shall meet to attempt to resolve through good faith negotiations the applicable
Indemnification Matters. The parties shall negotiate in good faith for up to 60
days in an attempt to reach a settlement of any disputed matter. In the event
that such good faith negotiations are unsuccessful or in the event of any other
dispute under this Section IX, the parties shall proceed in accordance with
Section 11.07 of this Agreement.
(d) (i) If a claim shall be made by any taxing authority, which, if successful, might result in an indemnity payment to any Purchaser Indemnified Party, the Purchaser shall
promptly notify the Parent in writing (a "Tax Notice") of such claim a "Tax Claim"). If a Tax Notice is not given to the Parent within a reasonable period of time, or unreasonable detail to apprise the Parent of the nature of the Tax Claim, in each case taking into account the facts and circumstances with respect to such Tax Claim, neither the Parent nor the Seller shall be liable to any Purchaser Indemnified Party to the extent that the Parent's or the Seller's position is prejudiced as a result thereof.
(ii) With respect to any Tax Claim, the Parent and the Seller shall have the right to control and conduct all proceedings and negotiations in connection with such Tax Claim (including, without limitation, selection of counsel) and, without limiting the foregoing, may in the Parent's sole discretion pursue or forego any and all administrative appeals, proceedings, hearings and conferences with any taxing authority with respect thereto, and may, in the Parent's sole discretion, either pay the Tax claimed and sue for a refund where applicable law permits such refund suits or contest the Tax Claim ~n any permissible manner. The Parent shall, within 30 days of receipt or' a Tax Notice with respect to a Tax Claim (the "Tax Notice Period"), notify the Purchaser in writing of its intention to control and conduct the proceedings and negotiations in connection with such Tax Claim. In the event that the Parent does notify the Purchaser of its intention to control and conduct the proceedings and negotiations in connection with any Tax Claim as provided above, the Purchaser shall have the right to participate fully in such proceedings and negotiations (including, without limitation, with counsel of its choice), at its sole expense, and the Parent and the Seller shall cooperate fully with the Purchaser in connection with such participation. If the Parent does not deliver to the Purchaser within the Tax Notice Period written notice that it will control and conduct the proceedings and negotiations in connection with a Tax Claim, the Purchaser may control, or cause the applicable Group Member to control, and conduct such proceedings and negotiations in such manner as it may deem appropriate. In the event that the Parent or the Seller do not exercise their right to control and conduct the proceedings and negotiations in connection with any Tax Claim as provided above, the Parent and the Seller shall have the right to participate fully in such proceedings and negotiations (including, without limitation, with counsel of their choice), at their sole expense, and the Purchaser shall, and shall cause each Group Member to, cooperate fully with Parent and the Seller and their accountants and other representatives in connection with such participation, and in all cases the Purchaser shall keep the Parent fully informed as to all matters concerning such Tax Claim and shall promptly notify the Parent in writing of any and all significant developments relating thereto. Without limiting Sections 8.04 and 8.06, the Purchaser and each of its Affiliates shall (and the Purchaser shall cause the Group Members to) cooperate fully with the Parent and the Seller in contesting any Tax Claim, which cooperation shall include, without limitation, the retention and (upon the Parent's request) the provision to the Parent of records and information which are relevant to such Tax Claim, and making officers and employees available on a timely and mutually convenient basis to provide additional information or explanation of any material provided hereunder or to testify at proceedings relating to such Tax Claim.
(iii) Notwithstanding anything to the contrary contained herein, in no event shall the Purchaser or any Group Member settle or otherwise compromise any Tax Claim without the Parent's prior written consent which may not be withheld for any reason.
(a) Subject to Section 9.08, but notwithstanding anything else in this Section ix or Section X to the contrary and subject to the final sentence of this Section 9.05(a), no Purchaser Indemnified Party shall be entitled to indemnification pursuant to Section 9.01 hereof unless and until the aggregate amount of all Damages to which the indemnity set forth in Section 9.01 relates, sustained or incurred by all Purchaser Indemnified Parties exceeds an aggregate amount (the "Basket Amount") equal to $500,000; provided that the Basket Amount shall be increased, dollar for dollar, by the amount by which the Consolidated Net Working Capital as of the Closing Date (as determined pursuant to Section 8.20) exceeds $85.8 million. Subject to Section 9.04 and Section 9.08, if such Damages exceed the Basket Amount, then the Seller's liability for indemnification under Section 9.01 shall be limited to the amount of such Damages sustained or incurred which exceeds the Basket Amount.
(b) The representations and warranties contained in or made pursuant to this Agreement shall expire eighteen months from the Closing Date, provided that the representations and warranties contained in Sections 2.07, 2.21, 2.24, 8.15 and 8.20 shall survive for the applicable statute of limitations, and the Medicare Representations shall expire twenty-four months from the Closing Date; provided further that if written notice is properly given under this Section IX with respect to any alleged breach of a representation or warranty to which such party is entitled to be indemnified hereunder prior to the applicable expiration date, such representation or warranty with respect to such specified matter only shall continue indefinitely until the applicable claim is finally resolved.
matter of this Agreement and the transactions contemplated hereby (other than for fraud and other than disputes arising under the second sentence of Section 8.06(b) hereof which disputes shall be resolved as set forth in such Section) shall be in accordance with, and limited by, the indemnification provisions set forth in this Agreement; provided, however, that nothing contained in this Agreement shall in any manner limit the Purchaser's right to seek injunctive and other equitable relief to enforce the obligations of the Seller and the Parent under this Agreement."
firm or corporation claiming by, through or under the Purchaser (or any Affiliate thereof) in connection with this Agreement and the transactions contemplated herein, and the Purchaser hereby agrees to defend, indemnify and hold the Parent and the Seller harmless from any Damages sustained or incurred by the Seller by reason of any such claim for any such fee or other compensation.
(a) if to the Seller or the Parent:
NovaCare, Inc.
oral, of the parties, and, except as otherwise provided in Sections 6.03 and 8.05 hereof, no modification hereof shall be effective unless in writing and signed by the party against which it is sought to be enforced.
"Actions" shall have the meaning set forth in Section 2.15 hereof.
"Affiliate" means a person or entity who directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, another person.
"Applicable Law" shall mean the collective reference to any law, rule, regulation, ordinance, writ, judgment, injunction, decree, determination, award or other order of any Governmental Authority, in each case excluding any and all Environmental Laws.
"Beneficiary" shall mean the person(s) or entity(ies) designated by an Employee or Former Employee, by operation of law or otherwise, as the party entitled to compensation, benefits, damages, insurance coverage, payments, indemnification or any other goods or services as a result of any liability or claim under any applicable welfare or benefit plan or program.
"Benefit Plan" shall have the meaning set forth in Section 2.12 hereof.
"Best Efforts" or "best efforts" shall mean diligently, promptly and in good faith taking all actions which are reasonable, necessary and appropriate to accomplish the objective requiring the use of best efforts, but shall not include any obligation (a) to make any payment, incur any costs, commit available resources, or forego the receipt of any payment, which in any case is material in amount in light of the required objective, (b) to initiate any lawsuit or other" proceeding to achieve the required objective, or (C) to take any action which is unlawful.
"Closing" and "Closing Date" shall have the meanings set forth in
Section 4.01 hereof.
"Code" shall mean the Internal Revenue Code of 1986, as amended.
"Common Stock" shall have the meaning set forth in the recitals hereof.
"Competing Business" shall mean any business or other enterprise which engages in the business in which any Group Member currently engages.
"Confidentiality Agreement" shall have the meaning set forth in
Section 11.02 hereof.
"Contracts" shall have the meaning set forth in Section 2.10 hereof.
"Control" (including the terms "controlling", "controlled by" and "under common control with") means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of the person, whether through stock ownership, voting rights, governing boards or otherwise.
"Damages" shall mean any and all losses, claims, demands, damages, liabilities, obligations, costs and expenses, including without limitation, reasonable fees and disbursements of counsel (however sustained or incurred, including, without limitation, in any action or proceeding involving any third party or involving any other party to this Agreement) sustained or incurred by the Purchaser Indemnified Parties (or any of them) or the Seller Indemnified Parties (or any of them), as the case may be, and other reasonable out-of-pocket costs and expenses incurred in connection with investigating or defending any action, suit or proceeding, commenced or threatened, but excluding punitive damages (other than punitive damages payable to third parties).
"Determination" shall mean (a) the final non-appealable judgment by a court of competent jurisdiction or arbitrator with respect to any claim covered by Section IX hereof or (b)
a compromise and settlement agreement executed and delivered by both the Indemnitor and the Indemnitee with respect to any claim covered by Section IX.
"Determination Date" shall mean the date the Determination is final, legally binding, and non-appealable.
"Effective Time" shall mean at the close of business Eastern Standard Time on the Closing Date.
"Employees" shall mean (i) all individuals with whom a Group Member maintains, on the Closing Date, an employer-employee relationship, including any individuals on lay-off, disability or leave of absence, whether paid or unpaid, and (ii) individuals whose primary role and responsibilities relate to the businesses conducted by the Group.
"Environmental Laws" shall have the meaning set forth in Section 2.16(b) hereof.
"Environmental Permits" shall have the meaning set forth in Section
2.l6(b) hereof.
"ERISA" shall have the meaning set forth in Section 2.12(a) hereof.
"Financial Statements" shall have the meaning set forth in Section 2.04 hereof.
"Former Employees" shall mean all individuals as to whom an employer- employee relationship with any Group Member existed prior to the Closing Date, but does not exist on the Closing Date, who remain entitled to benefits under any applicable welfare or benefit plan or program.
"GAAP" shall mean generally accepted accounting principles, consistently applied.
"Governmental Authority" shall mean the collective reference to any court, tribunal, government, or governmental agency, authority or instrumentality, domestic or foreign.
"Group" shall mean the Companies and their respective subsidiaries, taken as a whole.
"Group Member" shall mean, individually, each of the Companies and each of its subsidiaries.
"Indemnification Matter" shall have the meaning set forth in Section 9.03 hereof.
"Knowledge of the Parent" shall mean, with respect to a particular fact or other matter, that (i) an individual who is a director or officer of the Parent, the Seller, any Company or any Group Member is actually aware of such fact or other matter or (ii) a reasonably prudent individual in the satisfaction of his or her duties as a director or officer of the Parent, the Seller, any Company or any Group Member would be reasonably expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonable investigation.
"Knowledge of the Purchaser" shall mean, with respect to a particular fact or other matter, that (i) an individual who is a director or officer of the Purchaser is actually aware of such fact or other matter or (ii) a reasonably prudent individual in the satisfaction of his or her
duties as a director or officer of the Purchaser would be reasonably expected to discover or otherwise become aware of such fact or other matter in the course of conducting a reasonable investigation.
"Lien" shall mean any mortgage, pledge, encumbrance, charge or other security interest of any kind or nature whatsoever.
"Managed Company" shall have the meaning set forth in Section 2.01 hereof.
"Material Adverse Effect" shall mean any circumstance or event which, individually or in the aggregate with any other circumstance or event, is or is reasonably likely to be material and adverse to the assets, properties, businesses, results of operations or financial condition of the Group, taken as a whole, and in any case after application of the proceeds of any insurance or indemnity under any contract or agreement to which any Group Member, the Parent, the Seller or the Purchaser (or any Affiliate thereof) is a parry: provided that the term "Material Adverse Effect" as used herein shall not include any effect attributable to changes in the economy (of the United States or any other country generally changes in the industries ~n which any Group Member engages, or seasonality of the businesses of any Group Member or any changes in reimbursement regulation, legislation or regulatory interpretation, For the purposes of this Agreement, the determination of whether a breach of a representation and warranty or covenant of this Agreement shall be deemed to give rise to a Material Adverse Effect shall be determined on a cumulative basis by adding the effect of the breach of any such representation and warranty or covenant (determined without regard to any materiality or Material Adverse Effect qualifiers) to the effect of all other breaches of representations and warranties and covenants of this Agreement (determined without regard to any materiality or Material Adverse Effect qualifiers) for each of the applicable period or periods to which each such representation, warranties or covenants relate, in all cases before applying the materiality standard set forth in the preceding sentence, and then determining whether, for any of the applicable periods, such aggregate sum or effect meets or exceeds the materiality standard set forth in the preceding sentence. For purposes of this definition of Material Adverse Effect, the effect of any matter as to any past period shall be determined based on its actual effect, and its effect as to any future period shall be determined based on the effect that such matter is reasonably likely to have.
"Medicare Representations" shall mean those representations and warranties set forth in Sections 2.16 (c) through (i), 2.25, 2.27, 2.30 and 2.31 herein.
"Non-PEO Benefit Plans" shall mean the Benefit Plans not maintained pursuant to the Parent NCES Agreement.
"PEO Benefit Plans" shall mean the Benefit Plans maintained pursuant to the Parent NCES Agreement.
"Permits" shall have the meaning set forth in Section 2.16(a) hereof.
"Permitted Liens" shall mean:
(a) Liens for Taxes which are not yet due or which are being contested in good faith by appropriate proceedings, provided that adequate reserves with respect to contested Taxes are maintained on the books of any Group Member;
(b) pledges or deposits made in the ordinary course of business in connection with workers' compensation, unemployment insurance and other social security legislation;
(c) easements, rights-of-way, restrictions and other similar encumbrances previously incurred in the ordinary course of business which, in respect of properties or assets of the Group. are not material, and which, in the case of such encumbrances on the assets or properties of any Group Member, do not materially detract from the value of any such properties or assets and do not materially interfere with any present use of such properties or assets:
(d) carriers', warehousemen's, mechanics', materialmen' s, repairmen's or other like Liens arising in the ordinary course of business which are not overdue for a period of more than 90 days or which are being contested in good faith by appropriate proceedings;
(e) deposits to secure the performance of bids, contracts (other than for borrowed money), leases, statutory obligations, surety and appeal bonds, performance bonds and other obligations of a like nature incurred in the ordinary course of business;
(f) statutory and contractual Liens on the property of any Group Member in favor of landlords securing leases; and
"Pre-Closing Covenants" shall have the meaning set forth in Section 9.05(c) hereof,
"Protected Employee" shall mean any current or former executive or professional employee of the Group Members or the Purchaser during the period in which the covenant set forth in Section 8.11 hereof are in effect, but excluding any persons who have not been employed by any Group Member or the Purchaser during the two-year period preceding the date on which a determination is made regarding whether a person is a Protected Employee.
"Purchaser Indemnified Parties" shall have the meaning set forth in
Section 9.01 hereof.
"Retro-Premium Insurance Amounts" shall mean any liability or other obligation paid by the Parent or the Seller (or any Affiliate of the Parent or the Seller) (whether by reimbursement to any claims security or escrow funds, any additional premiums on retrospective adjustment or otherwise) under any policies of insurance maintained by the Parent or the Seller (or any Affiliate of the Parent or the Seller) for the benefit of any Group Member attributable to events or occurrences on or prior to the Closing Date.
"Schedules" shall mean the Schedules attached hereto and made a part of this Agreement.
"Seller Indemnified Parties" shall have the meaning set forth in
Section 9 02 hereof.
"Seller's Health Plan" shall have the meaning set forth in Section 8.0 hereof
"Seller Tax Periods" shall mean and include any and all periods ending on or before the Closing Date, and in addition, the portion of any taxable period that includes, but does not end on or before, the Closing Date that consists of a partial period deemed to end on the Closing Date: provided that in the case of any Seller Tax Period that does not end on or before the Closing Date, for purposes hereof the books and records of the relevant Group Members shall be deemed to have been closed at and as of the Closing Date hereof.
"Subsidiary" and "Subsidiaries" shall have the meanings set forth in
Section 2.01
"Taxes" shall have the meaning set forth in Section 2.07 hereof.
"Tax Claim" shall have the meaning set forth in Section 9.03(d) hereof, "Tax Returns" shall have the meaning set forth in Section 2.07 hereof,
"Tax Sharing Agreement" shall mean the practice employed by the Parent in causing the Seller and each of the Group Members to pay to the Parent or to the Seller the separate company liability of each Group Member in respect of the consolidated Federal income Tax and state income Tax liabilities of the Parent's or the Seller's tax group, as applicable.
"Y2K-compliant" shall mean able to provide specific dates and calculate spans of dates, and to record, store, process and provide true and accurate dates and calculations for dates and spans of dates within and between the twentieth and twenty-first centuries prior to, including and following January 1, 2000, including by: (i) correctly processing day and date calculations; (ii) recognizing January 1, 2001 as a valid date; (iii) recognizing the year 2000 as a leap year having 366 days, and correctly processing February 29, 2000 as a valid leap year date; (iv) employing only four-digit year representations in software, components and systems owned or operated in connection with any Company or Subsidiary; and (v) incorporating interface programs sufficient to translate accurately to four-digit format (without any burden of interpretation) any two-digit year representations included in software, components or systems, including but not limited to external databases, data warehouses, software systems and user interfaces that send data to or receive data, from software, components or systems used in the Group's business.
* * *
IN WITNESS WHEREOF, this Agreement has been duly executed by the parties hereto as of the date first above written.
SELLER:
NC RESOURCES, INC.
By: /s/ Michael K. Fox ------------------------------ Name: Title |
PARENT:
NOVACARE, INC.
By: /s/ Timothy E. Foter ------------------------------ Name: Title |
PURCHASER:
SELECT MEDICAL CORPORATION
By: /s/ Martin F. Jackson ------------------------------ Name: Title |
Exhibit 2.4
FIRST AMENDMENT
TO
STOCK PURCHASE AGREEMENT
This First Amendment to the Stock Purchase Agreement (this "First Amendment") made and entered into as of November 14, 1999, by and among NovaCare, Inc. a Delaware corporation ("Parent"), NC Resources, Inc., a Delaware corporation and a wholly owned subsidiary of Parent ("Seller"), and Select Medical Corporation, a Delaware corporation ("Purchaser"), amends that certain Stock Purchase Agreement, dated as of October 1, 1999, by and among Parent, Seller and Purchaser (the "Original Agreement"). Capitalized terms used but not defined herein shall have the meanings assigned to them in the Original Agreement.
W I T N E S S E T H
Whereas, the parties have entered into the Original Agreement; and
Whereas, the parties desire to amend the Original Agreement.
Now, Therefore, in consideration of the premises and mutual covenants herein contained, and other good and valuable consideration, the receipt of which is acknowledged by the parties, and intending to be legally bound hereby, the parties hereby agree as follows:
1. Section 1.02 of the Original Agreement is hereby amended and restated in its entirety to read as follows:
2. Section 2.04(a)(ii) of the Original Agreement is hereby amended by replacing the period at the end thereof with a semicolon and adding thereafter the following:
"and (iii) unaudited combined statement of the results of operations of the Companies and their subsidiaries for the fiscal quarter ended September 30, 1999 and combined balance sheet of the Companies and their subsidiaries as of September 30, 1999."
3. Section 2.04 of the Original Agreement is hereby amended by adding after subparagraph (g) thereof the following:
"(h) Attached as Schedule 2.04(H) is an estimate of the revenues of the Companies and the Subsidiaries for the month of October, 1999, which estimate was prepared in good faith by the Parent in the ordinary course of business (the "October Revenue Report")."
4. Section 2.06 of the Original Agreement is amended by adding after "(a)" in the second line thereof the words:
"except as reflected in the Financial Statements of the Companies as of and for the 3 month period ended September 30, 1999, and except as disclosed in the October Revenue Report,"
5. Section 2.30 of the Original Agreement is hereby amended by adding at the end thereof the following:
"All billings by all Group Members accurately reflect the level of service actually delivered to the patients, are substantiated by all documentation required by applicable legal, contractual and professional standards, and Group Members do not perform and bill for services at a level above that which is appropriate."
6. Section 6.10 of the Original Agreement is amended by adding before the period at the end thereof the words "and the Group Members have been released of all obligations under the Credit Agreement referred to on Schedule 2.02."
7. The Original Agreement is hereby amended to add Section 6.11, as follows:
8. The Original Agreement is hereby amended to add Section 6.12, as follows:
9. Section 8.06(d) of the Original Agreement is amended by deleting the
first word thereof and replacing it with the words: "Except as provided in
Section 8.27, the"
10. The first sentence of Section 8.10(d) of the Original Agreement is hereby amended and restated in its entirety to read as follows:
11. Section 8.15 of the Original Agreement is hereby amended and restated in its entirety to read as follows:
(a) The Parent represents and warrants to the Purchaser that all accounts receivable reflected on the Closing Balance Sheet, net of reserves against such accounts receivable reflected on the Closing Balance Sheet, shall be fully collected. In order to give effect to the foregoing representation, the Parent, Seller and the Purchaser agree to the payments and procedures set forth in this Section 8.15.
(b) The following terms when used in this Section 8.15 shall have the meanings assigned to them below:
(i) "Closing Date Receivables" shall mean all accounts receivable reflected on the Closing Balance Sheet, net of reserves against such accounts receivable reflected on the Closing Balance Sheet.
(ii) "Litigation Receivables" means Closing Date Receivables which represent amounts due from patients who as of the Closing Date have notified Parent, Seller or a Group Member of their inability to pay such accounts pending resolution of litigation brought by such patient to collect damages or insurance proceeds.
(iii) "Ordinary Receivables" means Closing Date Receivables other than Litigation Receivables.
(iv) "Cumulative Receivable Collections" means, at any time, the amount of cash collected by the Group Members on account of Closing Date Receivables from and including the day after the Closing Date to such time.
(v) "Ordinary Receivable Collection Target Percentage" means, for each of the periods specified in the table below, the percentage set forth opposite such period:
----------------------------------------------------------------------------------------------------------------------------------- Period beginning the day after the Closing Ordinary Receivable Collection Target - Date and ending: Percentage --------------- ---------- ----------------------------------------------------------------------------------------------------------------------------------- February 29, 2000 53% ----------------------------------------------------------------------------------------------------------------------------------- May 31, 2000 84% ----------------------------------------------------------------------------------------------------------------------------------- August 31, 2000 90% ----------------------------------------------------------------------------------------------------------------------------------- November 30, 2000 95% ----------------------------------------------------------------------------------------------------------------------------------- February 28, 2001 97% ----------------------------------------------------------------------------------------------------------------------------------- May 31,2001 98% ----------------------------------------------------------------------------------------------------------------------------------- August 31, 2001 99% ------------------------------------------------------------------------------------------------------------------------------------ November 30, 2001 100% ------------------------------------------------------------------------------------------------------------------------------------ |
(vi) "Litigation Receivable Collection Target Percentage" means, for each of the periods specified below, the percentage set forth opposite such period:
------------------------------------------------------------------------------------------------------------------------------------ Period beginning the day after the Closing Litigation Receivable Collection Target - Date and ending: Percentage --------------- ---------- ------------------------------------------------------------------------------------------------------------------------------------ February 29, 2000 12.5% ------------------------------------------------------------------------------------------------------------------------------------ May 31,2000 25% ------------------------------------------------------------------------------------------------------------------------------------ August 31, 2000 37.5% ------------------------------------------------------------------------------------------------------------------------------------ November 30, 2000 50% ------------------------------------------------------------------------------------------------------------------------------------ February 28, 2001 62.5% ------------------------------------------------------------------------------------------------------------------------------------ May 31,2001 75% ------------------------------------------------------------------------------------------------------------------------------------ August 31, 2001 87.5% ------------------------------------------------------------------------------------------------------------------------------------ November 30, 2001 100% ------------------------------------------------------------------------------------------------------------------------------------ |
(vii) "Adjusted Litigation Receivables" means Litigation Receivables multiplied by 2/3.
(viii) "Cumulative Escrow Collections" means, at any time, the cumulative amount of cash paid to the Purchaser from the Escrow Account by the Escrow Agent pursuant to the provisions of Section 8.15(c) from and including the day after the Closing Date to such time, excluding any amounts paid in respect of interest pursuant to Section 8.15(d).
(ix) "Cumulative Collections" means, at any time, the Cumulative Receivable Collections at such time, plus the Cumulative Escrow Collections at such time.
(c) As promptly as practicable after February 29, 2000, May 31, 2000, August 31, 2000, November 30, 2000, February 28, 2001, May 31, 2001, August 31, 2001 and November 30, 2001 (each such date a "Measurement Date"), the Purchaser shall deliver to the Parent and Seller a statement of the Cumulative Collections as of such Measurement Date, together with the work papers upon which Purchaser's calculation of such Cumulative Collections is based, and within 10 days thereafter the Seller shall pay to Purchaser (and to effect such payment shall instruct the Escrow Agent to pay to the Purchaser) the amount, if any, by- which (A) the sum of (i) the amount of Ordinary Receivables multiplied by the Ordinary Receivable Collection Target Percentage applicable to such Measurement Date plus (ii) the amount of the Adjusted Litigation Receivables multiplied by the Litigation Receivable Collection Target Percentage applicable to such Measurement Date, exceeds (B) the Cumulative Collections as of such Measurement Date; provided that for purposes of the Measurement Date which is November 30, 2001, the term "Adjusted Litigation Receivables" in clause "(A)" above shall be replaced
with the term "Litigation Receivables;" and provided further that, if as of November 30, 2001, Cumulative Collections as of such date exceed the amount of Closing Date Receivables, Purchaser shall deposit such excess amount into the Escrow Account (together with interest on such amount accrued from August 31, 2001 to the date of payment, at an annual rate of interest equal to the weighted average interest rate earned during such period on the funds in the Escrow Account (as reported to the parties by the Escrow Agent)) and such deposited amount shall thereafter constitute part of the "Indemnity Escrow Deposit" under and as defined in the Escrow Agreement. During the 30 day period prior to each Measurement Date, and during the 10 day period following Purchaser's delivery of such statement, Seller shall be given reasonable access to such employees and such work papers management reports and other information relating to the determination of Cumulative Collections for the 90 day period ending on such Measurement Date as it reasonably requests. In addition, during the 90 day period prior to the first Measurement Date, Purchaser shall provide Seller with reasonable access to those of its employees as are involved in the creation of the reporting system to be used to calculate Cumulative Receivable Collections, and will consider Seller's reasonable suggestions to improve the integrity of such reporting system.
(d) Together with each payment required to be made to Purchaser
pursuant to paragraph (c) above, Seller shall, in addition, pay to Purchaser
(and to effect such payment shall instruct the Escrow Agent to pay to Purchaser)
interest on the amount of such payment accrued from the Closing Date to the date
of payment, at an annual rate of interest equal to the weighted average interest
rate earned during such period on the funds in the Escrow Account (as reported
to the parties by the Escrow Agent).
(e) During the two year period following the Closing, the Purchaser will cause the Group Members to follow substantially the same accounts receivable collector) practices as were used by the Group Members prior to Closing."
12. Section 8.16 of the Original Agreement is hereby amended and restated in its entirety to read as follows:
13. Section 8.18 of the Original Agreement is hereby amended to read in its entirety as follows:
14. Section 8.19(u) of the Original Agreement is hereby deleted.
15. Section 8.19 of the Original Agreement is hereby amended to add at the end of the section prior to the period (.), as follows:
"and the Parent hereby agrees to use its best efforts to assist the Purchaser in negotiating such a contract that is acceptable to the Purchaser. Pending the negotiation and execution of such contract with AT&T, Parent's and Purchaser's obligations with respect to the AT&T contract will be as set forth in the Transition Services Agreement."
16. Section 8.20(b) of the Original Agreement is hereby amended by adding before the period at the end of the first sentence thereof, the following:
17. Section 8.20(d) of the Original Agreement is hereby amended by adding at the end thereof the following:
"Each time Parent or Seller make any payment required pursuant to this
Section 8.20(d) with respect to a breach of the representations in Section
8.20(a)(i) or Section 8.20(a)(ii), it shall, in addition to such payment, pay to
Purchaser interest on the amount of such payment accrued from and including the
Closing Date to the date of payment, at an annual rate of interest equal to the
weighted average interest rate earned during such period on the funds in the
Escrow Account (as reported to the parties by the Escrow Agent)."
18. The Original Agreement is hereby amended to add Section 8.25, as follows:
19. The Original Agreement is hereby amended to add Section 8.26, as follows:
$1,700,000 and the amount of any cash invested by the Companies in the Joint Venture after September 30, 1999, and in the event such value does not exceed such amount Parent and Seller will pay Purchaser the difference between such amounts."
20. The Original Agreement is hereby amended to add Section 8.27, as follows:
21. The Original Agreement is hereby amended to add Section 8.28, as follows:
22. Section 9.01(g) of the Original Agreement is amended by replacing the words
"seventy-five percent (75%)" with the words "ninety percent (90%)", and Section 9.02(e) of the Original Agreement is amended by replacing the words "twenty-five percent (25%)" with the words "ten percent (10%)".
23. Section 9.01(h) of the Original Agreement is hereby amended and restated in its entirety to read as follows:
24. Section 9.01(k) of the Original Agreement is hereby amended and restated in its entirety to read as follows:
transactions, occurrences or practices as those alleged in, or that could have been alleged in the Qui Tam Suit, and (m) any liability or obligation specified in Section 9.10."
25. Section 9.02(h) of the Original Agreement is hereby amended and restated in its entirety to read as follows:
26. Section 9.04 of the Original Agreement is hereby amended and restated in its entirety to read as follows:
27. Section 9.08 of the Original Agreement is hereby amended to add before the period (.), as follows:
", and (iii) there shall be no limitations on the liability (or the
sources of recovery) of the Seller and the Parent under either Section 9.04 or
Section 9.05 for Damages of the Purchaser which relate to the representations,
warranties and indemnifications set forth in Section 8.26, Section 9.01(1) or
Section 9.10."
28. The Original Agreement is hereby amended to add Section 9.10, as follows:
(a) Subject to the limitations contained in Section 9.10(b), notwithstanding anything in this Agreement to the contrary, the Parent and Seller hereby jointly and severally agree to indemnify and hold harmless the Purchaser Indemnified Parties from and against any and all Damages, sustained or incurred by any of the Purchaser Indemnified Parties, as a result of, or arising from, any action brought or claim made (whether or not any litigation has been commenced) by or on behalf of the former stockholders (the "Former Stockholders") of Joyner Sportsmedicine Institute, Inc. ("Joyner") alleging a breach of any obligation to make so-called earnout payments pursuant to Section I. C. of the Agreement of Purchase and Sale (the "Joyner Purchase Agreement"), dated March 1, 1998, by and among NovaCare Outpatient Rehabilitation East, Inc., the Parent, Joyner and the Former Stockholders, or otherwise claiming that as a result of actions or omissions of the Parent or its subsidiaries the Former Stockholders have not received the full amount of the earnout payments to which they would otherwise be entitled (together, the "Joyner Earn-Out Obligations"), including any amount paid in settlement of any such
actions or claims. The parties agree that such Damages shall include, but not be limited to, amounts contained in any settlement arrangement, whether or not any litigation has commenced, negotiated by the Purchaser and/or a Group Member, as applicable, in their sole discretion, however structured, in connection with obtaining a release from such Former Stockholders with respect to any claims made by such Former Stockholders.
(b) The parties hereto acknowledge and agree that the intent of the foregoing indemnification is to protect the Purchaser Indemnified Parties from and against any financial obligation incurred in connection with the resolution of any and all disputes relating to the Joyner Earn-Out Obligations, in excess of any such amounts that would, under the terms of the Joyner Purchase Agreement as in effect on the date hereof, be payable to the Former Shareholders in respect of Joyner Earn-Out Obligations at the time such indemnification - obligations hereunder arise. Accordingly, the parties hereto agree that the Damages payable to the Purchaser hereunder, whether as a result of a settlement, arbitration award or judgment, shall not include (or shall be reduced by, as applicable) an amount equal to the amount(s), if any, that would, as of the date of such settlement, award or judgment, be payable to the Former Stockholders under the Joyner Purchase Agreement as in effect on the date hereof in respect of the Joyner Earn-Out Obligations based- on the actual net revenues achieved for the relevant period. On the other hand, if as of the date of any such settlement, arbitration award or judgment, no such amount is payable to the Former Stockholders with respect to the Joyner Earn-Out Obligations for the relevant period, either because such period has not yet occurred or been completed, or because sufficient revenues have not been generated for such period (or portion thereof), or for any other reason, the Damages shall include the full amount of any such settlement, award or judgment. By way of illustration, if the Purchaser and/or a Group Member structure a settlement of the Joyner Earn-Out Obligations for the period ending March 31, 2000 by paying to the Former Stockholders a payment of $4,000,000, but, based on the actual net revenues achieved for the period ending March 31, 2000, an earnout payment of $ 1-,000,000 is, at the time of such settlement, due under the terms of the Joyner Purchase Agreement, as in effect on the date hereof, to the Former Stockholders in respect of the Joyner Earn-Out Obligations for that period, the Purchaser would be entitled to draw $3,000,000 from the Earn-Out Escrow Account (upon delivery to the Parent and Seller of a release, executed by the Former Stockholders, with respect to the Joyner Earn-Out Obligations for such period), in addition to any other Damages it may have incurred. If, on the other hand, the Purchaser and/or a Group Member settles all the Joyner Earn-Out Obligations for the periods ending March 31, 2000 and March 31, 2001, by paying to the Former Stockholders $5,000,000, and, at the time of such settlement, sufficient revenues have not been generated to entitle the Former Stockholders to any earn- out payment for the period ending March 31, 2000 (nor for the period ending March 31, 2001, since the earn-out period will not have even commenced), the entire $5,000,000 amount would be included as Damages, and the Purchaser would be entitled to withdraw such Damages from the Earn-Out Escrow Account (upon delivery to the Parent and Seller of a release executed by the Former Stockholders with respect to the Earn-Out Obligations). Neither Parent nor Seller shall be entitled to make any claim that (and hereby waive any claim hereafter arising that), had Purchaser or any Group Member operated Joyner's business differently, the Former Stockholders would have been entitled to a larger earn-out payment.
(c) The Purchaser and the Seller agree that the Purchaser shall be entitled to draw from the Earn-Out Escrow Account any and all amounts necessary to satisfy the Parent's and Seller's obligation set forth in this Section 9.10. The Purchaser and the Seller further agree that the Purchaser shall be entitled to draw from the Earn-Out Escrow Account as hereinbefore provided whether or not the underlying dispute and/or any resulting claim constitutes or gives rise to a claim of a Purchaser Indemnified Party against the Parent and Seller pursuant to the indemnification provisions set forth in any other section of this Agreement and the Escrow Agreement relating hereto; the Purchaser shall have no obligation to first seek recovery from the amounts held pursuant to the Escrow Agreement but may draw upon the Earn-Out Escrow Account without regard to the Escrow Agreement.
(f) The parties agree to give instructions to the Escrow Agent to give effect to the provisions of this Agreement."
29. Section 11.13 of the Original Agreement is hereby amended by adding at the end thereof the following: "For the avoidance of doubt, the Parent and Seller agree that all obligations of Parent herein are the joint and several obligations of the Parent and Seller."
30. Schedule 1.02 of the Original Agreement is hereby amended and restated as set forth in Exhibit A hereto.
31. Schedule 2.03 of the Original Agreement is hereby amended to add the language set forth in Exhibit B hereto.
32. The words "[See Section 8.18]" of Schedule 2.10(b) of the Original Agreement are hereby deleted and replaced with "[See Section 8.19]".
33. The words "Winthrop - telecom hardware lease $15,000 per month" of Schedule 2.10(b) of the Original Agreement are hereby deleted.
34. Schedule 2.15 of the Original Agreement is hereby amended to add the language set forth in Exhibit C hereto.
35. The Original Agreement is hereby amended to add Exhibit l.02A as set forth in Exhibit D hereto.
36. The Original Agreement is hereby amended to add Exhibit 6.11 as set forth in Exhibit E hereto.
37. The Original Agreement is hereby amended to add Exhibit 8.16 as set forth in Exhibit F hereto.
38. Exhibit 1.02 of the Original Agreement is hereby replaced with Exhibit G.
39. The Original Agreement is hereby amended to add Exhibit 8.18 as set forth in Exhibit H.
40. Schedule 2.04 of the Original Agreement is hereby amended to add thereto the Financial Statements of the Companies as of and for the 3 month period ended September 30, 1999, which statements are attached as Exhibit I.
41. The Original Agreement is hereby amended to add Schedule 2.04(H) as set forth in Exhibit J.
42. Any reference in the Original Agreement to the term "Agreement" is deemed to refer to both the Original Agreement as well as the Original Agreement, as amended by this First Amendment.
43. Except as amended by this First Amendment, the Original Agreement remains in full force and effect.
44. This First Amendment is made under, and shall be construed and enforced in accordance with, the laws of the Commonwealth of Pennsylvania applicable to agreements made and to be performed solely therein, without giving effect to principles of conflicts of law.
45. This First Amendment may be executed in several counterparts, each of which shall be deemed an original and all of which shall constitute one and the same instrument.
IN Witness Whereof, the parties have caused this First Amendment to be executed as of the date first written above.
NovaCare, Inc.
By: /s/ Timothy E. Foter ----------------------------------- Name: Timothy E. Foter Title: Chief Executive Officer |
NC Resources, Inc.
By: /s/ Michael K. Fox ----------------------------------- Name: Michael K. Fox Title: President |
Select Medical Corporation
By: /s/ Michael E. Tarvin ----------------------------------- Name: Michael E. Tarvin Title: Vice President |
EXHIBIT 4.1
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON DECEMBER 15, 1998, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE SPECIFIED IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF DECEMBER 15,1998 AMONG THE ISSUER AND THE PURCHASERS NAMED THEREIN, AND THE ISSUER RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER A COPY OF SUCH CONDITIONS WILL BE FURNISHED BY THE ISSUER TO THE HOLDER HEREOF UPON WRITTEN REQUEST WITHOUT CHARGE.
THIS NOTE IS ISSUED WITH ORIGINAL ISSUE DISCOUNT ("OID") AS DEFINED BY SECTION 1273(a)(1) OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED. THE FOLLOWING INFORMATION IS PROVIDED PURSUANT TO THE INFORMATION REPORTING REQUIREMENTS SET FORTH IN TREASURY REGULATION 1.1275-3.
THE ISSUE PRICE OF THIS DEBT INSTRUMENT IS $25,714,290. THE AMOUNT OF Oil) ON THIS DEBT INSTRUMENT IS $9,285,710 ASSUMING ALL PAYMENTS OF PRINCIPAL ARE MADE AT MATURITY. THE ISSUE DATE OF THIS DEBT INSTRUMENT IS DECEMBER 15, 1998. THE PER ANNUM YIELD TO MATURITY OF THIS DEBT INSTRUMENT IS 15.02% COMPOUNDED QUARTERLY.
SELECT MEDICAL CORPORATION
10% Senior Subordinated Note
Due December 15, 2008
$35,000,000 Dated: December 15, 1998
SELECT MEDICAL CORPORATION, a Delaware corporation (hereinafter called the "Company"), for value received, hereby promises to pay to WCAS CAPITAL PARTNERS III, L.P. ("WCAS CP III") or its registered assigns, the principal sum of THIRTY-FIVE MILLION DOLLARS ($35,000,000) on December 15, 2008. In addition, the Company hereby promises to pay to WCAS CP Ill, or its registered assigns, interest (computed on the basis of a 360-day year consisting of twelve 30-day months from the date hereof on the unpaid principal amount hereof at the rate of 10% per annum quarterly in arrears on March 15, June 15, September 15 and December 15 of each year (each such date being an "Interest Payment Date"), commencing on March 15, 1999, until the principal amount hereof shall have become due and payable, whether at maturity or by acceleration or otherwise, and thereafter at the rate of 12% per annum on any overdue principal amount and (to the extent permitted by applicable law) on any overdue interest until paid.
All payments of principal and interest on this Note shall be in such coin or currency of the United States of America as at the time of payment shall be legal tender for payment of public and private debts.
On any Interest Payment Date on or after December 15, 2003, the Company shall also pay such amount of accrued original issue discount on this Note as shall be necessary to ensure that this Note shall not be considered an "applicable high yield discount obligation" within the meaning of Section 163(i) of the Internal Revenue Code of 1986, as amended (the "Code"), or any successor provision. In the event that any such payment of accrued original issue discount occurs, the amount of principal payable on this Note shall be reduced to the extent necessary to ensure that the yield to maturity on this Note (determined as provided by Section 1272 of the Code and the regulations thereunder and computed by taking into account any such payment of accrued original issue discount pursuant to this paragraph) shall equal the yield to maturity on this Note (computed as though no payment of accrued original issue discount had been made under this paragraph). The Company and WCAS CP III agree that the original issue discount characteristics of the Note reflected in the legend were determined in accordance with Treasury Regulation Section 1.1273-2(h)(l) and that they shall report the accrual of interest and original issue discount on the Note consistent with those determinations for all tax purposes.
If any payment on this Note is due on a day which is not a Business Day, it shall be due on the next succeeding Business Day. For purposes of this Note, "Business Day" shall mean any day other than a Saturday, Sunday or a legal holiday or day on which banks are authorized or required to be closed in Chicago or New York.
1. The Note. This Note is issued pursuant to and is subject to the terms and provisions of the Securities Purchase Agreement dated as of December 15, 1998 (the "Purchase Agreement"), among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII"), WCAS CP III, Golder, Thoma, Cressey, Rauner Fund V, L.P., GTCR Associates V and the other several purchasers named on Schedule I thereto. As used herein, the term "Note" or "Notes" includes the 10% Senior Subordinated Note due December 15, 2008 of the Company in the principal amount of $35,000,000 issued on the first closing date under the Purchase Agreement (the "First Issuance Date"), any 10% Senior Subordinated Notes due December 15, 2008 of the Company in the aggregate principal amount of up to $30,000,000 issued on subsequent closing dates pursuant to the Purchase Agreement and any 10% Senior Subordinated Note or Notes due December 15, 2008 subsequently issued upon exchange or transfer thereof.
2. Transfer, Etc. of Notes. The Company shall keep at its office or agency maintained as provided in paragraph (a) of Section 7 a register in which the Company shall provide for the registration of this Note and for the registration of transfer and exchange of this Note. The holder of this Note may, at its option, and either in person or by its duly authorized attorney, surrender the same for registration of transfer or exchange at the office or agency of the Company maintained as provided in Section 7 and, without expense to such holder (except for taxes or governmental charges imposed in connection therewith), receive in exchange therefor a Note or Notes each in such denomination or denominations (which shall be $100,000 or an
integral multiple thereof) as such holder may request, dated as of the date to which interest has been paid on the Note or Notes so surrendered for transfer or exchange, for the same aggregate principal amount as the then unpaid principal amount of the Note or Notes so surrendered for transfer or exchange, and registered in the name of such person or persons a~ may be designated by such holder. Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed, or shall be accompanied by a written instrument of transfer, satisfactory in form to the Company, duly executed by the holder of such Note or its attorney duly authorized in writing. Every Note so made and delivered in exchange for such Note shall in all ether respects be in the same form and have the same terms and legends thereon as such Note. No transfer or exchange of any Note shall be valid (x) unless made in the foregoing manner at such office or agency and (y) unless registered under the Securities Act of 1933, as amended, or any applicable state securities laws or unless an exemption from such registration is available.
3. Loss, Theft, Destruction or Mutilation of Note. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, and, in the case of any such loss, theft or destruction, upon receipt of an affidavit of loss and an indemnity reasonably acceptable in form and substance to i he Company from the holder thereof, or, in the case of any such mutilation, upon surrender and cancellation of this Note, the Company will make and deliver, in lieu of this Note, a new Note of like tenor and unpaid principal amount and dated as of the date to which interest has been paid on this Note.
4. Persons Deemed Owners; Holders. The Company may deem and treat the person in whose name this Note is registered as the owner and holder of this Note for the purpose of receiving payment of principal of and interest on this Note and for all other purposes whatsoever, whether or not this Note shall be overdue. With respect to any Note at any time outstanding, the term "holder," as used herein, shall be deemed to mean the person in whose name such Note is registered as aforesaid at such time.
5. Prepayments.
may be, so called for prepayment, at the prepayment price determined in accordance with Section 5(a) hereof. A prepayment of less than all of the outstanding principal amount of this Note shall not relieve the Company of its obligation to make scheduled payments of interest payable in respect of the principal remaining outstanding on the Interest Payment Dates.
6. Special Mandatory Prepayments. (a) Subject to any applicable restrictions contained in, or prior applications of funds required pursuant to, the Credit Agreement, within 30 days after the consummation of:
(i) a Change of Control, or
(ii) the issuance (other than by dividend or upon the exercise of employee stock options) of any capital stock or other ownership interest of the Company pursuant to offerings registered under the Securities Act of 1933, as amended (the "Securities Act"),
offering of the Company's capital stock registered under the Securities Act, the Company shall instead be required to apply only 25% of the Net Proceeds received by the Company therefrom to prepay the Notes. Partial prepayments of the Notes pursuant to this Section 6 shall be made on a pro rata basis with respect to the Notes, based on the aggregate principal amount of Notes then outstanding.
(b) In the event of a required prepayment of the indebtedness outstanding under the Notes pursuant to Section 6(a) hereof, the Company will, promptly but in no event later than 30 days after the consummation of the transaction requiring such prepayment, in good faith, (i) obtain any required consent of the holders of any Senior Indebtedness (as defined herein) to permit the prepayment contemplated by Section 6(a), or (ii) repay some or all of such Senior Indebtedness to the extent necessary (including, if necessary, payment in full of such Senior Indebtedness and payment of any prepayment premiums, fees, expenses or penalties) to permit the prepayment contemplated b~ Section 6(a) without such consent. Failure to comply with the foregoing shall not relieve the Company from its obligations pursuant to paragraph (a) above.
For purposes of this Section 6, (i) the terms "person" and "group" shall have the meaning set forth in Section l3(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), whether or not applicable, (ii) the term "beneficial owner" shall have the meaning set forth in Rules 13d-3 and 13d-5 under the Exchange Act, whether or not applicable,
except that a person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time or upon the occurrence of certain events, (iii) any "person" or "group" will be deemed to beneficially own any Voting Stock of the Company so long as such person or group beneficially owns, directly or indirectly, in the aggregate a majority of the Voting Stock of a registered holder of the Voting Stock of the Company, and (iv) the term "Principal Stockholders" shall mean any of WCAS VII, WCAS Healthcare Partners L.P., WCAS CP Ill, Golder, Thoma, Cressey, Rauner Fund V, L.P., GTCR Associates V, GTCR Fund VI, L.P., GTCR Executive Fund, L.P., GTCR Associates, VI, Bryan C. Cressey, Thoma Cressey Fund VI, L.P., Select Partners, L.P., Select Healthcare Investors I, L.P., Select Investments II, L.P., Rocco A.. Ortenzio or Robert A. Ortenzio and, as applicable, any general partners thereof (including any of the general partners or managing members of such general partners) and any other investment limited partnerships or other investment entities under common control therewith.
7. Covenants Relating to the Notes. The Company covenants and agrees
that so long as the Notes shall be outstanding and, in the case of paragraphs
(k) through (n) below, so long as five million dollars ($5,000,000) of aggregate
principal amount of the Notes is outstanding:
(ii) any transaction approved by the Board of Directors of the Company in
accordance with the provisions of Section 144 of the Delaware General
Corporation Law, or otherwise permitted by such Section, (iii) customer
transactions in the ordinary course of business and on arm's length terms and
(iv) the transactions contemplated by the Purchase Agreement, the Ancillary
Agreements (as defined therein) and the Management Agreements.
(i) the Company is the surviving corporation or the entity formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale or other disposition shall have been made is a corporation organized or existing under the laws of the United States of any state thereof or the District of Columbia;
(ii) the surviving corporation or other entity (if other than the Company) shall expressly and effectively assume in writing the due and punctual payment of the principal of and interest on this Note, according to its tenor, and the due and punctual performance and observance of all the terms, covenants,
agreements and conditions of this Note to be performed or observed by the Company to the same extent as if such surviving corporation had been the original maker of this Note;
(iii) the Company or such other corporation or other entity shall not otherwise be in default in the performance or observance of any covenant, agreement or condition of this Note; and
(iv) the holder of this Note shall have received, in connection therewith, an opinion of counsel for the Company (or other counsel satisfactory to the holder), in form and substance satisfactory to the holder, to the effect that any such consolidation, merger, sale or conveyance and any such assumption complies with the provisions of this paragraph (j).
Notwithstanding anything to the contrary herein, in no event shall a foreclosure on any collateral pledged in respect of obligations arising under or in connection with the Credit Agreement be deemed to constitute a violation of the Company's obligations under this paragraph (j).
WCAS VII or any of its affiliates in connection with the acquisition of such subsidiary by the Company (the "Put Securities").
8. Modification by Holders; Waiver. The Company may, with the written consent of the holders of not less than a majority in principal amount of the Notes then outstanding, modify the terms and provisions of this Note or the rights of the holders of this Note or the obligations of the Company hereunder, and the observance by the Company of any term or provision of this Note may be waived with the written consent of the holders of not less than a majority in principal amount of the Notes then outstanding.
Any such modification or waiver shall apply equally to each holder of the Notes and shall be binding upon them, upon each future holder of any Note and upon the Company, whether or not such Note shall have been marked to indicate such modification or waiver, but any Note issued thereafter shall bear a notation referring to any such modification or waiver. Promptly after obtaining the written consent of the holders as herein provided, the Company shall transmit a copy of such modification or waiver to the holders of the Notes at the time outstanding.
9. Events of Default. If any one or more of the following events, herein called "Events of Default," shall occur (for any reason whatsoever, and whether such occurrence shall, on the part of the Company or any of its subsidiaries, be voluntary or involuntary or come about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of a court of competent jurisdiction or any order, rule or regulation of any administrative or other governmental authority) and such Event of Default shall be continuing:
(i) default shall be made in the payment of the principal of this Note when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or repurchase (including default of any optional prepayment in accordance with the requirements of Section 5, or any special mandatory prepayment in accordance with the requirements of Section 6, as the case may be) or by acceleration or otherwise; or
(ii) default shall be made in the payment of any installment of interest on this Note according to its terms when and as the same shall become due and payable, and such default shall continue for 5 Business Days; or
(iii) default shall be made in the due observance or performance of any covenant, condition or agreement on the part of the Company contained herein in Section 7(j); or
(iv) default shall be made in the due observance or performance of any other covenant, condition or agreement on the part of the Company to be observed or performed pursuant to the terms hereof or of the Purchase Agreement, and such default shall continue for 10 Business Days after written notice thereof from holders of not less than 33-1/3% of the aggregate principal amount of the Notes at the time outstanding, specifying such default and requesting that the same be remedied; or
(v) the entry of a decree or order for relief by a court having jurisdiction in the premises in respect of the Company or any of its subsidiaries in any involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar laws, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or any of its subsidiaries for any substantial part of any of their property or ordering the winding-up or
liquidation of any of their affairs and the continuance of any such decree or order unstayed and in effect for a period of 30 consecutive days; or
(vi) the commencement by the Company or any of its material subsidiaries of a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar laws, or the consent by any of them to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or any of its material subsidiaries for any substantial part of any of their property, or the making by any of them of any general assignment for the benefit of creditors, or the failure of the Company or of any of its material subsidiaries generally to pay its debts as such debts become due, or the taking of corporate action by the Company or any of its material subsidiaries in furtherance of or which might reasonably be expected to result in any of the foregoing; or
(vii) a default or an event of default as defined in any instrument evidencing or under which the Company or any of its material subsidiaries has outstanding at the time any Indebtedness in excess of $1,000,000 in aggregate principal amount shall occur and as a result thereof the maturity of any such Indebtedness shall have been accelerated so that the same shall have become due and payable prior to the date on which the same would otherwise have become due and payable and such acceleration shall not have been rescinded or annulled within 20 days; or
(viii) final judgment (not reimbursed by insurance policies of the Company or any of its subsidiaries) for the payment of money in excess of $1,000,000 shall be rendered against the Company or any of its subsidiaries and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed;
Without limiting the foregoing, the Company hereby waives any right to
trial by jury in any legal proceeding related in any way to this Note and agrees
that any such proceeding may, if the holder so elects, be brought and enforced
in the Supreme Court of the State of New York for New York County or the United
States District Court for the Southern District of New York and the Company
hereby waives any objection to jurisdiction or venue in any such proceeding
commenced in such court. The Company further agrees that any process required
to be served on it for purposes of any such proceeding may be served on it, with
the same effect as personal service on it within the State of New York, by
registered mail addressed to it at its office or agency set forth in paragraph
(a) of Section 7 for purposes of notices hereunder.
10. Suits for Enforcement. Subject to the provisions of Section 13 of this Note, in case any one or more of the Events of Default specified in Section 9 of this Note shall happen and be continuing (subject to any applicable cure period expressly set forth herein), the holder of this Note may proceed to protect and enforce its rights by suit in equity, action at law and/or by other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Note or in aid of the exercise of any power granted in this Note, or may proceed to enforce the payment of this Note or to enforce any other legal or equitable right of the holder of this Note.
In case of any default under this Note, the Company will pay to the holder hereof reasonable collection costs and reasonable attorneys' fees, to the extent actually incurred.
11. Remedies Cumulative. No remedy herein conferred upon the holder of this Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.
12. Remedies Not Waived. No course of dealing between the Company and the holder of this Note or any delay on the part of the holder hereof in exercising any rights hereunder shall operate as a waiver of any right of the holder of this Note.
13. Subordination. (a) Anything contained in this Note to the contrary notwithstanding, the indebtedness evidenced by the Notes shall be subordinate and junior, to the extent set forth in the following paragraphs (A), (B), (C) and (D), to all Senior Indebtedness of the Company. "Senior Indebtedness "shall mean the principal of, premium, if any, and interest on (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law), and all reasonable fees, reimbursement and indemnity obligations, and all other obligations arising in connection with, any indebtedness for borrowed money of the
Company, contingent or otherwise i including guarantees of any such indebtedness of others), now outstanding or created, incurred, issued, assumed or guaranteed in the future, other than any such indebtedness as to which the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such indebtedness shall be subordinate in right of a to one or more categories or issues of indebtedness of the Company. Without uniting the generality of the foregoing, Senior Indebtedness shall include all Obligations (under and as defined in the Credit Agreement) and the Company's guarantee of Obligations (as defined in the Credit Agreement originally dated as of February 28, 1998, and amended and restated as of June 30, 1998, among the Company, Canadian Back Institute Limited, Canadian Imperial Bank of Commerce, as agent and the lenders named on the signature page thereof, as from time to time amended or increased or otherwise modified, together with any agreement entered into in connection with the restatement, increase, renewal, extension, restructuring, refunding or refinancing of the obligations under such credit agreement (the "Canadian Credit Agreement")); notwithstanding the foregoing, Senior Indebtedness shall include only such Obligations under the Credit Agreement and such guarantee of the Obligations under the Canadian Credit Agreement until such time as the same have been indefeasibly paid in full in cash and all obligations to provide financial accommodations under the Credit Agreement or the Canadian Credit Agreement have terminated. For purposes of this Note, "Credit Agreement" shall mean the Credit Agreement dated June 30, 1998 among the Company, the several financial institutions from time to time party thereto, Bank of America National Trust and Savings Association, as administrative agent or any successor agent (the "Senior Lender") and CIBC Inc. as syndication agent, as from time to time amended or increased or otherwise modified, together with any agreement entered into in connection with the restatement, increase, renewal, extension, restructuring, refunding or refinancing of the obligations under such credit agreement. Notwithstanding anything contained herein to the contrary, the indebtedness evidenced by the Notes shall not be subordinated and junior in right of payment to any claims of any trade creditors of the Company.
(A) In the event of any insolvency, bankruptcy, liquidation, reorganization or other similar proceedings, or any receivership proceedings in connection therewith, relative to the Company or its creditors or its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company, whether or not involving insolvency or bankruptcy proceedings, then all Senior Indebtedness shall first be paid in full in cash (or such payment is duly provided for), before any payment, whether on account of principal, interest or otherwise, is made upon the Notes.
(B) In any of the proceedings referred to in paragraph (A) above, any payment or distribution of any kind or character, whether in cash, property, stock or obligations which may be payable or deliverable in respect of the Notes shall be paid or delivered directly to the holders of Senior Indebtedness for application in payment thereof, unless and until all Senior Indebtedness shall have been paid in full in cash (or such payment is duly provided for).
(C) No payment shall be made, directly or indirectly, on account of the Notes (i) upon maturity of any Senior Indebtedness obligation, by lapse of time, acceleration (unless waived), or otherwise, unless and until all principal thereof and interest thereon and all other obligations in respect thereof shall first be paid in full in cash (or such payment is duly provided for), or (ii) upon the happening of any default in payment of any principal of, premium, if any, or interest on or any other amounts payable in respect of Senior Indebtedness when the same becomes due and payable whether at maturity or at a date fixed for prepayment or by declaration or otherwise (a "Senior Payment Default"), unless and until such Senior Payment Default shall have been cured or waived or shall have ceased to exist.
receive, retain, sue for or otherwise seek enforcement or collection of all amounts payable on account of principal of or interest on the Notes.
(b) Subject to the payment in full in cash of all Senior Indebtedness
(or the provision for such payment) as aforesaid, the holders of the Notes shall
be subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of any kind or character, whether in cash, property,
stock or obligations, which may be payable or deliverable to the holders of
Senior Indebtedness, until the principal of, and interest on, the Notes shall be
paid in full, and, as between the Company, its creditors other than the holders
of Senior Indebtedness, and the holders of the Notes, no such payment or
distribution made to the holders of Senior Indebtedness by virtue of this
Section 13 which otherwise would have been made to the holder of the Notes shall
be deemed a payment by the Company on account of the Senior Indebtedness, it
being understood that the provisions of this Section 13 are and are intended
solely for the purposes of defining the relative rights of the holders of the
Notes, on the one hand, and the holders of the Senior Indebtedness, on the other
hand. Subject to the rights, if any, under this Section 13 of holders of Senior
Indebtedness to receive cash, property, stock or obligations otherwise payable
or deliverable to the holders of the Notes, nothing herein shall either impair,
as between the Company and the holder of the Notes, the obligation of the
Company, which is unconditional and absolute, to pay to the holder thereof the
principal thereof and interest thereon in accordance with its terms or prevent
(except as otherwise specified therein) the holders of the Notes from exercising
all remedies otherwise permitted by applicable law or hereunder upon default
hereunder.
(c) If any payment or distribution of any character or any security, whether in cash, securities or other property; shall be received by any holders of the Notes in contravention of any of the terms hereof or before all the Senior Indebtedness obligations have been paid in full in cash (or such payment is duly provided for), such payment or distribution or security shall be received in trust for the benefit of, and shall be paid over or delivered and transferred to, the holders of the Senior Indebtedness at the time outstanding in accordance with the priorities then existing among such holders for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all such Senior Indebtedness in full in cash. In the event of the failure of any such holder to endorse or assign any such payment, distribution or security, each holder of any Senior Indebtedness is hereby irrevocably authorized to endorse or assign the name.
(d) The holders of the Notes unconditionally waive (i) all notices
which may be required, whether by statute, rule of law or otherwise, to preserve
intact any rights of any holder of any Senior Indebtedness, including, without
limitation, any demand, presentment and protest, proof of notice of nonpayment
under any Senior Indebtedness or the Credit Agreement, and notice of any failure
on the part of the Company to perform and comply with any covenant, agreement,
term or condition of any Senior Indebtedness, (ii) any right to the enforcement,
assertion or exercise by any holder of any Senior Indebtedness of any right,
power, privilege or remedy conferred in such Senior Indebtedness or otherwise,
(iii) any requirements of diligence on the part of any holder of any of the
Senior Indebtedness, (iv) any requirement on the part of
any holder of any Senior Indebtedness to mitigate damages resulting from any default under such Senior Indebtedness and (v) any notice of any sale, transfer or other disposition of' any Senior Indebtedness by any holder thereof.
(e) The obligations of the holder under these subordination provisions shall continue to be effective, or be reinstated, as the case may be, if at any time any payment in respect of any Senior Indebtedness, or any other payment to any holder of any Senior Indebtedness in its capacity as such, is rescinded or must otherwise be restored or returned by the holder of such Senior Indebtedness upon the occurrence of any proceeding referred to in paragraph 13(a)(A) or upon or as a result of the appoint of a receiver, intervenor or conservator of, or trustee or similar officer for, the Company or any substantial part of its property or otherwise, all as though such payment had not been made.
(f) Notwithstanding anything to the contrary herein, the Company
shall not at any time offer (and the holder hereof shall not at any time accept)
(i) any pledge of collateral or (ii) any guaranty by any parent or subsidiary of
the Company, in each case with respect to the obligations of the Company under
this Note.
14. Covenants Bind Successors and Assigns. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not.
15. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York.
16. Headings. The headings of the sections and paragraphs of this Note are inserted for convenience only and co not constitute a part of this Note.
17. Third Party Beneficiaries. The provisions of Section 13 are intended to be for the benefit of, and shall be enforceable directly by each holder of, the Senior Indebtedness.
IN WITNESS WHEREOF, SELECT MEDICAL CORPORATION has caused this Note to be signed in its corporate name by one of its officers thereunto duly authorized and to be dated as of the day and year specified above.
SELECT MEDICAL CORPORATION
By /s/ Robert Ortenzio --------------------------------- Name: Title: |
EXHIBIT 4.2
THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON DECEMBER 15, 1998, AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF DECEMBER 15,1998 AMONG THE ISSUER AND THE PURCHASERS NAMED THEREIN, AND THE ISSUER RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS WILL BE FURNISHED BY THE ISSUER TO THE HOLDER HEREOF UPON WRITTEN REQUEST WITHOUT CHARGE.
SELECT MEDICAL CORPORATION
10% Senior Subordinated Note
Due December 15, 2008
$30,000,000 Dated: February 9, 1999
SELECT MEDICAL CORPORATION, a Delaware corporation (hereinafter called the "Company"), for value received, hereby promises to pay to WCAS CAPITAL PARTNERS III, L.P. ("WCAS CF III") or its registered assigns, the principal sum of THIRTY MILLION DOLLARS ($30,000,000 on December 15, 2008. In addition, the Company hereby promises to pay to WCAS CP III, or its registered assigns, interest (computed on the basis of a 360-day year consisting of twelve 30-day months) from the date hereof on the unpaid principal amount hereof at the rate of 10% per annum quarterly in arrears on March 15, June 15, September 15, and December 15 of each year (each such date being an "Interest Payment Date"), commencing on March 15, 1999, until the principal amount hereof shall have become due and payable, whether at maturity or by acceleration or otherwise, and thereafter at the rate of 12% per annum on any overdue principal amount and (to the extent permitted by applicable law) on any overdue interest until paid.
All payments of principal and interest on this Note shall be in such coin or currency of the United States, of America as at (he time of payment and shall be legal tender for payment of public and private debts.
On any Interest Payment Date on or after December 15, 2003, the Company shall also pay such amount of accrued original issue discount on this Note as shall be necessary to ensure that this Note shall not be considered an "applicable high yield discount obligation" within the meaning of Section 163(i) of the Internal Revenue Code of 1986, as amended (the Code"), or any successor provision. In the event that any such payment of accrued original issue discount occurs, the amount of principal payable on this Note shall be reduced to the extent necessary to ensure that the yield to maturity on this Note (determined as provided by Section
1272 of the Code and the regulations thereunder and computed by taking into account any such payment of accrued original issue discount pursuant to this paragraph) shall equal the yield to maturity on this Note (computed as though no payment of accrued original issue discount had been made under this paragraph).
If any payment on this Note is due on a day which is not a Business Day, it shall be due on the next succeeding Business Day. For purposes of this Note, "Business Day" shall mean any day other than a Saturday, Sunday or a legal holiday or day on which banks are authorized or required to be closed in Chicago or New York.
1. The Note. This Note is issued pursuant to and is subject to the terms and provisions of the Securities Purchase Agreement dated as of December 15, 1998 (the "Purchase Agreement"), among the Company, Welsh, Carson, Anderson & Stowe VII, L.P. ("WCAS VII"), WCAS C? III, Golder, Thoma, Cressey, Rauner Fund V. L.P., GTCR Associates V and the other several purchasers named on Schedule I thereto. As used herein, the term "Note" or "Notes" includes the 10% Senior Subordinated Note due December 15, 2008 of the Company in the principal amount of $35,000,000 issued on the first closing date under the Purchase Agreement (the "First Issuance Date"), any 10% Senior Subordinated Notes due December 15, 2008 of the Company in the aggregate principal amount of up to $30,000,000 issued on subsequent closing dates pursuant to the Purchase Agreement and any 10% Senior Subordinated Note or Notes due December 15, 2008 subsequently issued upon exchange or transfer thereof.
2. Transfer, Etc. of Notes. The Company shall keep at its office or agency maintained as provided in paragraph (a) of Section 7 a register in which the Company shall provide for the registration of this Note and for the registration of transfer and exchange of this Note. The holder of this Note may, at its option, and either in person or by its duly authorized attorney, surrender the same for registration of transfer or exchange at the office or agency of the Company maintained as provided in Section 7 and, without expense to such holder (except for taxes or governmental charges imposed in connection therewith), receive in exchange therefor a Note or Notes each in such denomination or denominations (which shall be $100,000 or an integral multiple thereof) as such holder may request, dated as of the date to which interest has been paid on the Note or Notes so surrendered for transfer or exchange, for the same aggregate principal amount as the then unpaid principal amount of the Note or Notes so surrendered for transfer or exchange, and registered in the name of such person or persons as may be designated by such holder. Every Note presented or surrendered for registration of transfer or exchange shall be duly endorsed, or shall be accompanied by a written instrument of transfer, satisfactory in form to the Company, duly executed by the holder of such Note or its attorney duly authorized in writing. Every Note so made and delivered in exchange for such Note shall in all other respects be in the same form and have the same terms and legends thereon as such Note. No transfer or exchange of any Note shall be valid (x) unless made in the foregoing manner at such office or agency and (y) unless registered under the Securities Act of 1933, as amended, or any applicable state securities laws or unless an exemption from such registration is available.
3. Loss, Theft, Destruction or Mutilation of Note. Upon receipt of evidence satisfactory to the Company of the loss, theft, destruction or mutilation of this Note, arid, in the case of any such loss, theft or destruction, upon receipt of an affidavit of loss and an indemnity reasonably acceptable in form and substance to the Company from the holder thereof, or, in the case of any such mutilation, upon surrender and cancellation of this Note, the Company will make and deliver, in lieu of this Note, a new Note of like tenor and unpaid principal amount and dated as of the date to which interest has been paid on this Note.
4. Persons Deemed Owners; Holders. The Company may deem and treat the person in whose name this Note is registered as the owner and holder of this Note for the purpose of receiving payment of principal of 2nd interest on this Note and for all other purposes whatsoever, whether or not this Note shall be overdue. With respect to any Note at any time outstanding, the term "holder," as used herein, shall be deemed to mean the person in whose name such Note is registered as aforesaid at such time.
5. Prepayments.
6. Special Mandatory Prepayments. (a) Subject to any applicable restrictions contained in, or prior applications of funds required pursuant to, the Credit Agreement, within 30 days after the consummation of:
(i) a Change of Control, or
(ii) the issuance (other than by dividend or upon the exercise of employee stock options) of any capital stock or other ownership interest of the Company pursuant to offerings registered under the Securities Act of 1933, as amended (the "Securities Act"),
(b) In the event of a required prepayment of the indebtedness outstanding under the Notes pursuant to Section 6(a) hereof, the Company will, promptly but in no event later than 30 days after the consummation of the transaction requiring such prepayment, in good faith, (i) obtain any required consent of the holders of any Senior Indebtedness (as defined herein) to permit the prepayment contemplated by Section 6(a), or (ii) repay some or all of such Senior Indebtedness to the extent necessary (including, if necessary, payment in full of such
Senior Indebtedness and payment of any prepayment premiums, fees, expenses or penalties) to permit the prepayment contemplated by Section 6(a) without such consent. Failure to comply with the foregoing shall not relieve the Company from its obligations pursuant to paragraph (a) above.
For purposes of this Section 6, (i) the terms "person" and "group"
shall have the meaning set forth in Section 13(d)(3) of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), whether or not applicable, (ii)
the term "beneficial owner" shall have the meaning set forth in Rules 13d-3 and
13d-5 under the Exchange Act, whether or not applicable, except that a person
shall be deemed to have "beneficial ownership" of all shares that any such
person has the right to acquire, whether such right is exercisable immediately
or only after the passage of time or upon the Occurrence of certain events,
(iii) any "person" or "group" will be deemed to beneficially own any Voting
Stock of the Company so long as such person or group beneficially owns, directly
or indirectly, in the aggregate a majority of the Voting Stock of a registered
holder of the Voting Stock of the Company, and (iv) the term "Principal
Stockholders" shall mean any of WCAS VII, WCAS Healthcare Partners L.P., WCAS CP
III, Golder, Thoma, Cressey, Rauner Fund V, L.P., GTCR Associates V, GTCR Fund
VI, L.P., GTCR Executive Fund, L.P., GTCR Associates, VI, Bryan C. Cressey,
Thoma Cressey Fund VI, L.P., Select Partners, L.P., Select Healthcare Investors
I, L.P., Select Investments H, L.P., Rocco A. Ortenzio or Robert A. Ortenzio
and, as applicable, any general partners thereof (including any of the general
partners or managing members of such general partners) and any
other investment limited partnerships or other investment entities under common control therewith.
7. Covenants Relating to the Notes. The Company covenants and agrees that so long as the Notes shall be outstanding and in the case of paragraphs (k) through (n) below, so long as five million dollars ($5,000,000) of aggregate principal amount of the Notes is outstanding:
abandonment or termination is, in the good faith business judgment of the Company, in the best interests of the Company and nit disadvantageous to the holder of this Note.
at law or in equity or by or before any governmental instrumentality or agency which, if adversely determined, would materially impair the right' of the Company to carry on its business substantially as now or then conducted, or would reasonably be expected to have a material adverse effect on the properties, assets, financial condition, prospects, operating results or business of the Company and its subsidiaries taken as a whole, give notice to the holder of this Note, specifying the nature of such event.
(i) the Company is the surviving corporation or the entity formed by or surviving any such consolidation or merger (if other than the Company) or to which such sale or other disposition shall have been made is a corporation organized or existing under the laws of the United States of any state thereof or the District of Columbia;
(ii) the surviving corporation or other entity (if other than the Company) shall expressly and effectively assume in writing the due and punctual payment of the principal of and interest on this Note, according to its tenor, and the due and punctual performance and observance of all the terms, covenants, agreements and conditions of this Note to be performed or observed by the Company to the same extent as if such surviving corporation had been the original maker of this Note;
(iii) the Company or such other corporation or other entity shall not otherwise be in default in the performance or observance of any covenant, agreement or condition of this Note; and
(iv) the holder of' his Note, shall have received, in connection therewith, an opinion of counsel for the Company (or other counsel satisfactory to the holder), in form and substance satisfactory to the holder, to the effect that any
such consolidation, merger, sale or conveyance and any such assumption complies with the provisions of this paragraph (j).
Notwithstanding anything to the contrary herein, in no event shall a foreclosure on any collateral pledged in respect of obligations arising under or in connection with the Credit Agreement be deemed to constitute a violation of the Company's obligations under this paragraph (j).
par value (the "Preferred Stock"), (C) dividends, distributions or payments by any subsidiary to the Company or to any wholly owned subsidiary of the Company, (D) repurchases of Put Securities, (E) distributions pro rata to the stockholders, members, partners or other equity holders of less than wholly owned subsidiaries of the Company approved by representatives to the Company's Board of Directors designated by WCAS Vii or any of its affiliates, or (F) repurchases of shares of any class of stock of the Company from employees upon their termination of employment, or (ii) except as permitted under the Credit Agreement, make any payments of principal, or retire, redeem, purchase or otherwise acquire any Indebtedness other than any Senior Indebtedness or the Notes (such declarations, payments, purchases, redemptions, retirements, acquisitions or distributions being herein called "Restricted Payments").
8. Modification by Holders; Waiver. The Company may, with the written consent of the holders of not less than a majority in principal amount of the Notes then outstanding, modify the terms and provisions of this Note or the rights of the holders of this Note or the obligations of the Company hereunder, and the observance by the Company of any term or provision of this Note may be waived with the written consent of the holders of not less than a majority in principal amount of the Notes then outstanding.
Any such modification or waiver shall apply equally to each holder of the Notes and shall be binding upon them, upon each future holder of any Note and upon the Company, whether or not such Note shall have been marked to indicate such modification or waiver, but any Note issued thereafter shall bear a notation referring to any such modification or waiver. Promptly after obtaining the written consent of the holders as herein provided, the Company shall transmit a copy of such modification or waiver to the holders of the Notes at the time outstanding.
9. Events of Default. If any one or more of the following events, herein called "Events of Default, "shall occur (for any reason whatsoever, and whether such occurrence shall, on the part of the Company or any of its subsidiaries, be voluntary or involuntary or come
about or be effected by operation of law or pursuant to or in compliance with any judgment, decree or order of a court of competent jurisdiction or any order, rule or regulation of any administrative or other governmental authority) and such Event of Default shall be continuing:
(i) default shall be made in the payment of the principal of this Note when and as the same shall become due and payable, whether at maturity or at a date fixed for prepayment or repurchase (including default of any optional prepayment in accordance with the requirements of Section 5, on any special mandatory prepayment in accordance with the requirements of Section 6, as the case may be) or by acceleration or otherwise; or
(ii) default shall be made in the payment of any installment of interest on this Note according to its terms when and as the same shall become due and payable, and such default shall continue for 5 Business Days; or
(iii) default shall be made in the due observance or performance of any covenant, condition or agreement on me part of the Company contained herein in Section 7(j); or
(iv) default shall be made in the due observance or performance of any other covenant, condition or agreement on the part of the Company to be observed or performed pursuant to the terms hereof or of the Purchase Agreement, and such default shall continue for 10 Business Days after written notice thereof from holders of not less than 33-1/3% of the aggregate principal amount of the Notes at the time outstanding, specifying such default and requesting that the same be remedied; or
(v) the entry of a decree on order for relief by a court having jurisdiction in the premises in respect of the Company or any of its subsidiaries in any involuntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar laws, or appointing a receiver, liquidator, assignee, custodian, trustee, sequestrator (or similar official) of the Company or any of its subsidiaries for any substantial part of any of their property or ordering the winding-up or liquidation of any of their affairs and the continuance of any such decree or order unstayed and in effect for a period of 30 consecutive days; or
(vi) the commencement by the Company or any of its material subsidiaries of a voluntary case under the federal bankruptcy laws, as now constituted or hereafter amended, or any other applicable federal or state bankruptcy, insolvency or other similar laws, or the consent by any of them to the appointment of or taking possession by a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Company or any of its material subsidiaries for any substantial part of any of their property, or the making by any of them of any general assignment for the benefit of creditors, or
the failure of the Company or of any of its material subsidiaries generally to pay its debts as such debts become due, or the taking of corporate action by the Company or any of its material subsidiaries in furtherance of or which might reasonably be expected to result in any of the foregoing; or
(vii) a default or an event of default as defined in any instrument evidencing or under which the Company or any of its material subsidiaries has outstanding at the time any Indebtedness in excess of $1,000,000 in aggregate principal amount shall occur and as a result thereof the maturity of any such Indebtedness shall have been accelerated so that the same shall have become due and payable prior to the date on which the same would otherwise have become due and payable and such acceleration shall not have been rescinded or annulled within 20 days; or
(viii) final judgment (not reimbursed by insurance policies of the Company or any of its subsidiaries) for the payment of money in excess of $1,000,000 shall be rendered against the Company or any of its subsidiaries and the same shall remain undischarged for a period of 30 days during which execution shall not be effectively stayed;
Without limiting the foregoing, the Company hereby waives any right to trial by jury in any legal proceeding related in any way to this Note and agrees that any such proceeding may, if the holder so elects, be brought and enforced in the Supreme Court of the State of New York for New York County or the United States District Court for the Southern District of New York and the Company hereby waives any objection to jurisdiction or venue in any such proceeding commenced in such court. The Company further agrees that any process required to
be served on it for purposes of any such proceeding may be served on it, with
the same effect as personal service on it within the State of New York, by
registered mail addressed to it at its office or agency set forth in paragraph
(a) of Section 7 for purposes of notices hereunder.
10. Suits for Enforcement. Subject to the provisions of Section 13 of this Note, in case any one or more of the Events of Default specified in Section 9 of this Note shall happen and be continuing (subject to any applicable cure period expressly set forth herein), the holder of this Note may proceed to protect and enforce its rights by suit in equity, action at law and/or by other appropriate proceeding, whether for the specific performance of any covenant or agreement contained in this Note or in aid of the exercise of any power granted in this Note, or may proceed to enforce the payment of this Note or to enforce any other legal or equitable right of the holder of this Note.
In case of any default under this Note, the Company will pay to the holder hereof reasonable collection costs and reasonable attorneys' fees, to the extent actually incurred.
11. Remedies Cumulative. No remedy herein conferred upon the holder of this Note is intended to be exclusive of any other remedy and each and every such remedy shall be cumulative and shall be in addition to every other remedy given hereunder or now or hereafter existing at law or in equity or by statute or otherwise.
12. Remedies Not Waived. No course of dealing between the Company and the holder of this Note or any delay on the part of the holder hereof in exercising any rights hereunder shall operate as a waiver of any right of the holder of this Note.
13. Subordination. (a) Anything contained in this Note to the contrary notwithstanding, the indebtedness evidenced by the Notes shall be subordinate and junior, to the extent set forth in the following paragraphs (A), (B), (C) and (D), to all Senior Indebtedness of the Company. "Senior Indebtedness" shall mean the principal of, premium, if any, and interest on (including any interest accruing subsequent to the filing of a petition of bankruptcy at the rate provided for in the documentation with respect thereto, whether or not such interest is an allowed claim under applicable law), and all reasonable fees, reimbursement and indemnity obligations, and all other obligations arising in connection with any indebtedness for borrowed money of the Company, contingent or otherwise (including guarantees of any such indebtedness of others), now outstanding or created, incurred, issued, assumed or guaranteed in the future, other than any such indebtedness as to which the instrument creating or evidencing the same or pursuant to which the same is outstanding expressly provides that such indebtedness shall be subordinate in right of payment to one or more categories or issues of indebtedness of the Company. Without limiting the generality of the foregoing, Senior Indebtedness shall include all Obligations (under and as defined in the Credit Agreement) and the Company's guarantee of Obligations (as defined in the Credit Agreement originally dated as of February 28, 1998, and amended and restated as of June 30, 1998, among the Company, Canadian Back Institute Limited, Canadian Imperial Bank of Commerce, as agent and the lenders named on the signature page thereof, as from time to time amended or increased or otherwise modified, 'together with any agreement entered into in connection with the restatement, increase, renewal, extension, restructuring, refunding or
refinancing of the obligations under such credit agreement (the "Canadian Credit Agreement")); notwithstanding the foregoing, Senior Indebtedness shall include only such Obligations under the Credit Agreement and such guarantee of the Obligations under the Canadian Credit Agreement until such time as the same have been indefeasibly paid in full in cash and all obligations to provide financial accommodations under the Credit Agreement or the Canadian Credit Agreement have terminated. For purposes of this Note, "Credit Agreement" shall mean the Credit Agreement dated June 30, 1998 among the Company, the several financial institutions from time to time party thereto, Bank of America National Trust and Savings Association, as administrative agent or any successor agent (the "Senior Lender") and CIBC Inc. as syndication agent, as from time to time amended or increased or otherwise modified, together with any agreement entered into in connection with the restatement, increase, renewal, extension, restructuring, refunding or refinancing of the obligations under such credit agreement. Notwithstanding anything contained herein to the contrary, the indebtedness evidenced by the Notes shall not be subordinated and junior in right of payment to any claims of any trade creditors of the Company.
(A) In the event of any insolvency, bankruptcy, liquidation, reorganization or other similar proceedings, or any receivership proceedings in connection therewith, relative to the Company or its creditors or its property, and in the event of any proceedings for voluntary liquidation, dissolution or other winding up of the Company, whether or not involving insolvency or bankruptcy proceedings, then all Senior Indebtedness shall first be paid in full in dash (or such payment is duly provided for), before any payment, whether on account of principal, interest or otherwise, is made upon the Notes.
(B) In any of the proceedings referred to in paragraph (A) above, any payment or distribution of any kind or character whether in cash, property, stock or obligations which may be payable or deliverable in respect of the Notes shall be paid or delivered directly to the holders of Senior Indebtedness for application in payment thereof, unless and until all Senior Indebtedness shall have been paid in full in cash (or such payment is duly provided for).
(C) No payment shall be made, directly or indirectly, on account of the Notes (i) upon maturity of any Senior Indebtedness obligation, by lapse of time, acceleration (unless waived), or otherwise, unless and until all principal thereof and interest thereon and all other obligations in respect thereof shall first be paid in full in cash (or such payment is duly provided for), or (ii) upon the happening of any default in payment of any principal, premium, if any, or interest on or any other amounts payable in respect of Senior Indebtedness when the same becomes due and payable whether at maturity or at a date fixed for prepayment or by declaration or otherwise (a "Senior Payment Default"), unless and until such Senior Payment Default shall have been cured or waived or shall have ceased to exist.
(b) Subject to the payment in full in cash of all Senior Indebtedness
(or the provision for such payment) as aforesaid, the holders of the Notes shall
be subrogated to the rights of the holders of Senior Indebtedness to receive
payments or distributions of any kind or character, whether in cash, property
stock or obligations, which may be payable or deliverable to the holders of
Senior Indebtedness, until the principal of, and interest on, the Notes shall be
paid in full, and, as between the Company, its creditors other than the holders
of Senior Indebtedness, and the holders of the Notes, no such payment or
distribution made to the holders of Senior Indebtedness by virtue of this
Section 13 which otherwise would have been made to the holder of
the Notes shall be deemed a payment by the Company on account of the Senior
Indebtedness, it being understood that the provisions, of this Section 13 are
and are intended solely for the purposes of defining the relative rights of the
holders of the Notes, on the one hand, and the holders of the Senior
Indebtedness, on the other hand. Subject to the rights, if any, under this
Section 13 of holders of Senior Indebtedness to receive cash, property, stock or
obligations otherwise payable or deliverable to the holders of the Notes,
nothing herein shall either impair, as between the Company and the holder of the
Notes, the obligation of the Company, which is unconditional and absolute, to
pay to the holder thereof the principal thereof and interest thereon in
accordance with its terms or prevent (except as otherwise specified therein) the
holders of the Notes from exercising all remedies otherwise permitted by
applicable law or hereunder upon default hereunder.
(c) If any payment or distribution of any character or any security, whether in cash, securities or other property, shall be received by any holders of the Notes in contravention of any of the terms hereof or before all the Senior Indebtedness obligations have been paid in fill in cash (or such payment is duly provided for), such payment or distribution or security shall be received in trust for the benefit of, arid shall be paid over or delivered and transferred to, the holders of the Senior Indebtedness at the time outstanding in accordance with the priorities then existing among such holders for application to the payment of all Senior Indebtedness remaining unpaid, to the extent necessary to pay all such Senior Indebtedness in full in cash. In the event of the failure of any such holder to endorse or assign any such payment, distribution or security, each holder of any Senior Indebtedness is hereby irrevocably authorized to endorse or assign the name.
(d) The holders of the Notes unconditionally waive (i) all notices
which may be required, whether by statute, rule of law or otherwise, to preserve
intact any rights of any holder of any Senior Indebtedness, including, without
limitation, any demand, presentment and protest, proof of notice of nonpayment
under any Senior Indebtedness or the Credit Agreement, and notice of any failure
on the part of the Company to perform and comply with any covenant, agreement,
term or condition of any Senior Indebtedness, (ii) any right to the enforcement,
assertion or exercise by any holder of any Senior Indebtedness of any right,
power, privilege or remedy conferred in such Senior Indebtedness or otherwise,
(iii) any requirements of diligence on the part of any holder of any of the
Senior Indebtedness, (iv) any requirement on the part of any holder of any
Senior Indebtedness to mitigate damages resulting from any default under such
Senior Indebtedness and (v) any notice of any sale, transfer or other
disposition of any Senior Indebtedness by any holder thereof.
(e) The obligation of the holder under these subordination provisions shall continue to be effective, or be reinstated, as the case may be, if at any time any payment in respect of any Senior Indebtedness, or any other payment to any holder of any Senior Indebtedness in its capacity as such, is rescinded or must otherwise be restored or returned by the holder of such Senior Indebtedness upon the occurrence of any proceeding referred to in paragraph 13(a)(A) or upon or as a result of the appointment of a receiver, intervenor or
conservator of, or trustee or similar officer for, the Company or any substantial part of its property or otherwise, all as though such payment had not been made.
(f) Notwithstanding anything to the contrary herein, the Company
shall not at any time offer (and the holder hereof shall not at any time accept)
(i) any pledge of collateral or (ii) any guaranty by any parent or subsidiary of
the Company, in each case with respect to the obligations of the Company under
this Note.
14. Covenants Bind Successors and Assigns. All the covenants, stipulations, promises and agreements in this Note contained by or on behalf of the Company shall bind its successors and assigns, whether so expressed or not.
15. Governing Law. This Note shall be governed by and construed in accordance with the laws of the State of New York.
16. Headings. The headings of the sections and paragraphs of this Note are inserted for convenience only and do not constitute a part of this Note.
17. Third Party Beneficiaries. The provisions of Section 13 are intended to be for the benefit of, and shall be enforceable directly by each holder of, the Senior Indebtedness.
IN WITNESS WHEREOF, SELECT MEDICAL CORPORATION has caused this Note to be signed in its corporate name by one of its officers thereunto duly authorized and to be dated as of the day and year specified above.
SELECT MEDICAL CORPORATION
By /s/ Michael E. Tarvin --------------------------------- Name: Title: |
Exhibit 10.1
THIS AGREEMENT is made as of February 5, 1997, by and among Select Medical Corporation, a Delaware corporation (the "Company"), Golder, Thoma, Cressey, Rauner Fund V, L.P., a Delaware limited partnership ("GTCR"), Welsh, Carson, Anderson & Stowe VII, L.P., a Delaware limited partnership, and certain of its partners (collectively, together with GTCR, the "Investors"), Rocco Ortenzio and Robert Ortenzio (each, an "Executive"), Select Investments H, a Pennsylvania general partnership (the "Pennsylvania Partnership"), and Select Partners, L.P., a Delaware limited partnership (the "Delaware Partnership").
The Company and the Investors are parties to a Purchase Agreement of even date herewith (the "Purchase Agreement"). In order to induce the Investors to enter into the Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the Closing under the Purchase Agreement. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in Section 7 hereof.
The parties hereto agree as follows:
that in any event the Company shall pay all Registration Expenses in connection with any registration initiated as a Company-paid Long-Form Registration whether or not it has become effective and whether or not such registration has counted as one of the permitted Company-paid Long-Form Registrations.
Registrable Securities initially requesting such Demand Registration shall be entitled to withdraw such request and, if such request is withdrawn, such Demand Registration shall not count as one of the permitted Demand Registrations hereunder and the Company shall pay all Registration Expenses in connection with such registration. The Company may delay a Demand Registration hereunder only once in any twelve-month period.
an orderly manner in such offering within a price range acceptable to the holders of a majority of the Registrable Securities to be included in such registration, the Company shall include in such registration (1) first, the securities requested to be included therein by the holders requesting such registration, (ii) second, the Registrable Securities requested to be included in such registration, pro rata among the holders of such Registrable Securities on the basis of the number of shares owned by each such holder, and (iii) third, other securities requested to be included in such registration.
(a) prepare and file with the Securities and Exchange Commission a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective (provided that before filing a registration statement or prospectus or any amendments or supplements thereto, the Company shall furnish to the counsel selected by the holders of a majority of the Registrable Securities covered by such registration statement copies of all such documents proposed to be filed, which documents shall be subject to the review and comment of such counsel);
(b) notify each holder of Registrable Securities of the effectiveness of each registration statement filed hereunder and prepare and file with the Securities and Exchange Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for a period of not less than 180 days and comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement during such period in accordance with the intended methods of disposition by the sellers thereof set forth in such registration statement;
(c) furnish to each seller of Registrable Securities such number of copies of such registration statement, each amendment and supplement thereto, the prospectus included in such registration statement (including each preliminary prospectus) and such other documents as such seller may reasonably request in order to facilitate the disposition of the Registrable Securities owned by such seller;
(d) use its best efforts to register or qualify such Registrable Securities under such other securities or blue sky laws of such jurisdictions as any seller reasonably requests and do any and all other acts and things which may be reasonably necessary or advisable to enable such seller to consummate the disposition in such jurisdictions of the Registrable Securities owned by such seller (provided that the Company shall not be required to (i) qualify generally to do business in any jurisdiction where it would not otherwise be required to qualify but for this subparagraph, (ii) subject itself to taxation in any such jurisdiction or (iii) consent to general service of process in any such jurisdiction);
(e) notify each seller of such Registrable Securities, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event as a result of which the prospectus included in such registration statement contains an untrue statement of a material fact or omits any fact necessary to make the statements therein not misleading, and, at the request of any such seller, the Company shall prepare a supplement or amendment to such prospectus so that, as thereafter delivered to the purchasers of such Registrable Securities, such prospectus shall not contain an untrue statement of a material fact or omit to state any fact necessary to make the statements therein not misleading;
(f) cause all such Registrable Securities to be listed on each securities exchange on which similar securities issued by the Company are then listed and, if not so listed, to be listed on the NASD automated quotation system and, if listed on the NASD automated quotation system, use its best efforts to secure designation of all such Registrable Securities covered by such registration statement as a NASDAQ "national market system security" within the meaning of Rule I lAa2-1 of the Securities and Exchange Commission or, failing that, to secure NASDAQ authorization for such Registrable Securities and, without limiting the generality of the foregoing, to arrange for at least two market makers to register as such with respect to such Registrable Securities with the NASD;
(g) provide a transfer agent and registrar for all such Registrable Securities not later than the effective date of such registration statement;
(h) enter into such customary agreements (including underwriting agreements in customary form) and take all such other actions as the holders of a majority of the Registrable Securities being sold or the underwriters, if any, reasonably request in order to expedite or facilitate the disposition of such Registrable Securities (including effecting a stock split or a combination of shares);
(i) make available for inspection by any seller of Registrable Securities, any underwriter participating in any disposition pursuant to such registration statement and any
attorney, accountant or other agent retained by any such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors, employees and independent accountants to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement;
(j) otherwise use its best efforts to comply with all applicable rules
and regulations of the Securities and Exchange Commission, and make available to
its security holders, as soon as reasonably practicable, an earnings statement
covering the period of at least twelve months beginning with the first day of
the Company's first full calendar quarter after the effective date of the
registration statement, which earnings statement shall satisfy the provisions of
Section 11(a) of the Securities Act and Rule 158 thereunder;
(k) permit any holder of Registrable Securities which holder, in its sole and exclusive judgment, might be deemed to be an underwriter or a controlling person of the Company, to participate in the preparation of such registration or comparable statement and to require the insertion therein of material, furnished to the Company in writing, which in the reasonable judgment of such holder and its counsel should be included;
(l) in the event of the issuance of any stop order suspending the effectiveness of a registration statement, or of any order suspending or preventing the use of any related prospectus or suspending the qualification of any common stock included in such registration statement for sale in any jurisdiction, the Company shall use its best efforts promptly to obtain the withdrawal of such order;
(m) use its best efforts to cause such Registrable Securities covered by such registration statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the sellers thereof to consummate the disposition of such Registrable Securities; and
(n) obtain a cold comfort letter from the Company's independent public accountants in customary form and covering such matters of the type customarily covered by cold comfort letters as the holders of a majority of the Registrable Securities being sold reasonably request (provided that such Registrable Securities constitute at least 10% of the securities covered by such registration statement).
(a) All expenses incident to the Company's performance of or compliance with this Agreement, including without limitation all registration and filing fees, fees and expenses of compliance with securities or blue sky laws, printing expenses, messenger and delivery expenses, fees and disbursements of custodians, and fees and disbursements of counsel for the Company and all independent certified public accountants, underwriters (excluding discounts and commissions) and other Persons retained by the Company (all such expenses being herein called "Registration Expenses"), shall be borne as provided in this Agreement, except that
the Company shall, in any event, pay its internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expense of any annual audit or quarterly review, the expense of any liability insurance and the expenses and fees for listing the securities to be registered on each securities exchange on which similar securities issued by the Company are then listed or on the NASD automated quotation system.
(b) In connection with each Demand Registration and each Piggyback Registration, the Company shall reimburse the holders of Registrable Securities included in such registration for the reasonable fees and disbursements of one counsel chosen by the holders of a majority of the Registrable Securities included in such registration and for the reasonable fees and disbursements of each additional counsel retained by any holder of Registrable Securities for the purpose of rendering a legal opinion on behalf of such holder in connection with any underwritten Demand Registration or Piggyback Registration.
(c) To the extent Registration Expenses are not required to be paid by the Company, each holder of securities included in any registration hereunder shall pay those Registration Expenses allocable to the registration of such holder's securities so included, and any Registration Expenses not so allocable shall be borne by all sellers of securities included in such registration in proportion to the aggregate selling price of the securities to be so registered.
(a) The Company agrees to indemnify, to the extent permitted by law, each holder of Registrable Securities, its officers and directors and each Person who controls such holder (within the meaning of the Securities Act) against all losses, claims, damages, liabilities and expenses caused by any untrue or alleged untrue statement of material fact contained in any registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as the same are caused by or contained in any information furnished in writing to the Company by such holder expressly for use therein or by such holder's failure to deliver a copy of the registration statement or prospectus or any amendments or supplements thereto after the Company has furnished such holder with a sufficient number of copies of the same. In connection with an underwritten offering, the Company shall indemnify such underwriters, their officers and directors and each Person who controls such underwriters (within the meaning of the Securities Act) to the same extent as provided above with respect to the indemnification of the holders of Registrable Securities.
(b) In connection with any registration statement in which a holder of Registrable Securities is participating, each such holder shall furnish to the Company in writing such information and affidavits as the Company reasonably requests for use in connection with any such registration statement or prospectus and, to the extent permitted by law, shall indemnify the Company, its directors and officers and each Person who controls the Company (within the meaning of the Securities Act) against any losses, claims, damages, liabilities and expenses
resulting from any untrue or alleged untrue statement of material fact contained in the registration statement, prospectus or preliminary prospectus or any amendment thereof or supplement thereto or any omission or alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, but only to the extent that such untrue statement or omission is contained in any information or affidavit so furnished in writing by such holder; provided that the obligation to indemnify shall be individual, not joint and several, for each holder and shall be limited to the lesser of (1) the net amount of proceeds received by such holder from the sale of Registrable Securities pursuant to such registration statement or (2) such holder's pro rata share (based on ownership of capital stock) of such indemnifiable losses, claims, damages, liabilities and/or expenses.
(c) Any Person entitled to indemnification hereunder shall (i) give prompt written notice to the indemnifying party of any claim with respect to which it seeks indemnification (provided that the failure to give prompt notice shall not impair any Person's right to indemnification hereunder to the extent such failure has not prejudiced the indemnifying party) and (ii) unless in such indemnified party's reasonable judgment a conflict of interest between such indemnified and indemnifying parties may exist with respect to such claim, permit such indemnifying party to assume the defense of such claim with counsel reasonably satisfactory to the indemnified party. If such defense is assumed, the indemnifying party shall not be subject to any liability for any settlement made by the indemnified party without its consent (but such consent shall not be unreasonably withheld). An indemnifying party who is not entitled to, or elects not to, assume the defense of a claim shall not be obligated to pay the fees and expenses of more than one counsel for all parties indemnified by such indemnifying party with respect to such claim, unless in the reasonable judgment of any indemnified party a conflict of interest may exist between such indemnified party and any other of such indemnified parties with respect to such claim.
(d) The indemnification provided for under this Agreement shall remain in full force and effect regardless of any investigation made by or on behalf of the indemnified party or any officer, director or controlling Person of such indemnified party and shall survive the transfer of securities. The Company also agrees to make such provisions, as are reasonably requested by any indemnified party, for contribution to such party in the event the Company's indemnification is unavailable for any reason.
undertake any indemnification obligations to the Company or the underwriters with respect thereto, except as otherwise provided in Section 6 hereof.
(d) Unless otherwise stated, other capitalized terms contained herein have the meanings set forth in the Purchase Agreement.
registered mail, return receipt requested and postage prepaid. Such notices, demands and other communications shall be sent to the Investors and to each Executive at the addresses indicated on the Schedule of Holders and to the Company at the address of its corporate headquarters or to such other address or to the attention of such other person as the recipient party has specified by prior written notice to the sending party.
* * * * *
IN WITNESS WHEREOF, the parties have executed this Registration Agreement as of the date first written above.
SELECT MEDICAL CORPORATION
By: /s/ Rocco A. Ortenzio --------------------------------- Its: --------------------------------- |
GOLDER, THOMA, CRESSEY, RAUNER
FUND V, L.P.
By: GTCR V, L.P.
Its: General Partner
By: Golder, Thoma, Cressey, Rauner, Inc.
Its: General Partner
WELSH, CARSON, ANDERSON & STOWE
VII, L.P.
By: /s/ Laura Van Buren --------------------------------- Its: --------------------------------- |
WELSH, CARSON, ANDERSON & STOWE
HEALTHCARE PARTNERS, L.P.
By: /s/ Laura Van Buren --------------------------------- Its: --------------------------------- |
/s/ Laura Van Buren --------------------------------------- Bruce Anderson /s/ Laura Van Buren --------------------------------------- Russell Carson /s/ Laura Van Buren --------------------------------------- Patrick Welsh /s/ Laura Van Buren --------------------------------------- Richard Stowe /s/ Laura Van Buren --------------------------------------- Andrew Paul /s/ Laura Van Buren --------------------------------------- Thomas McInerney /s/ Laura Van Buren --------------------------------------- Laura VanBuren /s/ Laura Van Buren --------------------------------------- James Hoover /s/ Laura Van Buren --------------------------------------- Robert Minicucci /s/ Laura Van Buren --------------------------------------- Anthony De Nicola /s/ Laura Van Buren --------------------------------------- Paul Queally |
/s/ David F. Bellet -------------------------------------- David F. Bellet |
MSTC, custodian FBO the IRA/Rollover of James B. Hoover
By: /s/ James B. Hoover --------------------------------- |
/s/ Rocco A. Ortenzio --------------------------------------- Rocco A. Ortenzio /s/ Robert A. Ortenzio --------------------------------------- Robert A. Ortenzio |
SELECT INVESTMENTS I
By: /s/ Rocco A. Ortenzio --------------------------------- Its: --------------------------------- |
SELECT PARTNERS, L.P.
By: /s/ Rocco A. Ortenzio --------------------------------- Its: --------------------------------- |
Golder, Thoma, Cressey, Rauner Fund V, L.P.
6100 Sears Tower
Chicago, IL 60606-6402
Attention: Bryan C. Cressey
Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Attention: James B. Hoover
Welsh, Carson, Anderson & Stowe
Healthcare Partners, L.P.
320 Park Avenue
New York, New York 10022
Attention: James B. Hoover
Bruce Anderson
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Russell Carson
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Patrick Welsh
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Richard Stowe
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Andrew Paul
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Thomas McInerney
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Laura VanBuren
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
James Hoover
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Robert Minicucci
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Anthony De Nicola
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Paul Queally
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
David F. Bellet
c/o Crown Advisors Ltd.
60 East 42nd Street, Suite 3405
New York, New York 10165
MSTC, custodian FBO the IRA/Rollover of
James B. Hoover
c/o Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Rocco Ortenzio
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Robert Ortenzio
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Select Investments II
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Select Partners, L.P.
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Exhibit 10.2
AMENDMENT NO. 1 TO REGISTRATION AGREEMENT
AMENDMENT NO. 1 TO REGISTRATION AGREEMENT, dated as of December 15, 1998 (the "Amendment"), by and among Select Medical Corporation, a Delaware corporation (the "Company"), the stockholders of the Company whose names appear in Schedule I annexed hereto (collectively, the "Original Stockholders"), and the additional stockholders of the Company whose names appear in Schedule II annexed hereto (collectively, the "Additional Stockholders"), amending the Registration Agreement dated as of February 5, 1997 (the "Agreement") by and among the Company, the Original Stockholders and the other stockholders of the Company named as parties thereto at the foot thereof.
WHEREAS, the Company, the Additional Stockholders and certain of the Original Stockholders (collectively, the "December 1998 Investors") are parties to a Securities Purchase Agreement dated as of December 15, 1998, providing, among other things, for the sale to such December 1998 Investors of an aggregate 21,224,489 shares (the "December 1998 Shares") of the Company's Common Stock, par value $.01 (the "Common Stock"); and
WHEREAS, the Company and the Original Stockholders entered into the Agreement in order, among other things, to specify certain rights and obligations of each of the parties thereto with respect to the shares of Common Stock held by each of them; and
WHEREAS, the Agreement may be amended by the written consent of the Company and the holders of 66.67% of the Registrable Securities (as defined therein); and
WHEREAS, the Original Stockholders collectively own more than 66.67% of the outstanding Registrable Securities; and
WHEREAS, the Company and the Original Stockholders now desire to amend the Agreement in the manner set forth below in order, among other things, to include the December 1998 Shares as Registrable Securities under the terms of the Agreement and to include the Additional Stockholders as parties to the Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
by such Additional Stockholder's execution of this Amendment, each of such Additional Stockholders agrees to comply with and be bound by all of the provisions of the Agreement as an Investor thereunder, as if an original signatory thereto. For purposes of the Agreement, the December 1998 Shares shall be deemed to be included in the term "Investor Registrable Securities".
"The Company and certain of the Investors are parties to a Purchase Agreement, dated as of February 5, 1997 (the "1997 Purchase Agreement"). The Company, the Investors and the Additional Stockholders (as such term is defined in Amendment No. 1 to Registration Agreement dated as of December 15, 1998 among the Company and the parties thereto (the "Amendment")) are parties to a Securities Purchase Agreement, dated as of December 15, 1998 (the "1998 Purchase Agreement" and, collectively with the 1997 Purchase Agreement, the "Purchase Agreements" or the "Purchase Agreement"). In order to induce certain of the Investors to enter into the 1997 Purchase Agreement and the Investors and the Additional Stockholders to enter into the 1998 Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement, as amended by the Amendment. The execution and delivery of this Agreement is a condition to the Closing under the 1997 Purchase Agreement. The execution and delivery of the Amendment is a condition to the Closing under the 1998 Purchase Agreement. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in Section 7 hereof."
"Unless otherwise stated, other capitalized terms contained herein have the meanings set forth in the 1997 Purchase Agreement."
IN WITNESS WHEREOF, the Company, the Original Stockholders and the Additional Stockholders have executed this Amendment as of the day and year first above written.
SELECT MEDICAL CORPORATION
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
ORIGINAL STOCKHOLDERS:
GOLDER, THOMA, CRESSEY, RAUNER FUND V, L.P.
By GTCR V, L.P., General Partner
By Golder, Thoma, Cressey, Rauner, Inc., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Title: |
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners, L.P., General Partner
By /s/ Laura Van Buren --------------------------------- Name: Title: |
WCAS HEALTHCARE PARTNERS, L.P.
By WCAS HC Partners, General Partner
By /s/ Russell L. Carson --------------------------------- Name: Title: |
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
By /s/ Laura Van Buren --------------------------------- Laura M. VanBuren Individually and as Attorney-in-Fact /s/ Rocco A. Ortenzio ----------------------------------- Rocco Ortenzio /s/ Robert A. Ortenzio ----------------------------------- Robert Ortenzio |
SELECT INVESTMENTS II
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
SELECT PARTNERS, L.P.
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
ADDITIONAL STOCKHOLDERS:
WCAS CAPITAL PARTNERS III, L.P.
By WCAS CP III Associates, L.L.C., General Partner
By /s/ Laura Van Buren --------------------------------- Name: Title: /s/ Lawrence B. Sorrel ----------------------------------- Lawrence B. Sorrel /s/ Priscilla A. Newman ----------------------------------- Priscilla A. Newman /s/ Rudolph Rupert ----------------------------------- Rudolph Rupert /s/ D. Scott Mackesy ----------------------------------- D. Scott Mackesy |
GTCR FUND VI, L.P.
By GTCR Partners VI, L.P., General Partner By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal |
THOMA CRESSEY FUND VI, L.P.
By TC Partners VI, L.P., General Partner By Thoma Cressey Equity Partners Inc., General Partner
SELECT HEALTHCARE INVESTORS I, L.P.
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
ANVERS, L.P.
By /s/ Leopold Swergold --------------------------------- Name: Title: |
ANVERS II, L.P.
By /s/ Leopold Swergold --------------------------------- Name: Title: |
GTCR VI EXECUTIVE FUND, L.P.
By GTCR Partners VI, L.P., General Partner By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal |
GTCR ASSOCIATES VI
By GTCR Partners VI, L.P., Managing Genera! Partner By GTCR Golder Rauner L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal /s/ Bryan C. Cressey ----------------------------------- Bryan C. Cressey |
SCHEDULE I
Golder, Thoma, Cressey, Rauner Fund V, L.P.
Welsh, Carson, Anderson & Stowe VII, L.P.
WCAS Healthcare Partners, L.P.
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
Rocco Ortenzio
Robert Ortenzio
Select Investments II
Select Partners, L.P.
SCHEDULE II
WCAS Capital Partners III, L.P.
Lawrence B. Sorrel
Priscilla A. Newman
Rudolph Rupert
D. Scott Mackesy
c/o Welsh, Carson, Anderson & Stowe
320 Park Avenue, Suite 2500
New York, New York 10022
Attention: Lawrence B. Sorrel
GTCR Fund VI, L.P.
GTCR VI Executive Fund, L.P.
GTCR Associates VI
6100 Sears Tower
233 South Wacker Drive
Chicago, IL 60606-6402
Attention: Donald J. Edwards
Thoma Cressey Fund VI, L.P.
Sears Tower, 44th floor
233 South Wacker Drive
Chicago, IL 60606-6402
Attention: Bryan C. Cressey
Bryan C. Cressey
Sears Tower, 44th floor
233 South Wacker Drive
Chicago, IL 60606-6402
Select Healthcare Investors I, L.P.
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
SCHEDULE II (Continued)
Anvers, L.P.
Anvers II, L.P.
Furman Selz Incorporated
230 Park Avenue
New York, New York 10169
Attention: Leo Swergold
Exhibit 10.3
AMENDMENT NO. 2 TO REGISTRATION AGREEMENT
AMENDMENT NO. 2 TO REGISTRATION AGREEMENT, dated as of November 19, 1999 ("Amendment No. 2"), by and among Select Medical Corporation, a Delaware corporation (the "Company")and the stockholders of the Company whose names appear in Schedule I annexed hereto (collectively, the "Stockholders"), amending the Registration Agreement dated as of February 5, 1997, as amended as of December 15, 1998 (the "Agreement") by and among the Company, the Stockholders and the other stockholders of the Company named as parties thereto at the foot thereof.
WHEREAS, the Company and certain of the Stockholders (the "November 1999 Investors") are parties to a Securities Purchase Agreement dated as of November 19, 1999 (the "1999 Purchase Agreement"), providing, among other things, for the sale to such November 1999 Investors of an aggregate (i) 1,667,000 shares of the Company's Common Stock, par value $.01 (the "Common Stock") and (ii) 16,000,000 shares of the Company's Class B Preferred Stock, par value $01 (the "Class B Preferred "together with the Common Stock subject to the 1999 Purchase Agreement, the "November 1999 Shares"); and
WHEREAS, the Company and the Stockholders entered into the Agreement in order, among other things, to specify certain rights and obligations of each of the parties thereto with respect to the shares of Common Stock held by each of them; and
WHEREAS, the Agreement may be amended by the written consent of the Company and the holders of 66.67% of the Registrable Securities (as defined therein); and
WHEREAS, the Stockholders collectively own more than 66.67% of the outstanding Registrable Securities; and
WHEREAS, the Company and the Stockholders now desire to amend the Agreement in the manner set forth below in order, among other things, to include the November 1999 Shares as Registrable Securities under the terms of the Agreement;
NOW THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows:
"The Company and certain of the Investors are parties to a Purchase Agreement, dated as of February 5, 1997 (the "1997 Purchase Agreement"). The Company, the Investors and the Additional Stockholders (as such term is defined in Amendment No. 1 to Registration Agreement, dated as of December 15, 1998 among the Company and the parties thereto ("Amendment No. 1")) are parties to a Securities Purchase Agreement, dated as of December 15, 1998 (the "1998 Purchase Agreement"). The Company and the Stockholders (as such term is defined in Amendment No. 2 to the Registration Agreement, dated as of November 19, 1999, among the Company and the parties thereto ("Amendment No. 2") are parties to a Purchase Agreement, dated as of November 19, 1999 (the "1999 Purchase Agreement" and, collectively with the 1997 Purchase Agreement and the 1998 Purchase Agreement, the "Purchase Agreements" or the "Purchase Agreement"). In order to induce certain of the Investors to enter into the 1997 Purchase Agreement, the Investors and the Additional Stockholders to enter into the 1998 Purchase Agreement and the Stockholders to enter into the 1999 Purchase Agreement, the Company has agreed to provide the registration rights set forth in this Agreement, as amended by Amendment No. 1 and Amendment No. 2. The execution and delivery of this Agreement is a condition to the Closing under the 1997 Purchase Agreement. The execution and delivery of Amendment No. 1 is a condition to the Closing under the 1998 Purchase Agreement. The execution and delivery of Amendment No. 2 is a condition to the Closing under the 1999 Purchase Agreement. Unless otherwise provided in this Agreement, capitalized terms used herein shall have the meanings set forth in Section 7 hereof."
Agreement, and except only to the extent that they may be varied hereby, all of the terms of the Agreement shall remain unchanged and in full force and effect.
IN WITNESS WHEREOF, the Company and the Stockholders have executed this Amendment No. 2 as of the day and year first above written.
SELECT MEDICAL CORPORATION
By /s/ Michael E. Tarvin --------------------------------- Name: Title: |
STOCKHOLDERS:
GOLDER, THOMA, CRESSEY, RAUNER FUND V, L.P.
By GTCR V, L.P., General Partner
By Golder, Thoma, Cressey, Rauner, Inc., General
Partner
By /s/ Donald J. Edwards --------------------------------- Name: Title: |
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By WCAS VII Partners, L.P., General Partner
By /s/ Jonathan Rather --------------------------------- Name: Title: |
WCAS HEALTHCARE PARTNERS, L.P.
By WCAS HC Partners, General Partner
By /s/ Jonathan Rather --------------------------------- Name: Title: |
John Almeida
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
James B. Hoover
Thomas E. McInerney
D. Scott Mackesy
Robert A. Minicucci
Priscilla A. Newman
Andrew M. Paul
Paul B. Queally
Jonathan Rather
Rudolph E. Rupert
Lawrence B. Sorrel
Richard H. Stowe
Sanjay Swani
Sean Traynor
Laura M. VanBuren
Patrick J. Welsh
By /s/ Jonathan Rather --------------------------------- Jonathan Rather as Attorney-in-Fact |
DELAWARE CHARTER TRUST CO., AS TRUSTEE
FOR THE BENEFIT OF THE IRA ROLLOVER OF
JAMES B. HOOVER
By /s/ James B. Hoover --------------------------------- Name: Title: |
John Almeida
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
James B. Hoover
Thomas E. McInerney
D. Scott Mackesy
Robert A. Minicucci
Priscilla A. Newman
Andrew M. Paul
Paul B. Queally
Jonathan Rather
Rudolph E. Rupert
Lawrence B. Sorrel
Richard H. Stowe
Sanjay Swani
Sean Traynor
Laura M. VanBuren
Patrick J. Welsh
By_________________________________ Jonathan Rather as Attorney-in-Fact
JAMES B. HOOVER IRA ROLLOVER CHASE
CUSTODIAN
By_________________________________
Name:
Title:
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
/s/ Rocco A. Orterzio ----------------------------------- Rocco Ortenzio /s/ Robert A. Ortenzio ----------------------------------- Robert Ortenzio |
SELECT INVESTMENTS II
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
SELECT PARTNERS, L.P.
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
WCAS CAPITAL PARTNERS III, L.P.
By WCAS CP III Associates, L.L.C., General Partner
Title:
GTCR FUND VI, L.P.
By GTCR Partners VI, L.P., General Partner
By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal |
THOMA CRESSEY FUND VI, L.P.
By TC Partners VI, L.P., General Partner
By Thoma Cressey Equity Partners Inc., General Partner
By /s/ Bryan C. Cressey --------------------------------- Name: Title: |
GTCR VI EXECUTIVE FUND, L.P.
By GTCR Partners VI, L.P., General Partner
By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal |
GTCR ASSOCIATES VI
By GTCR Partners VI, L.P., Managing General Partner
By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal /s/ Bryan C. Cressey ----------------------------------- Bryan C. Cressey |
THOMA CRESSEY FRIENDS FUND VI, L.P.
By TC Partners VI, L.P., General Partner
By Thoma Cressey Equity Partners, Inc., General Partner
By /s/ Bryan C. Cressey --------------------------------- Name: Its: Principal |
SELECT HEALTHCARE INVESTORS I, L.P.
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
ANVERS, L.P.
By /s/ Leopold Swergold --------------------------------- Name: Title: |
ANVERS II, L.P.
By /s/ Leopold Swergold --------------------------------- Name: Title: |
SCHEDULE I
Stockholders
Golder, Thoma, Cressey, Rauner Fund V, L.P.
Welsh, Carson, Anderson & Stowe VII, L.P.
WCAS Healthcare Partners, L.P.
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
James B. Hoover
Robert A. Minicucci
Andrew M. Paul
Paul B. Queally
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
Rocco Ortenzio
Robert Ortenzio
Select Investments II
Select Partners, L.P.
WCAS Capital Partners III, L.P.
Lawrence B. Sorrel
Priscilla A. Newman
Rudolph Rupert
Scott Mackesy
GTCR Fund VI, L.P.
GTCR VI Executive Fund, L.P.
GTCR Associates VI
Thoma Cressey Fund VI, L.P.
Bryan C. Cressey
Select Healthcare Investors I, L.P.
Anvers, L.P.
Anvers II, L.P.
Exhibit 10.4
CREDIT AGREEMENT
dated as of
September 22, 2000
among
SELECT MEDICAL CORPORATION
CANADIAN BACK INSTITUTE LIMITED
The Lenders Party Hereto
THE CHASE MANHATTAN BANK,
as Administrative Agent
for the US Facilities
THE CHASE MANHATTAN BANK OF CANADA,
as Administrative Agent
for the Canadian Facilities
BANC OF AMERICA SECURITIES LLC
as Syndication Agent
and
CIBC, INC.,
as Documentation Agent
CHASE SECURITIES INC.
BANC OF AMERICA SECURITIES LLC,
as Co-Lead Arrangers and Joint Book Managers
TABLE OF CONTENTS
Page ---- ARTICLE I Definitions SECTION 1.01. Defined Terms ................................................ 2 SECTION 1.02. Classification of Loans and Borrowings ....................... 37 SECTION 1.03. Terms Generally .............................................. 37 SECTION 1.04. Accounting Terms; GAAP ....................................... 38 ARTICLE II The Credits SECTION 2.01. Commitments .................................................. 38 SECTION 2.02. Loans and Borrowings ......................................... 39 SECTION 2.03. Requests for Borrowings ...................................... 40 SECTION 2.04. Bankers' Acceptances ......................................... 41 SECTION 2.05. Letters of Credit ............................................ 44 SECTION 2.06. Funding ...................................................... 50 SECTION 2.07. Rate Elections ............................................... 51 SECTION 2.08. Termination and Reduction of Commitments ..................... 53 SECTION 2.09. Repayment of Loans; Evidence of Debt ......................... 54 SECTION 2.10. Amortization of Term Loans and B/As .......................... 56 SECTION 2.11. Prepayment of Loans .......................................... 58 SECTION 2.12. Fees ......................................................... 61 SECTION 2.13. Interest ..................................................... 62 SECTION 2.14. Alternate Rate of Interest ................................... 64 SECTION 2.15. Increased Costs .............................................. 64 SECTION 2.16. Break Funding Payments ....................................... 66 SECTION 2.17. Taxes ........................................................ 66 SECTION 2.18. Payments Generally; Pro Rata Treatment; Sharing of Set-offs .. 68 SECTION 2.19. Mitigation Obligations; Replacement of Lenders ............... 70 SECTION 2.20. Increase in Revolving Commitments ............................ 71 ARTICLE III Representations and Warranties SECTION 3.01. Corporate Existence and Power ................................ 72 SECTION 3.02. Corporate Authorization; No Contravention .................... 73 SECTION 3.03. Governmental Authorization ................................... 73 |
SECTION 3.04. Binding Effect ................................................ 74 SECTION 3.05. Litigation .................................................... 74 SECTION 3.06. No Default .................................................... 74 SECTION 3.07. ERISA Compliance .............................................. 74 SECTION 3.08. Use of Proceeds; Margin Regulations ........................... 75 SECTION 3.09. Title to Properties ........................................... 75 SECTION 3.10. Taxes ......................................................... 76 SECTION 3.11. Financial Condition ........................................... 76 SECTION 3.12. Environmental Matters ......................................... 77 SECTION 3.13. Collateral Documents .......................................... 78 SECTION 3.14. Regulated Entities ............................................ 78 SECTION 3.15. Copyrights, Patents, Trademarks and Licenses, Etc. ............ 78 SECTION 3.16. Subsidiaries .................................................. 79 SECTION 3.17. Insurance ..................................................... 79 SECTION 3.18. Solvency ...................................................... 79 SECTION 3.19. Full Disclosure ............................................... 79 SECTION 3.20. Subordination of Certain Indebtedness ......................... 80 SECTION 3.21. Canadian Pension and Benefit Plans. ........................... 80 ARTICLE IV Conditions SECTION 4.01. Effective Date ................................................ 80 SECTION 4.02. Each Credit Event ............................................. 83 ARTICLE V Affirmative Covenants SECTION 5.01. Financial Statements .......................................... 84 SECTION 5.02. Certificates; Other Information ............................... 85 SECTION 5.03. Notices ....................................................... 86 SECTION 5.04. Preservation of Corporate Existence, Etc....................... 88 SECTION 5.05. Maintenance of Property ....................................... 89 SECTION 5.06. Insurance ..................................................... 89 SECTION 5.07. Payment of Obligations ........................................ 90 SECTION 5.08. Compliance with Laws .......................................... 90 SECTION 5.09. Compliance with ERISA ......................................... 90 SECTION 5.10. Inspection of Property and Books and Records .................. 90 SECTION 5.11. Environmental Laws ............................................ 91 SECTION 5.12. Further Assurances ............................................ 91 SECTION 5.13. Acquisitions; Dispositions .................................... 92 SECTION 5.14. Fiscal Year ................................................... 93 SECTION 5.15. Interest Rate Protection; Hedging Agreements .................. 93 SECTION 5.16. Real Estate Leases ............................................ 93 |
SECTION 5.17. Canadian Pension and Benefit Plans ............................ 93 ARTICLE VI Negative Covenants SECTION 6.01. Limitation on Liens ........................................... 94 SECTION 6.02. Disposition of Property ....................................... 97 SECTION 6.03. Consolidations and Mergers .................................... 98 SECTION 6.04. Loans and Investments ......................................... 98 SECTION 6.05. Limitation on Indebtedness .................................... 101 SECTION 6.06. Transactions with Affiliates .................................. 102 SECTION 6.07. Use of Proceeds ............................................... 102 SECTION 6.08. Contingent Obligations ........................................ 102 SECTION 6.09. Joint Ventures ................................................ 103 SECTION 6.10. Lease Obligations ............................................. 103 SECTION 6.11. Restricted Payments ........................................... 104 SECTION 6.12. ERISA ......................................................... 105 SECTION 6.13. Change in Business ............................................ 105 SECTION 6.14. Accounting Changes ............................................ 105 SECTION 6.15. Subordinated Indebtedness ..................................... 105 SECTION 6.16. Financial Covenants ........................................... 106 ARTICLE VII Events of Default SECTION 7.01. Event of Default .............................................. 108 SECTION 7.02. Remedies ...................................................... 112 ARTICLE VIII Agents ARTICLE IX Miscellaneous SECTION 9.01. Notices ....................................................... 115 SECTION 9.02. Waivers; Amendments ........................................... 116 SECTION 9.03. Expenses; Indemnity; Damage Waiver ............................ 118 SECTION 9.04. Successors and Assigns ........................................ 120 SECTION 9.05. Survival ...................................................... 123 SECTION 9.06. Counterparts; Integration; Effectiveness....................... 124 SECTION 9.07. Severability .................................................. 124 SECTION 9.08. Right of Setoff ............................................... 124 SECTION 9.09. Governing Law; Jurisdiction; Consent to |
Service of Process ......................................... 125 SECTION 9.10. WAIVER OF JURY TRIAL .......................................... 126 SECTION 9.11. Headings ...................................................... 126 SECTION 9.12. Confidentiality ............................................... 126 SECTION 9.13. Interest Rate Limitation ...................................... 127 SECTION 9.14. Releases of Guarantors and Collateral ......................... 127 SECTION 9.15. Liabilities of CBIL ........................................... 128 |
Schedule 2.01 -- Lenders; Commitments
Schedule 2.05 - Existine Letters of Credit
Schedule 3.01 -- Exceptions to corporate existence and good
standing representation and warranty
Schedule 3.03 -- Governmental Approvals, Etc.
Schedule 3.05 -- Disclosed Matters
Schedule 3.09 -- Mortgage Properties
Schedule 3.12 -- Environmental Matters
Schedule 3.16 - Subsidiaries/Equity Interests in other Persons
Schedule 3.17 -- Insurance
Schedule 3.20 -- Senior Subordinated Notes and unsecured
Indebtedness subordinate to Obligations
Schedule 6.01 -- Existing Liens
Schedule 6.04 -- Existing Investments
Schedule 6.05 -- Existing Indebtedness
A: Seller Notes
B: Other Indebtedness
Exhibit A Form of Assignment and Acceptance Exhibit B Form of Administrative Questionnaire Exhibit C Form of B/A Exhibit D-1 Form of US Guarantee Agreement Exhibit D-2 Form of Canadian Guarantee Agreement Exhibit E-1 Form of US Pledge Agreement Exhibit E-2 Form of Canadian Pledge Agreement Exhibit F-1 Form of US Security Agreement Exhibit F-2 Form of Canadian Security Agreement Exhibit G Form of Indemnity, Subrogation and Contribution Agreement Exhibit H-1 Form of Opinion of Dechert Price & Rhoads Exhibit H-2 Form of Opinion of Tory's Exhibit H-3 Form of Opinion of Local Counsel Exhibit H-4 Form of Opinion of Kirkland & Ellis and Reboul, MacMurray, Hewitt, Maynard & Kristol Exhibit I Form of Negative Pledge Agreement Exhibit J Form of Perfection Certificate |
5 Exhibit K Form of Compliance Certificate Exhibit L Form of Accession Agreement |
CREDIT AGREEMENT dated as of
September 22, 2000, among SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"); CANADIAN BACK INSTITUTE LIMITED, an Ontario corporation and a wholly owned subsidiary of the Company ("CBIL" and, together with the Company, the ("Borrowers"); the LENDERS party hereto; THE CHASE MANHATTAN BANK, as US Agent and US Collateral Agent; THE CHASE MANHATTAN BANK OF CANADA, as Canadian Agent and Canadian Collateral Agent; BANC OF AMERICA SECURITIES LLC, as Syndication Agent; and CIBC, Inc., as Documentation Agent.
The Company and CBIL have requested the Lenders (such term and each other capitalized term used and not otherwise defined herein having the meaning assigned to it in Article I) to extend credit in the form of (a) US Term Commitments under which the Company may obtain term loans denominated in US Dollars in an aggregate principal amount not greater than US$158,000,000, (b) Revolving Commitments under which the Company may obtain revolving loans and letters of credit denominated in US Dollars in an aggregate principal amount at any time outstanding that will not result in the aggregate Revolving Exposures exceeding US$55,000,000 and (c) Canadian Term Commitments under which CBIL may obtain term loans denominated in Canadian Dollars in an aggregate principal amount not greater than C$25,279,000. The proceeds of Term Borrowings hereunder are to be used to refinance amounts outstanding under the Existing Credit Agreements and, to the extent such proceeds exceed such amounts, for general corporate purposes of the Borrowers and their subsidiaries. The proceeds of Revolving Borrowings and Letters of Credit issued hereunder are to be used for general corporate purposes of the Borrowers and their subsidiaries, including working capital and capital expenditures.
The Lenders are willing to establish the credit facilities referred to in the preceding paragraph upon the terms and subject to the conditions set forth herein. Accordingly, the parties hereto agree as follows:
================================================================================ ABR and Eurodollar Spreads and ------- ---------------------- Leverage Canadian Base B/A Acceptance Commitment -------- ------------- -------------- ---------- Category Ratio: Rate Spreads Fee Rates Fee Rates -------- ------ ------------ --------- --------- -------------------------------------------------------------------------------- 1 **3.50 2.75% 3.75% 0.50% -------------------------------------------------------------------------------- 2 *3.50 and 2.50% 3.50% 0.50% **3.00 -------------------------------------------------------------------------------- 3 *3.00 and 2.25% 3.25% 0.50% **2.50 -------------------------------------------------------------------------------- 4 *2.50 and 2.00% 3.00% 0.50% **2.00 -------------------------------------------------------------------------------- 5 *2.00 1.50% 2.50% 0.375% ================================================================================ |
* means less than ** means more equals to
(i) at any time prior to an Initial Public Offering, the failure of the Controlling Shareholders to, directly or indirectly, own in the aggregate at least 51% of the outstanding shares of voting stock of the Company,
(ii) at any time after an Initial Public Offering, the failure of the Controlling Shareholders to, directly or indirectly, own in the aggregate at least 30% of the outstanding shares of voting stock of the Company,
(iii) at any time, the failure of the Controlling Shareholders to, directly or indirectly, have the power to direct the management and policies of the Company,
(iv) any "person" (as such term is used in Sections 13(d) and 14(d) of the Exchange Act), other than the Controlling Shareholders and their related funds, is or becomes the "beneficial owner" (as defined in Rules 13d-3 and 13d-5 under the Exchange Act, except that for purposes of this clause (iv) such person shall be deemed to have "beneficial ownership" of all shares that any such person has the right to acquire, whether such right is exercisable immediately or only after the passage of time), directly or indirectly, of at any time, a percentage of the total voting power of the voting stock of the Company in excess of that percentage of the total voting power of the voting stock of the Company beneficially owned, directly or
indirectly, by Welsh Carson and its related funds in the aggregate;
(v) at any time, the failure of the Company to, directly or indirectly, (a) own in the aggregate at least 51% of the outstanding shares of voting stock of CBIL or (b) have the power to direct the management and policies of CBIL;
(vi) at any time prior to an Initial Public Offering, the failure of any Controlling Shareholder to own, directly or indirectly, more than one half of the percentage of the total voting stock of the Company owned by all the Controlling Shareholders that such Controlling Shareholder owns on the date of this Agreement, or
(vii) at any time, the occurrence of a "change in control" or similar event, however denominated, under the Senior Subordinated Notes, any other Indebtedness with a principal amount in excess of $5,000,000 or any preferred stock of the Company or any Significant Subsidiary.
(a) the US Guarantee Agreement (or a supplement thereto) shall have been executed by the Company and each US Subsidiary existing at such time, shall have been delivered to the US Collateral Agent and shall be in full force and effect;
(b) the Canadian Guarantee Agreement (or a supplement thereto) shall have been executed by each Canadian Subsidiary existing at such time, shall have been delivered to the Canadian Collateral Agent and shall be in full force and effect;
(d) the Canadian Pledge Agreement (or supplements thereto) shall have been duly executed and delivered by CBIL and each Canadian Subsidiary existing at such time and directly owning any outstanding Equity Interests or any Indebtedness, and there shall have been duly and validly pledged to the Canadian Collateral Agent
thereunder as security for the Canadian Obligations (i) all the outstanding Equity Interests owned directly by CBIL or any Canadian Subsidiary and (ii) all Indebtedness owed to CBIL or any Canadian Subsidiary; and any certificates, promissory notes or other instruments representing the Equity Interests or Indebtedness pledged or subjected to a charge under the Canadian Pledge Agreement, accompanied by stock powers or other instruments of transfer endorsed in blank, shall be in the actual possession of the Canadian Collateral Agent and all other steps required under applicable law or requested by the Canadian Collateral Agent to ensure that the Canadian Pledge Agreement creates valid, first priority, perfected Liens on all the Collateral subject thereto shall have been taken;
(e) the US Security Agreement (or supplements thereto) shall have been duly executed and delivered by the Company and each US Subsidiary existing at such time and there shall have been subjected to security interests thereunder as security for the Obligations all the assets of the Company and each US Subsidiary in which a security interest can be created under the UCC, and all documents and instruments, including UCC financing statements, required by law or reasonably requested by the US Collateral Agent to be filed, registered or recorded to create the security interests intended to be created by the US Security Agreement and perfect such Liens to the extent required by, and with the priority required by, the US Security Agreement, shall have been filed, registered or recorded (or arrangements satisfactory to the US Collateral Agent for such filing, registration or recording shall have been made);
(f) the Canadian Security Agreement (or supplements thereto) shall have been duly executed and delivered by CBIL and each Canadian Subsidiary existing at such time and there shall have been subjected to security interests thereunder as security for the Canadian Obligations all the assets of CBIL and each Canadian Subsidiary in which a security interest can be created under the laws of Canada or any Province thereof, and all documents and instruments, including financing statements, required by law or reasonably requested by the Canadian Collateral Agent to be filed, registered or recorded to create the security interests intended to be created by the Canadian Security Agreement and perfect such Liens to the extent required by, and with the priority required by, the Canadian Security Agreement, shall have been filed, registered
or recorded (or arrangements satisfactory to the Canadian Collateral Agent for such filing, registration or recording shall have been made);
(g) the applicable Collateral Agent shall have received, on or prior
to the later of the Effective Date and the 45th day after the acquisition
by the Company, CBIL, any US Subsidiary or any Canadian Subsidiary of any
Mortgaged Property, (i) a Mortgage with respect to such Mortgaged Property
duly executed and delivered by the record owner thereof, and evidence of
the recording thereof and the taking of all other actions necessary to
perfect the Lien created thereby, (ii) a policy or policies of title
insurance issued by a recognized title insurance company insuring the Lien
of each such Mortgage as a valid first Lien on the Mortgaged Property
described therein, free of any other Liens except as expressly permitted by
Section 6.02, together with such endorsements, coinsurance and reinsurance
as the applicable Collateral Agent or the Required Lenders may reasonably
request, and (iii) such surveys, abstracts, appraisals, legal opinions and
other documents as the applicable Collateral Agent or the Required Lenders
may reasonably request with respect to any such Mortgage or Mortgaged
Property;
(h) the Indemnity, Subrogation and Contribution Agreement (or a supplement thereto) shall have been executed by the Company and each US Subsidiary party to the US Guarantee Agreement or any Security Document, shall have been delivered to the US Collateral Agent and shall be in full force and effect; and
(i) each Loan Party shall have obtained all consents and approvals required to be obtained by it in connection with the execution and delivery of all Security Documents to which it is a party, the performance of its obligations thereunder and the granting by it of the Liens thereunder.
Notwithstanding the foregoing provisions of this definition, (i) the Collateral Agents may grant extensions of time (not to exceed 90 days) for the perfection of security interests in or the obtaining of title insurance with respect to particular assets where it determines that perfection cannot be accomplished without undue effort or expense by the time or times at which it would otherwise be required by this Agreement or the Security Documents, (ii) in the event that the consent of any limited partner (other than any Loan Party) of a Canadian Subsidiary that is a limited partnership is required under the limited partnership
Period shall be extended to the next succeeding Business Day.
C$.01) calculated by multiplying (a) the face amount of such B/A by (b) the quotient obtained by dividing (i) one by (ii) the sum of (A) one and (B) the product of (x) the Discount Rate (expressed as a decimal) applicable to such B/A and (y) a fraction the numerator of which is the Contract Period applicable to such B/A and the denominator of which is 365, with such quotient being rounded upward or downward to the fifth decimal place and .000005 being rounded upward.
intentional and unintentional, negligent and non-negligent, sudden or non- sudden, accidental or non-accidental, placement, spills, leaks, discharges, emissions or releases) of any Hazardous Material at, in, or from Property, whether or not owned by the Company or any Subsidiary.
ERISA, or the commencement of proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e) an event or condition which might reasonably be expected to constitute grounds under Section 4042 of ERISA for the termination of, or the appointment of a trustee to administer, any Pension Plan or Multiemployer Plan; or (f) the imposition of any liability under Title IV of ERISA, other than PBGC premiums due but not delinquent under Section 4007 of ERISA, upon the Borrower or any ERISA Affiliate.
Company, other than (i) any public offering or sale of common stock of the Company pursuant to a registration statement on Form S-8, Form S-4 or comparable forms or (ii) any unit offering of debt and common stock of the Company if less than 20% of the proceeds of such offering are attributable to the issuance of common stock and, in each case, as a result, such common stock is not required to be registered under Section 12 of the Securities Exchange Act of 1934.
on a day for which there is no numerically corresponding day in the last calendar month of such Interest Period) shall end on the last Business Day of the last calendar month of such Interest Period. For purposes hereof, the date of a Borrowing initially shall be the date on which such Borrowing is made and thereafter shall be the effective date of the most recent conversion or continuation of such Borrowing.
Commercial Code or any comparable law) and any contingent or other agreement to provide any of the foregoing, but not including the interest of a lessor under an operating lease.
be in form and substance reasonably satisfactory to the Collateral Agent.
(a) any sale, transfer or other disposition (including pursuant to a
sale and leaseback transaction or an asset securitization) of any property
or asset of the Company or any Subsidiary, other than (i) dispositions
described in clauses (a), (b), (c), (e), (f) (to the extent the proceeds
are applied in accordance with clause (i) of the proviso of such clause),
(h), (i) and (j) of Section 6.02 and (ii) other dispositions resulting in
aggregate Net Proceeds not exceeding US$5,000,000 during any fiscal year of
the Company; or
(b) any Event of Loss with respect to any property or asset of the Company or any Subsidiary, but only to the extent that the Net Proceeds therefrom in excess of US$2,000,000 have not been applied to repair, restore or replace such property or asset within 180 days (or, if agreed to by the US Agent pursuant to Section 5.06, a longer period of up to 270 days) after such event; or
(c) the issuance by the Company or any Subsidiary of any Equity Interests, or the receipt by the Company or any Subsidiary of any capital contribution, other than (i) any such issuance of Equity Interests to, or receipt of any such capital contribution from, the Company or a Subsidiary or (ii) any such issuance of Equity Interests to, or the receipt by the Company or any Subsidiary of any capital contribution from, the
Controlling Shareholders, the proceeds of which are used to finance a Permitted Acquisition; or
(d) the incurrence by the Company or any Subsidiary of any
Indebtedness, other than Indebtedness permitted to be incurred pursuant to
Section 6.05.
outstanding accepted B/As and unused Commitments representing more than 50% of the sum of the total Revolving Exposures, outstanding Term Loans, outstanding accepted B/As and unused Commitments at such time.
amount of such Lender's Revolving Loans and its LC Exposure at such time.
Regulation D of the Board). Such reserve percentages shall include those imposed pursuant to such Regulation D. Eurodollar Loans shall be deemed to constitute eurocurrency funding and to be subject to such reserve requirements without benefit of or credit for proration, exemptions or offsets that may be available from time to time to any Lender under such Regulation D or any comparable regulation. The Statutory Reserve Rate shall be adjusted automatically on and as of the effective date of any change in any reserve percentage.
The initial aggregate amount of the Lenders' US Term Commitments is US$158,000,000.
to refer to this Agreement in its entirety and not to any particular provision hereof, (d) all references herein to Articles, Sections, Exhibits and Schedules shall be construed to refer to Articles and Sections of, and Exhibits and Schedules to, this Agreement and (e) the words "asset" and "property" shall be construed to have the same meaning and effect and to refer to any and all tangible and intangible assets and properties, including cash, securities, accounts and contract rights.
ARTICLE II
conversion or continuation pursuant to Section 2.07, may not be reborrowed.
(d) Notwithstanding any other provision of this Agreement, the Company shall not be entitled to request, or to elect to convert any Borrowing to or continue any Borrowing as, a Eurodollar Borrowing if the Interest Period requested with respect thereto would end after the Revolving Maturity Date or the US Term Maturity Date, as applicable.
(i) whether the requested Borrowing is to be a US Term Borrowing, a Canadian Term Borrowing or a Revolving Borrowing;
(ii) the aggregate amount of such Borrowing;
(iii) the date of such Borrowing, which shall be a Business Day;
(iv) if such Borrowing is a US Term Borrowing or a Revolving Borrowing, whether such Borrowing is to be an ABR Borrowing or a Eurodollar Borrowing;
(v) in the case of a Eurodollar Borrowing, the initial Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period"; and
(vi) the location and number of the applicable Borrower's account to which funds are to be disbursed, which shall comply with the requirements of Section 2.06.
If no election as to the Type of a US Term Borrowing or Revolving Borrowing is specified, then the requested Borrowing shall be an ABR Borrowing. If no Interest Period is specified with respect to any requested Eurodollar Borrowing, then the Company shall be deemed to have selected
an Interest Period of one month's duration. Promptly following receipt of a Borrowing Request in accordance with this Section, the Applicable Agent shall advise each applicable Lender of the details thereof and of the amount of such Lender's Loan to be made as part of the requested Borrowing.
(b) The B/As of a single Contract Period accepted and purchased on any date shall be in an aggregate amount that is an integral multiple of C$100,000 and not less than C$500,000. The face amount of each B/A shall be C$100,000 or any whole multiple thereof. If any Canadian Term Lender's ratable share of the B/As of any Contract Period to be accepted on any date would not be an integral multiple of C$100,000, the face amount of the B/As accepted by such Lender may be increased or reduced to the nearest integral multiple of C$100,000 by the Canadian Agent in its sole discretion.
(c) To request an acceptance and purchase of B/As, CBIL shall notify the Canadian Agent of such request by telephone not later than 11:00 a.m., Toronto time, two Business Days before the date of such acceptance and purchase. Each such telephonic request shall be irrevocable and shall be confirmed promptly by hand delivery or telecopy to the Canadian Agent of a written request in a form approved by the Canadian Agent and signed by CBIL. Each such telephonic and written request shall specify the following information:
(i) the aggregate face amount of the B/As to be accepted and purchased;
(ii) the date of such acceptance and purchase, which shall be a Business Day;
(iii) the Contract Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Contract Period" (and which shall in no event end after the Canadian Term Maturity Date); and
(iv) the location and number of CBIL's account to which any funds are to be disbursed, which shall comply with the requirements of Section 2.06. If no Contract Period is specified with respect to any requested acceptance and purchase of B/As, then CBIL shall be deemed to have selected a Contract Period of one month's duration.
Promptly following receipt of a request in accordance with this paragraph, the Canadian Agent shall advise each Canadian Term Lender of the details thereof and of the amount of B/As to be accepted and purchased by such Lender.
(e) Drafts of CBIL to be accepted as B/As hereunder shall be signed as set forth in paragraph (d) above. Notwithstanding that any Person whose signature appears on any B/A may no longer be an authorized signatory for any of the Lenders or CBIL at the date of issuance of such B/A, such signature shall nevertheless be valid and sufficient for all purposes as if such authority had remained in force at the time of such issuance and any such B/A so signed shall be binding on CBIL.
(f) Upon acceptance of a B/A by a Lender, such Lender shall purchase, or arrange the purchase of, such B/A from CBIL at the Discount Rate for such Lender applicable to such B/A accepted by it and provide to the Canadian Agent the Discount Proceeds for the account of CBIL as provided in Section 2.06. The acceptance fee payable by CBIL to a Lender under Section 2.12 in respect of each B/A accepted by such Lender shall be set off against the Discount Proceeds payable by such Lender under this paragraph.
Notwithstanding the foregoing, in the case of any B/A Drawing resulting from the
conversion or continuation of a B/A Drawing or Canadian Term Loan pursuant to
Section 2.07, the net amount that would otherwise be payable to CBIL by each
Lender pursuant to this paragraph will be applied as provided in Section
2.07(f).
(g) Each Lender may at any time and from time to time hold, sell, rediscount or otherwise dispose of any or all B/A's accepted and purchased by it.
(h) Each B/A accepted and purchased hereunder shall mature at the end of the Contract Period applicable thereto.
(i) CBIL waives presentment for payment and any other defence to payment of any amounts due to a Lender in respect of a B/A accepted and purchased by it pursuant to this Agreement which might exist solely by reason of such B/A being held, at the maturity thereof, by such Lender in its own right and CBIL agrees not to claim any days of grace if such Lender as holder sues CBIL on the B/A for payment of the amounts payable by CBIL thereunder. On the specified maturity date of a B/A, or such earlier date as may be required pursuant to the provisions of this Agreement, CBIL shall pay the Lender that has accepted and purchased such B/A the full face amount of such B/A, and after such payment CBIL shall have no further liability in respect of such B/A and such Lender shall be entitled to all benefits of, and be responsible for all payments due to third parties under, such B/A. Amounts owed by CBIL at the maturity dates of B/As may not be voluntarily prepaid.
(j) At the option of CBIL and any Lender, B/A's under this Agreement to be accepted by that Lender may be issued in the form of depository bills for deposit with The Canadian Depository for Securities Limited pursuant to the Depository Bills and Notes Act (Canada). All depository bills so issued shall be governed by the provisions of this Section 2.04.
renewal or extension of each Letter of Credit the Company shall be deemed to represent and warrant that), after giving effect to such issuance, amendment, renewal or extension (i) the LC Exposure shall not exceed US$15,000,000 and (ii) the aggregate Revolving Exposures shall not exceed the aggregate Revolving Commitments.
under this Agreement with respect to Letters of Credit issued by it prior to such replacement, but shall not be required to issue additional Letters of Credit.
additional Lenders to act as an issuing bank under this Agreement with the
consent of the US Agent (which consent shall not be unreasonably withheld) and
such Lender. Any Lender designated as an issuing bank pursuant to this paragraph
(k) shall be deemed to be and shall have all the rights and obligations of an
"Issuing Bank" hereunder.
(b) Unless the Applicable Agent shall have received notice from a Lender prior to the proposed date of any Borrowing or acceptance and purchase of B/As that such Lender will not make available to the Applicable Agent such Lender's share of the proceeds thereof, the Applicable Agent may assume that such Lender has made such share available on such date in accordance with paragraph (a) of this Section and may, in reliance upon such assumption, make available to the applicable Borrower a corresponding amount. In such event, if a Lender has not in fact made its share of such proceeds available to the Applicable Agent, then the applicable Lender and the applicable Borrower severally agree to pay to the Applicable Agent forthwith on demand such corresponding amount with interest thereon, for each day from and including the date such amount is made available to such Borrower to but excluding the date of payment to the Applicable Agent, at (i) in the case of such Lender, a rate determined by the Applicable Agent in accordance with banking industry rules on interbank compensation or (ii) in the case of such Borrower, the interest rate applicable to ABR Loans or the Canadian Base Rate Loans, as the case may be.
(b) To make an election pursuant to this Section, the applicable
Borrower shall notify the Applicable Agent of such election by telephone (i) in
the case of an election that will result in a Borrowing or the continuation of a
Borrowing, by the time that a Borrowing Request would be required under Section
2.03 if the applicable Borrower were requesting a Borrowing of the Type and
Class resulting or continuing from such election to be made on the effective
date of such election and (b) in the case of an election that will result in a
B/A Drawing or the continuation of a B/A Drawing, by the time specified in
Section 2.04(c). Each such telephonic Rate Election Request shall be irrevocable
and shall be confirmed promptly by hand delivery or telecopy to the Applicable
Agent of a written Rate Election Request in a form approved by the Applicable
Agent and signed by the applicable Borrower.
(c) Each telephonic and written Rate Election Request shall specify the following information in compliance with Section 2.02 or 2.04:
(i) the Borrowing or B/A Drawing to which such Rate Election Request applies and, if different options are being elected with respect to different portions thereof, the portions thereof to be allocated to each resulting Borrowing or B/A Drawing (in which case the information to be specified pursuant to clauses (iii) and (iv) below shall be specified for each resulting Borrowing or B/A Drawing);
(ii) the effective date of the election made pursuant to such Rate Election Request, which shall be a Business Day;
(iii) in the case of an election with respect to a US Term Borrowing or a Revolving Borrowing, whether an ABR Borrowing or a Eurodollar Borrowing is elected, and in the case of an election with respect to a Canadian Term Borrowing or a B/A Drawing, whether a Canadian Term Borrowing or a B/A Drawing is elected; and
(iv) in the case of an election of a Eurodollar Borrowing, the Interest Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Interest Period", and in the case of an election of a B/A Drawing, the Contract Period to be applicable thereto, which shall be a period contemplated by the definition of the term "Contract Period".
If any such Rate Election Request requests a Eurodollar Borrowing or B/A Drawing but does not specify an Interest Period or Contract Period, then the applicable Borrower shall be deemed to have selected an Interest Period of one month's duration or a Contract Period of one month's duration, as the case may be.
(d) Promptly following receipt of an Rate Election Request, the Applicable Agent shall advise each applicable Lender of the details thereof and of such Lender's portion of each resulting Borrowing or B/A Drawing.
(e) If the applicable Borrower fails to deliver a timely Rate Election Request with respect to a Eurodollar Borrowing or B/A Drawing prior to the end of the Interest Period or Contract Period applicable thereto, then, unless such Borrowing or B/A Drawing is repaid as provided herein, at the end of such Interest Period or Contract Period such
Borrowing or B/A Drawing shall be converted to an ABR Borrowing or a Canadian Base Rate Borrowing, as applicable. Notwithstanding any contrary provision hereof, if an Event of Default has occurred and is continuing and the US Agent, at the request of the Required Lenders, so notifies the Borrowers, then, so long as an Event of Default is continuing (i) no outstanding Borrowing may be converted to or continued as a Eurodollar Borrowing or a B/A Drawing and (ii) unless repaid, each Eurodollar Borrowing or B/A Drawing shall be converted to an ABR Borrowing or a Canadian Base Rate Borrowing, as applicable, at the end of the Interest Period or Contract Period applicable thereto.
(f) Upon the conversion of any Canadian Term Borrowing or the
continuation of any B/A Drawing (or portion thereof) to or as a B/A Drawing, the
net amount that would otherwise be payable to CBIL by each Lender pursuant to
Section 2.04(f) in respect of such new B/A Drawing shall be applied against the
principal of the Canadian Term Loan made by such Lender (in the case of a
conversion), or CBIL's obligation to reimburse such Lender in respect of the
B/As accepted by such Lender under Section 2.04(i) (in the case of a
continuation), as part of such Canadian Term Borrowing to be so converted or
such maturing B/A Drawing to be so continued, and CBIL shall pay to such Lender
an amount equal to the difference between the principal amount of such Canadian
Term Loan or the aggregate face amount of such maturing B/As, as the case may
be, and such net amount.
(g) The conversion or continuation of any Borrowing or B/A drawing shall not constitute a repayment of amounts outstanding or a new advance of funds hereunder.
(b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness of each Borrower to such Lender resulting from each Loan made by such Lender, including the amounts of principal and interest payable and paid to such Lender from time to time hereunder.
(c) The Facility Agents shall maintain accounts in which they shall record (i) the amount of each Loan made hereunder, the Class and Type thereof and the Interest Period applicable thereto, (ii) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder and (iii) the amount of any sum received by the Facility Agents hereunder for the accounts of the Lenders and each Lender's share thereof.
(e) Any Lender may request that Loans of any Class made by it be evidenced by a promissory note. In such event, the applicable Borrower shall prepare, execute and deliver to such Lender a promissory note payable to the order of such Lender (or, if requested by such Lender, to such Lender and its registered assigns) and in a form approved by the Applicable Agent. Thereafter, the Loans evidenced by such promissory note and interest thereon shall at all times (including after assignment pursuant to Section 9.04) be represented by one or more promissory notes in such form payable to the order of the payee named therein (or, if such promissory note is a registered note, to such payee and its registered assigns).
Date Amount ---- ------ September 30, 2001 US$6,320,000 December 31, 2001 US$6,320,000 March 31, 2002 US$6,320,000 June 30, 2002 US$6,320,000 September 30, 2002 US$6,320,000 December 31, 2002 US$9,028,571 March 31, 2003 US$9,028,571 June 30, 2003 US$9,028,571 September 30, 2003 US$9,028,571 December 31, 2003 US$11,285,714 March 31, 2004 US$11,285,714 June 30, 2004 US$11,285,714 September 30, 2004 US$11,285,714 December 31, 2004 US$11,285,714 March 31, 2005 US$11,285,714 June 30, 2005 US$11,285,714 US Term Maturity Date US$11,285,714 |
(b) Subject to adjustment pursuant to paragraph (d) of this Section, CBIL shall repay Canadian Term Borrowings and/or the face amount or outstanding B/A Drawings on each date set forth below in the amount set forth opposite such date:
Date Amount ---- ------ September 30, 2001 C$1,011,160.00 December 31, 2001 C$1,011,160.00 March 31, 2002 C$1,011,160.00 June 30, 2002 C$1,011,160.00 September 30, 2002 C$1,011,160.00 December 31, 2002 C$1,444,513.90 March 31, 2003 C$1,444,513.90 June 30, 2003 C$1,444,513.90 September 30, 2003 C$1,444,513.90 December 31, 2003 C$1,805,643.02 March 31, 2004 C$1,805,643.02 June 30, 2004 C$1,805,643.02 September 30, 2004 C$1,805,643.02 December 31, 2004 C$1,805,643.02 March 31, 2005 C$1,805,643.02 June 30, 2005 C$1,805,643.02 Canadian Term Maturity Date C$1,805,643.22 |
(c) To the extent not previously paid, (i) all US Term Borrowings shall be due and payable on the US Term Maturity Date and (ii) all Canadian Term Borrowings and Obligations in respect of B/As shall be due and payable on the Canadian Term Maturity Date.
(d) Any prepayment of a Term Borrowing of either Class or amounts to become due in respect of B/As shall be applied to reduce the subsequent scheduled repayments in respect of such Class or such B/A Drawings to be made pursuant to this Section ratably in accordance with the amounts thereof. If the initial aggregate amount of the Lenders' Term Commitments of either Class exceeds the aggregate principal amount of Term Loans of such Class that are made (and, in the case of the Canadian Term Commitments, the aggregate face amount of the B/As that are accepted) on the Effective Date, then the scheduled repayments in respect of such Class or B/A Drawings to be made pursuant to this Section shall be ratably reduced by an aggregate amount equal to such excess.
(e) Prior to any repayment of any Term Borrowings of either Class or B/A Drawings hereunder, the Borrower shall select the Borrowing or Borrowings of the applicable Class or B/A Drawings to be repaid and shall notify the Applicable Agent by telephone (confirmed by telecopy) of such selection not later than 11:00 a.m. in the Applicable Jurisdiction three Business Days before the scheduled date of such repayment. Each repayment of a Term Borrowing or B/A Drawings shall be applied ratably to the Loans included in the repaid Borrowing or the B/As included in such B/A Drawing. Repayments of Term Borrowings shall be accompanied by accrued interest on the amount repaid.
(b) In the event and on each occasion that the sum of the Revolving Exposures exceeds the total Revolving Commitments, the Company shall prepay Revolving Borrowings (or, if no such Borrowings are outstanding, deposit cash collateral in an account with the US Agent pursuant to Section 2.05(j)) in an aggregate amount equal to such excess.
(d) Following the end of each fiscal year of the Company, commencing with the fiscal year ending December 31, 2001, the Borrowers shall prepay Term Borrowings and amounts owed in respect of outstanding B/As in an aggregate amount equal to 50% of Excess Cash Flow for such fiscal year. Each prepayment pursuant to this paragraph shall be made within five days after the date on which financial statements are delivered pursuant to Section 5.01(a) with respect to the fiscal year for which Excess Cash Flow is being calculated (and in any event within 95 days after the end of such fiscal year).
(e) Prior to any optional or mandatory prepayment of Borrowings or amounts owing in respect of outstanding B/As hereunder, the Borrowers shall select the Borrowing or Borrowings and B/As to be prepaid and shall specify such selection in the notice of such prepayment pursuant to paragraph (f) of this Section. In the event of any optional or mandatory prepayment of Term Borrowings and amounts owing in respect of outstanding B/As made at a time when US Term Borrowings and Canadian Term Borrowings and/or B/As remain outstanding, the Borrowers shall, except as required by the proviso in paragraph (c) above, select Term Borrowings and B/As to be prepaid so that the aggregate amount of such prepayment is allocated between the US Term Borrowings and Canadian Term Borrowings and/or B/As ratably based on the aggregate principal amount of outstanding Borrowings of each such Class and the aggregate face amount of all outstanding B/As.
prepayment of any Borrowing shall be in an amount that would be permitted in the case of an advance of a Borrowing of the same Type as provided in Section 2.02, except as necessary to apply fully the required amount of a mandatory prepayment. Each prepayment of a Borrowing shall be applied ratably to the Loans included in the prepaid Borrowing. Prepayments shall be accompanied by accrued interest to the extent required by Section 2.13.
(b) CBIL agrees to pay to the Canadian Agent, for the account of each Canadian Term Lender, on each date on which B/As are accepted hereunder, an acceptance fee computed by multiplying (i) the product of the face amount of each B/A accepted by such Lender and the Applicable Rate by (ii) a fraction the numerator of which is the number of days in the Contract Period applicable to such B/A and the denominator of which is 365.
(c) The Company agrees to pay (i) to the US Agent for the account of
each Revolving Lender a participation fee with respect to its participations in
Letters of Credit, which shall accrue at the same Applicable Rate as interest on
Eurodollar Revolving Loans on the average daily amount of such Lender's LC
Exposure (excluding any portion thereof attributable to unreimbursed LC
Disbursements) during the period from and including the Effective Date to but
excluding the later of the date on which such Lender's Revolving Commitment
terminates and the date on which such Lender ceases to have any LC Exposure, and
(ii) to each Issuing Bank a fronting fee, which shall accrue at the rate of .25%
per annum on the daily average aggregate outstanding amount of all Letters of
Credit issued by it, during the period from and including the Effective Date to
but excluding the later of the date of termination of the Revolving Commitments
and the date on which there ceases to be any LC Exposure with respect to Letters
of Credit issued by such Issuing Bank, as well as such Issuing Bank's standard
fees with respect to the issuance, amendment, renewal or extension of any Letter
of Credit or processing of drawings thereunder. Participation fees and fronting
fees accrued through and including the last day of March,
(d) The Borrowers agree to pay to the Facility Agents, for their own account, fees payable in the amounts and at the times separately agreed upon between the Borrowers and the Facility Agents.
(e) All fees payable hereunder shall be paid on the dates due, in immediately available funds, to the applicable Agent (or to the applicable Issuing Bank, in the case of fees payable to it) for distribution, in the case of commitment fees and participation fees, to the Lenders entitled thereto. Fees due hereunder which shall have been paid shall not be refundable under any circumstances.
(b) The Loans comprising each Eurodollar Borrowing shall bear interest at the Adjusted LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Rate.
(c) The Loans comprising each Canadian Base Rate Borrowing shall bear interest at the Canadian Base Rate plus the Applicable Rate.
(d) Notwithstanding the foregoing, if any principal of or interest on any Loan or any fee or other amount payable by the Borrowers hereunder is not paid when due, whether at stated maturity, upon acceleration or otherwise, such overdue amount shall bear interest, after as well as before judgment, at a rate per annum equal to (i) in the case of overdue principal of any Loan, 2% per annum plus the rate otherwise applicable to such Loan as provided in the preceding paragraphs of this Section or (ii) in the case of any other amount, 2% per annum plus (A) in the case of any amounts payable in US Dollars, the rate applicable to
ABR Loans as provided in paragraph (a) of this Section and (B) in the case of any amounts payable in Canadian Dollars, the rate applicable to Canadian Base Rate Loans as provided in paragraph (b) of this Section.
(f) All interest hereunder shall be computed on the basis of a year of 360 days, except that interest computed by reference to (i) the Alternate Base Rate at times when the Alternate Base Rate is based on the Prime Rate and (ii) the Canadian Base Rate shall be computed on the basis of a year of 365 days (or 366 days in a leap year), and in each case shall be payable for the actual number of days elapsed (including the first day but excluding the last day). The applicable Alternate Base Rate, Adjusted LIBO Rate or Canadian Base Rate shall be determined by the Applicable Agent, and such determination shall be conclusive absent manifest error.
(a) the US Agent determines (which determination shall be conclusive absent manifest error) that adequate and reasonable means do not exist for ascertaining the Adjusted LIBO Rate for such Interest Period; or
(b) the US Agent is advised by the Required Lenders that the Adjusted LIBO Rate for such Interest Period will not adequately and fairly reflect the cost to such Lenders of making or maintaining their Loans included in such Borrowing for such Interest Period;
then the US Agent shall give notice thereof to the Company and the Lenders by telephone or telecopy as promptly as practicable thereafter and, until the US Agent notifies the Company and the Lenders that the circumstances giving rise to such notice no longer exist, (i) any Rate Election Request that requests the conversion of any Borrowing to, or continuation of any Borrowing as, a Eurodollar Borrowing shall be ineffective and (ii) if any Borrowing Request requests a Eurodollar Borrowing, such Borrowing shall be made as an ABR Borrowing.
(i) impose, modify or deem applicable any reserve, special deposit or similar requirement against assets of, deposits with or for the account of, or credit extended by, any Lender (except any such reserve requirement reflected in the Adjusted LIBO Rate) or Issuing Bank; or
(ii) impose on any Lender or Issuing Bank or the London interbank market any other condition affecting this Agreement or Eurodollar Loans made by such Lender or any Letter of Credit or participation therein;
and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurodollar Loan or obtaining funds for the purchase of B/As (or of maintaining its obligation to make any such Loan or to accept and purchase B/As) or to increase the cost to such Lender or Issuing Bank of participating in, issuing or maintaining any Letter of Credit or to reduce the amount of any sum received or receivable by such Lender or Issuing Bank hereunder (whether of principal, interest or otherwise), then the Borrowers will pay to such Lender or Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or such Issuing Bank, as the case may be, for such additional costs incurred or reduction suffered, as determined by such Lender or Issuing Bank in good faith.
(b) If any Lender or Issuing Bank determines in good faith that any Change in Law regarding capital requirements has or would have the effect of reducing the rate of return on such Lender's or Issuing Bank's capital or on the capital of such Lender's or Issuing Bank's holding company, if any, as a consequence of this Agreement or the Loans made or B/As accepted and purchased by, or participations in Letters of Credit held by, such Lender, or the Letters of Credit issued by such Issuing Bank, to a
level below that which such Lender or Issuing Bank or such Lender's or Issuing Bank's holding company could have achieved but for such Change in Law (taking into consideration such Lender's or Issuing Bank's policies and the policies of such Lender's or Issuing Bank's holding company with respect to capital adequacy), then from time to time the Borrowers will pay to such Lender or Issuing Bank, as the case may be, such additional amount or amounts as will compensate such Lender or Issuing Bank or such Lender's or Issuing Bank's holding company for any such reduction suffered.
(c) A certificate of a Lender or Issuing Bank setting forth the amount or amounts necessary to compensate such Lender or Issuing Bank or its holding company, as the case may be, as specified in paragraph (a) or (b) of this Section, shall be delivered to the Borrowers and shall be conclusive absent manifest error. The Borrowers shall pay such Lender or such Issuing Bank, as the case may be, the amount shown as due on any such certificate within 10 days after receipt thereof absent manifest error in the determination of such amount.
accordance therewith), or (d) the assignment of any Eurodollar Loan or right to receive payment in respect of any B/A other than on the last day of the Interest Period or Contract Period applicable thereto as a result of a request by the Company pursuant to Section 2.19, then, in any such event, the applicable Borrower shall compensate each Lender for the loss, cost and expense attributable to such event. In the case of a Eurodollar Loan, such loss, cost or expense to any Lender shall be deemed to include an amount determined by such Lender to be the excess, if any, of (i) the amount of interest which would have accrued on the principal amount of such Loan had such event not occurred, at the Adjusted LIBO Rate that would have been applicable to such Loan, for the period from the date of such event to the last day of the then current Interest Period therefor (or, in the case of a failure to borrow, convert or continue, for the period that would have been the Interest Period for such Loan), over (ii) the amount of interest which would accrue on such principal amount for such period at the interest rate which such Lender would bid were it to bid, at the commencement of such period, for US Dollar deposits of a comparable amount and period from other banks in the eurodollar market. A certificate of any Lender setting forth any amount or amounts that such Lender is entitled to receive pursuant to this Section shall be delivered to the applicable Borrower and shall be conclusive absent manifest error. The applicable Borrower shall pay such Lender the amount shown as due on any such certificate within 10 days after receipt thereof absent manifest error in the determination of such amount.
(b) In addition, the Borrowers shall pay any Other Taxes to the relevant Governmental Authority in accordance with applicable law.
(c) The Borrowers shall indemnify each Agent, each Lender and each Issuing Bank, within 15 days after written demand therefor, for the full amount of any Indemnified Taxes or Other Taxes paid by such Agent, Lender or Issuing Bank, as the case may be, on or with respect to any payment by or on account of any obligation of any Loan Party hereunder or under any other Loan Document (including Indemnified Taxes or Other Taxes imposed or asserted on or attributable to amounts payable under this Section) and any penalties, interest and reasonable expenses arising therefrom or with respect thereto, whether or not such Indemnified Taxes or Other Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability delivered to the Borrowers by a Lender or an Issuing Bank, or by an Agent on its own behalf or on behalf of a Lender or an Issuing Bank, shall be conclusive absent manifest error in the determination of such amount.
(d) As soon as practicable after any payment of Indemnified Taxes or Other Taxes by any Loan Party to a Governmental Authority, the Borrowers shall deliver to the Facility Agents the original or a certified copy of a receipt issued by such Governmental Authority evidencing such payment, a copy of the return reporting such payment or other evidence of such payment reasonably satisfactory to the Facility Agents.
(e) Any Foreign Lender that is entitled to an exemption from or reduction of withholding tax under the law of the jurisdiction in which a Loan Party is located, or any treaty to which such jurisdiction is a party, with respect to payments under this Agreement shall deliver to such Loan Party (with a copy to the Applicable Agent), at the time or times prescribed by applicable law, such properly completed and executed documentation prescribed by applicable law or reasonably requested by such Loan Party as will permit such payments to be made without withholding or at a reduced rate, provided that such Foreign Lender has received written notice from such Loan Party advising it of the availability of such exemption or reduction and supplying all applicable documentation.
such time is expressly required, prior to 3:00 p.m. in the Applicable Jurisdiction), on the date when due, in immediately available funds, without set-off or counterclaim. Any amounts received after such time on any date may, in the discretion of the Applicable Agent, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. All such payments to the US Agent shall be made to it at its offices at 270 Park Avenue, New York, New York, and all such payments to the Canadian Agent shall be made to it at its offices at 100 King Street West, Suite 6900, Toronto M5X1A4, Canada, except for payments to be made directly to any Issuing Bank as expressly provided herein and except that payments pursuant to Sections 2.15, 2.16, 2.17 and 9.03 shall be made directly to the Persons entitled thereto and payments pursuant to other Loan Documents shall be made to the Persons specified therein. Each Facility Agent shall distribute any such payments received by it for the account of any other Person to the appropriate recipient promptly following receipt thereof. If any payment under any Loan Document shall be due on a day that is not a Business Day, the date for payment shall be extended to the next succeeding Business Day, and, in the case of any payment accruing interest, interest thereon shall be payable for the period of such extension. All payments of the principal of and interest on and other amounts in respect of Canadian Term Loans and B/As, and all payments of commitment fees in respect of the Canadian Term Commitments and of B/A acceptance fees, shall be payable in Canadian Dollars. All other payments under each Loan Document shall be made in US Dollars.
(b) If at any time insufficient funds are received by and available to a Facility Agent to pay fully all amounts of principal, unreimbursed LC Disbursements, interest and fees then due hereunder, such funds shall be applied ratably among the parties entitled thereto in accordance with the amounts then due to such parties.
(c) If any Lender shall, by exercising any right of set-off or counterclaim or otherwise, obtain payment in respect of any principal of or interest on its Term Loans or Revolving Loans or payment obligation in respect of a B/A or LC Disbursement due from either Borrower resulting in such Lender receiving payment of a greater proportion of the aggregate amount of the principal of or interest on its Term Loans or Revolving Loans or payment obligations in respect of B/As or LC Disbursements due to it from such Borrower than the proportion received by any other Lender, then the Lender receiving such greater proportion shall purchase (for cash at face value) participations in the Revolving Loans,
(d) Unless the Applicable Agent shall have received notice from a Borrower prior to the date on which any payment is due to such Agent for the account of the Lenders or any Issuing Bank hereunder that such Borrower will not make such payment, such Agent may assume that such Borrower has made such payment on such date in accordance herewith and may, in reliance upon such assumption, distribute to the Lenders or such Issuing Bank, as the case may be, the amount due. In such event, if such Borrower has not in fact made such payment, then each of the Lenders or such Issuing Bank, as the case may be, severally agrees to repay to such Agent forthwith on demand the amount so distributed to such Lender or Issuing Bank with interest thereon, for each day from and including the date such amount is distributed to it to but excluding the date of payment to such Agent, at a rate determined by such Agent in accordance with banking industry rules on interbank compensation.
(e) If any Lender shall fail to make any payment required to be made by it hereunder, then the Facility Agents may, in their discretion (notwithstanding any contrary provision hereof), apply any amounts thereafter
received by them for the account of such Lender to satisfy such Lender's obligations under such Sections until all such unsatisfied obligations are fully paid.
in a material reduction in the compensation or payments required under such Sections. A Lender shall not be required to make any such assignment and delegation if, prior thereto, as a result of a waiver by such Lender or otherwise, the circumstances entitling the Company to require such assignment and delegation cease to apply.
reflect the increased Revolving Commitment of such Lender. Notwithstanding the foregoing, no increase in the aggregate Revolving Commitments (or in the Revolving Commitment of any Lender) shall become effective under this Section unless, on the date of such increase, the conditions set forth in paragraphs (a) and (b) of Section 4.02 shall be satisfied (with all references in such paragraphs to a Borrowing being deemed to be references to such increase) and the US Agent shall have received a certificate to that effect dated such date and executed by a Financial Officer of the Company. Following any increase of a Lender's Revolving Commitment or any extension of a new Revolving Commitment pursuant to this paragraph, any Revolving Loans outstanding prior to the effectiveness of such increase or extension shall continue outstanding until the ends of the respective Interests Periods applicable thereto, and shall then be repaid or refinanced with new Revolving Loans made pursuant to Sections 2.01 and 2.03.
ARTICLE III
The Company and CBIL severally represent and warrant to the Facility Agents and each Lender that:
(a) is a corporation, limited liability company or limited partnership duly organized, validly existing and in good standing under the laws of the jurisdiction of its incorporation or formation except as set forth in Schedule 3.01;
(b) has the power and authority and all material governmental licenses, authorizations, consents and approvals necessary to own its assets, to carry on its business and to execute, deliver, and perform its obligations under the Loan Documents;
(c) is duly qualified as a foreign corporation and is licensed and in good standing under the laws of each jurisdiction where its ownership, lease or operation of property or the conduct of its business requires such qualification or license; and
(d) is in compliance with all Requirements of Law; except, in each case referred to in clause (b) or clause
(c), to the extent that the failure to do so could not reasonably be expected to have a Material Adverse Effect.
(a) contravene the terms of any of that Person's Organization Documents;
(b) conflict with or result in any breach or contravention of, or the creation of any Lien (other than the Liens created under the Security Documents) under, any document evidencing any Contractual Obligation to which such Person is a party or any order, injunction, writ or decree of any Governmental Authority to which such Person or its property is subject; or
(c) violate any Requirement of Law;
except for any of the foregoing matters set forth in clause (b) or (c) that would not have a Material Adverse Effect.
proceedings, claims or disputes pending, or to the knowledge of either Borrower, threatened or contemplated, at law, in equity, in arbitration or before any Governmental Authority, against the Company or any of its Subsidiaries or any of their respective properties which:
(a) purport to affect or pertain to this Agreement or any other Loan Document, or any of the Transactions; or
(b) could reasonably be expected to be determined adversely to the Company or any applicable Subsidiary and, if so determined, could reasonably be expected to have a Material Adverse Effect. No injunction, writ, temporary restraining order or other order of any nature has been issued by any court or other Governmental Authority purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any other Loan Document, or directing that the Transactions not be consummated as herein or therein provided.
(b) There are no pending or, to the best knowledge of the Borrowers, threatened claims, actions or lawsuits, or actions by any Governmental Authority, with respect to any Plan which have resulted or could reasonably be expected to result in a Material Adverse Effect. There has been no prohibited transaction or violation of the fiduciary responsibility rules with respect to any Plan
which has resulted or could reasonably be expected to result in a Material Adverse Effect.
(c) (i) No ERISA Event has occurred or is reasonably expected to
occur; (ii) no Pension Plan has any Unfunded Pension Liability; (iii) neither
the Borrower nor any ERISA Affiliate has incurred, or reasonably expects to
incur, any liability under Title IV of ERISA with respect to any Pension Plan
(other than premiums due and not delinquent under Section 4007 of ERISA); (iv)
neither the Company nor any ERISA Affiliate has incurred, or reasonably expects
to incur, any liability (and no event has occurred which, with the giving of
notice under Section 4219 of ERISA, would result in such liability) under
Section 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (v)
neither the Company nor any ERISA Affiliate has engaged in a transaction that
could be subject to Section 4069 or 4212(c) of ERISA; which, in the case of any
of clauses (i) through (v), individually or in the aggregate, could reasonably
be expected to create a material liability to the Company and the Subsidiaries.
is no proposed tax assessment against the Company or any Subsidiary that would, if made, have a Material Adverse Effect.
(i) were prepared in accordance with GAAP consistently applied throughout the periods covered thereby, except as otherwise expressly noted therein;
(ii) fairly present in all material respects the financial condition of the Company and the Subsidiaries as of the dates thereof and results of their operations for the period covered thereby; and
(iii) except as specifically disclosed in Schedule 3.11, show all material Indebtedness and other liabilities, direct or contingent, of the Company and its consolidated Subsidiaries as of the dates thereof, including liabilities for taxes, material commitments and Contingent Obligations that are required to be disclosed in accordance with GAAP.
(b) Since December 31, 1999, there has been no Material Adverse Effect.
(c) The unaudited consolidated balance sheets of the Company and its Subsidiaries as of March 31 and June 30, 2000, and the related consolidated statements of income, shareholders' equity and cash flows for the fiscal quarters ending on such dates, (i) were prepared in accordance with GAAP, subject to ordinary, good faith year end audit adjustments and the absence of footnotes; and (ii) fairly present in all material respects the financial position and the results of operations of the Company and the Subsidiaries as of the dates thereof.
(b) Except as specifically disclosed in Schedule 3.12, the Company and the Subsidiaries has obtained all
licenses, permits, authorizations and registrations required under any Environmental Law ("Environmental Permits") and necessary for their respective ordinary course operations, all such Environmental Permits are in good standing, and the Company and the Subsidiaries are in compliance with all material terms and conditions of such Environmental Permits, except for failure to obtain or non-compliance which would not (if enforced in accordance with applicable law) reasonably be expected to have a Material Adverse Effect.
(c) Except as specifically disclosed in Schedule 3.12, none of the Company, any of the Subsidiaries or any of their respective present property or operations, is subject to any outstanding written order from or agreement with any Governmental Authority, or subject to any judicial or docketed administrative proceeding, respecting any Environmental Law, Environmental Claim or Hazardous Material, except such written orders, agreements or administrative proceedings which would not reasonably be expected to result in liability of US$3,000,000 in the aggregate in excess of amounts reserved for or reasonably available from insurance or third parties.
(b) All representations and warranties of the Company and the Subsidiaries party thereto contained in the Security Documents, as the schedules to which such representations refer shall have been updated from time to time in accordance with the provisions of the Security Documents, are true and correct.
threatened, and no patent, invention, device, application, principle or any statute, law, rule, regulation, standard or code is pending or, to the knowledge of the Borrowers, proposed, which, in either case, could reasonably be expected to have a Material Adverse Effect.
to be performed in connection with the Canadian Pension Plans and the funding agreements therefor have been performed in a timely fashion. There have been no improper withdrawals or applications of the assets of the Canadian Pension Plans or the Canadian Benefit Plans. There are no outstanding disputes concerning the assets of the Canadian Pension Plans or the Canadian Benefit Plans. Each of the Canadian Pension Plans is fully funded on a solvency basis (using actuarial methods and assumptions which are consistent with the valuations last filed with the applicable Governmental Authorities and which are consistent with generally accepted actuarial principles).]
ARTICLE IV
(a) The US Agent (or its counsel) shall have received from each party hereto either (i) a counterpart of this Agreement signed on behalf of such party or (ii) written evidence satisfactory to the US Agent (which may include telecopy transmission of a signed signature page of this Agreement) that such party has signed a counterpart of this Agreement.
(b) The US Agent shall have received a favorable written opinion (addressed to the Facility Agents, the Collateral Agents, the Issuing Banks and the Lenders and dated the Effective Date) of (i) Dechert, counsel to the Company, in substantially in the form of Exhibit H-1; (ii) Tory's, counsel to CBIL, in substantially in the form of Exhibit H-2; (iii) opinions of local real estate counsel to the Loan Parties in the jurisdictions specified in Schedule 4.01(b), in substantially in the form of Exhibit H-3; and (iv) opinions of Kirkland & Ellis and Reboul, MacMurray, Hewitt, Maynard & Kristol, counsel to Golder Thoma and Welsh Carson, respectively, substantially in the form of Exhibit H-4; in each case covering such other matters relating to the Loan Parties, the Loan Documents or the Transactions as the Facility Agents or the Required Lenders shall reasonably request. The Borrowers hereby request such counsel to deliver such opinions.
(c) The US Agent shall have received such documents and certificates as the US Agent or its counsel shall reasonably have requested relating to the organization, existence and good standing of each Loan Party, the authorization of the Transactions and any other legal matters relating to the Loan Parties, the Loan Documents or the Transactions, all in form and substance satisfactory to the US Agent and its counsel.
(d) The US Agent shall have received a certificate, dated the Effective Date and signed by the President, a Vice President or a Financial Officer of the Company, confirming compliance with the conditions set forth in paragraphs (a) and (b) of Section 4.02.
(e) The US Agent shall have received all fees and other amounts due and payable on or prior to the Effective Date, including, to the extent invoiced, reimbursement or payment of all out-of-pocket expenses (including reasonable fees, charges and disbursements of counsel) required to be reimbursed or paid by any Loan Party hereunder or under any other Loan Document.
(f) The Collateral and Guarantee Requirement shall have been satisfied and the Collateral Agents shall have received a completed Perfection Certificate dated the Effective Date and signed by an executive officer or Financial Officer of the Company, together with all attachments contemplated thereby, including the results of a search of the UCC (or equivalent) filings made with respect to the Loan Parties in the jurisdictions contemplated by the Perfection Certificate and copies of the financing statements (or similar documents) disclosed by such search and evidence reasonably satisfactory to the Collateral Agents that the Liens indicated by such financing statements (or similar documents) are permitted by Section 6.01 or have been released.
(g) The US Agent shall have received evidence that the insurance required by Section 5.06 and the Security Documents is in effect.
(h) The US Agent shall have received the Negative Pledge Agreement, duly executed by each of the parties thereto.
(i) All consents and approvals required to be obtained from any Governmental Authority or other Person in connection with the Transactions shall have
been obtained without the imposition of any burdensome conditions.
(j) The US Agent shall have received (i) audited consolidated and consolidating balance sheets and related statements of income, stockholders' equity and cash flows of the Company and the Subsidiaries for the fiscal years ended December 31, 1999 and 1998 and (ii) to the extent available, unaudited consolidated balance sheets and related statements of income, stockholders' equity and cash flows of the Company and the Subsidiaries for each fiscal quarter ended after December 31, 1999, and prior to the Effective Date.
(k) The US Agent shall have received the Company's budget for fiscal year 2000 and financial projections of the Company for each year through the final maturity of the Borrowings hereunder.
(l) The Lenders shall have received a solvency certificate from a Financial Officer of the Company, in form and substance reasonably satisfactory to the US Agent, and such other information as shall have been reasonably requested by the Lenders, confirming the solvency of each Borrower on a consolidated basis after giving effect to the Transactions occurring on the Effective Date.
(m) The Lenders shall be reasonably satisfied as to the amount and nature of any environmental or employee health and safety exposures to which the Company and the Subsidiaries shall be subject and with the plans of the Company and the Subsidiaries with respect thereto.
(n) The consummation of the Transactions shall not (i) violate any applicable law, statute, rule or regulation, (ii) cause or create any prepayment events or liens under any debt instruments or other agreements or (iii) conflict with, or result in a default or event of default under, any material agreement of the Company or any Subsidiary.
(o) The Existing Credit Agreements shall have been or shall simultaneously be terminated, all amounts outstanding thereunder shall have been paid in full and all Liens securing the obligations thereunder shall have been released, and the Administrative Agent shall have received such evidence as it shall reasonably have requested as to the satisfaction of such conditions.
(p) The terms of the Company's Class A Preferred Stock shall have been amended as necessary so that no prepayment, and no mandatory redemption or repurchase (including a redemption or repurchase at the option of the holders thereof) of any of such Preferred Stock will be required prior to the US Term Maturity Date.
The Administrative Agent shall notify the Company and the Lenders of the Effective Date, and such notice shall be conclusive and binding. Notwithstanding the foregoing, the obligations of the Lenders to make Loans and accept and purchase B/As and of the Issuing Banks to issue Letters of Credit hereunder shall not become effective unless each of the foregoing conditions is satisfied (or waived pursuant to Section 9.02) at or prior to 5:00 p.m., New York City time, on September 22, 2000 (and, in the event such conditions are not so satisfied or waived, the Commitments shall terminate at such time).
(a) The representations and warranties of each Loan Party set forth in the Loan Documents shall be true and correct in all material respects on and as of the date of such Borrowing or acceptance and purchase of B/As or the date of issuance, amendment, renewal or extension of such Letter of Credit, as applicable.
(b) At the time of and immediately after giving effect to such Borrowing or acceptance and purchase of B/As or the issuance, amendment, renewal or extension of such Letter of Credit, as applicable, no Default shall have occurred and be continuing.
Each Borrowing or acceptance and purchase of B/As and each issuance, amendment, renewal or extension of a Letter of Credit shall be deemed to constitute a representation and warranty by the Borrowers on the date thereof as to the matters specified in paragraphs (a) and (b) of this Section.
ARTICLE V
Until the Commitments have expired or been terminated and the principal of and interest on each Loan, each amount owed in respect of any B/A and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, each Borrower severally covenants and agrees with the Lenders that, unless the Required Lenders shall otherwise agree in writing:
(a) as soon as available, but not later than ninety days after the end of each fiscal year, a copy of the audited consolidated balance sheet of the Company and the Subsidiaries as at the end of such fiscal year and the related consolidated statements of income, shareholders' equity and cash flows for such year, and accompanied by the opinion of Pricewaterhouse Coopers LLP or another nationally-recognized independent public accounting firm (the "Independent Auditor") which report shall state that such consolidated financial statements present fairly in all material respects the financial position and results of operations of the Company and the Subsidiaries at the dates and for the periods indicated in conformity with GAAP. Such opinion shall not be qualified or limited because of a restricted or limited examination by the Independent Auditor of any material portion of the Company's or any Subsidiary's records;
(b) as soon as available, but not later than forty-five days after the end of each of the first three fiscal quarters of each fiscal year (commencing with the fiscal quarter ended September 30, 2000), a copy of the unaudited consolidated balance sheet of the Company and the Subsidiaries as of the end of such quarter and the related consolidated statements of income, shareholders' equity and cash flows for the period commencing on the first day and ending on the last day of such quarter, setting forth in comparative form the figures for the comparable quarter of the previous fiscal year, and certified by a Financial Officer of the Company as fairly presenting in all material respects, in accordance with GAAP (subject to ordinary, good faith year-end audit adjustments and the absence of
footnotes), the financial position and the results of operations of the Company and the Subsidiaries;
(d) as soon as available, but not later than January 31 of each year, financial projections for the Company on a consolidated basis in form and detail reasonably satisfactory to the US Agent for the period ending on the US Term Maturity Date.
(a) concurrently with the delivery of the financial statements referred to in Section 5.01(a) and (b), a compliance certificate executed by a Financial Officer of the Company together with a management analysis and discussion of such financial statements;
(b) promptly, but not later than five days after the distribution or filing thereof, (i) prior to an Initial Public Offering, copies of all financial statements and reports delivered to the Company's shareholders which would be in the nature of reports delivered to public shareholders, and, (ii) after an Initial Public Offering, copies of all financial statements and regular, periodic or special reports (including Forms 10K, 10Q and 8K) that the Company or any Subsidiary may make to, or file with, the SEC or that the Company sends to its shareholders; and
(c) promptly, such additional information regarding the business, financial or corporate affairs of the Company or any Subsidiary as the US Agent, at the request of any Lender, may from time to time reasonably request.
Any financial statement, report or other document required to be delivered pursuant to clauses (b) or (c) of this
Section 5.02 shall be deemed to have been delivered when the Company notifies the US Agent that such financial statement, report or other document is available to the general public on the Security and Exchange Commission's internet website.
(a) of the occurrence of any Default or Event of Default; of any breach or non-performance of, or any default under, any Contractual Obligation of the Company or any Subsidiary which could reasonably be expected to result in a Material Adverse Effect; and any dispute, litigation, investigation, proceeding or suspension which may exist at any time between the Company or any Subsidiary and any Governmental Authority which could reasonably be expected to result in a Material Adverse Effect;
(b) of the commencement of, or any material development in, any litigation or proceeding affecting the Company or any Subsidiary (i) in which the amount of damages (exclusive of amounts reserved for such litigation or proceeding or available from insurance) claimed is US$5,000,000 (or its equivalent in another currency or currencies) or more, (ii) in which injunctive or similar relief is sought and which could reasonably be expected to be adversely determined and which, if so determined, could reasonably be expected to have a Material Adverse Effect, or (iii) in which the relief sought is an injunction or other stay of the performance of this Agreement or any other Loan Document;
(c) upon, but in no event later than 10 days after, becoming aware of
(i) any and all enforcement, cleanup, removal or other governmental or
regulatory actions instituted, completed or threatened in writing against the
Company or any Subsidiary or any of their respective properties pursuant to any
applicable Environmental Laws which could reasonably be expected to be adversely
determined and which, if so determined, could reasonably be expected to give
rise to a potential liability of the Borrower and its Subsidiaries of
US$3,000,000 in the aggregate in excess of amounts reserved for or reasonably
available from insurance or third parties, (ii) all other Environmental Claims
which could reasonably be expected to be adversely determined and which, if so
determined, could reasonably be expected to give rise to a potential liability
of the Borrower and its Subsidiaries of US$3,000,000 in the aggregate in excess
of amounts reserved for or reasonably available from insurance or third parties,
and (iii) any
environmental or similar condition on any real property adjoining or in the vicinity of the property of the Company or any Subsidiary that could reasonably be anticipated to cause such property or any part thereof to be subject to any material restrictions on the ownership, occupancy, transferability or use of such property under any Environmental Laws, except for any such restrictions which would not affect such Person's ability to continue its previous use of such property;
(d) of any other litigation or proceeding affecting the Company or any Subsidiary (other than non-material Environmental Claims) which the Company would be required to report to the SEC pursuant to the Exchange Act, within four days after reporting the same to the SEC;
(e) of the occurrence of any of the following events affecting the Company or any ERISA Affiliate (but in no event more than 10 days after such event), and deliver to the US Agent and each Lender a copy of any notice with respect to such event that is filed with a Governmental Authority and any notice delivered by a Governmental Authority to the Company or any ERISA Affiliate with respect to such event:
(i) an ERISA Event that could reasonably be expected to create a material liability of the Company;
(ii) a material increase in the Unfunded Pension Liability of any Pension Plan;
(iii) the adoption of, or the commencement of contributions to, any Plan subject to Section 412 of the Code by the Company or any ERISA Affiliate; or
(iv) the adoption of any amendment to a Plan subject to Section 412 of the Code, if such amendment results in a material increase in contributions or Unfunded Pension Liability;
(g) of the creation of any new Subsidiary; and
(h) any default by a Loan Party under an LTACH Lease that remains uncured and unwaived for a period of more than 7 days.
Each notice under this Section shall be accompanied by a written statement by a Responsible Officer setting forth details of the occurrence referred to therein, and stating what action the Company or any affected Subsidiary proposes to take with respect thereto and at what time. Each notice under paragraph (a) above shall describe with particularity any and all clauses or provisions of this Agreement or other Loan Document that have been (or foreseeably will be) breached or violated.
(a) preserve and maintain in full force and effect its corporate existence and good standing under the laws of its state or jurisdiction of organization;
(b) preserve and maintain in full force and effect, except where the failure to do so would not result in a Material Adverse Effect, all governmental rights, privileges, qualifications, permits, licenses and franchises necessary or desirable in the normal conduct of its business (including, without limitation, the certifications for all of their LTACHs);
(c) use reasonable efforts, in the ordinary course of business, to preserve its business organization and goodwill; and
(d) preserve or renew all of its registered patents, trademarks, trade names and service marks, the non-preservation of which could reasonably be expected to have a Material Adverse Effect.
(a) all tax liabilities, assessments and governmental charges or levies upon it or its properties or assets, unless the same are being contested in good faith by appropriate proceedings and adequate reserves in accordance
with GAAP are being maintained by the Company or such Subsidiary and unless neither the Company nor any Subsidiary's title to and right to use its property is materially adversely affected by such non-payment;
(b) all lawful claims (other than Permitted Liens) which, if unpaid, would by law become a Lien upon its property unless neither the Company nor any Subsidiary's title to and right to use its property is materially adversely affected by such non-payment; and
(c) all Indebtedness as and when due and payable, but subject to any subordination provisions contained in any instrument or agreement evidencing such Indebtedness.
(b) Upon the written request of the US Agent or any Lender, the Company shall submit and cause each of its Subsidiaries to submit, to the US Agent with sufficient copies for each Lender, at the Company's sole cost and expense, at reasonable intervals (not to exceed once per year), a report providing an update of the status of any environmental, health or safety compliance, hazard or liability issue identified in any notice or report required pursuant to subsection 5.03(c), that could, individually or in the aggregate, reasonably be expected to result in liability which would have a Material Adverse Effect.
(b) The Company will, and will cause each Subsidiary to, execute any and all further documents, financing statements, agreements and instruments, and take all such further actions (including the filing and recording of financing statements, fixture filings, mortgages, deeds of trust and other documents), which may be required under any applicable law, or which either Collateral Agent or the Required Lenders may reasonably request, to cause the Collateral and Guarantee Requirement to be and remain satisfied at all times, all at the expense of the Loan Parties. The Company also agrees to provide to the
(a) At least 15 days' prior written notice from a Responsible Officer of the Company, stating the Company's intention to consummate such Acquisition or sale, together with a brief summary of the substantive terms thereof;
(b) No later than five days after the consummation of such Acquisition or sale, a certified copy of the executed contract or agreement relating to such Acquisition or sale; and
(b) The Company and CBIL shall pay and perform all of its obligations
under each Hedging Agreement entered into (i) prior to the date hereof with any
counterparty that is a Lender (or an Affiliate thereof) on the date hereof or
(ii) on or after the date hereof with any counterparty that is a Lender (or
Affiliate thereof) at the time such Hedging Agreement is entered into.
(b) The Company and CBIL shall cause each Loan Party that after the
date hereof adopts a Canadian Pension Plan (i) in the case of a Canadian Pension
Plan required to be registered under the ITA or any other applicable laws, to
use its best efforts to seek and receive confirmation in writing from the
applicable Governmental Authorities to the effect that such plan is
unconditionally registered under the ITA and such other applicable laws and (ii)
to perform in a timely fashion in all material respects all obligations
(including fiduciary, funding, investment and administration obligations)
required to be performed in connection with such plan and the funding media
therefor.
(c) The Company and CBIL shall cause each Loan Party to deliver to the Agents (i), promptly after the filing thereof by any Loan Party with any applicable Governmental Authority, copies of each annual and other
return, report or valuation with respect to each Canadian Pension Plan, (ii) promptly after receipt thereof, a copy of any direction, order, notice, ruling or opinion that any Loan Party may receive from any applicable Governmental Authority with respect to any Canadian Pension Plan, and (iii) notification within 30 days of any increases having a cost to such Loan Party in excess of C$300,000 per annum, in the benefits of any existing Canadian Pension Plan or Canadian Benefit Plan, or the establishment of any new Canadian Pension Plan or Canadian Benefit Plan, or the commencement of contributions to any such plan to which any Loan Party was not previously contributing.
ARTICLE VI
Until the Commitments have expired or been terminated and the principal of and interest on each Loan, each amount owed in respect of any B/A and all fees payable hereunder shall have been paid in full and all Letters of Credit shall have expired or terminated and all LC Disbursements shall have been reimbursed, each Borrower severally covenants and agrees with the Lenders that, unless the Required Lenders shall otherwise agree in writing:
(a) any Lien existing on property of the Company or any Subsidiary on the date hereof and set forth in Schedule 6.01 securing Indebtedness outstanding on such date;
(b) any Lien created under any Loan Document;
(c) Liens for taxes, fees, assessments or other governmental charges which are not delinquent or remain payable without penalty, or to the extent that non-payment thereof is permitted by Section 5.07, provided that no notice of lien has been filed or recorded under the Code or other applicable legislation;
(d) carriers', warehousemen's, mechanics', landlords', materialmen's, repairmen's or other similar
Liens arising in the ordinary course of business which are not delinquent or remain payable without penalty or to the extent that non-payment thereof is permitted by Section 5.07;
(e) Liens (other than any Lien imposed by ERISA and other than on the Collateral) consisting of pledges or deposits required in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and other similar legislation;
(f) Liens on the property of the Company or the Subsidiaries securing
(i) the non-delinquent performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, (ii) contingent obligations on
surety and appeal bonds, and (iii) other non-delinquent obligations of a like
nature; in each case, incurred in the ordinary course of business, provided all
such Liens in the aggregate would not (even if enforced) cause a Material
Adverse Effect;
(h) easements, rights-of-way, restrictions and other similar encumbrances incurred in the ordinary course of business which, in the aggregate, are not substantial in amount, and which do not in any case materially detract from the value of the property subject thereto or interfere with the ordinary conduct of the businesses of the Company and the Subsidiaries;
(j) purchase money security interests on any property acquired or held by the Company or the Subsidiaries in the ordinary course of business, securing Indebtedness
(m) Liens securing Indebtedness of a Subsidiary to the Company;
(n) Liens on property owned by the Company or any Subsidiary constituting leasehold improvements to the extent such property is affixed to the related real estate in such a manner as to be subject to Liens on the real estate to which it is affixed;
(o) provisions subordinating the interest of the Company or any Subsidiary, as a lessee, to an underlying lease or to a security interest in the leased property granted or to be granted by the lessor;
(p) restrictions on the assignability of the lessee's interest in any lease where the Company or any Subsidiary is a lessee; and
(q) any extension, renewal or replacement of any of the foregoing (subject to the limitations set forth above on the amounts of the Liens so replaced).
(a) dispositions in the ordinary course of business;
(b) the sale of equipment to the extent that such equipment is exchanged for credit against the purchase price of similar replacement equipment or the proceeds of such sale are applied within 180 days to the purchase price of such replacement equipment;
(c) dispositions of inventory and equipment by the Company or any Subsidiary to the Company or any Subsidiary pursuant to reasonable business requirements;
(e) dispositions by the Company of the stock of any Subsidiary to any other Subsidiary; dispositions by any Subsidiary of the Company to the Company; and dispositions by a Subsidiary to another Subsidiary;
(g) dispositions by the Company and any Subsidiary, in each case without recourse, of accounts receivable arising in the ordinary course of business in connection with the compromise or collection thereof (but not as part of a securitization program);
(h) the sale of Equity Interests in the Company including any such sale or issuance by the Company of its capital stock or options to purchase its capital stock to directors, officers or employees of Company or any of its Subsidiaries;
(i) the abandonment or other disposition of intellectual property that is, in the reasonable judgment of the Person owning such property, no longer economically practicable to maintain or useful in the conduct of the business of such Person; and
(j) transfers of assets permitted by Section 6.09.
(b) any US Subsidiary may merge with any one or more other US Subsidiaries and any Canadian Subsidiary may merge with any one or more other Canadian Subsidiaries;
(c) any Subsidiary may sell all or substantially all of its assets (upon voluntary liquidation or otherwise), to the Company or another Subsidiary; and
(d) any Subsidiary may merge with another Person in connection with a Permitted Acquisition or a permitted disposition under Section 6.02.
(a) Investments held by the Company or a Subsidiary in the form of cash equivalents or short term marketable securities;
(b) extensions of credit in the nature of accounts receivable or notes receivable arising from the sale or lease of goods or services in the ordinary course of business;
(c) Investments by the Company or a Subsidiary in any of its domestic Subsidiaries; existing Investments by the Company and the Subsidiaries in its Canadian Subsidiaries and additional Investments by the Company and the Subsidiaries in an aggregate amount not to exceed US$4,000,000 in any of the Canadian Subsidiaries (exclusive of any amounts prepaid in respect of the Canadian Term Loans pursuant to Section 2.11 and exclusive of amounts to be applied by CBIL to the repayment of the Canadian Term Loans); extensions of credit to the Company by any of the Subsidiaries or extensions of credit to any Subsidiary by another Subsidiary;
(d) any Investment which is a Permitted Acquisition;
(e) loans to third party professional corporations or similar entities with which the Company or any Subsidiary has an exclusive management arrangement which are secured by all of the assets of such corporation or entity and all of the Company's rights under which loans have been pledged as Collateral, so long as the aggregate amount of all such Investments and outstanding loans does not exceed US$30,000,000 at any time;
(f) Investments in Joint Ventures permitted under Section 6.09;
(g) Investments in connection with the repurchase of minority interests permitted under subsection 6.11(c);
(h) Investments outstanding on the date hereof and identified in Schedule 6.04;
(i) Investments that constitute Indebtedness permitted under Section 6.05;
(j) pledges or deposits required in the ordinary course of business in connection with workmen's compensation, unemployment insurance and other social security or similar legislation;
(k) pledges or deposits required in the ordinary course of business in connection with the non-delinquent performance of bids, trade contracts (other than for borrowed money), leases or statutory obligations, contingent obligations on Surety Instruments, and any other non-delinquent obligations of a like nature;
(l) advances, loans or extensions of credit to employees and directors not to exceed US$2,000,000 at any time outstanding;
(m) advances, loans or extensions of credit in an aggregate amount not to exceed US$500,000 to suppliers in the ordinary course of business by the Company or any Subsidiary;
(n) Investments received in connection with the bankruptcy or reorganization of suppliers and customers and in settlement of delinquent obligations of, and other disputes with, customers or suppliers arising in the ordinary course of business;
(o) Investments for the creation of any Subsidiary (including any Canadian Subsidiary if permitted by clause (c) of this Section);
(p) Investments consisting of non-cash consideration received in the form of securities, notes or similar obligations in connection with a disposition permitted by Section 6.02;
(q) Investments consisting of commitments to the extent the obligation of the Company or a Subsidiary to perform its obligations thereunder is conditioned on the approval of the Required Lenders; and
(r) Investments not otherwise described in this Section which do not exceed US$5,000,000 in the aggregate at any time outstanding, net of returns of capital, cash dividends and distributions received in respect thereof and net cash proceeds of sales thereof.
(a) Indebtedness incurred pursuant to this Agreement;
(b) Indebtedness consisting of Contingent Obligations permitted pursuant to Section 6.08;
(c) unsecured Indebtedness of the Company or any Subsidiary assumed or incurred to a seller in connection with an Acquisition or Investment consummated prior to the date hereof and set forth in Part A of Schedule 6.05, and other Indebtedness existing on the date hereof and set forth in Part B of Schedule 6.05, and refinancings of such Indebtedness that do not increase the principal amount or shorten the maturity thereof;
(e) Indebtedness secured by Liens permitted by paragraphs (i) and (j) of Section 6.01;
(f) Indebtedness in an aggregate amount not to exceed US$10,000,000 incurred in connection with capital leases permitted under Section 6.10;
(g) Indebtedness permitted under paragraph (c) of Section 6.04;
(h) Indebtedness from honoring a check, draft or similar instrument against insufficient funds;
Lenders than the terms customarily provided by the Company to sellers prior to the date hereof;
(j) unsecured Indebtedness on account of trade payables arising in the ordinary course of business;
(k) unsecured Indebtedness not otherwise described in this Section of the Company or any Subsidiary in an aggregate amount that, together with Contingent Obligations (without duplication) permitted under Section 6.08(e), does not exceed US$5,000,000 at any time outstanding;
(l) Indebtedness in respect of Hedging Agreements required to be entered into by Section 5.15 or otherwise entered into to hedge against risks to which the Company is exposed in the course of its business, but not for speculative purposes; and
(m) Indebtedness under the Designated Canadian Revolving Facilities.
(a) endorsements for collection or deposit in the ordinary course of business;
(b) Contingent Obligations of the Company and the Subsidiaries existing as of the date hereof and listed in Schedule 6.08;
(c) Contingent Obligations with respect to Surety Instruments made in the ordinary course of business;
(d) Contingent Obligations of the Company on behalf of its Subsidiaries; and
(e) Contingent Obligations not otherwise described in this Section of the Company or any Subsidiary in an aggregate amount that, together with Indebtedness (without duplication) permitted under Section 6.05(k), does not exceed US$5,000,000 at any time outstanding.
(a) leases of the Company and of Subsidiaries in existence on the date hereof;
(b) operating leases entered into by the Company or any Subsidiary after the date hereof in the ordinary course of business;
(c) capital leases entered into by the Company or any Subsidiary after the date hereof to finance the acquisition of property or equipment; and
obligations or securities on account of any shares of any class of its capital stock, or purchase, redeem or otherwise acquire for value any shares of its capital stock or any warrants, rights or options to acquire such shares, now or hereafter outstanding; except that the Company or, with respect to clause (b), the Company or any Subsidiary, may:
(a) declare and make dividend payments or other distributions payable solely in its common stock;
(b) so long as no Default shall have occurred and be continuing or would result therefrom, declare and pay cash dividends on its Class A and Class B preferred stock at the rates provided in the Company's certificate of incorporation as in effect on the date hereof;
(c) purchase, redeem or otherwise acquire shares of its common stock or warrants or options to acquire any such shares (i) with proceeds received from (A) the substantially concurrent issue of new shares of its common stock or (B) its directors, officers or employees, (ii) so long as no Default is continuing or would arise as a result thereof, from officers, directors and employees in connection with the termination of their relationships with the Company and the Subsidiaries for consideration not exceeding US$2,500,000 in the aggregate, (iii) in connection with the exercise by the holder of any minority interest in a Subsidiary of its rights under a "put", repurchase or similar arrangement described (as to material terms) in Schedule 6.11, and (iv) so long as no Default is continuing or would arise as a result thereof, in connection with the exercise by the holder of any minority interest in a Subsidiary of its rights under a "put", "call", repurchase or similar arrangement not described in Schedule 6.11 with the Company or a Subsidiary (exclusive of any "put", "call", repurchase or similar arrangement exercised upon an Initial Public Offering), in an aggregate amount not to exceed US$10,000,000 for all such exercises by all such holders;
(d) permit any Subsidiary to declare and make dividend payments to the Company or minority interest holders or any Subsidiary to declare and make dividend payments to any other Subsidiary; and
(e) permit any Joint Venture to declare and make dividend payments or distributions in accordance with the terms of its operating agreement.
fiduciary responsibility rules with respect to any Plan which has resulted or could reasonably expected to result in liability of the Company in an aggregate amount in excess of US$500,000 or (b) engage in a transaction that reasonably could be expected to be subject to Section 4069 or 4212(c) of ERISA.
(a) the Fixed Charge Coverage Ratio as of any fiscal quarter end occurring during any period set forth below to be less than the ratio set forth below opposite such period:
Period Minimum Fixed ------ ------------- Charge Coverage Ratio --------------------- The Effective Date through 0.90 to 1.00 June 30, 2002 July 1, 2002 through 0.95 to 1.00 September 30, 2002 October 1, 2002 and 1.00 to 1.00 thereafter |
(b) the Interest Coverage Ratio as of any fiscal quarter end occurring during any period set forth below to be less than the ratio set forth below opposite such period:
Period Minimum Interest Coverage Ratio ------ ------------------------------- The Effective Date 2.00 to 1.00 through December 31, 2000 January 31, 2001 2.25 to 1.00 through June 30, 2001 July 1, 2001 through 2.75 to 1.00 December 31, 2001 January 1, 2002 through 3.25 to 1.00 June 30, 2002 July 1, 2002 through 3.50 to 1.00 December 31, 2002 January 1, 2003 and 3.50 to 1.00 thereafter |
(c) the Leverage Ratio as of any date during any period set forth below to be greater than the amount set forth below opposite such period:
Period Maximum Leverage Ratio ------ ---------------------- The Effective Date 3.75 to 1.00 through December 31, 2000 January 31, 2001 through 3.50 to 1.00 June 30, 2001 July 1, 2001 through 3.00 to 1.00 December 31, 2001 January 1, 2002 through 2.75 to 1.00 June 30, 2002 July 1, 2002 through 2.25 to 1.00 December 31, 2002 January 1, 2003 and 2.25 to 1.00 thereafter |
(d) Net Worth on any date to be less than (i) during the period from the Effective Date through December 31, 2000, US$151,800,000 and (ii) during any fiscal quarter thereafter, US$151,800,000, plus 50% of the consolidated net income of the Company and the Subsidiaries from January 1, 2001 through such date.
ARTICLE VII
scheduled maturity, required prepayment, acceleration, demand, or otherwise) and
such failure continues after the expiration of any applicable grace period; or
(ii) fails to perform or observe any other condition or covenant and such
failure continues after the expiration of any applicable grace period, or any
other event shall occur or condition exist, under any agreement or instrument
relating to any such Indebtedness or Contingent Obligation or any such Hedging
Agreement or Equity Interest referred to in clause (i), if the effect of such
failure, event or condition is to cause, or to permit the holder or holders of
such Indebtedness or Equity Interest or beneficiary or beneficiaries of such
Indebtedness (or a trustee or agent on behalf of such holder or holders or
beneficiary or beneficiaries) to cause, such Indebtedness or Equity Interest to
be declared to be or to become due and payable, or to be required to be redeemed
or repurchased, prior to its stated maturity, or such Hedging Agreement to be
terminated, or such Contingent Obligation to become payable or cash collateral
in respect thereof to be demanded, except in the event the effect of such
failure, event or condition shall have been waived; or
have expired except for any of the foregoing which could not reasonably be expected to have a Material Adverse Effect; or
ARTICLE VIII
The banks serving as the Agents hereunder shall have the same rights and powers in their capacity as Lenders as any other Lender and may exercise the same as though they were not the Agents, and such banks and their Affiliates may accept deposits from, lend money to and generally engage in any kind of business with the Company or any Subsidiary or other Affiliate thereof as if they were not the Agents hereunder.
The Agents shall not have any duties or obligations except those expressly set forth in the Loan Documents. Without limiting the generality of the
foregoing, (a) the Agents shall not be subject to any fiduciary or other implied duties, regardless of whether a Default has occurred and is continuing, (b) the Agents shall not have any duty to take any discretionary action or exercise any discretionary powers, except discretionary rights and powers expressly contemplated by the Loan Documents that the Agents are required to exercise in writing by the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02), and (c) except as expressly set forth in the Loan Documents, the Agents shall not have any duty to disclose, and shall not be liable for the failure to disclose, any information relating to the Company or any Subsidiary that is communicated to or obtained by it in any capacity other than its capacity as Agent. The Agents shall not be liable for any action taken or not taken by them with the consent or at the request of the Required Lenders (or such other number or percentage of the Lenders as shall be necessary under the circumstances as provided in Section 9.02) or in the absence of their own gross negligence or wilful misconduct. The Agents shall not be deemed to have knowledge of any Default unless and until written notice thereof is given to them by the Company or a Lender, and the Agents shall not be responsible for or have any duty to ascertain or inquire into (i) any statement, warranty or representation made in or in connection with any Loan Document, (ii) the contents of any certificate, report or other document delivered thereunder or in connection therewith, (iii) the performance or observance of any of the covenants, agreements or other terms or conditions set forth in any Loan Document, (iv) the validity, enforceability, effectiveness or genuineness of any Loan Document or any other agreement, instrument or document, or (v) the satisfaction of any condition set forth in Article IV or elsewhere in any Loan Document, other than to confirm receipt of items expressly required to be delivered to them.
The Agents shall be entitled to rely upon, and shall not incur any liability for relying upon, any notice, request, certificate, consent, statement, instrument, document or other writing believed by them to be genuine and to have been signed or sent by the proper Person. The Agents also may rely upon any statements made to them orally or by telephone and believed by them to be made by the proper Persons, and shall not incur any liability for relying thereon. The Agents may consult with legal counsel (who may be counsel for the Company), independent accountants and other experts selected by them, and shall not be liable for any action taken or not taken by them in
accordance with the advice of any such counsel, accountants or experts.
The Agents may perform any of and all their duties and exercise their rights and powers by or through any one or more sub-agents appointed by them and selected with reasonable care. The Agents and any such sub-agent may perform any and all its duties and exercise its rights and powers through their respective Related Parties. The exculpatory provisions of the preceding paragraphs shall apply to any such sub-agent and to the Related Parties of each Agent and any such sub-agent, and shall apply to their respective activities in connection with the syndication of the credit facilities provided for herein as well as activities in their capacities as Agents.
Subject to the appointment and acceptance of a successor Agent as provided in this paragraph, any Agent may resign at any time by notifying the Lenders, the Issuing Banks and the Borrowers. Upon any such resignation, the Required Lenders shall have the right, in consultation with the Borrowers, to appoint a successor. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Agent gives notice of its resignation, then the retiring Agent may, on behalf of the Lenders and the Issuing Banks, appoint a successor Agent which shall be (a) in the case of a successor to the US Agent, a bank with an office in New York, New York, or an Affiliate of any such bank, and (b) in the case of a successor to the Canadian Agent, a bank with an office in Toronto, Canada, or an Affiliate of any such bank. Upon the acceptance of its appointment as an Agent hereunder by a successor, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations hereunder. The fees payable by the Borrowers to a successor Agent shall be the same as those payable to its predecessor unless otherwise agreed between the Borrowers and such successor. After an Agent's resignation hereunder, the provisions of this Article and Section 9.03 shall continue in effect for the benefit of such retiring Agent, its sub-agents and their respective Related Parties in respect of any actions taken or omitted to be taken by any of them while it was acting as Agent.
Each Lender acknowledges that it has, independently and without reliance upon any Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also
acknowledges that it will, independently and without reliance upon any Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement, any other Loan Document or related agreement or any document furnished hereunder or thereunder.
It is understood that the financial institutions named in the heading of this Agreement as Syndication Agent and Documentation Agent shall have no duties or responsibilities for the administration of this Agreement or the other Loan Documents.
ARTICLE IX
(a) if to the Company, to it at 4716 Old Gettysburg Road, Mechanicsburg, Pennsylvania 17055, Attention of General Counsel (Telecopy No. 717-975-9981);
(b) if to CBIL or any other Loan Party (other than the Company), to it in care of the Company;
(c) if to the US Agent, to The Chase Manhattan Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Victor Quinones (Telecopy No. (212) 552-7500), with a copy to The Chase Manhattan Bank, 270 Park Avenue, New York, New York 10017, Attention of Stephen P. Rochford, Vice President (Telecopy No. (212) 270-5135);
(d) if to the Canadian Agent, to The Chase Manhattan Bank of Canada, 100 King Street West, Suite 6900, Toronto M5X1A4, Canada, Attention of Christine Chan, Vice President (Telecopy No. (416) 216-4133);
(e) if to The Chase Manhattan Bank, as Issuing Bank, to it at The Chase Manhattan Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Victor Quinones (Telecopy No. (212) 552-7500) and if to any other Issuing Bank, to it at its address (or telecopy number) set forth in a notice from such Issuing Bank to the parties hereto; and
(f) if to any Lender, to it at its address (or telecopy number) set forth in its Administrative Questionnaire.
Any party hereto may change its address or telecopy number for notices and other communications hereunder by notice to the other parties hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt.
(b) Neither this Agreement nor any other Loan Document nor any provision hereof or thereof may be waived, amended or modified except, in the case of this Agreement, pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders or, in the case of any other Loan Document, pursuant to an agreement or
Lenders) or the Canadian Term Lenders (but not the Revolving Lenders or the US Term Lenders) may be effected by an agreement or agreements in writing entered into by the Borrowers and requisite percentage in interest of the affected Class of Lenders that would be required to consent thereto under this Section if such Class of Lenders were the only Class of Lenders hereunder at the time. Notwithstanding the foregoing, any provision of this Agreement may be amended by an agreement in writing entered into by the Borrowers, the Required Lenders and the Facility Agents (and, if their rights or obligations are affected thereby, the Issuing Banks) if (i) by the terms of such agreement the Commitment of each Lender not consenting to the amendment provided for therein shall terminate upon the effectiveness of such amendment and (ii) at the time such amendment becomes effective, each Lender not consenting thereto receives payment in full of the principal of and interest accrued on each Loan made by it and all other amounts owing to it or accrued for its account under this Agreement.
(d) To the extent permitted by applicable law, neither Borrower shall assert, and each hereby waives, any claim against any Indemnitee, on any theory of liability, for special, indirect, consequential or punitive damages (as opposed to direct or actual damages) arising out of, in connection with or as a result of this Agreement or any
agreement or instrument contemplated hereby, the Transactions, any Loan or Letter of Credit or the use of the proceeds thereof.
(e) All amounts due under this Section shall be payable promptly after written demand therefor.
(d) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee, the assignee's completed Administrative Questionnaire (unless the assignee shall already be a Lender
hereunder), the processing and recordation fee referred to in paragraph (b) of
this Section and any written consent to such assignment required by paragraph
(b) of this Section, the US Agent shall accept such Assignment and Acceptance
and record the information contained therein in the Register. No assignment
shall be effective for purposes of this Agreement unless it has been recorded in
the Register as provided in this paragraph.
(f) A Participant shall not be entitled to receive any greater payment under Section 2.15 or 2.17 than the applicable Lender would have been entitled to receive with respect to the participation sold to such Participant, unless the sale of the participation to such Participant is made with the Borrower's prior written consent. A Participant that would be a Foreign Lender if it were a Lender shall not be entitled to the benefits of Section 2.17 unless the Company is notified of the participation sold to such Participant and such Participant agrees, for the
benefit of the Borrowers, to comply with Section 2.17(e) as though it were a Lender.
matter hereof. Except as provided in Section 4.01, this Agreement shall become effective when it shall have been executed by the Agents and when the US Agent shall have received counterparts hereof which, when taken together, bear the signatures of each of the other parties hereto, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. Delivery of an executed counterpart of a signature page of this Agreement by telecopy shall be effective as delivery of a manually executed counterpart of this Agreement.
(b) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the
nonexclusive jurisdiction of the Supreme Court of the State of New York sitting in New York County and of the United States District Court of the Southern District of New York, and any appellate court from any thereof, in any action or proceeding arising out of or relating to any Loan Document, or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Nothing in this Agreement or any other Loan Document shall affect any right that any Agent, any Issuing Bank or any Lender may otherwise have to bring any action or proceeding relating to this Agreement or any other Loan Document against either Borrower or its properties in the courts of any jurisdiction.
(c) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or hereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any other Loan Document in any court referred to in paragraph (b) of this Section. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court.
(d) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement or any other Loan Document will affect the right of any party to this Agreement to serve process in any other manner permitted by law.
ENTER INTO THIS AGREEMENT BY, AMONG OTHER THINGS, THE MUTUAL WAIVERS AND CERTIFICATIONS IN THIS SECTION.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written.
SELECT MEDICAL CORPORATION,
by /s/ Michael E. Tarvin __________________________ Name: Title: |
CANADIAN BACK INSTITUTE
LIMITED,
by /s/ Kenneth Moore _________________________ Name: Title: |
THE CHASE MANHATTAN BANK,
individually and as US Agent,
Issuing Bank and US Collateral
Agent,
by /s/ Stephen P. Rochford _________________________ Name: Title: |
THE CHASE MANHATTAN BANK OF
CANADA, individually and as
Canadian Agent and Canadian
Collateral Agent,
by /s/ Christine Chan /s/ Drew McDonald ______________________________________ Name: Title: |
EXHIBIT 10.5
SECURITIES PURCHASE AGREEMENT
Among
SELECT MEDICAL CORPORATION,
WELSH, CARSON, ANDERSON & STOWE VII, L.P.,
WCAS CAPITAL PARTNERS III, L.P., THOMA, CRESSEY, RAUNER FUND V, L.P.,
GTCR ASSOCIATES V,
THOMA CRESSEY FUND VI, L.P.,
GTCR FUND VI, L.P.,
GTCR ASSOCIATES VI,
GTCR VI EXECUTIVE FUND, L.P.,
and
THE SEVERAL PERSONS NAMED
IN SCHEDULE I HERETO
Dated as of December 15, 1998
TABLE OF CONTENTS
I. PURCHASE AND SALE OF SECURITIES.................................................................... 2 SECTION 1.01. Issuance and Sale of the Shares to the Purchasers...................................... 2 SECTION 1.02. Issuance and Sale of the Initial Note and Shares to WCAS CP III........................ 2 SECTION 1.03. Closing Date........................................................................... 3 SECTION 1.04. Issuance and Sale of Additional Notes to WCAS CP III................................... 3 SECTION 1.05. Subsequent Closing Dates............................................................... 4 II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY...................................................... 4 SECTION 2.01. Organization and Corporate Power....................................................... 4 SECTION 2.02. Capital Stock and Related Matters...................................................... 5 SECTION 2.03. Subsidiaries, Investments.............................................................. 6 SECTION 2.04. Authorization of Agreements............................................................ 6 SECTION 2.05. Validity............................................................................... 7 SECTION 2.06. Financial Statements; Undisclosed Liabilities.......................................... 7 SECTION 2.07. Tax Matters............................................................................ 7 SECTION 2.08. Litigation, Etc........................................................................ 8 SECTION 2.09. Brokerage.............................................................................. 8 SECTION 2.10. Consents, Etc.......................................................................... 8 SECTION 2.11. ERISA.................................................................................. 8 SECTION 2.12. Compliance with Laws................................................................... 9 SECTION 2.13. Disclosure............................................................................. 9 III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS................................................... 9 SECTION 3.01. Investment............................................................................. 9 SECTION 3.02. Brokerage.............................................................................. 10 IV. COVENANTS.......................................................................................... 10 SECTION 4.01. Financial Statements and Other Information............................................. 10 SECTION 4.02. Inspection of Property................................................................. 12 SECTION 4.03. Restrictions........................................................................... 12 SECTION 4.04. Affirmative Covenants.................................................................. 14 SECTION 4.05. Current Public Information............................................................. 14 SECTION 4.06. Amendment of Other Agreements.......................................................... 14 SECTION 4.07. Limited Preemptive Rights.............................................................. 14 SECTION 4.08. Public Disclosures..................................................................... 15 SECTION 4.09. Unrelated Business Taxable Income...................................................... 16 SECTION 4.10. Hart-Scott-Rodino Compliance........................................................... 16 SECTION 4.11. Conduct of the Company's Business...................................................... 16 SECTION 4.12. Further Assurances..................................................................... 16 SECTION 4.13. Transfer of Restricted Securities...................................................... 17 SECTION 4.14. Waiver of Preemptive Rights With Respect to the Sale of the Securities................. 17 V. CONDITIONS PRECEDENT............................................................................... 18 |
SECTION 5.01. Conditions Precedent to the Obligations of the Purchasers on the Closing Date.......... 18 SECTION 5.02. Conditions Precedent to the Obligations of the Company on the Closing Date............. 20 SECTION 5.03. Conditions Precedent to the Obligations of WCAS CP III on each Subsequent Closing Date. 20 SECTION 5.04. Conditions Precedent to the Obligations of the Company on the Closing Date............. 21 VI. TERMINATION........................................................................................ 22 SECTION 6.01. Termination by the Parties............................................................. 22 SECTION 6.02. Effect of Termination.................................................................. 22 VII. MISCELLANEOUS...................................................................................... 22 SECTION 7.01. Expenses, Etc.......................................................................... 22 SECTION 7.02. Survival of Agreements................................................................. 22 SECTION 7.03. Parties in Interest.................................................................... 23 SECTION 7.04. Notices................................................................................ 23 SECTION 7.05. Entire Agreement; Assignment........................................................... 24 SECTION 7.06. Counterparts........................................................................... 24 SECTION 7.07. Definitions............................................................................ 24 SECTION 7.08. Headings............................................................................... 25 SECTION 7.09. Severability........................................................................... 25 SECTION 7.10. Governing Law.......................................................................... 25 |
INDEX TO EXHIBITS, SCHEDULES AND ANNEX
Exhibit Description ------- ----------- A Form of Senior Subordinated Note B Form of Certificate of Amendment C Form of Amendment to Stockholders Agreement D Form of Amendment to Registration Agreement E Form of Professional Services Agreement F Opinion of Dechert Price & Rhoads Schedule Description -------- ----------- I Purchasers 2.02 Capital Stock 2.03 Subsidiaries 2.04(a) Authorizations, Etc. 2.06 Financial Statements; Undisclosed Liabilities 2.07 Taxes 2.08 Litigation 2.10 Consents iii |
SECURITIES PURCHASE AGREEMENT dated as of December 15, 1998, among |
SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"), WELSH, CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited partnership ("WCAS VII"), WCAS CAPITAL PARTNERS III, L.P., a Delaware limited partnership ("WCAS CP III"), GOLDER, THOMA, CRESSEY, RAUNER FUND V, L.P., a Delaware limited partnership ("GTCR Fund V"), GTCR ASSOCIATES V, a Delaware general partnership ("GTCR Associates V"), THOMA CRESSEY FUND VI, L.P. ("Thoma Cressey"), GTCR ASSOCIATES VI, a Delaware general partnership ("GTCR Associates VI"), GTCR VI EXECUTIVE FUND, L.P., a Delaware limited partnership ("GTCR Executive Fund"), Bryan C. Cressey, GTCR FUND VI, ("GTCR Fund VI" and, together with GTCR Fund V, GTCR Associates V, Thoma Cressey, Bryan C. Cressey, GTCR Associates VI and GTCR Executive Fund, "GTCR"), and the several persons named in Schedule I hereto (collectively with WCAS VII, WCAS CP III and GTCR, the "Purchasers").
WHEREAS, the Company desires to sell to the Purchasers (other than WCAS CP III) on the Closing Date (as hereinafter defined), and such Purchasers desire to purchase from the Company, on the terms and subject to the conditions set forth herein, an aggregate 18,571,429 shares of Common Stock, $.01 par value per share ("Common Stock"), of the Company at a purchase price of $3.50 per share; and
WHEREAS, the Company desires to sell to WCAS CP III on the Closing Date, and WCAS CP III desires to purchase from the Company, on the terms and subject to the conditions set forth herein, (i) a Senior Subordinated Note of the Company due December 15, 2008 substantially in the form of Exhibit A hereto (such note and any note issued in substitution therefor being hereafter called the "Initial Note"), in the principal amount of $35,000,000, and (ii) 2,653,060 shares (collectively with the shares to be purchased by the other Purchasers pursuant to this Agreement, the "Shares") of Common Stock, for an aggregate purchase price of $35,000,000; and
WHEREAS, the Company desires to sell to WCAS CP III on one or more Subsequent Closing Dates (as hereinafter defined), and WCAS CP III desires to purchase from the Company, on the terms and subject to the conditions set forth herein, up to an aggregate $30,000,000 principal amount of additional Senior Subordinated Notes of the Company due December 15, 2008 substantially in the form of the Initial Note (such note and any note issued in substitution therefor being hereafter called the "Additional Notes") (the Initial Note and the Additional Notes being hereafter called collectively the "Notes") for an aggregate purchase price equal to the principal amount thereof and
WHEREAS, the Company has agreed, as a condition to the obligation of the Purchasers to purchase said securities, that, contemporaneously with the closing of the purchase and sale of the Shares and the Initial Note, the Company shall (i) consummate the cash tender offer contemplated by that certain Agreement and Plan of Merger dated as of November 9, 1998 (the "Merger Agreement") among the Company, Select Medical of Mechanicsburg, Inc. and Intensiva Healthcare Corporation ("Intensiva"), and in connection therewith, acquire at least 90% of the issued and outstanding shares of Common Stock, par value $0.001 per share, of Intensiva on a fully-diluted basis, at a price not to exceed $9.625 per share, and (ii) use the
proceeds from the sale of the Shares and the Initial Note to pay the cash consideration to the stockholders of Intensiva contemplated by the Merger Agreement and other expenses relating to the acquisition of Intensiva and, with any remaining proceeds, to refinance indebtedness for borrowed money of Intensiva and for general corporate purposes; and
WHEREAS, the Company desires to amend its Restated Certificate of Incorporation (the "Certificate of Incorporation") pursuant to the Certificate of Amendment substantially in the form of Exhibit B hereto (the "Certificate of Amendment") to increase the Company's authorized Common Stock from 24,000,000 shares to 60,000,000 shares; and
WHEREAS, the parties desire that the Shares to be issued hereunder to WCAS VII and GTCR shall not entitle the holder thereof to any voting rights, except as required by law, until all applicable waiting periods under the Hart- Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), shall have expired or been terminated with respect to the acquisition by each of WCAS VII and GTCR of the Shares being acquired by it hereunder.
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:
I.
PURCHASE AND SALE OF SECURITIES
(a) Subject to the terms and conditions set forth herein, on the Closing Date (as hereinafter defined) the Company shall issue, sell and deliver to each Purchaser (other than WCAS CP III), and each such Purchaser, acting severally and not jointly, shall purchase from the Company, the number of shares of Common Stock set forth opposite the name of such Purchaser on Schedule I hereto under the heading "Number of Shares of Common Stock," for a purchase price of $3.50 per share. On the Closing Date, the Company shall issue a certificate or certificates in definitive form, registered in the name of each Purchaser (other than WCAS CP III), representing the number of Shares purchased by such Purchaser.
(b) As payment in full for the Shares being purchased by it hereunder, and against delivery of the certificate or certificates therefor as aforesaid, on the Closing Date each Purchaser (other than WCAS CP III), acting severally and not jointly, shall transfer, by wire transfer of immediately available funds to an account designated by the Company, the amount set forth opposite the name of such Purchaser on Schedule I under the heading "Aggregate Purchase Price."
(a) Subject to the terms and conditions set forth herein, on the Closing Date the Company shall issue, sell and deliver to WCAS CP III, and WCAS CP III shall purchase from the Company, 2,653,060 shares of Common Stock and the Initial Note (the Initial Note, together with the Shares, being hereinafter collectively called the "Initial Securities"), for an aggregate purchase price of $35,000,000. On the Closing Date, the Company shall issue the
Initial Note and a certificate for such shares of Common Stock in definitive form, registered in the name of WCAS CP III.
(b) On the Closing Date, as payment in full for the Initial Note and the shares of Common Stock being purchased by it, and against delivery of the Initial Note and a certificate for such shares of Common Stock as aforesaid, WCAS CP III shall pay to the Company $35,000,000 by wire transfer of immediately available funds to an account designated by the Company.
III to purchase such Additional Notes as described herein shall expire and terminate; provided, however, for a period of 60 days after the Termination Date, WCAS CP III may elect to purchase any unpurchased Additional Notes in accordance with this Section 1.04 by delivering a written request to the Company.
II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to each Purchaser to enter into this Agreement and purchase the Initial Securities and the Additional Notes, if any (collectively, the "Securities"), being purchased by such Purchaser, the Company represents and warrants to the Purchasers as follows:
(a) As of the Closing and immediately thereafter, the authorized capital stock of the Company shall consist of 60,000,000 shares of Common Stock, 3,000,000 shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and 55,000 shares of Preferred Stock, $01 par value per share ("Preferred Stock"), of the Company, of which 55,000 shares have been designated as Class A Preferred Stock. Immediately prior to the Closing, 21,097,206.5 shares of Common Stock, no shares of Class A Common Stock and 53,037.37 shares of Preferred Stock will be issued and outstanding, and 450,000 shares of Common Stock will have been reserved for issuance pursuant to the Company's stock option plans in effect as of the Closing. Except as contemplated by this Agreement or set forth in Schedule 2.02 hereto, as of the Closing, the Company shall not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, nor shall it have outstanding any warrants, rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans. As of the Closing, the Company shall not be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock, except as set forth in Schedule 2.02.
(b) There are no statutory or, to the best of the Company's
knowledge, contractual stockholders preemptive rights or rights of refusal with
respect to the issuance of Securities hereunder, except as set forth in Schedule
2.02. To the best of the Company's knowledge, the Company has not violated any
applicable federal or state securities laws in connection with the offer, sale
or issuance of any of its capital stock and, based in part on the investment
representations of each Purchaser in Article III hereof, the offer, sale and
issuance of the Securities hereunder will not require registration under the
Securities Act of 1933, as amended (the "Securities Act"), or any applicable
state securities laws. To the best of the Company's knowledge, there are no
agreements among the Company's stockholders with respect to the voting or
transfer of the Company's capital stock or with respect to any other aspect of
the Company's affairs, except for (i) the Stockholders Agreement dated February
5, 1997 (the "Stockholders Agreement") among the Company, Select Investments II
("Select II"), Select Partners L.P. ("Select LP"), WCAS VII, GTCR Fund V, GTCR
Associates V and the other persons named therein; (ii) the Registration
Agreement, dated February 5, 1997, among the Company, Select II, Select LP, WCAS
VII, GTCR Fund V and the several persons named therein; (iii) the Purchase
Agreement, dated as of February 5, 1997, as amended (the "1997 Purchase
Agreement"), among the Company, GTCR Fund V, WCAS VII and the other persons
named therein; (iv) the Warrant Agreement dated as of June 30, 1998 among WCAS
VII, GTCR Fund V, Rocco A. Ortenzio and Robert A. Ortenzio, and (v) each of the
two Amended and Restated Senior Management Agreements, each dated as of May 7,
1997 (the "Senior Management Agreements"), among the Company, Select II, Select
LP and the other persons named therein, or the "Other Senior Management
Agreements" (as such term is defined in the Senior Management Agreements; the
Senior Management Agreements and such Other Senior Management Agreements being
referred to collectively herein as the "Management Agreements").
(a) Schedule 2.03 hereto includes a complete and accurate list of each Subsidiary of the Company as of the Closing Date, indicating the jurisdiction of incorporation and the nature and level of ownership in such Subsidiary by the Company, any other Subsidiary of the Company and any other person (for purposes of this Agreement, "person" shall mean and include an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture or an unincorporated organization). Each Subsidiary of the Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is qualified to do business, in every jurisdiction in which the failure to so qualify might reasonably be expected to have a Material Adverse Effect.
(b) Except as set forth on Schedule 2.03 hereto, as of the Closing
Date neither the Company nor any of the Subsidiaries owns of record or
beneficially, directly or indirectly, (i) any shares of outstanding capital
stock or securities convertible into capital stock of any other corporation or
(ii) any participating interest in any partnership, joint venture or other non-
corporate business enterprise.
(c) For purposes of this Agreement, the term "Subsidiary", when used with respect to the Company, shall mean any corporation or other business entity, a majority of whose outstanding securities having the right generally to vote for the election of directors or otherwise direct the actions of such entity is at the time owned, directly or indirectly, by the Company and/or one or more other Subsidiaries of the Company.
(a) Except as described in Schedule 2.04(a) hereto, each of (i) the execution and delivery by the Company of this Agreement, the Notes and the Ancillary Agreements; (ii) the performance by the Company of its respective obligations hereunder and thereunder; (iii) the issuance, sale and delivery by the Company of the Shares and the Notes; (iv) the amendment of the Company's Certificate of Incorporation in accordance with the Certificate of Amendment; and (v) the performance by the Company of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action and will not (x) violate (A) any provision of law, any order of any court or other agency of government (other than immaterial violations that can be cured without adversely affecting the validity of the Securities or the business of the Company as currently conducted), (B) the Certificate of Incorporation or Bylaws of the Company or (C) any material provision of any indenture, agreement or other instrument to which the Company or any of its properties or assets is bound; (y) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material provision of any such indenture, agreement or other instrument; or (z) result in the creation or imposition of any lien, charge, encumbrance, security interest or other similar claim (any of the foregoing, a "Claim") in favor of any third person upon any of the assets of the Company.
(b) The Shares have been duly authorized by the Company and, when sold and paid for in accordance with this Agreement, will be validly issued, fully paid and nonassessable shares of Common Stock. The issuance, sale and delivery of the Shares to the Purchasers hereunder is not subject to any preemptive rights of stockholders of the Company or
to any right of first refusal or other similar right in favor of any person, other than the preemptive rights of certain parties under the 1997 Purchase Agreement and the Management Agreements, as to which waivers have been obtained.
(a) Attached hereto as Part I of Schedule 2.06 are the consolidated balance sheet of the Company as of March 31, 1998, and the related consolidated statements of operations, cash flows and stockholders' equity for the year then ended, including the notes thereto (collectively, the "Financial Statements"), audited and certified by Ernst & Young LLP, the independent auditors retained by the Company. The Financial Statements fairly present the consolidated financial position and stockholders' equity of the Company and its Subsidiaries as of the dates specified therein and the consolidated results of operations of the Company and its Subsidiaries for the period then ended in conformity with generally accepted accounting principles applied on a consistent basis.
(b) Except as set forth in Part II of Schedule 2.06 hereto, as of the
Closing Date neither the Company nor any of its Subsidiaries has any material
obligation or liability (whether accrued, absolute, contingent, unliquidated or
otherwise, whether or not known to the Company or any Subsidiary, whether due or
to become due and regardless of when asserted) other than: (i) liabilities set
forth or reflected on the balance sheet included in the Financial Statements,
(ii) liabilities and obligations which have arisen after the date of such
balance sheet in the ordinary course of business (none of which is a liability
arising from breach of contract, breach of warranty, tort, infringement, claim
or lawsuit) and (iii) liabilities and obligations which have been disclosed and
approved by the representatives to the Company's Board of Directors designated
by WCAS VII and GTCR Fund V.
questions or claims concerning the Company's tax liability. The Company has not made an election under (S)341(f) of the Internal Revenue Code of 1986, as amended (the "IRC").
designated by each of WCAS VII and GTCR on the Board of Directors in accordance with the terms of the Stockholders Agreement) providing benefits to current or former employees, including any bonus plan, plan for deferred compensation, employee health or other welfare benefit plan or other arrangement, whether or not terminated. For purposes of this Section 2.10, the term "Company" includes all organizations under common control with the Company pursuant to Section 4 14(b) or (c) of the IRC.
(a) Neither this Agreement nor any of the schedules, attachments, written statements, documents, certificates or other items prepared or supplied to the Purchasers by or on behalf of the Company with respect to the transactions contemplated hereby (collectively, the "Materials") contain any untrue statement of material fact or omit a material fact necessary to make each statement contained herein or therein not misleading. There is no fact which the Company has not disclosed to the Purchasers in writing and of which any of its officers, directors or executive employees is aware and which has had or might reasonably be anticipated to have a material adverse effect upon the existing or expected financial condition, operating results, assets, customer or supplier relations, employee relations or business prospects of the Company and its Subsidiaries taken as a whole.
(b) Except as and to the extent specifically set forth in this Agreement (including, with respect to any Materials, the representations set forth in paragraph (a) hereof), neither the Company nor any Subsidiary makes any representation or warranty of any kind or nature with respect to the matters contemplated hereby.
III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser, severally and not jointly, represents and warrants to the Company as follows:
Securities in a transaction that is the subject of either (i) an effective registration statement under the Securities Act and any applicable state securities laws, or (ii) an opinion of counsel to the effect that such registration is not required (which opinion and counsel shall be reasonably satisfactory to the Company). Such Purchaser understands that each certificate representing the Securities shall be imprinted with a legend in substantially the following form:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON [INSERT DATE OF ORIGINAL ISSUANCE], AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF DECEMBER 15, 1998 AMONG THE ISSUER AND THE PURCHASERS NAMED THEREIN, AND THE ISSUER RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. A COPY OF SUCH CONDITIONS WILL BE FURNISHED BY THE ISSUER TO THE HOLDER THEREOF UPON WRITTEN REQUEST WITHOUT CHARGE."
IV.
COVENANTS
(i) as soon as available but in any event within 45 days after the end of each quarterly accounting period in each fiscal year, unaudited consolidating and consolidated statements of income and cash flows of the Company and its Subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and consolidating and consolidated balance sheets of the Company and its Subsidiaries as of the end of such quarterly period, all prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year- end adjustments;
(ii) accompanying the financial statements referred to in paragraph
(i), an Officer's Certificate (as hereinafter defined) stating that neither
the Company nor any of its Subsidiaries is in default under any of its
other material agreements or, if any such default exists, specifying the
nature and period of existence thereof and what actions the Company and its
Subsidiaries have taken and propose to take with respect thereto;
(iii) within 120 days after the end of the each fiscal year, consolidating and consolidated statements of income and cash flows of the Company and its Subsidiaries for such fiscal year, and consolidating and consolidated balance sheets of the Company and its Subsidiaries as of the end of such fiscal year, setting forth in each case comparisons to the annual budget and to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by (a) with respect to the consolidated portions of such statements (except with respect to budget data), an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized national standing acceptable to WCAS VII and GTCR, and (b) a copy of such firm's annual management letter to the Company's board of directors;
(iv) promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of the Company's operations or financial affairs given to the Company by its independent accountants (and not otherwise contained in other materials provided hereunder);
(v) at the beginning of each fiscal year, an annual budget prepared on a monthly basis for the Company and its Subsidiaries for such fiscal year (displaying anticipated statements of income and cash flows), and promptly upon preparation thereof any other significant budgets prepared by the Company and any revisions of such annual or other budgets, and within 30 days after any monthly period in which there is a material adverse deviation from the annual budget, an Officer's Certificate explaining the deviation and what actions the Company has taken and proposes to take with respect thereto;
(vi) promptly (but in any event within five business days) after the discovery or receipt of notice of any default under any material agreement to which it or any of its Subsidiaries is a party or any other event or circumstance affecting the Company or any Subsidiary which is reasonably likely to have a material adverse effect on the financial condition, operating results, assets, operations or business prospects of the Company or any Subsidiary (including the filing of any material litigation against the Company or any Subsidiary or the existence of any material dispute with any person which involves a reasonable likelihood of such litigation being commenced), an Officer's Certificate specifying the nature and period of existence thereof and what actions the Company and its Subsidiaries have taken and propose to take with respect thereto; and
(vii) with reasonable promptness, such other information and financial data concerning the Company and its Subsidiaries as any person entitled to receive information under this Section 4.01 may reasonably request.
Each of the financial statements referred to in paragraph (i) and (iii) shall be true and correct in all material respects as of the dates and for the period stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations or business prospects of the Company and its Subsidiaries taken as a whole).
(i) directly or indirectly declare or pay any dividends or make any distributions upon any of its equity securities, other than payments of dividends on, or redemption payments in respect of, the Class A Preferred Stock pursuant to the Certificate of Incorporation;
(ii) except (x) for redemptions or purchases of the Class A Preferred Stock pursuant to the Certificate of Incorporation of the Company, (y) for repurchases, redemptions or acquisitions of equity securities pursuant to agreements in effect as of the date hereof with the Company's employees or directors in effect on the date hereof and (z) in connection with the exercise by the holder of any minority interest in a Subsidiary of its rights under a "put," repurchase or similar arrangement with the Company or any Subsidiary in effect as of the date hereof, directly or indirectly redeem, purchase or otherwise acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire,
any of the Company's equity securities (including, without limitation, warrants, options and other rights to acquire equity securities);
(iii) except for the issuance of equity securities (x) under any
stock option plan or other benefit plan or arrangement approved by the
Board of Directors of the Company or (y) upon the exercise of preemptive
rights or warrants authorized as of the date hereof, authorize, issue, sell
or enter into any agreement providing for the issuance (contingent or
otherwise), or permit any Subsidiary to authorize, issue, sell or enter
into any agreement providing for the issuance (contingent or otherwise) of,
(a) any notes or debt securities containing equity features (including,
without limitation, any notes or debt securities convertible into or
exchangeable for equity securities, issued in connection with the issuance
of equity securities or containing profit participation features) or (b)
any equity securities (or any securities convertible into or exchangeable
for any equity securities) or rights to acquire any equity securities,
other than the issuance of equity securities by a Subsidiary to the Company
or another Subsidiary;
(iv) merge or consolidate with any person or permit any Subsidiary to merge or consolidate with any person (other than a wholly owned Subsidiary);
(v) sell, lease or otherwise dispose of, or permit any Subsidiary to sell, lease or otherwise dispose of, more than 5% of the consolidated assets of the Company and its Subsidiaries (computed on the basis of book value, determined in accordance with generally accepted accounting principles consistently applied, or fair market value, determined by the Board of Directors in its reasonable good faith judgment) in any transaction or series of related transactions (other than sales of inventory in the ordinary course of business);
(vi) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction (including, without limitation, any reorganization in partnership form);
(vii) acquire, or permit any Subsidiary to acquire, any interest in any business (whether by a purchase of assets, purchase of stock, merger otherwise), or enter into any joint venture;
(viii) enter into, or permit any Subsidiary to enter into, the ownership, active management or operation of any business other than the ownership and operation of businesses engaged as rehabilitation hospitals or specialty long-term hospitals or engaged in rehabilitation services or contract therapy services or related businesses;
(ix) enter into, or permit any Subsidiary to enter into, any transaction with any of its or any Subsidiary's officers, directors, employees or Affiliates or any individual related by blood, marriage or adoption to any such person (a "Relative") or any entity in which any such person or individual owns a beneficial interest (a "Related Entity"), except for normal employment arrangements and benefit programs on reasonable terms and except as otherwise expressly contemplated by this Agreement and the Ancillary Agreements; or
(x) create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, indebtedness exceeding the amounts approved therefor by the Board in the annual budget.
(i) comply with all applicable laws, rules and regulations of all governmental authorities, the violation of which would reasonably be expected to have a Material Adverse Effect, and pay and discharge when payable all taxes, assessments and governmental charges (except to the extent the same are being contested in good faith and adequate reserves therefor have been established);
(ii) enter into and maintain appropriate nondisclosure and noncompete agreements with its key employees; and
(iii) cause any Other Senior Management Agreement entered into by the Company after the date hereof which provides for the sale of Common Stock to or employment of certain members of senior management (the "Other Executives"), to be in form and substance reasonably satisfactory to each of the Purchasers.
(i) Except for the issuance of shares of Common Stock (a) pursuant to the Other Senior Management Agreements, (b) as consideration for acquisitions, (c) upon the exercise of stock options granted pursuant to a stock option or other benefit plan or arrangement approved by the Board of Directors of the Company, (d) upon the exercise
of warrants approved by the Board of Directors of the Company or (e) pursuant to a public offering registered under the Securities Act, if the Company at any time after the Closing authorizes the issuance or sale of any shares of Common Stock or any securities containing options or rights to acquire any shares of Common Stock (other than as a dividend on the outstanding Common Stock), the Company shall first offer to sell to each holder of Shares (without duplication) a portion of such stock or securities equal to the quotient determined by dividing (1) the number of shares of Shares held by such holder by (2) the total number of shares of Common Stock outstanding on a fully diluted basis immediately prior to such issuance; provided, however, that if two or more securities shall be proposed to be sold as a "unit" in such issuance, any such election must relate to such unit of securities. Each holder of Shares shall be entitled to purchase all or any portion of such stock or securities at the most favorable price and on the most favorable terms as such stock or securities are to be offered to any other persons.
(ii) In order to exercise its purchase rights hereunder a holder of Shares must within 15 days after receipt of written notice from the Company describing in reasonable detail the stock or securities being offered, the purchase price thereof, the payment terms and such holder's percentage allotment deliver a written notice to the Company describing its election hereunder. If all of the stock and securities offered to the holders of Shares is not fully subscribed by such holders, the remaining stock and securities shall be reoffered by the Company to the holders purchasing their full allotment upon the terms set forth in this paragraph, except that such holders must exercise their purchase rights within five days after receipt of such reoffer.
(iii) Upon the expiration of the offering periods described above, the Company shall be entitled to sell such stock or securities which the holders of Shares have not elected to purchase during the 90 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such holders. Any stock or securities offered or sold by the Company after such 90-day period must be reoffered to the holders of Shares pursuant to the terms of this paragraph.
(iv) Nothing contained in this Section 4.07 shall be deemed to amend, modify or limit in any way the restrictions on the issuance of shares of stock set forth in Section 4.03 hereof or elsewhere in this Agreement, in the Stockholders Agreement or in any other agreement to which the Company is bound.
using all reasonable efforts to obtain all necessary waivers, consents and approvals and to effect all necessary registrations and filings.
(a) Restricted Securities are transferable only pursuant to (i) public offerings registered under the Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar rule or rules then in force) if such rule or rules are available and (iii) subject to the conditions specified in subparagraph (b) below, any other legally available means of transfer.
(b) In connection with the transfer of any Restricted Securities (other than a transfer described in Section 4.1 3(a)(i) or (ii) above), the holder thereof shall deliver written notice to the Company describing in reasonable detail the transfer or proposed transfer, together with an opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol or Kirkland & Ellis or other counsel which (to the Company's reasonable satisfaction) is knowledgeable in securities law matters to the effect that such transfer of Restricted Securities may be effected without registration of such Restricted Securities under the Securities Act. In addition, if the holder of the Restricted Securities delivers to the Company an opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol or Kirkland & Ellis or such other counsel that no subsequent transfer of such Restricted Securities shall require registration under the Securities Act, the Company shall promptly upon such contemplated transfer deliver new certificates for such Restricted Securities which do not bear the Securities Act legend set forth in Article III. If the Company is not required to deliver new certificates for such Restricted Securities not bearing such legend, the holder thereof shall not transfer the same until the prospective transferee has confirmed to the Company in writing its agreement to be bound by the conditions contained in this paragraph and Article III.
(c) Upon the request of any Purchaser, the Company shall promptly supply to such Purchaser or its prospective transferees all information regarding the Company required to be delivered in connection with a transfer pursuant to Rule 144A of the Securities and Exchange Commission.
V.
CONDITIONS PRECEDENT
(i) copies of(1) the Certificate of Incorporation of the Company and each of its Subsidiaries, including all amendments thereto, certified as of a recent date by the Secretary of State of the jurisdiction of incorporation of such corporation and (2) a certificate of such Secretary, dated as of a recent date, as to the due incorporation and good standing of such corporation, and listing all documents relating to the Company or such Subsidiary, as the case may be, on file with such official; and
(ii) a certificate of the Secretary or an Assistant Secretary of the Company, dated the Closing Date and certifying (1) that attached thereto is a true and complete copy of the By-laws of the Company as in effect on the date of such certification and at all times since February 5, 1997; (2) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement, the Notes and the Ancillary Agreements, the issuance, sale and delivery of the Securities and the amendment of the Company's Certificate of Incorporation pursuant to the Certificate of Amendment, and that all such resolutions are still in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement; (3) that the Certificate of Incorporation of the Company has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(2) above; and (4) as to the incumbency and specimen signature of each officer of the Company executing this Agreement, the Ancillary Agreements, the Initial Note, the stock certificates representing the Shares and any certificate or instrument furnished pursuant hereto, and a certification by another officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this paragraph (ii).
All such documents shall be satisfactory in form and substance to the Purchasers and their counsel.
complied with by it prior to the Closing Date, and the Company shall have so certified to WCAS CP III in writing.
administrative agency or authority, or national securities exchange shall be in
effect that would prevent the consummation of the transactions contemplated by
Section 1.04.
VI.
TERMINATION
(a) by mutual consent of the Purchasers and the Company; or
(b) by WCAS VII or GTCR upon the occurrence of any of the following:
(i) the termination of the Merger Agreement, (ii) a reduction of the Minimum
Condition (as defined in the Merger Agreement) to a percentage less than 90% of
the outstanding shares of Intensiva on a fully-diluted basis, or (iii) an
increase in the purchase price of the Offer (as defined in the Merger Agreement)
to a price greater than $9.625 per share.
(c) by the Company or by WCAS VII or GTCR, if the transactions contemplated hereby have not been consummated before January 31, 1999, unless the failure to consummate such transactions results from a breach of any representation, warranty or covenant of the party seeking to terminate this Agreement.
VII.
MISCELLANEOUS
in any certificate or other instrument delivered by the Company hereunder shall be deemed to constitute representations and warranties made by the Company.
if to the Company, to:
Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Attention: General Counsel
Telecopy Number: 717-972-1042
with a copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
Attention: Henry N. Nassau, Esq.
Telecopy Number: 215-994-2222
if to any Purchaser, to it at its address set forth on Schedule I hereto;
with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, New York 10111
Attention: Othon A. Prounis, Esq.
Telecopy Number: 212-841-5725
and to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, Illinois 60601
Attention: Margaret A. Gibson, Esq.
Telecopy Number: 312-861-2200
or, in any case, at such other address or addresses as shall have been furnished in writing by such party to the other parties hereto. All such notices, requests, consents and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of mailing, on the fifth business day following the date of such mailing, (c) in the case of delivery by overnight courier, on the business day following the date of delivery to such courier, and (d) in the case of telecopy, when received.
the registration statement covering them, (b) become eligible for sale pursuant to Rule 144(k) (or any similar provision then in force) under the Securities Act or (c) been otherwise transferred and new certificates for them not bearing the Securities Act legend set forth in Article III have been delivered by the Company in accordance with Section 4.13. Whenever any particular securities cease to be Restricted Securities, the holder thereof shall be entitled to receive from the Company, without expense, new securities of like tenor not bearing a Securities Act legend of the character set forth in Article III.
IN WITNESS WHEREOF, the Company and the Purchasers have executed this Agreement as of the day and year first above written.
SELECT MEDICAL CORPORATION
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
GOLDER, THOMA, CRESSEY, RAUNER FUND V,
L.P.., General Partner
By Golder, Thoma, Cressey, Rauner, Inc., General
Partner
By /s/ Donald J. Edwards --------------------------------- Name: Title: |
GTCR ASSOCIATES V
By Golder, Thoma, Cressey, Rauner, Inc.,
Managing General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Title: |
GTCR FUND VI, L.P.
By GTCR Partners VI, L.P., General Partner
By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal |
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. Mclnerney
D. Scott Mackesy
Robert A. Minicucci
Priscilla A. Newman
Andrew M. Paul
Paul B. Queally
Rudolph E. Rupert
Lawrence B. Sorrel
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
By /s/ Laura Van Buren --------------------------------- Laura M. VanBuren Individually and as Attorney-in-Fact /s/ David F. Bellet ----------------------------------- David F. Bellet |
SELECT PARTNERS, L.P.
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
SELECT HEALTHCARE INVESTORS I, L.P.
By /s/ Rocco A. Ortenzio --------------------------------- Name: Title: |
/s/ Rocco A. Ortenzio ----------------------------------- Rocco A. Ortenzio /s/ Robert A. Ortenzio ----------------------------------- Robert A. Ortenzio |
ANVERS, L.P.
By F.S.I.P., L.L.C., General Partner
By /s/ Leo Swergold --------------------------------- Name: Leo Swergold Title: Senior Managing Director |
ANVERS II, L.P.
By F.S.I.P., L.L.C., General Partner
By /s/ Leo Swergold --------------------------------- Name: Leo Swergold Title: Senior Managing Director |
GTCR VI EXECUTIVE FUND, L.P.
By GTCR Partners VI, L.P., General Partner
By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal |
GTCR ASSOCIATES VI
By GTCR Partners VI, L.P., Managing General Partner
By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards --------------------------------- Name: Its: Principal /s/ Bryan C. Cressey ----------------------------------- Bryan C. Cressey |
EXHIBIT 10.6
SECURITIES PURCHASE AGREEMENT
Among
SELECT MEDICAL CORPORATION,
WELSH, CARSON, ANDERSON & STOWE VII, L.P.,
WCAS CAPITAL PARTNERS III, L.P.,
THOMA CRESSEY FUND VI, L.P.,
GTCR FUND VI, L.P.,
and
THE SEVERAL PERSONS NAMED
IN SCHEDULE I HERETO
Dated as of November 19, 1999
TABLE OF CONTENTS
Page ---- I. PURCHASE AND SALE OF SECURITIES......................................................... 2 SECTION 1.01. Issuance and Sale of the Class B Preferred Stock....................... 2 SECTION 1.02. Issuance and Sale of the Note and Common Stock to WCAS CP III.......... 2 SECTION 1.03. Closing Date........................................................... 2 SECTION 1.04. Springing Shares....................................................... 2 II. REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................................... 3 SECTION 2.01. Organization and Corporate Power....................................... 3 SECTION 2.02. Capital Stock and Related Matters...................................... 4 SECTION 2.03. Subsidiaries; Investments.............................................. 5 SECTION 2.04. Authorization of Agreements, Etc....................................... 5 SECTION 2.05. Validity............................................................... 6 SECTION 2.06. Financial Statements; Undisclosed Liabilities.......................... 6 SECTION 2.07. Tax Matters............................................................ 6 SECTION 2.08. Litigation, Etc........................................................ 6 SECTION 2.09. Brokerage.............................................................. 7 SECTION 2.10. Consents, Etc.......................................................... 7 SECTION 2.11. ERISA.................................................................. 7 SECTION 2.12. Compliance with Laws................................................... 7 SECTION 2.13. Disclosure............................................................. 7 III. REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........................................ 8 SECTION 3.01. Investment............................................................. 8 SECTION 3.02. Brokerage.............................................................. 9 IV. COVENANTS............................................................................... 9 SECTION 4.01. Financial Statements and Other Information............................. 9 SECTION 4.02. Inspection of Property................................................. 10 SECTION 4.03. Restrictions........................................................... 10 SECTION 4.04. Affirmative Covenants.................................................. 12 SECTION 4.05. Current Public Information............................................. 12 SECTION 4.06. Amendment of Other Agreements.......................................... 13 SECTION 4.07. Limited Preemptive Rights.............................................. 13 SECTION 4.08. Public Disclosures..................................................... 14 SECTION 4.09. Unrelated Business Taxable Income...................................... 14 SECTION 4.10. Hart-Scott-Rodino Compliance........................................... 14 SECTION 4.11. Conduct of the Company's Business...................................... 14 SECTION 4.12. Further Assurances..................................................... 15 SECTION 4.13. Transfer of Restricted Securities...................................... 15 SECTION 4.14. Waiver of Preemptive Rights With Respect to the Sale of the Securities. 15 SECTION 4.15. Guarantees............................................................. 15 |
V. CONDITIONS PRECEDENT.................................................................... 16 SECTION 5.01. Conditions Precedent to the Obligations of the Purchasers on the Closing Date.................................................... 16 SECTION 5.02. Conditions Precedent to the Obligations of the Company on the Closing Date.................................................... 17 VI. TERMINATION............................................................................. 18 SECTION 6.01. Termination by the Parties............................................. 18 SECTION 6.02. Effect of Termination.................................................. 18 VII. MISCELLANEOUS........................................................................... 18 SECTION 7.01. Expenses, Etc.......................................................... 18 SECTION 7.02. Survival of Agreements................................................. 18 SECTION 7.03. Parties in Interest.................................................... 19 SECTION 7.04. Notices................................................................ 19 SECTION 7.05. Entire Agreement; Assignment........................................... 20 SECTION 7.06. Counterparts........................................................... 20 SECTION 7.07. Definitions............................................................ 20 SECTION 7.08. Headings............................................................... 21 SECTION 7.09. Severability........................................................... 21 SECTION 7.10. Governing Law.......................................................... 21 |
INDEX TO EXHIBITS, SCHEDULES AND ANNEX
Exhibit Description ------- ----------- A Form of Senior Subordinated Note B Form of Certificate of Amendment C Form of Amendment to Stockholders Agreement D Form of Amendment to Registration Agreement E Form of Professional Services Agreement F Form of Opinion of Dechert Schedule Description -------- ----------- I Purchasers 2.02 Capital Stock 2.03 Subsidiaries 2.04(a) Authorizations, Etc. 2.06 Financial Statements; Undisclosed Liabilities 2.07 Taxes 2.08 Litigation 2.10 Consents iii |
SECURITIES PURCHASE AGREEMENT dated as of November 19, 1999, among |
SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"), WELSH, CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited partnership ("WCAS VII"), WCAS CAPITAL PARTNERS III, L.P., a Delaware limited partnership ("WCAS CP III"), THOMA CRESSEY FUND VI, L.P. ("Thoma Cressey"), GTCR FUND VI, a Delaware general partnership ("GTCR") and the several persons named in Schedule I hereto (collectively with WCAS VII, WCAS CP III, Thoma Cressy and GTCR, the "Purchasers").
WHEREAS, the Company desires to sell to the Purchasers (other than WCAS CP III) on the Closing Date (as hereinafter defined), and such Purchasers desire to purchase from the Company, on the terms and subject to the conditions set forth herein, an aggregate of 16,000,000 shares of Class B Convertible Preferred Stock (the "Class B Preferred Stock") of the Company, at a purchase price of $3.75 per share; and
WHEREAS, the Company desires to sell to WCAS CP III on the Closing Date, and WCAS CP III desires to purchase from the Company, on the terms and subject to the conditions set forth herein, (i) a Senior Subordinated Note of the Company due November 19, 2009 substantially in the form of Exhibit A hereto (such note and any note issued in substitution therefor being hereafter called the "Note"), in the principal amount of $25,000,000 and (ii) an aggregate of 1,667,000 shares of Common Stock, $.01 par value per share (the "Common Stock"), of the Company; and
WHEREAS, the Company has agreed, as a condition to the obligation of the Purchasers to purchase the Securities (as hereinafter defined), that, contemporaneously with the closing of the purchase and sale of the Shares and the Note, the Company shall (i) consummate the purchase of shares contemplated by that certain Stock Purchase Agreement by and among NovaCare, Inc., NC Resources, Inc. and the Company, dated as of October 1, 1999 (the "Stock Purchase Agreement") and (ii) use the proceeds from the sale of the Securities to pay the cash consideration to NC Resources, Inc. as contemplated by the Stock Purchase Agreement and other expenses relating to the acquisition of the shares pursuant to the Stock Purchase Agreement; and
WHEREAS, the Company desires to amend its Restated Certificate of Incorporation (the "Certificate of Incorporation") pursuant to the Certificate of Amendment substantially in the form of Exhibit B hereto (the "Certificate of Amendment") to (i) increase the Company's authorized shares of Common Stock from 60,000,000 shares to 75,000,000 shares and (ii) to increase the Company's authorized shares of Preferred Stock, par value $.01 per share, from 55,000 shares to 16,055,000 shares and to designate 16,000,000 of such shares as Class B Preferred Stock; and
WHEREAS, the parties desire that neither the Class B Preferred Stock nor the Common Stock (including the Springing Shares (as defined herein)) shall entitle the holder thereof to any voting rights, except as required by law, until all applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, shall have expired or been terminated with respect to the acquisition by Thoma Cressey of the Class B Preferred Stock, being acquired by it hereunder, and the acquisition by WCAS CP III of the Common Stock (including the Springing Shares), being acquired by it hereunder;
NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained, the parties hereto agree as follows:
I.
PURCHASE AND SALE OF SECURITIES
(a) Subject to the terms and conditions set forth herein, on the Closing Date (as hereinafter defined) the Company shall issue, sell and deliver to each Purchaser (other than WCAS CP III), and each such Purchaser (other than WCAS CP III), acting severally and not jointly, shall purchase from the Company, the number of shares of Class B Preferred Stock set forth opposite the name of such Purchaser on Schedule I hereto under the heading "Number of Shares of Class B Preferred," for a purchase price of $3.75 per share. On the Closing Date, the Company shall issue a certificate or certificates in definitive form, registered in the name of each Purchaser (other than WCAS CP III), representing the number of shares of Class B Preferred purchased by such Purchaser.
(b) As payment in full for the shares of Class B Preferred being purchased by it hereunder, and against delivery of the certificate or certificates therefor as aforesaid, on the Closing Date each Purchaser (other than WCAS CP III), acting severally and not jointly, shall transfer, by wire transfer of immediately available funds to an account designated by the Company, the amount set forth opposite the name of such Purchaser on Schedule I under the heading "Aggregate Class B Preferred Purchase Price."
(a) Subject to the terms and conditions set forth herein, on the
Closing Date the Company shall issue, sell and deliver to WCAS CP III, and WCAS
CP III shall purchase from the Company, the Note and an aggregate 1,667,000
shares of Common Stock, of which 416,750 shares shall constitute the Springing
Shares (as hereinafter defined) and shall be subject to the provisions of
Section 1.04 hereof (said securities, together with the shares, being
hereinafter collectively called the "Securities"), for an aggregate purchase
price of $25,000,000. On the Closing Date, the Company shall issue the Note, a
certificate representing 1,250,250 shares of Common Stock and a certificate
representing the Springing Shares, in definitive form, in each case registered
in the name of WCAS CP III.
(b) On the Closing Date, as payment in full for the Note and the shares of Common Stock being purchased by it, and against delivery of the Note and certificates for such shares of Common Stock as aforesaid, WCAS CP III shall pay to the Company $25,000,000 by wire transfer of immediately available funds to an account designated by the Company.
Shares") to the Company and WCAS CP III shall tender, transfer, assign and deliver the Springing Shares to the Company as a contribution to capital. Such Springing Shares shall be transferred and assigned free and clear of all liens, claims and encumbrances of any kind whatsoever without payment of additional consideration. The closing for the consummation of the transaction contemplated by the Call Notice shall take place on the date that shall not be less than 10 days nor more than 20 days after the date of delivery of such Call Notice, or such other date as the parties may mutually determine.
(b) WCAS CP III agrees to hold and not to transfer any Springing Shares until such time as it is determined hereunder that the Trigger Event has not occurred and the transfer restrictions as described in Sections 3.01 and 4.13 herein have been satisfied.
(c) If the Company at any time subdivides or combines (by any stock split, stock dividend, recapitalization or otherwise) its Common Stock, an appropriate adjustment to the number of Springing Shares shall be made as determined by the Company.
(d) WCAS CP III understands that the certificate representing the Springing Shares shall be imprinted with the legend in substantially the following form (in addition to the legend provided in Section 3.01 hereof'):
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO A CALL OPTION BY THE COMPANY SPECIFIED IN THE SECURITIES PURCHASE AGREEMENT DATED NOVEMBER 19, 1999 AMONG THE ISSUER AND THE PURCHASERS NAMED THEREIN."
II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
As a material inducement to each Purchaser to enter into this Agreement and purchase the Securities, being purchased by such Purchaser, the Company represents and warrants to the Purchasers as follows:
reflect all amendments made thereto at any time prior to the date of this Agreement and are correct and complete.
(a) As of the Closing and immediately thereafter, the authorized capital stock of the Company shall consist of 75,000,000 shares of Common Stock, 3,000,000 shares of Class A Common Stock, par value $.01 per share ("Class A Common Stock"), and 16,055,000 shares of Preferred Stock, $.01 par value per share ("Preferred Stock"), of the Company, of which 55,000 shares have been designated as Class A Preferred Stock and 16,000,000 shares have been designated as Class B Preferred Stock and 450,000 shares of Common Stock will have been reserved for issuance pursuant to the Company's stock option plans in effect as of the Closing. Immediately prior to the Closing, 42,555,694 shares of Common Stock, no shares of Class A Common Stock and 53,037.37 shares of Class A Preferred Stock will be issued and outstanding. Except as contemplated by this Agreement or set forth in Schedule 2.02 hereto, as of the Closing, the Company shall not have outstanding any stock or securities convertible or exchangeable for any shares of its capital stock or containing any profit participation features, nor shall it have outstanding any warrants, rights or options to subscribe for or to purchase its capital stock or any stock or securities convertible into or exchangeable for its capital stock or any stock appreciation rights or phantom stock plans. As of the Closing, the Company shall not be subject to any obligation (contingent or otherwise) to repurchase or otherwise acquire or retire any shares of its capital stock or any warrants, options or other rights to acquire its capital stock, except as set forth in Schedule 2.02.
(b) There are no statutory or, to the best of the Company's
knowledge, contractual stockholders preemptive rights or rights of refusal with
respect to the issuance of Securities hereunder, except as set forth in Schedule
2.02. To the best of the Company's knowledge, the Company has not violated any
applicable federal or state securities laws in connection with the offer, sale
or issuance of any of its capital stock and, based in part on the investment
representations of each Purchaser in Article III hereof, the offer, sale and
issuance of the Securities hereunder will not require registration under the
Securities Act of 1933, as amended (the "Securities Act"), or any applicable
state securities laws. To the best of the Company's knowledge, there are no
agreements among the Company's stockholders with respect to the voting or
transfer of the Company'scapital stock or with respect to any other aspect of
the Company's affairs except for (i) the Stockholders Agreement dated February
5, 1997, as amended (the "Stockholders Agreement") among the Company, Select
Investments II ("Select II"), Select Partners L.P. ("Select LP"), WCAS VII,
Golder, Thoma, Cressey, Rauner Fund V, L.P. ("GTCR Fund V"), GTCR Associates V
and the other persons named therein; (ii) the Registration Agreement, dated
February 5, 1997, as amended, among the Company, Select II, Select LP, WCAS VII,
GTCR Fund V and the several persons named therein; (iii) the Purchase Agreement,
dated as of February 5, 1997, as amended (the "1997 Purchase Agreement"), among
the Company, GTCR Fund V, WCAS VII and the other persons named therein; (iv) the
Purchase Agreement dated December 15, 1998, among the Company, WCAS VII, WCAS CP
III, GTCR Fund VI, L.P., GTCR Associates VI, GTCR VI Executive Fund, L.P. and
the Several Persons Named in Schedule I thereto (the "1998 Purchase Agreement"),
(v) the Warrant Agreement dated as of June 30, 1998, as amended among WCAS VII,
GTCR Fund V, Rocco A. Ortenzio and Robert A. Ortenzio, and (vi) each of the two
Amended and Restated Senior Management Agreements, each dated as of May 7, 1997
(the "Senior Management Agreements"), among the Company, Select II, Select LP
and the other persons named therein, or the "Other Senior Management Agreements"
(as such term is defined in the Senior Management Agreements; the Senior
Management Agreements and such Other Senior Management Agreements being referred
to collectively herein as the "Management Agreements").
(a) Schedule 2.03 hereto includes a complete and accurate list of each Subsidiary of the Company as of the Closing Date, indicating the jurisdiction of incorporation and the nature and level of ownership in such Subsidiary by the Company, any other Subsidiary of the Company and any other person (for purposes of this Agreement, "person" shall mean and include an individual, a partnership, a limited liability company, a corporation, an association, a joint stock company, a trust, a joint venture or an unincorporated organization). Each Subsidiary of the Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation, and is qualified to do business, in every jurisdiction in which the failure to so qualify might reasonably be expected to have a Material Adverse Effect.
(b) Except as set forth on Schedule 2.03 hereto, as of the Closing
Date neither the Company nor any of the Subsidiaries owns of record or
beneficially, directly or indirectly, (i) any shares of outstanding capital
stock or securities convertible into capital stock of any other corporation or
(ii) any participating interest in any partnership, joint venture or other non-
corporate business enterprise.
(c) For purposes of this Agreement, the term "Subsidiary", when used with respect to the Company, shall mean any corporation or other business entity, a majority of whose outstanding securities having the right generally to vote for the election of directors or otherwise direct the actions of such entity is at the time owned, directly or indirectly, by the Company and/or one or more other Subsidiaries of the Company.
(a) Except as described in Schedule 2.04(a) hereto, each of (i) the execution and delivery by the Company of this Agreement, the Note and the Ancillary Agreements; (ii) the performance by the Company of its respective obligations hereunder and thereunder; (iii) the issuance, sale and delivery by the Company of the Shares and the Note; (iv) the amendment of the Company's Certificate of Incorporation in accordance with the Certificate of Amendment; and (v) the performance by the Company of the transactions contemplated hereby and thereby have been duly authorized by all requisite corporate action and will not (x) violate (A) any provision of law, any order of any court or other agency of government (other than immaterial violations that can be cured without adversely affecting the validity of the Securities or the business of the Company as currently conducted), (B) the Certificate of Incorporation or Bylaws of the Company or (C) any material provision of any indenture, agreement or other instrument to which the Company or any of its properties or assets is bound; (y) conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any material provision of any such indenture, agreement or other instrument; or (z) result in the creation or imposition of any lien, charge, encumbrance, security interest or other similar claim (any of the foregoing, a "Claim") in favor of any third person upon any of the assets of the Company.
(b) The shares of Common Stock and Class B Preferred Stock to be purchased pursuant to this Agreement have been duly authorized by the Company and, when sold and paid for in accordance with this Agreement will be validly issued, fully paid and nonassessable. The issuance, sale and delivery of such shares of Common Stock and Class B Preferred Stock to the Purchasers hereunder is not subject to any preemptive rights of stockholders of the Company or to any right of first refusal or other similar right in favor of any person, other than the preemptive rights of certain parties under the 1997 Purchase Agreement, the 1998 Purchase Agreement and the Management Agreements, as to which waivers have been obtained.
(a) Attached hereto as Part I of Schedule 2.06 are the consolidated balance sheet of the Company as of March 31, 1999, and the related consolidated statements of operations, cash flows and stockholders' equity for the year then ended, including the notes thereto (collectively, the "Financial Statements"), audited and certified by Ernst & Young LLP, the independent auditors retained by the Company. The Financial Statements fairly present the consolidated financial position and stockholders' equity of the Company and its Subsidiaries as of the dates specified therein and the consolidated results of operations of the Company and its Subsidiaries for the period then ended in conformity with generally accepted accounting principles applied on a consistent basis.
(b) Except as set forth in Part II of Schedule 2.06 hereto, as of the
Closing Date neither the Company nor any of its Subsidiaries has any material
obligation or liability (whether accrued, absolute, contingent, unliquidated or
otherwise, whether or not known to the Company or any Subsidiary, whether due or
to become due and regardless of when asserted) other than: (i) liabilities set
forth or reflected on the balance sheet included in the Financial Statements,
(ii) liabilities and obligations which have arisen after the date of such
balance sheet in the ordinary course of business (none of which is a liability
arising from breach of contract, breach of warranty, tort, infringement, claim
or lawsuit) and (iii) liabilities and obligations which have been disclosed and
approved by the representatives to the Company's Board of Directors designated
by WCAS VII and GTCR Fund V.
Effect; neither the Company nor any of its Subsidiaries is subject to any arbitration proceedings under collective bargaining agreements or otherwise or, to the best of the Company's knowledge, any governmental investigations or inquiries; and, to the best of the Company's knowledge, there is no basis for any of the foregoing. Neither the Company nor any of its Subsidiaries is subject to any judgment, order or decree of any court or other governmental agency. The Company has not received any opinion or memorandum or legal advice from legal counsel to the effect that it or any of its Subsidiaries is exposed, from a legal standpoint, to any liability or disadvantage which may be material to its business.
(a) Neither this Agreement nor any of the schedules, attachments, written statements, documents, certificates or other items prepared or supplied to the Purchasers by or on behalf of the
Company with respect to the transactions contemplated hereby (collectively, the "Materials") contain any untrue statement of material fact or omit a material fact necessary to make each statement contained herein or therein not misleading. There is no fact which the Company has not disclosed to the Purchasers in writing and of which any of its officers, directors or executive employees is aware and which has had or might reasonably be anticipated to have a material adverse effect upon the existing or expected financial condition, operating results, assets, customer or supplier relations, employee relations or business prospects of the Company and its Subsidiaries taken as a whole.
(b) Except as and to the extent specifically set forth in this Agreement (including, with respect to any Materials, the representations set forth in paragraph (a) hereof), neither the Company nor any Subsidiary makes any representation or warranty of any kind or nature with respect to the matters contemplated hereby.
III.
REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS
Each Purchaser, severally and not jointly, represents and warrants to the Company as follows:
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED ON [INSERT DATE OF ORIGINAL ISSUANCE], AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE IS SUBJECT TO THE CONDITIONS SPECIFIED IN THE SECURITIES PURCHASE AGREEMENT DATED AS OF NOVEMBER 19, 1999 AMONG THE ISSUER AND THE PURCHASERS NAMED THEREIN, AND THE ISSUER RESERVES THE RIGHT TO REFUSE THE TRANSFER OF SUCH SECURITIES UNTIL SUCH CONDITIONS HAVE BEEN FULFILLED WITH RESPECT TO SUCH TRANSFER. ANY TRANSFER WITHOUT SATISFACTION OF SUCH CONDITIONS IS NULL AND VOID. A COPY OF SUCH CONDITIONS WILL BE FURNISHED BY THE ISSUER TO
THE HOLDER THEREOF UPON WRITTEN REQUEST WITHOUT
CHARGE."
IV.
COVENANTS
(i) as soon as available but in any event within 45 days after the end of each quarterly accounting period in each fiscal year, unaudited consolidating and consolidated statements of income and cash flows of the Company and its Subsidiaries for such quarterly period and for the period from the beginning of the fiscal year to the end of such quarter, and consolidating and consolidated balance sheets of the Company and its Subsidiaries as of the end of such quarterly period, all prepared in accordance with generally accepted accounting principles, consistently applied, subject to the absence of footnote disclosures and to normal year- end adjustments;
(ii) accompanying the financial statements referred to in paragraph
(i), an Officer's Certificate (as hereinafter defined) stating that neither
the Company nor any of its Subsidiaries is in default under any of its
other material agreements or, if any such default exists, specifying the
nature and period of existence thereof and what actions the Company and its
Subsidiaries have taken and propose to take with respect thereto;
(iii) within 120 days after the end of the each fiscal year, consolidating and consolidated statements of income and cash flows of the Company and its Subsidiaries for such fiscal year, and consolidating and consolidated balance sheets of the Company and its Subsidiaries as of the end of such fiscal year, setting forth in each case comparisons to the annual budget and to the preceding fiscal year, all prepared in accordance with generally accepted accounting principles, consistently applied, and accompanied by (a) with respect to the consolidated portions of such statements (except with respect to budget data), an opinion containing no exceptions or qualifications (except for qualifications regarding specified contingent liabilities) of an independent accounting firm of recognized national standing acceptable to WCAS VII and GTCR, and (b) a copy of such firm's annual management letter to the Company's board of directors;
(iv) promptly upon receipt thereof, any additional reports, management letters or other detailed information concerning significant aspects of the Company's operations or financial affairs given to the Company by its independent accountants (and not otherwise contained in other materials provided hereunder);
(v) at the beginning of each fiscal year, an annual budget prepared on a monthly basis for the Company and its Subsidiaries for such fiscal year (displaying anticipated statements of income and cash flows), and promptly upon preparation thereof any other significant budgets prepared by the Company and any revisions of such annual or other budgets, and within 30 days after any monthly period in which there is a material adverse deviation from the annual budget, an Officer's Certificate explaining the deviation and what actions the Company has taken and proposes to take with respect thereto;
(vi) promptly (but in any event within five business days) after the discovery or receipt of notice of any default under any material agreement to which it or any of its Subsidiaries is a party or any other event or circumstance affecting the Company or any Subsidiary which is reasonably likely to have a material adverse effect on the financial condition, operating results, assets, operations or business prospects of the Company or any Subsidiary (including the filing of any material litigation against the Company or any Subsidiary or the existence of any material dispute with any person which involves a reasonable likelihood of such litigation being commenced), an Officer's Certificate specifying the nature and period of existence thereof and what actions the Company and its Subsidiaries have taken and propose to take with respect thereto; and
(vii) with reasonable promptness, such other information and financial data concerning the Company and its Subsidiaries as any person entitled to receive information under this Section 4.01 may reasonably request.
Each of the financial statements referred to in paragraph (i) and (iii) shall be true and correct in all material respects as of the dates and for the period stated therein, subject in the case of the unaudited financial statements to changes resulting from normal year-end audit adjustments (none of which would, alone or in the aggregate, be materially adverse to the financial condition, operating results, assets, operations or business prospects of the Company and its Subsidiaries taken as a whole).
Preferred Stock held by WCAS VII shall be deemed to have been given when the unanimous approval of the Directors designated by WCAS VII has been obtained, as evidenced by written minutes or board resolutions and (b) the consent of the holders of a majority of the shares of Class B Preferred Stock held by GTCR shall be deemed to have been given when the unanimous approval of the Directors designated by GTCR has been obtained, as evidenced by written minutes or board resolutions;
(i) directly or indirectly declare or pay any dividends or make any distributions upon any of its equity securities, other than payments of dividends on, or redemption payments in respect of, the Class A Preferred Stock and the Class B Preferred Stock pursuant to the Certificate of Incorporation;
(ii) except (w) for the exercise of the call with respect to the Springing Shares provided in Section 1.04, (x) for redemptions or purchases of the Class A Preferred Stock or Class B Preferred Stock pursuant to the Certificate of Incorporation of the Company, (y) for repurchases, redemptions or acquisitions of equity securities pursuant to agreements in effect as of the date hereof with the Company's employees or directors in effect on the date hereof and (z) in connection with the exercise by the holder of any minority interest in a Subsidiary of its rights under a "put," repurchase or similar arrangement with the Company or any Subsidiary in effect as of the date hereof, directly or indirectly redeem, purchase or otherwise acquire, or permit any Subsidiary to redeem, purchase or otherwise acquire, any of the Company's equity securities (including, without limitation, warrants, options and other rights to acquire equity securities);
(iii) except for the issuance of equity securities (x) under any stock option plan or other benefit plan or arrangement approved by the Board of Directors of the Company or (y) upon the exercise of preemptive rights or warrants authorized as of the date hereof, authorize, issue, sell or enter into any agreement providing for the issuance (contingent or otherwise), or permit any Subsidiary to authorize, issue, sell or enter into any agreement providing for the issuance (contingent or otherwise) of, (a) any notes or debt securities containing equity features (including, without limitation, any notes or debt securities convertible into or exchangeable for equity securities, issued in connection with the issuance of equity securities or containing profit participation features) or (b) any equity securities (or any securities convertible into or exchangeable for any equity securities) or rights to acquire any equity securities, other than the issuance of equity securities by a Subsidiary to the Company or another Subsidiary;
(iv) merge or consolidate with any person or permit any Subsidiary to merge or consolidate with any person (other than a wholly owned Subsidiary);
(v) sell, lease or otherwise dispose of, or permit any Subsidiary to sell, lease or otherwise dispose of, more than 5% of the consolidated assets of the Company and its Subsidiaries (computed on the basis of book value, determined in accordance with generally accepted accounting principles consistently applied, or fair market value, determined by the Board of Directors in its reasonable good faith judgment) in any transaction or series of related transactions (other than sales of inventory in the ordinary course of business);
(vi) liquidate, dissolve or effect a recapitalization or reorganization in any form of transaction (including, without limitation, any reorganization in partnership form);
(vii) acquire, or permit any Subsidiary to acquire, any interest in any business (whether by a purchase of assets, purchase of stock, merger otherwise), or enter into any joint venture;
(viii) enter into, or permit any Subsidiary to enter into, the ownership, active management or operation of any business other than the ownership and operation of businesses engaged as rehabilitation hospitals or specialty. long-term hospitals or engaged in rehabilitation services or contract therapy services or related businesses;
(ix) enter into, or permit any Subsidiary to enter into, any transaction with any of its or any Subsidiary's officers, directors, employees or Affiliates or any individual related by blood, marriage or adoption to any such person (a "Relative") or any entity in which any such person or individual owns a beneficial interest (a "Related Entity"), except for normal employment arrangements and benefit programs on reasonable terms and except as otherwise expressly contemplated by this Agreement and the Ancillary Agreements; or
(x) create, incur, assume or suffer to exist, or permit any Subsidiary to create, incur, assume or suffer to exist, indebtedness exceeding the amounts approved therefor by the Board in the annual budget.
(i) comply with all applicable laws, rules and regulations of all governmental authorities, the violation of which would reasonably be expected to have a Material Adverse Effect, and pay and discharge when payable all taxes, assessments and governmental charges (except to the extent the same are being contested in good faith and adequate reserves therefor have been established);
(ii) enter into and maintain appropriate nondisclosure and noncompete agreements with its key employees; and
(iii) cause any Other Senior Management Agreement entered into by the Company after the date hereof which provides for the sale of Common Stock to or employment of certain members of senior management (the "Other Executives"), to be in form and substance reasonably satisfactory to each of the Purchasers.
deliver to any holder of the Securities a written statement as to whether it has complied with such requirements.
(ii) In order to exercise its purchase rights hereunder a holder of Shares must within 15 days after receipt of written notice from the Company describing in reasonable detail the stock or securities being offered, the purchase price thereof, the payment terms and such holder's percentage allotment deliver a written notice to the Company describing its election hereunder. If all of the stock and securities offered to the holders of Shares is not fully subscribed by such holders, the remaining stock and securities shall be reoffered by the Company to the holders purchasing their full allotment upon the terms set forth in this paragraph, except that such holders must exercise their purchase rights within five days after receipt of such reoffer.
(iii) Upon the expiration of the offering periods described above, the Company shall be entitled to sell such stock or securities which the holders of Shares have not elected to purchase during the 90 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such holders. Any stock or securities offered or sold by the Company after such 90-day period must be reoffered to the holders of Shares pursuant to the terms of this paragraph.
(iv) Nothing contained in this Section 4.07 shall be deemed to amend, modify or limit in any way the restrictions on the issuance of shares of stock set forth in Section 4.03 hereof or elsewhere in this Agreement, in the Stockholders Agreement or in any other agreement to which the Company is bound.
(a) Restricted Securities are transferable only pursuant to (i) public offerings registered under the Securities Act, (ii) Rule 144 or Rule 144A of the Securities and Exchange Commission (or any similar rule or rules then in force) if such rule or rules are available and (iii) subject to the conditions specified in subparagraph (b) below, any other legally available means of transfer.
(b) In connection with the transfer of any Restricted Securities (other than a transfer described in Section 4.13(a)(i) or (ii) above), the holder thereof shall deliver written notice to the Company describing in reasonable detail the transfer or proposed transfer, together with an opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol or Kirkland & Ellis or other counsel which (to the Company's reasonable satisfaction) is knowledgeable in securities law matters to the effect that such transfer of Restricted Securities may be effected without registration of such Restricted Securities under the Securities Act. In addition, if the holder of the Restricted Securities delivers to the Company an opinion of Reboul, MacMurray, Hewitt, Maynard & Kristol or Kirkland & Ellis or such other counsel that no subsequent transfer of such Restricted Securities shall require registration under the Securities Act, the Company shall promptly upon such contemplated transfer deliver new certificates for such Restricted Securities which do not bear the Securities Act legend set forth in Article III. If the Company is not required to deliver new certificates for such Restricted Securities not bearing such legend, the holder thereof shall not transfer the same until the prospective transferee has confirmed to the Company in writing its agreement to be bound by the conditions contained in this paragraph and Article III.
(c) Upon the request of any Purchaser, the Company shall promptly supply to such Purchaser or its prospective transferees all information regarding the Company required to be delivered in connection with a transfer pursuant to Rule 144A of the Securities and Exchange Commission.
V.
CONDITIONS PRECEDENT
(i) copies of (1) the Certificate of Incorporation of the Company, including all amendments thereto, certified as of a recent date by the Secretary of State of the jurisdiction of incorporation of such corporation and (2) a certificate of such Secretary, dated as of a recent date, as to the due incorporation and good standing of such corporation, and listing all documents relating to the Company on file with such official; and
(ii) a certificate of the Secretary or an Assistant Secretary of the Company, dated the Closing Date and certifying (1) that attached thereto is a true and complete copy of the By-laws of the Company as in effect on the date of such certification and at all times since February 5, 1997; (2) that attached thereto is a true and complete copy of resolutions adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement, the Note and the Ancillary Agreements, the issuance, sale and delivery of the Securities and the amendment of the Company's Certificate of Incorporation pursuant to the Certificate of Amendment, and that all such resolutions are still in full force and effect and are all the resolutions adopted in connection with the transactions contemplated by this Agreement; (3) that the Certificate of Incorporation of the Company has not been amended since the date of the last amendment referred to in the certificate delivered pursuant to clause (i)(2) above; and (4) as to the incumbency and specimen signature of each officer of the Company executing this Agreement, the Ancillary Agreements, the Note, the stock certificates representing the shares of Common Stock issued hereunder and any certificate or instrument furnished pursuant hereto, and a certification by another officer of the Company as to the incumbency and signature of the officer signing the certificate referred to in this paragraph (ii).
All such documents shall be satisfactory in form and substance to the Purchasers and their counsel.
VI.
TERMINATION
(a) by mutual consent of the Purchasers and the Company; or
(b) by WCAS VII or GTCR upon the occurrence of any of the following:
(i) the termination of the Stock Purchase Agreement or (ii) an increase in the
Purchase Price (as defined in the Stock Purchase Agreement) to an aggregate
price greater than $200,000,000.
(c) by the Company or by WCAS VII or GTCR, if the transactions contemplated hereby have not been consummated before December 1, 1999, unless the failure to consummate such transactions results from a breach of any representation, warranty or covenant of the party seeking to terminate this Agreement.
VII.
MISCELLANEOUS
sale and delivery of the Securities pursuant hereto, notwithstanding any investigation made at any time by or on behalf of any party hereto. All statements contained in any certificate or other instrument delivered by the Company hereunder shall be deemed to constitute representations and warranties made by the Company.
if to the Company, to:
Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Attention: General Counsel
Telecopy Number: 717-972-1042
with a copy to:
Dechert
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
Attention: Carmen J. Romano, Esq.
Telecopy Number: 215-994-2222
if to any Purchaser, to it at its address set forth on Schedule I hereto; with a copy to:
Reboul, MacMurray, Hewitt, Maynard & Kristol
45 Rockefeller Plaza
New York, New York 10111
Attention: Othon A. Prounis, Esq.
Telecopy Number: 212-841-5725
and to:
Kirkland & Ellis
200 E. Randolph Drive
Chicago, Illinois 60601
Attention: Margaret A. Gibson, Esq.
Telecopy Number: 312-861-2200
or, in any case, at such other address or addresses as shall have been furnished in writing by such party to the other parties hereto. All such notices, requests, consents and other communications shall be deemed to have been received (a) in the case of personal delivery, on the date of such delivery, (b) in the case of mailing, on the fifth business day following the date of such mailing, (c) in the case of delivery by overnight courier, on the business day following the date of delivery to such courier, and (d) in the case of telecopy, when received.
IN WITNESS WHEREOF, the Company and the Purchasers have executed this Agreement as of the day and year first above written.
SELECT MEDICAL CORPORATION
By /s/ Michael E. Tarvin ----------------------------- Name: Title: |
GTCR FUND VI, L.P.
By GTCR Partners VI, L.P., General Partner
By GTCR Golder Rauner, L.L.C., General Partner
By /s/ Donald J. Edwards ----------------------------- Name: Its: Principal |
THOMA CRESSEY FUND VI, L.P.
By TC Partners VI, L.P., General Partner
By Thoma Cressey Equity Partners, Inc., General Partner
By /s/ Bryan C. Cressey ----------------------------- Name: Its: Principal |
WELSH, CARSON, ANDERSON & STOWE VII, L.P
By WCAS VII Partners, L.P., General Partner
By /s/ Jonathan Rather ----------------------------- Name: Title: |
WCAS CAPITAL PARTNERS III, L.P.
By WCAS CP III Associates, L.L.C., General Partner
Title:
WCAS HEALTHCARE PARTNERS, L.P.
By WCAS HC Partners, General Partner
Title:
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
Thomas E. McInerney
D. Scott Mackesy
Robert A. Minicucci
Priscilla A. Newman
Andrew M. Paul
Paul B. Queally
Rudolph E. Rupert
Lawrence B. Sorrel
Richard H. Stowe
Laura M. VanBuren
Patrick J. Welsh
/s/ David F. Bellet ------------------------------- David F. Bellet |
WCAS CAPITAL PARTNERS III, L.P.
By WCAS CP III Associates, L.L.C., General Partner
By /s/ Jonathan Rather ----------------------------- Name: Title: |
WCAS HEALTHCARE PARTNERS, L.P.
By WCAS HC Partners, General Partner
By /s/ Jonathan Rather ----------------------------- Name: Title: |
John Almeida
Bruce K. Anderson
Russell L. Carson
Anthony J. de Nicola
James B. Hoover
Thomas E. McInerney
D. Scott Mackesy
Robert A. Minicucci
Priscilla A. Newman
Andrew M. Paul
Paul B. Queally
Jonathan Rather
Rudolph E. Rupert
Lawrence B. Sorrel
Richard H. Stowe
Sanjay Swani
Sean Traynor
Laura M. VanBuren
Patrick J. Welsh
By /s/ Jonathan Rather ----------------------------- Jonathan Rather as Attorney-in-Fact |
GTCR VI EXECUTIVE FUND, L.P.
By GTCR Partners VI. L.P., General Partner
By GTCR Golder Rauner. L.L.C., General Partner
By /s/ Donald J. Edwards ----------------------------- Name: Its: Principal |
GTCR ASSOCIATES VI
By GTCR Partners VI, L.P., Managing General Partner
By GTCR Golder Rauner. L.L.C.. General Partner
By /s/ Donald J. Edwards ----------------------------- Name: Its: Principal |
ANVERS, L.P.
By F.S.I.P., L.L.C., General Partner
By /s/ Illegible ----------------------------- Name: Leo Swergold Title: Senior Managing Director |
ANVERS II, L.P.
By F.S.I.P., L.L.C., General Partner
By /s/ Illegible ----------------------------- Name: Leo Swergold Title: Senior Managing Director |
JAMES B. HOOVER IRA ROLLOVER
CHASE CUSTODIAN
By /s/ James B. Hoover ----------------------------- Name: Title: |
ANVERS, L.P.
By F.S.I.P., L.L.C., General Partner
ANVERS II, L.P.
By F.S.I.P., L.L.C., General Partner
Exhibit 10.7
PROFESSIONAL SERVICES AGREEMENT dated as of November 19, 1999 (the "Agreement"), by and among SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"), GOLDER, THOMA, CRESSEY, RAUNER, [NC., a Delaware corporation ("Golder Rauner"), THOMA CRESSEY EQUITY PARTNERS INC. (together with Golder Rauner, "GTCR") and WCA MANAGEMENT CORPORATION, a New York corporation ("WCAS").
WHEREAS (i) GTCR Fund VI, L.P., a Delaware limited partnership, GTCR VI Executive Fund, LP., a Delaware limited partnership, GTCR Associates VI, L.P., a Delaware limited partnership, and Thoma Cressey Fund VI, L.P., a Delaware limited partnership (collectively, the "GTCR Purchasers"), (ii) Welsh, Carson, Anderson & Stowe VII, L.P., a Delaware limited partnership and WCAS Capital Partners III, L.P., a Delaware limited partnership ("WCAS CP III") (collectively, the "WCAS Purchasers" and, together with the GTCR Purchasers, the "Purchasers") are purchasing an aggregate 16,000,000 shares of Class B Preferred Stock, $.01 par value (the "Class B Preferred") shares of the Company pursuant to the terms of the Securities Purchase Agreement of even date herewith (the "Purchase Agreement") among the Company and the Purchasers, and WCAS CP III is purchasing an aggregate 1,667,000 shares of Common Stock, $.01 par value ("Common Stock", together with the Class B Preferred, the "Shares") and a Senior Subordinated Note of the Company due November 19, 2009 in the principal amount of $25,000,000 (the "Note") pursuant to the terms of such Purchase Agreement (the purchase of such shares of Common Stock, Class B Preferred and the Note pursuant to the Purchase Agreement being referred to herein collectively as the "Investments"); and
WHEREAS, each of GTCR and WCAS has provided substantial financial and management consulting services to the Company in connection with arranging for the investments to be made by the GTCR Purchasers and the WCAS Purchasers, respectively, and the Company is willing to compensate each of GTCR and WCAS for such services as provided herein; and
WHEREAS it is a condition precedent to the obligation of the Purchasers and the Other Purchasers to close the transactions contemplated by the Purchase Agreement that the Company execute and deliver this Agreement and provide to the Other Purchasers compensation for their commitment to make the Investments contemplated by this Agreement as provided herein;
NOW, THEREFORE, in consideration of the foregoing premises and the respective agreements hereinafter set forth and the mutual benefits to be derived herefrom, the Company, GTCR and WCAS hereby agree as follows:
funds equal to one percent (1%) of the total cash consideration paid to the
Company by the GTCR Purchasers in connection with such purchase and sale and
(ii) to WCAS an investment fee in immediately available funds equal to one
percent (1%) of the total cash consideration paid to the Company by the WCAS
Purchasers in connection with such purchase and sale.
IN WITNESS WHEREOF, the Company, GTCR and WCAS have caused this Professional Services Agreement to be duly executed and delivered on the date and year first above written.
SELECT MEDICAL CORPORATION
By /s/ Michael E. Tarvin ----------------------------------- Name: Title: |
WCA MANAGEMENT CORPORATION
By /s/ Jonathan Rather ----------------------------------- Name: Title: |
GOLDER, THOMA, CRESSEY, RAUNER, INC.
By /s/ Donald J. Edwards ----------------------------------- Name: Title: |
THOMA CRESSEY EQUITY PARTNERS INC.
By /s/ Bryan C. Cressey ----------------------------------- Name: Title: |
Exhibit 10.8
THIS AGREEMENT is made and entered into this 1 6th day of December, 1 998, by and between SELECT MEDICAL CORPORATION, a Delaware corporation ("Employer"), having an address do Select Medical Corporation, 4718 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, PA 1 7055, and DAVID W. CROSS, an individual ("Employee"), residing at 10 Lindworth Drive, St. Louis, Missouri 63124.
A. Employer is in the business of operating long-term acute care hospitals ("LTACHs") throughout the United States (the "Business").
B. In accordance with that certain Third Amended and Restated Employment Agreement of David W. Cross, dated as of October 12, 1998 (the "Prior Agreement"), Employee was employed as the President and Chief Executive Officer of Intensiva Healthcare Corporation, a Delaware corporation ("Intensiva"), prior to its acquisition by Employer. Pursuant to Section 7.2(e) of the Prior Agreement, Employee desires to terminate the Prior Agreement, effective on the date hereof, based on the occurrence of a Change of Control (as that term is defined in the Prior Agreement) of Intensiva and to resign as the President and Chief Executive Officer of Intensiva.
C. Employer desires to employ Employee to serve as its Senior Vice President -Development and to develop new LTACHs for the Business.
D. Employee desires to be employed by Employer to render such services in connection with the Business, on the terms and conditions specified below.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employee and Employer, intending to be legally bound hereby, covenant and agree as follows:
(b) Employer agrees to employ Employee, and Employee hereby accepts such employment and agrees to serve Employer, upon and subject to the terms and conditions set forth herein.
(a) Employee represents and warrants to Employer that Employee has disclosed, and at all times during the Employment Term (as hereinafter defined) will disclose, to Employer the following matters, whether occurring at any time prior to or during the Employment Term:
(i) any criminal complaint, indictment or criminal proceeding (involving other than a misdemeanor offense) in which Employee is named as a defendant;
(ii) any investigation or proceeding, whether administrative, civil or criminal, relating to an allegation against Employee of filing false health care claims, violating anti-kickback laws, or engaging in other billing improprieties; or
(iii) any dependency on, habitual use or episodic abuse of, alcohol or controlled substances by Employee, or any participation by Employee in any alcohol or controlled substance detoxification, treatment, recovery, rehabilitation, counseling, screening or monitoring program.
(b) Employee shall at all times render services hereunder in a competent, professional and ethical manner, in accordance with all applicable statutes, regulations, rules, orders and directives of any and all governmental and regulatory bodies having competent jurisdiction.
(c) Employee further represents and warrants that Employee is not, and has not been, excluded from participation in the Medicare or Medicaid programs or otherwise found to be in violation of any of the rules or regulations of such programs.
(b) Employee shall serve as Employer's Senior Vice President Development and will develop new LTACHs for the Business throughout the United States at such locations as are approved by Employer. In such capacity, Employee will, as directed by Employer, also seek contracts to manage rehabilitation units in general acute care hospitals. Employee shall report to Employer's President and Chief Operating Officer. Employee shall not be required to relocate from St. Louis, Missouri.
parent company may establish from time to time (including, without limitation, Employer's Code of Conduct), and all work performed by Employee shall be subject to review and evaluation by Employer.
arrangements, and each shall instead constitute an unfunded and unsecured promise to pay money in the future exclusively from the general assets of Employer.
(a) This Agreement shall commence on the date hereof and remain in effect, unless this Agreement is terminated by either party hereto, or extended by the written agreement of both parties hereto, for a period of two (2) years after the date hereof. Thereafter, this Agreement shall continue in effect from month to month unless either party shall notify the other party in writing of its decision to terminate this Agreement effective thirty (30) days after the other party's receipt of such notice. Employer may terminate this Agreement in the case of a breach of this Agreement by Employee under Section 5(c) below effective upon written notice to Employee.
(b) Upon termination of employment hereunder, Employee shall be entitled to receive such salary and fringe benefits, if any, accrued under the terms of this Agreement, but unpaid, as of the date of such termination, and all future compensation and all future benefits shall cease and terminate as of the date of termination. Employee shall be entitled to pro rata salary through the date of such termination, but Employee shall not be entitled to any incentive compensation not yet paid as of the date of termination.
(c) Employer shall be entitled to terminate this Agreement, for cause, if any of the following events shall occur:
(i) Employee's death or upon Employee's becoming incapacitated due to accident, sickness or other circumstances which render Employee mentally or physically incapable of performing the duties and services required of Employee for a period of sixty (60) consecutive days, as determined by a physician mutually selected by Employer and Employee;
(ii) Employee engages in criminal or fraudulent conduct, in the good faith opinion of Employer, or Employee is found guilty of such conduct by any court or governmental agency of competent jurisdiction;
(iii) Breach by Employee of any material representation, warranty or other material term or provision in this Agreement, which breach has not been cured to the satisfaction of Employer within twenty (20) calendar days after notice of such breach;
(iv) Intentional refusal by Employee to perform any duty reasonably required of Employee hereunder for a continuous period of three (3) calendar days after delivery of written notice thereof to Employee by Employer;
(v) The observed use of illegal drugs by Employee at any time or place or the abuse of alcohol or the appearance, in the good faith determination of Employer, of Employee being under the influence of drugs and/or alcohol on the premises of Employer or any client of Employer, during any time during which Employee is performing services for Employer, or the good faith determination of Employer that Employee is addicted to drugs or alcohol and has refused any recognized rehabilitation procedures; or
(vi) Employee's gross negligence or willful misconduct in the performance of the duties and services required of Employee.
(d) Following any involuntary termination of his employment with
Employer (other than a termination for cause in accordance with
Section 5(c) above), Employer shall be obligated to pay to Employee,
as severance pay, an amount equal to one (1) year of base salary,
payable in substantially equal bi-weekly installments at the level
then being paid to Employee. Employer shall also continue Employee's
medical and other benefits until Employee is re-employed or for the
balance of the Employment Term, which ever is first to occur. In the
event that Employee is re-employed, but the benefits provided
through such reemployment are less than the benefits provided under
this Agreement, then Employer shall pay to Employee, in monthly
installments,
such difference in value. Should Employee die before receipt of the severance payments, then such payments will be made to the executors or administrators of Employee's estate.
(a) Employee recognizes that Employer's entering into this Agreement is induced primarily because of the covenants and assurances made by Employee, that Employee's covenant not to compete is necessary to insure that continuation of the Business, and that irreparable harm and damage will be done to Employer and its affiliates in the event that Employee competes with Employer or its affiliates within the geographic areas described below. Therefore, Employee agrees that, during the Employment Term, Employee shall not, directly or indirectly, in whole or in part, without the express written consent of Employer (which consent may be withheld in Employer's sole discretion), own, manage, operate, control, establish, participate in the management or control of, be employed by, lend Employee's name to or maintain or continue any interest whatsoever in, provide financial assistance to, or provide consulting or other services related to, any enterprise (a) having to do with the provision, distribution, marketing, promotion, or advertising of any type(s) of service(s) or product(s) in direct competition to those offered by Employer within (i) the fifty (50) states of the United States, (ii) United States territories and possessions, and (iii) each foreign country, possession or territory in which Employer may be engaged in business at the termination of Employee's employment. Additionally for a period of one (1) year after the end of the Employment Term or the earlier termination of this Agreement, Employee shall not, directly or indirectly, in whole or in part, without the express written consent of Employer (which consent may be withheld in Employer's sole discretion), own, manage, operate, control, establish, participate in the management or control of, be employed by, lend Employee's name to or maintain or continue any interest whatsoever in, provide financial assistance to, or provide consulting or other services related to, any enterprise in direct competition with the business of Employer or any of its affiliates within a 50-mile radius of the location of any competing or substantially similar facility or business of Employer, or an affiliate, which was in operation on the date of termination or expiration of this Agreement.
(b) Nothing contained in this Section 7 or in Section 3.4 of this Agreement shall prevent Employee from (i) passively investing in one or more venture capital funds managed by Collinson Howe and Lennox Venture Partners, Inc. (New York, NY) or Three Arch Partners (Menlo Park, CA), or similar funds, which may in turn invest in businesses which compete with Employer, provided that Employee shall not be entitled to provide advice to, or consult in any way with, such competing businesses nor shall Employee be entitled to own directly or indirectly more than ten percent (10%) of any such fund or underlying competing business, or (ii) investing in, or serving as a director of Odessey Healthcare so long as such company remains a provider of hospice services and does not compete with Employer.
(c) If any part of Section 6 or this Section 7 shall be determined by a court of competent jurisdiction to be unreasonable in duration, geographic area or scope, then this Agreement is intended to and shall extend only for such period of time, in such area and with respect to such activity, as is determined by such court to be reasonable.
(a) All records, files, reports and documents pertaining to services rendered by Employee hereunder, or to the development or operation of the Business, or any business hereafter operated by Employer, belong to and shall remain the property of Employer. Employee recognizes and acknowledges that the terms of this Agreement, the names and addresses of the patients and clients of the Business, as well as Employer's proprietary information and trade secrets as they may exist from time to time, are valuable, special, and unique assets of Employer's business. Employee also recognizes and acknowledges that the systems, protocols, policies, procedures, manuals, reports, data bases, documents, instruments and other materials used by Employer in connection with the Business are proprietary to Employer, and are valuable, special and unique assets of Employer's business. Employee shall not, during or after the term of Employee's employment hereunder, disclose either Employer's proprietary information or trade secrets to any other person, or entity for any reason or purpose whatsoever, without the written consent of Employer. All written materials, records and other documents made by, or coming into the possession of, Employee during the term hereof which contain or disclose any of the foregoing shall be and remain the property of Employer. Upon the termination of this Agreement for any reason whatsoever, Employee shall promptly deliver the same, and all copies thereof, to Employer.
(b) All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Employee or which are disclosed or made known to Employee, individually or in conjunction with others, during the Employment Term (whether during business hours or otherwise and whether on Employer's premises or elsewhere) which relate to Employer's past, present or anticipated business, products or services (including, without limitation, all such information relating to corporate opportunities, financial and sales data, pricing and contractual terms, employee evaluations, opinions, interpretations, prospects, the identity of patients or entities that refer patients to Employer, the identity of key contacts within the entities that refer patients to Employer, and marketing and merchandising information or techniques, prospective names, and methods of doing business) shall be disclosed to Employer and are and shall be the sole and exclusive property of Employer. All memoranda, notes, records, files, correspondence, drawings, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Employer. Employee hereby specifically sells, assigns, and transfers to Employer all of Employee's right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor's certificates, or other industrial rights that may be filed thereon, including divisions, continuations, continuations-in- part, reissues and/or extensions thereof.
If to Employer: c/o Select Medical Corporation 4718 Old Gettysburg Road Post Office Box 2034 Mechanicsburg, PA 17055 Attention: General Counsel If to Employee: David W. Cross 10 Lindworth Drive St. Louis, MO 63124 |
Either party hereto may change the address for notice by notifying the other party, in writing, of the new address.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written.
Employer:
SELECT MEDICAL CORPORATION, a Delaware
corporation
By: /s/ Robert A. Ortenzio ----------------------- Robert A. Ortenzio President |
Employee:
/s/ David W. Cross --------------------------- |
The undersigned, intending to be legally bound hereby, joins in the execution and delivery of the aforesaid Employment Agreement, dated December 16, 1998 (the "Agreement"), for the purpose of agreeing to and accepting the terms and conditions of Sections 1(a) and 10.9 thereto.
IN WITNESS WHEREOF, the undersigned has caused this instrument to be duly executed this 1 6th day of December, 1 998.
INTENSIVA HEALTHCARE CORPORATION, a Delaware
corporation
By: /s/ Robert A. Ortenzio ----------------------------- |
Exhibit 10.9
THIS AGREEMENT is made as of June 2, 1997, between Select Medical Corporation, a Delaware corporation (the "Company"), and Frank Fritsch (the "Executive").
The Company and Executive desire to enter into an agreement (A) pursuant to which Executive will purchase, and the Company will sell, (i) 61,150 shares of Common Stock, 41,150 shares of which shall constitute the "Executive Stock" and 20,000 shares of which shall constitute the "Investor Common Stock" and (ii) 95 shares of Class A Preferred and (B) to set forth Executive's terms of employment with the Company. Certain definitions are set forth in Section 11 of this Agreement.
Golder, Thoma, Cressey, Rauner Fund V, L.P. ("GTCR") and Welsh, Carson, Anderson & Stowe VII, L.P. and certain of its partners ("WCAS") purchased shares of Common Stock and Class A Preferred and may purchase additional shares of Class A Preferred, pursuant to a purchase agreement among the Company and the Purchasers, dated as of February 5, 1997 (as amended and supplemented from time to time, the "Purchase Agreement"). GTCR and WCAS are collectively referred to herein as the "Purchasers" and individually as a "Purchaser." Certain provisions of this Agreement are intended for the benefit of, and will be enforceable by, the Purchasers.
The parties hereto agree as follows:
PROVISIONS RELATING TO STOCK
(a)(i) Upon execution of this Agreement, Executive will purchase, and the Company will sell, 41,150 shares of Executive Stock at a price of $0.25 per share. The Company will deliver to the Executive the certificate representing such Executive Stock, and the Executive will deliver to the Company a cashier's or certified check or wire transfer of funds in the aggregate amount of $10,287.50.
(a)(ii) Upon execution of this Agreement, Executive will purchase, and the Company will sell, 20,000 shares of Investor Common Stock at a price of $0.25 per share. The Company will deliver to the Executive the certificate representing such Investor Common Stock, and the Executive will deliver to the Company a cashier's or certified check or wire transfer of funds in the aggregate amount of $5,000.00.
(a)(iii) Upon execution of this Agreement, Executive will purchase, and the Company will sell, 5.28 shares of Class A Preferred at a price of $1,000.00 per share. The Company will deliver to the Executive the certificate representing such Class A Preferred, and the Executive will deliver to the Company a cashier's or certified check or wire transfer of funds in the aggregate amount of $5,280.00.
(e) In connection with the purchase and sale of any class of Stock hereunder, Executive represents and warrants to the Company that:
(i) The Stock to be acquired by Executive pursuant to this Agreement will be acquired for Executive's own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act, or any applicable state securities laws, and the Stock will not be disposed of in contravention of the Securities Act or any applicable state securities laws.
(ii) Executive is an "accredited investor" as such term is defined in Rule 501(a)(5) of Regulation D under the Securities Act.
(iii) Executive is an executive officer of the Company, is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Stock.
(iv) Executive is able to bear the economic risk of his investment in the Stock for an indefinite period of time because the Stock has not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available.
(v) Executive has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of Stock and has had full access to such other information concerning the Company as he has requested.
(vi) This Agreement constitutes the legal, valid and binding obligation of Executive, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which Executive is a party or any judgment, order or decree to which Executive is subject.
(vii) Executive is a resident of the State of Pennsylvania.
(f) As an inducement to the Company to issue the Stock to Executive, as a condition thereto, Executive acknowledges and agrees that:
(i) neither the issuance of the Stock to Executive nor any provision contained herein shall entitle Executive to remain in the employment of the Company and its Subsidiaries or affect the right of the Company to terminate Executive's employment at any time for any reason; and
(ii) the Company shall have no duty or obligation to disclose to Executive, and Executive shall have no right to be advised of, any material information regarding the Company and its Subsidiaries at any time prior to, upon or in connection with the repurchase of Stock upon the termination of Executive's employment with the Company and its Subsidiaries.
(a) Except as otherwise provided in Section 2(b) below, the Executive Stock will become vested in accordance with the following schedule, if as of each such date Executive is still employed by the Company or any of its Subsidiaries:
Cumulative Percentage of Anniversary Date Executive Stock Vested ---------------- ---------------------- June 2, 1998 20% June 2, 1999 40% June 2, 2000 60% June 2, 2001 80% June 2, 2002 100% |
(b) If Executive ceases to be employed by the Company and its Subsidiaries on any date other than any anniversary date prior to June 2, 2002, the cumulative percentage of Executive Stock to become vested will be determined on a pro rata basis according to the number of days elapsed since the prior anniversary date. Upon the occurrence of a Sale of the Company (while Executive is employed by the Company), all shares of Executive Stock which have not yet become vested shall become vested at the time of such event. Shares of Executive Stock which have become vested are referred to herein as "Vested Shares," and all other shares of Executive Stock are referred to herein as "Unvested Shares."
(a)(ii) In the event Executive fails to purchase any shares of the Investor Stock which he is required to purchase pursuant to this Agreement (a "Triggering Event"), the Executive Stock and the Investor Stock (in each case, whether held by Executive or one or more of Executive's transferees, other than the Company or the Purchasers) will be subject to repurchase, in each case by the Company and the Purchasers pursuant to the terms and conditions set forth in this Section 3. The repurchase options set forth in Sections 3(a)(i) and 3(a)(ii) shall be referred to herein as the "Repurchase Option".
Class A Preferred will be the Liquidation Value of such share, plus all accrued and unpaid dividends thereon.
(c) The Board may elect to purchase all or any portion of any class of the Executive Stock or the Investor Stock by delivering written notice (the "Repurchase Notice") to the holder or holders of such Stock within one year after the Termination or Triggering Event. The Repurchase Notice will set forth the number of shares of Stock (including the number of Unvested Shares and Vested Shares, if any) of each class to be acquired from each holder, the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction. The number of shares to be repurchased by the Company shall first be satisfied to the extent possible from the shares of Stock held by Executive at the time of delivery of the Repurchase Notice. If the number of shares of Stock then held by Executive is less than the total number of shares of Stock which the Company has elected to purchase, the Company shall purchase the remaining shares elected to be purchased from the other holder(s) of Stock under this Agreement, pro rata according to the number of shares of Stock held by such other holder(s) at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share). The number of shares of each class of Stock to be repurchased hereunder will be allocated among Executive and the other holders of Stock (if any) pro rata according to the number of shares of Stock to be purchased from such person.
(d) If for any reason the Company does not elect to purchase all of the Stock pursuant to the Repurchase Option, the Purchasers shall be entitled to exercise the Repurchase Option for the shares of Stock the Company has not elected to purchase (the "Available Shares"). As soon as practicable after the Company has determined that there will be Available Shares, but in any event within ten months after the Termination or Triggering Event, the Company shall give written notice (the "Option Notice") to the Purchasers setting forth the number of Available Shares and the purchase price for the Available Shares. The Purchasers may elect to purchase any or all of the Available Shares by giving written notice to the Company within one month after the Option Notice has been given by the Company. As soon as practicable, and in any event within ten days, after the expiration of the one-month period set forth above, the Company shall notify each holder of Stock as to the number of shares being purchased from such holder by the Purchasers (the "Supplemental Repurchase Notice"). If the Purchasers elect to purchase an aggregate number of shares greater than the Available Shares, the Available Shares will be allocated among the Purchasers based upon the number of shares of Common Stock held by such Purchaser on a fully-diluted basis. At the time the Company delivers the Supplemental Repurchase Notice to the holder(s) of such Stock, the Company shall also deliver written notice to each Purchaser setting forth the number of shares such Purchaser is entitled to purchase, the aggregate purchase price and the time and place of the closing of the transaction. The number of shares of each class of Stock to be repurchased hereunder shall be allocated among the Company and each Purchaser pro rata according to the number of shares of Stock to be purchased by each of them.
(e) The closing of the purchase of the Stock pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice or
Supplemental Repurchase Notice, which date shall not be more than one month nor less than five days after the delivery of the later of either such notice to be delivered. The Company and/or the Purchasers will pay for the Stock to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of funds in the aggregate amount of the purchase price for such shares. In addition, the Company may pay the purchase price for such shares by offsetting amounts outstanding under any bona fide debts owed by Executive to the Company. The Company and the Purchasers will be entitled to receive customary representations and warranties from the sellers regarding such sale and to require all sellers signatures be guaranteed.
(f) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Stock by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Subsidiaries' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Stock hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so under such restrictions.
(g) Upon the occurrence of a Qualified Public Offering, the Repurchase Option shall terminate with respect to Vested Shares of Executive Stock and all shares of Investor Stock.
(a) Retention of Executive Stock. Until the fifth anniversary of the date of this Agreement, Executive shall not sell, transfer, assign, pledge or otherwise dispose of any interest in any shares of Executive Stock, except for Exempt Transfers (as defined in Section 4(b) below) other than sales to the public pursuant to Rule 144 promulgated under the Securities Act or any similar rule then in force.
Purchasers within 60 days after the Sale Notice has been given to the Company. If the Company has not elected to purchase all of the Stock to be transferred, the Purchasers may elect to purchase all (but not less than all) of the Stock to be transferred upon the same terms and conditions as those set forth in the Sale Notice by giving written notice of such election to Executive within 90 days after the Sale Notice has been given to the Purchasers. If the Purchasers elect to purchase an aggregate number of shares greater than the Stock to be transferred, such Stock will be allocated among the Purchasers based upon the number of shares of Stock held by such Purchaser on a fully-diluted basis. If neither the Company nor the Purchasers elect to purchase all of the shares of Stock specified in the Sale Notice, Executive may transfer the shares of Stock specified in the Sale Notice, subject to the provisions of Section 4(d) below, at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 60-day period immediately following the Authorization Date. Any shares of Stock not transferred within such 60-day period will be subject to the provisions of this Section 4(c) upon subsequent transfer. The Company may pay the purchase price for such shares by offsetting amounts outstanding under any bona fide debts owed by Executive to the Company.
(i) If neither the Company nor the Purchasers has elected
to purchase all of the Stock specified in the Sale Notice pursuant to
Section 4(c) above, the Purchasers may elect to participate in the
contemplated Transfer by delivering written notice to Executive and the
Company within 100 days after receipt by the Purchasers of the Sale Notice.
If the Purchasers have elected to participate in such sale, Executive and
the Purchasers will be entitled to sell in the contemplated sale, at the
same price and on the same terms, a number of shares of the Company's
Common Stock equal to the product of (i) the quotient determined by
dividing the percentage of the Company's Common Stock (on a fully-diluted
basis) held by such person, by the aggregate percentage of the Company's
Common Stock (on a fully-diluted basis) owned by Executive (including both
Vested and Unvested Shares) and each Purchaser participating in such sale
and (ii) the number of shares of Common Stock to be sold in the
contemplated sale. Any purchaser in a sale subject to this Section 4(d)
will be required to purchase from the Purchasers, at each Purchaser's
election, a portion of the Class A Preferred held by such Purchasers equal
to the greater of the percentage of (x) such Purchaser's Common Stock being
sold in such transaction and (y) the Executive's Class A Preferred, as the
case may be, being sold in such transaction.
(1) the Sale Notice contemplated a sale of 100 shares of Common Stock;
(2) Executive was at such time the owner of 120 shares of Common Stock (which was equal to 30% of the Common Stock on a fully-
diluted basis); and
(3) each Purchaser elected to participate and each Purchaser owned 40 shares of Common Stock (which was equal to 10% of Common Stock on a fully-diluted basis) and 120 shares of Class A Preferred;
(A) Executive would be entitled to sell 60 shares of Common Stock (30% / 50% x 100 shares); and
(B) each Purchaser would be entitled to sell 20 shares of Common Stock (10% / 50% x 100 shares) and 60 shares of Class A Preferred (the same percentage of the Purchaser's Class A Preferred as the percentage of the Purchaser's Common Stock being sold, i.e., 50%).
Executive will use his best efforts to obtain the agreement of the prospective transferee(s) to the participation of the Purchasers in the contemplated Transfer and will not transfer any Stock to the prospective transferee(s) if such transferee(s) refuses to allow the participation of the Purchasers.
(ii) Each holder transferring any class of Stock pursuant to this Section 4(d) shall pay its pro rata share (based on the number of such shares to be sold) of the expenses incurred by the holders in connection with such Transfer and shall be obligated to join on a pro rata basis (based on the number of such shares to be sold) in any indemnification or other obligations that the Executive agrees to provide in connection with such Transfer (other than any such obligations that relate specifically to a particular holder such as indemnification with respect to representations and warranties given by a holder regarding such holder's title to and ownership of such shares; provided that no holder shall be obligated in connection with such Transfer to agree to indemnify or hold harmless the transferees with respect to an amount in excess of the net cash proceeds paid to such holder in connection with such Transfer).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED AS OF JUNE 2, 1997, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN OTHER SENIOR MANAGEMENT AGREEMENT BETWEEN THE COMPANY AND AN EXECUTIVE OF THE COMPANY DATED AS OF JUNE 2, 1997, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(a) Except for the issuance of Common Stock (i) to the Other Executives pursuant to the Other Senior Management Agreements, (ii) to the Partnerships (as defined in the Senior Management Agreement), Rocco Ortenzio and Robert Ortenzio pursuant to the Senior Management Agreement, (iii) to the Purchasers pursuant to the Purchase Agreement, (iv) in connection with acquisitions as contemplated by Section 1B(c) of the Purchase Agreement, (v) to certain investors designated by the Board or (vi) pursuant to a public offering registered under the Securities Act, if the Company at any time after the date hereof authorizes the issuance or
sale of any shares of Common Stock or any securities containing options or rights to acquire any shares of Common Stock (other than as a dividend on the outstanding Common Stock), the Company shall first offer to sell to each holder of Stock a portion of such stock or securities equal to the quotient determined by dividing (1) the number of shares of Common Stock held by such holder by (2) the total number of shares of Common Stock outstanding on a fully-diluted basis immediately prior to such issuance. Each holder of Stock (accepting such offer) shall also purchase the same percentage of any other class of Company securities (whether debt or equity) being sold with the Common Stock. Each holder of Stock shall be entitled to purchase all or any portion of such stock or securities at the most favorable price and on the most favorable terms as such stock or securities are to be offered to any other Persons.
(b) In order to exercise its purchase rights hereunder, a holder of Stock must within 15 days after receipt of written notice from the Company describing in reasonable detail the stock or securities being offered, the purchase price thereof, the payment terms and such holder's percentage allotment, deliver a written notice to the Company describing its election hereunder. If all of the stock and securities offered to the holders of Stock is not fully subscribed by such holders, the remaining stock and securities shall be reoffered by the Company to the holders purchasing their full allotment upon the terms set forth in this paragraph, except that such holders must exercise their purchase rights within five days after receipt of such reoffer.
(c) Upon the expiration of the offering periods described above, the Company shall be entitled to sell such stock or securities which the holders of Stock have not elected to purchase during the 90 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such holders. Any stock or securities offered or sold by the Company after such 90-day period must be reoffered to the holders of Stock pursuant to the terms of this Section 6.
(d) Nothing contained in this Section 6 shall be deemed to amend, modify or limit in any way the restrictions on the issuance of shares of Common Stock set forth in the Purchase Agreement, in the Stockholders Agreement or in any other agreement to which the Company is bound.
PROVISIONS RELATING TO EMPLOYMENT
(i) The Employment Period will continue until Executive's resignation, disability (as determined by the Board in its good faith judgment) or death or until the Board determines in its good faith judgment that termination of Executive's employment is in the best interests of the Company.
(ii) Upon a termination of the Employment Period for any reason, Executive shall not be entitled to receive his Annual Base Salary or any fringe benefits or
bonuses for periods after the termination of the Employment Period, unless the Board, in its sole discretion, provides otherwise.
that the court shall be allowed to revise the restrictions contained herein to cover the maximum duration, scope and area permitted by law. Because Executive's services are unique and because Executive has access to confidential information, the parties hereto agree that money damages would be an inadequate remedy for any breach of this Agreement. Therefore, in the event a breach or threatened breach of this Agreement, the Company or its successors or assigns may, in addition to other rights and remedies existing in their favor, apply to any court of competent jurisdiction for specific performance and/or injunctive or other relief in order to enforce, or prevent any violations of, the provisions hereof (without posting a bond or other security).
GENERAL PROVISIONS
otherwise provided herein, each such other holder of Investor Stock will succeed to all rights and obligations attributable to the Executive as a holder of Investor Stock hereunder. Investor Stock will also include shares of the Company's capital stock issued with respect to Investor Stock by way of a stock split, stock dividend or other recapitalization.
term "Sale of the Company" shall not include any sale of equity securities by the Company in a private or public offering to other investors selected by the Purchasers.
Select Medical Corporation 4718 Old Gettysburg Road P.O. Box 2034
Mechanicsburg, Pennsylvania 17055 Attention: Chairman and Chief Executive Officer
c/o Select Medical Corporation
(At the address as set forth above)
Golder, Thoma, Cressey Fund V, L.P.
6100 Sears Tower
Chicago, Illinois 60606-6402
Attention: Bryan C. Cressey
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich
Margaret A. Gibson
Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Attention: James B. Hoover
or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or sent or, if mailed, five days after deposit in the U.S. mail.
performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Agreement.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Other Senior Management Agreement on the date first written above.
SELECT MEDICAL CORPORATION
By: /s/ Rocco A. Ortenzio --------------------------- Its: --------------------------- /s/ Frank Fritsch ------------------------------- Frank Fritsch |
Agreed and Accepted:
GOLDER, THOMA, CRESSEY, RAUNER FUND V, L.P.
By: GTCR V, L.P.
Its: General Partner
By: Golder, Thoma, Cressey, Rauner, Inc. Its: General Partner
By: /s/ Bryan C. Cressey ------------------------------------------- Its: Principal |
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
WELSH, CARSON, ANDERSON & STOWE
HEALTHCARE PARTNERS, L.P.
By: /s/ Russell L. Carson ------------------------------------------- Its: General Partner |
SCHEDULE A
Period Annual Base Salary ------ ------------------ From June 1, 1997 to August 1, 1997 $104,000 Starting August 1, 1997 $130,000 |
EXHIBIT A
_____________, 1997
ELECTION TO INCLUDE STOCK IN GROSS
INCOME PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned purchased shares of Common Stock, par value $.01 per share (the "Shares"), of Select Medical Corporation (the "Company") on _________, 1997. Under certain circumstances, the Company has the right to repurchase certain of the Shares at cost from the undersigned (or from the holder of the Shares, if different from the undersigned) should the undersigned cease to be employed by the Company and its subsidiaries or upon certain other events. Hence, the Shares are subject to a substantial risk of forfeiture that may not be avoided by a transfer of the Shares to another person. The undersigned desires to make an election to have the Shares taxed under the provision of Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") at the time he purchased the Shares.
Therefore, pursuant to Code (S)83(b) and Treasury Regulation (S)1.83-2 promulgated thereunder, the undersigned hereby makes an election, with respect to the Shares (described below), to report as taxable income for calendar year 1997 the excess (if any) of the Shares' fair market value on __________, 1997 over the purchase price thereof.
The following information is supplied in accordance with Treasury Regulation (S)1.83-2(e):
1. The name, address and social security number of the undersigned:
Frank Fritsch
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Social Security Number: 000-00-0000
2. A description of the property with respect to which the election is being made: ______ shares of Common Stock, par value $.01 per share, and ____ shares of Class A Preferred Stock, par value $.01 per share, of the Company.
3. The date on which the property was transferred: _________, 1997. The taxable year for which such election is made: calendar 1997.
4. The restrictions to which the property is subject: If the undersigned does not purchase certain shares of the Company's capital stock, the Shares will be subject to repurchase by the Company at cost. If the undersigned ceases to be employed by the Company or any of its subsidiaries prior to June 2, 2002, the unvested portion of the Shares will be subject to repurchase by the Company at cost. Twenty percent of the Shares become vested shares on each of June 2. 1998, June 2, 1999, June 2, 2000, June 2, 2001 and June 2, 2002.
5. The fair market value on ___________, 1997 of the property with respect to which the election is being made, determined without regard to any lapse restrictions: $____ per share of Common Stock and $____ per share of Class A Preferred Stock.
6. The amount paid for such property: $0.25 per share of Common Stock and $1,000.00 per share of Class A Preferred Stock.
A copy of this election has been furnished to the Secretary of the Company pursuant to Treasury Regulations (S)1.83-2(d).
Dated: /s/ Frank Fritsch ---------------- --------------------------------------- Frank Fritsch |
Pursuant to the Other Senior Management Agreement, dated as of June 2, 1997, by and between the undersigned and Select Medical Corporation, a Delaware corporation (the "Company"), the undersigned will purchase shares of the Company's Common Stock, par value $.01 per share, and shares of the Company's Class A Preferred Stock, par value $.01 per share.
Pursuant to Section 9 of the Stockholders Agreement, dated as of February 5, 1997, by and among the Company and certain other stockholders listed therein (the "Stockholders Agreement"), the Company has permitted the undersigned to become a party to the Stockholders Agreement and to succeed to all of the rights and obligations of a "Stockholder" under the Stockholders Agreement. The undersigned hereby agrees to be bound by all of the terms and conditions of the Stockholders Agreement.
All notices to the undersigned should be sent to the following address:
Date: June 2, 1997 ------------------ /s/ Frank Fritsch ----------------------------- Frank Fritsch |
Acknowledged and Agreed:
SELECT MEDICAL CORPORATION
By: /s/ Rocco A. Ortenzio ----------------------- Its: ---------------------- |
Exhibit 10.10
SELECT MEDICAL CORPORATION
4716 Old Gettysburg Road P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
March 1, 2000
Mr. S. Frank Fritsch
Select Medical Corporation
4716 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Dear Mr. Fritsch:
The following will confirm the agreement of Select Medical Corporation, a Delaware corporation (the "Company"), with you concerning the consequences upon certain terminations of your employment in connection with a change in control of the Company.
In consideration of your past and continued service to the Company and in consideration of the mutual covenants and agreements contained in this letter (this "Letter Agreement"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
any stock option or other award agreements entered into between you and the
Company (including agreements that may be entered into in the future in
connection with additional awards granted pursuant to any Company plan, the
"Award Agreements") and the Company agrees that all unvested, unexercised stock
options held by you which were granted to you by the Company shall become fully
vested and exercisable as of the date of the Covered Termination and you will
have the right to exercise, at any time prior to the earlier of three months
after the date of termination or the expiration date of such option, all such
options to purchase the Company's stock notwithstanding any contrary vesting
schedule that may be contained in the applicable plan or Award Agreement, and
(ii) the Company will, on or before your last day as an employee of the Company,
pay to you, in lieu of any other rights to cash compensation other than the
payment of your salary for services performed before the date of termination and
as a severance benefit, a lump sum cash payment equal to your total base salary
plus bonus compensation from the Company for the preceding three years (or, if
you shall have been employed for less than three years, an amount equal to three
times your average total annual cash compensation for base salary and bonus for
your years of service to the Company).
(i) Prior to a Public Offering (as defined below), a "Change of Control" shall be deemed to have occurred, subject to Section 3(a)(iii) below, upon (i) any sale, lease, exchange or other transfer of all or substantially all of the property and assets of the Company (on a consolidated basis) to an entity, other than an entity at least 75% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Company immediately prior to such sale or other transfer, (ii) any merger or consolidation to which the Company is a party and as a result of which the holders of the voting securities of the Company immediately prior thereto own less than a majority of the outstanding voting securities of the surviving entity immediately following such transaction, or (iii) any person's (excluding WCAS, GTCR and Thoma Cressey Partners, the financial sponsors of the Company as of the date hereof), including a group's, becoming the beneficial owner of securities representing more than 50% of the voting securities of the Company then outstanding.
(ii) Following a Public Offering, a "Change of Control" shall be deemed to have occurred if, subject to Section 3(a)(iii) below, (i) any person including a group, but excluding any stockholder of the Company who immediately prior to the Public Offering beneficially owned 12% or more of the Company's outstanding shares, becomes the beneficial owner of shares of the Company having more than 50% of the total number of votes that may be cast for the election of directors of the Company, (ii) any person including a group, other than you or any group of which you are a party, increases its beneficial ownership of shares of the Company beyond such person's ownership immediately after the Public Offering by a number of shares equal to or greater than 33% of the total number of votes that may be cast for the election of directors; (iii) the individuals who serve on the Board of Directors of the
Company as of the effective date hereof (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, any person who becomes a director subsequent to the effective date hereof, whose election or nomination for election was approved by a vote of at least a majority of the directors then constituting the Incumbent Directors, shall for purposes of this clause (iii) be considered an Incumbent Director; (iv) the consummation of a merger or consolidation of the Company in which the stockholders of the Company immediately prior to such merger or consolidation, would not, immediately after the merger or consolidation, beneficially own, directly or indirectly, shares representing in the aggregate more than 50% of the combined voting power of the voting securities of the corporation issuing cash or securities in the merger or consolidation (or of its ultimate parent corporation, if any); or (v) there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (on a consolidated basis), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Company immediately prior to such sale.
(iii) Notwithstanding the foregoing, in no event shall a "Change of Control" be deemed to occur for purposes of this Letter Agreement, whether prior to or following a Public Offering, unless the total consideration for the transaction or transactions which would, absent this clause (iii), constitute a Change of Control, has a value that is equal to or greater than $3.75 per share of common stock of the Company (the "Minimum Value"); provided that such Minimum Value shall be adjusted to reflect changes to such common stock in the event of a stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, or other similar change in the structure or capitalization of the Company, or any other event which in the discretion of the Board of Directors of the Company necessitates such an adjustment.
(iv) For purposes of this Section 3(a), (A) the terms "person," "group," "beneficial owner," and "beneficially own" have the same meanings as such terms under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, (B) the term "Public Offering" shall mean the consummation of the first public offering of shares of common stock of the Company in a firm commitment underwritten offering registered under the Securities Act of 1933, as amended, on Form S-1 or its successor forms, and (C) the term "voting securities" shall mean securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions).
or omitted to be done, by you not in good faith and without a reasonable belief
that his action or omission was in the best interest of the Company. Your
employment shall not be deemed to have been terminated for Cause unless the
Company shall have given or delivered to you (i) reasonable notice setting forth
the reasons for the Company's intention to terminate your employment for Cause;
(ii) an opportunity to cure any such breach during the 30-day period after your
receipt of such notice; (iii) a reasonable opportunity, at any time during the
30-day period after your receipt of such notice, together with your counsel, to
be heard before the Board of Directors; and (iv) a notice of termination stating
that, in the good faith opinion of not less than a majority of the entire
membership of the Board of Directors of the Company, you are guilty of the
conduct set forth in any of clauses (i), (ii) or (iii) of the definition of
Cause above.
(a) If all, or any portion, of the payments or other benefits
provided under any section of this Agreement, either alone or together with
other payments and benefits that you receive or are entitled to receive from the
Company or its affiliates, (whether or not under an existing plan, arrangement
or other agreement) (collectively the "Payments") would constitute an excess
"parachute payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and would result in the imposition on you
of an excise tax under Section 4999 of the Code, (such excise tax, together with
any interest and penalties related thereto, are hereinafter collectively
referred to as the "Excise Tax") then, in addition to any other benefits to
which you are entitled under this Agreement, you will be entitled to receive an
additional payment (a "Gross-Up Payment") in cash, in an amount such that after
you pay all taxes including, without limitation, (i) any income taxes (and any
interest and penalties imposed with respect thereto) and (ii) any Excise Tax,
imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. Unless you and the
Company otherwise agree in writing, any determination required under this
Section 4, including without limitation, the amount of payments under this
Article 6 (the "Parachute Gross-up") shall be computed and made in writing by
the Employer's then independent public accountants (the "Accountants"), whose
determination shall be, subject to the Employee's reasonable approval of the
calculations required under this Article 6, conclusive and binding upon the
Employee and the Employer for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may rely on reasonable,
good faith
interpretations concerning the application of Section 280G and 4999 of the Code. You and the Company shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Section 4. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4.
(b) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that (i) Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that have been made will be determined to have been in excess of the Gross-Up Payments actually required (an "Overpayment"). In the event that you are required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for your benefit. In the event that it is finally determined that an Overpayment has occurred, you will promptly, and in any event within 30 days of such determination, refund the amount of the Overpayment, plus any interest actually paid to you with respect to the Overpayment, to the Company. The Company shall have the right with respect to the determination of either an Underpayment or an Overpayment to you to appeal the assertion of any Underpayment or to claim, and sue for, a refund of any Excise Tax paid by you upon any Payment or Gross-Up Payment, provided that the Company shall promptly reimburse you for all expenses, including counsel and accounting fees, incurred in connection with any such proceeding. Alternatively, the Company may undertake any such proceeding, and you shall cooperate with the Company in any such proceeding.
(a) The Company will require any purchaser of all or substantially all of the assets of the Company, by agreement in form and substance reasonably satisfactory to you, to expressly assume and agree to perform this Letter Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Letter Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if a Covered Termination had occurred. As used in this Letter Agreement, "Company" shall mean the Company as hereinbefore defined and any purchaser of its assets as aforesaid which executed and delivers the agreement provided for herein.
(b) This Letter Agreement shall remain in effect for so long as you are employed by the Company. This Letter Agreement may not be modified or waived except in writing and agreed to by the Company and you. This Letter Agreement shall be governed by the laws of the Commonwealth of Pennsylvania and shall inure to the benefit of your heirs.
(c) The Company represents that this Letter Agreement has been duly
authorized and is binding on and enforceable against the Company. The invalidity or unenforceability of any provision of this Letter Agreement shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect.
(d) Upon payment of the amount required under paragraph 1 hereof, you shall deliver to the Company a general release of liability of the Company and its officers and directors in a form reasonably satisfactory to the Company.
(e) All payments made pursuant to this Letter Agreement shall be subject to withholding of applicable deductions and income and employment taxes.
(f) Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails to the following addresses:
If to Employee:
S. Frank Fritsch
14 Southwatch Drive
Mechanicsburg, PA 17055
If to the Company:
Select Medical Corporation
4716 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
Please indicate your acceptance of the above agreement by signing below in the space indicated.
Very truly yours,
SELECT MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Robert A. Ortenzio ----------------------- Robert A. Ortenzio, President |
Agreed to and accepted:
/s/ Frank Fritsch ---------------------------- S. Frank Fritsch |
EXHIBIT 10.11
SELECT MEDICAL CORPORATION
4716 Old Gettysburg Road P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
March 1, 2000
Mr. Martin F. Jackson
Select Medical Corporation
4716 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Dear Mr. Jackson:
The following will confirm the agreement of Select Medical Corporation, a Delaware corporation (the "Company"), with you concerning the consequences upon certain terminations of your employment in connection with a change in control of the Company.
In consideration of your past and continued service to the Company and in consideration of the mutual covenants and agreements contained in this letter (this "Letter Agreement"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
granted pursuant to any Company plan, the "Award Agreements") and the Company agrees that all unvested, unexercised stock options held by you which were granted to you by the Company shall become fully vested and exercisable as of the date of the Covered Termination and you will have the right to exercise, at any time prior to the earlier of three months after the date of termination or the expiration date of such option, all such options to purchase the Company's stock notwithstanding any contrary vesting schedule that may be contained in the applicable plan or Award Agreement, and (ii) the Company will, on or before your last day as an employee of the Company, pay to you, in lieu of any other rights to cash compensation other than the payment of your salary for services performed before the date of termination and as a severance benefit, a lump sum cash payment equal to your total base salary plus bonus compensation from the Company for the preceding three years (or, if you shall have been employed for less than three years, an amount equal to three times your average total annual cash compensation for base salary and bonus for your years of service to the Company).
(i) Prior to a Public Offering(as defined below), a "Change of
Control" shall be deemed to have occurred, subject to Section 3(a)(iii) below,
upon (i) any sale, lease, exchange or other transfer of all or substantially all
of the property and assets of the Company (on a consolidated basis) to an
entity, other than an entity at least 75% of the combined voting power of the
voting securities of which are owned by persons in substantially the same
proportion as their ownership of the Company immediately prior to such sale or
other transfer, (ii) any merger or consolidation to which the Company is a party
and as a result of which the holders of the voting securities of the Company
immediately prior thereto own less than a majority of the outstanding voting
securities of the surviving entity immediately following such transaction, or
(iii) any person's (excluding WCAS, GTCR and Thoma Cressey Partners, the
financial sponsors of the Company as of the date hereof), including a group's,
becoming the beneficial owner of securities representing more than 50% of the
voting securities of the Company then outstanding.
(ii) Following a Public Offering, a "Change of Control" shall be deemed to have occurred if, subject to Section 3(a)(iii) below, (i) any person including a group, but excluding any stockholder of the Company who immediately prior to the Public Offering beneficially owned 12% or more of the Company's outstanding shares, becomes the beneficial owner of shares of the Company having more than 50% of the total number of votes that may be cast for the election of directors of the Company, (ii) any person including a group, other than you or any group of which you are a party, increases its beneficial ownership of shares of the Company beyond such person's ownership immediately after the Public Offering by a number of shares equal to or greater than 33% of the total number of votes that may be cast for the election of directors; (iii) the individuals who serve on the Board of Directors of the Company as of the effective date hereof (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, any person who becomes
a director subsequent to the effective date hereof, whose election or nomination for election was approved by a vote of at least a majority of the directors then constituting the Incumbent Directors, shall for purposes of this clause (iii) be considered an Incumbent Director; (iv) the consummation of a merger or consolidation of the Company in which the stockholders of the Company immediately prior to such merger or consolidation, would not, immediately after the merger or consolidation, beneficially own, directly or indirectly, shares representing in the aggregate more than 50% of the combined voting power of the voting securities of the corporation issuing cash or securities in the merger or consolidation (or of its ultimate parent corporation, if any); or (v) there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (on a consolidated basis), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Company immediately prior to such sale.
(iii) Notwithstanding the foregoing, in no event shall a "Change of Control" be deemed to occur for purposes of this Letter Agreement, whether prior to or following a Public Offering, unless the total consideration for the transaction or transactions which would, absent this clause (iii), constitute a Change of Control, has a value that is equal to or greater than $3.75 per share of common stock of the Company (the "Minimum Value"); provided that such Minimum Value shall be adjusted to reflect changes to such common stock in the event of a stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, or other similar change in the structure or capitalization of the Company, or any other event which in the discretion of the Board of Directors of the Company necessitates such an adjustment.
(iv) For purposes of this Section 3(a), (A) the terms "person," "group," "beneficial owner," and "beneficially own" have the same meanings as such terms under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, (B) the term "Public Offering" shall mean the consummation of the first public offering of shares of common stock of the Company in a firm commitment underwritten offering registered under the Securities Act of 1933, as amended, on Form S-l or its successor forms, and (C) the term "voting securities" shall mean securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions).
have been terminated for Cause unless the Company shall have given or delivered
to you (i) reasonable notice setting forth the reasons for the Company's
intention to terminate your employment for Cause; (ii) an opportunity to cure
any such breach during the 30-day period after your receipt of such notice;
(iii) a reasonable opportunity, at any time during the 30-day period after your
receipt of such notice, together with your counsel, to be heard before the Board
of Directors; and (iv) a notice of termination stating that, in the good faith
opinion of not less than a majority of the entire membership of the Board of
Directors of the Company, you are guilty of the conduct set forth in any of
clauses (i), (ii) or (iii) of the definition of Cause above.
(a) If all, or any portion, of the payments or other benefits provided
under any section of this Agreement, either alone or together with other
payments and benefits that you receive or are entitled to receive from the
Company or its affiliates, (whether or not under an existing plan, arrangement
or other agreement) (collectively the "Payments") would constitute an excess
"parachute payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and would result in the imposition on you
of an excise tax under Section 4999 of the Code, (such excise tax, together with
any interest and penalties related thereto, are hereinafter collectively
referred to as the "Excise Tax") then, in addition to any other benefits to
which you are entitled under this Agreement, you will be entitled to receive an
additional payment (a "Gross-Up Payment") in cash, in an amount such that after
you pay all taxes including, without limitation, (i) any income taxes (and any
interest and penalties imposed with respect thereto) and (ii) any Excise Tax,
imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. Unless you and the
Company otherwise agree in writing, any determination required under this
Section 4, including without limitation, the amount of payments under this
Article 6 (the "Parachute Gross-up") shall be computed and made in writing by
the Employer's then independent public accountants (the "Accountants"), whose
determination shall be, subject to the Employee's reasonable approval of the
calculations required under this Article 6, conclusive and binding upon the
Employee and the Employer for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may rely on reasonable,
good faith interpretations concerning the application of Section 280G and 4999
of the Code. You and the Company shall furnish to the Accountants such
information and documents as the Accountants
may reasonably request in order to make a determination under this Section 4. The Company shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Section 4.
(b) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that (i) Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that have been made will be determined to have been in excess of the Gross-Up Payments actually required (an "Overpayment"). In the event that you are required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for your benefit. In the event that it is finally determined that an Overpayment has occurred, you will promptly, and in any event within 30 days of such determination, refund the amount of the Overpayment, plus any interest actually paid to you with respect to the Overpayment, to the Company. The Company shall have the right with respect to the determination of either an Underpayment or an Overpayment to you to appeal the assertion of any Underpayment or to claim, and sue for, a refund of any Excise Tax paid by you upon any Payment or Gross-Up Payment, provided that the Company shall promptly reimburse you for all expenses, including counsel and accounting fees, incurred in connection with any such proceeding. Alternatively, the Company may undertake any such proceeding, and you shall cooperate with the Company in any such proceeding.
(a) The Company will require any purchaser of all or substantially all of the assets of the Company, by agreement in form and substance reasonably satisfactory to you, to expressly assume and agree to perform this Letter Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Letter Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if a Covered Termination had occurred. As used in this Letter Agreement, "Company" shall mean the Company as hereinbefore defined and any purchaser of its assets as aforesaid which executed and delivers the agreement provided for herein.
(b) This Letter Agreement shall remain in effect for so long as you are employed by the Company. This Letter Agreement may not be modified or waived except in writing and agreed to by the Company and you. This Letter Agreement shall be governed by the laws of the Commonwealth of Pennsylvania and shall inure to the benefit of your heirs.
(c) The Company represents that this Letter Agreement has been duly authorized and is binding on and enforceable against the Company. The invalidity or unenforceability of any provision of this Letter Agreement shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect.
(d) Upon payment of the amount required under paragraph 1 hereof, you shall deliver to the Company a general release of liability of the Company and its officers and directors in a form reasonably satisfactory to the Company.
(e) All payments made pursuant to this Letter Agreement shall be subject to withholding of applicable deductions and income and employment taxes.
(f) Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails to the following addresses:
If to Employee:
Martin F. Jackson
3 Spartan Circle
Camp Hill, PA 17011
If to the Company:
Select Medical Corporation
4716 Old Gettysburg Road
Mecbanicsburg, PA 17055
Attention: General Counsel
Please indicate your acceptance of the above agreement by signing below in the space indicated.
Very truly yours,
SELECT MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Robert A. Ortenzio -------------------------- Robert A. Ortenzio, President |
Agreed to and accepted:
/s/ Martin F. Jackson ----------------------------- Martin F. Jackson |
Exhibit 10.12
THIS AGREEMENT is made and entered into this 21st day of December, 1999, by and between REHABCLINICS, INC., a Delaware corporation ("Employer"), having an address c/o Select Medical Corporation, P.O. Box 2034, 4718 Old Gettysburg Road, Mechanicsburg, PA 17055, and EDWARD R. MIERSCH, an individual ("Employee"), residing at 10 Jonathan Morris Circle, Media, PA 19063.
A Employer is in the business of operating and managing outpatient medical rehabilitation facilities and practices located throughout the United States (the "Business").
B. Employer desires to employ Employee to provide management and administrative services in connection with Employer's operation of the Business.
C. Employee desires to be employed by Employer to render such services in connection with the Business, on the terms and conditions specified below.
NOW, THEREFORE, in consideration of the foregoing recitals and the mutual promises and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Employee and Employer intending to be legally bound hereby, covenant and agree as follows:
(i) any criminal complaint, indictment or criminal proceeding (involving other than a misdemeanor offense) in which Employee is named as a defendant;
(ii) any investigation or proceeding, whether administrative, civil or criminal, relating to an allegation against Employee of filing false health care claims, violating anti-kickback laws, or engaging in other billing improprieties; or
(iii) any dependency on, habitual use or episodic abuse of, alcohol or controlled substances by Employee, or any participation by Employee in any alcohol or controlled substance detoxification, treatment, recovery, rehabilitation, counseling, screening or monitoring program.
(b) Employee shall at all times render services hereunder in a competent, professional and ethical manner, in accordance with all applicable statutes, regulations, rules, orders and directives of any and all governmental and regulatory bodies having competent jurisdiction.
(c) Employee further represents and warrants that Employee is not, and has not been, excluded from participation in the Medicare or Medicaid programs or otherwise found to be in violation of any of the rules or regulations of such programs, nor has Employee been convicted, under federal or state law, of a criminal offense related to (A) neglect or abuse of a patient, or (B) the delivery of an item or service, including the performance of management or administrative services, related to the Medicare or Medicaid programs.
(b) Employer shall be entitled to terminate this Agreement, for cause, if any of the following events shall occur:
(i) Employee's death or upon Employee's becoming incapacitated due to accident, sickness or other circumstances which render Employee mentally or physically incapable of performing the duties and services required of Employee for a period of ninety (90) consecutive days, as determined by a physician mutually selected by Employer and Employee;
(ii) Employee engages in criminal, unethical, immoral or fraudulent conduct, in the good faith opinion of Employer, or Employee is found guilty of such conduct by any court or governmental agency of competent jurisdiction;
(iii) Breach by Employee of any material representation, warranty or other material term or provision in this Agreement, which breach has not been cured to the reasonable satisfaction of Employer within twenty (20) calendar days after notice of such breach;
(iv) Intentional refusal by Employee to perform any duty reasonably required of Employee hereunder for a continuous period of three (3) calendar days after delivery of written notice thereof to Employee by Employer (it being understood that if Employee is out-of-town for business or otherwise and unable to receive any such notice, such notice will not be effective until he returns to his home);
(v) The observed use of illegal drugs by Employee at any time or place or the abuse of alcohol or the appearance, in the good faith determination of Employer, of Employee being under the influence of drugs and/or alcohol on the premises of Employer or any client of Employer, during any time during which Employee is performing services for Employer or the good faith determination of Employer that Employee is addicted to drugs or alcohol and has refused any recognized rehabilitation procedures; or
(vi) Employee's gross negligence or willful misconduct in the performance of the duties and services required of Employee.
(c) Employer will be entitled to terminate this Agreement, without cause, at any time. In the event of any such termination, then Employee shall be entitled to receive severance payments in the form of (i) continuation of Employee's base salary for a period of one (1) year after the effective date of such termination, and (ii) payment, at the normal interval, of any Guaranteed Bonus Payment which would have been due and payable to Employee in the absence of such termination. In addition, if Employer elects to terminate this Agreement without cause, then Employee's stock options will continue to vest until the first anniversary of the effective date of termination of this Agreement (the "Anniversary Date"), and Employee will have ninety (90) days after the Anniversary Date to exercise any options vested and outstanding on the Anniversary Date.
(d) Upon termination of employment hereunder, Employee shall be entitled to receive such salary and fringe benefits, if any, accrued under the terms of this Agreement, but unpaid, as of the date of such termination, and, except as otherwise provided under subsection 5(c) above, all future compensation and all future benefits shall cease and terminate as of the date of termination. Employee shall be entitled pro rata salary through the date of such termination, but Employee shall not be entitled to any incentive compensation not yet paid as of the date of termination, except as otherwise provided under subsection 5(c) above.
during the Employment Term, was an employee of Employer or any of its subsidiaries or affiliates.
(b) If any part of Section 6 or this Section 7 shall be determined by a court of competent jurisdiction to be unreasonable in duration, geographic area or scope, then this Agreement is intended to and shall extend only for such period of time, in such area and with respect to such activity, as is determined by such court to be reasonable.
(b) All information, ideas, concepts, improvements, discoveries and inventions, whether patentable or not, which are conceived, made, developed or acquired by Employee or which are disclosed or made known to Employee, individually or in conjunction with others, during the Employment Term (whether during business hours or otherwise and whether on Employer's premises or elsewhere) which relate to Employer's past, present or anticipated business, products or services (including, without limitation, all such information relating to corporate opportunities, financial and sales data, pricing and contractual terms, employee evaluations, opinions, interpretations, prospects, the identity of patients or entities that refer patients to Employer, the identity of key contacts within the entities that refer patients to Employer, and marketing and merchandising information or techniques, prospective names, and methods of doing business) shall be disclosed to Employer and are and shall be the sole and
exclusive property of Employer. All memoranda, notes, records, files, correspondence, drawings, manuals, models, specifications, computer programs, maps and all other writings or materials of any type embodying any of such information, ideas, concepts, improvements, discoveries and inventions are and shall be the sole and exclusive property of Employer. Employee hereby specifically sells, assigns, and transfers to Employer all of Employee's right, title and interest in and to all such information, ideas, concepts, improvements, discoveries or inventions, and any United States or foreign applications for patents, inventor's certificates, or other industrial rights that may be filed thereon, including divisions, continuations, continuations-in- part, reissues and/or extensions thereof.
If to Employer: c/o Select Medical Corporation 4718 Old Gettysburg Road Post Office Box 2034 Mechanicsburg, PA 17055 Attention: CEO
If to Employee: Mr. Ed Miersch 10 Jonathan Morris Circle Media, PA 19063
Either party hereto may change the address for notice by notifying the other party in writing, of the new address.
IN WITNESS WHEREOF, the parties hereto have set their hands and seals as of the day and year first above written.
Employer:
REHABCLINICS, INC., a Delaware corporation
By: /s/ Robert A. Ortenzio ------------------------------ Robert A. Ortenzio, President |
Employee:
/s/ Edward R. Miersch --------------------------------- Ed Miersch |
EXHIBIT 10.13
SELECT MEDICAL CORPORATION
4716 Old Gettysburg Road P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
March 1, 2000
Mr. Edward R. Miersch
Select Medical Corporation
4716 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Dear Mr. Miersch:
The following will confirm the agreement of Select Medical Corporation, a Delaware corporation (the "Company"), with you concerning the consequences upon certain terminations of your employment in connection with a change in control of the Company.
In consideration of your past and continued service to the Company and in consideration of the mutual covenants and agreements contained in this letter (this "Letter Agreement"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
have the right to exercise, at any time prior to the earlier of three months
after the date of termination or the expiration date of such option, all such
options to purchase the Company's stock notwithstanding any contrary vesting
schedule that may be contained in the applicable plan or Award Agreement, and
(ii) the Company will, on or before your last day as an employee of the Company,
pay to you, in lieu of any other rights to cash compensation other than the
payment of your salary for services performed before the date of termination and
as a severance benefit, a lump sum cash payment equal to your total base salary
plus bonus compensation from the Company for the preceding three years (or, if
you shall have been employed for less than three years, an amount equal to three
times your average total annual cash compensation for base salary and bonus for
your years of service to the Company).
(i) Prior to a Public Offering (as defined below), a "Change of
Control" shall be deemed to have occurred, subject to Section 3(a)(iii) below,
upon (i) any sale, lease, exchange or other transfer of all or substantially all
of the property and assets of the Company (on a consolidated basis) to an
entity, other than an entity at least 75% of the combined voting power of the
voting securities of which are owned by persons in substantially the same
proportion as their ownership of the Company immediately prior to such sale or
other transfer, (ii) any merger or consolidation to which the Company is a party
and as a result of which the holders of the voting securities of the Company
immediately prior thereto own less than a majority of the outstanding voting
securities of the surviving entity immediately following such transaction, or
(iii) any person's (excluding WCAS, GTCR and Thoma Cressey Partners, the
financial sponsors of the Company as of the date hereof), including a group's,
becoming the beneficial owner of securities representing more than 50% of the
voting securities of the Company then outstanding.
(ii) Following a Public Offering, a "Change of Control" shall be deemed to have occurred if, subject to Section 3(a)(iii) below, (i) any person including a group, but excluding any stockholder of the Company who immediately prior to the Public Offering beneficially owned 12% or more of the Company's outstanding shares, becomes the beneficial owner of shares of the Company having more than 50% of the total number of votes that may be cast for the election of directors of the Company, (ii) any person including a group, other than you or any group of which you are a party, increases its beneficial ownership of shares of the Company beyond such person's ownership immediately after the Public Offering by a number of shares equal to or greater than 33% of the total number of votes that may be cast for the election of directors; (iii) the individuals who serve on the Board of Directors of the Company as of the effective date hereof (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, any person who becomes a director subsequent to the effective date hereof, whose election or nomination for election was approved by a vote of at least a majority of the directors then constituting the Incumbent Directors, shall for purposes of this clause (iii) be considered an Incumbent Director; (iv) the consummation of a merger or consolidation of the Company in which the stockholders of the Company immediately prior to such merger or consolidation, would not, immediately after the merger or consolidation, beneficially own, directly or indirectly, shares representing in the
aggregate more than 50% of the combined voting power of the voting securities of the corporation issuing cash or securities in the merger or consolidation (or of its ultimate parent corporation, if any); or (v) there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (on a consolidated basis), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Company immediately prior to such sale.
(iii) Notwithstanding the foregoing, in no event shall a "Change of Control" be deemed to occur for purposes of this Letter Agreement, whether prior to or following a Public Offering, unless the total consideration for the transaction or transactions which would, absent this clause (iii), constitute a Change of Control, has a value that is equal to or greater than $3.75 per share of common stock of the Company (the "Minimum Value"); provided that such Minimum Value shall be adjusted to reflect changes to such common stock in the event of a stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, or other similar change in the structure or capitalization of the Company, or any other event which in the discretion of the Board of Directors of the Company necessitates such an adjustment.
(iv) For purposes of this Section 3(a), (A) the terms "person," "group," "beneficial owner," and "beneficially own" have the same meanings as such terms under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, (B) the term "Public Offering" shall mean the consummation of the first public offering of shares of common stock of the Company in a firm commitment underwritten offering registered under the Securities Act of 1933, as amended, on Form S-1 or its successor forms, and (C) the term "voting securities" shall mean securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions).
(a) If all, or any portion, of the payments or other benefits
provided under any section of this Agreement, either alone or together with
other payments and benefits that you receive or are entitled to receive from the
Company or its affiliates, (whether or not under an existing plan, arrangement
or other agreement) (collectively the "Payments") would constitute an excess
"parachute payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and would result in the imposition on you
of an excise tax under Section 4999 of the Code, (such excise tax, together with
any interest and penalties related thereto, are hereinafter collectively
referred to as the "Excise Tax") then, in addition to any other benefits to
which you are entitled under this Agreement, you will be entitled to receive an
additional payment (a "Gross-Up Payment") in cash, in an amount such that after
you pay all taxes including, without limitation, (i) any income taxes (and any
interest and penalties imposed with respect thereto) and (ii) any Excise Tax,
imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. Unless you and the
Company otherwise agree in writing, any determination required under this
Section 4, including without limitation, the amount of payments under this
Article 6 (the "Parachute Gross-up") shall be computed and made in writing by
the Employer's then independent public accountants (the "Accountants"), whose
determination shall be, subject to the Employee's reasonable approval of the
calculations required under this Article 6, conclusive and binding upon the
Employee and the Employer for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may rely on reasonable,
good faith interpretations concerning the application of Section 280G and 4999
of the Code. You and the Company shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section 4. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 4.
(b) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that (i) Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that have been made will be determined to have been in excess of the Gross-Up Payments actually required (an "Overpayment"). In the event that you are required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for
your benefit. In the event that it is finally determined that an Overpayment has occurred, you will promptly, and in any event within 30 days of such determination, refund the amount of the Overpayment, plus any interest actually paid to you with respect to the Overpayment, to the Company. The Company shall have the right with respect to the determination of either an Underpayment or an Overpayment to you to appeal the assertion of any Underpayment or to claim, and sue for, a refund of any Excise Tax paid by you upon any Payment or Gross-Up Payment, provided that the Company shall promptly reimburse you for all expenses, including counsel and accounting fees, incurred in connection with any such proceeding. Alternatively, the Company may undertake any such proceeding, and you shall cooperate with the Company in any such proceeding.
(a) The Company will require any purchaser of all or substantially all of the assets of the Company, by agreement in form and substance reasonably satisfactory to you, to expressly assume and agree to perform this Letter Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Letter Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if a Covered Termination had occurred. As used in this Letter Agreement, "Company" shall mean the Company as hereinbefore defined and any purchaser of its assets as aforesaid which executed and delivers the agreement provided for herein.
(b) This Letter Agreement shall remain in effect for so long as you are employed by the Company. This Letter Agreement may not be modified or waived except in writing and agreed to by the Company and you. This Letter Agreement shall be governed by the laws of the Commonwealth of Pennsylvania and shall inure to the benefit of your heirs.
(c) The Company represents that this Letter Agreement has been duly authorized and is binding on and enforceable against the Company. The invalidity or unenforceability of any provision of this Letter Agreement shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect.
(d) Upon payment of the amount required under paragraph 1 hereof, you shall deliver to the Company a general release of liability of the Company and its officers and directors in a form reasonably satisfactory to the Company.
(e) All payments made pursuant to this Letter Agreement shall be subject to withholding of applicable deductions and income and employment taxes.
(f) Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails to the following addresses:
If to Employee:
Edward R. Miersch
10 Jonathan Morris Circle
Media, PA 19063
If to the Company:
Select Medical Corporation
4716 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
Please indicate your acceptance of the above agreement by signing below in the space indicated.
Very truly yours,
SELECT MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Robert A. Ortenzio ----------------------- Robert A. Ortenzio President |
Agreed to and accepted:
/s/ Edward R. Miersch ------------------------------- Edward R. Miersch |
EXHIBIT 10.14
THIS AGREEMENT is made as of the 1st day of March, 2000, by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and ROBERT A. ORTENZIO, an individual (the "Employee").
WHEREAS, the Employer wishes to ensure the continued services of the Employee for the term of this Agreement, and the Employee desires to be employed by the Employer for such term, upon the terms and conditions set forth below;
NOW THEREFORE, in consideration of the mutual agreements contained herein and intending to be legally bound, the parties hereto hereby agree as follows:
Article 1. CAPACITY AND DUTIES
subsidiaries to which the Employee is appointed by the Employer's Board of Directors, without compensation other than that provided for in this Agreement; provided that nothing herein shall be deemed to prevent the Employee from serving as a director of other companies so long as such service does not unreasonably interfere with the performance of the Employee's duties hereunder.
Article 2. TERM OF EMPLOYMENT; TERMINATION
because of physical or mental injury or sickness to perform the substantial and material duties of the Employee hereunder. Upon a termination of employment described in this Section 2.02(a), (i) the Employee or his estate or beneficiaries, as applicable, shall be entitled to receive any base salary and other benefits earned and accrued under this Agreement prior to the date of termination, (ii) any stock options with respect to the Employer's stock held by the Employee at the time of such termination shall become fully exercisable as of the date of such termination and shall remain exercisable, by the Employee or his estate or beneficiaries, as applicable, until the later of three months following the date of such termination or the expiration date of such option, notwithstanding any contrary vesting schedules otherwise applicable to such options, and (iii) the Employee and his estate and beneficiaries shall have no further rights to any other compensation or benefits, or any other rights, hereunder.
employment shall not be deemed to have been terminated for cause unless the
Employer shall have given or delivered to the Employee (i) reasonable notice
setting forth the reasons for the Employer's intention to terminate the
Employee's employment for cause, (ii) an opportunity for the Employee to cure
any such breach during the 30-day period after the Employee's receipt of such
notice, (iii) a reasonable opportunity, at any time during the 30-day period
after the Employee's receipt of such notice, for the Employee, together with his
counsel, to be heard before the Board of Directors, and (iv) a Notice of
Termination (as defined in Section 2.02(d)) stating that, in the good faith
opinion of not less than a majority of the entire membership of the Board of
Directors, the Employee was guilty of the conduct set forth in any of clauses
(i), (ii) or (iii) of the second sentence of this Section 2.02(b). If the
Employer terminates the Employee's employment for cause pursuant to this Section
2.02(b), (i) the Employer shall pay to the Employee any base salary and other
benefits earned and accrued under this Agreement prior to the termination of
employment, excluding any unpaid bonuses, whether or not earned or accrued, and
(ii) the Employee shall have no further rights to compensation or benefits, or
any other rights, hereunder.
(i) the assignment to the Employee of any duties inconsistent in any material respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1.02 of
this Agreement, or any other action by the Employer which results in a material diminution or material adverse change in such position, status, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which is remedied within 15 days after receipt of the Notice of Termination given by the Employee, which specifies the Employee's grounds for good reason; provided that in order for such assignment or other action to constitute good reason hereunder, the Employee must give or deliver to the Employer the Notice of Termination, in accordance with Section 2.02(d), no later than 30 days after the time at which the assignment or action purportedly giving rise to good reason first occurs;
(ii) any failure by the Employer to comply with any of the
provisions of Article 3 of this Agreement, other than an isolated, insubstantial
and inadvertent failure not occurring in bad faith and which is remedied by the
Employer within 15 days after receipt of the Notice of Termination given by the
Employee, which specifies the Employee's grounds for good reason; provided that
in order for such failure to constitute good reason hereunder, the Employee must
give or deliver to the Employer the Notice of Termination, in accordance with
Section 2.02(d), no later than 30 days after the time at which the failure
purportedly giving rise to good reason first occurs;
(iii) the Employer's requiring the Employee to be based at any office or location other than Mechanicsburg, Pennsylvania or within 25 miles of such location; or
(iv) any failure by the Employer to comply with and satisfy
Section 7.01 of this Agreement.
For purposes of this Section 2.02(c) any good faith determination of "good reason" made by the Employee shall be conclusive.
the Employee for such year, or if no such target is established the bonus paid or payable to the Employee for the year prior to the year of termination, multiplied by (B) a fraction, the numerator of which is the number of days in the year of termination completed prior to such termination and the denominator of which is 365; provided that if a target bonus had been established with respect to the year of termination, a pro-rated bonus shall be payable pursuant to this Section 2.02(e)(ii) only if the performance goals established with respect to such target bonus have been achieved by the date the bonus would have been paid in the absence of the Employee's termination of employment, (iii) the Employer agrees that such termination would not be voluntary or a termination "for cause" as contemplated by any stock option or other incentive plans and any stock option or other award agreements entered into between the Employer and the Employee (including agreements that may be entered into after the date hereof), and that any stock options with respect to the Employer's stock held by the Employee shall become fully exercisable as of the date of such termination and shall remain exercisable until the later of three months following the date of such termination or the expiration date of such option, notwithstanding any contrary vesting schedules otherwise applicable to such options, (iv) the Employer will continue to pay the Employee, for the balance of the Term, his base salary as of the date of such termination, and (v) the Employee shall have no further rights hereunder. Such continued payments will be made at the times and in the manner they would have been made to the Employee in the absence of such termination.
Article 3. COMPENSATION
Employer shall pay to the Employee a base salary of $450,000 per year in equal bi-weekly installments. The Board of Directors of the Employer may, in its sole discretion from time to time, increase the base compensation to be paid to the Employee as provided in this Article 3. The Employee will also be eligible to receive bonus compensation, annual or otherwise, in an amount to be determined by the Employer's Board of Directors in its sole discretion.
Article 4. CERTAIN COVENANTS
Employer shall be the sole property of the Employer and, upon the termination of the Employee's employment hereunder or upon request of the Employer at any time, the Employee shall promptly deliver the same to the Employer and shall retain no copies thereof.
provision, the duration or scope of such provision, as the case may be, shall be reduced so that such provision becomes enforceable and, in its reduced form, such provision shall then be enforceable and shall be enforced. The parties hereto understand that each of the covenants of the Employee contained in this Article 4 is an essential element of this Agreement. The Employee's obligations under this Article 4 shall survive the termination of this Agreement.
Article 5. CHANGE OF CONTROL
(including agreements that may be entered into after the date hereof), and that all unvested, unexercised stock options to purchase stock of the Employer held by the Employee shall become fully vested and exercisable as of the date of such termination, and the Employee will have the right to exercise, at any time prior to the later of three months after the date of termination or the expiration date of such option, notwithstanding any contrary vesting schedule otherwise applicable to such options, and (D) the Employee shall have no further rights to compensation or benefits, or any other rights, hereunder.
total number of votes that may be cast for the election of directors; (iii) the
individuals who serve on the Board of Directors of the Employer as of the
effective date hereof (the "Incumbent Directors") cease for any reason to
constitute at least a majority of the Board of Directors of the Employer;
provided, however, any person who becomes a director subsequent to the effective
date hereof, whose election or nomination for election was approved by a vote of
at least a majority of the directors then constituting the Incumbent Directors,
shall for purposes of this clause (iii) be considered an Incumbent Director;
(iv) the consummation of a merger or consolidation of the Employer in which the
stockholders of the Employer immediately prior to such merger or consolidation,
would not, immediately after the merger or consolidation, beneficially own,
directly or indirectly, shares representing in the aggregate more than 50% of
the combined voting power of the voting securities of the corporation issuing
cash or securities in the merger or consolidation (or of its ultimate parent
corporation, if any); or (v) there is consummated an agreement for the sale or
disposition by the Employer of all or substantially all of the Employer's assets
(on a consolidated basis), other than a sale or disposition by the Employer of
all or substantially all of the Employer's assets to an entity, at least 50% of
the combined voting power of the voting securities of which are owned by persons
in substantially the same proportion as their ownership of the Employer
immediately prior to such sale.
Value"); provided that such Minimum Value shall be adjusted to reflect changes to such common stock in the event of a stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, or other similar change in the structure or capitalization of the Employer, or any other event which in the discretion of the Board of Directors of the Employer necessitates such an adjustment.
Article 6. CERTAIN ADDITIONAL PAYMENTS
6.01. If all, or any portion, of the payments or other benefits provided under any section of this Agreement (including, without limitation, Sections 2 and 5 hereof), either alone or together with other payments and benefits which the Employee receives or is entitled to receive from the Company or its affiliates, (whether or not under an existing plan, arrangement or other agreement) (collectively the "Payments") would constitute an excess "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the
"Code") and would result in the imposition on the Employee of an excise tax
under Section 4999 of the Code, (such excise tax, together with any interest and
penalties related thereto, are hereinafter collectively referred to as the
"Excise Tax") then, in addition to any other benefits to which the Employee is
entitled under this Agreement, the Employee shall be entitled to receive an
additional payment (a "Gross-Up Payment") in cash, in an amount such that after
payment by the Employee of all taxes including, without limitation, (i) any
income taxes (and any interest and penalties imposed with respect thereto) and
(ii) any Excise Tax, imposed upon the Gross-Up Payment, the Employee retains an
amount of the Gross-Up Payment equal to the Excise Tax imposed upon the
Payments. Unless the Employer and the Employee otherwise agree in writing, any
determination required under this Article 6, including without limitation, the
amount of payments under this Article 6 (the "Parachute Gross-up") shall be
computed and made in writing by the Employer's then independent public
accountants (the "Accountants"), whose determination shall be, subject to the
Employee's reasonable approval of the calculations required under this Article
6, conclusive and binding upon the Employee and the Employer for all purposes.
For purposes of making the calculations required by this Article 6, the
Accountants may rely on reasonable, good faith interpretations concerning the
application of Section 280G and 4999 of the Code. The Employee and the Employer
shall furnish to the Accountants such information and documents as the
Accountants may reasonably request in order to make a determination under this
Article 6. The Employer shall bear all costs the Accountants may reasonably
incur in connection with any calculations contemplated by this Article 6.
6.02. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that (i)
Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that have been made will be determined to have been in excess of the Gross-Up Payments actually required (an "Overpayment"). In the event that the Employee is required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. In the event that it is finally determined that an Overpayment has occurred, the Employee shall promptly, and in any event within 30 days of such determination, refund the amount of the Overpayment, plus any interest actually paid to the Employee with respect to the Overpayment, to the Company. The Company shall have the right with respect to the determination of either an Underpayment or an Overpayment to require the Employee to appeal the assertion of any Underpayment or to claim, and sue for, a refund of any Excise Tax paid by the Employee upon any Payment or Gross-Up Payment, provided that the Company shall promptly reimburse the Employee for all expenses, including counsel and accounting fees, incurred in connection with any such proceeding. Alternatively, the Company may undertake any such proceeding, and the Employee shall cooperate with the Company in any such proceeding.
Article 7. MISCELLANEOUS
purchaser of all or substantially all of the assets of the Employer to assume expressly and agree to perform this Agreement in the same manner and to the same extent that the Employer would be required to perform if no such purchase had taken place. As used in this Agreement, the Employer shall mean the Employer as hereinbefore defined and any purchaser of its assets as aforesaid which executed and delivers the agreement provided for herein.
given when so delivered personally or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails to the following addresses:
If to Employee:
Robert A. Ortenzio
1709 Olmstead Way East
Camp Hill, PA 17011
If to the Employer:
Select Medical Corporation
4718 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Michael E. Tarvin ----------------------------- Michael E. Tarvin, Senior Vice President /s/ Robert A. Ortenzio ------------------------------- Robert A. Ortenzio |
EXHIBIT 10.15
This is an Amendment, dated August 8, 2000 (the "Amendment") to the Employment Agreement made as of the 1/st/ day of March, 2000 (the "Employment Agreement") by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"), and ROBERT A. ORTENZIO, an individual (the "Employee").
The Company and the Employee executed and delivered the Employment Agreement. The Company and the Employee now desire to amend the Employment Agreement as hereinafter provided.
Accordingly, and intended to be legally bound hereby, the Company and the Employee agree as follows:
1. Effective as of the first of the Company's payroll periods beginning after the Refinancing Date (as defined in paragraph 2 of this Amendment), the Employee's base salary under Section 3.01 of the Employment Agreement shall be increased to $700,000.
2. For purposes of the Employment Agreement, as amended by Amendment No. 1, the term "Refinancing Date" shall mean the first date upon which:
a. the Company has closed the refinancing of its Second Amended and Restated Credit Agreement dated as of November 19, 1999, to the reasonable satisfaction of the Company; and
b. after that refinancing has been accomplished, the debt created thereby is solely that of the Company (and its subsidiaries) and no shareholder or other investor in the Company guarantees or is otherwise directly obligated to repay that debt.
3. Except as amended hereby, the Employment Agreement shall continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION
Attest: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger ---------------------- ------------------------------- Michael E. Tarvin, Scott A. Romberger, Secretary Vice President and Controller |
THIS AGREEMENT is made as of the 1/st/ day of March, 2000, by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and ROCCO A. ORTENZIO, an individual (the "Employee").
WHEREAS, the Employer wishes to ensure the continued services of the Employee for the term of this Agreement, and the Employee desires to be employed by the Employer for such term, upon the terms and conditions set forth below;
NOW THEREFORE, in consideration of the mutual agreements contained herein and intending to be legally bound, the parties hereto hereby agree as follows:
Article 1. CAPACITY AND DUTIES
compensation other than that provided for in this Agreement; provided that nothing herein shall be deemed to prevent the Employee from serving as a director of other companies so long as such service does not unreasonably interfere with the performance of the Employee's duties hereunder.
Article 2. TERM OF EMPLOYMENT; TERMINATION
the Employee hereunder. Upon a termination of employment described in this
Section 2.02(a), (i) the Employee or his estate or beneficiaries, as applicable,
shall be entitled to receive any base salary and other benefits earned and
accrued under this Agreement prior to the date of termination, (ii) any stock
options with respect to the Employer's stock held by the Employee at the time of
such termination shall become fully exercisable as of the date of such
termination and shall remain exercisable, by the Employee or his estate or
beneficiaries, as applicable, until the later of three months following the date
of such termination or the expiration date of such option, notwithstanding any
contrary vesting schedules otherwise applicable to such options, and (iii) the
Employee and his estate and beneficiaries shall have no further rights to any
other compensation or benefits, or any other rights, hereunder.
reasonable notice setting forth the reasons for the Employer's intention to
terminate the Employee's employment for cause, (ii) an opportunity for the
Employee to cure any such breach during the 30-day period after the Employee's
receipt of such notice, (iii) a reasonable opportunity, at any time during the
30-day period after the Employee's receipt of such notice, for the Employee,
together with his counsel, to be heard before the Board of Directors, and (iv) a
Notice of Termination (as defined in Section 2.02(d)) stating that, in the good
faith opinion of not less than a majority of the entire membership of the Board
of Directors, the Employee was guilty of the conduct set forth in any of clauses
(i), (ii) or (iii) of the second sentence of this Section 2.02(b). If the
Employer terminates the Employee's employment for cause pursuant to this Section
2.02(b), (i) the Employer shall pay to the Employee any base salary and other
benefits earned and accrued under this Agreement prior to the termination of
employment, excluding any unpaid bonuses, whether or not earned or accrued, and
(ii) the Employee shall have no further rights to compensation or benefits, or
any other rights, hereunder.
(i) the assignment to the Employee of any duties inconsistent in any material respect with the Employee's position (including status, offices, titles and reporting requirements), authority, duties or responsibilities as contemplated by Section 1.02 of this Agreement, or any other action by the Employer which results in a material diminution or material adverse change in such position, status, authority, duties or responsibilities, excluding for this purpose an isolated, insubstantial and inadvertent action not taken in bad faith and which
is remedied within 15 days after receipt of the Notice of Termination given by the Employee, which specifies the Employee's grounds for good reason; provided that in order for such assignment or other action to constitute good reason hereunder, the Employee must give or deliver to the Employer the Notice of Termination, in accordance with Section 2.02(d), no later than 30 days after the time at which the assignment or action purportedly giving rise to good reason first occurs;
(ii) any failure by the Employer to comply with any of the provisions
of Article 3 of this Agreement, other than an isolated, insubstantial and
inadvertent failure not occurring in bad faith and which is remedied by the
Employer within 15 days after receipt of the Notice of Termination given by the
Employee, which specifies the Employee's grounds for good reason; provided that
in order for such failure to constitute good reason hereunder, the Employee must
give or deliver to the Employer the Notice of Termination, in accordance with
Section 2.02(d), no later than 30 days after the time at which the failure
purportedly giving rise to good reason first occurs;
(iii) the Employer's requiring the Employee to be based at any office or location other than Mechanicsburg, Pennsylvania or within 25 miles of such location; or
(iv) any failure by the Employer to comply with and satisfy Section 7.01 of this Agreement.
For purposes of this Section 2.02(c) any good faith determination of "good reason" made by the Employee shall be conclusive.
Termination to the other party hereto. For purposes of this Agreement, a "Notice of Termination" means a written notice which (i) indicates the specific termination provision of this Agreement relied upon, (ii) if applicable, sets forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Employee's employment under the provision so indicated, and (iii) specifies the termination date (which date shall, except as otherwise expressly provided in this Article 2, be not more than 15 days after the giving of such Notice). In the event of a termination by the Employer for cause or a termination by the Employee for good reason, the Notice of Termination shall not be effective unless preceded by satisfaction of the procedural requirements set forth in Section 2.02(b) or 2.02(c) hereof, as applicable.
established with respect to the year of termination, a pro-rated bonus shall be payable pursuant to this Section 2.02(e)(ii) only if the performance goals established with respect to such target bonus have been achieved by the date the bonus would have been paid in the absence of the Employee's termination of employment, (iii) the Employer agrees that such termination would not be voluntary or a termination "for cause" as contemplated by any stock option or other incentive plans and any stock option or other award agreements entered into between the Employer and the Employee (including agreements that may be entered into after the date hereof), and that any stock options with respect to the Employer's stock held by the Employee shall become fully exercisable as of the date of such termination and shall remain exercisable until the later of three months following the date of such termination or the expiration date of such option, notwithstanding any contrary vesting schedules otherwise applicable to such options, (iv) the Employer will continue to pay the Employee, for the balance of the Term, his base salary as of the date of such termination, and (v) the Employee shall have no further rights hereunder. Such continued payments will be made at the times and in the manner they would have been made to the Employee in the absence of such termination.
Article 3. COMPENSATION
The Employee will also be eligible to receive bonus compensation, annual or otherwise, in an amount to be determined by the Employer's Board of Directors in its sole discretion.
fringe benefit programs and similar benefits that may be available to other senior executives of the Employer generally, on the same terms and conditions as such other executives, in each case to the extent that the Employee is eligible under the terms of such plans or programs.
Article 4. CERTAIN COVENANTS
employees or agents who need to know such information, or as a result of legal process) or use for his own account or the account of any other person any confidential or proprietary records, data, trade secrets, customer lists or any other confidential or proprietary information whatsoever (the "Confidential Information") used by the Employer and made known (whether or not with the knowledge and permission of the Employer, and whether or not developed, devised or otherwise created in whole or in part by the efforts of the Employee) to the Employee by reason of his association with the Employer. The Employee further covenants and agrees that he shall retain all such knowledge and information which he shall acquire or develop respecting such Confidential Information in trust for the sole benefit of the Employee and its successors and assigns.
Employee contained in this Article 4 is an essential element of this Agreement. The Employee's obligations under this Article 4 shall survive the termination of this Agreement.
Article 5. CHANGE OF CONTROL
right to exercise, at any time prior to the later of three months after the date of termination or the expiration date of such option, notwithstanding any contrary vesting schedule otherwise applicable to such options, and (D) the Employee shall have no further rights to compensation or benefits, or any other rights, hereunder.
in substantially the same proportion as their ownership of the Employer immediately prior to such sale or other transfer, (ii) any merger or consolidation to which the Employer is a party and as a result of which the holders of the voting securities of the Employer immediately prior thereto own less than a majority of the outstanding voting securities of the surviving entity immediately following such transaction, or (iii) any person's (excluding WCAS, GTCR and Thoma Cressey Partners, the financial sponsors of the Employer as of the date hereof), including a group's, becoming the beneficial owner of securities representing more than 50% of the voting securities of the Employer then outstanding.
majority of the Board of Directors of the Employer; provided, however, any person who becomes a director subsequent to the effective date hereof, whose election or nomination for election was approved by a vote of at least a majority of the directors then constituting the Incumbent Directors, shall for purposes of this clause (iii) be considered an Incumbent Director, (iv) the consummation of a merger or consolidation of the Employer in which the stockholders of the Employer immediately prior to such merger or consolidation, would not, immediately after the merger or consolidation, beneficially own, directly or indirectly, shares representing in the aggregate more than 50% of the combined voting power of the voting securities of the corporation issuing cash or securities in the merger or consolidation (or of its ultimate parent corporation, if any); or (v) there is consummated an agreement for the sale or disposition by the Employer of all or substantially all of the Employer's assets (on a consolidated basis), other than a sale or disposition by the Employer of all or substantially all of the Employer's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Employer immediately prior to such sale.
Article 6. CERTAIN ADDITIONAL PAYMENTS
6.01. If all, or any portion, of the payments or other benefits provided under any section of this Agreement (including, without limitation, Sections 2 and 5 hereof), either alone or together with other payments and benefits which the Employee receives or is entitled to receive from the Company or its affiliates, (whether or not under an existing plan, arrangement or other agreement) (collectively the "Payments") would constitute an excess "parachute payment" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and would result in the imposition on the Employee of an excise tax under Section 4999 of the Code, (such excise tax, together with any interest and penalties related thereto, are hereinafter collectively referred to as the "Excise Tax") then, in addition to any other benefits to which the Employee is entitled under this Agreement, the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in cash, in an amount such that after payment by the Employee of all taxes including, without limitation, (i) any income taxes (and any interest
and penalties imposed with respect thereto) and (ii) any Excise Tax, imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Unless the Employer and the Employee otherwise agree in writing, any determination required under this Article 6, including without limitation, the amount of payments under this Article 6 (the "Parachute Gross-up") shall be computed and made in writing by the Employer's then independent public accountants (the "Accountants"), whose determination shall be, subject to the Employee's reasonable approval of the calculations required under this Article 6, conclusive and binding upon the Employee and the Employer for all purposes. For purposes of making the calculations required by this Article 6, the Accountants may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Employee and the Employer shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Article 6. The Employer shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Article 6.
6.02. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination' by the Accountants hereunder, it is possible that (i) Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that have been made will be determined to have been in excess of the Gross-Up Payments actually required (an "Overpayment"). In the event that the Employee is required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the
Company to or for the benefit of the Employee. In the event that it is finally determined that an Overpayment has occurred, the Employee shall promptly, and in any event within 30 days of such determination, refund the amount of the Overpayment, plus any interest actually paid to the Employee with respect to the Overpayment, to the Company. The Company shall have the right with respect to the determination of either an Underpayment or an Overpayment to require the Employee to appeal the assertion of any Underpayment or to claim, and sue for, a refund of any Excise Tax paid by the Employee upon any Payment or Gross-Up Payment, provided that the Company shall promptly reimburse the Employee for all expenses, including counsel and accounting fees, incurred in connection with any such proceeding. Alternatively, the Company may undertake any such proceeding, and the Employee shall cooperate with the Company in any such proceeding.
Article 7. MISCELLANEOUS
If to Employee:
Rocco A. Ortenzio
7 Westwind Drive
Lemoyne, PA 17043
If to the Employer:
Select Medical Corporation
4718 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION, a Delaware corporation
By: /s/ Michael E. Tarvin ---------------------------------- Michael E. Tarvin, Senior Vice President /s/ Rocco A. Ortenzio ------------------------------------- Rocco A. Ortenzio |
EXHIBIT 10.17
This is an Amendment, dated August 8, 2000 (the "Amendment") to the Employment Agreement made as of the 1st day of March, 2000 (the "Employment Agreement") by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"), and ROCCO A. ORTENZIO, an individual (the "Employee").
The Company and the Employee executed and delivered the Employment Agreement. The Company and the Employee now desire to amend the Employment Agreement as hereinafter provided.
Accordingly, and intended to be legally bound hereby, the Company and the Employee agree as follows:
1. Effective as of the first of the Company's payroll periods beginning after the Refinancing Date (as defined in paragraph 3 of this Amendment), the Employee's base salary under Section 3.01 of the Employment Agreement shall be increased to $800,000.
2. Effective upon the Refinancing Date, the Employment Agreement is hereby amended by addition of the following new Section 3.07:
(1) during the year 2000, the Company will pay a total of $750,000, plus;
(2) during each of the nine calendar years beginning with the year 2001, the amount of $1,250,000; provided that:
policies are surrendered, the Company will be entitled to be repaid that percentage of the aggregate premiums paid hereunder that the cash value received upon such surrender is of the total cash value of the policies upon with the Company has paid premiums hereunder.
3. For purposes of the Employment Agreement, as amended by Amendment No. 1, the term "Refinancing Date" shall mean the first date upon which:
a. the Company has closed the refinancing of its Second Amended and Restated Credit Agreement dated as of November 19, 1999, to the reasonable satisfaction of the Company; and
b. after that refinancing has been accomplished, the debt created thereby is solely that of the Company (and its subsidiaries) and no shareholder or other investor in the Company guarantees or is otherwise directly obligated to repay that debt.
5. Except as amended hereby, the Employment Agreement shall continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION
Attest: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger --------------------------- --------------------------- Michael E. Tarvin, Scott A. Romberger, Secretary Vice President and Controller |
EXHIBIT 10.18
THIS AGREEMENT made this 6th day of October, 2000 by and between Select Medical Corporation ("Corporation"), and Michael E. Salerno, Trustee of the irrevocable trust under deed of Rocco A. Ortenzio, Settlor, dated October 20, 1987 ("Owner"), and Rocco A. Ortenzio ("Employee") (the Corporation, Owner and Employee collectively referred to as "Parties").
Employee wishes to provide life insurance protection for his family in the event of his death, under several policies of life insurance (the "Policies") insuring his life, issued by several life insurance companies (the "Insurers"). The Policies and the Insurers are identified on Exhibit A.
The Corporation is willing to pay premiums on the Policies as an additional employment benefit for Employee, on the terms and conditions hereinafter set forth.
Owner is the owner of the Policies and, as such, possesses all incidents of ownership in and to the Policies.
Corporation wishes to have the Policies collaterally assigned to it by Owner, to secure the payment of its Secured Premium Amount as hereinafter defined.
Accordingly, in consideration of the premises and of the mutual promises contained
herein, and intending to be legally bound hereby, the Parties hereto agree as follows:
(a) Owner is the sole and absolute owner of each Policy, and may exercise all ownership rights granted to the owner thereof by the terms of each Policy, except as hereinafter provided.
(b) It is the intention of the Parties to this Agreement and the collateral assignment executed by Owner to Corporation in connection herewith that Owner shall retain all rights which each Policy grants to the owner thereof, except Corporation's right to its Secured Premium Amount. Specifically, but without limitation, Corporation shall neither have nor exercise any right as collateral assignee of any Policy which, except as explicitly provided in this Agreement or the accompanying collateral assignment with respect to the Policy, could in any way defeat or impair Owner's right to receive the cash Surrender Value or the death proceeds of the Policy, in excess of the amount due Corporation hereunder. All provisions of this agreement and of each such collateral assignment shall be construed so as to carry out such intention.
(c) The Corporation shall have the right, at any time, consistent with the terms of any Policy, to recover its Secured Premium Amount during the Employee's lifetime by loan, partial surrender or withdrawal of the amount of its Secured Premium, determined as of the date of such loan, partial surrender or withdrawal.
(a) Except as otherwise provided herein, on or before the payment date or dates requested each year by the Employee pursuant to Amendment No. 1, the Corporation shall remit the full amount of the Scheduled Premium to Insurer, and shall, upon request, promptly furnish Employee, and Owner, evidence of timely payment of such premium. Corporation shall annually furnish Employee a statement of the amount of income reportable for federal and state income tax purposes, if any, as a result of Corporation's payment of such portion of the premium.
In no event shall Corporation have any right to borrow against any Policy in an amount in excess of the Secured Premium Amount of the Corporation. The collateral assignment of a Policy to Corporation hereunder shall not be terminated, altered or amended by Owner, without the express written consent of Corporation. The Parties hereto agree to take all
action necessary to cause such collateral assignment to conform to the provisions of this Agreement.
(a) Except as to the limited Policy security rights specifically granted Corporation herein, Owner retains all incidents of ownership (including the right to surrender or cancel any Policy, the right to borrow or withdraw against any Policy, and the rights to change the Dividend Option).
(b) Owner's right to borrow shall be limited to an amount equal to the maximum loan value, reduced by the Secured Premium Amount of the Corporation.
(c) Owner's right to withdraw cash values under any Policy's "Withdrawal" provisions shall be limited to the Surrender Value, reduced by the Secured Premium Amount of the Corporation, and subject to any Policy surrender limitations.
(a) Upon the death of the Employee, Corporation shall be entitled to receive from the death proceeds an amount equal to its Secured Premium Amount. The beneficiary designated by Owner in accordance with Article 4 shall be entitled to the remainder of such proceeds, if any.
(b) If any interest is due upon the death proceeds under the terms of the insurance contract, Owner and Corporation shall share such interest as their respective share of the death proceeds (as defined in the preceding paragraph) bears to the total death proceeds, excluding such interest.
(a) Total cessation of the business of Corporation;
(b) Bankruptcy, receivership or dissolution of Corporation;
(c) Termination of Employee's employment by Corporation (other than by reason of Employee's death);
(d) Payment by Owner to Corporation of the Secured Premium Amount.
(a) For sixty (60) days after the date of the termination of this Agreement, Owner shall have the option of obtaining the release of the collateral assignment of any or all of the Policies from Corporation. To obtain such release, Owner shall pay to Corporation the amount of the Corporation's Secured Premium Amount with respect to the Policies to be so released. Upon receipt of such amount, Corporation shall release the collateral assignment of the Policy by the execution and delivery of an appropriate instrument of release.
(b) If Owner fails to exercise such option within sixty (60) day period, then, Corporation may enforce its rights to be paid the amount of its Secured Premium Amount; provided that in the event the cash Surrender Value of the Policy exceeds the amount due
Corporation and the Owner surrenders the Policy, such excess shall be paid to Owner. Thereafter, neither Owner nor its respective successors, assigns, or beneficiaries shall have any further interest in and to the Policy, either under the terms thereof or under this Agreement.
giving or making the same. If such notice, consent or demand is mailed to party hereto, it shall be sent United States certified mail, postage paid, addressed to such party's last known address as shown on the records of Corporation. The date of such mail shall be deemed the date of notice, consent or demand.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement, in duplicate, as of the day and year first above written.
Attest: SELECT MEDICAL CORPORATION /s/ Michael E. Tarvin By: /s/ Scott A. Romberger ----------------------------- ------------------------------ Michael E. Tarvin, Secretary Scott A. Romberger Vice President and Controller [ILLEGIBLE] By: /s/ Rocco A. Ortenzio [Seal] ----------------------------- ------------------------------ , Witness Rocco A. Ortenzio Employee |
Rocco A. Ortenzio Irrevocable Trust u/d dated October 20, 1987
[ILLEGIBLE] /s/ Michael E. Salerno ----------------------------- ---------------------------------- , Witness Michael E. Salerno Trustee |
Exhibit A |
Table of Policies and Insurers Under Split Dollar Agreement among Select Medical Corporation, Rocco A. Ortenzio and Michael E. Salerno, Trustee, dated August 9, 2000
-------------------------------------------------------------------------------- Insurer Policy Number Issue Date -------------------------------------------------------------------------------- Great West Insurance Company 4995814 October 9, 1995 -------------------------------------------------------------------------------- Metropolitan Life Insurance Company 951050265A October 9, 1995 -------------------------------------------------------------------------------- Metropolitan Life Insurance Company 960150090PR January 9, 1996 -------------------------------------------------------------------------------- Metropolitan Life Insurance Company 951150267A October 9, 1997 -------------------------------------------------------------------------------- Sun Life Insurance Company 020018770 October 9, 1995 -------------------------------------------------------------------------------- |
Exhibit 10.19
THIS AGREEMENT is made as of the 1st day of March, 2000, by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and PATRICIA A. RICE, an individual (the "Employee").
WHEREAS, the Employer wishes to ensure the continued services of the Employee for the term of this Agreement, and the Employee desires to be employed by the Employer for such term, upon the terms and conditions set forth below;
NOW THEREFORE, in consideration of the mutual agreements contained
herein and intending to be legally bound, the parties hereto hereby agree as
follows:
Article 1. CAPACITY AND DUTIES
Article 2. TERM OF EMPLOYMENT; TERMINATION
2.02. Termination.
termination, and (ii) the Employee and her estate and beneficiaries shall have no further rights to any other compensation or benefits, or any other rights, hereunder.
(iii) of the second sentence of this Section 2.02(b). If the Employer terminates the Employee's employment for cause pursuant to this Section 2.02(b), (i) the Employer shall pay to the Employee any base salary and other benefits earned and accrued under this Agreement prior to the termination of employment, excluding any unpaid bonuses, whether or not earned or accrued, and (ii) the Employee shall have no further rights to compensation or benefits, or any other rights, hereunder.
shall pay to the Employee a pro-rated bonus for the year of termination in an amount equal to the product of(A) the target bonus established with respect to the Employee for such year, or if no such target is established the bonus paid or payable to the Employee for the year prior to the year of termination, multiplied by (B) a fraction, the numerator of which is the number of days in the year of termination completed prior to such termination and the denominator of which is 365; provided that if a target bonus had been established with respect to the year of termination, a pro-rated bonus shall be payable pursuant to this Section 2.02(d)(ii) only if the performance goals established with respect to such target bonus have been achieved by the date the bonus would have been paid in the absence of the Employee's termination of employment (iii) the Employer agrees that such termination would not be voluntary or a termination "for cause" as contemplated by any stock option or other incentive plans and any stock option or other award agreements entered into between the Employer and the Employee (including agreements that may be entered into after the date hereof), and that any stock options with respect to the Employer's stock held by the Employee shall become fully exercisable as of the date of such termination and shall remain exercisable until the later of three months following the date of such termination or the expiration date of such option, notwithstanding any contrary vesting schedules otherwise applicable to such options, (iv) the Employer will continue to pay the Employee, for the balance of the Term, her base salary as of the date of such termination, and (v) the Employee shall have no further rights hereunder. Such continued payments will be made at the times and in the manner they would have been made to the Employee in the absence of such termination.
Article 3. COMPENSATION
professional meetings, instructional courses and other meetings of like nature so as to better enable the Employee to perform professional services in the employ of the Employer shall not be considered vacation time.
Article 4. CERTAIN COVENANTS
more than 5% of the equity thereof. In addition, this Section 4.01 shall not prevent the Employee from acquiring as a passive investor up to 5% of the equity of a competing enterprise so long as the Employee does not participate in the management thereof.
one-year period preceding the end of such term, employed by or associated with the Employer in an executive, managerial or sales capacity.
Agreement or otherwise, shall not constitute a defense to the enforcement of the Restrictive Covenants.
Article 5. CHANGE OF CONTROL
Section 7.01 of this Agreement, then on or before the Employee's last day of providing services hereunder, in lieu of any other rights to cash compensation she may have under this Agreement which have not accrued by such date, including any compensation pursuant to Section 2.02(d), (A) the Employer will pay to the Employee any base salary and other benefits earned and accrued under this Agreement, (B) the Employer will pay to the Employee a lump sum cash payment equal to her total cash compensation for base salary and bonus for the immediately preceding three completed calendar years (or equal to three times her average total annual cash compensation for base salary and bonus for her years of service to the Employer, if less than three years), (C) the Employer agrees that such termination would not be voluntary or a termination "for cause" as contemplated by any stock option or other incentive plans and any stock option or other award agreements entered into between the Employer and the Employee (including agreements that may be entered into after the date hereof), and that all unvested, unexercised stock options to purchase stock of the Employer held by the Employee shall become fully vested and exercisable as of the date of such termination, and the Employee will have the right to exercise, at any time prior to the later of three months after the date of termination or the expiration date of such option, notwithstanding any contrary vesting schedule otherwise applicable to such options, and (D) the Employee shall have no further rights to compensation or benefits, or any other rights, hereunder.
who has taken steps reasonably calculated to effect the Change of Control, then within 10 days of such Change of Control, in lieu of any other rights to cash compensation the Employee may have under this Agreement which have not accrued by such date, including any compensation pursuant to Section 2.02(d), the Employer shall provide to the Employee all of the compensation and benefits described in clauses (B) and (C) in Section 5.01(a), provided that the payment described in such clause (B) shall be reduced by the total of any and all payments made to the Employee pursuant to Section 2.02(d) hereof, and the Employee shall have no further rights to compensation or benefits, or any other rights, hereunder.
assets (on a consolidated basis), other than a sale or disposition by the Employer of all or substantially all of the Employer's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Employer immediately prior to such sale.
holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions).
Article 6. CERTAIN ADDITIONAL PAYMENTS
6.01. If all, or any portion, of the payments or other benefits provided under any section of this Agreement (including, without limitation, Sections 2 and 5 hereof), either alone or together with other payments and benefits which the Employee receives or is entitled to receive from the Company or its affiliates, (whether or not under an existing plan, arrangement or other agreement) (collectively the "Payments") would constitute an excess "parachute payment" within the meaning of Section 2800 of the Internal Revenue Code of 1986, as amended (the "Code") and would result in the imposition on the Employee of an excise tax under Section 4999 of the Code, (such excise tax, together with any interest and penalties related thereto, are hereinafter collectively referred to as the "Excise Tax") then, in addition to any other benefits to which the Employee is entitled under this Agreement, the Employee shall be entitled to receive an additional payment (a "Gross-Up Payment") in cash, in an amount such that after payment by the Employee of all taxes including, without limitation, (i) any income taxes (and any interest and penalties imposed with respect thereto) and (ii) any Excise Tax, imposed upon the Gross-Up Payment, the Employee retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. Unless the Employer and the Employee otherwise agree in writing, any determination required under this Article 6, including without limitation, the amount of payments under this Article 6 (the "Parachute Gross- up") shall be computed and made in writing by the Employer's then independent public accountants (the "Accountants"), whose determination shall be, subject to the Employee's reasonable approval of the calculations
required under this Article 6, conclusive and binding upon the Employee and the Employer for all purposes. For purposes of making the calculations required by this Article 6, the Accountants may rely on reasonable, good faith interpretations concerning the application of Section 280G and 4999 of the Code. The Employee and the Employer shall furnish to the Accountants such information and documents as the Accountants may reasonably request in order to make a determination under this Article 6. The Employer shall bear all costs the Accountants may reasonably incur in connection with any calculations contemplated by this Article 6.
6.02. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that (i) Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that have been made will be determined to have been in excess of the Gross-Up Payments actually required (an "Overpayment"). In the event that the Employee is required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for the benefit of the Employee. In the event that it is finally determined that an Overpayment has occurred, the Employee shall promptly, and in any event within 30 days of such determination, refund the amount of the Overpayment, plus any interest actually paid to the Employee with respect to the Overpayment, to the Company. The Company shall have the right with respect to the determination of either an Underpayment or an Overpayment to require the Employee to appeal the assertion of any Underpayment or to claim, and sue for, a refund of any Excise Tax paid by the Employee upon any Payment or Gross-Up Payment, provided that the
Company shall promptly reimburse the Employee for all expenses, including counsel and accounting fees, incurred in connection with any such proceeding. Alternatively, the Company may undertake any such proceeding, and the Employee shall cooperate with the Company in any such proceeding.
Article 7. MISCELLANEOUS
written or oral, with respect thereto. This Agreement may not be altered or amended except by an agreement in writing.
If to Employee:
Patricia A. Rice
416 Parkside Rd.
Camp Hill, PA 17011
If to the Employer:
Select Medical Corporation
4718 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
herein, no delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Michael E. Tarvin ---------------------------- Michael E. Tarvin, Senior Vice President By: /s/ Patricia A. Rice ---------------------------- Patricia A. Rice |
EXHIBIT 10.20
This is an Amendment, dated August 8, 2000 (the "Amendment") to the Employment Agreement made as of the 1/st/ day of March, 2000 (the "Employment Agreement") by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"), and PATRICIA A. RICE, an individual (the "Employee").
The Company and the Employee executed and delivered the Employment Agreement. The Company and the Employee now desire to amend the Employment Agreement as hereinafter provided.
Accordingly, and intended to be legally bound hereby, the Company and the Employee agree as follows:
1. Effective as of the first of the Company's payroll periods beginning after the Refinancing Date (as defined in paragraph 2 of this Amendment), the Employee's base salary under Section 3.01 of the Employment Agreement shall be increased to $500,000.
2. For purposes of the Employment Agreement, as amended by Amendment No. 1, the term "Refinancing Date" shall mean the first date upon which:
a. the Company has closed the refinancing of its Second Amended and Restated Credit Agreement dated as of November 19, 1999, to the reasonable satisfaction of the Company; and
b. after that refinancing has been accomplished, the debt created thereby is solely that of the Company (and its subsidiaries) and no shareholder or other investor in the Company guarantees or is otherwise directly obligated to repay that debt.
3. Except as amended hereby, the Employment Agreement shall continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION
Attest: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger ---------------------- ---------------------------------- Michael E. Tarvin, Scott A. Romberger, Secretary Vice President and Controller |
EXHIBIT 10.21
THIS AGREEMENT is made as of March 28, 1997, between Select Medical Corporation, a Delaware corporation (the "Company"), and Michael E. Tarvin (the "Executive").
The Company and Executive desire to enter into an agreement pursuant to which Executive will purchase, and the Company will sell, (i) 46,150 shares of Common Stock, 41,150 shares of which shall constitute the "Executive Stock" and 5,000 shares of which shall constitute the "Investor Common Stock" and (ii) 23.75 shares of Class A Preferred. Certain definitions are set forth in Section 13 of this Agreement.
Golder, Thoma, Cressey, Rauner Fund V, L.P. ("GTCR") and Welsh, Carson, Anderson & Stowe VII, L.P. and certain of its partners ("WCAS") purchased shares of Common Stock and may purchase additional shares of Common Stock and shares of Class A Preferred, pursuant to a purchase agreement among the Company and the Purchasers, dated as of February 5, 1997 (as amended and supplemented from time to time, the "Purchase Agreement"), GTCR and WCAS are collectively referred to herein as the "Purchasers" and individually as a "Purchaser." Certain provisions of this Agreement are intended for the benefit of, and will be enforceable by, the Purchasers.
The parties hereto agree as follows:
PROVISIONS RELATING TO STOCK
(a)(i) Upon execution of this Agreement, Executive will purchase, and the Company will sell, 41,150 shares of Executive Stock at a price of $0.25 per share. The Company will deliver to the Executive the certificate representing such Executive Stock, and the Executive will deliver to the Company a cashier's or certified check or wire transfer of funds in the aggregate amount of $10,287.50.
(a)(ii) Upon execution of this Agreement, Executive will purchase, and the Company will sell, 3,635 shares of Investor Common Stock at a price of $0.25 per share. The Company will deliver to the Executive the certificate representing such Investor Common Stock, and the Executive will deliver to the Company a cashier's or certified check or wire transfer of funds in the aggregate amount of $908.75.
(b) Upon the purchase from time to time by the Purchasers (a
"Purchaser Closing") of additional shares of Common Stock and Class A Preferred
pursuant to Section 1B(c) of the Purchase Agreement, Executive will purchase,
and the Company will sell (i) up to an additional 1,365 shares of Investor
Common Stock at a price of $0.25 per share and (ii) up to an aggregate of 23.75
shares of Class A Preferred at a price of $ 1,000.00 per share (each of (i) and
(ii) immediately above as adjusted from time to time as a result of stock
dividends, stock splits, recapitalization and similar events). The number of
shares of Investor Common Stock and Class A Preferred to be sold by the Company
and purchased by the Executive at any Purchaser Closing shall equal 1,365 shares
of Investor Common Stock or 23.75 shares of Class A Preferred
(d) Executive's commitment to purchase shares of Investor Stock pursuant to this Agreement shall terminate upon a Qualified Public Offering.
(e) In connection with the purchase and sale of the Stock hereunder, Executive represents and warrants to the Company that:
(i) The Stock to be acquired by Executive pursuant to this Agreement will be acquired for Executive's own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act, or any applicable state securities laws, and the Stock will not be disposed of in contravention of the Securities Act or any applicable state securities laws.
(ii) Executive is an executive office of the Company, is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Stock.
(iii) Executive is able to bear the economic risk of his investment in the Stock for an indefinite period of time because the Stock has not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available.
(iv) Executive has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of Stock and has had full access to such other information concerning the Company as he has requested.
(v) This Agreement constitutes the legal, valid and binding obligation of Executive, enforceable in accordance with its terms, and the execution, delivery and performance of this Agreement by Executive does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which Executive is a party or any judgment, order or decree to which Executive is subject.
(vi) Executive is a resident of the State of Pennsylvania.
(f) As an inducement to the Company to issue the Stock to Executive, as a condition thereto, Executive acknowledges and agrees that:
(i) neither the issuance of the Stock to Executive nor any provision contained herein shall entitle Executive to remain in the employment of the Company and its Subsidiaries or affect the right of the Company to terminate Executive's employment at any time for any reason; and
(ii) the Company shall have no duty or obligation to disclose to Executive, and Executive shall have no right to be advised of, any material information regarding the Company and its Subsidiaries at any time prior to, upon or in connection with the repurchase of Stock upon the termination of Executive's employment with the Company and its Subsidiaries.
(a) Except as otherwise provided in Section 2(b) below, the Executive Stock will become vested in accordance with the following schedule, if as of each such date Executive is still employed by the Company or any of its Subsidiaries:
Cumulative Percentage of Executive Anniversary Date Stock Vested ---------------- ---------------------------- March 1, 1998 20% March 1, 1999 40% March 1, 2000 60% March 1, 2001 80% March 1, 2002 100% |
(b) If Executive ceases to be employed by the Company and its Subsidiaries on any date other than any anniversary date prior to March 1, 2002, the cumulative percentage of Executive Stock to become vested will be determined on a pro rata basis according to the number of days elapsed since the prior anniversary date. Upon the occurrence of a Sale of the Company (while Executive is employed by the Company), all shares of Executive Stock which have not yet become vested shall become vested at the time of such event. Shares of Executive Stock which have become vested are referred to herein as "Vested Shares," and all other shares of Executive Stock are referred to herein as "Unvested Shares."
(a)(i) In the event Executive ceases to be employed by the Company and its Subsidiaries for any reason (the "Termination"), the Executive Stock and the Investor Stock (in each case, whether held by Executive or one or more of Executive's transferees, other than the
(a)(ii) In the event Executive fails to purchase any shares of the Investor Stock which he is required to purchase pursuant to this Agreement (a "Triggering Event"), the Executive Stock and the Investor Stock (in each case, whether held by Executive or one or more of Executive's transferees, other than the Company or the Purchasers) will be subject to repurchase, in each case by the Company and the Purchasers pursuant to the terms and conditions set forth in this Section 3. The repurchase options set forth in Sections 3(a)(i) and 3(a)(ii) shall be referred to herein as the "Repurchase Option".
(c) The Board may elect to purchase all or any portion of any class of the Executive Stock or the Investor Stock by delivering written notice (the "Repurchase Notice") to the holder or holders of such Stock within one year after the Termination or Triggering Event. The Repurchase Notice will set forth the number of shares of Stock (including the number of Unvested Shares and Vested Shares, if any) of each class to be acquired from each holder, the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction. The number of shares to be repurchased by the Company shall first be satisfied to the extent possible from the shares of Stock held by Executive at the time of delivery of the Repurchase Notice. If the number of shares of Stock then held by Executive is less than the total number of shares of Stock which the Company has elected to purchase, the Company shall purchase the remaining shares elected to be purchased from the other holder(s) of Stock under this Agreement, pro rata according to the number of shares of Stock held by such other holder(s) at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share). The number of shares of each class of Stock to be repurchased hereunder will be
allocated among Executive and the other holders of Stock (if any) pro rata according to the number of shares of Stock to be purchased from such person.
(d) If for any reason the Company does not elect to purchase all of the Stock pursuant to the Repurchase Option, the Purchasers shall be entitled to exercise the Repurchase Option for the shares of Stock the Company has not elected to purchase (the "Available Shares"). As soon as practicable after the Company has determined that there will be Available Shares, but in any event within ten months after the Termination or Triggering Event, the Company shall give written notice (the "Option Notice") to the Purchasers setting forth the number of Available Shares and the purchase price for the Available Shares. The Purchasers may elect to purchase any or all of the Available Shares by giving written notice to the Company within one month after the Option Notice has been given by the Company. As soon as practicable, and in any event within ten days, after the expiration of the one-month period set forth above, the Company shall notify each holder of Stock as to the number of shares being purchased from such holder by the Purchasers (the "Supplemental Repurchase Notice"). If the Purchasers elect to purchase an aggregate number of shares greater than the Available Shares, the Available Shares will be allocated among the Purchasers based upon the number of shares of Common Stock held by such Purchaser on a fully-diluted basis. At the time the Company delivers the Supplemental Repurchase Notice to the holder(s) of such Stock, the Company shall also deliver written notice to each Purchaser setting forth the number of shares such Purchaser is entitled to purchase, the aggregate purchase price and the time and place of the closing of the transaction. The number of shares of each class of Stock to be repurchased hereunder shall be allocated among the Company and each Purchaser pro rata according to the number of shares of Stock to be purchased by each of them.
(e) The closing of the purchase of the Stock pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice or Supplemental Repurchase Notice, which date shall not be more than one month nor less than five days after the delivery of the later of either such notice to be delivered. The Company and/or the Purchasers will pay for the Stock to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of funds in the aggregate amount of the purchase price for such shares. In addition, the Company may pay the purchase price for such shares by offsetting amounts outstanding under any bona fide debts owed by Executive to the Company. The Company and the Purchasers will be entitled to receive customary representations and warranties from the sellers regarding such sale and to require all sellers' signatures be guaranteed.
(f) Notwithstanding anything to the contrary contained in this Agreement, all repurchases of Stock by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Subsidiaries' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Stock hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so under such restrictions.
(g) Upon the occurrence of a Qualified Public Offering, the Repurchase Option shall terminate with respect to Vested Shares of Executive Stock and all shares of Investor Stock.
(i) if neither the Company nor the Purchasers has elected to purchase all of the Stock specified in the Sale Notice pursuant to Section 4(c) above, the Purchasers may elect to participate in the contemplated Transfer by delivering written
notice to Executive and the Company within 100 days after receipt by the
Purchasers of the Sale Notice. If the Purchasers have elected to
participate in such sale, Executive and the Purchasers will be entitled to
sell in the contemplated sale, at the same price and on the same terms, a
number of shares of the Company's Common Stock equal to the product of (i)
the quotient determined by dividing the percentage of the Company's Common
Stock (on a fully-diluted basis) held by such person, by the aggregate
percentage of the Company's Common Stock (on a fully-diluted basis) owned
by Executive (including both Vested and Unvested Shares) and each Purchaser
participating in such sale and (ii) the number of shares of Common Stock to
be sold in the contemplated sale. Any purchaser in a sale subject to this
Section 4(d) will be required to purchase from the Purchasers, at each
Purchaser's election, a portion of the Class A Preferred held by such
Purchasers equal to the greater of the percentage of (x) such Purchaser's
Common Stock being sold in such transaction and (y) the Executive's Class A
Preferred, as the case may be, being sold in such transaction.
(1) the Sale Notice contemplated a sale of 100 shares of Common Stock;
(2) Executive was at such time the owner of 120 shares of Common Stock (which was equal to 30% of the Common Stock on a fully-diluted basis); and
(3) each Purchaser elected to participate and each Purchaser owned 40 shares of Common Stock (which was equal to 10% of Common Stock on a fully- diluted basis) and 120 shares of Class A Preferred;
(A) Executive would be entitled to sell 60 shares of Common Stock (30% / 50% x 100 shares); and
(B) each Purchaser would be entitled to sell 20 shares of Common Stock (10% / 50% x 100 shares) and 60 shares of Class A Preferred (the same percentage of the Purchaser's Class A Preferred as the percentage of the Purchaser's Common Stock being sold, i.e., 50%).
Executive will use his best efforts to obtain the agreement of the prospective transferee(s) to the participation of the Purchasers in the contemplated Transfer and will not transfer any Stock to the prospective transferee(s) if such transferee(s) refuses to allow the participation of the Purchasers.
(ii) Each holder transferring any class of Stock pursuant to this
Section 4(d) shall pay its pro rata share (based on the number of such
shares to be sold) of the expenses incurred by the holders in connection
with such Transfer and shall be obligated to join on a pro rata basis
(based on the number of such shares to be sold) in any indemnification or
other obligations that the Executive agrees to provide in connection with
such Transfer (other than any such obligations that relate specifically to
a particular holder such as indemnification with respect to representations
and warranties given by a
holder regarding such holder's title to and ownership of such shares; provided that no holder shall be obligated in connection with such Transfer to agree to indemnify or hold harmless the transferees with respect to an amount in excess of the net cash proceeds paid to such holder in connection with such Transfer).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED AS OF MARCH 28, 1997, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER. THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN OTHER SENIOR MANAGEMENT AGREEMENT BETWEEN THE COMPANY AND AN EXECUTIVE OF THE COMPANY DATED AS OF MARCH 28, 1997. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(i) Except for the issuance of Common Stock (a) to the Other Executives pursuant to the Other Senior Management Agreements, (b) to the Partnerships (as defined in the
Senior Management Agreement), Rocco Ortenzio and Robert Ortenzio pursuant to the
Senior Management Agreement, (c) to the Purchasers pursuant to the Purchase
Agreement, (d) in connection with acquisitions as contemplated by Section 1B(c)
of the Purchase Agreement, (e) to certain investors designated by the Company or
(f) pursuant to a public offering registered under the Securities Act, if the
Company at any time after the date hereof authorizes the issuance or sale of any
shares of Common Stock or any securities containing options or rights to acquire
any shares of Common Stock (other than as a dividend on the outstanding Common
Stock), the Company shall first offer to sell to each holder of Stock a portion
of such stock or securities equal to the quotient determined by dividing (1) the
number of shares of Common Stock held by such holder by (2) the total number of
shares of Common Stock outstanding on a fully-diluted basis immediately prior to
such issuance. Each holder of Stock (accepting such offer) shall also purchase
the same percentage of any other class of Company securities (whether debt or
equity) being sold with the Common Stock. Each holder of Stock shall be entitled
to purchase all or any portion of such stock or securities at the most favorable
price and on the most favorable terms as such stock or securities are to be
offered to any other Persons.
(ii) In order to exercise its purchase rights hereunder, a holder of Stock must within 15 days after receipt of written notice from the Company describing in reasonable detail the stock or securities being offered, the purchase price thereof, the payment terms and such holder's percentage allotment, deliver a written notice to the Company describing its election hereunder. If all of the stock and securities offered to the holders of Stock is not fully subscribed by such holders, the remaining stock and securities shall be reoffered by the Company to the holders purchasing their full allotment upon the terms set forth in this paragraph, except that such holders must exercise their purchase rights within five days after receipt of such reoffer.
(iii) Upon the expiration of the offering periods described above, the Company shall be entitled to sell such stock or securities which the holders of Stock have not elected to purchase during the 90 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such holders. Any stock or securities offered or sold by the Company after such 90-day period must be reoffered to the holders of Stock pursuant to the terms of this Section 6.
(iv) Nothing contained in this Section 6 shall be deemed to amend, modify or limit in any way the restrictions on the issuance of shares of Common Stock set forth in the Purchase Agreement, in the Stockholders Agreement or in any other agreement to which the Company is bound.
PROVISIONS RELATING TO EMPLOYMENT
(i) The Employment Period will continue until Executive's resignation, disability (as determined by the Board in its good faith judgment) or death or until the Board determines in its good faith judgment that termination of Executive's employment is in the best interests of the Company.
(ii) Upon a termination of the Employment Period for any reason, Executive shall not be entitled to receive his Annual Base Salary or any fringe benefits or bonuses for periods after the termination of the Employment Period, unless the Board, in its sole discretion, provides otherwise.
GENERAL PROVISIONS
over-the-counter market as reported by the National Quotation Bureau Incorporated, or any similar successor organization, in each such case averaged over a period of 2l days consisting of the day as of which the Fair Market Value is being determined and the 20 consecutive business days prior to such day. If at any time such Common Stock is not listed on any securities exchange or quoted in the NASDAQ System or the over-the-counter market, the Fair Market Value will be the fair value of such Common Stock determined in good faith by the Board.
Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Attention: Chairman and Chief Executive Officer
c/o Select Medical Corporation
(At the address as set forth above)
Golder, Thoma, Cressey Fund V, L.P.
6100 Sears Tower
Chicago, Illinois 60606-6402
Attention: Bryan C. Cressey
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich
Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Attention: James B. Hoover
Reboul, MacMurray, Hewitt, Maynard & Kristol 45 Rockefeller Plaza New York, New York 10111 Attention: William J. Hewitt
or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Agreement will be deemed to have been given when so delivered or sent or, if mailed, five days after deposit in the U.S. mail.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Other Senior Management Agreement on the date first written above.
SELECT MEDICAL CORPORATION
By: /s/ Rocco A. Ortenzio ------------------------------------------ Its: ----------------------------------------- /s/ Michael E. Tarvin --------------------------------------------- Michael E. Tarvin |
Agreed and Accepted:
GOLDER, THOMA, CRESSEY, RAUNER FUND V, L.P.
By: GTCR V, L.P.
Its: General Partner
By: Golder, Thoma, Cressey, Rauner, Inc. Its: General Partner
By: /s/ Bryan C. Cressey --------------------------------- Its: Principal |
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By: /s/ Russell L. Carson --------------------------------- Its: General Partner |
WELSH, CARSON, ANDERSON & STOWE
HEALTHCARE PARTNERS, L.P.
By: /s/ Russell L. Carson --------------------------------- Its: General Partner |
/S/ Bruce Anderson -------------------------------------- Bruce Anderson /s/ Russell Carson -------------------------------------- Russell Carson /s/ Patrick Welsh -------------------------------------- Patrick Welsh /s/ Richard H. Stowe -------------------------------------- Richard Stowe /s/ Andrew M. Paul -------------------------------------- Andrew Paul /s/ Thomas McInerney -------------------------------------- Thomas McInerney /s/ Laura VanBuren -------------------------------------- Laura VanBuren /s/ James Hoover -------------------------------------- James Hoover /s/ Robert Minicucci -------------------------------------- Robert Minicucci /s/ Anthony De Nicola -------------------------------------- Anthony De Nicola /s/ Paul Queally -------------------------------------- Paul Quelly |
MSTC, custodian FBO the IRA/Rollover of
James B. Hoover
By: /s/ James B. Hoover ---------------------------------- |
SCHEDULE A
Period Annual Base Salary ------ ------------------ From February 17, 1997 to June 30, 1997 $ 90,500 From July 1, 1997 to August 9, 1997 $ 96,000 Starting August 10, 1997 $120,500 |
EXHIBIT A
_____________, 1997
ELECTION TO INCLUDE STOCK IN GROSS
INCOME PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned purchased shares of Common Stock, par value $.01 per share (the "Shares"), of Select Medical Corporation (the "Company") on __________, 1997. Under certain circumstances, the Company has the right to repurchase certain of the Shares at cost from the undersigned (or from the holder of the Shares, if different from the undersigned) should the undersigned cease to be employed by the Company and its subsidiaries or upon certain other events. Hence, the Shares are subject to a substantial risk of forfeiture that may not be avoided by a transfer of the Shares to another person. The undersigned desires to make an election to have the Shares taxed under the provision of Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") at the time he purchased the Shares.
Therefore, pursuant to Code (S)83(b) and Treasury Regulation (S)1.83-2 promulgated thereunder, the undersigned hereby makes an election, with respect to the Shares (described below), to report as taxable income for calendar year 1997 the excess (if any) of the Shares' fair market value on __________, 1997 over the purchase price thereof.
The following information is supplied in accordance with Treasury
Regulation (S) 1.83-2(e): 1. The name, address and social security number of the undersigned: |
Michael E. Tarvin
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Social Security Number: 000-00-0000
2. A description of the property with respect to which the election is being made: ______ shares of Common Stock, par value $.01 per share, and ____ shares of Class A Preferred Stock, par value $.01 per share, of the Company.
3. The date on which the property was transferred: _________, 1997. The taxable year for which such election is made: calendar 1997.
4. The restrictions to which the property is subject: If the undersigned does not purchase certain shares of the Company's capital stock, the Shares will be subject to repurchase by the Company at cost. If the undersigned ceases to be employed by the Company or any of its subsidiaries prior to March 1, 2002, the unvested portion of the Shares will be subject to repurchase by the Company at cost. Twenty percent of the Shares become vested
shares on each of March 1, 1998, March 1, 1999, March 1, 2000, March 1, 2001 and March 1, 2002.
5. The fair market value on __________, 1997 of the property with respect to which the election is being made, determined without regard to any lapse restrictions: $____ per share of Common Stock and $____ per share of Class A Preferred Stock.
6. The amount paid for such property: $0.25 per share of Common Stock and $1,000.00 per share of Class A Preferred Stock.
A copy of this election has been furnished to the Secretary of the
Company pursuant to Treasury Regulations (S) 1.83-2(d). Dated: _________________ _______________________________ Michael E. Tarvin |
Pursuant to the Other Senior Management Agreement, dated as of March 28, 1997, by and between the undersigned and Select Medical Corporation, a Delaware corporation (the "Company"), the undersigned will purchase shares of the Company's Common Stock, par value $.01 per share, and shares of the Company's Class A Preferred Stock, par value $.01 per share.
Pursuant to Section 9 of the Stockholders Agreement, dated as of February 5, 1997, by and among the Company and certain other stockholders listed therein (the "Stockholders Agreement"), the Company has permitted the undersigned to become a party to the Stockholders Agreement and to succeed to all of the rights and obligations of a "Stockholder" under the Stockholders Agreement. The undersigned hereby agrees to be bound by all of the terms and conditions of the Stockholders Agreement.
All notices to the undersigned should be sent to the following address:
Date:________________________ _____________________________________ Michael E. Tarvin Acknowledged and Agreed: SELECT MEDICAL CORPORATION By:__________________________ Its:_________________________ |
EXHIBIT 10.22
SELECT MEDICAL CORPORATION
4716 Old Gettysburg Road P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
March 1, 2000
Michael E. Tarvin, Esq.
Select Medical Corporation
4716 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Dear Mr. Tarvin:
The following will confirm the agreement of Select Medical Corporation, a Delaware corporation (the "Company"), with you concerning the consequences upon certain terminations of your employment in connection with a change in control of the Company.
In consideration of your past and continued service to the Company and in consideration of the mutual covenants and agreements contained in this letter (this "Letter Agreement"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
stock notwithstanding any contrary vesting schedule that may be contained in the applicable plan or Award Agreement, and (ii) the Company will, on or before your last day as an employee of the Company, pay to you, in lieu of any other rights to cash compensation other than the payment of your salary for services performed before the date of termination and as a severance benefit, a lump sum cash payment equal to your total base salary plus bonus compensation from the Company for the preceding three years (or, if you shall have been employed for less than three years, an amount equal to three times your average total annual cash compensation for base salary and bonus for your years of service to the Company).
(i) Prior to a Public Offering (as defined below), a "Change of
Control" shall be deemed to have occurred, subject to Section 3(a)(iii) below,
upon (i) any sale, lease, exchange or other transfer of all or substantially all
of the property and assets of the Company (on a consolidated basis) to an
entity, other than an entity at least 75% of the combined voting power of the
voting securities of which are owned by persons in substantially the same
proportion as their ownership of the Company immediately prior to such sale or
other transfer, (ii) any merger or consolidation to which the Company is a party
and as a result of which the holders of the voting securities of the Company
immediately prior thereto own less than a majority of the outstanding voting
securities of the surviving entity immediately following such transaction, or
(iii) any person's (excluding WCAS, GTCR and Thoma Cressey Partners, the
financial sponsors of the Company as of the date hereof), including a group's,
becoming the beneficial owner of securities representing more than 50% of the
voting securities of the Company then outstanding.
(ii) Following a Public Offering,, a "Change of Control" shall be deemed to have occurred if, subject to Section 3(a)(iii) below, (i) any person including a group, but excluding any stockholder of the Company who immediately prior to the Public Offering beneficially owned 12% or more of the Company's outstanding shares, becomes the beneficial owner of shares of the Company having more than 50% of the total number of votes that may be cast for the election of directors of the Company, (ii) any person including a group, other than you or any group of which you are a party, increases its beneficial ownership of shares of the Company beyond such person's ownership immediately after the Public Offering by a number of shares equal to or greater than 33% of the total number of votes that may be cast for the election of directors; (iii) the individuals who serve on the Board of Directors of the Company as of the effective date hereof (the "Incumbent Directors") cease for any reason to constitute at least a majority of the Board of Directors of the Company; provided, however, any person who becomes a director subsequent to the effective date hereof, whose election or nomination for election was approved by a vote of at least a majority of the directors then constituting the Incumbent Directors, shall for purposes of this clause (iii) be considered an Incumbent Director, (iv) the consummation of a merger or consolidation of the Company in which the stockholders of the Company immediately prior to such merger or consolidation, would not, immediately after the merger or consolidation, beneficially own, directly or indirectly, shares representing in the aggregate more than 50% of the combined voting power of the voting securities of the corporation issuing cash or securities in the merger or consolidation (or of its ultimate parent
corporation, if any); or (v) there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets (on a consolidated basis), other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Company immediately prior to such sale.
(iii) Notwithstanding the foregoing, in no event shall a "Change of Control" be deemed to occur for purposes of this Letter Agreement, whether prior to or following a Public Offering, unless the total consideration for the transaction or transactions which would, absent this clause (iii), constitute a Change of Control, has a value that is equal to or greater than $3.75 per share of common stock of the Company (the "Minimum Value"); provided that such Minimum Value shall be adjusted to reflect changes to such common stock in the event of a stock dividend, stock split, reverse stock split, stock combination, reclassification, recapitalization, or other similar change in the structure or capitalization of the Company, or any other event which in the discretion of the Board of Directors of the Company necessitates such an adjustment.
(iv) For purposes of this Section 3(a), (A) the terms "person," "group," "beneficial owner," and "beneficially own" have the same meanings as such terms under Section 13(d) of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder, (B) the term "Public Offering" shall mean the consummation of the first public offering of shares of common stock of the Company in a firm commitment underwritten offering registered under the Securities Act of 1933, as amended, on Form S-1 or its successor forms, and (C) the term "voting securities" shall mean securities, the holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions).
determination that, as a result of such Change of Control, (x) you are unable to perform your services effectively or there is any significant adverse change in your authority or responsibilities, as performed immediately prior to such Change of Control, (y) there is a reduction by the Company in your compensation from that in effect prior to such Change of Control, or (z) you are required to be based anywhere other than the Company's principal executive offices in (or within 25 miles of) Mechanicsburg, Pennsylvania (except for required travel on the Company's business to an extent substantially consistent with your business travel obligations prior to the Change of Control).
(a) If all, or any portion, of the payments or other benefits
provided under any section of this Agreement, either alone or together with
other payments and benefits that you receive or are entitled to receive from the
Company or its affiliates, (whether or not under an existing plan, arrangement
or other agreement) (collectively the "Payments") would constitute an excess
"parachute payment" within the meaning of Section 280G of the Internal Revenue
Code of 1986, as amended (the "Code") and would result in the imposition on you
of an excise tax under Section 4999 of the Code, (such excise tax, together with
any interest and penalties related thereto, are hereinafter collectively
referred to as the "Excise Tax") then, in addition to any other benefits to
which you are entitled under this Agreement, you will be entitled to receive an
additional payment (a "Gross-Up Payment") in cash, in an amount such that after
you pay all taxes including, without limitation, (i) any income taxes (and any
interest and penalties imposed with respect thereto) and (ii) any Excise Tax,
imposed upon the Gross-Up Payment, you will retain an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments. Unless you and the
Company otherwise agree in writing, any determination required under this
Section 4, including without limitation, the amount of payments under this
Article 6 (the "Parachute Gross-up") shall be computed and made in writing by
the Employer's then independent public accountants (the "Accountants"), whose
determination shall be, subject to the Employee's reasonable approval of the
calculations required under this Article 6, conclusive and binding upon the
Employee and the Employer for all purposes. For purposes of making the
calculations required by this Section 4, the Accountants may rely on reasonable,
good faith interpretations concerning the application of Section 280G and 4999
of the Code. You and the Company shall furnish to the Accountants such
information and documents as the Accountants may reasonably request in order to
make a determination under this Section 4. The Company shall bear all costs the
Accountants may reasonably incur in connection with any calculations
contemplated by this Section 4.
(b) As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accountants hereunder, it is possible that (i) Gross-Up Payments which will not have been made by the Company should have been made (an "Underpayment"), consistent with the calculations required to be made hereunder or that (ii) Gross-Up Payments that have been made will be determined to have been in excess of the Gross-Up Payments actually required (an "Overpayment"). In the event that you are required to make a payment of any Excise Tax, the Accountants shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to or for your benefit. In the event that it is finally determined that an Overpayment has occurred, you will promptly, and in any event within 30 days of such determination, refund the amount of the
Overpayment, plus any interest actually paid to you with respect to the Overpayment, to the Company. The Company shall have the right with respect to the determination of either an Underpayment or an Overpayment to you to appeal the assertion of any Underpayment or to claim, and sue for, a refund of any Excise Tax paid by you upon any Payment or Gross-Up Payment, provided that the Company shall promptly reimburse you for all expenses, including counsel and accounting fees, incurred in connection with any such proceeding. Alternatively, the Company may undertake any such proceeding, and you shall cooperate with the Company in any such proceeding.
(a) The Company will require any purchaser of all or substantially all of the assets of the Company, by agreement in form and substance reasonably satisfactory to you, to expressly assume and agree to perform this Letter Agreement in the same manner and to the same extent that the Company would be required to perform it if no such purchase had taken place. Failure of the Company to obtain such agreement prior to the effectiveness of any such succession shall be a breach of this Letter Agreement and shall entitle you to compensation from the Company in the same amount and on the same terms as you would be entitled hereunder if a Covered Termination had occurred. As used in this Letter Agreement, "Company" shall mean the Company as hereinbefore defined and any purchaser of its assets as aforesaid which executed and delivers the agreement provided for herein.
(b) This Letter Agreement shall remain in effect for so long as you are employed by the Company. This Letter Agreement may not be modified or waived except in writing and agreed to by the Company and you. This Letter Agreement shall be governed by the laws of the Commonwealth of Pennsylvania and shall inure to the benefit of your heirs.
(c) The Company represents that this Letter Agreement has been duly authorized and is binding on and enforceable against the Company. The invalidity or unenforceability of any provision of this Letter Agreement shall not affect the validity or enforceability of any other provision, which shall remain in full force and effect.
(d) Upon payment of the amount required under paragraph 1 hereof, you shall deliver to the Company a general release of liability of the Company and its officers and directors in a form reasonably satisfactory to the Company.
(e) All payments made pursuant to this Letter Agreement shall be subject to withholding of applicable deductions and income and employment taxes.
(f) Any notice or other communication required or permitted hereunder shall be in writing and shall be delivered personally, sent by facsimile transmission or sent by certified, registered or express mail, postage prepaid. Any such notice shall be deemed given when so delivered personally or sent by facsimile transmission or, if mailed, five days after the date of deposit in the United States mails to the following addresses:
If to Employee:
Michael E. Tarvin
140 Winfield Drive
Camp Hill, PA 17011
If to the Company:
Select Medical Corporation
4718 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
Please indicate your acceptance of the above agreement by signing below in the space indicated.
Very truly yours,
SELECT MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Robert A. Ortenzio --------------------------- Robert A. Ortenzio, President |
Agreed to and accepted:
/s/ Michael E. Tarvin -------------------------------- Michael E. Tarvin |
EXHIBIT 10.23
THIS AGREEMENT is made as of the 22nd day of May, 2000, by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and LEROY S. ZIMMERMAN, an individual (the "Employee").
WHEREAS, the Employer wishes to ensure the continued services of the Employee for the term of this Agreement, and the Employee desires to be employed by the Employer for such term, upon the terms and conditions set forth below.
NOW THEREFORE, in consideration of the mutual agreements contained herein and intending to be legally bound, the parties hereto hereby agree as follows:
Article 1. CAPACITY AND DUTIES
companies other than the Employer, including, without limitation, serving as special counsel or "of counsel" to the law firm of Eckert Seamans Cherin & Mellott, LLC during the first twelve (12) months of the term of this Agreement, so long as such service does not unreasonably interfere with the performance of the Employee's duties hereunder.
Article 2. TERM OF EMPLOYMENT; TERMINATION
Employee's disability. The term "disability" as used in this Section 2.02(a)
means the inability because of physical or mental injury or sickness to perform
the substantial and material duties of the Employee hereunder as generally
described in Section 1.02 above. Upon a termination of employment described in
this Section 2.02(a), (i) the Employee or his estate or beneficiaries, as
applicable, shall be entitled to receive any base salary and other benefits
earned and accrued under this Agreement prior to the date of termination, and
(ii) the Employee and his estate and beneficiaries shall have no further rights
to any other compensation or benefits, or any other rights, hereunder.
employment for cause, (ii) an opportunity for the Employee to cure any such
breach during the 30-day period after the Employee's receipt of such notice,
(iii) a reasonable opportunity, at any time during the 30-day period after the
Employee's receipt of such notice, for the Employee, together with his counsel,
to be heard before the Board of Directors, and (iv) a Notice of Termination (as
defined in Section 2.02(c)) stating that, in the good faith opinion of not less
than a majority of the entire membership of the Board of Directors, the Employee
was guilty of the conduct set forth in any of clauses (i), (ii) or (iii) of the
second sentence of this Section 2.02(b). If the Employer terminates the
Employee's employment for cause pursuant to this Section 2.02(b), (i) the
Employer shall pay to the Employee any base salary and other benefits earned and
accrued under this Agreement prior to the termination of employment, excluding
any unpaid bonuses, whether or not earned or accrued, and (ii) the Employee
shall have no further rights to compensation or benefits, or any other rights,
hereunder.
contrary vesting schedules otherwise applicable to such options, (iv) the Employer will continue to pay the Employee, for the balance of the Term, his base salary as of the date of such termination, and (v) the Employee shall have no further rights hereunder. Such continued payments will be made at the times and in the manner they would have been made to the Employee in the absence of such termination.
Article 3. COMPENSATION
Employee's annual base salary as of the date of such termination, such payments to commence from the date of such termination and to continue until the earlier of the tenth anniversary of the date of such termination, or the date on which the Employee is physically able to become gainfully employed in an occupation consistent with his education, training and experience. Notwithstanding the foregoing, if the Employer elects not to purchase disability insurance covering the Employee in an amount necessary to provide salary continuation payments at the rate of 50% of the Employee's annual base salary as of the date of such termination for the period set forth above, then the Employer shall be liable to the Employee for such supplemental amounts, when taken together with the disability insurance proceeds payable under the terms of policies purchased by the Employer, as may be required to assure that the Employee receives salary continuation payments at the rate of 50% of the Employee's annual base salary as of the date of such termination for the period set forth above.
Article 4. CERTAIN COVENANTS
radius of any hospital or outpatient rehabilitation clinic now or hereafter managed by the Employer or any of its affiliates or owned by the Employer or any of its affiliates to the extent of more than 5% of the equity thereof. In addition, this Section 4.01 shall not prevent the Employee from acquiring as a passive investor up to 5% of the equity of a competing enterprise so long as the Employee does not participate in the management thereof.
endeavor to entice away from the Employer, any person who is, or was at any time during the one-year period preceding the end of such term, employed by or associated with the Employer in an executive, managerial or sales capacity.
Agreement or otherwise, shall not constitute a defense to the enforcement of the Restrictive Covenants.
Article 5. CHANGE OF CONTROL
services hereunder, in lieu of any other rights to cash compensation he may have under this Agreement which have not accrued by such date, including any compensation pursuant to Section 2.02(d), (A) the Employer will pay to the Employee any base salary and other benefits earned and accrued under this Agreement, (B) the Employer will pay to the Employee a lump sum cash payment equal to his total cash compensation for base salary and bonus for the immediately preceding three completed calendar years (or equal to three times his average total annual cash compensation for base salary and bonus for his years of service to the Employer, if less than three years), (C) the Employer agrees that such termination would not be voluntary or a termination "for cause" as contemplated by any stock option or other incentive plans and any stock option or other award agreements entered into between the Employer and the Employee (including agreements that may be entered into after the date hereof), and that all unvested, unexercised stock options to purchase stock of the Employer held by the Employee shall become fully vested and exercisable as of the date of such termination, and the Employee will have the right to exercise, at any time prior to the later of three months after the date of termination or the expiration date of such option, notwithstanding any contrary vesting schedule otherwise applicable to such options, and (D) the Employee shall have no further rights to compensation or benefits, or any other rights, hereunder.
of such Change of Control, in lieu of any other rights to cash compensation the Employee may have under this Agreement which have not accrued by such date, including any compensation pursuant to Section 2.02(d), the Employer shall provide to the Employee all of the compensation and benefits described in clauses (B) and (C) in Section 5.01(a), provided that the payment described in such clause (B) shall be reduced by the total of any and all payments made to the Employee pursuant to Section 2.02(d) hereof, and the Employee shall have no further rights to compensation or benefits, or any other rights, hereunder.
assets (on a consolidated basis), other than a sale or disposition by the Employer of all or substantially all of the Employer's assets to an entity, at least 50% of the combined voting power of the voting securities of which are owned by persons in substantially the same proportion as their ownership of the Employer immediately prior to such sale.
holders of which are ordinarily, in the absence of contingencies, entitled to elect the corporate directors (or persons performing similar functions).
Article 6. MISCELLANEOUS
If to Employee:
LeRoy S. Zimmerman
4525 Custer Terrace
Harrisburg, PA 17110
If to the Employer:
Select Medical Corporation
4716 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
preclude any other or further exercise thereof or the exercise of any other such right, power or privilege.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION, a
Delaware corporation
By: /s/ Michael E. Tarvin --------------------------- Michael E. Tarvin, Senior Vice President /s/ LeRoy S. Zimmerman -------------------------------- LeRoy S. Zimmerman |
EXHIBIT 10.24
OFFICE LEASE AGREEMENT
BASIC LEASE INFORMATION/*/
9. Rentable Area of the Building: 36,030 Rentable square feet ------ 10. Rentable Area of the Premises: 8,205 Rentable square feet ------ 11. Useable Area of the Building: 31,168 Useable square feet ------ 12. Useable Area of the Premises: 7,135 Useable square feet ------ 13. Tenants Proportionate Share: 22.77 % (Item 10 divided by Item 9) ------ |
/*//*/ Notwithstanding the foregoing, the monthly Base Rental will be $11,281.88 through 12/31/99 or occupancy by Tenant of 4716 Old Gettysburg Road, if later.
Exhibits A-F are part of this Lease, identified as follows:
The foregoing Basic Lease Information is hereby incorporated into and made a part of the Office Lease Agreement which is described herein and attached. Each reference in the Lease to any information and definitions contained in the Basic Lease Information shall mean and refer to the information and definitions hereinabove set forth. In the event of any conflict between any Basic Lease Information and the Lease, the Lease shall control.
Landlord:
OLD GETTYSBURG ASSOCIATES I
a Pennsylvania general partnership WITNESS:___________________ By:______________________ Michael E. Salerno Managing Director Tenant: SELECT MEDICAL CORPORATION, a Delaware corporation ATTEST:____________________ By:______________________ Michael Tarvin Scott A. Romberger Secretary Vice President |
Page ARTICLE 1 Premises............................................... 5 ARTICLE 2 Term................................................... 5 ARTICLE 3 Delivery of the Premises to Tenant..................... 6 ARTICLE 4 Acceptance of the Premises and Building by Tenant...... 6 ARTICLE 5 Rental................................................. 7 ARTICLE 6 Operating Expenses..................................... 7 ARTICLE 7 Services by Landlord................................... 10 ARTICLE 8 Utilities.............................................. 10 ARTICLE 9 Use.................................................... 12 ARTICLE 10 Laws, Ordinances and Requirements of Public Authorities 12 ARTICLE 11 Observance of Rules and Regulations.................... 13 ARTICLE 12 Alterations............................................ 13 ARTICLE 13 Liens.................................................. 13 ARTICLE 14 Ordinary Repairs....................................... 14 ARTICLE 15 Insurance.............................................. 14 ARTICLE 16 Damage by Fire or Other Cause.......................... 16 ARTICLE 17 Condemnation........................................... 17 ARTICLE 18 Assignment and Subletting.............................. 18 ARTICLE 19 Indemnification........................................ 18 ARTICLE 20 Surrender of the Premises.............................. 19 ARTICLE 21 Estoppel Certificates.................................. 20 ARTICLE 22 Subordination.......................................... 20 ARTICLE 23 Parking................................................ 21 ARTICLE 24 Default and Remedies................................... 21 ARTICLE 25 Waiver by Tenant....................................... 24 ARTICLE 26 Security Deposit....................................... 24 ARTICLE 27 Attorney's Fees and Legal Expenses..................... 25 ARTICLE 28 Notices................................................ 25 ARTICLE 29 Miscellaneous.......................................... 25 |
EXHIBIT A - Description Of Premises
EXHIBIT B - Description Of Building
EXHIBIT C - Description Of Leasehold Improvements
EXHIBIT D - Description Of Parking Rights
EXHIBIT E - Security Card/Key Areas
EXHIBIT F - Rules And Regulations
THIS Lease, dated as of the date specified in the Basic Lease Information which is attached hereto and incorporated herein for all purposes, is made between Landlord and Tenant.
ARTICLE 1
Landlord leases to Tenant, and Tenant leases from Landlord for the Term (as defined below) and subject to the provisions hereof, to each of which Landlord and Tenant mutually agree, the Premises, which Premises is more particularly described in the floor plans in Exhibit A hereto, together with its appurtenances, including the right to use, in common with others, the lobbies, entrances, stairs, elevators, off-street parking and loading areas (for loading and unloading of materials and supplies), and other public portions of the Building, which Building is situated on the real property described in Exhibit B hereto. The Premises shall constitute part of the "Rentable Area," which shall be determined and defined by Landlord using standards adopted by Building Owners and Managers Association (BOMA). For purposes of this Lease, the Rentable Area of the Building and the Rentable Area of the Premises are as provided in the foregoing Basic Lease Information. The term "Common Areas" shall mean all of the common facilities now or hereafter under, over, in or adjacent to the Building designed and intended for use by all Tenants in the Building in common facilities now or hereafter under, over, in or adjacent to the Building designed and intended for use by all Tenants in the Building in common with Landlord and each other.
ARTICLE 2
(a) specified in the Basic Lease Information provided Landlord has
delivered the Premises with the Building Standard Leasehold
Improvements as set forth on Exhibit C substantially completed:
or
(b) of Tenant's occupancy of the Premises for the conduct of Tenant's business (i.e. not occupancy for construction purposes) (the "Commencement Date").
Unless sooner terminated, the Term shall end at midnight on the Expiration Date specified in the Basic Lease Information.
ARTICLE 3
Before the Commencement Date, Landlord shall substantially complete the floor(s) or portions thereof on which the Premises are located and shall construct the Leasehold Improvements, if any, to be constructed or installed by Landlord pursuant to the provisions of Exhibit C hereto. If for any reason Landlord cannot deliver the Premises to Tenant by the Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable for any loss or damage resulting therefrom except that the Rental shall be waived for the period between the Commencement Date and the date when Landlord can deliver possession and Landlord shall extend the Term. Tenant may not enter or occupy the Premises until it is tendered by Landlord, unless Tenant's entry relates to construction work in the Premises. The Premises shall be deemed completed and possession delivered when the Premises is completed to accommodate Tenants use. The terms of Exhibit C hereto shall govern the construction and installation of all Leasehold Improvements. The term "Building Standard Leasehold Improvements" as used herein shall mean those Leasehold Improvements which conform to Building Standard. The term "Non-Building Standard Leasehold Improvements" as used herein shall mean all Leasehold Improvements which exceed or deviate from Building Standard. The terms "Building Standard" and "Non-Building Standard" as used herein shall have the meanings specified in Exhibit C hereto.
ARTICLE 4
Taking possession of the Premises by Tenant shall be conclusive evidence that Tenant:
(a) accepts the Premises as suitable for the purposes for which they are Leased;
(b) accepts the Building and every part and appurtenance thereof as being in a good and satisfactory condition; and
(c) waives any defects in the Premises and its appurtenances, except for the completion of those items, if any, on any punchlist and on Exhibit C attached hereto.
Landlord shall not be liable, except for negligence or willful misconduct, to Tenant or any of its agents, employees, licensees, or invitees for any injury or damage to person or property due to
the condition or design of or any defect in the Building or its mechanical systems and equipment which may exist or occur, and Tenant, for itself and its agents, employees, licensees, and invitees, expressly assumes all risks of injury or damage to person or property, either proximate or remote, resulting from the condition of the Premises or the Building.
ARTICLE 5
ARTICLE 6
Share of Operating Expenses (as defined in article 6 and 7). in excess of the Initial Operating Expense Allowance ("Operating Expense Excess"). Such payments shall be calculated and made as follows:
(a) Before the beginning of each Fiscal Year during the Term, Landlord shall furnish Tenant with Landlord's reasonable estimate of the Operating Expenses and any anticipated Operating Expense Excess for such Fiscal Year. On the first day of each month during such Fiscal Year, Tenant shall pay Tenant's Proportionate Share of such Fiscal Year's estimated Operating Expense Excess in monthly installments of 1/12th of Tenant's Proportionate Share of the estimated annual Operating Expense Excess for such Fiscal Year.
(b) By the first day of March of each Fiscal Year during Tenant's occupancy (beginning with the Fiscal Year following the Commencement Date), or as soon thereafter as possible, Landlord shall furnish to Tenant a statement of Landlord's actual Operating Expense Excess for the previous Fiscal Year or fraction thereof if the Commencement Date occurred after the first day of the previous Fiscal Year. If the actual Operating Expense Excess is greater than Landlord's estimate, a lump sum payment, considered Rental for all purposes, shall be made by Tenant, within 30 days of the delivery of that statement, equal to Tenant's Proportionate Share of the actual Operating Expense Excess over the Landlord's estimate for the previous Fiscal Year. If the actual Operating Expense Excess is less than Landlord's estimate, a lump sum payment shall be made by Landlord, within 30 days of delivery of that statement, equal to Tenant's Proportionate Share of the actual Operating Expense Excess under Landlord's estimate. The effect of this reconciliation payment or adjustment is that the Tenant shall pay during each Fiscal Year during the Term, in addition to the Annual Base Rental, Tenant's Proportionate Share of Operating Expenses in excess of an amount equal to that Fixed years allowance. Said amount is based upon 12 months of building operation with all tenants utilizing all services provided by Landlord pursuant to Article 7 and Article 8.
(c) The Annual Operating Expense Allowance shall be increased each fiscal year by the Annual Operating Expense Allowance Increase (cumulative) as specified in the Basic Lease Information.
(d) With respect to the last Fiscal Year or partial Fiscal Year, as the case may be, during the Term, an adjustment will be made between Landlord and Tenant pursuant to Section 6.02, at the appropriate time after the Expiration Date. The provisions of the paragraph (d) shall survive termination of this Lease with respect to such adjustment and any payments owing by either party to the other after termination hereof.
Parking Areas, and exterior areas contained within the boundaries described in Exhibit B upon which the Building is situated. All Operating Expenses shall be determined according to generally accepted accrual accounting principles which shall be consistently applied. Operating Expenses shall include, but are not limited to, the following:
(a) Wages, salaries, and fees of all personnel or entities (exclusive of Landlord's executive personnel) directly engaged in the operation, maintenance, repair, or security of the Building, including taxes, insurance, and benefits relating thereto. As to personnel not involved exclusively with the administration and operation of the Building, only those portions of such expenses reasonably allocable to the Building shall be included.
(b) All supplies and materials used in the operation and maintenance of the Building, except for special lighting, relamping and ballasts within any Tenant space.
(c) Expenses of all maintenance, janitorial, security, and service agreements for the Building and the equipment therein, including, without limitation, alarm service, janitorial services, exterior window cleaning, elevator maintenance, landscaping, parking facility maintenance, roadway and utility maintenance and cleaning, etc.
(d) Expenses of all insurance relating to the Building for which Landlord is responsible hereunder, or which Landlord considers reasonably necessary for the operation of the Building, including, without limitation, the cost of property, casualty and liability insurance applicable to the Building and Landlord's personal property used in connection therewith, and the cost of business interruption or rental insurance.
(e) All taxes, assessments, and other governmental charges, now or hereafter applicable to the Building, or any portion thereof, or to Landlord's personal property used in connection therewith, and dues (including those levied by any Association managing all common areas and easements) attributable to the Building or its operation, exclusive of any inheritance, gift, franchise, income, corporate, or profit taxes which may be assessed against Landlord.
(f) Expenses of repairs and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to Tenants of the Building).
(g) Landlord's Costs related to fees paid to individuals or companies engaged in rendering legal, accounting or technical services including efforts to reduce Building Ad Valorem Tax expenses.
(h) All utility costs to Landlord of the Building (exclusive, however, of such special utility services as are provided in Section 8.02 hereof), including, without limitation, water, power, fuel, heating, lighting, air conditioning, and ventilation.
Operating Expenses shall not include specific costs especially billed to and paid by specific Tenants such as above Building Standard janitor service, above Building Standard utility service, or other services above Building Standard.
Tenant shall be liable for all taxes levied or assessed against personal property, furniture, fixtures, or Tenant finish placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property, and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is liable hereunder; provided that Tenant shall have the right to contest such taxes if Tenant shall have furnished Landlord with security sufficient in Landlord's reasonable determination.
ARTICLE 7
While Tenant is occupying the Premises and is not in default under this Lease, Landlord shall, at its expense, but subject to the provisions of Articles 6 and 8 hereof, furnish the Premises with:
(a) passenger elevator service (where applicable) in common with other Tenants for access to and from the Premises, reasonably limited after normal business hours and on Saturdays, Sundays, and holidays;
(b) janitorial cleaning services as are customarily provided to Tenants in comparable office buildings in the greater Harrisburg area; and
(c) the utility services provided for in Article 8 below.
ARTICLE 8
(a) potable water
(b) heating, ventilating, and/or air conditioning in season on business days from 7:00 a.m. to 6:00 p.m.
(c) electric lighting for public areas and special Services Areas of the Building
all of which services shall be provided to Tenant by Landlord and paid for by Landlord as part of the Operating Expense Allowance. If Tenant requires air conditioning or heating outside the hours and days specified above, Landlord shall furnish it only at Tenant's request, and Tenant
will bear the entire charge therefor which will be an amount equal to the rate charged to Landlord, at that time, plus a reasonable fee to cover Landlord's overhead costs, with a two-hour minimum. With respect to such after hours costs, Landlord acknowledges that the current after hours charge is $35.00 per hour. Whenever machines or equipment that generate abnormal heat are used in the Premises by Tenant which affect the temperature or humidity otherwise maintained by the central air conditioning system, Landlord will have the right to install supplemental air conditioning units in the Premises, and the full total cost thereof, will be paid by Tenant to Landlord on demand. Notwithstanding anything in this Lease to the contrary, Tenant shall be responsible for the cost of special lighting relamping and ballasts within the Premises after initial installation of such items.
(a) special mainframe type computers and/or electronic data processing equipment,
(b) special lighting which has electrical consumption in excess of the Building Standard lighting, or
(c) any item that consumes more than 0.5 kilowatts at rated capacity or requires a voltage other than 120 volt single phase
and such consumption by Tenant shall be deemed excessive usage for which Tenant shall pay Landlord upon receipt of an invoice for the cost to Landlord of such usage. Notwithstanding the aforementioned, Tenant acknowledges that the Building electrical feeders have normal design limitations, such that
(i) in no event shall lighting have a design load greater than an average of 2.00 watts per Usable square foot, and
(ii) collectively, Tenant's equipment and lighting shall not have an electrical design load greater than an average of 3.75 watts per Usable square foot
Upon the existence of Tenant's excess electrical requirements, Landlord may, at its option, upon not less than 30 days prior written notice to Tenant, discontinue electric services to the Premises until Tenant reduces its power consumption to the permissible limits. Landlord will not be liable in any way to Tenant for failure or defect in the supply or character of electric energy or any other utility service furnished to the Premises because of any requirement, act, or omission of the public utility servicing the Building. All installations of electrical fixtures, appliances, and equipment within the Premises shall be subject to Landlord's prior approval. Landlord's obligation to furnish utility services shall be subject to the rules and regulations of any municipal or other governmental authority regulating the business of providing utility services. When
Tenant's use of the Premises consumes power in excess of the Building Standard lighting and for typewriters, dictaphones, calculating machines and other normal office machines of similar low consumption, then the usage of such additional consumption shall be determined, at Landlord's election, either
(i) by a survey performed by a reputable consultant selected by Landlord (and paid for by Tenant when such additional consumption is proven), or
(ii) by separate meter in the Premises to be installed, maintained and read by Landlord at Tenant's sole expense.
ARTICLE 9
The Premises shall be used for general office purposes, and for no other purpose and Tenant agrees to use and maintain the Premises in a clean, careful, safe, lawful, and proper manner.
ARTICLE 10
Tenant shall, at its sole expense,
(i) comply with all laws, orders, ordinances, and regulations of federal, state, county, and municipal authorities having jurisdiction over the Premises,
(ii) comply with any direction made pursuant to law of any public officer or officers requiring abatement of any nuisance, or imposing any obligation, order, or duty upon Landlord or Tenant arising from Tenant's use of the Premises or from conditions which have been created by or at the insistence of Tenant or required by reason of a breach of any of Tenant's obligations hereunder, and
(iii) indemnify Landlord and hold Landlord harmless from any loss, cost,
claim, or expense which Landlord may incur or suffer by reason of
Tenant's failure to comply with its obligations under clauses (i) or
(ii) above. If Tenant receives
written notice of violation of any such law, order, ordinance, or regulation, it shall promptly notify Landlord thereof.
ARTICLE 11
Tenant and its employees, agents, visitors, and licensees shall observe faithfully and comply strictly with all Rules and Regulations attached to this Lease (Exhibit F). Landlord shall at all times have the right to make reasonable exchanges in and additions to such Rules and Regulation. Any failure by Landlord to enforce any of the Rules and Regulations now or hereafter in effect, either against Tenant or any other Tenant in the Building, shall not constitute a waiver of any such Rules and Regulations. Landlord shall not be liable to Tenant for the failure or refusal by any other Tenant, guest, invitee, visitor, or occupant of the Building to comply with any of the Rules and Regulations, but Landlord shall, after receipt of notice, take reasonable action to assure compliance.
ARTICLE 12
ARTICLE 13
Tenant shall keep the Premises, the Building, and the property on which the Building is located, free from any liens arising from any work performed, materials furnished, or obligations incurred by or at the request of Tenant Nothing contained in this Lease shall be construed as Landlord's consent to any performance of labor or furnishing of any materials for any specific improvements, alteration, or repair of, or to, the Premises, that would result in any liens against
the Premises or liability of the Landlord. If, based upon acts of Tenant, any lien is filed against the Premises, the Building, the Property on which the Building is located, or Tenant's Leasehold interests therein, Tenant shall discharge same within 10 days after its filing. If Tenant fails to discharge such lien within such period, then, in addition to any other right or remedy of Landlord, Landlord may, at its election, discharge the lien by either paying the amount claimed to be due, obtaining the discharge by deposit with a court or a title company, or by bonding. Tenant shall pay on demand any amount paid by Landlord for reasonable attorneys' fees and other legal expenses of Landlord incurred in defending any such action or in obtaining the discharge of such lien, together with all necessary disbursements in connection therewith, to double the amount of the lien claim plus a sufficient amount to cover any penalties, interest, attorneys' fees, court costs, and other legal expenses resulting from such contest. This bond shall name Landlord and such other parties as Landlord may direct as beneficiaries thereunder.
ARTICLE 14
Tenant shall, at all times during the Term hereof and at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, ordinary wear and tear, fire and other casualty excepted. Subject to Article 20, section 20.02 herein, Tenant shall, at the end of the term hereof, surrender the Premises, as repaired, to Landlord in the same condition as when received, ordinary wear and tear excepted. If Tenant fails to make such repairs promptly, Landlord may, at its option, make such repairs, and Tenant shall pay Landlord on demand Landlord's actual costs in making such repairs plus a fee of (15%) to cover Landlord's overhead.
ARTICLE 15
(a) All Risk Insurance (including fire, extended coverage, vandalism, malicious mischief, extended perils, sprinkler leakage and debris removal) upon property of every description and kind owned by Tenant and located in the Building or for which Tenant is legally liable or installed by or on behalf of Tenant including, without limitation, fittings, installations, fixtures, removable trade fixtures, Non-Building Standard Leasehold Improvements (as defined in Exhibit C), and alterations, in an amount not less than the full replacement cost thereof. If there is a dispute as to the amount which comprises full replacement cost, the decision of Landlord or the mortgagees of Landlord shall be conclusive and binding.
(b) Commercial liability insurance coverage to include death, personal injury, bodily injury (not less that $1,000,000 limits), broad form property damage (not less than $1,000,000 limits), fire sprinkler hazard, operations hazard, owner's protective coverage, contractual liability, and products and completed operations liability, with combined single liability limits not less than $1,000,000. Such coverage shall insure against all liability of Tenant and its authorized representatives and visitors arising out of, and in connection with, Tenant's use or occupancy of the Premises.
(c) Worker's Compensation and Employer's Liability Insurance, with a waiver of subrogation endorsement, in form and amount satisfactory to Landlord.
(d) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time in form, in amounts, and for insurance risks against which a prudent Tenant of a comparable size and in a comparable business would protect itself.
All policies shall be issued by insurers with a Best's Insurance Reports rating of A or better and shall be in form satisfactory to Landlord. Tenant agrees that certificates of insurance on the Landlord's standard form, or certified copies of each such insurance policy, naming Landlord and its mortgagees as additional insured, will be delivered to Landlord not later than 5 days prior to the date that Tenant takes possession of any part of the Premises. All policies shall contain an undertaking by the insurers to notify Landlord and the mortgagees of Landlord in writing, by Registered U.S. Mail, not less than 30 days before any material change, reduction in coverage, cancellation, or other termination thereof. All insurance shall be primarily as to Landlord and not participating with any other available insurance. So long as Tenant is not in default, proceeds of Tenant's insurance shall be available to repair or replace the insured fixtures and equipment.
shall promptly comply with all reasonable requirements of the insurance authority or any present or future insurer relating to the Premises and the Building.
ARTICLE 16
(i) are free from collection by Landlord's mortgagee, ground or primary lessor, and
(ii) are sufficient)
have the damage repaired with reasonable speed at the expense of Landlord, subject to delays which may arise by reason of adjustment of loss under insurance policies and to other delays beyond Landlord's reasonable control. Provided such damage was not the result of the negligence or willful misconduct of Tenant, or Tenant's employees or invitees, an abatement in the Rental hereunder shall be allowed as to that portion of the Premises rendered untenantable by such damage until such time as Landlord determines that such damaged portion of the Premises has been made tenantable for Tenant's use.
insufficient to repair or restore the damage by destruction, Landlord may, at its option, terminate this Lease by giving Tenant, within 60 days after such damage or destruction, notice of termination, and thereupon Rental and any other payments for which Tenant is liable under this Lease shall be apportioned and paid to the date of such damage, and Tenant shall immediately vacate the Premises, provided, however, that those provisions of this Lease which are designated to cover matters of termination and the period thereafter shall survive the termination hereof.
(a) the Building is damaged or destroyed to the extent that, in Landlord's reasonable opinion it would not be economically feasible to repair or restore such damage or destruction, or
(b) in Landlord's reasonable judgment, the damage or destruction to the Building cannot be repaired or restored within 60 days after such damage or destruction,
Landlord may, at its option, terminate this Lease by giving Tenant, within 60 days after such damage, notice of such termination requiring Tenant to vacate the Premises 60 days after delivery of the notice of termination, and thereupon Rental and any other payments shall be apportioned and paid to the date on which possession is relinquished and Tenant shall immediately vacate the Premises according to such notice of termination, provided, however, that those provisions of this Lease which are designed to cover matters of termination and the period thereafter shall survive the termination hereof.
ARTICLE 17
the Premises shall be taken or condemned, in whole or in part, for any public purpose to such an extent as to render said Premises untenantable, this Lease shall, at the option of Landlord or Tenant, forthwith terminate. All proceeds from any taking or condemnation shall belong to and be paid to Landlord, except to the extent of any proceeds awarded to Tenant on account of moving and relocation expenses and depreciation to and removal of Tenant's physical property.
ARTICLE 18
(a) to terminate this Lease as to the space so affected by Tenant in its notice, in which event Tenant, subject to the provisions of this Lease which expressly survive the termination hereof, shall be relieved of all further obligations hereunder as to such space;
(b) to permit Tenant to assign or sublet such space, subject, however, to the subsequent written approval of the proposed assignee or subTenant by Landlord, and provided that if the Rental rate agreed upon between Tenant and its proposed subtenant is greater than the Rental rate that Tenant must pay Landlord hereunder, then 100% of such excess Rental shall be considered additional Rental owed by Tenant to Landlord, and shall be paid by Tenant to Landlord in the same manner that Tenant pays Annual Base Rental; or
(c) to refuse to consent to Tenant's assignment or subleasing of such space and to continue this Lease in full force and effect as to the entire Premises, in which case, any judgment against Landlord for unreasonable denial shall be limited to specific performance of approval of said assignment or sublease.
No assignment or subletting by Tenant shall relieve Tenant of Tenant's obligations under this Lease. Any attempted assignment or sublease by Tenant in violation of the terms and provisions of this Section 18.01 shall be void. In no event shall Tenant solicit assignees or sublessees in other Buildings owned by Landlord, or at less than a fair market rate.
ARTICLE 19
Tenant waives all claims against Landlord for damage to any property or injury to, or death of, any person in, upon, or about the Building, the Premises or Parking Facilities arising at any time and from any and all causes whatsoever other than solely by reason of the negligence or willful
misconduct of Landlord, its agents, employees, representatives, or contractors, and Tenant agrees that it will defend, indemnify, save, and hold harmless, Landlord from and against all claims, demands, actions, damages, loss, cost, liabilities, expenses, and judgments suffered by, recovered from, or asserted against Landlord on account of any damage to any property or injury to, or death of, any person arising from the use of the Building, the Premises, or the Parking Facilities by Tenant or its employees or invitees, except such as is caused solely by the negligence or willful misconduct of Landlord, its agents, employees, representatives, or contractors. Tenant's foregoing indemnity obligation shall include reasonable attorneys' fees and all other reasonable costs and expenses incurred by Landlord. The provisions of this Article 19 shall survive the termination of this Lease with respect to any damage, injury, or death occurring before such termination. If Landlord is made a party to any litigation commenced by or against Tenant or relating to this Lease or to the Premises, and provided that in any such litigation, Landlord is not finally adjudicated to be at fault, then Tenant shall pay all costs and expenses, including attorneys' fees and court costs, incurred by or imposed upon Landlord because of any such litigation, and the amount of all such costs and expenses, including attorneys' fees and court costs, shall be a demand obligation owing by Tenant to Landlord, and shall be considered as additional Rental.
ARTICLE 20
from delay by Landlord in delivering possession of the Premises to such other Tenant or prospective Tenant.
ARTICLE 21
Tenant agrees to furnish, when requested by Landlord or the holder of any deed of trust covering the Building, the Land, or any interest of Landlord therein, a certificate signed by Tenant certifying to such parties as Landlord may designate to the extent true matters with respect to the terms and status of this Lease and the Premises, stating that Tenant, as of the date of such certificate, has no charge, lien, or claim of offset under this Lease or otherwise against Rentals or other charges due or to become due hereunder; and such other matters as may be requested by Landlord or the holder of any such deed of trust. To the extent any such statements requested are not true, Tenant shall explain such facts in writing. Landlord agrees periodically to furnish, when reasonably requested in writing by Tenant, certificates signed by Landlord containing substantially the same information as described above.
ARTICLE 22
(a) all ground or primary Leases in existence at the date hereof and to any supplements, modifications, and extensions thereof heretofore or hereafter made, and
(b) utility easements and agreements, covenants, restrictions, and other encumbrances which do not materially adversely effect Tenant's intended use of the Premises, both existing and future.
ARTICLE 23
Landlord will permit Tenant to use the areas designated by Landlord ("Parking Facilities") for parking of vehicles in common with other Tenants in the Building during the Term.
ARTICLE 24
(a) if Tenant shall fail to pay any Rental or other sums payable by Tenant hereunder within 10 days of written notice thereof from Landlord (provided, however, if such event of default shall occur more than once in every 6 month period, Landlord shall not be required to provide any written notice of default and an event of default shall occur as and when such Rental or other sums becomes due and payable);
(b) if Tenant shall fail to perform or observe any other term hereof or any of the Rules and Regulations and such failure shall continue for more than 30 days after notice thereof from Landlord;
(c) if Tenant fails to take occupancy within 30 days following substantial completion;
(d) if Tenant deserts or vacates any substantial portion of the Premises;
(e) if any petition is filed by or against Tenant or any guarantor of Tenant's obligations under this Lease under any section or chapter of the present or any future Federal Bankruptcy Code or under any similar law or statute of the United States or any state thereof;
(f) if Tenant or any guarantor of Tenant's obligations under this Lease becomes insolvent or makes a transfer in fraud of creditors;
(g) if Tenant or any guarantor of this Lease makes an assignment for the benefit of creditors; or
(h) if a receiver, custodian, or trustee is appointed for Tenant or for any of the assets of Tenant which appointment is not vacated within 30 days of the date of such appointment
(a) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to do so, Landlord may, without notice and without prejudice to any other remedy Landlord may have, enter upon and take possession of the Premises and expel or remove Tenant and its effects without being liable to prosecution or any claim for damages therefor; and Tenant shall be liable to Landlord for all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises or otherwise, including any loss of Rental for the remainder of the Term. Any such loss of Rental shall be offset by any Rental received by Landlord as a result of reletting the Premises during the remainder of the Term.
(b) Terminate this Lease, in which event Tenant's event of default shall be considered a total breach of Tenant's obligations under this Lease and Tenant immediately shall become liable for such damages for such breach amount, equal to the total of:
(1) the costs of recovering the Premises;
(2) the unpaid Rental earned as of the date of termination, plus interest thereon at a rate per annum from the due date equal to 5% percent over the Prime Rate; provided, however, that such interest shall never exceed the Highest Lawful Rate;
(3) the amount of the excess of
(i) the total Rental and other benefits which Landlord would have received under the Lease for the remainder of the Term, at the rates
then in effect, together with all other expenses occurred by Landlord in connection with Tenant's default, over
(ii) the Fair Market Rate of the balance of the Term as of the time of such breach,
which excess shall be discounted at the rate of 8% per annum to the then present value; and
(4) all other sums of money and damages owing by Tenant and Landlord.
(c) Enter upon and take possession of the Premises as Tenant's agent without terminating this Lease and without being liable to prosecution or any claim for damages therefor, and Landlord may relet the Premises as Tenant's agent and receive the Rental therefor, in which event Tenant shall pay to Landlord on demand the cost of renovating, repairing, and altering the Premises for a new Tenant or Tenants and any deficiency that may arise by reason of such reletting, provided, however, that Landlord shall have no duty to relet the Premises and Landlord's failure to relet the Premises shall not release or affect Tenant's liability for Rental or for damages.
(d) Do whatever Tenant is obligated to do under this Lease and may enter the Premises without being liable to prosecution or any claim for damages therefor, to accomplish this purpose. Tenant shall reimburse Landlord immediately upon demand for any expenses which Landlord incurs in thus effecting compliance with this Lease on Tenant's behalf, and Landlord shall not be liable for any damages suffered by Tenant from such action, whether caused by the negligence of Landlord or otherwise.
rights granted to Landlord in this Lease shall be cumulative of every other right or remedy which Landlord may otherwise have at law or in equity or by statue, and the exercise of one or more rights or remedies shall not prejudice or impair the current or subsequent exercise of other rights or remedies.
ARTICLE 25
To the extent permitted by applicable law, Tenant waives for itself and all claiming by, through, and under it, including creditors of all kinds
(a) any right and privilege which it or any of them may have under any present or future constitution, statute, or rule of law to redeem the Premises or to have a continuance of this Lease for the Term after termination of Tenant's right of occupancy by order or judgment of any court or by any legal process or writ, under the terms of this Lease, or after the termination of the Term as herein provided,
(b) the benefits of any present or future constitution, statute, or rule of law which exempts property form liability for debt or for distress for rent, and
(c) the provisions of law relating to notice and/or delay in levy of execution in case of eviction of a Tenant for non-payment of rent.
ARTICLE 26
The Security Deposit shall be held by Landlord, without interest, as security for the performance of Tenant's obligations under this Lease. Landlord may, without prejudice to any other remedy, use the Security Deposit to remedy any default in any obligation of Tenant hereunder, and such use shall survive the termination of this Lease, and Tenant shall promptly, on demand, restore the Security Deposit to its original amount. If Tenant is not in default at the termination of this Lease, any remaining portion of the Security Deposit shall be returned to Tenant. If Landlord transfers its interest in the Premises during the Term, Landlord shall assign the Security Deposit to the transferee who shall then become obligated to Tenant for its return, and thereafter Landlord shall have no further liability for its return.
ARTICLE 27
In any action or proceeding brought by either party against the other with respect to this Lease, the prevailing party shall be entitled to recover from the other party's reasonable attorneys' fees, investigation costs, and other legal expenses and court costs incurred by such party in such action or proceeding as the court may find to be reasonable. The prevailing party shall be the one who receives the net judgment in its behalf at the end of any action.
ARTICLE 28
Any notice or document required to be delivered hereunder shall be considered delivered, whether actually received or not, when hand delivered to the address of the other party, or 48 hours after deposited in the United States Mail, postage prepaid, registered or certified mail, return receipt requested, addressed to the parties hereto at the respective addresses specified in the Basic Lease Information, or at such other address as they have subsequently specified by written notice.
ARTICLE 29
Premises to prospective lenders or purchasers, and, during the last 6 months of the Term of the Lease, to show them to prospective Tenants at reasonable hours and, if they are vacated, to prepare them for re-occupancy. Landlord shall cause its officers, agents and representatives to exercise care with any such entry not to unreasonably interfere with the operation and normal office routine of Tenant (except in the case of emergency).
IN WITNESS WHEREOF, Landlord and Tenant have set their hands and seals to this Lease Agreement the day and year first above written.
Landlord:
OLD GETTYSBURG ASSOCIATES I
a Pennsylvania general partnership WITNESS: Illegible By: /s/ Michael E. Salerno ------------------------ --------------------------------- Michael E. Salerno Agent for Owner Tenant: SELECT MEDICAL CORPORATION, a Delaware corporation ATTEST: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger ------------------------- --------------------------------- Michael Tarvin Scott A. Romberger Secretary Vice President |
Exhibit 10.25
Old Gettysburg Associates
4718 Old Gettysburg Road
Mechanicsburg, PA 17055
THIS FIRST AMENDMENT (this "First Amendment") is made as of the ___ day of June, 1999, by and between OLD GETTYSBURG ASSOCIATES, a Pennsylvania general partnership ("Landlord"), and SELECT MEDICAL CORPORATION, a Delaware corporation ("Tenant").
BACKGROUND:
A. Landlord and Tenant are parties to that certain Office Lease Agreement dated June 15, 1999, (the "Lease"), pursuant to which Landlord leased to Tenant, and Tenant hired from Landlord, approximately 8,205 rentable square feet of space in the building located at 4718 Old Gettysburg, Road, Mechanicsburg, Pennsylvania. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Lease.
B. Landlord desires to lease additional space in the Building to Tenant, and Tenant desires to hire additional space in the Building from Landlord.
C. Landlord and Tenant now desire to amend the Lease as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and intending to be legally bound hereby, Landlord and Tenant agree as follows:
1. Tenant hereby agrees to lease from Landlord, and Landlord hereby agrees to lease to Tenant, approximately 3865 rentable square feet of space on the first floor of the Building designated as Suite 111 and more particularly described on Exhibit A to this Amendment, attached hereto and made a part hereof.
2. Tenant shall take the space AS-IS.
3. The Lease Term shall be from June 1, 1999 through December 31, 1999 or date of Tenant's occupation of 4716 Old Gettysburg Road, if later.
4. Monthly Rent for the additional space shall be $5,269.28.
5. All other terms and conditions contained in the Lease and not amended hereby remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have caused this First Amendment to be duly executed as of the Lease Commencement date of June 1, 1999.
Landlord: Old Gettysburg Associates a Pennsylvania general partnership Witness: Illegible By: /s/ Michael E. Salerno Date: 6/17/99 ---------------------- ------------------------- -------- Michael E. Salerno Agent for Owner Tenant: Select Medical Corporation a Delaware Corporation Attest: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger Date: 6/1/99 ------------------------ ------------------------- -------- Michael Tarvin Scott A. Romberger Secretary Vice President |
EXHIBIT 10.26
Old Gettysburg Associates
4718 Old Gettysburg Road
Mechanicsburg, PA 17055
THIS SECOND AMENDMENT (this "Second Amendment") is made as of the 1st day of February 2000, by and between OLD GETTYSBURG ASSOCIATES, a Pennsylvania general partnership ("Landlord"), and SELECT MEDICAL CORPORATION, a Delaware corporation ("Tenant").
BACKGROUND:
A. Landlord and Tenant are parties to that certain Office Lease Agreement dated June 15, 1999 (the "Lease"), pursuant to which Landlord leased to Tenant, and Tenant hired from Landlord. All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Lease.
B. Landlord and Tenant now desire to amend the Lease as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and promises contained herein, and intending to be legally bound hereby, Landlord and Tenant agree as follows:
1. Tenant hereby agrees to lease from Landlord, and Landlord hereby agrees to
lease to Tenant, approximately 4195 rentable square feet of space
consisting of space on the first floor of the Building, designed as Suite
111 (3865 rsf) and an office in the Executive area on the 4/th/ floor (33
rsf).
2. Tenant shall take the space AS-IS.
3. The Lease Term shall be from January 1, 2000 through May 31, 2004. (Lease Term coincides with original Basic Lease).
4. Monthly Rent for the additional space shall be $6,117.71. Increases shall run with original Lease Term.
5. All other terms and conditions contained in the Lease and not amended hereby remain in full force and effect.
IN WITNESS WHEREOF, Landlord and Tenant have caused the First Amendment to be duly executed.
Landlord: Old Gettysburg Associates A Pennsylvania general partnership Witness: Illegible By: /s/ Michael E. Salerno Date: 2/7/00 -------------------- -------------------------- Michael E. Salerno Agent for Owner Tenant: Select Medical Corporation A Delaware Corporation Attest: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger Date: 2/1/00 ----------------------- ------------------------- Michael Tarvin Scott A. Romberger, Secretary Vice President |
Exhibit 10.27
OFFICE LEASE AGREEMENT
BASIC LEASE INFORMATION
foot for Fiscal Year 2000. 17. Annual Operating Expense Allowance Increase (cumulative): 0 % ----- 18. Fiscal Year: Twelve months ending December 31 --------------------------------------------------------------- |
Exhibits A-G are part of this Lease, identified as follows:
The foregoing Basic Lease Information is hereby incorporated into and made a part of the Office Lease Agreement which is described herein and attached. Each reference in the Lease to any information and definitions contained in the Basic Lease Information shall mean and refer to the information and definitions hereinabove set forth. In the event of any conflict between any Basic Lease Information and the Lease, the Lease shall control.
Landlord:
OLD GETTYSBURG ASSOCIATES III
a Pennsylvania general partnership WITNESS: Illegible By: /s/ Michael E. Salerno --------------------- ---------------------------------- Michael E. Salerno on behalf of General Partner Select Capital Corporation Tenant SELECT MEDICAL CORPORATION A Delaware corporation ATTEST: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger --------------------- ---------------------------------- Michael E. Tarvin Scott A. Romberger Secretary Vice President |
TABLE OF CONTENTS
ARTICLE 1 Premises............................................... 4 ARTICLE 2 Term................................................... 4 ARTICLE 3 Delivery of the Premises to Tenant..................... 5 ARTICLE 4 Acceptance of the Premises and Building by Tenant...... 5 ARTICLE 5 Rental................................................. 6 ARTICLE 6 Operating Expenses..................................... 6 ARTICLE 7 Services by Landlord................................... 9 ARTICLE 8 Utilities.............................................. 9 ARTICLE 9 Use.................................................... 11 ARTICLE 10 Laws, Ordinances and Requirements of Public Authorities 11 ARTICLE 11 Observance of Rules and Regulations.................... 11 ARTICLE 12 Alterations............................................ 12 ARTICLE 13 Liens.................................................. 12 ARTICLE 14 Ordinary Repairs....................................... 12 ARTICLE 15 Insurance.............................................. 13 ARTICLE 16 Damage by Fire or Other Cause.......................... 15 ARTICLE 17 Condemnation........................................... 16 ARTICLE 18 Assignment and Subletting.............................. 16 ARTICLE 19 Indemnification........................................ 17 ARTICLE 20 Surrender of the Premises.............................. 17 ARTICLE 21 Estoppel Certificates.................................. 18 ARTICLE 22 Subordination.......................................... 18 ARTICLE 23 Parking................................................ 19 ARTICLE 24 Default and Remedies................................... 19 ARTICLE 25 Waiver by Tenant....................................... 22 ARTICLE 26 Security Deposit....................................... 22 ARTICLE 27 Attorney's Fees and Legal Expenses..................... 23 ARTICLE 28 Notices................................................ 23 ARTICLE 29 Miscellaneous.......................................... 23 |
THIS Lease, dated as of the date specified in the Basic Lease Information which is attached hereto and incorporated herein for all purposes, is made between Landlord and Tenant.
ARTICLE 1
Landlord leases to Tenant, and Tenant leases from Landlord for the Term (as defined below) and subject to the provisions hereof, to each of which Landlord and Tenant mutually agree, the Premises, which Premises is more particularly described in the floor plans in Exhibit A hereto, together with its appurtenances, including the right to use, in common with others, the lobbies, entrances, stairs, elevators, off-street parking and loading areas (for loading and unloading of materials and supplies), and other public portions of the Building, which Building is situated on the real property described in Exhibit B hereto. The Premises shall constitute part of the "Rentable Area," which shall be determined and defined by Landlord using standards adopted by Building Owners and Managers Association (BOMA). For purposes of this Lease, the Rentable Area of the Building and the Rentable Area of the Premises are as provided in the foregoing Basic Lease Information. The term "Common Areas" shall mean all of the common facilities now or hereafter under, over, in or adjacent to the Building designed and intended for use by all Tenants in the Building in common facilities now or hereafter under, over, in or adjacent to the Building designed and intended for use by all Tenants in the Building in common with Landlord and each other.
ARTICLE 2
(a) specified in the Basic Lease Information provided Landlord has
delivered the Premises with the Building Standard Leasehold
Improvements as set forth on Exhibit C substantially completed:
or
(b) of Tenant's occupancy of the Premises for the conduct of Tenant's business (i.e. not occupancy for construction purposes)(the "Commencement Date").
Unless sooner terminated, the Term shall end at midnight on the Expiration Date specified in the Basic Lease Information.
ARTICLE 3
Before the Commencement Date, Landlord shall substantially complete the floor(s) or portions thereof on which the Premises are located and shall construct the Leasehold Improvements, if any, to be constructed or installed by Landlord pursuant to the provisions of Exhibit C hereto. If for any reason Landlord cannot deliver the Premises to Tenant by the Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable for any loss or damage resulting therefrom, except that the Rental shall be waived for the period between the Commencement Date and the date when Landlord can deliver possession and Landlord shall extend the Term. Tenant may not enter or occupy the Premises until it is tendered by Landlord, unless Tenant's entry relates to construction work in the Premises. The Premises shall be deemed completed and possession delivered when the Premises is completed to accommodate Tenants use. The terms of Exhibit C hereto shall govern the construction and installation of all Leasehold Improvements. The term "Building Standard Leasehold Improvements" as used herein shall mean those Leasehold Improvements which conform to Building Standard. The term "Non-Building Standard Leasehold Improvements" as used herein shall mean all Leasehold Improvements which exceed or deviate from Building Standard. The terms "Building Standard" and "Non-Building Standard" as used herein shall have the meanings specified in Exhibit C hereto.
ARTICLE 4
Taking possession of the Premises by Tenant shall be conclusive evidence that Tenant
(a) accepts the Premises as suitable for the purposes for which they are Leased;
(b) accepts the Building and every part and appurtenance thereof as being in a good and satisfactory condition; and
(c) waives any defects in the Premises and its appurtenances, except for the completion of those items, if any, on any punchlist and on Exhibit C attached hereto.
Landlord shall not be liable, except for negligence or willful misconduct, to Tenant or any of its agents, employees, licensees, or invitees for any injury or damage to person or property due to the condition or design of or any defect in the Building or its mechanical systems and equipment which may exist or occur, and Tenant, for itself and its agents, employees, licensees, and invitees, expressly assumes all risks of injury or damage to person or property, either proximate or remote, resulting from the condition of the Premises or the Building.
ARTICLE 5
ARTICLE 6
(a) Before the beginning of each Fiscal Year during the Term, Landlord shall furnish Tenant with Landlord's reasonable estimate of the Operating Expenses and any anticipated Operating Expense Excess for such Fiscal Year. On the first day of each month during such Fiscal Year, Tenant shall pay Tenant's Proportionate
Share of such Fiscal Year's estimated Operating Expense Excess in monthly installments of 1/12th of Tenant's Proportionate Share of the estimated annual Operating Expense Excess for such Fiscal Year.
(b) By the first day of March of each Fiscal Year during Tenant's occupancy (beginning with the Fiscal Year following the Commencement Date), or as soon thereafter as possible, Landlord shall furnish to Tenant a statement of Landlord's actual Operating Expense Excess for the previous Fiscal Year or fraction thereof if the Commencement Date occurred after the first day of the previous Fiscal Year. If the actual Operating Expense Excess is greater than Landlord's estimate, a lump sum payment, considered Rental for all purposes, shall be made by Tenant, within 30 days of the delivery of that statement, equal to Tenant's Proportionate Share of the actual Operating Expense Excess over the Landlord's estimate for the previous Fiscal Year. If the actual Operating Expense Excess is less than Landlord's estimate, a lump sum payment shall be made by Landlord, within 30 days of delivery of that statement, equal to Tenant's Proportionate Share of the actual Operating Expense Excess under Landlord's estimate. The effect of this reconciliation payment or adjustment is that the Tenant shall pay during each Fiscal Year during the Term, in addition to the Annual Base Rental, Tenant's Proportionate Share of Operating Expenses in excess of an amount equal to that Fixed years allowance. Said amount is based upon 12 months of building operation with all tenants utilizing all services provided by Landlord pursuant to Article 7 and Article 8.
(c) The Annual Operating Expense Allowance shall be increased each fiscal year by the Annual Operating Expense Allowance Increase (cumulative) as specified in the Basic Lease Information.
(d) With respect to the last Fiscal Year or partial Fiscal Year, as the case may be, during the Term, an adjustment will be made between Landlord and Tenant pursuant to Section 6.02, at the appropriate time after the Expiration Date. The provisions of the paragraph (d) shall survive termination of this Lease with respect to such adjustment and any payments owing by either party to the other after termination hereof.
(a) Wages, salaries, and fees of all personnel or entities (exclusive of Landlord's executive personnel) directly engaged in the operation, maintenance, repair, or security of the Building, including taxes, insurance, and benefits relating thereto. As to personnel not involved exclusively with the administration and operation of
the Building, only those portions of such expenses reasonably allocable to the Building shall be included.
(b) All supplies and materials used in the operation and maintenance of the Building, except for special lighting, relamping and ballasts within any Tenant space.
(c) Expenses of all maintenance, janitorial, security, and service agreements for the Building and the equipment therein, including, without limitation, alarm service, janitorial services, exterior window cleaning, elevator maintenance, landscaping, parking facility maintenance, roadway and utility maintenance and cleaning, etc.
(d) Expenses of all insurance relating to the Building for which Landlord is responsible hereunder, or which Landlord considers reasonably necessary for the operation of the Building, including, without limitation, the cost of property, casualty and liability insurance applicable to the Building and Landlord's personal property used in connection therewith, and the cost of business interruption or rental insurance.
(e) All taxes, assessments, and other governmental charges, now or hereafter applicable to the Building, or any portion thereof, or to Landlord's personal property used in connection therewith, and dues (including those levied by any Association managing all common areas and easements) attributable to the Building or its operation, exclusive of any inheritance, gift, franchise, income, corporate, or profit taxes which may be assessed against Landlord.
(f) Expenses of repairs and general maintenance (excluding repairs and general maintenance paid by proceeds of insurance or by Tenant or other third parties, and alterations attributable solely to Tenants of the Building).
(g) Landlord's Costs related to fees paid to individuals or companies engaged in rendering legal, accounting or technical services including efforts to reduce Building Ad Valorem Tax expenses.
(h) All utility costs to Landlord of the Building (exclusive, however, of such special utility services as are provided in Section 8.02 hereof), including, without limitation, water, power, fuel, heating, lighting, air conditioning, and ventilation.
Operating Expenses shall not include specific costs especially billed to and paid by specific Tenants such as above Building Standard janitor service, above Building Standard utility service, or other services above Building Standard.
Tenant shall be liable for all taxes levied or assessed against personal property, furniture, fixtures, or Tenant finish placed by Tenant in the Premises. If any such taxes for which Tenant is liable are levied or assessed against Landlord or Landlord's property, and Landlord elects to pay the taxes based on such increase, Tenant shall pay to Landlord upon demand that part of such taxes for which Tenant is liable hereunder; provided that Tenant shall have the right to contest such taxes if Tenant shall have furnished Landlord with security sufficient in Landlord's reasonable determination.
ARTICLE 7
While Tenant is occupying the Premises and is not in default under this Lease, Landlord shall, at its expense, but subject to the provisions of Articles 6 and 8 hereof, furnish the Premises with:
(a) passenger elevator service (where applicable) in common with other Tenants for access to and from the Premises, reasonably limited after normal business hours and on Saturdays, Sundays, and holidays;
(b) janitorial cleaning services as are customarily provided to Tenants in comparable office buildings in the greater Harrisburg area; and
(c) the utility services provided for in Article 8 below.
ARTICLE 8
(a) potable water
(b) heating, ventilating, and/or air conditioning in season on business days from 7:00 a.m. to 6:00 p.m.
(c) electric lighting for public areas arid special Services Areas of the Building
all of which services shall be provided to Tenant by Landlord and paid for by Landlord as part of the Operating Expense Allowance. If Tenant requires air conditioning or heating outside the hours and days specified above, Landlord shall furnish it only at Tenant's request, and Tenant will bear the entire charge therefor which will be an amount equal to the rate charged to Landlord, at that time, plus a reasonable fee to cover Landlord's overhead costs, with a two-hour minimum. With respect to such after hours costs, Landlord acknowledges that the current after hours charge is $35.00 per hour. Whenever machines or equipment that generate abnormal heat are used in the Premises by Tenant which affect the temperature or humidity otherwise maintained by the central air conditioning system, Landlord will have the right to install supplemental air conditioning units in the Premises, and the full total cost thereof, will be paid by Tenant to Landlord on demand. Notwithstanding anything in this Lease to the contrary, Tenant shall be responsible for the cost of special lighting relamping and ballasts within the Premises after initial installation of such items.
Expense Allowance. Tenant agrees that Landlord's aforesaid obligation does not include the provision of power for:
(a) special mainframe type computers and/or electronic data processing equipment,
(b) special lighting which has electrical consumption in excess of the Building Standard lighting, or
(c) any item that consumes more than 0.5 kilowatts at rated capacity or requires a voltage other than 120 volt single phase
and such consumption by Tenant shall be deemed excessive usage for which Tenant shall pay Landlord upon receipt of an invoice for the cost to Landlord of such usage. Notwithstanding the aforementioned, Tenant acknowledges that the Building electrical feeders have normal design limitations, such that
(i) in no event shall lighting have a design load greater than an average of 2.00 watts per Usable square foot, and
(ii) collectively, Tenant's equipment and lighting shall not have an electrical design load greater than an average of 3.75 watts per Usable square foot.
Upon the existence of Tenant's excess electrical requirements, Landlord may, at its option, upon not less than 30 days prior written notice to Tenant, discontinue electric services to the Premises until Tenant reduces its power consumption to the permissible limits. Landlord will not be liable in any way to Tenant for failure or defect in the supply or character of electric energy or any other utility service furnished to the Premises because of any requirement, act, or omission of the public utility servicing the Building. All installations of electrical fixtures, appliances, and equipment within the Premises shall be subject to Landlord's prior approval. Landlord's obligation to furnish utility services shall be subject to the rules and regulations of any municipal or other governmental authority regulating the business, of providing utility services. When Tenant's use of the Premises consumes power in excess of the Building Standard lighting and for typewriters, dictaphones, calculating machines and other normal office machines of similar low consumption, then the usage of such additional consumption shall be determined, at Landlord's election, either
(i) by a survey performed by a reputable consultant selected by Landlord (and paid for by Tenant when such additional consumption is proven), or
(ii) by separate meter in the Premises to be installed, maintained and read by Landlord at Tenant's sole expense.
Improvements or facilities, but Tenant will have no claim for rebate, abatement of Rental, or damages because of any malfunctions or interruptions in service.
ARTICLE 9
The Premises shall be used for general office purposes, and for no other purpose and Tenant agrees to use and maintain the Premises in a clean, careful, safe, lawful, and proper manner.
ARTICLE 10
Tenant shall, at its sole expense,
(i) comply with all laws, orders, ordinances, and regulations of federal, state, county, and municipal authorities having jurisdiction over the Premises,
(ii) comply with any direction made pursuant to law of any public officer or officers requiring abatement of any nuisance, or imposing any obligation, order, or duty upon Landlord or Tenant arising from Tenant's use of the Premises or from conditions which have been created by or at the insistence of Tenant or required by reason of a breach of any of Tenant's obligations hereunder, and
(iii) indemnify Landlord and hold Landlord harmless from any loss, cost, claim, or expense which Landlord may incur or suffer by reason of 'Tenant's failure to comply with its obligations under clauses (i) or (ii) above. If Tenant receives written notice of violation of any such law, order, ordinance, or regulation, it shall promptly notify Landlord thereof.
ARTICLE 11
Tenant and its employees, agents, visitors, and licensees shall observe faithfully and comply strictly with all Rules and Regulations attached to this Lease (Exhibit F). Landlord shall at all times have the right to make reasonable exchanges in and additions to such Rules and Regulation. Any failure by Landlord to enforce any of the Rules and Regulations now or hereafter in effect, either against Tenant or any other Tenant in the Building, shall not constitute a waiver of any such Rules and Regulations. Landlord shall not be liable to Tenant for the failure or refusal by any other Tenant, guest, invitee, visitor, or occupant of the Building to comply with any of the Rules and Regulations, but Landlord shall, after receipt of notice, take reasonable action to assure compliance.
ARTICLE 12
ARTICLE 13
Tenant shall keep the Premises, the Building, and the property on which the Building is located, free from any liens arising from any work performed, materials furnished, or obligations incurred by or at the request of Tenant. Nothing contained in this Lease shall be construed as Landlord's consent to any performance of labor or furnishing of any materials for any specific improvements, alteration, or repair of, or to, the Premises, that would result in any liens against the Premises or liability of the' Landlord. If, based upon acts of Tenant, any lien is filed against the Premises, the Building, the Property on which the Building is located, or Tenant's Leasehold interests therein, Tenant shall discharge same within 10 days after its filing. If Tenant fails to discharge such lien within such period, then, in addition to any other right or remedy of Landlord, Landlord may, at its election, discharge the lien by either paying the amount claimed to be due, obtaining the discharge by deposit with a court or a title company, or by bonding. Tenant shall pay on demand any amount paid by Landlord for reasonable attorneys' fees and other legal expenses of Landlord incurred in defending any such action or in obtaining the discharge of such lien, together with all necessary disbursements in connection therewith, to double the amount of the lien claim plus a sufficient amount to cover any penalties, interest, attorneys' fees, court costs, and other legal expenses resulting from such contest. This bond shall name Landlord and such other parties as Landlord may direct as beneficiaries thereunder.
ARTICLE 14
Tenant shall, at all times during the Term hereof and at Tenant's sole cost and expense, keep the Premises and every part thereof in good condition and repair, ordinary wear and tear, fire and other casualty excepted. Subject to Article 20, section 20.02 herein, Tenant shall, at the end of the term hereof, surrender the Premises, as repaired, to Landlord in the same condition as when
received, ordinary wear and tear excepted. If Tenant fails to make such repairs promptly, Landlord may, at its option, make such repairs, and Tenant shall pay Landlord on demand Landlord's actual costs in making such repairs plus a fee of (15%) to cover Landlord's overhead.
ARTICLE 15
(a) All Risk Insurance (including fire, extended coverage, vandalism, malicious mischief, extended perils, sprinkler leakage and debris removal) upon property of every description and kind owned by Tenant and located in the Building or for which Tenant is legally liable or installed by or on behalf of Tenant including, without limitation, fittings, installations, fixtures, removable trade fixtures, Non-Building Standard Leasehold Improvements (as defined in Exhibit C), and alterations, in an amount not less than the full replacement cost thereof. If there is a dispute as to the amount which comprises full replacement cost, the decision of Landlord or the mortgagees of Landlord shall be conclusive and binding.
(b) Commercial liability insurance coverage to include death, personal injury, bodily injury (not less that $1,000,000 limits), broad form property damage (not less than $1,000,000 limits), fire sprinkler hazard, operations hazard, owner's protective coverage, contractual liability and products and completed operations liability, with combined single liability limits not less than $1,000,000. Such coverage shall insure against all liability of Tenant and its authorized representatives and visitors arising out of, and in connection with, Tenant's use or occupancy of the Premises.
(c) Worker's Compensation and Employer's Liability Insurance, with a waiver of subrogation endorsement, in form and amount satisfactory to Landlord.
(d) Any other form or forms of insurance as Tenant or Landlord or the mortgagees of Landlord may reasonably require from time to time in form, in amounts, and for insurance risks against which a prudent Tenant of a comparable size and in a comparable business would protect itself.
All policies shall be issued by insurers with a Best's Insurance Reports rating of A or better and shall be in form satisfactory to Landlord. Tenant agrees that certificates of insurance on the Landlord's standard form, or certified copies of each such insurance policy, naming Landlord and its mortgagees as additional insured, will be delivered to Landlord not later than 5 days prior to the date that Tenant takes possession of any part of the Premises. All policies shall contain an undertaking by the insurers to notify Landlord and the mortgagees of Landlord in writing, by Registered U.S. Mail, not less than 30 days before any material change, reduction in coverage,
cancellation, or other termination thereof. All insurance shall be primarily as to Landlord and not participating with any other available insurance. So long as Tenant is not in default, proceeds of Tenant's insurance shall be available to repair or replace the insured fixtures and equipment
ARTICLE 16
(i) are free from collection by Landlord's mortgagee, ground or primary lessor, and
(ii) are sufficient)
have the damage repaired with reasonable speed at the expense of Landlord, subject to delays which may arise by reason of adjustment of loss under insurance policies and to other delays beyond Landlord's reasonable control Provided such damage was not the result of the negligence or willful misconduct of Tenant, or Tenant's employees or invitees, an abatement in the Rental hereunder shall be allowed as to that portion of the Premises rendered untenantable by such damage until such time as Landlord determines that such damaged portion of the Premises has been made tenantable for Tenant's use.
(a) the Building is damaged or destroyed to the extent that, in Landlord's reasonable opinion it would not be economically feasible to repair or restore such damage or destruction, or
(b) in Landlord's reasonable judgment, the damage or destruction to the Building cannot be repaired or restored within 60 days after such damage or destruction,
Landlord may, at its option, terminate this Lease by giving Tenant, within 60 days after such damage, notice of such termination requiring Tenant to vacate the Premises 60 days after delivery of the notice of termination, and thereupon Rental and any other payments shall be apportioned and paid to the date on which possession is relinquished and Tenant shall immediately vacate the Premises according to such notice of termination, provided, however, that those provisions of this Lease which are designed to cover matters of termination arid the period thereafter shall survive the termination hereof.
ARTICLE 17
If the Premises shall be taken or condemned, in whole or in part, for any public purpose to such an extent as to render said Premises untenantable, this Lease shall, at the option of Landlord or Tenant, forthwith terminate. All proceeds from any taking or condemnation shall belong to and be paid to Landlord, except to the extent of any proceeds awarded to Tenant on account of moving and relocation expenses and depreciation to and removal of Tenant's physical property.
ARTICLE 18
(a) to terminate this Lease as to the space so affected by Tenant in its notice, in which event Tenant, subject to the provisions of this Lease which expressly survive the termination hereof, shall be relieved of all further obligations hereunder as to such space;
(b) to permit Tenant to assign or sublet such space, subject, however, to the subsequent written approval of the proposed assignee or subTenant by Landlord, and provided that if the Rental rate agreed upon between Tenant and its proposed subtenant is greater than the Rental rate that Tenant must pay Landlord hereunder, then 100% of such excess Rental shall be considered additional Rental owed by Tenant to Landlord, and shall be paid by Tenant to Landlord in the same manner that Tenant pays Annual Base Rental; or
(c) to refuse to consent to Tenant's assignment or subleasing of such space and to continue this Lease in full force and effect as to the entire Premises, in which case, any judgment against Landlord for unreasonable denial shall be limited to specific performance of approval of said assignment or sublease.
No assignment or subletting by Tenant shall relieve Tenant of Tenant's obligations under this Lease. Any attempted assignment or sublease by Tenant in violation of the terms and provisions of this Section 18.01 shall be void. In no event shall Tenant solicit assignees or sublessees in other Buildings owned by Landlord, or at less than a fair market rate.
ARTICLE 19
Tenant waives all claims against Landlord for damage to any property or injury to, or death of, any person in, upon, or about the Building, the Premises or Parking Facilities arising at any time and from any and all causes whatsoever other than solely by reason of the negligence or willful misconduct of Landlord, its agents, employees, representatives, or contractors, and Tenant agrees that it will defend, indemnify, save, and hold harmless, Landlord from and against all claims, demands, actions, damages, loss, cost, liabilities, expenses, and judgments suffered by, recovered from, or asserted against Landlord on account of any damage to any property or injury to, or death of, any person arising from the use of the Building, the Premises, or the Parking Facilities by Tenant or its employees or invitees, except such as is caused solely by the negligence or willful misconduct of Landlord, its agents, employees, representatives, or contractors. Tenant's foregoing indemnity obligation shall include reasonable attorneys' fees and all other reasonable costs and expenses incurred by Landlord. The provisions of this Article 19 shall survive the termination of this Lease with respect to any damage, injury, or death occurring before such termination. If Landlord is made a party to any litigation commenced by or against Tenant or relating to this Lease or to the Premises, and provided that in any such litigation, Landlord is not finally adjudicated to be at fault, then Tenant shall pay all costs and expenses, including attorneys' fees and court costs, incurred by or imposed upon Landlord because of any such litigation, and the amount of all such costs and expenses, including attorneys' fees and court costs, shall be a demand obligation owing by Tenant to Landlord, and shall be considered as additional Rental.
ARTICLE 20
this Lease. In the event Landlord so elects, and Tenant fails to remove the aforementioned items, Landlord may remove and store same at Tenant's cost, and Tenant shall pay Landlord on demand, the cost of restoring the Premises to Building Standard, ordinary wear and tear excepted. Tenant agrees to remove, at Tenant's expense, all of its furniture, furnishings, personal property, and moveable trade fixtures by the Expiration Date, and shall promptly reimburse Landlord for the cost of repairing all damage done to the Premises or the Building by such removal.
ARTICLE 21
Tenant agrees to furnish, when requested by Landlord or the holder of any deed of trust covering the Building, the Land, or any interest of Landlord therein, a certificate signed by Tenant certifying to such parties as Landlord may designate to the extent true matters with respect to the terms and status of this Lease and the Premises, stating that Tenant, as of the date of such certificate, has no charge, lien, or claim of offset under this Lease or otherwise against Rentals or other charges due or to become due hereunder; and such other matters as may be requested by Landlord or the holder of any such deed of trust To the extent any such statements requested are not true, Tenant shall explain such facts in writing. Landlord agrees periodically to furnish, when reasonably requested in writing by Tenant, certificates signed by Landlord containing substantially the same information as described above.
ARTICLE 22
Lease. Tenant shall, however, upon demand, execute, acknowledge, and deliver to Landlord any further instruments and certificates evidencing such subordination as Landlord may require. This Lease is further subject and subordinate to
(a) all ground or primary Leases in existence at the date hereof and to any supplements, modifications, and extensions thereof heretofore or hereafter made, and
(b) utility easements and agreements, covenants, restrictions, and other encumbrances which do not materially adversely effect Tenant's intended use of the Premises, both existing and future.
ARTICLE 23
Landlord will permit Tenant to use the areas designated by Landlord ("Parking Facilities") for parking of vehicles in common with other Tenants in the Building during the Term.
ARTICLE 24
(a) if Tenant shall fail to pay any Rental or other sums payable by Tenant hereunder within 10 days of written notice thereof from Landlord (provided, however, if such event of default shall occur more than once in every 6 months period, Landlord shall not be required to provide any written notice of default and an
event of default shall occur as and when such Rental or other sums becomes due and payable);
(b) if Tenant shall fail to perform or observe any other term hereof or any of the Rules and Regulations and such failure shall continue for more than 30 days after notice thereof from Landlord;
(c) if Tenant fails to take occupancy within 30 days following substantial completion;
(d) if Tenant deserts or vacates any substantial portion of the Premises;
(e) if any petition is filed by or against Tenant or any guarantor of Tenant's obligations under this Lease under any section or chapter of the present or any future Federal Bankruptcy Code or under any similar law or statute of the United States or any state thereof;
(f) if Tenant or any guarantor of Tenant's obligations under this Lease becomes insolvent or makes a transfer in fraud of creditors;
(g) if Tenant or any guarantor of this Lease makes an assignment for the benefit of creditors; or
(h) if a receiver, custodian, or trustee is appointed for Tenant or for any of the assets of Tenant which appointment is not vacated within .30 days of the date of such appointment.
(a) Terminate this Lease, in which event Tenant shall immediately surrender the Premises to Landlord. If Tenant fails to do so, Landlord may, without notice and without prejudice to any other remedy Landlord may have, enter upon and take possession of the Premises and expel or remove Tenant and its effects without being liable to prosecution or any claim for damages therefor; and Tenant shall be liable to Landlord for all loss and damage which Landlord may suffer by reason of such termination, whether through inability to relet the Premises or otherwise, including any loss of Rental for the remainder of the Term. Any such loss of Rental shall be offset by any Rental received by Landlord as a result of reletting the Premises during the remainder of the Term.
(b) Terminate this Lease, in which event Tenant's event of default shall be considered a total breach of Tenant's obligations under this Lease and Tenant immediately shall become liable for such damages for such breach amount, equal to the total of:
(1) the costs of recovering the Premises;
(2) the unpaid Rental earned as of the date of termination, plus interest thereon at a rate per annum from the due date equal to 5% percent over the Prime Rate; provided, however, that such interest shall never exceed the Highest Lawful Rate;
(3) the amount of the excess of
(i) the total Rental and other benefits which Landlord would have received under the Lease for the remainder of the Term, at the rates then in effect, together with all other expenses occurred by Landlord in connection with Tenant's default, over
(ii) the Fair Market Rate of the balance of the Term as of the time of such breach,
which excess shall be discounted at the rate of 8% per annum to the then present value; and
(4) all other sums of money and damages owing by Tenant and Landlord.
(c) Enter upon and take possession of the Premises as Tenant's agent without terminating this Lease and without being liable to prosecution or any claim for damages therefor, and Landlord may relet the Premises as Tenant's agent and receive the Rental therefor, in which event Tenant shall pay to Landlord on demand the cost of renovating, repairing, and altering the Premises for a new Tenant or Tenants and any deficiency that may. arise by reason of such reletting, provided, however, that Landlord shall have no duty to relet the Premises and Landlord's failure to relet the Premises shall not release or affect Tenant's liability for Rental or for damages.
(d) Do whatever Tenant is obligated to do under this Lease and may enter the Premises without being liable to prosecution or any claim for damages therefor, to accomplish this purpose. Tenant shall reimburse Landlord immediately upon demand for any expenses which Landlord incurs in thus effecting compliance with this Lease on Tenant's behalf, and Landlord shall not be liable for any damages suffered by Tenant from such action, whether caused by the negligence of Landlord or otherwise.
more of the remedies herein provided upon a breach hereof shall not constitute a waiver of any other breach of the Lease.
ARTICLE 25
To the extent permitted by applicable law, Tenant waives for itself and all claiming by, through, and under it, including creditors of all kinds
(a) any right and privilege which it or any of them may have under any present or future constitution, statute, or rule of law to redeem the Premises or to have a continuance of this Lease for the Term after termination of Tenant's right of occupancy by order or judgment of any court or by any legal process or writ, under the terms of this Lease, or after the termination of the Term as herein provided,
(b) the benefits of any present or future constitution, statute, or rule of law which exempts property form liability for debt or for distress for rent, and
(c) the provisions of law relating to notice and/or delay in levy of execution in case of eviction of a Tenant for non-payment of rent.
ARTICLE 26
The Security Deposit shall be held by Landlord, without interest, as security for the performance of Tenant's obligations under this Lease. Landlord may, without prejudice to any other remedy, use the Security Deposit to remedy any default in any obligation of Tenant hereunder, and such use shall survive the termination of this Lease, and Tenant shall promptly, on demand, restore the Security Deposit to its original amount If Tenant is not in default at the termination of this Lease, any remaining portion of the Security Deposit shall be returned to Tenant. If Landlord transfers its interest in the Premises during the Term, Landlord shall assign the Security Deposit to the transferee who shall then become obligated to Tenant for its return, and thereafter Landlord shall have no further liability for its return.
ARTICLE 27
In any action or proceeding brought by either party against the other with respect to this Lease, the prevailing party shall be entitled to recover from the other party's reasonable attorneys' fees, investigation costs, and other legal expenses and court costs incurred by such party in such action or proceeding as the court may find to be reasonable. The prevailing party shall be the one who receives the net judgment in its behalf at the end of any action.
ARTICLE 28
Any notice or document required to be delivered hereunder shall be considered delivered, whether actually received or not, when hand delivered to the address of the other party, or 48 hours after deposited in the United States Mail, postage prepaid, registered or certified mail, return receipt requested, addressed to the parties hereto at the respective addresses specified in the Basic Lease Information, or at such other address as they have subsequently specified by written notice.
ARTICLE 29
IN WITNESS WHEREOF, Landlord and Tenant have set their hands and seals to this Lease Agreement the day and year first above written.
Landlord:
OLD GETTYSBURG ASSOCIATES III
a Pennsylvania general partnership WITNESS: Illegible By: /s/ Michael E. Salerno ------------------------ -------------------------------- Michael E. Salerno on behalf of General Partner Select Capital Corporation Tenant SELECT MEDICAL CORPORATION A Delaware corporation ATTEST: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger ------------------------ -------------------------------- Michael E. Tarvin Scott A. Romberger Secretary Vice President |
Exhibit 10.28
EQUIPMENT LEASE AGREEMENT
Between
SELECTION CAPITAL CORPORATION
("Lessor")
and
SELECT MEDICAL CORPORATION
("Lessee")
EQUIPMENT LEASE AGREEMENT
THIS EQUIPMENT LEASE AGREEMENT (this "Lease") is made and entered into as of the First day of April, 1997, by and between SELECT CAPITAL CORPORATION, a Pennsylvania corporation having an address at 4720 Old Gettysburg, Road, Mechanicsburg, PA 17055 ("Lessor"), and SELECT MEDICAL CORPORATION, a Delaware corporation having an address at 4718 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, PA 17055 ("Lessee").
a. Commencement Date: April 1, 1997
b. Equipment: Those certain items, together with all replacements, parts, repairs, additions and accessories incorporated therein or affixed thereto, more particularly described on Exhibit "A" attached hereto and made a part hereof.
c. Interest Rate: The lesser of (i) ten percent (10%) per annum; or (iii) the maximum contract rate of interest that Lessor may charge and then permissible under applicable law.
d. Premises: Suite 407, 4718 Old Gettysburg Road, Mechanicsburg, PA.
e. Rent: The annual aggregate amount of Sixty-Two Thousand Four Hundred Thirty-Six Dollars ($62,436.00), which shall be payable in twelve (12) equal monthly installments of Five Thousand Two Hundred Three Dollars ($5,203.00).
f. Term. Five (5) years, beginning on the Commencement Date, and ending on March 31, 2002.
therefor, Lessee shall pay to Lessor interest at the Interest Rate on any amount due Lessor from the due date, without grace, until that amount and interest is paid.
resulting from the foregoing defaults or the exercise of Lessor's remedies. No remedy referred to in this paragraph is intended to be exclusive, but each shall be cumulative and in addition to any other remedy referred to above or otherwise available to Lessor at law or in equity. To the extent permitted by law, Lessee hereby waives any rights now or hereafter conferred by statute or otherwise which may require Lessor to sell, lease or otherwise use the Equipment in mitigation of Lessor's damages as set forth in this paragraph or which may otherwise limit or modify any of Lessor's rights or remedies under this paragraph.
Lessee hereby appoints Lessor as Lessee's irrevocable agent and attorney-in-fact to execute all documents which Lessor deems necessary to release, terminate and void Lessee's interest in the Equipment and to file said documents for recordation with appropriate agencies, if necessary, provided that an event of default has occurred.
a. Extend the Term of this Lease for an additional one (1) year period under the same terms and conditions contained herein, exercisable by written notice of such election by Lessee to Lessor not less than thirty (30) days prior to the date upon which the Term would otherwise expire; or
b. Return the Equipment to Lessor, with freight and insurance prepaid, to a destination by Lessor. Lessee will permit access to the Equipment by Lessor, or Lessor's representative, prior to such loading and shipping in order that Lessor can inspect the Equipment; or
c. Purchase the Equipment for the purchase price of Fifty-Five Thousand Seven Hundred Fifty-Five Dollars ($55,755.00).
To the extent any provisions of this Lease are in conflict with the provisions contained in federal statutes, rules or regulations relating to the Medicare program, this Lease shall be deemed to have been amended in order to bring it into conformity with the provisions contained in the Medicare statutes, rules or regulations.
IN WITNESS WHEREOF, this Lease is hereby executed as of the day and year first above written.
SELECT CAPITAL CORPORATION,
a Pennsylvania corporation
By: /s/ Michael E. Salerno ------------------------------------ Michael E. Salerno, Vice President |
SELECT MEDICAL CORPORATION,
a Delaware corporation
By: /s/ Scott A. Romberger ------------------------------------ Scott A. Romberger, Vice President |
Exhibit 10.29
THIS FIRST AMENDMENT TO EQUIPMENT LEASE AGREEMENT ("First Amendment") is made this 8th day of December, 1997, by and between SELECT CAPITAL CORPORATION, a Pennsylvania corporation ("Lessor"), and SELECT MEDICAL CORPORATION, a Delaware corporation ("Lessee").
BACKGROUND:
A. Lessor and Lessee are parties to that certain Equipment Lease Agreement dated as of April 1, 1997 (the "Lease"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Lease.
B. Lessor and Lessee now desire to amend the Lease as hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows:
1. Effective January 1, 1998, the copier identified on Exhibit "A" attached to the Lease as having been purchased on November 20, 1996 at a cost of $8,795.00 shall be deemed to have been deleted from Exhibit "A" and shall thereafter be excluded from the definition of Equipment.
2. Effective January 1, 1998 and continuing thereafter for the remainder of the Term of the Lease, the annual aggregate amount of Rent shall be Sixty Thousand Four Hundred Sixty-Six and 20/100 Dollars ($60,466.20), payable in equal monthly installments of Five Thousand Thirty-Eight and 85/100 Dollars ($5,038.85).
3. All other terms and conditions contained in the Lease and not amended hereby remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be duly executed as of the day and year first above written.
SELECT CAPITAL CORPORATION,
a Pennsylvania corporation
By: /s/ Michael E. Salerno -------------------------------------- Michael E. Salerno, Vice President |
SELECT CAPITAL CORPORATION,
a Delaware corporation
By: /s/ Scott A. Romberger ------------------------------------- Scott A. Romberger, Vice President |
Exhibit 10.30
THIS SECOND AMENDMENT TO EQUIPMENT LEASE AGREEMENT ("Second Amendment") is made this 28th day of January, 2000, by and between SELECT CAPITAL CORPORATION, a Pennsylvania corporation ("Lessor"), and SELECT MEDICAL CORPORATION, a Delaware corporation ("Lessee").
BACKGROUND
A. Lessor and Lessee are parties to that certain Equipment Lease Agreement dated as of April 1, 1997 (the "Lease"). All capitalized terms not otherwise defined herein shall have the meanings ascribed to them in the Lease.
B. Lessor and Lessee now desire to amend the Lease as hereinafter set forth.
NOW THEREFORE, in consideration of the mutual covenants and agreements set forth herein, and intending to be legally bound hereby, the parties hereto agree as follows:
1. Lessee hereby agrees to purchase from Lessor, and Lessor hereby agrees
to sell to Lessee, the telephone system identified on Exhibit "A"
attached to the Lease (the "Telephone System") for a purchase price
equal to $7,577.77. The purchase price will be paid in cash within two
(2) business days following the execution and delivery of this
Amendment. Thereafter, Lessee will have, own and enjoy all of Lessor's
rights, titles and interest in and to the Telephone System
2. Effective, February 1, 2000, the Telephone System (having been purchased on November 20, 1996 at a cost of $12,717.35) shall be deemed to have been deleted from Exhibit "A" and shall thereafter be excluded from the definition of Equipment.
3. Effective February 1, 2000 and continuing thereafter for the remainder of the Term of the Lease, the annual aggregate amount of Rent shall be Fifty-Seven Thousand Six Hundred Seventeen and 88/100 Dollars ($57,617.88), payable in equal monthly installments of Four Thousand Eight Hundred One and 49/100 Dollars ($4,801.49).
4. The buy-out price contained in Section 12(c) of the Lease is hereby reduced to Fifty One Thousand Four Hundred Fifty Two and 43/100 Dollars ($51,452.43).
5. All other terms and conditions contained in the Lease and not amended hereby remain in full force and effect.
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to be
duly executed as of the day and year first above written.
SELECT CAPITAL CORPORATION
a Pennsylvania Corporation
By: /s/ Michael E. Salerno ------------------------------------ Michael E. Salerno, Vice President |
SELECT MEDICAL CORPORATION
a Delaware Corporation
By: /s/ Scott A. Romberger ------------------------------------ Scott A. Romberger, Vice President |
EXHIBIT 10.32
SECOND AMENDED AND RESTATED
WARRANT AGREEMENT
This SECOND AMENDED AND RESTATED WARRANT AGREEMENT dated as of November 19, 1999, is by and among SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company'), WELSH, CARSON, ANDERSON & STOWE VII, L.P., a Delaware limited partnership ("WCAS VII"), WCAS CAPITAL PARTNERS III, L.P., a Delaware limited partnership ("WCAS CP III"), GOLDER, THOMA, CRESSEY, RAUNER FUND V, L.P., a Delaware limited partnership ("GTCR V" and, together with WCAS VII and WCAS CP Ill, individually, a "Guarantor" and collectively, the "Guarantors"), Mr. Rocco A. Ortenzio, an individual with an address as set forth beneath his name on Schedule I hereto ("Rocco Ortenzio"), and Mr. Robert A. Ortenzio, an individual with an address set forth beneath his name on Schedule I hereto ("Robert Ortenzio"; and, together with Rocco Ortenzio, being hereinafter referred to individually as a "Co-Support Party" and collectively as the "Co- Support Parties").
WHEREAS, the Company and the Guarantors have entered into that certain Warrant Agreement dated as of June 30, 1998, as amended as of February 9, 1999 (the "Original Warrant Agreement"); and
WHEREAS, the Guarantors and the Co-Support Parties collectively own a majority of the outstanding Common Stock (as such terms are defined below) of the Company; and
WHEREAS, the Company, the Guarantors and the Co-Support Parties have determined that it is imperative to the future growth of the Company that the Company enter into, on or about the date hereof (i) the Second Amended and Restated Credit Agreement (the "U.S. Credit Agreement"), with Bank of America, N.A., as administrative agent, collateral agent and swingline lender, The Chase Manhattan Bank, as syndication agent, Canadian Imperial Bank of Commerce, as documentation agent and the other financial institutions party thereto, and (ii) the Credit Agreement (the "Canadian Credit Agreement", together with the "US Credit Agreement" the "Credit Agreements"), with CANADIAN BACK INSTITUTE LIMITED, Bank of America Canada, as administrative agent, and the other financial institutions party thereto. The US Credit Agreement and the Canadian Credit Agreement provide for loans by the lenders set forth therein (the "Banks") to the Company in the aggregate principal amount of $225,000,000 (the "Loans"); and
WHEREAS, the Banks are unwilling to enter into the Credit Agreements or make the Loans available to the Company unless the payment of the Company's obligations to the Banks thereunder is, on the terms and subject to the conditions set forth in the Guarantors' respective Guarantees (as such term is defined below), guaranteed severally by the Guarantors;
WHEREAS, in order to protect their existing substantial equity investments in the Company and to ensure the Company's future financial growth, the Guarantors and the CoSupport Parties are willing to assume additional financial risk in their role as stockholders of
the Company by (i) in the case of the Guarantors, giving certain several guarantees to the Banks with respect to the Loans and (ii) in the case of the Co-Support Parties (and in order to induce the Guarantors to give their respective aforesaid several guarantees to the Banks), agreeing to make contributions to each of the Guarantors, up to each Co-Support Party's Percentage (which is the percentage shown on Schedule II hereto in the column headed "Percentage" for such party) in the event such Guarantor is required to make payment under its Guarantee; and
WHEREAS, in consideration of the Guarantors and the Co-Support Parties assuming such additional financial risk by, in the case of the Guarantors, giving such guarantees and, in the case of the Co-Support Parties, agreeing to be responsible to the Guarantors for contribution payments, the Company is willing to issue Warrants (as such term is defined below) to the Guarantors and the Co-Support Parties, on the terms and subject to the conditions hereinafter set forth; and
WHEREAS, on December 15, 1998, the Certificate of Incorporation of the Company was amended to increase the number of authorized shares of the Company's Common Stock and to authorize a new class of nonvoting common stock of the Company, par value $.01 per share (the "Class A Common Stock"); and
WHEREAS, the parties have agreed to amend the Original Warrant Agreement to provide that the Guarantors who are members of the WCAS Group (as defined below) will receive shares of Class A Common Stock as provided for herein; and
WHEREAS, pursuant to the Original Warrant Agreement, each Guarantor (other than WCAS CP III) and each Co-Support Party is entitled to Warrants to purchase a number of Warrant Shares (as hereinafter defined) shown opposite such Guarantor's and such Co-Support Party's name in Schedule I hereto on the dates as set forth on such Schedule I; and
WHEREAS, the Company desires to execute and deliver to such Guarantors and such Co-Support Parties amended and restated Warrants as provided for herein;
NOW, THEREFORE, in consideration of the foregoing and the mutual agreements contained herein, the parties hereby agree as follows:
I.
ISSUANCE OF WARRANTS
(b) On January 31, 2000 and on each April 30, July 31, October 31 and January 31 thereafter (each a "Quarterly Payment Date"), the Company will execute and deliver to each Guarantor and each Co-Support Party, as the holder of a Warrant, an amendment to such Warrant (individually, a "Warrant Amendment" and collectively, the "Warrant Amendments") pursuant to which the number of Warrant Shares issuable upon exercise of such Warrant immediately prior to the execution and delivery of the Warrant Amendment applicable thereto shall be increased by such number of Warrant Shares as is obtained by multiplying:
(x) the Percentage set forth opposite such Guarantor's or Co- Support Party's name on Schedule II hereto; by
(y) the product of 275,000 and a fraction, the numerator of which is the Average Quarterly Bank Exposure and the denominator of which is the Aggregate Bank Credit Exposure.
For purposes of this Agreement, the term "Average Quarterly Bank Exposure" shall mean the average daily amounts outstanding (including interest and all costs) under the Loans, that are supported by the Guarantees, for the quarterly period preceding and including the Quarterly Payment Date; and the term "Aggregate Bank Credit Exposure" shall mean, the aggregate amount of each Guarantor's and Co- Support Party's liability with respect to the Loans as of the Quarterly Payment Date (including interest and all costs), assuming the entire amount of the Loans available for borrowing by the Company under the Credit Agreements, as at such date, as having been borrowed and being outstanding and unpaid. In the event the Aggregate Bank
Credit Exposure is greater or lesser than $55,000,000 (excluding interest and costs), the 275,000 Warrant Share number in clause (y)(i) shall be proportionately increased or decreased.
II.
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to, and agrees with, the Guarantors and the Co-Support Parties as follows:
or other instrument, or result in the creation or imposition of any lien, charge or incumbrance of any nature upon any of the properties or assets of the Company or any of its subsidiaries.
(b) The Warrant Shares have been, and will at all times be, duly reserved for issuance upon exercise of the Warrants and, when so issued, will be duly authorized, validly issued and outstanding, fully paid and non assessable shares of Common Stock and Class A Common Stock, free and clear of any and all taxes, liens, charges and other encumbrances of any kind or nature. Neither the execution and delivery of the Warrants nor the issuance and delivery of the Warrant Shares upon exercise thereof is subject to any preemptive rights of shareholders of the Company or to any right of first refusal or other similar right in favor of any person.
III.
REPRESENTATIONS AND WARRANTIES OF THE GUARANTORS
Each Guarantor and Co-Support Party represents and warrants, severally and not jointly, to the Company that it is acquiring the Warrants, and will, upon exercise thereof acquire the Warrant Shares, for its own account for purposes of investment and not with a view to or for sale in connection with any distribution thereof. Each Guarantor and Co-Support Party further represents that it understands (i) that neither the Warrants nor the Warrant Shares have been registered under the Securities Act by reason of their issuance in transactions exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof, (ii) the Warrants and, upon exercise thereof, the Warrant Shares must be held indefinitely unless a subsequent disposition thereof is registered under the Securities Act or is otherwise exempt from such registration, (iii) the Warrants and the Warrant Shares will bear a legend to such effect and (iv) the Company will make a notation on its transfer books to such effect. Each Guarantor and CoSupport Party (i) acknowledges that it has had a full opportunity to request from the Company to review and has received all information deemed relevant in making a decision to enter into this Agreement and consummate the transactions contemplated thereby and (ii) will comply with the restrictions on transferability of the Warrants and Warrant Shares contained in the Warrant. Each Guarantor and Co-Support Party is an "accredited investor" within the meaning of Rule 50 1(a) of the Securities Act.
IV.
AGREEMENTS AMONG THE GUARANTORS AND THE CO-SUPPORT PARTIES
Each of the Guarantors and Co-Support Parties agrees, severally and not jointly, with one another that any and all payments made by the Guarantors pursuant to their respective
Guarantees shall be allocated among the Guarantors and the Co-Support Parties in the proportions shown opposite their respective names on Schedule II in the column headed "Percentage," regardless of whether claims shall have been asserted under or in respect of one Guarantor's Guarantee and not the other, and without regard to any release of either Guarantee by any beneficiary thereof In the event that either Guarantor makes a payment (whether for obligations of the Company under either or both of the Credit Agreements, fees, expenses or otherwise) pursuant to its respective Guarantees, such Guarantor shall, in accordance with the notice provisions set forth in Section 6.004 hereof, give written notice ( a "Payment Notice") to the other Guarantor and to each of the Co-Support Parties of the making of such payment. Each Guarantor and each CoSupport Party agrees to make any payments required to be made by it under this Article III to the other party or parties, as the case may be, to whom such required payments are to made by wire transfer within five business days after delivery of a Payment Notice given hereunder.
V.
AGREEMENTS OF THE COMPANY
The Company covenants and agrees that any right to payment received by the Guarantors and the Co-Support Parties, as the case may be, in respect of either or both of the Credit Agreements and their guaranty or other credit support in connection therewith, whether by way of purchase, subrogation, contribution or otherwise, and regardless whether and to what extent the same shall be subordinated to other indebtedness to the Banks or shall have been waived pending certain events, may be applied, both as to principal and accrued and unpaid interest, dollar for dollar, by the Guarantors and the Co-Support Parties, or any of them, as the purchase price of any equity securities offered by the Company to investors for cash. In addition, in the event that the Company shall be unable to make a payment under either or both of the Credit Agreements, the Guarantors and the Co-Support Parties shall have the right (but not the obligation) (i) to purchase additional equity securities of the Company and (ii) to require the Company to use the net proceeds of such purchase to make such payment under either of the Credit Agreements. The right set forth in the preceding sentence may only be exercised upon joint approval by the Guarantors and the Co-Support Parties, and the securities so purchased shall be issued at fair value, based upon current market conditions for the issuance of equity securities. The Company shall use its best efforts to provide the Guarantors and the Co-Support Parties with sufficient notice in advance of a payment default under either of the Credit Agreements to enable the Guarantors and the CoSupport Parties to exercise their rights under this Article IV.
The parties hereto acknowledge that (i) the Warrant Shares issued or issuable to the Guarantors are "Investor Registrable Securities" for purposes of the Registration Agreement, dated as of February 5, 1997, and amended as of December 15, 1998 and November 19, 1999 (the "Registration Agreement"), by and among the Company, the Guarantors, the Co-Support Parties and certain other parties signatory thereto, (ii) the Warrant Shares issued or issuable to the CoSupport Parties are "Executive Registrable Securities" for purposes of the Registration
Agreement and (iii) the Warrant Shares issued or issuable to the Guarantors and the Co-Support Parties are "Stockholder Shares" for purposes of the Stockholders Agreement, dated as of February 5, 1997, and amended as of December 15, 1998, and November 19, 1999 by and among the Company, the Guarantors, the Co-Support Parties and certain other parties signatory thereto.
VI.
MISCELLANEOUS
If to the Company to it at:
4718 Old Gettysburg Road
P.0. Box 2034
Mechanicsburg, Pennsylvania 17055
Attention: Michael E. Tarvin, General Counsel
If to any Guarantor or Support Party, to it at its address as set forth in Schedule I, or, in any such case, at such other address or addresses as shall have been furnished in writing my such party to the others.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the day and year first above written.
SELECT MEDICAL CORPORATION
By /s/ Michael E. Tarvin ------------------------------------- Name: Title: |
WELSH, CARSON, ANDERSON & STOWE VII,
L.P.
By WCAS VII Partners, General Partner
WCAS CAPITAL PARTNERS III, L.P.
By WCAS CP III Associates, L.L.C., General
Partner
GOLDER, THOMA, CRESSEY, RAUNER FUND
V, L.P.
By Golder, Thoma, Cressey, Rauner, Inc.,
General Partner
By /s/ Rocco A. Ortenzio ------------------------------------- Rocco A. Ortenzio By /s/ Robert A. Ortenzio ------------------------------------- Robert A. Ortenzio |
------------------------------------------------------------------------------------------------------------------------------------ Number of Number of Number of Number of Number of Aggregate Warrants Warrants Warrants Warrants Number of Warrants Warrants Name and Address issued on issued on issued on issued on Warrants on issued on issued as on of Guarantor or June 30, Oct. 31, Jan. 29, April 30, July 31, October 31, November 19, Co-Support Party Percentage 1998 1998 1999 1999 1999 1999 1999 ------------------------------------------------------------------------------------------------------------------------------------ Welsh, Carson, Anderson & 34.44% 376,370 188,185 188,185 17,923 38,609.5 68,837 848,109.5 Stowe, VII, L.P. (as of 11/19/99) 320 Park Avenue New York, NY 10022-6815 31.878% (from 4/30/99 thru 11/19/99) 37.637% (from 6/30/98 thru 4/30/00) ------------------------------------------------------------------------------------------------------------------------------------ WCAS Capital Partners, III, 6.56% 0 0 0 3,238 6,975 7,015 17,228 L.P. (as of 11/19/99) 320 Park Avenue New York, NY 10022-6815 5.759% (from 4/30/98 thru 11/19/99) ------------------------------------------------------------------------------------------------------------------------------------ Golder, Thoma, Cressey, 41.0% 376,370 188,185 188,185 21,161 45,584.5 45,852 865,337.5 Rauner Fund V, L.P. (as of 11/19/99) 6100 Sears Tower Chicago, IL 60606-6402 37.637% (from 6/30/98 thru 11/19/99) ------------------------------------------------------------------------------------------------------------------------------------ Rocco A. Ortenzio 12.20% 169,180 84,590 84,590 9,512 20,490 20,610 388,972 c/o Select Medical (as of 11/19/99) Corporation 4718 Old Gettysburg Road 16.918% P.O. Box 2034 (from 6/30/98 Mechanicsburg, PA 17055 thru 11/19/99) ------------------------------------------------------------------------------------------------------------------------------------ |
----------------------------------------------------------------------------------------------------------------------------------- Robert A. Ortenzio 5.8% 78,080 39,040 39,040 4,390 9,457 9,512 179,519 ------ ------ ------ ----- ----- ----- ------- c/o Select Medical (as of 11/19/99) Corporation 4718 Old Gettysburg Road 7.808% P.O. Box 2034 (from 6/30/98 Mechanicsburg, PA 17055 thru 11/19/99) ----------------------------------------------------------------------------------------------------------------------------------- 100.000% 1,000,000 500,000 500,000 56,224 121,116 121,826 2,299,166 ======= ========= ======= ======= ====== ======= ======= ========= ----------------------------------------------------------------------------------------------------------------------------------- |
Schedule II Guarantor or Co-Support Party Percentage ----------------------------- ---------- Welsh, Carson, Anderson & Stowe VII, L.P. 34.44% WCAS Capital Partners III, L.P. 6.56% Golder, Thoma, Cressey, Rauner Fund V, L.P. 41.1% Rocco Ortenzio 12.2% Robert Ortenzio 5.8% |
Memorandum to Sarah Gelb Michael Tarvin -------------- |
Attached is an executed copy of the Second Amended and Restated Warrant Agreement. As you know, the schedules to the Agreement were finalized post-closing. I would appreciate it if you could both review the schedules to confirm that they are in final form.
Please call me at (212) 841-0645 with any questions.
Susan M. Clee
EXHIBIT 10.33
THIS FIRST AMENDMENT is made as of this 15th day of October, 2000, by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer") , having an address c/o Select Medical Corporation, 4716 Old Gettysburg Road, P.O. Box 2034, Mechanicsburg, Pennsylvania 17055, and DAVID W. CROSS, an individual (the "Employee"), residing at 10 Lindworth Drive, St. Louis, Missouri 63124.
A. Employer and Employee executed and delivered that certain Employment Agreement, dated December 16, 1998 (the "Agreement"), pursuant to which Employer employed Employee to serve as its Senior Vice President - Development and to develop new long term acute care hospitals for Employer and to provide other services for Employer's businesses. All capitalized terms not specifically defined herein shall have the meanings ascribed to them in the Agreement.
B. Employer and Employee now desire to amend the Agreement as hereinafter provided.
NOW, THEREFORE, the parties hereto, intending to be legally bound hereby, covenant and agree as follows:
"This Agreement shall commence on the date hereof and remain in effect, unless this Agreement is terminated by either party hereto, or extended by the written agreement of both parties hereto, until December 31, 2001."
"You will be eligible to receive incentive compensation at such times and in such amounts as is determined by the Chairman or the President of Employer from time to time."
IN WITNESS WHEREOF, the parties hereto have caused this First Amendment to Employ-
ment Agreement to be executed the day and year first above written.
Employer:
SELECT MEDICAL CORPORATION, a Delaware
corporation
By: /s/ Robert A. Ortenzio ------------------------------------ Robert A. Ortenzio, President |
Employee:
/s/ David W. Cross --------------------------------------- David W. Cross |
Exhibit 10.34
THIS AMENDED AND RESTATED SENIOR MANAGEMENT AGREEMENT (this "Senior
Management Agreement") is made as of May 7, 1997, by and among Select Medical
Corporation, a Delaware corporation (the "Company"), John Ortenzio, Martin
Ortenzio, Select Investments II, a Pennsylvania general partnership (the
"Pennsylvania Partnership"), Select Partners, L.P., a Delaware limited
partnership (the "Delaware Partnership") and Rocco A. Ortenzio (the
"Executive"). The Pennsylvania Partnership and the Delaware Partnership are
sometimes individually referred to herein as a "Partnership" and collectively,
as the "Partnerships." Certain definitions are set forth in Section 11 of this
Senior Management Agreement.
WHEREAS, the Company, John Ortenzio, Martin Ortenzio, the Pennsylvania Partnership, the Delaware Partnership, and the Executive are parties to a Senior Management Agreement, dated as of February 5, 1997 (the "Original Agreement"). Pursuant to the Original Agreement, the Company sold and the Executive and each of the Partnerships purchased, shares of the Company's Common Stock, par value $.01 per share (the "Common Stock"). Pursuant to Supplement No. 1 to Purchase Agreement and Management Agreements, dated as of May 7, 1997 ("Supplement No. 1"), by and among the Company, the Pennsylvania Partnership, the Delaware Partnership, Executive, the Purchasers (as defined below) and certain other persons listed therein, Executive purchased additional shares of Common Stock and shares of Class A Preferred Stock, par value $.01 per share (the "Class A Preferred").
WHEREAS, the parties hereto wish to amend and restate the Original Agreement as set forth herein.
WHEREAS, pursuant to a purchase agreement (the "Purchase Agreement"), dated as of February 5, 1997, by and among the Company, Golder, Thoma, Cressey, Rauner Fund V, L.P. ("GTCR"), and Welsh, Carson, Anderson & Stowe VII, L.P. and certain of its partners ("WCAS," together with GTCR, the "Purchasers"), the Purchasers purchased shares of Common Stock. Pursuant to Supplement No. 1, the Purchasers purchased additional shares of Common Stock and shares of Class A Preferred. Pursuant to the Purchase Agreement, the Purchasers intend to purchase additional shares of Class A Preferred. Certain provisions of this Senior Management Agreement are intended for the benefit of, and will be enforceable by, the Purchasers.
The parties hereto agree as follows:
PROVISIONS RELATING TO STOCK
1. Purchase and Sale of Stock.
(a) Pursuant to the Original Agreement:
(i) Executive purchased, and the Company sold, 523,932 shares of Common Stock at a price of $0.50 per share (the "Executive Stock"). As a result of a two-for-one stock split of the Common Stock on March 11, 1997 (the "Stock Split"), the Executive owns 1,047,864 shares of Common Stock.
(ii) the Pennsylvania Partnership purchased, and the Company sold, an aggregate of 235,273 shares of Investor Common Stock (including those shares of Investor Common Stock purchased pursuant to the Original Ortenzio Agreement) at a price of $0.50 per share. As a result of the Stock Split, the Pennsylvania Partnership owned 470,546 shares of Common Stock. As a result of Supplement No. 1, the Pennsylvania Partnership owns 646,832 shares of Common Stock and 73 shares of Class A Preferred.
(iii) the Delaware Partnership purchased, and the Company sold, an aggregate of 283,623 shares of Investor Common Stock (including those shares of Investor Common Stock purchased pursuant to the Original Ortenzio Agreement) at a price of $0.50 per share. As a result of the Stock Split, the Delaware Partnership owned 567,246 shares of Common Stock. As a result of Supplement No. 1, the Delaware Partnership owns 780,000 shares of Common Stock and 206 shares of Class A Preferred.
(b) After giving effect to the Stock Split, upon the purchase from time to time by the Purchasers (a "Purchaser Closing") of additional shares of Class A Preferred pursuant to Section 1B(c) of the Purchase Agreement:
(i) the Pennsylvania Partnership will purchase (and the Executive will cause the Pennsylvania Partnership to purchase), and the Company will sell, up to an aggregate of 1,241.62 shares of Class A Preferred (including those shares of Class A Preferred purchased pursuant to the Ortenzio Senior Management Agreement) at a price of $1,000.00 per share (as adjusted from time to time as a result of stock dividends, stock splits, recapitalization and similar events occurring after the date of the Stock Split). The number of shares of Class A Preferred to be sold by the Company and purchased by the Pennsylvania Partnership at any Purchaser Closing shall equal: (1) 1,241.62 shares of Class A Preferred (as adjusted from time to time as a result of stock dividends, stock splits, recapitalization and similar events occurring after the date of the Stock Split), multiplied by (2) a fraction (A) the numerator of which will be the aggregate number of shares of such class of stock to be concurrently purchased by the Purchasers and (B) the denominator of which will be 44,862 shares of Class A Preferred (as adjusted from time to time as a result of stock dividends, stock splits, recapitalization and similar events occurring after the date of the Stock Split). The Company will deliver to the Pennsylvania Partnership the certificates representing such shares of Investor Stock purchased by the Pennsylvania Partnership, and the Pennsylvania
(d) Each Partnership's commitment to purchase shares of Investor Stock pursuant to this Senior Management Agreement shall terminate upon a Qualified Public Offering.
(e) In connection with the purchase and sale of the Stock pursuant to the Original Agreement and hereunder, Executive and each of the Partnerships did represent and warrant under the Original Agreement and will represent and warrant upon subsequent purchases of Stock hereunder, respectively, to the Company that:
(i) The Stock to be acquired by Executive and each of the Partnerships pursuant to this Senior Management Agreement will be acquired for Executive's and each Partnership's own account and not with a view to, or intention of, distribution thereof in violation of the Securities Act, or any applicable state securities laws, and the Stock will not be disposed of in contravention of the Securities Act or any applicable state securities laws.
(ii) Executive is an executive officer of the Company, is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Stock.
(iii) Each of the Partnerships (including the Other Partners) is sophisticated in financial matters and is able to evaluate the risks and benefits of the investment in the Stock.
(iv) Executive and each of the Partnerships (including the Other Partners) is able to bear the economic risk of its investment in the Stock for an indefinite period of time because the Stock has not been registered under the Securities Act and, therefore, cannot be sold unless subsequently registered under the Securities Act or an exemption from such registration is available.
(v) Executive and each of the Partnerships (including the Other Partners) has had an opportunity to ask questions and receive answers concerning the terms and conditions of the offering of Stock and has had full access to such other information concerning the Company as it has requested.
(vi) Executive and each of the Other Partners is a resident of the state of Pennsylvania.
(vii) The Pennsylvania Partnership is a general partnership duly formed under Pennsylvania law and has its principal place of business in the state of Pennsylvania. The Delaware Partnership is a limited partnership duly formed under Delaware law and has its principal place of business in the state of Pennsylvania.
(viii) This Senior Management Agreement constitutes the legal, valid and binding obligation of Executive and each of the Partnerships (including the Other Partners), enforceable in accordance with its terms, and the execution, delivery and performance of this Senior Management Agreement by Executive and each of the Partnerships (including the Other Partners) does not and will not conflict with, violate or cause a breach of any agreement, contract or instrument to which Executive or such Partnership (including the Other Partners) is a party or any judgment, order or decree to which Executive or such Partnership (includiig the Other Partners) is subject.
(ix) Executive, the Other Partners and Robert Ortenzio are the only partners of the Pennsylvania Partnership and the Delaware Partnership.
(f) As an inducement to the Company to issue the Stock to Executive and each of the Partnerships, and as a condition thereto, Executive and each of the Partnerships did acknowledge and agree and do acknowledge and agree that:
(i) neither the issuance of the Stock to Executive or any of the Partnerships nor any provision contained herein shall entitle Executive to remain in the
employment of the Company and its Subsidiaries or affect the right of the Company to terminate Executive's employment at any time for any reason; and
(ii) the Company shall have no duty or obligation to disclose to Executive nor to any of the Partnerships, and Executive and the Partnerships shall have no right to be advised of, any material information regarding the Company and its Subsidiaries upon or in connection with the repurchase of Stock upon the termination of Executive's employment with the Company and its Subsidiaries.
(g) At the time of any purchase of Investor Stock by either of the Partnerships pursuant to Sections 1(a)(ii), 1(a)(iii), 1(b)(i) and 1(b)(ii) above, the Company shall pay to Executive an investment fee in immediately available funds equal to one-half of one percent (.5%) of the amount paid to the Company in connection with such purchase. If any individual payment to Executive pursuant to this Section 1(g) would be less than $10,000, then such payment shall be held by the Company until such time as the aggregate of such payments equals or exceeds $10,000.
(a) Except as otherwise provided in Section 2(b) below, the Executive Stock will become vested in accordance with the following schedule:
Cumulative Percentage of Executive Anniversary Date Stock Vested ---------------- ----------------------- March 1, 1998 25% March 1, 1999 50% |
March 1, 200O 75%
March 1, 200l 100%
(b) If Executive ceases to be employed by the Company and its
Subsidiaries as a result of: (i) his termination by the Company without Cause or
(ii) the nonrenewal by the Company of any Renewal Term (as defined below) for
reasons without Cause, the Executive Stock shall fully vest automatically. If
Executive ceases to be employed by the Company and its Subsidiaries as a result
of his death or Disability, an additional 25% of the aggregate shares of
Executive Stock shall become vested at the time of such event. If Executive
ceases to be employed by the Company and its Subsidiaries for any reason other
than death, Disability, termination without Cause or nonrenewal by the Company
of any Renewal Term, the Executive Stock shall no longer continue to vest and if
Executive ceases to be employed on any date other than any anniversary date
prior to March 1, 2001,
the cumulative percentage of Executive Stock to become vested will be determined on a pro rata basis according to the number of days elapsed since the prior anniversary date. Upon the occurrence of a Sale of the Company (while Executive is employed by the Company), all shares of Executive Stock which have not yet become vested shall become vested at the time of such event. Upon the occurrence of a Qualified Public Offering (while Executive is employed by the Company), an additional 25% of the aggregate shares of Executive Stock (representing the final year of the vesting period) shall become vested at the time of such event.
Shares of Executive Stock which have become vested are referred to herein as "Vested Shares," and all other shares of Executive Stock are referred to herein as "Unvested Shares."
(a) In the event (i) Executive ceases to be employed by the Company and its Subsidiaries as a result of his termination by the Company for Cause, Executive's resignation or nonrenewal by Executive of any Renewal Term, the Executive Stock (whether held by Executive or one or more of the Executive's transferees, other than the Company or the Purchasers) will be subject to repurchase, (ii) Executive ceases to be employed by the Company and its Subsidiaries as a result of his death or Disability, the Unvested Shares of Executive Stock (whether held by Executive or one or more of the Executive's transferees, other than the Company or the Purchasers) will be subject to repurchase (any of the events in clause (i) or (ii) immediately above, a "Termination") or (iii) either Partnership fails to purchase any shares of the Class A Preferred or Investor Common Stock which it is required to purchase pursuant to Sections l(b)(i) and l(b)(ii) above (a "Triggering Event"), the Executive Stock and the Investor Stock (whether held by Executive, the Partnerships or one or more of their transferees, other than the Company or the Purchasers) will be subject to repurchase, in each case by the Company and the Purchasers pursuant to the terms and conditions set forth in this Section 3 (the "Repurchase Option").
(c) The Board may elect to purchase all or any portion of any class of the Executive Stock or Investor Stock by delivering written notice (the "Repurchase Notice") to the holder or holders of such Stock within one year after the Termination or Triggering Event. The Repurchase Notice will set forth the number of shares of Stock (including the number of unvested Shares and Vested Shares, if any) of each class to be acquired from each holder, the aggregate consideration to be paid for such shares and the time and place for the closing of the transaction. The number of shares to be repurchased by the Company shall first be satisfied to the extent possible from the shares of Stock held by Executive and the Partnerships at the time of delivery of the Repurchase Notice. If the number of shares of Stock then held by Executive and the Partnerships is less than the total number of shares of Stock which the Company has elected to purchase, the Company shall purchase the remaining shares elected to be purchased from the other holder(s) of Stock under this Senior Management Agreement, pro rata according to the number of shares of Stock held by such other holder(s) at the time of delivery of such Repurchase Notice (determined as nearly as practicable to the nearest share). The number of shares of each class of Stock to be repurchased hereunder will be allocated among Executive, the Partnerships and the other holders of Stock (if any) pro rata according to the number of shares of Stock to be purchased from such person.
(d) If for any reason the Company does not elect to purchase all of the Stock pursuant to the Repurchase Option, the Purchasers shall be entitled to exercise the Repurchase Option for the shares of Stock the Company has not elected to purchase (the "Available Shares"). As soon as practicable after the Company has determined that there will be Available Shares, but in any event within ten months after the Termination or Triggering Event, the Company shall give written notice (the "Option Notice") to the Purchasers setting forth the number of Available Shares and the purchase price for the Available Shares. The Purchasers may elect to purchase any or all of the Available Shares by giving written notice to the Company within one month after the Option Notice has been given by the Company. As soon as practicable, and in any event within ten days, after the expiration of the one-month period set forth above, the Company shall notify each holder of Stock as to the number of shares being purchased from such holder by the Purchasers (the "Supplemental Repurchase Notice"). If the Purchasers elect to purchase an aggregate number of shares greater than the Available Shares, the Available Shares will be allocated among the Purchasers based upon the number of shares of Common Stock held by such Purchaser on a fully-diluted basis. At the time the Company delivers the Supplemental Repurchase Notice to the holder(s) of such Stock, the Company shall also deliver written notice to each Purchaser setting forth the number of shares such Purchaser is entitled to purchase, the aggregate purchase price and the time and place of the closing of the transaction. The number of shares of each class of Stock to be repurchased hereunder shall be allocated among the Company and each Purchaser pro rata according to the number of shares of Stock to be purchased by each of them.
(e) The closing of the purchase of the Stock pursuant to the Repurchase Option shall take place on the date designated by the Company in the Repurchase Notice or Supplemental Repurchase Notice, which date shall not be more than one month nor less than five days after the delivery of the later of either such notice to be delivered. The Company and/or the Purchasers will pay for the Stock to be purchased pursuant to the Repurchase Option by delivery of a check or wire transfer of funds in the aggregate amount of the purchase price for such shares. In addition, the
Company may pay the purchase price for such shares by offsetting amounts outstanding under any bona fide debts owed by Executive or any of the Partnerships to the Company. The Company and the Purchasers will be entitled to receive customary representations and warranties from the sellers regarding such sale and to require all sellers' signatures be guaranteed.
(f) Notwithstanding anything to the contrary contained in this Senior Management Agreement, all repurchases of Stock by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Subsidiaries' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Stock hereunder which the Company is otherwise entitled or required to make, the Company may make such repurchases as soon as it is permitted to do so under such restrictions.
(g) Upon the occurrence of a Qualified Public Offering, the Repurchase Option shall terminate with respect to Vested Shares and all shares of Investor Stock.
Notice by giving written notice of such election to Executive, the Pennsylvania Partnership or the Delaware Partnership, as appropriate, within 90 days after the Sale Notice has been given to the Purchasers. If the Purchasers elect to purchase an aggregate number of shares greater than the Stock to be transferre, such Stock will be allocated among the Purchasers based upon the number of shares of Stock held by such Purchaser on a fully-diluted basis. If neither the Company nor the Purchasers elect to purchase all of the shares of Stock specified in the Sale Notice, Executive, the Pennsylvania Partnership or the Delaware Partnership, as the case may be, may transfer the shares of Stock specified in the Sale Notice, subject to the provisions of Section 4(d) below, at a price and on terms no more favorable to the transferee(s) thereof than specified in the Sale Notice during the 60-day period immediately following the Authorization Date. Any shares of Stock not transferred within such 60-day period will be subject to the provisions of this Section 4(c) upon subsequent transfer. The Company may pay the purchase price for such shares by offsetting amounts outstanding under any bona fide debts owed by Executive or the Partnerships to the Company.
(i) If neither the Company nor the Purchasers has elected
to purchase all of the Stock specified in the Sale Notice pursuant to
Section 4(c) above, the Purchasers may elect to participate in the
contemplated Transfer by delivering written notice to Executive, the
Pennsylvania Partnership or the Delaware Partnership, as appropriate, and
the Company within 100 days after receipt by the Purchasers of the Sale
Notice. If the Purchasers have elected to participate in such sale,
Executive, the Pennsylvania Partnership, or the Delaware Partnership, as
the case may be, and the Purchasers will be entitled to sell in the con-
templated sale, at the same price and on the same terms, a number of shares
of the Company's Common Stock equal to the product of(i) the quotient
determined by dividing the percentage of the Company's Common Stock (on a
fully-diluted basis) held by such person, by the aggregate percentage of
the Company's Common Stock (on a fully-diluted basis) owned by Executive
(including both Vested and Unvested Shares), the Pennsylvania Partnership
or the Delaware Partnership. as the case may be, and each Purchaser
participating in such sale and (ii) the number of shares of Common Stock to
be sold in the contemplated sale. Any purchaser in a sale subject to this
Section 4(d) will be required to purchase from the Purchasers, at each
Purchaser's election, a portion of the Class A Preferred held by such
Purchasers equal to the greater of the percentage of (x) such Purchaser's
Common Stock being sold in such transaction and(y) the Pennsylvania
Partnership's or the Delaware Partnership's Class A Preferred, as the
case may be, being sold in such transaction.
(1) the Sale Notice contemplated a sale of 100 shares of Common Stock;
(2) Executive was at such time the owner of 120 shares of Common Stock (which was equal to 30% of the Common Stock on a fully-diluted basis); and
(3) each Purchaser elected to participate and each Purchaser owned 40 shares of Common Stock (which was equal to 10% of Common Stock on a fully-diluted basis) and 120 shares of Class A Preferred;
(A) Executive would be entitled to sell 60 shares of Common Stock (30% / 50% x 100 shares); and
(B) each Purchaser would be entitled to sell 20 shares of Common Stock (10% / 50% x 100 shares) and 60 shares of Class A Preferred (the same percentage of the Purchaser's Class A Preferred as the percentage of the Purchaser's Common Stock being sold, i.e., 50%).
Executive, the Pennsylvania Partnership and the Delaware Partnership will use their best efforts to obtain the agreement of the prospective transferee(s) to the participation of the Purchasers in the contemplated Transfer and will not transfer any Stock to the prospective transferee(s) if such transferee(s) refuses to allow the participation of the Purchasers.
(ii) Each holder transferring any class of Stock pursuant to this Section 4(d) shall pay its pro rata share (based on the number of such shares to be sold) of the expenses incurred by the holders in connection with such Transfer and shall be obligated to join on a pro rata basis (based on the number of such shares to be sold) in any indemnification or other obligations that the Executive or any of the Partnerships agree to provide in connection with such Transfer (other than any such obligations that relate specifically to a particular holder such as indemnification with respect to representations and warranties given by a holder regarding such holder's title to and ownership of such shares; provided that no holder shall be obligated in connection with such Transfer to agree to indemnify or hold harmless the transferees with respect to an amount in excess of the net cash proceeds paid to such holder in connection with such Transfer).
any Partnership Interests, in each case unless (i) prior written consent of each Purchaser is obtained or (ii) such Transfer complies with all of the transfer restrictions or provisions applicable to the Transfer of Stock (treating such Partnership Interests as if such Partnership Interests were Stock).
"THE SECURITIES REPRESENTED BY THIS CERTIFICATE WERE ORIGINALLY ISSUED AS OF ___________, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD OR TRANSFERRED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT OR AN EXEMPTION FROM REGISTRATION THEREUNDER THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE ALSO SUBJECT TO ADDITIONAL RESTRICTIONS ON TRANSFER, CERTAIN REPURCHASE OPTIONS AND CERTAIN OTHER AGREEMENTS SET FORTH IN AN AMENDED AND RESTATED SENIOR MANAGEMENT AGREEMENT BETWEEN THE COMPANY, AN EXECUTIVE OF THE COMPANY AND CERTAIN OTHER PARTIES DATED AS OF MAY 7, 1997, AS AMENDED AND SUPPLEMENTED FROM TIME TO TIME. A COPY OF SUCH AGREEMENT MAY BE OBTAINED BY THE HOLDER HEREOF AT THE COMPANY'S PRINCIPAL PLACE OF BUSINESS WITHOUT CHARGE."
(i) Except for the issuance of Common Stock (a) to the Other
Executives pursuant to the Other Senior Management Agreements, (b) to the
Partnerships and Robert Ortenzio pursuant to this Senior Management Agreement
and the Ortenzio Senior Management Agreement, (c) to the Purchasers pursuant to
the Purchase Agreement, (d) in connection with acquisitions as contemplated by
Section lB(c) of the Purchase Agreement, or (e) pursuant to a public offering
registered under the Securities Act, if the Company at any time after the
Closing authorizes the
issuance or sale of any shares of Common Stock or any securities containing options or rights to acquire any shares of Common Stock (other than as a dividend on the outstanding Common Stock), the Company shall first offer to sell to each holder of Stock a portion of such stock or securities equal to the quotient determined by dividing (1) the number of shares of Common Stock held by such holder by (2) the total number of shares of Common Stock outstanding on a fully-diluted basis immediately prior to such issuance. Each holder of Stock (accepting such offer) shall also purchase the same percentage of any other class of Company securities (whether debt or equity) being sold with the Common Stock. Each holder of Stock shall be entitled to purchase all or any portion of such stock or securities at the most favorable price and on the most favorable terms as such stock or securities are to be offered to any other Persons.
(ii) In order to exercise its purchase rights hereunder, a holder of Stock must within 15 days after receipt of written notice from the Company describing in reasonable detail the stock or securities being offered, the purchase price thereof, the payment terms and such holder's percentage allotment deliver a written notice to the Company describing its election hereunder. If all of the stock and securities offered to the holders of Stock is not fully subscribed by such holders, the remaining stock and securities shall be reoffered by the Company to the holders purchasing their full allotment upon the terms set forth in this paragraph, except that such holders must exercise their purchase rights within five days after receipt of such reoffer.
(iii) In the event that any Other Executive elects not to purchase shares of Common Stock (or any other class of Company securities being sold with the Common Stock) pursuant to the Other Senior Management Agreements (the "Preemptive Shares"), then at the same price and upon the same terms, Executive shall have the option to purchase any or all of such Preemptive Shares. In the event that Executive and Robert Ortenzio elect to purchase an aggregate number of shams greater than the Preemptive Shares, the Preemptive Shares will be allocated among Executive and Robert Ortenzio based upon the number of shares of Common Stock held by such person on a fully-diluted basis.
(iv) Upon the expiration of the offering periods described above, the Company shall be entitled to sell such stock or securities which the holders of Stock have not elected to purchase during the 90 days following such expiration on terms and conditions no more favorable to the purchasers thereof than those offered to such holders. Any stock or securities offered or sold by the Company after such 90-day period must be reoffered to the holders of Stock pursuant to the terms of this Section 6.
(v) Nothing contained in this Section 6 shall be deemed to amend, modify or limit in any way the restrictions on the issuance of shares of Common Stock set forth in the Purchase Agreement, in the Stockholders Agreement or in any other agreement to which the Company is bound.
Registration (as defined in the Registration Agreement, dated as of February 5, 1997, among the Executive, the Company, the Purchasers and certain other parties, the "Registration Agreement") or any underwritten Piggyback Registration (as defined in the Registration Agreement) in which any shares of Stock are included (except as part of such underwritten registration), unless the underwriters managing the registered public offering otherwise agree.
PROVISIONS RELATING TO EMPLOYMENT
(i) The Employment Period will continue until February 5, 1998
(the "Initial Term") and shall be renewed automatically for successive one
year periods (each a "Renewal Term") unless the Company or the Executive
gives the other party written notice of nonrenewal at least 30 days prior
to the expiration of the Initial Term or any Renewal Term; provided that
(i) the Employment Period shall automatically terminate upon Executive's
resignation, death or Disability and (ii) the Employment Period may be
terminated by the Company at any time prior to such date for Cause or
without Cause.
(ii) If Executive's employment is terminated by the Company without Cause, until the end of the six-month period commencing on the date of termination, the
Company shall continue to pay to Executive, his Annual Base Salary on
regular salary payment dates. In addition, the Company shall have the
option, by delivering written notice to Executive, to extend the severance
period from six months to a period of up to one year after the date
of termination (the "Extended Period"). If the Employment Period is
terminated by the Company for Cause or is terminated pursuant to clause
(c)(i)(i) above, Executive shall be entitled to receive his Base Salary
through the date of termination. All of Executive's other rights to
benefits and bonuses hereunder (if any) shall automatically cease upon
termination of the Employment Period.
iary to cease doing business with the Company or such Subsidiary, or in any way interfere with the relationship between any such customer, supplier, licensee or business relation and the Company or any Subsidiary.
GENERAL PROVISIONS
negligence or willful misconduct with respect to the Company or any of its Subsidiaries or (v) any other material breach of this Senior Management Agreement.
Stock will also include shares of the Company's capital stock issued with respect to Investor Common Stock by way of a stock split, stock dividend or other recapitalization.
Purchasers in the aggregate acquire(s) (i) capital stock of the Company possessing the voting power (other than voting rights accruing only in the event of a default, breach or event of noncompliance) to elect a majority of the Company's board of directors (whether by merger, consolidation, reorganization, combination, sale or transfer of the Company's capital stock, shareholder or voting agreement, proxy, power of attorney or otherwise) or (ii) all or substantially all of the Company's assets determined on a consolidated basis; provided that the term "Sale of the Company" shall not include any sale of equity securities by the Company in a private or public offering to other investors selected by the Purchasers.
Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, Pennsylvania 17055
Attention: Chairman and Chief Executive Officer
c/o Select Medical Corporation
(At the address as set forth above)
c/o Select Medical Corporation
(At the address as set forth above)
Golder, Thoma, Cressey Fund V, L.P.
6100 Sears Tower
Chicago, Illinois 60606-6402
Attention: Bryan C. Cressey
Kirkland & Ellis
200 East Randolph Drive
Chicago, Illinois 60601
Attention: Kevin R. Evanich
Welsh, Carson, Anderson & Stowe VII, L.P.
320 Park Avenue
New York, New York 10022
Attention: James B. Hoover
Reboul, MacMurray, Hewitt, Maynard & Kristol 45 Rockefeller Plaza New York, New York 10111 Attention: William J. Hewitt
or such other address or to the attention of such other person as the recipient party shall have specified by prior written notice to the sending party. Any notice under this Senior Management Agreement will be deemed to have been given when so delivered or sent or, if mailed, five days after deposit in the U.S. mail.
Management Agreement and the consummation of the transactions contemplated by the Original Agreement and this Senior Management Agreement; provided, however, that the Company will in no event be responsible for any expenses incurred in excess of $25,000.
Agreement specifically, to recover damages and costs (including attorneys' fees) caused by any breach of any provision of this Senior Management Agreement and to exercise all other rights existing in its favor. The parties hereto agree and acknowledge that money damages may not be an adequate remedy for any breach of the provisions of this Senior Management Agreement and that any party may in its sole discretion apply to any court of law or equity of competent jurisdiction (without posting any bond or deposit) for specific performance and/or other injunctive relief in order to enforce or prevent any violations of the provisions of this Senior Management Agreement.
* * * * *
IN WITNESS WHEREOF, the parties hereto have executed this Senior Management Agreement on the date first written above.
SELECT MEDICAL CORPORATION
By: /s/ Rocco A. Ortenzio ------------------------------- Its: Illegible ------------------------------- /s/ Rocco A. Ortenzio ----------------------------------- Rocco A. Ortenzio /s/ John Ortenzio ----------------------------------- John Ortenzio /s/ Martin Ortenzio ----------------------------------- Martin Ortenzio |
SELECT INVESTMENTS
By: /s/ Rocco A. Ortenzio ------------------------------- Its: General Partner ------------------------------- |
SELECT PARTNERS, L.P.
By: /s/ Rocco A. Ortenzio ------------------------------- Its: General Partner ------------------------------- |
Agreed and Accepted:
GOLDER THOMA, CRESSEY, RAUNER FUND V, L.P.
By: GTCR V, L.P. Its: General Partner By: Golder, Thoma, Cressey, Rauner, Inc. Its: General Partner By: -------------------------------------- Its: Principal |
IN WITNESS WHEREOF, the parties hereto have executed this Senior |
Management Agreement on the date first written above.
SELECT MEDICAL CORPORATION
SELECT INVESTMENTS LIMITED
SELECT PARTNERS LIMITED
Agreed and Accepted:
GOLDER THOMA, CRESSEY, RAUNER FUND V, L.P.
By: GTCR V, L.P. Its: General Partner By: Golder, Thoma, Cressey, Rauner, Inc. Its: General Partner By: Illegible ------------------------------------- Its: Principal |
WELSH, CARSON, ANDERSON & STOWE VII, L.P.
By: /s/ Laura Van Buren ----------------------------------- Its: General Partner ----------------------------------- |
WELSH, CARSON, ANDERSON & STOWE
HEALTHCARE PARTNERS, L.P.
By: /s/ Laura Van Buren ----------------------------------- Its: General Partner ----------------------------------- |
/s/ Laura Van Buren --------------------------------------- Bruce Anderson /s/ Laura Van Buren --------------------------------------- Russell Carson /s/ Laura Van Buren --------------------------------------- Patrick Welsh /s/ Laura Van Buren --------------------------------------- Richard Stowe /s/ Laura Van Buren --------------------------------------- Andrew Paul /s/ Laura Van Buren --------------------------------------- Thomas McInerney /s/ Laura Van Buren --------------------------------------- Laura Van Buren /s/ Laura Van Buren --------------------------------------- James Hoover /s/ Laura Van Buren --------------------------------------- Robert Minicucci /s/ Laura Van Buren --------------------------------------- Anthony De Nicola /s/ Laura Van Buren --------------------------------------- Paul Queally |
/s/ David Bellet --------------------------------------- David Bellet |
MSTC, custodian FBO the IRA/Rollover
of James B. Hoover
MSTC, custodian FBO the IRA/Rollover
of James B. Hoover
EXHIBIT A
________________, 1997
ELECTION TO INCLUDE STOCK IN GROSS
INCOME PURSUANT TO SECTION 83(b) OF THE
INTERNAL REVENUE CODE
The undersigned purchased shares of Class A Preferred Stock, par value $.01
per share (the "Shares"), of Select Medical Corporation (the "Company") on
_______, 1997. Under certain circumstances, the Company has the right to
repurchase certain of the Shares at Liquidation Value (as such term is defined
in the Company's Certificate of Incorporation) from the undersigned (or from the
holder of the Shares, if different from the undersigned) upon certain events.
Hence, the Shares may be subject to a substantial risk of forfeiture that may
not be avoided by a transfer of the Shares to another person. The undersigned
desires to make an election to have the Shares taxed under the provision of
Section 83(b) of the Internal Revenue Code of 1986, as amended (the "Code") at
the time he purchased the Shares.
Therefore, pursuant to Code (S)83(b) and Treasury Regulation (S)1.83-2 promulgated thereunder, the undersigned hereby makes an election, with respect to the Shares (described below), to report as taxable income for calendar year 1997 the excess (if any) of the Shares' fair market value on _____, 1997 over the purchase price thereof.
The following information is supplied in accordance with Treasury Regulation (S)1.83-2(e):
1. The name, address and social security number of the undersigned:
[___________________]
c/o Select Medical Corporation
4718 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Social Security Number: ___________________
2. A description of the property with respect to which the election is being made: ________ shares of Class A Preferred Stock, par value $.01 per share, of the Company.
3. The date on which the property was transferred: ___________, 1997. The taxable year for which such election is made: calendar 1997.
4. The restrictions to which the property is subject: If a certain partnership of the undesigned does not purchase certain shares of the Company's capital stock, the Shares will be subject to repurchase by the Company at Liquidation Value (as such term is defined in the Company's Certificate of Incorporation).
5. The fair market value on ________, 1997 of the property with respect to which the election is being made, determined without regard to any lapse restrictions: $_________ per share of Class A Preferred Stock
6. The amount paid for such property: $l,000.00 per share of Class A Preferred Stock.
A copy of this election has been furnished to the Secretary of the Company pursuant to Treasury Regulations (S)1.83-2(d).
EXHIBIT 10.35
This is an Amendment, dated January 1, 2000 (the "Amendment") to the Amended and Restated Senior Management Agreement made as of the 7th day of May, 1997 (the "Senior Management Agreement") by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Company"), and ROCCO A. ORTENZIO, an individual (the "Executive").
The Company and the Executive executed and delivered the Senior Management Agreement. The Company and the Executive now desire to amend the Senior Management Agreement as hereinafter provided.
Accordingly, and intended to be legally bound hereby, the Company and the Executive agree as follows:
1. The Senior Management Agreement is hereby amended by addition of the following new Section 8(d):
(1) during the year 2000, the Company will pay a total of $1,190,000, plus;
(2) an amount equal to $18,000 per month for each calendar month in calendar 2000 following the Refinancing Date (as hereinafter defined), plus a pro rata portion of that amount for the calendar month in which the Refinancing Date occurs; provided that:
policies are surrendered, the Company will be entitled to be repaid that percentage of the aggregate premiums paid hereunder that the cash value received upon such surrender is of the total cash value of the policies upon with the Company has paid premiums hereunder.
2. For purposes of the Employment Agreement, as amended by Amendment No. 1, the term "Refinancing Date" shall mean the first date upon which:
a. the Company has closed the refinancing of its Second Amended and Restated Credit Agreement dated as of November 19, 1999, to the reasonable satisfaction of the Company; and
b. after that refinancing has been accomplished, the debt created thereby is solely that of the Company (and its subsidiaries) and no shareholder or other investor in the Company guarantees or is otherwise directly obligated to repay that debt.
4. Except as amended hereby, the Employment Agreement shall continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first above written.
SELECT MEDICAL CORPORATION
Attest: /s/ Michael E. Tarvin By: /s/ Scott A. Romberger ----------------------------- --------------------------------- Michael E. Tarvin, Scott A. Romberger, Secretary Vice President and Controller Witness: [ILLEGIBLE] /s/ Rocco A. Ortenzio (SEAL) ---------------------------- ------------------------------ Rocco A. Ortenzio |
Exhibit 21.1
U.S. Subsidiaries State of Incorporation ----------------- ---------------------- Abel Center for Rehabilitation Therapies, Inc. Oregon Abel Healthcare Network, Inc. Oregon Affiliated Physical Therapists, Ltd. Arizona Allegany Hearing and Speech, Inc. Maryland American Rehabilitation Center, Inc. Missouri American Rehabilitation Clinic, Inc. Missouri American Transitional Hospitals, Inc. Delaware Athens Sport Medicine Clinic, Inc. Georgia Ather Sports Injury Clinic, Inc. California Atlantic Health Group, Inc. Delaware Atlantic Rehabilitation Services, Inc. New Jersey Boca Rehab Agency, Inc. Delaware Buendel Physical Therapy, Inc. Florida C.E.R. - West, Inc. Michigan CCISUB, Inc. North Carolina CMC Center Corporation California Cenla Physical Therapy & Rehabilitation Agency, Inc. Louisiana Center for Evaluation & Rehabilitation, Inc. Michigan Center for Physical Therapy and Sports Rehabilitation, Inc. New Mexico CenterTherapy, Inc. Minnesota Central Missouri Rehabilitation Services, Inc. Missouri Central Missouri Therapy, Inc. Missouri Champion Physical Therapy, Inc. Pennsylvania C.O.A.S.T. Institute Physical Therapy, Inc. California Coplin Physical Therapy Associates, Inc. Minnesota Crowley Physical Therapy Clinic, Inc. Louisiana Douglas Avery & Associates, Ltd. Virginia Douglas C. Claussen, R.P.T., Physical Therapy, Inc. California Elk County Physical Therapy, Inc. Pennsylvania Fine, Bryant & Wah, Inc. Maryland Francis Naselli, Jr. & Stewart Rich Physical Therapists, Inc. Pennsylvania Gallery Physical Therapy Center, Inc. Minnesota Georgia NovaCare Ventures, Inc. Georgia Georgia Physical Therapy of West Georgia, Inc. Georgia Georgia Physical Therapy, Inc. Georgia Greater Sacramento Physical Therapy Associates, Inc. California Grove City Physical Therapy and Sports Medicine, Inc. Pennsylvania Gulf Breeze Physical Therapy, Inc. Florida Gulf Coast Hand Specialists, Inc. Florida Hand Therapy and Rehabilitation Associates, Inc. California Hand Therapy Associates, Inc. Arizona Hangtown Physical Therapy, Inc. California |
U.S. Subsidiaries State of Incorporation ----------------- ---------------------- Hawley Physical Therapy, Inc. California Human Performance and Fitness, Inc. California Indianapolis Physical Therapy and Sports Medicine, Inc. Indiana Industrial Health Care Company Connecticut Intensiva Healthcare Corporation Delaware Intensiva Hospital of Greater St. Louis, Inc. Missouri Joyner Sports Science Institute, Inc. Pennsylvania Joyner Sportsmedicine Institute, Inc. Pennsylvania Kentucky Rehabilitation Services, Inc. Kentucky Kesinger Physical Therapy, Inc. California Lynn M. Carlson, Inc. Arizona Mark Butler Physical Therapy Center, Inc. New Jersey Medical Plaza Physical Therapy, Inc. Missouri Metro Rehabilitation Services, Inc. Michigan Michigan Therapy Centre, Inc. Michigan MidAtlantic Health Group, Inc. Delaware Mitchell Tannenbaum I, Inc. Illinois Mitchell Tannenbaum II, Inc. Illinois Mitchell Tannenbaum III, Inc. Illinois Monmouth Rehabilitation, Inc. New Jersey New England Health Group, Inc. Massachusetts New Mexico Physical Therapists, Inc. New Mexico Northside Physical Therapy, Inc. Ohio NovaCare Occupational Health Services, Inc. Delaware NovaCare Outpatient Rehabilitation East, Inc. Delaware NovaCare Outpatient Rehabilitation I, Inc. Kansas NovaCare Outpatient Rehabilitation, Inc. Kansas NovaCare Outpatient Rehabilitation West, Inc. Delaware NovaCare Rehabilitation, Inc. Minnesota Ortho Rehab Associates, Inc. Florida Orthopedic and Sports Physical Therapy of Cupertino, Inc. California P.T. Services Company Ohio P.T. Services, Inc. Ohio P.T. Services Rehabilitation, Inc. Ohio Peter Trailov R.P.T. Physical Therapy Clinic, Orthopaedic Rehabilitation & Sports Medicine, Ltd. Illinois Peters, Starkey & Todrank Physical Therapy Corporation California Physical Focus, Inc. Delaware Physical Rehabilitation Partners, Inc. Louisiana Physical Therapy Clinic of Lee's Summit, Inc. Missouri Physical Therapy Enterprises, Inc. Arizona Physical Therapy Institute, Inc. Louisiana Physical Therapy Services of the Jersey Cape, Inc. New Jersey Physio-Associates, Inc. Pennsylvania Pro Active Therapy of Ahoskie, Inc. North Carolina Pro Active Therapy of Gaffney, Inc. South Carolina |
U.S. Subsidiaries State of Incorporation ----------------- ---------------------- Pro Active Therapy of Greenville, Inc. North Carolina Pro Active Therapy of North Carolina, Inc. North Carolina Pro Active Therapy of Rocky Mount, Inc. North Carolina Pro Active Therapy of South Carolina, Inc. South Carolina Pro Active Therapy of Virginia, Inc. Virginia Pro Active Therapy, Inc. North Carolina Professional Therapeutic Services, Inc. Ohio Quad City Management, Inc. Iowa RCI (Colorado), Inc. Delaware RCI (Exertec), Inc. Delaware RCI (Illinois), Inc. Delaware RCI (Michigan), Inc. Delaware RCI (S.P.O.R.T.), Delaware RCI (WRS), Inc. Delaware RCI Nevada, Inc. Delaware Rebound Oklahoma, Inc. Oklahoma Redwood Pacific Therapies, Inc. California Rehab Advantage, Inc. Delaware Rehab Managed Care of Arizona, Inc. Delaware Rehab Provider Network - California, Inc. California Rehab Provider Network - Delaware, Inc. Delaware Rehab Provider Network - Georgia, Inc. Georgia Rehab Provider Network - Illinois, Inc. Illinois Rehab Provider Network - Indiana, Inc. Indiana Rehab Provider Network - Maryland, Inc. Maryland Rehab Provider Network - Michigan, Inc. Michigan Rehab Provider Network - New Jersey, Inc. New Jersey Rehab Provider Network - Ohio, Inc. Ohio Rehab Provider Network - Oklahoma, Inc. Oklahoma Rehab Provider Network - Pennsylvania, Inc. Pennsylvania Rehab Provider Network - Virginia, Inc. Virginia Rehab Provider Network - Washington, D.C., Inc. District of Columbia Rehab Provider Network of Colorado, Inc. Colorado Rehab Provider Network of Florida, Inc. Florida Rehab Provider Network of Nevada, Inc. Nevada Rehab Provider Network of New Mexico, Inc. New Mexico Rehab Provider Network of North Carolina, Inc. North Carolina Rehab Provider Network of Texas, Inc. Texas Rehab Provider Network of Wisconsin, Inc. Wisconsin Rehab World, Inc. Delaware Rehab/Work Hardening Management Associates, Ltd. Pennsylvania RehabClinics (COAST), Inc. Delaware RehabClinics (GALAXY), Inc. Illinois RehabClinics (New Jersey), Inc. Delaware RehabClinics (PTA), Inc. Delaware RehabClinics (SPT), Inc. Delaware |
U.S. Subsidiaries State of Incorporation ----------------- ---------------------- RehabClinics Abilene, Inc. Delaware RehabClinics Dallas, Inc. Delaware RehabClinics Pennsylvania, Inc. Pennsylvania RehabClinics, Inc. Delaware Rehabilitation Management, Inc. Delaware Rehabilitation Network, Inc. Oregon Robert M. Bacci, R.P.T. Physical Therapy, Inc. California S.T.A.R.T., Inc. Massachusetts Scott G. Knoche, Inc. Missouri Select Air Corporation Delaware Select Employment Services, Inc. Delaware Select Houston Investors, Inc. Delaware SelectMark, Inc. Delaware Select Medical of Kentucky, Inc. Delaware Select Medical of Maryland, Inc. Delaware Select Medical of New Jersey, Inc. Delaware Select Medical of New York, Inc. Delaware Select Medical of Ohio, Inc. Delaware Select Medical of Pennsylvania, Inc. Delaware Select Specialty Hospital - Akron, Inc. Missouri Select Specialty Hospital - Ann Arbor, Inc. Missouri Select Specialty Hospital - Battle Creek, Inc. Missouri Select Specialty Hospital - Beech Grove, Inc. Missouri Select Specialty Hospital - Biloxi, Inc. Mississippi Select Specialty Hospital - Camp Hill, Inc. Delaware Select Specialty Hospital - Central Detroit, Inc. Delaware Select Specialty Hospital - Charleston, Inc. Delaware Select Specialty Hospital - Cincinnati, Inc. Missouri Select Specialty Hospital - Columbus, Inc. Delaware Select Specialty Hospital -Columbus/University, Inc. Missouri Select Specialty Hospital - Dallas, Inc. Delaware Select Specialty Hospital - Denver, Inc. Delaware Select Specialty Hospital - Durham, Inc. Delaware Select Specialty Hospital - Eastern Oklahoma, Inc. Missouri Select Specialty Hospital - Erie, Inc. Delaware Select Specialty Hospital - Evansville, Inc. Missouri Select Specialty Hospital - Flint, Inc. Missouri Select Specialty Hospital - Fort Smith Missouri Select Specialty Hospital - Fort Wayne, Inc. Missouri Select Specialty Hospital - Greensburg, Inc. Delaware Select Specialty Hospital - Houston, Inc. Delaware Select Specialty Hospital - Indianapolis, Inc. Delaware Select Specialty Hospital - Johnstown, Inc. Missouri Select Specialty Hospital - Kansas City, Inc. Missouri Select Specialty Hospital - Knoxville, Inc. Delaware Select Specialty Hospital - Little Rock, Inc. Delaware Select Specialty Hospital - Louisville, Inc. Delaware |
U.S. Suubsidiaries State of Incorporation ------------------ ---------------------- Select Specialty Hospital - Macomb County, Inc. Missouri Select Specialty Hospital - Memphis, Inc. Delaware Select Specialty Hospital - Mesa, Inc. Delaware Select Specialty Hospital - Miami, Inc. Delaware Select Specialty Hospital - Milwaukee, Inc. Delaware Select Specialty Hospital - Morgantown, Inc. Delaware Select Specialty Hospital - Nashville, Inc. Delaware Select Specialty Hospital - New Orleans, Inc. Delaware Select Specialty Hospital - North Knoxville, Inc. Missouri Select Specialty Hospital - Northwest Detroit, Inc. Delaware Select Specialty Hospital - Northwest Indiana, Inc. Missouri Select Specialty Hospital - Oklahoma City/East Campus, Inc. Missouri Select Specialty Hospital - Oklahoma City, Inc. Delaware Select Specialty Hospital - Omaha, Inc. Missouri Select Specialty Hospital - Philadelphia/AEMC, Inc. Missouri Select Specialty Hospital - Phoenix, Inc. Delaware Select Specialty Hospital - Pittsburgh, Inc. Missouri Select Specialty Hospital - Pontiac, Inc. Missouri Select Specialty Hospital - Reno, Inc. Missouri Select Specialty Hospital - San Antonio, Inc. Delaware Select Specialty Hospital - Sioux Falls, Inc. Missouri Select Specialty Hospital - Topeka, Inc. Missouri Select Specialty Hospital - TriCities, Inc. Delaware Select Specialty Hospital - Tulsa, Inc. Delaware Select Specialty Hospital - West Columbus, Inc. Delaware Select Specialty Hospital - Western Michigan, Inc. Missouri Select Specialty Hospital - Wichita, Inc. Missouri Select Specialty Hospital - Wilmington, Inc. Missouri Select Specialty Hospital - Wyandotte, Inc. Delaware Select Specialty Hospital - Youngstown, Inc. Missouri Select Specialty Hospitals, Inc. Delaware Select Synergos, Inc. Delaware Select Unit Management, Inc. Delaware Sierra Nevada Physical Therapy Corporation California SMC of Florida, Inc. Delaware South Jersey Physical Therapy Associates, Inc. New Jersey South Jersey Rehabilitation and Sports Medicine Center, Inc. New Jersey Southpointe Fitness Center, Inc. Pennsylvania Southwest Emergency Associates, Inc. Arizona Southwest Medical Supply Company New Mexico Southwest Physical Therapy, Inc. New Mexico Southwest Therapists, Inc. New Mexico Sporthopedics Sports and Physical Therapy Centers, Inc. California Sports & Orthopedic Rehabilitation Services, Inc. Florida Sports Therapy and Arthritis Rehabilitation, Inc. Delaware Sprint Physical Therapy, P.C. Colorado |
U.S. Subsidiaries State of Incorporation ----------------- ---------------------- Star Physical Therapy, Inc. Florida Stephenson-Holtz, Inc. California The Center for Physical Therapy and Rehabilitation, Inc. New Mexico The Orthopedic Sports and Industrial Rehabilitation Network, Inc Pennsylvania Theodore Dashnaw Physical Therapy, Inc. California Treister, Inc. Ohio Union Square Center for Rehabilitation & Sports Medicine, Inc. California Valley Group Physical Therapists, Inc. Pennsylvania Vanguard Rehabilitation, Inc. Arizona Wayzata Physical Therapy Center, Inc. Minnesota West Penn Rehabilitation Services, Inc. Pennsylvania West Side Physical Therapy, Inc. Ohio West Suburban Health Partners Minnesota Western Missouri Rehabilitation Services, Inc. Missouri Worker Rehabilitation Services, Inc. Illinois Yuma Rehabilitation Center, Inc. Arizona |
Canadian Subsidiaries Province of Incorporation --------------------- ------------------------- Canadian Back Institute Limited Ontario 1263568 Ontario Limited Ontario Deer Valley Physical Therapy, Inc. Alberta Dynamic Rehabilitation, Inc. Ontario Eastern Rehabilitation, Inc. Ontario Hospital-Side Physiotherapy Clinic, Inc. Alberta U.S. Partnerships and Limited Liability Companies State of Formation ------------------------------------------------- ------------------ Avalon Rehabilitation & Healthcare, LLC Delaware Joyner/Wendt-Bristol, L.L.C. Delaware Kentucky Orthopedic Rehabilitation, LLC Delaware Millennium Rehab Services, LLC Delaware Mountain Top Rehab, LLC Maryland NW Rehabilitation Associates, L.P. Delaware Rehab Advantage Therapy Services, LLC Delaware Select Management Services, LLC Delaware Select Specialty Hospital - Houston, L.P. Delaware Select South NJ Management Services, LLC Delaware TJ Corporation I, L.L.C. Delaware T.J. Partnership I Delaware Canadian Limited Partnerships Province of Declaration of Partnership ----------------------------- -------------------------------------- CBI Barrie Limited Partnership Ontario CBI Brampton Limited Partnership Ontario CBI Burnaby Limited Partnership Ontario CBI Calgary Limited Partnership Ontario CBI Cambridge Limited Partnership Ontario CBI Edmonton Limited Partnership Ontario CBI Fraser Valley Limited Partnership Ontario CBI Gatineau Limited Partnership Ontario CBI Halifax Limited Partnership Ontario CBI Kitchener Limited Partnership Ontario CBI Lethbridge Limited Partnership Ontario CBI London East Limited Partnership Ontario CBI London Limited Partnership Ontario CBI Mississauga Limited Partnership Ontario CBI Montreal Limited Partnership Ontario CBI Niagara Limited Partnership Ontario CBI North York Limited Partnership Ontario CBI Ottawa Limited Partnership Ontario CBI Ottawa West Limited Partnership Ontario CBI Port Coquitlam Limited Partnership Ontario CBI Regina Limited Partnership Ontario CBI Richmond Limited Partnership Ontario |
CBI Sarnia Limited Partnership Ontario CBI St. Clair West Limited Partnership Ontario CBI South Calgary Limited Partnership Ontario CBI South Scarborough Limited Partnership Ontario CBI Sudbury Limited Partnership Ontario CBI Surrey Limited Partnership Ontario CBI Toronto Limited Partnership Ontario CBI Vancouver Limited Partnership Ontario CBI Victoria Limited Partnership Ontario CBI Windsor Limited Partnership Ontario CBI Winnipeg Limited Partnership Ontario Part II - Other Equity Investments U.S. Minority Interests State of Formation ----------------------- ------------------ GP Therapy, L.L.C. Georgia Garrett Rehab Services, LLC Maryland Gill/Balsano Consulting, L.L.C. Delaware Mercy/Joyner Associates Pennsylvania Optima Rehabilitation Services, Ltd. Ohio Optima Rehabilitation Services II, Ltd. Ohio Raffles Insurance Limited Cayman Islands Work Horizons, Ltd. Ohio Canadian Minority Interests Province of Incorporation --------------------------- ------------------------- CBI Physical Therapy Inc. Ontario CBI Physiotherapists Corp. Ontario CBI Professional Services Inc. Ontario |
Exhibit 23.1
We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated October 26, 2000 relating to the financial statements and financial statement schedules of Select Medical Corporation, which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" and "Selected Consolidated Financial and Other Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP Harrisburg, Pennsylvania October 27, 2000 |
EXHIBIT 23.2
CONSENT OF INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" and to the use of our report dated November 18, 1998, with respect to the consolidated financial statements of American Transitional Hospitals, Inc. included in this Registration Statement (Form S-1) and related Prospectus of Select Medical Corporation.
/s/ ERNST & YOUNG LLP Nashville, Tennessee October 25, 2000 |
Exhibit 23.3
The Board of Directors
Select Medical Corporation:
We consent to the inclusion of our report dated April 9, 1999, relating to the consolidated balance sheets of Intensiva HealthCare Corporation and subsidiaries as of December 15, 1998 and December 31, 1997, and the related consolidated statements of operations, stockholders' equity, and cash flows for the period from January 1, 1998 through December 15, 1998 and the year ended December 31, 1997, in the registration statement on Form S-1 of Select Medical Corporation, to be filed with the Securities and Exchange Commission on October 27, 2000 and to the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP St. Louis, Missouri October 27, 2000 |
Exhibit 23.5
Report of Independent Accountants on
Financial Statement Schedules
To the Board of Directors of Select Medical Corporation:
Our audits of the consolidated financial statements referred to in our report dated October 26, 2000 appearing in this Registration Statement on Form S-1 also included an audit of the financial statement schedule listed in Item 16(b) of this Form S-1. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP Harrisburg, Pennsylvania October 27, 2000 |
Exhibit 23.6
We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated July 6, 2000 and September 21, 1999 relating to the combined financial statement of NovaCare Physical Rehabilitation and Occupational Health Group, which appear in such Registration Statement. We also consent to the references to us under the headings "Experts" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania October 27, 2000 |
ARTICLE 5 |
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED CONSOLIDATED FINANCIAL STATEMENTS OF THE REGISTRANT AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. |
MULTIPLIER: 1,000 |
PERIOD TYPE | YEAR | 6 MOS |
FISCAL YEAR END | DEC 31 1999 | DEC 31 1999 |
PERIOD START | JAN 01 1999 | JAN 01 2000 |
PERIOD END | DEC 31 2000 | JUN 30 2000 |
CASH | 4,067 | 5,096 |
SECURITIES | 0 | 0 |
RECEIVABLES | 253,640 | 242,757 |
ALLOWANCES | 69,492 | 65,076 |
INVENTORY | 0 | 0 |
CURRENT ASSETS | 252,710 | 238,785 |
PP&E | 102,534 | 113,538 |
DEPRECIATION | 17,462 | 26,692 |
TOTAL ASSETS | 620,718 | 609,705 |
CURRENT LIABILITIES | 120,112 | 124,059 |
BONDS | 319,694 | 295,212 |
PREFERRED MANDATORY | 120,804 | 125,075 |
PREFERRED | 0 | 0 |
COMMON | 443 | 446 |
OTHER SE | 48,994 | 53,707 |
TOTAL LIABILITY AND EQUITY | 620,718 | 609,705 |
SALES | 0 | 0 |
TOTAL REVENUES | 455,975 | 397,422 |
CGS | 0 | 0 |
TOTAL COSTS | 383,453 | 322,418 |
OTHER EXPENSES | 16,741 | 14,095 |
LOSS PROVISION | 8,858 | 12,633 |
INTEREST EXPENSE | 21,461 | 18,300 |
INCOME PRETAX | (819) | 15,430 |
INCOME TAX | 2,811 | 6,228 |
INCOME CONTINUING | (7,292) | 7,024 |
DISCONTINUED | 0 | 0 |
EXTRAORDINARY | 5,814 | 0 |
CHANGES | 0 | 0 |
NET INCOME | (13,106) | 7,024 |
EPS BASIC | (.43) | .06 |
EPS DILUTED | (.43) | .06 |