As filed with the Securities and Exchange Commission on March 30, 2001.
Registration No. 333-48856
AMENDMENT No. 4
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
Delaware 8093 23-2872718
(State or Other Jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Incorporation or
Organization) Classification Code Number) Identification No.)
|
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 (212) 909-6775
(215) 994-4000
|
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 10,625,000 shares of common stock. The second prospectus relates to a concurrent offering outside the United States and Canada of an aggregate of 1,875,000 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. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion
Preliminary Prospectus dated March 30, 2001
PROSPECTUS
12,500,000 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 10,625,000 shares in the U.S. and Canada, and the international managers are offering 1,875,000 shares outside the U.S. and Canada.
We expect the public offering price to be between $11.00 and $13.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will be quoted 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 9 of this prospectus.
Per Share Total
--------- -----
Public offering price............................. $ $
Underwriting discount............................. $ $
Proceeds, before expenses, to Select Medical ..... $ $
|
The U.S. underwriters may also purchase up to an additional 1,593,750 shares from Select Medical at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments. The international managers may similarly purchase up to an additional 281,250 shares from Select Medical.
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 , 2001.
-----------
Merrill Lynch & Co.
JPMorgan
Credit Suisse First Boston
CIBC World Markets
SG Cowen
First Union Securities, Inc.
-----------
The date of this prospectus is , 2001.
|
[INSIDE FRONT COVER]
[Maps as of December 31, 2000, of the United States and Canada, with stars showing the number and location, by state or province, of inpatient hospitals and circles showing the number and location, by state or province, of outpatient clinics.]
[Logo of Select Medical Corporation]
Text: Canada - More than 85 clinics [located beneath map of Canada] United States - More than 600 Facilities [located beneath map of U.S.]
TABLE OF CONTENTS
Page
----
Prospectus Summary....................................................... 1
Risk Factors............................................................. 9
Forward-Looking Statements............................................... 15
Use of Proceeds.......................................................... 16
Dividend Policy.......................................................... 16
Capitalization........................................................... 17
Dilution................................................................. 19
Selected Consolidated Financial and Other Data........................... 20
Unaudited Pro Forma Consolidated Financial Information................... 24
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 27
Our Business............................................................. 39
Management............................................................... 56
Related Party Transactions............................................... 65
Principal Stockholders................................................... 70
Description of Capital Stock............................................. 73
Shares Eligible for Future Sale.......................................... 77
United States Federal Tax Considerations for Non-United States Holders... 78
Underwriting............................................................. 81
Legal Matters............................................................ 86
Experts.................................................................. 86
Where You Can Find More Information...................................... 86
Index to Consolidated Financial Statements............................... F-1
|
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. The information in this prospectus gives effect to a reverse 1 to .576 common stock split, which will be completed prior to the completion of this offering.
Select Medical Corporation
Overview of Our Company
We operate specialty acute care hospitals for long term stay patients and outpatient rehabilitation clinics. We began operations in 1997 under the leadership of our current management team and have grown our business through strategic acquisitions and internal development. Based on the number of our facilities and clinics, we are:
. the second largest operator of specialty acute care hospitals for long term stay patients in the United States; and
. the second largest operator of outpatient rehabilitation clinics in the United States.
For the year ended December 31, 2000, we earned approximately 48% of our operating revenues from our specialty acute care hospitals and approximately 52% from our outpatient rehabilitation business.
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 December 31, 2000, we have developed 18 new specialty acute care hospitals and 57 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 approximately 10 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.
Some Risks of Our Business
We operate in a highly regulated environment, which subjects our business to many risks unique to our industry. For example, approximately one third of our net operating revenues for the year ended December 31, 2000 were paid to us by the highly regulated federal Medicare program. The methods and rates of Medicare reimbursements may change at any time. Any changes in Medicare could reduce our reimbursements from that program and lower our profit margins. In addition, our strategy for growth in our business depends substantially on our ability to complete acquisitions successfully and our ability to develop new hospitals. There can be no assurance that we will be successful in completing acquisitions or developing new hospitals. Both strategies involve significant expenditures and numerous other risks.
We must also comply with many federal, state and local laws and regulations relating to, among other things, licensure of our facilities and clinics, fraud and abuse in Medicare billing, physician self-referral, payment for services, and privacy of patient information. Changes in or violations of these laws and regulations, or changes in their interpretation or enforcement could materially affect our results of operations.
Industry Overview
According to the Health Care Financing Administration, total U.S. healthcare spending is estimated to grow 6.6% in 2001 and at an average annual rate of 6.5% 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.................................... 10,625,000 shares
International offering........................... 1,875,000 shares
Total........................................ 12,500,000 shares
Common stock to be outstanding after this offering.. 46,951,705 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 and payment of
accrued dividends on our
preferred stock.
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 1,875,000 shares of common stock that the underwriters have the option to purchase from us to cover overallotments. All information in this prospectus assumes the issuance and sale of common stock in the offering at an assumed initial public offering price of $12.00 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 9,216,000 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, 1999 and 2000 from our audited 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, 2000 is pro forma for the conversion of our Class B Preferred Stock as if this event had been completed on January 1, 2000, and as adjusted for the offering and expected use of proceeds as if it had been completed on January 1, 2000, and excludes extraordinary items. 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 as of December 31, 2000 are pro forma for the conversion of our Class B Preferred Stock and as adjusted to give effect to the offering and expected use of proceeds as if these events had been completed on December 31, 2000.
Year Ended December 31,
--------------------------------------------
Pro Forma
As Adjusted
1997 1998 1999 2000 2000(g)
-------- --------- --------- --------- -----------
(in thousands, except per share data)
Consolidated Statement
of Operations Data
Net operating revenues.. $ 11,194 $ 149,043 $ 455,975 $ 805,897 $ 805,897
Operating expenses (a).. 13,740 145,450 413,731 714,227 714,227
Depreciation and
amortization........... 285 4,942 16,741 30,401 30,401
Special charges (b)..... -- 10,157 5,223 -- --
-------- --------- --------- --------- ---------
Income (loss) from
operations............. (2,831) (11,506) 20,280 61,269 61,269
Other income............ 6,022 -- -- -- --
Interest expense
(income), net.......... (64) 4,976 21,099 35,187 28,061
-------- --------- --------- --------- ---------
Income (loss) before
minority interests,
income taxes and
extraordinary items.... 3,255 (16,482) (819) 26,082 33,208
Minority interests (c).. -- 1,744 3,662 4,144 4,144
-------- --------- --------- --------- ---------
Income (loss) before
income taxes and
extraordinary item..... 3,255 (18,226) (4,481) 21,938 29,064
Income tax provision
(benefit).............. 1,308 (182) 2,811 9,979 12,829
-------- --------- --------- --------- ---------
Net income (loss) before
extraordinary item..... 1,947 (18,044) (7,292) 11,959 16,235
Extraordinary item (d).. -- -- 5,814 6,247 --
-------- --------- --------- --------- ---------
Net income (loss)....... 1,947 (18,044) (13,106) 5,712 16,235
Less: Preferred
dividends ............. 266 2,540 5,175 8,780 --
-------- --------- --------- --------- ---------
Net income (loss)
available to common
stockholders .......... $ 1,681 $ (20,584) $ (18,281) $ (3,068) $ 16,235
======== ========= ========= ========= =========
Net income (loss) per
common share:
Basic:
Net income (loss)
before extraordinary
item................ $ 0.26 $ (1.64) $ (0.50) $ 0.13 $ 0.35
Extraordinary item... -- -- (0.24) (0.25) --
-------- --------- --------- --------- ---------
Net income (loss).... $ 0.26 $ (1.64) $ (0.74) $ (0.12) $ 0.35
======== ========= ========= ========= =========
Diluted:
Net income (loss)
before extraordinary
item................ $ 0.26 $ (1.64) $ (0.50) $ 0.12 $ 0.32
Extraordinary item... -- -- (0.24) (0.24) --
-------- --------- --------- --------- ---------
Net income (loss).... $ 0.26 $ (1.64) $ (0.74) $ (0.12) $ 0.32
======== ========= ========= ========= =========
Weighted average common
shares outstanding (e):
Basic.................. 6,557 12,517 24,557 25,457 46,933
Diluted................ 6,564 12,517 24,557 25,907 50,058
Other data:
EBITDA (f).............. $ (2,546) $ 3,593 $ 42,244 $ 91,670
EBITDA as a % of net
revenue................ (22.7)% 2.4 % 9.3 % 11.4%
Cash flow (used in)
provided by operating
activities............. $ (2,367) $ (24,702) $ (25,157) $ 22,513
Cash flow (used in)
provided by investing
activities............. (671) (209,481) (181,262) 14,197
Cash flow provided by
(used in) financing
activities............. 7,897 242,298 197,480 (37,616)
|
As of December 31, 2000
------------------------
Pro Forma
Actual As Adjusted (h)
-------- ---------------
(in thousands)
Consolidated Balance Sheet Data
Cash and cash equivalents.............................. $ 3,151 $ 4,078
Working capital........................................ 109,243 110,170
Total assets........................................... 586,800 587,727
Total long term obligations............................ 284,042 223,234
Total stockholders' equity and preferred stock......... 178,071 245,998
|
(footnotes begin on page 8)
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 December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(dollars in thousands)
Specialty Hospital Data:
Number of hospitals--start of period.............. -- 39 44
Number of hospitals acquired.................... 37 -- --
Number of hospital start-ups.................... 2 6 10
Number of hospitals closed...................... -- 1 --
-------- -------- --------
Number of hospitals--end of period (i)............ 39 44 54
-------- -------- --------
Available licensed beds (j)....................... 1,428 1,649 1,982
Admissions (k).................................... 2,640 12,421 14,210
Patient days (l).................................. 74,418 358,304 427,448
Average length of stay (m)........................ 29 30 30
Occupancy rate (n)................................ 52% 63% 63%
Percent patient days--Medicare (o)................ 78% 78% 76%
EBITDA (f)........................................ $ 3,147 $ 35,929 $ 44,550
Same Specialty Hospital Data:
Admissions (k).................................. 11,796 12,415
Patient days (l)................................ 342,417 375,653
Average length of stay (m)...................... 30 30
Occupancy rate (n).............................. 65% 70%
Percent patient days--Medicare (o).............. 78% 76%
EBITDA (f)...................................... $ 36,942 $ 42,192
Outpatient Rehabilitation Data:
Number of clinics--start of period................ 66 94 620
Number of clinics acquired...................... 21 516 17
Number of clinics start-ups..................... 11 14 32
Number of clinics closed/sold................... 4 4 33
-------- -------- --------
Number of clinics owned--end of period............ 94 620 636
Number of clinics managed--end of period (p)...... 21 38 43
-------- -------- --------
Total number of clinics........................... 115 658 679
-------- -------- --------
EBITDA (f)........................................ $ 12,598 $ 22,697 $ 65,420
|
(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.
(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 and September 2000.
(e) For information concerning calculation of weighted average shares
outstanding, see note 14 to the consolidated financial statements.
(f) 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 is not 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 commonly used by financial
analysts and investors to evaluate the financial results of companies in
our industry, and we believe it therefore 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. For reconciliation of net income (loss) to
EBITDA, see "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Results of Operations."
(g) The pro forma as adjusted consolidated statement of operations for the year
ended December 31, 2000 reflects the following adjustments as a result of
this offering as if the offering occurred on January 1, 2000:
. the reduction in interest expense of $7.1 million for the repayment of
$32.0 million of 10.2% senior debt under our bank credit facility and
the repayment of $35.0 million of 10% senior subordinated notes.
. additional tax expense of $2.9 million related to the $7.1 million
interest expense decrease described above.
. the reversal of $3.7 million of preferred dividends on our Class B
Preferred Stock which will convert into common stock upon the completion
of this offering, and the reversal of $5.1 million of dividends on Class
A Preferred Stock as if such stock were redeemed on January 1, 2000.
. an additional 2,675,000 options and warrants that become dilutive based
on a stock price of $12.00 on January 1, 2000.
We expect to recognize an extraordinary charge of approximately $6 million
resulting from the repayment of the senior subordinated notes. This
extraordinary charge is not reflected in the pro forma as adjusted results.
(h) Reflects the application of the net proceeds from this offering, including
$32.0 million to repay loans under our credit facility, $69.6 million to
redeem preferred stock and pay accrued preferred stock dividends, and $35.0
million to repay senior subordinated debt. At December 31, 2000 we had
accrued dividends of $16.8 million. The $0.9 million difference between the
estimated net proceeds expected to be used to pay accrued dividends on the
offering date and the accrued dividends at December 31, 2000 has been
reflected as additional cash on the pro forma as adjusted consolidated
balance sheet data.
(i) As of December 31, 2000, we owned 100% of all of our hospitals except for
two hospitals that had a 20% minority owner and three hospitals that had a
3% minority owner.
(j) 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.
(k) Admissions represent the number of patients admitted for treatment.
(l) Patient days represent the total number of days of care provided to
patients.
(m) 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.
(n) 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.
(o) We calculate percentage by dividing the number of Medicare patient days by
the total number of patient days.
(p) Managed clinics are clinics that we operate through long term management
arrangements and clinics operated through unconsolidated joint ventures.
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 for the year ended December 31, 2000 came from the highly regulated federal Medicare program. The methods and rates of Medicare reimbursements may change at any time. Our specialty acute care hospitals operate as Medicare-designated long term acute care hospitals. As long term acute care hospitals, they 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, receive reimbursements from 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 2002. 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 qualify as hospitals separate from their host hospitals, our profitability may decline.
As of December 31, 2000, 49 of our 54 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 as separate hospitals located in space leased from, and located in, a general acute care hospital, known as a host hospital. This is known as a "hospital within a hospital" model. These additional criteria include limitations on services purchased from the host hospital and other requirements concerning separateness from the host hospital. If several of our hospitals were to lose their cost-based reimbursement status or failed to comply with the separateness 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."
Future cost containment initiatives undertaken by private third party payors may limit our future net operating revenues and profitability.
Initiatives undertaken by major insurers and managed care companies to contain healthcare costs affect the profitability of our specialty acute care hospitals and outpatient rehabilitation clinics. 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. If insurers or managed care companies from whom we receive substantial payments were to reduce the amounts they pay for services, our profit margins may decline, or we may lose patients if we choose not to renew our contracts with these insurers at lower rates.
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 specialty 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.
Shortages in qualified nurses could increase our operating costs significantly.
Our specialty 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 have 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.
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 specialty 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.
For example, following two acquisitions in 1998, we recorded a special charge of $6.3 million related to impairment of assets. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Special Charges." In addition, following our acquisition of Intensiva Healthcare Corporation, we determined that one of the hospitals owned by Intensiva was underperforming, and we closed that hospital in the following year at a cost of $3.5 million.
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.
If our assumptions regarding the beneficial life of our intangible assets prove to be inaccurate, or subsequently change, our current earnings may be overstated and future earnings also may be adversely affected.
Our balance sheet has an amount designated as "intangible assets" that represents 43% of our assets and 518% of our stockholders' equity at December 31, 2000. Upon the consummation of an acquisition, we undertake a process to value the tangible and intangible assets of the acquired business to determine the appropriate allocation of the purchase price. In this process, we consider the value of tangible assets such as property and equipment, unrecorded assets and various intangible assets. Intangible assets consist primarily of goodwill, trademarks, management service agreements and assembled workforce. Goodwill arises when an acquirer pays more for a business than the fair value of the tangible and separately measurable intangible net assets. Generally accepted accounting principles require the amortization of goodwill and all other intangible assets over the period benefited. The current estimated useful life is 40 years for our goodwill and trademarks, 20 years for our management service agreements and 7 years for our assembled workforce. We have determined the useful lives of these intangible assets by examining the attributes of each of the intangible assets at the time of acquisition. In making this determination of useful lives, we have reviewed with our independent accountants the significant factors that we considered in arriving at the consideration we paid for, and the expected period of benefit from, the acquired business.
We continuously review the appropriateness of the amortization periods we are using and may in the future change them as necessary to reflect any revised expectations. This information is also reviewed with our independent accountants. If the factors we considered, and which give rise to our intangible assets, result in an actual beneficial period shorter than our determined useful life, earnings reported in the periods immediately following some acquisitions would be overstated. In addition, in later years, we would be burdened by a continuing charge against earnings without the associated benefit to income. Earnings in later years could also be affected significantly if we subsequently determine that the remaining balance of an intangible has been impaired.
Competition may limit our ability to acquire hospitals and clinics and adversely affect our growth.
We have historically faced limited competition in acquiring specialty 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 specialty 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.
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, with policy limits generally equal to $1.0 million per claim and annual aggregate limits of $3.0 million. We also maintain $20.0 million in excess liability coverage. However, our insurance coverage does not cover punitive damages and 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 or are required to pay punitive damages, 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 integrating the information systems relating to our outpatient rehabilitation business, which could cause business interruption.
We currently manage our outpatient rehabilitation business using seven billing systems. 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, affiliates of Welsh, Carson, Anderson & Stowe VII, L.P., 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.
Affiliates of Welsh, Carson, Anderson & Stowe VII, L.P., 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 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;
. 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; and
. providing for the establishment of a shareholder rights plan.
Delaware law may also discourage, delay or prevent someone from acquiring or merging with us. See "Description of Capital Stock."
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 51,552,855 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, with exceptions, 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 33,713,087 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 Merrill Lynch releasing these stockholders from the lock- ups described above, 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.
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.
Purchasers of the common stock in the offering will pay a price per share that substantially exceeds our current net tangible book value per share, based on an assumed initial public offering price of $12.00 per share, the midpoint of the range of prices shown on the front page of this prospectus. Our net tangible book value at December 31, 2000 after giving effect to the conversion of the Class B Preferred Stock, was a deficit of $142.9 million, or $4.15 per share of common stock. Based on an assumed initial public offering price of $12.00 per share, purchasers of the common stock in the offering will contribute 50.8% of the aggregate consideration for our issued and outstanding common stock but will own only 26.6% of our issued and outstanding common stock. As a result, new investors will experience dilution of $12.12 per share, based on an assumed initial public offering price of $12.00 per share. Our existing stockholders will experience an immediate and substantial increase in net tangible book value in the amount of $4.03 per share of common stock based on an assumed initial public offering price of $12.00 per share.
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 have received approval for our common stock to be quoted 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. The stock market in general and the market for securities of hospital and other healthcare companies in particular have experienced extreme volatility that often has been unrelated to the operating performance or prospects of particular companies. For example, changes and proposed changes in laws and regulations relating to Medicare reimbursements and the provision of healthcare services can cause extreme changes in the market prices of securities such as our common stock.
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. In making forward-looking statements, we undertake no obligation, other than that required by law, 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 $137.5 million after deducting estimated expenses and underwriting discounts and commissions of $12.5 million, based on an assumed initial offering price of $12.00, the midpoint of the range of prices shown on the front page of this prospectus. We will use these net proceeds to repay $24.0 million of our senior debt under the term loan portion of our bank credit facility and, as required under our bank credit facility, 50% of any net proceeds (after deducting underwriting commissions and expenses) in excess of $138.0 million to repay additional principal of the term loan portion of our credit facility. Our bank credit facility matures in September 2005 and bears interest at a fluctuating rate, which as of December 31, 2000, was a weighted average interest rate of approximately 10.2%. The bank debt that we are repaying with the proceeds of this offering was incurred to refinance existing bank debt. See "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Capital Resources."
We will also use these net proceeds to redeem $52.8 million of our Class A Preferred Stock and to pay $17.7 million in dividends accrued on our Class A and Class B Preferred Stock. At December 31, 2000 we had $16.8 million in dividends accrued on our Class A and Class B Preferred Stock. Additionally, $0.9 million will be used to pay dividends accruing between December 31, 2000 and the date this offering is completed. We reflected the additional proceeds as cash on our December 31, 2000 pro forma as adjusted consolidated balance sheet. We will also repay $35.0 million of the principal of our senior subordinated notes, which were issued to WCAS Capital Partners III, L.P. in December 1998, February 1999 and November 1999. The senior subordinated notes issued in December 1998 and February 1999 mature on December 15, 2008, and the note issued on November 19, 1999 matures on November 19, 2009. All notes bear interest at 10% per year. We intend to repay in full the note due November 19, 2009, which is in the principal amount of $25.0 million. The remaining $10.0 million will be allocated pro rata to the notes due December 15, 2008. We then expect to use the balance of approximately $8.0 million of the net proceeds to repay all or a portion of the borrowings outstanding under the revolving portion of our credit facility.
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. Our current credit facility and our senior subordinated notes prohibit us from declaring or paying dividends on our common stock. 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 December 31, 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 Amended and Restated 1997 Stock Option Plan, under which options to purchase 4,501,431 shares were outstanding as of December 31, 2000 at a weighted average exercise price of $6.79 per share, and under warrants outstanding to purchase 1,873,283 shares at an exercise price of $6.08 per share. You should read this table in conjunction with our "Selected Consolidated Financial and Other Data," our "Consolidated Financial Statements" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," included elsewhere in this prospectus.
As of December 31, 2000
---------------------------------
Pro Forma
Actual Pro Forma As Adjusted
--------- --------- -----------
(dollars in thousands)
Long term debt:
Senior credit facility..................... $ 195,877 $ 195,877 $ 163,877
10% senior subordinated notes due 2008(a).. 56,685 56,685 47,964
10% senior subordinated note due 2009(a)... 20,087 20,087 --
Seller notes(b)............................ 27,888 27,888 27,888
Other...................................... 2,251 2,251 2,251
--------- --------- ---------
Total debt................................... 302,788 302,788 241,980
Less current portion....................... (18,746) (18,746) (18,746)
--------- --------- ---------
Total long term debt..................... 284,042 284,042 223,234
--------- --------- ---------
Preferred stock, $.01 par value
Class A: 55,000 shares authorized, 52,838
shares issued and outstanding-- actual and
pro forma; no shares authorized, issued
and outstanding--pro forma as adjusted.... 65,481 65,481 --
Class B: 16,000,000 shares authorized,
16,000,000 shares issued and outstanding--
actual; no shares authorized, issued and
outstanding--pro forma and pro forma as
adjusted.................................. 64,092 4,092 --
Undesignated preferred stock, no shares
authorized or outstanding--actual;
10,000,000 shares authorized, no shares
issued and outstanding--pro forma and pro
forma as adjusted......................... -- -- --
Stockholders' equity:
Common stock, $.01 par value; 78,000,000
shares authorized, 25,696,818 shares
issued--actual; 34,912,818 shares issued--
pro forma; 200,000,000 shares authorized,
47,412,818 shares issued--pro forma as
adjusted.................................. 257 349 474
Capital in excess of par..................... 73,069 132,977 270,354
Accumulated deficit(c)....................... (23,757) (23,757) (23,757)
Treasury stock, at cost; 221,411 shares--
actual and pro forma; 461,459 shares--pro
forma as adjusted(d)........................ (1,039) (1,039) (1,039)
Cumulative translation adjustment............ (32) (32) (32)
--------- --------- ---------
Total stockholders' equity................... 48,498 108,498 245,998
--------- --------- ---------
Total capitalization......................... $ 462,113 $ 462,113 $ 469,232
========= ========= =========
(footnotes on following page)
|
DILUTION
At December 31, 2000, we had a pro forma net tangible book deficit after giving effect to the conversion of Class B Preferred Stock of $142.9 million, or $4.15 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 12,500,000 shares of our common stock at an assumed initial public offering price of $12.00 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 deficit at December 31, 2000 would have been $5.4 million, or $0.12 per share. This represents an immediate reduction in net tangible book deficit of $4.03 per share to existing stockholders and an immediate dilution of $12.12 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........... $12.00
Pro Forma net tangible book deficit per share at
December 31, 2000...................................... $(4.15)
Increase per share attributable to this offering........ 4.03
------
Pro Forma as adjusted net tangible book value per share
after the offering....................................... (0.12)
------
Dilution per share to new investors in this offering...... $12.12
======
|
The following table summarizes on an as adjusted basis, after giving effect to the conversion of the Class B Preferred Stock, as of December 31, 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 $12.00 per share and before deducting estimated underwriting discounts and commissions and our estimated offering expenses:
Shares Purchased Total Consideration Average
------------------ -------------------- Price Per
Number Percent Amount Percent Share
---------- ------- ------------ ------- ---------
Existing
stockholders(1)........ 34,451,359 73.38% $145,399,667 49.22% $ 4.22
New investors(2)........ 12,500,000 26.62 150,000,000 50.78 12.00
---------- ------ ------------ ------
Total................. 46,951,359 100.00% $295,399,667 100.00%
========== ====== ============ ======
|
The foregoing discussion and tables assume no exercise of any stock options outstanding as of December 31, 2000. As of December 31, 2000, there were options outstanding to purchase a total of 4,501,431 shares of our common stock at a weighted average exercise price of $6.79 per share and 1,255,056 shares reserved for future grant under our Amended and Restated 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 following selected consolidated historical financial and other data 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, but capitalization and operations did not commence until February 7, 1997 when we acquired all of the outstanding common stock of our predecessor company, Sports and Orthopedic Rehabilitation Services, P.A. The predecessor company data as of December 31, 1996, for the period ended December 31, 1996 and for the period from January 1, 1997 through February 6, 1997 has been derived from unaudited financial statements, which are not included in this prospectus. 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, 1999 and 2000 and for the years ended December 31, 1997, 1998, 1999 and 2000 have been derived from consolidated financial statements audited by PricewaterhouseCoopers LLP, independent accountants. Consolidated balance sheets at December 31, 1999 and 2000 and the related statements of operations, stockholders' equity and cash flows for the periods ended December 31, 1998, 1999, and 2000 and the related notes appear elsewhere in this prospectus. The pro forma as adjusted consolidated statement of operations data for the year ended December 31, 2000 is pro forma for the conversion of our Class B Preferred Stock as if these events had been completed on January 1, 2000, and as adjusted for the offering and expected use of proceeds as if it had been completed on January 1, 2000, and excludes extraordinary items. 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 as of December 31, 2000 are pro forma for the conversion of our Class B Preferred Stock and as adjusted to give effect to the offering and expected use of proceeds as if these events had been completed on December 31, 2000.
Predecessor Company
------------------------
January 1, Year Ended December 31,
1997 --------------------------------------------------
Year Ended Through Pro Forma
December 31, February 6, As Adjusted
1996 1997 1997 1998 1999 2000 2000(g)
------------ ----------- ------- -------- -------- -------- -----------
(in thousands, except per share data)
Consolidated Statement
of Operations Data
Net operating revenues.. $3,323 $ 456 $11,194 $149,043 $455,975 $805,897 $805,897
Operating expenses (a).. 2,828 300 13,740 145,450 413,731 714,227 714,227
Depreciation and
amortization........... 112 8 285 4,942 16,741 30,401 30,401
Special charge (b)...... -- -- -- 10,157 5,223 -- --
------ ------ ------- -------- -------- -------- --------
Income (loss) from
operations............. 383 148 (2,831) (11,506) 20,280 61,269 61,269
Other income............ 74 -- 6,022 -- -- -- --
Interest expense
(income), net.......... 62 9 (64) 4,976 21,099 35,187 28,061
------ ------ ------- -------- -------- -------- --------
Income (loss) before
minority interests,
income taxes and
extraordinary item..... 395 139 3,255 (16,482) (819) 26,082 33,208
Minority interests (c).. -- -- -- 1,744 3,662 4,144 4,144
------ ------ ------- -------- -------- -------- --------
Income (loss) before
income taxes and
extraordinary item..... 395 139 3,255 (18,226) (4,481) 21,938 29,064
Income tax provision
(benefit).............. 195 38 1,308 (182) 2,811 9,979 12,829
------ ------ ------- -------- -------- -------- --------
Net income (loss) before
extraordinary item..... 200 101 1,947 (18,044) (7,292) 11,959 16,235
Extraordinary item (d).. -- -- -- -- 5,814 6,247 --
------ ------ ------- -------- -------- -------- --------
Net income (loss)....... $ 200 $ 101 1,947 (18,044) (13,106) 5,712 16,235
====== ======
Less: Preferred
dividends.............. (266) (2,540) (5,175) (8,780) --
------- -------- -------- -------- --------
Net income (loss)
available to common
stockholders........... $ 1,681 $(20,584) $(18,281) $ (3,068) $ 16,235
======= ======== ======== ======== ========
Net income (loss) per
common share:
Basic:
Net income (loss)
before extraordinary
item.................. $ 0.26 $ (1.64) $ (0.50) $ 0.13 $ 0.35
Extraordinary item..... -- -- (0.24) (0.25) --
------- -------- -------- -------- --------
Net income (loss) per
common share.......... $ 0.26 $ (1.64) $ (0.74) $ (0.12) $ 0.35
======= ======== ======== ======== ========
Diluted:
Net income (loss)
before extraordinary
item.................. $ 0.26 $ (1.64) $ (0.50) $ 0.12 $ 0.32
Extraordinary item..... -- -- (0.24) (0.24) --
------- -------- -------- -------- --------
Net income (loss) per
common share.......... $ 0.26 $ (1.64) $ (0.74) $ (0.12) $ 0.32
======= ======== ======== ======== ========
Weighted average common
shares outstanding (e):
Basic.................. 6,557 12,517 24,557 25,457 46,933
Diluted................ 6,564 12,517 24,557 25,907 50,058
|
Predecessor Company
------------------------
January 1,
1997
Year Ended Through Year Ended December 31,
December 31, February 6, ---------------------------------------
1996 1997 1997 1998 1999 2000
------------ ----------- ------- -------- -------- -------
(in thousands, except per share data)
Other data:
EBITDA(f).............. $ 495 $ 156 $(2,546) $ 3,593 $ 42,244 $91,670
EBITDA as a % of net
revenue............... 14.9% 34.2% (22.7)% 2.4 % 9.3 % 11.4 %
Cash flow (used in)
provided by operating
activities............ $(2,367) $(24,702) $(25,157) $22,513
Cash flow (used in)
provided by investing
activities............ (671) (209,481) (181,262) 14,197
Cash flow provided by
(used in) financing
activities............ 7,897 242,298 197,480 (37,616)
|
Predecessor
Company As of December 31,
------------ ----------------------------------------------
As of Pro Forma
December 31, As
1996 1997 1998 1999 2000 Adjusted(h)
------------ ------- -------- -------- -------- -----------
(in thousands)
Consolidated Balance
Sheet Data
Cash and cash
equivalents............ $ 15 $ 4,859 $ 13,001 $ 4,067 $ 3,151 $ 4,078
Working capital......... (331) 4,248 39,807 132,598 109,243 110,170
Total assets............ 1,825 18,191 336,949 620,718 586,800 587,727
Total long term
obligations............ 272 2,023 147,726 319,694 284,042 223,234
Total stockholders'
equity and preferred
stock.................. 207 10,769 116,337 170,241 178,071 245,998
|
(footnotes begin on page 23)
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
December 31
---------------------------
1998 1999 2000
------- -------- --------
(dollars in thousands)
Specialty Hospital Data:
Number of hospitals--start of period.............. -- 39 44
Number of hospitals acquired.................... 37 -- --
Number of hospital start-ups.................... 2 6 10
Number of hospitals closed...................... -- 1 --
------- -------- --------
Number of hospitals--end of period (i)............ 39 44 54
------- -------- --------
Available licensed beds (j)....................... 1,428 1,649 1,982
Admissions (k).................................... 2,640 12,421 14,210
Patient days (l).................................. 74,418 358,304 427,448
Average length of stay (m)........................ 29 30 30
Occupancy rate (n)................................ 52% 63% 63%
Percent patient days--Medicare (o)................ 78% 78% 76%
EBITDA (f)........................................ $ 3,147 $ 35,929 $ 44,550
Same Specialty Hospital Data:
Admissions (k).................................. 11,796 12,415
Patient days (l)................................ 342,417 375,653
Average length of stay (m)...................... 30 30
Occupancy rate (n).............................. 65% 70%
Percent patient days--Medicare (o).............. 78% 76%
EBITDA (f)...................................... $ 36,942 $ 42,192
Outpatient Rehabilitation Data:
Number of clinics--start of period................ 66 94 620
Number of clinics acquired...................... 21 516 17
Number of clinics start-ups..................... 11 14 32
Number of clinics closed/sold................... 4 4 33
------- -------- --------
Number of clinics owned--end of period............ 94 620 636
Number of clinics managed--end of period (p)...... 21 38 43
------- -------- --------
Total number of clinics........................... 115 658 679
------- -------- --------
EBITDA (f)........................................ $12,598 $ 22,697 $ 65,420
|
(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.
(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 and September 2000.
(e) For information concerning calculation of weighted average shares
outstanding, see note 14 to Select Medical Corporation's Consolidated
Financial Statements.
(f) 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 is not 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 commonly used by financial
analysts and investors to evaluate the financial results of companies in
our industry, and we believe it therefore 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. For reconciliation of net income (loss) to
adjusted EBITDA, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Results of Operations."
(g) The as adjusted consolidated statement of operations for the year ended
December 31, 2000 reflects the following adjustments as a result of this
offering:
. the reduction in interest expense of $7.1 million for the repayment of
$32.0 million of 10.2% senior debt under our bank credit facility and
the repayment of $35.0 million of 10% senior subordinated notes.
. additional tax expense of $2.9 million related to the $7.1 million
interest expense decrease described above.
. the reversal of $3.7 million of preferred dividends on our Class B
Preferred Stock which will convert into common stock upon the completion
of this offering, and the reversal of $5.1 million dividends on Class A
Preferred Stock as if such stock were redeemed on January 1, 2000.
. an additional 2,675,000 options and warrants that became dilutive based
on a stock price of $12.00 on January 1, 2000.
We expect to recognize an extraordinary charge of approximately $6 million
resulting from the repayment of the senior subordinated notes. This
extraordinary charge is not reflected in the pro forma as adjusted results.
(h) Reflects the application of the net proceeds from this offering, including
$32.0 million to repay loans under our credit facility, $69.6 million to
redeem preferred stock and pay accrued preferred stock dividends, and $35.0
million to repay senior subordinated debt. At December 31, 2000 we had
accrued dividends of $16.8 million. The $0.9 million difference between the
estimated net proceeds expected to be used to pay accrued dividends on the
offering date and the accrued dividends at December 31, 2000 has been
reflected as additional cash on the pro forma as adjusted consolidated
balance sheet data.
(i) As of December 31, 2000 we owned 100% of all of our hospitals except for
two hospitals that had a 20% minority owner and three hospitals that had a
3% minority owner.
(j) 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.
(k) Admissions represent the number of patient admitted for treatment.
(l) Patient days represent the total number of days of care provided to
patients.
(m) 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.
(n) 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.
(o) We calculate percentage by dividing the number of Medicare patient days by
the total number of patient days.
(p) 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 are included elsewhere in this prospectus. The unaudited pro forma consolidated financial information presented here should be read together with these 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, 2000 to reflect the automatic conversion of the Class B Preferred Stock and the application of the estimated net proceeds from this offering, based on an assumed initial public offering price of $12.00 per share, as if these events had occurred on January 1, 2000, and excluded extraordinary items, to arrive at the unaudited pro forma consolidated statement of operations for the year ended December 31, 2000. No adjustments have been made with respect to four small acquisitions made during 2000 since these acquisitions would not have a material impact on the pro forma results.
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 above events been completed on January 1, 2000 and should not be construed as being representative of future results of operations.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31, 2000
-----------------------------------------------------------
(in thousands, except per share data)
Adjustments Pro Forma
Select Class B for As
Historical Conversion Pro Forma Offering Adjusted
---------- ---------- --------- ----------- ---------
Net operating revenues.. $805,897 -- $805,897 $805,897
Operating Expenses...... 714,227 -- 714,227 714,227
Depreciation and
amortization........... 30,401 -- 30,401 30,401
-------- ------- -------- --------
Total operating
expenses............... 744,628 -- 744,628 744,628
Income from operations.. 61,269 -- 61,269 61,269
Interest expense, net... 35,187 -- 35,187 $(7,126)(b) 28,061
-------- ------- -------- ------- --------
Income before minority
interests.............. 26,082 -- 26,082 7,126 33,208
Minority interests...... 4,144 -- 4,144 -- 4,144
-------- ------- -------- ------- --------
Income before income
taxes.................. 21,938 -- 21,938 7,126 29,064
Income tax provision
(benefit).............. 9,979 -- 9,979 2,850 (b) 12,829
-------- ------- -------- ------- --------
Net income before
extraordinary item..... 11,959 -- 11,959 4,276 16,235
Less: Preferred
dividends.............. 8,780 $(3,686)(a) 5,094 (5,094)(b) --
-------- ------- -------- ------- --------
Income applicable to
common stockholders
before extraordinary
item................... $ 3,179 $ 3,686 $ 6,865 $ 9,370 $ 16,235
======== ======= ======== ======= ========
Basic income per common
share before
extraordinary item..... $ 0.13 $ 0.20 $ 0.35
Weighted average basic
common shares
outstanding ........... 25,457 9,216 (a) 34,673 12,260 (b) 46,933
Diluted income per
common share before
extraordinary item..... $ 0.12 $ 0.20 $ 0.32
Weighted average diluted
common shares
outstanding............ 25,907 9,216 (a) 35,123 14,935 (b) 50,058
|
(footnotes begin on the following page)
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following adjustments were applied to our Consolidated Statement of Operations to arrive at the Unaudited Pro Forma Consolidated Statement of Operations.
(a) We reflected the elimination of preferred dividends on the Class B Preferred Stock of $3.7 million reflecting the conversion of 16,000,000 shares of our Class B Preferred Stock, which automatically convert into 9,216,000 shares of common stock upon the completion of this offering;
(b) We reflected:
(i) the reduction in interest expense of $7.1 million for the year ended December 31, 2000 for the repayment of $32.0 million of 10.2% senior debt under our bank credit facility and the repayment of $35.0 million of 10% senior subordinated notes;
(ii) the reversal of preferred dividends on the Class A Preferred Stock of $5.1 million, which we recorded during 2000;
(iii) the issuance of 12,500,000 shares in the public offering;
(iv) the transfer of 240,048 shares to us for no additional consideration
upon repayment in full of the 10% senior subordinated note due 2009,
which we intend to repay upon the completion of this offering.
(v) an additional 2,675,000 options and warrants that become dilutive based on a stock price of $12.00 on January 1, 2000.
(vi) additional tax expense of $2.9 million related to the interest expense decrease of $7.1 million in 2000.
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 based on the number of our clinics. As of December 31, 2000, we operated 54 specialty acute care hospitals in 19 states and 679 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. For the year ended December 31, 2000, we had net operating revenues of $805.9 million. Of this total, we earned 51.7% of our net operating revenues from our outpatient rehabilitation business and 48.3% 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 consisting of cash and the assumption of seller notes. The purchase was funded through the sale of Class B Preferred Stock, common stock, issuance of senior subordinated debt, 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 closed or sold 28 of these occupational health centers.
On December 15, 1998, we acquired Intensiva Healthcare Corporation for $103.6 million in cash. The purchase was funded through the sale of common stock, issuance of 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 in cash. We funded this purchase through borrowings under our credit facility. At the time of acquisition, American Transitional Hospitals operated 15 specialty acute care hospitals. For a discussion of the factors we consider in acquisitions, see "Business--Specialty Acute Care Hospital Strategy" and "Business--Outpatient Strategy."
Development of New Specialty Acute Care Hospitals
Our goal is to open approximately 10 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 ten hospitals in 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 $400,000 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 amount due to Medicare was $13.1 million as of December 31, 1999. We recorded this amount as due to third party payors on our balance sheet. As of December 31, 2000 we had a receivable from Medicare of $2.8 million. Substantially all Medicare cost reports are settled through 1997.
Net operating revenues generated directly from the Medicare program represented approximately 35.1% of net operating revenues for the year ended December 31, 2000 and 48.1% and 37.9% for the years ended December 31, 1999 and 1998, respectively. The decline in the percentage of our net operating revenue coming from Medicare during the year ended December 31, 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. The federal government might, in the future, reduce the funds available under that program 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
December 31,
---------------------
1998 1999 2000
----- ----- -----
Net operating revenues................................. 100.0% 100.0% 100.0%
Cost of services (a)................................... 86.5 84.1 81.5
General and administrative............................. 8.4 4.7 3.5
Bad debt expense....................................... 2.7 1.9 3.6
----- ----- -----
EBITDA (b)............................................. 2.4 9.3 11.4
Depreciation and amortization.......................... 3.3 3.7 3.8
Special charges........................................ 6.8 1.2 --
----- ----- -----
Income (loss) from operations.......................... (7.7) 4.4 7.6
Other income........................................... -- -- --
Interest expense, net.................................. 3.3 4.6 4.4
----- ----- -----
Income (loss) before minority interests, income taxes
and extraordinary item................................ (11.0) (0.2) 3.2
Minority interests..................................... 1.2 0.8 0.5
----- ----- -----
Income (loss) before income taxes and extraordinary
item.................................................. (12.2) (1.0) 2.7
Income tax (benefit)................................... (0.1) 0.6 1.2
----- ----- -----
Net income (loss) before extraordinary item............ (12.1) (1.6) 1.5
Extraordinary item..................................... -- 1.3 0.8
----- ----- -----
Net income (loss)...................................... (12.1)% (2.9)% 0.7%
===== ===== =====
|
The following table summarizes selected financial data by business segment, for the periods indicated.
Year Ended December 31, % Change
---------------------------- ------------
1998 1999 2000 98-99 99-00
-------- -------- -------- ----- -----
(dollars in thousands)
Net operating revenues:
Specialty hospitals............... $ 62,715 $307,464 $378,910 390.3% 23.2%
Outpatient rehabilitation......... 83,059 141,740 416,775 70.7 194.0
Other............................. 3,269 6,771 10,212 107.1 50.8
-------- -------- -------- ----- -----
Total company..................... $149,043 $455,975 $805,897 205.9% 76.7%
======== ======== ======== ===== =====
EBITDA: (b)
Specialty hospitals............... $ 3,147 $ 35,929 $ 44,550 NM 24.0%
Outpatient rehabilitation......... 12,598 22,697 65,420 80.2% 188.2
Other............................. (12,150) (16,382) (18,300) (34.9) (11.7)
-------- -------- -------- ----- -----
Total company..................... $ 3,595 $ 42,244 $ 91,670 NM 117.0%
======== ======== ======== ===== =====
Income (loss) from operations:
Specialty hospitals............... $ 1,182 $ 28,016 $ 35,421 NM 26.4%
Outpatient rehabilitation......... 4,323 16,222 49,258 275.3% 203.7
Other............................. (17,011) (23,958) (23,410) (40.8) 2.3
-------- -------- -------- ----- -----
Total company..................... $(11,506) $ 20,280 $ 61,269 NM 202.1%
======== ======== ======== ===== =====
EBITDA margins: (b)
Specialty hospitals............... 5.0% 11.7% 11.8% 134.0% 0.9%
Outpatient rehabilitation......... 15.2 16.0 15.7 5.3 (1.9)
Other............................. NM NM NM NM NM
-------- -------- -------- ----- -----
Total company..................... 2.4% 9.3% 11.4% 287.5% 22.6%
======== ======== ======== ===== =====
Total assets:
Specialty hospitals............... $240,266 $250,034 $246,495
Outpatient rehabilitation......... 90,267 350,419 329,874
Other............................. 6,416 20,265 10,431
-------- -------- --------
Total company..................... $336,949 $620,718 $586,800
======== ======== ========
Purchases of property and
equipment, net:
Speciality hospitals.............. $ 3,632 $ 7,243 $ 13,677
Outpatient rehabilitation......... 2,042 3,085 6,399
Other............................. 749 568 2,354
-------- -------- --------
Total company..................... $ 6,423 $ 10,896 $ 22,430
======== ======== ========
|
The following table reconciles EBITDA to net income (loss):
Year Ended December 31,
----------------------------
1998 1999 2000
-------- -------- --------
(in thousands)
EBITDA.......................................... $ 3,593 $ 42,244 $ 91,670
Depreciation and amortization................... (4,942) (16,741) (30,401)
Special charge.................................. (10,157) (5,223) --
Other income.................................... -- -- --
Interest income................................. 406 362 939
Interest expense................................ (5,382) (21,461) (36,126)
Minority interest............................... (1,744) (3,662) (4,144)
Income tax (expense) benefit.................... 182 (2,811) (9,979)
Extraordinary item.............................. -- (5,814) (6,247)
-------- -------- --------
Net income (loss)............................... $(18,044) $(13,106) $ 5,712
======== ======== ========
|
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 June 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 subsidiaries, officers and employees. See Note 10 to Select Medical Corporation's Consolidated Financial Statements.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
Net Operating Revenues
Our net operating revenues increased 76.7% to $805.9 million for the year ended December 31, 2000 compared to $456.0 million for the year ended December 31, 1999. The percentage of our net operating revenues coming from Medicare declined to 35.1% during the year ended December 31, 2000 from 48.1% for 1999. This decline was principally related to the acquisition of NovaCare, which receives a comparatively lower percentage of its revenue from Medicare.
Specialty Acute Care Hospitals. Our specialty hospital revenues increased 23.2% to $378.9 million for the year ended December 31, 2000 compared to $307.5 million for the year ended December 31, 1999. Net operating revenues for the specialty hospitals operated throughout both periods increased 11.0% to $325.3 million for 2000 from $293.1 million for 1999. This increase resulted from an improved occupancy rate and a higher non-Medicare payor mix. The remaining increase of $39.2 million resulted from the internal development of new specialty hospitals that commenced operations in 1999 and 2000.
Outpatient Rehabilitation. Our outpatient rehabilitation revenues increased 194.0% to $416.8 million for the year ended December 31, 2000 compared to $141.7 million for the year ended December 31, 1999. This increase was principally related to the acquisition of the NovaCare Physical Rehabilitation and Occupational
Health Division in November 1999, which accounted for $261.8 million of the increase. The remaining increase resulted primarily from increased volume in existing businesses.
Other. Our other revenues increased 50.8% to $10.2 million for the year ended December 31, 2000 compared to $6.8 million for the year ended December 31, 1999. The increase in other revenue reflects higher corporate general and administrative costs in 2000, which resulted in higher Medicare reimbursements for those costs.
Operating Expenses
Our operating expenses increased by $300.5 million to $714.2 million for the year ended December 31, 2000 compared to $413.7 million for the year ended December 31, 1999. The increase in operating expenses was principally related to the acquisition of the NovaCare Physical Rehabilitation and Occupational Health Division, which accounted for $220.0 million of the increase. Our specialty hospital segment experienced an increase in operating expenses of $62.8 million. This increase principally related to growth in operating expenses associated with the hospitals opened in 1999 and 2000. As a percent of our net operating revenues, our operating expenses declined to 88.6% in 2000 from 90.7% in 1999. 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 81.5% during 2000 from 84.1% during 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 3.5% from 4.7%. 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 3.6% during 2000 compared to 1.9% during 1999. This increase resulted primarily from our acquisition of the NovaCare Physical Rehabilitation and Occupational Health Division, which incurs 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 117.0% to $91.7 million for the year ended December 31, 2000 compared to $42.2 million for the year ended December 31, 1999. Our EBITDA margins increased to 11.4% for 2000 compared to 9.3% for 1999. For cash flow information, see "--Capital Resources and Liquidity."
Specialty Acute Care Hospitals. EBITDA increased 24.0% to $44.6 million for the year ended December 31, 2000 compared to $35.9 million for the year ended December 31, 1999. Our EBITDA margins remained consistent at 11.8% and 11.7% in 2000 and 1999, respectively. The hospitals we operated throughout both periods accounted for $5.3 million of the increase. This increase in same hospital EBITDA resulted from an increase in non-Medicare payor mix. Our same hospital EBITDA margin increased from 12.6% to 13.0%. The balance of the increase of $3.4 million resulted from our newly developed hospitals.
Outpatient Rehabilitation. EBITDA increased by 188.2% to $65.4 million for the year ended December 31, 2000 compared to $22.7 million for the year ended December 31, 1999. The major contributor to this increase was the NovaCare Physical Rehabilitation and Occupational Health Division acquisition that accounted for $41.9 million of the increase. The remaining increase of $0.8 million resulted from growth in our existing business. Our EBITDA margins declined to 15.7% during 2000 from 16.0% during 1999. This decline resulted from the acquisition of the NovaCare Physical Rehabilitation and Occupational Health Division, which historically had lower margins than our existing outpatient rehabilitation business. These lower margins were the result of higher bad debt expense and costs of services as a percentage of net operating revenues.
Other. EBITDA loss increased by 11.7% to a loss of $18.3 million for the year ended December 31, 2000 compared to a loss of $16.4 million for the year ended December 31, 1999. This increase resulted from the increase in general and administrative expenses associated with the growth of the organization, principally the addition of the NovaCare division and our new hospital development.
Income from Operations
Income from operations increased 202.1% to $61.3 million for the year ended December 31, 2000 compared to $20.3 million for the year ended December 31, 1999. The increase in income from operations resulted from EBITDA increases 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 by 81.6% to $30.4 million for 2000 compared to $16.7 million for 1999. Approximately $10.3 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 acquired NovaCare fixed assets. The remaining increase resulted from depreciation of new fixed assets.
Interest Expense
Interest expense increased to $36.1 million for the year ended December 31, 2000 from $21.5 million for the year ended December 31, 1999. The increase in interest expense resulted from higher average 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 increased by $0.4 million to $4.1 million for the year ended December 31, 2000 compared to $3.7 million for the year ended December 31, 1999. This increase resulted from improved operating performance in our operating subsidiaries that are structured with a minority interest component.
Income Taxes
We recorded income tax expense of $10.0 million for the year ended December 31, 2000. The expense represented an effective tax rate of 45.5% and exceeded statutory federal and state tax rates as a result of non-deductible goodwill. We recorded income tax expense of $2.8 million for the year ended December 31, 1999. This expense represented an effective tax rate of 62.7%. 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.
Extraordinary Item
On September 22, 2000, we entered into a new $230 million credit facility with a syndicate of banks that replaced our $225 million credit facility dated November 19, 1999. The extraordinary item consists of the unamortized deferred financing costs of $6.2 million related to the November 19, 1999 credit facility.
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
Net Operating Revenues
Our net operating revenues increased 205.9% 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 due to that hospital's operating performance.
Outpatient Rehabilitation. Our outpatient rehabilitation revenues increased 70.7% 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. The increase in other revenue reflects higher corporate general and administrative costs in 1999, which resulted in higher Medicare reimbursements for those 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. These efficiencies were realized as a result of our ability to spread our support function costs over a larger operating group. We expect this trend to continue as we grow our business. Cost savings have been achieved through renegotiation of supply contracts and improved management of clinical staffing levels at our hospitals. 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. For cash flow information, see "--Capital Resources and Liquidity."
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. These cost reduction initiatives are discussed above under "Operating Expenses."
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 loss increased 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 increase resulted from higher administrative costs in 1999 to manage the increased size of our company.
Income from Operations
Income from operations increased by $31.8 million to $20.3 million for the year ended December 31, 1999 compared to a loss of $11.5 million for the year ended December 31, 1998. 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 in connection with 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.
Capital Resources and Liquidity
Years Ended December 31, 2000, 1999 and 1998
Operating activities generated $22.5 million in cash during the year ended December 31, 2000 compared to cash usages of $25.2 million and $24.7 million in the years ended December 31, 1999 and 1998,
respectively. The increase in cash flow in 2000 is attributable to increased earnings and improved working capital management. The use of cash in 1999 and 1998 was primarily attributable to net losses and an increase in accounts receivable that resulted from our growth.
Investing activities provided $14.2 million of cash flow during 2000 compared to cash usages of $181.3 million and $209.5 million in the years ended December 31, 1999 and 1998, respectively. For the year ended December 31, 2000, we received proceeds of $29.9 million from two escrow funds established as part of the NovaCare acquisition and proceeds of $13.0 million from the sale of the occupational health centers. These occupational health centers were an operating division of NovaCare. The claim against the escrow fund resulted from an increase in uncollectible accounts receivable, which were paid with the proceeds from the escrow fund. Cash inflows were offset principally by the purchases of $22.4 million of equipment and acquisition and earnout payments of $9.3 million. The increase in property and equipment purchases reflects the growth in new hospital development during 2000. The principal usage of cash in 1999 and 1998 was to fund acquisitions. Our investment in property and equipment during 1999 and 1998 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 used $37.6 million of cash for the year ended December 31, 2000. This was due principally to the repayment of debt. In 1999 and 1998 we had cash inflows of $197.5 million and $242.3 million, 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 $109.2 million at December 31, 2000, compared to $132.6 million at December 31, 1999. The decrease in net working capital from 1999 to 2000 was attributable primarily to the collection of the accounts receivable from the escrow funds 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 collection of the escrow 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 December 31, 2000, our weighted average interest rate under our credit agreement was approximately 10.2%. As of December 31, 2000, we had borrowed all of our available loans under the U.S. and Canadian term loans and had availability to borrow an additional $30.4 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,
. restrictions against paying certain dividends.
. 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 the tangible and intangible assets of us and our subsidiaries, including 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 guaranteed by our domestic subsidiaries.
We have entered into an amendment to our credit agreement, certain provisions of which will become effective upon the completion of this offering. The amendment requires us to apply $24.0 million of the net proceeds from this offering plus 50% of any net proceeds over $138.0 million from this offering to repay the U.S. term loan portion of our credit facility. In addition, we are permitted to use up to $53.0 million of the net proceeds to redeem our Class A Preferred Stock and $45.0 million to repay our senior subordinated notes. Our revolving credit facility will also be increased, by an amount equal to approximately 83% of the amount of our U.S. term loans under the credit facility we repay using the net proceeds of this offering.
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 approximately 10 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. From time to time, we may complete small acquisitions of specialty hospitals and outpatient rehabilitation businesses. These type of acquisitions typically involve consideration of less than $5.0 million. 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. Because of the limited use of derivative instruments, management does not believe that there will be a material effect on our consolidated financial statements.
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 change in interest rates by one percentage point on variable rate debt would have resulted in interest expense fluctuating approximately $1.3 million for 1999, and $2.0 million for 2000. We are required by the amendment to our credit agreement to hedge our interest rate risk by March 31, 2001 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 agreement, we will enter into one or more interest rate protection agreements which will fix or limit the interest cost to us with respect to at least 50% of the amount of the term loans outstanding pro forma for this offering.
Approximately 10% of our term-loan borrowings under our credit agreement are denominated in Canadian dollars. Although we are not required by our credit agreement to maintain a hedge on our foreign currency risk, we have entered into a five year hedge agreement that allows us to limit the cost of Canadian dollars to a range of US$0.6631 to US$0.6711 per Canadian dollar to limit our risk on the potential fluctuation in the exchange rate of the Canadian dollar to the U.S. dollar.
Subsequent Events
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 expect to pay these minority owners approximately $15.6 million for their ownership interests. About $11.4 million of the expected purchase price for these ownership interests will be paid in cash, and about $4.2 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, the shares, by the terms of the agreements we entered into with these owners when we purchased their businesses, will be at the price to the public of the common stock sold in this offering less fixed discounts of 20%. All these shares will be restricted securities eligible for resale under Rule 144 of the Securities Act.
We expect to take an extraordinary charge of approximately $6 million related to unearned discounts and deferred financing costs associated with the repayment of $35.0 million of our senior subordinated notes upon the consummation of our initial public offering.
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 based on the number of our clinics. As of December 31, 2000, we operated 54 specialty acute care hospitals in 19 states and 679 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. For the year ended December 31, 2000, we had net operating revenues of $805.9 million. Of this total, we earned 51.7% of our net operating revenues from our outpatient rehabilitation business and 48.3% 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, 17 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 margins improved by 2.1 percentage points for the year ended December 31, 2000 compared to the year ended December 31, 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 119 days as of December 31, 1999 to 85 days as of December 31, 2000.
. Experience in Successfully Completing and Integrating Acquisitions. Since we began operations in 1997, we have completed three significant acquisitions for approximately $366 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 December 31, 2000, we developed 18 new specialty acute care hospitals and 57 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 December
31, 2000, we had $4.1 million in cash, and our total long term debt of $223.2 million represented 47.6% of our capitalization.
Specialty Acute Care Hospitals
As of December 31, 2000, we operated 54 specialty acute care hospitals, 49 of which were certified by the federal Medicare program as long-term acute care hospitals. These hospitals generally have 35 to 40 beds, and as of December 31, 2000, we operated a total of 1,982 available licensed beds. Our specialty acute care hospitals employ approximately 5,800 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 comprises 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 54 specialty hospitals we operated as of December 31, 2000, two are freestanding facilities and 52 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 December 31, 2000, 49.8% 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 approximately 10 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, such as 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 December 31, 2000, we had completed the development and opening of the following 18 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
SSH-Erie* Erie PA October 2000 35
SSH-North Dallas Dallas TX November 2000 11
SSH-Fort Smith* Fort Smith AR December 200 34
---
Total 596
===
|
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 allocate our resources efficiently, 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 December 31, 2000, all but our seven 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. General acute care hospitals incur substantial overhead costs in order to provide a wide array of patient services. We provide a much narrower range of patient services, and our hospitals within a hospital lease underutilized space within a general acute care hospital. These factors permit our hospitals to operate with lower overhead costs per patient than general acute care hospitals can. As a result of these lower costs, we 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, based on the number of our clinics. As of December 31, 2000, we operated 593 clinics throughout 29 states and the District of Columbia and 86 clinics in seven provinces throughout Canada. Our outpatient rehabilitation division
employs approximately 7,500 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 found that $13 in savings is generated for every dollar spent by insurers 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 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 approximately $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 11.0% 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 U.S. healthcare spending is estimated to grow 6.6% in 2001 and at an average annual rate of 6.5% 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 70 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 8.9 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,
-------------------
Net Operating Revenues by Payor Source 1998 1999 2000
-------------------------------------- ----- ----- -----
Commercial insurance (a)................................... 37.6% 34.6% 51.2%
Medicare................................................... 37.9 48.1 35.1
Private and other (b)...................................... 24.5 15.7 12.4
Medicaid (c)............................................... -- 1.6 1.3
----- ----- -----
Total.................................................... 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.
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. See "--Government Regulations--Overview of U.S. and State Government Reimbursements."
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 ours 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 54 hospitals participate in the Medicare program. In addition, we provide the majority of our outpatient rehabilitation services through clinics certified by Medicare as 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 December 31, 2000, all but our seven 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. For the year ended December 31, 2000, we received approximately one-third of our revenue from Medicare.
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 more than 25 days. 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. Legislation enacted in December 2000, the "Medicare, Medicaid, and SCHIP Benefits Improvement and Protection Act of 2000," increases the target amount by 25 percent and the national ceiling by 2 percent for cost reporting periods beginning after October 1, 2000.
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. When developing the prospective payment system, the December 2000 legislation requires the Secretary to examine the feasibility and impact of basing payment on the existing (or refined) short term acute hospital DRGs and the most recently available hospital discharge data. The Secretary is required to implement a prospective payment system using the existing short term acute hospital DRGs that have been modified where feasible, unless a different prospective payment system is implemented by October 1, 2002.
Outpatient Rehabilitation Services Medicare Reimbursement. We provide the majority of our outpatient rehabilitation services in our rehabilitation clinics. Through our contract services agreements, we also provide outpatient rehabilitation services in the following settings:
. schools;
. physician-directed clinics;
. hospitals; and
. skilled nursing facilities.
Essentially, all of our outpatient 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 through 2002 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. The December 2000 legislation also requires the Secretary to study the implications of eliminating the "in the room" supervision requirement for Medicare payment for physical therapy assistants who are supervised by physical therapists and the implications of this requirement on the physical therapy cap.
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 2.3% of our net operating revenues for the year ended December 31, 2000.
Workers' Compensation. Workers' compensation programs account for approximately 18.2% of our revenue from outpatient rehabilitation services for the year ended December 31, 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
In 1996, approximately 70% of all funding for the Canadian healthcare system was derived from public sources, according to Health Canada. 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 year ended December 31, 2000, we derived about 3.9% 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.
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 five 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. As a result of the December 2000 legislation, however, subordinate facilities that were treated as provider- based prior to October 1, 2000 will not have to comply with the new standards until October 1, 2002. Subordinate facilities that are established after October 1, 2000 will be required to satisfy the new standards for cost reporting periods beginning on or after January 10, 2001. The December 2000 legislation also moderated the geographic proximity requirement for provider- based status under the new standards, thereby removing an obstacle to provider- based status for certain subordinate facilities, and many long term acute care hospital satellites, in particular.
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. The Department of Health and Human Services has finalized two rules to date mandating the use of new standards with respect to certain healthcare transactions and health information. The first rule requires the use of uniform 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, and it establishes standards for the use of electronic signatures.
Second, the Department of Health and Human Services has finalized new standards relating to the privacy of individually identifiably health information. 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 associate to whom such information is disclosed. Rules governing the security of health information have been proposed but have not yet been issued in final form.
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 October 16, 2002. The privacy standards under the Health Insurance Portability and Accountability Act were issued on December 28, 2000, and will become effective on April 14, 2001. We will be required to comply with them by April 14, 2003. Once the security 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 December 31, 2000 we employed approximately 13,700 people throughout the United States and Canada. A total of approximately 8,100 of our employees are full-time and the remaining approximately 5,600 are part-time employees. Outpatient, contract therapy and physical rehabilitation and occupational health employees totaled approximately 7,500 and inpatient employees totaled approximately 5,800.
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 indemnify us against all losses that result from this litigation up to a cap of $62.8 million, other than for lost profits or consequential damages. 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 and some of the subsidiaries we acquired in the NovaCare acquisition as defendants 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 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. These insurance policies also do not cover punitive damages. 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. The compliance officer and the compliance committee are responsible for reviewing and investigating each compliance incident 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 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. 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 December 31, 2000, included approximately 679 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 December 31, 2000, we had 52 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 December 31, 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
James E. Dalton, Jr. ............... 58 Director
Donald J. Edwards................... 35 Director
Meyer Feldberg...................... 58 Director
Director and Executive Vice
LeRoy S. Zimmerman.................. 66 President, Public Policy
Executive Vice President of
Patricia A. Rice.................... 54 Operations
Senior Vice President and Chief
David W. Cross...................... 54 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
Vice President, Controller and Chief
Scott A. Romberger.................. 40 Accounting Officer
|
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 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 12 institutionally funded limited partnerships with total capital of $11 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 its founding in June 1998 and prior to that time was a principal and partner at Golder, Thoma, Cressey and Rauner, the predecessor of GTCR Golder Rauner, LLC, since 1980. He serves as a director of Clarion Technologies Inc. and as a director and chairman of Cable Design Technologies Corp.
James E. Dalton, Jr. has been a director since December, 2000. Mr. Dalton has served as President, Chief Executive Officer and as a director of Quorom Health Group, Inc. since May 1, 1990. Prior to joining Quorom, he served as Regional Vice President, Southwest Region for HealthTrust, Inc., as division Vice President of HCA, and as Regional Vice President of HCA Management Company. Mr. Dalton is on the board of directors of of the Nashville Health Care Council, and is on the board of directors and past chairman of the Federation of American Health Systems. He was elected to the American Hospital Association's Board of Trustees on January 1, 2000. He also serves on the board of directors of AmSouth Bancorporation, and U.S. Oncology, Inc. He serves as a Trustee for the Universal Health Services Realty Income Trust. Mr. Dalton is a Fellow of the American College of Healthcare Executives.
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 Dynacare, Inc., American Medical Laboratories and a number of private companies.
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 in 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 March 1996 until October 1998, Mr. Miersch served first as Vice President-- Operations then as 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 September 1993 until March 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 September 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 September 1980 to January 1986.
Scott A. Romberger has served as Vice President and Controller since February 1997. In addition, he became Chief Accounting Officer in December, 2000. Prior to February 1997, he was Vice President--Controller of Continental Medical Systems from January 1991 until January 1997. Prior to that time, he served as Acting Corporate Controller and Assistant Controller of Continental Medical Systems from June 1990 and December 1988, respectively. Mr. Romberger is a certified public accountant and was employed by a national accounting firm from April 1985 until December 1988.
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 2002 Messrs. Edwards, Feldberg and Zimmerman
Messrs. Cressey, Dalton, and Robert
Class II 2003 Ortenzio
Messrs. Carson, Rocco Ortenzio and a
Class III 2004 director to be named
|
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. The compensation committee consists of Russell L. Carson, Bryan C. Cressey and Meyer Feldberg. Messrs. Cressey and Feldberg are two of our nonemployee directors and constitute the members of the sub-committee of the compensation committee, which administers certain aspects of our Amended and Restated 1997 Stock Option Plan. In addition, the compensation committee reviews compensation arrangements for our other executive officers. The compensation committee also administers our equity compensation plans.
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. Messrs. Feldberg and Dalton are currently the two members of our audit committee. We intend to name one additional independent director 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 Amended and Restated 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 served as the only members of the compensation committee since we formed the committee in 1997, until Mr. Feldberg became a member of the compensation committee in 2000. Mr. Carson may be deemed an executive officer of WCAS Capital Partners III, L.P. which holds the Senior Subordinated Notes. As of December 31, 1999, we were indebted to WCAS Capital Partners III, L.P. in an amount in excess of 5% of our total consolidated assets. See "Related Party Transactions."
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, 2000.
Summary Compensation Table
Long-Term
Annual Compensation Compensation
---------------------------------- ------------
Securities
Name and Principal Other Underlying All Other
Position Salary Bonus Compensation (a) Options/SARs Compensation
------------------ -------- -------- ---------------- ------------ ------------
Rocco A. Ortenzio (b)
Chairman and Chief
Executive Officer..... 2000 $581,667 $287,500 $ -- -- $7,690
1999 387,222 193,611 -- 655,044
Robert A. Ortenzio (c)
President and Chief
Operating Officer..... 2000 507,692 256,250 5,250 -- --
1999 334,669 165,446 3,976 436,697
Patricia A. Rice (c)
Executive Vice
President of
Operations............ 2000 365,385 147,500 5,250 201,600 --
1999 233,450 90,000 4,611 --
Martin F. Jackson (c)
Senior Vice President
and Chief Financial
Officer............... 2000 234,616 94,000 5,250 120,960
Edward R. Miersch (c)
President of NovaCare
Division.............. 2000 294,231 122,500 2,100 259,200
|
(b) Represents the benefit to Rocco A. Ortenzio of premiums we paid in
connection with life insurance policies owned by the Rocco A. Ortenzio
Irrevocable Trust. See "--Employment Agreements." Under this arrangement we
paid no premiums in respect of term life insurance, and the value of the
premiums paid by us reflects the present value of an interest free loan to
Mr. Ortenzio through the end of the fiscal year.
(c) Other compensation represents employer matching contributions to the 401(k)
plan.
Option Grants During the Year Ended December 31, 2000
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, 2000.
Potential Realizable Value at
Number of Percentage of Assumed Annual Rates of Stock
Securities Total Options Price Appreciation for
Underlying Granted to Exercise Option Term (c)
Options Employees in Price per -----------------------------
Name Granted (a) 2000 Share (b) Expiration Date 5% 10%
---- ---------- ------------- ----------- --------------- -----------------------------
Patricia A. Rice........ 201,600 10.7% $6.51-10.42 1/3/10-10/13/10 $250,318 $1,242,664
Martin F. Jackson....... 120,960 6.4% $6.51-10.42 1/3/10-10/13/10 $166,296 $784,570
Edward R. Miersch....... 259,200 13.8% $6.51-10.42 1/3/10-10/13/10 $266,621 $1,464,094
|
(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. 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. If the hypothetical gains in these columns were calculated assuming that the price of our common stock on the date of this prospectus was $12.00 per share, the midpoint of the range of initial public offering prices set forth on the cover page of this prospectus, then the potential realizable value of the option grants would be as follows: Ms. Rice- $2,463,844 (at 5%) and $4,485,865 (at 10%); Mr. Jackson- $1,447,963 (at 5%) and $2,657,097 (at 10%); and Mr. Miersch $3,249,072 (at 5%) and $5,850,960 (at 10%).
Year End December 31, 2000 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 1,605,444 0 $9,220,147 $ 0
Robert A. Ortenzio...... 0 0 753,497 0 4,271,267 0
Patricia A. Rice........ 0 0 0 201,600 0 993,500
Martin F. Jackson....... 0 0 11,520 167,040 68,200 846,400
Edward R. Miersch....... 0 0 0 259,200 0 1,354,500
|
Employment Agreements
In March 2000, we entered into three-year employment agreements with three of our executive officers, Rocco A. Ortenzio, Robert A. Ortenzio and Patricia A. Rice. Under these agreements, which were amended on August 8, 2000 and February 3, 2001, the executive 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 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 Robert A. Ortenzio and Patricia A. Rice for the same period; however, payments to them must equal 50% of their annual base salary. In addition, Rocco A. Ortenzio and Robert A. Ortenzio are each entitled to six weeks paid vacation. 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. In each employment agreement, for the term of the agreement and for two years after the termination of employment, the executive may not participate in any business that competes with us within a twenty-five mile radius of any of our hospitals or outpatient rehabilitation clinics. The executive also may not solicit any of our employees for one year after the termination of the executive's employment.
These three employment agreements also contain a change of control provision. If, within the one-year period immediately following a change of control of Select, we terminate Rocco A. Ortenzio or Robert A. Ortenzio without cause or Rocco A. Ortenzio or Robert A. Ortenzio terminates his employment agreement for any reason, 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. If, within the one-year period immediately following a change of control of Select, Patricia A. Rice terminates her employment for certain specified reasons or, within the five-year period immediately following a change of control, is terminated without cause, has her compensation reduced from that in effect prior to the change of control or is relocated to a location more than 25 miles from Mechanicsburg, Pennsylvania, we are obligated to pay her a lump sum cash payment equal to her base salary plus bonus for the previously three completed calendar years. In addition, all of their unvested and unexercised stock options will vest. A change in control is generally defined to include the following: 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 total voting shares; a business combination following which there is an increase in share ownership by any person or group, other than the executive or any group of which the executive is a part, by an amount equal to or greater than 33% of our total voting shares; our current directors, or any director elected after the date of the respective employment agreement whose election was approved by a majority of the then current directors, cease to constitute at least a majority of our board; a business combination following which our stockholders cease to own shares representing more than 50% of the voting power of the surviving corporation; or a sale of substantially all of our assets other than to an entity controlled by our shareholders prior to the sale. 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 $6.51 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 target bonus established for that year, or if no target bonus is established the bonus paid or payable to them for the year prior to their termination, in either case multiplied by the fraction of the year of termination they were employed. In addition, we would also be obligated to pay these executives their base salary as of the date of termination for the balance of the term of the agreement. Finally, all vested and unexercised stock options will vest immediately.
Under amendments to 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. In the event of Mr. Ortenzio's death, we will be repaid from the death proceeds of the policies. In the event the policy is surrendered or canceled, we will be repaid from the cash surrender value of the policies. At any time prior to Mr. Ortenzio's death, we can be paid by loan, partial surrender or withdrawal of premiums paid prior to the time of loans, surrender or withdrawal.
We have also entered into a deferred compensation agreement with 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 1999, we entered into a three year employment agreement with Mr. Edward R. Miersch, which remains in effect for successive one year periods, unless terminated by 180 days prior notice by either party. Under this agreement, we granted him options to purchase 241,920 shares of our common stock at an exercise price of $6.51 per share with the options vesting over five years. Mr. Miersch is entitled to receive an annual salary of $300,000 and incentive compensation in an amount of up to 40% of his base salary. Further, Mr. Miersch is entitled to any employment and fringe benefits under our policies as they exist from time to time and which are made available to substantially all of our employees. During the employment term and for two years after the termination of his employment, Mr. Miersch may not solicit any of our employees or participate in any business that competes with us within a twenty mile radius of any of our facilities or businesses.
In March 2000, we entered into change of control agreements with Mr. Miersch and Mr. Martin F. Jackson, which were each amended on February 23, 2001. These agreements provide that if within a five-year period immediately following a change of control of Select, we terminate Mr. Jackson or Mr. Miersch without cause, reduce either of their compensation from that in effect prior to the change of control or relocate Mr. Jackson to a location more than 25 miles from Mechanicsburg, Pennsylvania or Mr. Miersch to a location more than 25 miles from King of Prussia, Pennsylvania, we are obligated to pay the affected individual a lump sum cash payment equal to his base salary plus bonus for the previous three completed calendar years. If at the time we terminate Mr. Jackson or Mr. Miersch without cause or Mr. Jackson or Mr. Miersch terminates his employment for good reason in connection with a change in control, Mr. Jackson or Mr. Miersch has been employed by us for less than three years, we must pay the terminated individual three times his average total annual cash compensation (base salary and bonus) for his years of service. In addition, the agreements provide that all unvested stock options will vest upon termination. A change in control has the same definition as in the employment agreements of Rocco A. Ortenzio, Robert A. Ortenzio and Patricia A Rice, as described above.
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 13, 2000. The plan provides for the grant of stock options to designated officers, key employees, and consultants of ours and our subsidiaries and our non-employee directors.
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), or consultant providing services to us or our subsidiaries and our non-employee directors are 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 5,760,000 shares of our common stock, plus any additional amount (the additional amount will be calculated by the committee from time to time) necessary to make the total shares available for issuance under the plan equal to the sum of 5,760,000 plus 14% of the total issued and outstanding common stock in excess of 34,560,000 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 key employee or officer may receive awards covering more than 8,640,000 shares (subject to adjustment for stock splits, dividends and the like) under the plan during any calendar year or over the life of the plan.
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 any key employee or officer who owns more than 10% of the combined voting power of the company or any of our subsidiaries at the time the option is granted to him). The exercise price of a non-qualified stock option may be at less than the fair market value on the date of grant. The term of an option may not be greater than ten years (or five years for an incentive stock option granted to an employee or officer who owns more than 10% of the combined voting power of the company or any of our subsidiaries). 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. All outstanding unvested options will vest upon a change in control, as defined in the plan.
Amendment and Termination. The plan will terminate on midnight of February 21, 2011, 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:
. with respect to incentive stock options any amendment that would, if it were not approved by the stockholders, change the class of employees eligible to participate in the plan;
. any amendment that would, if it were not approved by the stockholders, increase the maximum number of shares of common stock with respect to which incentive stock options may be granted, except as permitted under the terms of the plan;
. any amendment that would, if it were not approved by the stockholders, extend the duration of the plan with respect to any incentive stock options granted 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 950,400 and 316,800 shares of our common stock,
respectively, at an exercise price of $6.08 per share. In November 1999, Rocco
A. Ortenzio and Robert A. Ortenzio received additional options to purchase
655,044 and 436,697 shares of our common stock, respectively, at an exercise
price of $6.51 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 $0.29 per share until September 19, 1998, $6.08 per share until November 19, 1999 and for $6.51 per share thereafter. Our Class A Preferred Stock was sold for $1,000 per share, and our Class B Preferred Stock was sold for $3.75 per share. Each share of Class A Preferred Stock will be redeemed upon the completion of this offering for a cash payment of $1,000 plus accrued dividends. Each share of Class B Preferred Stock will convert into .576 shares of our Common Stock upon the completion of this offering.
Shares of Shares of
Shares of Class A Class B
Common Preferred Preferred Amount
Stock Stock Stock Received
Name Date Purchased Purchased Purchased by Select
---- -------- --------- --------- --------- ----------
Rocco A. Ortenzio (a)........ 2/5/97 1,299,025 -- -- $ 375,875
5/7/97 147,583 128 -- 170,248
6/18/97 -- 109 -- 108,490
2/9/98 -- 502 -- 501,640
4/29/98 -- 355 -- 354,609
6/3/98 -- 563 -- 562,186
6/30/98 -- 173 -- 172,978
7/20/98 140,838 -- -- 40,760
10/21/98 -- 468 -- 467,168
12/16/98 363,234 -- -- 2,207,152
2/29/00 38,592 -- -- 251,250
Robert A. Ortenzio (b)....... 2/5/97 794,370 -- -- $ 229,852
5/7/97 88,270 66 -- 90,777
6/18/97 -- 56 -- 55,494
2/9/98 -- 257 -- 256,590
4/29/98 -- 182 -- 181,383
6/3/98 -- 288 -- 287,560
6/30/98 -- 89 -- 88,478
10/21/98 -- 239 -- 238,969
12/16/98 79,864 -- -- 485,287
2/29/00 19,238 -- -- 125,250
|
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 2,986,986 -- -- $ 864,290
Stowe VII, L.P., and 5/7/97 1,123,062 1,254 -- 1,578,960
affiliates............. 6/18/97 -- 1,069 -- 1,068,910
2/9/98 -- 4,940 -- 4,939,130
4/29/98 -- 3,494 -- 3,493,290
6/3/98 -- 5,535 -- 5,534,760
6/30/98 -- 1,704 -- 1,703,380
10/21/98 -- 4,603 -- 4,602,280
12/16/98 6,162,081(c) -- -- 28,157,498
11/19/99 960,162(d) -- 7,531,424 28,242,841
Affiliates of GTCR 2/5/97 3,139,569 -- -- $ 908,440
Golder Rauner, LLC..... 5/7/97 1,180,431 1,319 -- 1,660,560
6/18/97 -- 1,123 -- 1,122,910
2/9/98 -- 5,193 -- 5,192,130
4/29/98 -- 3,671 -- 3,670,290
6/3/98 -- 5,819 -- 5,818,760
6/30/98 -- 1,791 -- 1,790,380
10/21/98 -- 4,837 -- 4,836,530
12/16/98 2,454,171 -- -- 14,912,499
11/19/99 -- -- 1,983,333 7,437,499
|
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 $6.08 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
------- ----------------- -------------- -------------- -------- ---------
06/30/98 216,789 -- 216,789 -- 44,974
07/11/98 -- -- -- 97,448 --
10/31/98 108,395 -- 108,395 48,724 22,487
01/29/99 108,395 -- 108,395 48,724 22,487
04/30/99 10,324 1,865 12,189 5,479 2,529
07/31/99 22,239 4,018 26,257 11,802 5,447
10/31/99 22,370 4,041 26,411 11,871 5,479
01/31/00 47,783 9,011 56,794 18,563 8,757
04/30/00 54,553 10,391 64,944 19,325 9,187
07/31/00 54,553 10,391 64,944 19,325 9,187
09/22/00 31,427 5,986 37,414 11,133 5,292
------- ------ ------- ------- -------
676,828 45,703 722,532 292,394 135,826
|
On December 15, 1998, we issued an aggregate of 12,225,306 shares of our common stock. Of this amount, 2,343,086 common shares were purchased by Thoma Cressey Fund VI, L.P., 82,286 shares were purchased by Bryan C. Cressey and 68,631 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 246,857 common shares. WCAS Capital Partners III, L.P. purchased 1,528,163 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, Rocco A. Ortenzio and 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 $3.75 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 960,192 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 240,048 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 19,749 shares of our common stock at a price of $6.08 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, $60,000 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 63.6% 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, the company we were to acquire paid a break-up fee to us and our financial sponsors. Based on the relative amounts 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 by Rocco A. Ortenzio, Robert A. Ortenzio, Martin J. Ortenzio and John M. Ortenzio. We received a payment of $6,022,000. Martin Ortenzio and John Ortenzio are the sons or Rocco A. Ortenzio, and the brothers of Robert A. Ortenzio. These partnerships have since been liquidated.
In 1998, to finance acquisitions and for working capital, we received two loans of $1.0 million each from Rocco A. Ortenzio. The loans were at an annual interest rate of 10%, and were payable six months from the date of the loan. We repaid the loan in full in 1998 with a lump sum payment of $2,014,000.
We lease our corporate office space in Mechanicsburg, Pennsylvania from Old Gettysburg Associates I and Old Gettysburg Associates III, two general partnerships that are owned by Rocco A. Ortenzio, Robert A. Ortenzio, Martin J. Ortenzio and John M. Ortenzio. In 1997, 1998, 1999 and 2000, we paid to these partnerships an aggregate amount of $11l,861, $151,266, $501,719 and $1,131,251, respectively, for office rent, for various improvements to our office space and miscellaneous expenses. These amounts included $145,460 paid in 1999 to CCI Construction Company, Inc., a company owned by John M. Ortenzio, for improvements to the leased facilities. Our current 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 currently pay approximately $992,000 per year in rent for this office space. We believe that these leases and arrangements have been and 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 Pennsylvania corporation whose principal offices are located in Mechanicsburg, Pennsylvania. Rocco A. Ortenzio, Robert A. Ortenzio, Martin J. Ortenzio and John M. Ortenzio each own 25% of Select Capital Corporation. 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 year under the agreement. Since our inception through December 31, 2000, we have paid a total of $421,776 to Select Capital Corporation for equipment rental, improvements, maintenance, limousine and telephone expenses. We believe that this lease and these arrangements were 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.
In 2000, we paid $7,953 to Select Security, Inc. for security card readers and related expenses. Robert A. Ortenzio owns 18%, Rocco A. Ortenzio and Martin J. Ortenzio each own 10%, and John M. Ortenzio owns 2% of the outstanding capital stock of Select Security, Inc. We believe that the terms of these transactions were no less favorable to us than they would have been 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 for approximately $2.5 million. Pursuant to a Cost Sharing Agreement also dated December 1, 1999, we paid $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 paid us fees from time to time under this agreement for various services, including the use of pilots who are our employees. In October 2000, we terminated the December 1, 1999 Cost Sharing Agreement and entered into a new Cost Sharing Agreement with Select Transport and Select Air II Corporation, a corporation owned by Rocco A. Ortenzio. Under the new Cost Sharing Agreement, we and Select Air II will each pay to Select Transport $3,250 for the use of hangar facility. We will employ a full-time mechanic and Select Air II will pay us 40% of our out of pocket costs to employ the mechanic. We will continue to hire two full-time pilots, and Select Air II will reimburse us for the cost of their services on a per diem basis. The cost sharing agreement also allows for aircraft swapping at prescribed rates.
In 1997 we paid $4,000 to Old Gettysburg Associates II to lease office space at 4720 Old Gettysburg Road in Mechanicsburg, Pennsylvania. We no longer lease this space. Old Gettysburg Associates II is a general partnership owned by Rocco A. Ortenzio, Robert A. Ortenzio, Martin J. Ortenzio and John M. Ortenzio.
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 December 31, 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, the transfer of 240,048 shares to us by WCAS Capital Partners III, L.P. upon the repayment of the 10% senior subordinated note due 2009, 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 VII, L.P.(a)... 11,714,805 45.1% 22,596 42.8% 7,531,424 47.1% 16,052,905 34.7%
Entities affiliated with
GTCR Golder, Rauner,
LLC (b)................ 7,496,704 28.9 23,751 44.9 1,983,333 12.4 8,639,104 18.7
Entities affiliated with
Thoma Cressey Fund VI,
L.P. (c)............... 2,343,086 9.3 -- -- 5,950,000 37.2 5,770,286 12.7
Rocco A. Ortenzio (d)... 4,133,967 15.2 2,295 4.3 -- -- 4,133,967 8.7
Robert A. Ortenzio (e).. 2,117,923 8.1 1,174 2.2 -- -- 2,117,923 4.5
Russell L. Carson (f)... 11,843,916 45.6 22,929 43.4 7,642,640 47.8 16,246,077 35.1
Bryan C. Cressey (g).... 9,113,619 35.1 23,751 44.9 5,950,000 37.2 12,540,819 27.1
Donald J. Edwards (h)... 7,496,704 28.9 23,751 44.9 1,983,333 12.4 8,639,104 18.7
Meyer Feldberg.......... -- -- -- -- -- -- -- --
James E. Dalton, Jr. ... -- -- -- -- -- -- -- --
LeRoy S. Zimmerman (i).. 13,939 * -- -- -- -- 13,939 *
Patricia A. Rice (j).... 244,682 * 143 * -- -- 244,682 *
Martin F. Jackson (k)... 88,820 * -- -- -- -- 88,820 *
Edward R. Miersch (l)... 50,803 * -- -- -- -- 50,803 *
---------- ---- ---------- -------- ---------- ---- ---------- ----
All executive officers
and directors as a
group (15 persons)..... 28,489,511 95.9% 50,433 95.4% 15,575,973 97.3% 37,461,272 74.9%
========== ==== ========== ======== ========== ==== ========== ====
|
Carson, Anderson & Stowe VII, L.P. and 285,531 shares held by Welsh, Carson, Anderson & Stowe Healthcare Partners, L.P. Class A Preferred shares held include 21,931 shares held by Welsh, Carson, Anderson & Stowe VII, L.P. and 665 shares held by Welsh, Carson, Anderson & Stowe Healthcare Partners, L.P. Class B Preferred Shares held include 7,284,932 shares held by Welsh, Carson, Anderson & Stowe VII, L.P. and 246,492 shares held by Welsh, Carson, Anderson & Stowe Healthcare Partners, L.P. Excludes 240,048 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 WCAS VII Partners, L.P. and WCAS CP III, L.L.C., respectively. Bruce K. Anderson, Russell L. Carson, Anthony J. DeNicola, Thomas E. McInerney, Robert A. Minicucci, Paul B. Queally, Jonathan Rather, Rudolph E. Rupert, Lawrence B. Sorrel and Patrick J. Welsh are general partners of WCAS VII Partners and managing members of WCAS CP III. The general partner of WCAS Healthcare Partners, L.P. is WCAS HP Partners. Russell L. Carson and Patrick J. Welsh are partners of WCAS HP Partners. Accordingly, each of the individuals listed above may be deemed a beneficial owner of the shares owned by these entities. These individuals own 353,822 common, 846 Class A Preferred and 307,947 Class B Preferred shares of record in the aggregate. Shares listed as beneficially owned by affiliates of Welsh, Carson, Anderson & Stowe VII, L.P. do not include any shares owned of record by these individuals. Welsh, Carson, Anderson & Stowe VII, L.P.'s business address is 320 Park Avenue, Suite 2500, New York, New York 10022.
(b) Common shares held include 10,408 shares held by GTCR Associates V, 1,813 shares held by GTCR Associates VI, 800,902 shares held by GTCR Fund VI, L.P., 5,742 shares held by GTCR VI Executive Fund L.P. and 5,955,307 shares and warrants to purchase 722,532 shares owned by Golder, Thoma, Cressey, Rauner Fund V, L.P. Class A Preferred shares held include 42 shares held by GTCR Associates V, 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, 1,964,799 shares held by GTCR Fund VI, L.P. and 14,085 shares held by GTCR VI Executive Fund, L.P. GTCR V, L.P. is the general partner of Golder, Thoma, Cressey, Rauner Fund V, L.P., and the managing general partner of GTCR Associates V. Golder, Thoma, Cressey, Rauner, Inc. is the general partner of GTCR V., L.P. GTCR Partners VI, L.P. is the general partner of GTCR Fund VI, L.P. and GTCR Executive Fund VI, L.P., and the managing general partner of GTCR Associates VI. GTCR Golder Rauner, LLC is the general partner of GTCR Partners VI, 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 2,319,889 shares held by Thoma Cressey Fund VI,
L.P. and 23,197 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. TC
Partners VI, L.P. is the general partner of Thoma Cressey Fund VI, L.P.
and Thoma Cressey Friends Fund VI, L.P. Thoma Cressey Equity Partners,
Inc. is the general partner of the TC Partners VI, L.P. Thoma Cressey Fund
VI, L.P.'s business address is Sears Tower, 92nd Floor, 233 S. Wacker
Drive, Chicago, IL 60606-6402.
(d) Includes options to purchase 1,605,444 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus,
warrants to purchase 292,394 common shares and 246,857 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 753,497 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus
and warrants to purchase 135,826 common shares. Also includes 32,914
common shares owned by the Ortenzio Family Partnership, L.P., of which
Robert A. Ortenzio is the general partner, and 246,857 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 11,714,805 common shares, 22,596 Class A Preferred shares and
7,531,424 Class B Preferred shares owned by Welsh, Carson, Anderson &
Stowe VII, L.P. and its affiliates. Mr. Carson is a principal of Welsh,
Carson, Anderson & Stowe VII, L.P.
(g) Includes 2,343,086 common shares and 5,950,000 Class B Preferred shares
owned by Thoma Cressey Fund VI, L.P. and its affiliates. Mr. Cressey is a
principal of TC Partners VI, L.P. Common shares beneficially owned also
include 5,955,307 common shares and 722,532 warrants to purchase common
shares owned by Golder, Thoma, Cressey, Rauner Fund V, L.P., and 10,408
common shares owned by GTCR Associates V. Preferred shares beneficially
owned also include 23,709 Class A Preferred shares owned by Golder, Thoma,
Cressey, Rauner Fund V, L.P. and 42 Class A Preferred shares owned by GTCR
Associates V. Mr. Cressey is a principal of Golder, Thoma, Cressey,
Rauner, Inc., which is the general partner of GTCR V, L.P. Mr. Cressey
disclaims beneficial ownership of any shares that exceed his pecuniary
interest in the entities affiliated with GTCR Golder Rauner, LLC and Thoma
Cressey Equity Partners.
(h) Includes 7,496,704 common shares, 23,751 Class A Preferred shares and
1,983,333 Class B Preferred shares owned by affiliates of GTCR Golder,
Rauner, LLC and Golder, Thoma, Cressey Rauner, Inc. Mr. Edwards is a
principal of Golder, Thoma, Cressey Rauner, Inc. and GTCR Golder Rauner,
LLC. Mr. Edwards disclaims beneficial ownership of any shares that exceed
his pecuniary interest therein.
(i) Includes options to purchase 5,760 common shares which are currently
exercisable or exercisable within 60 days of the date of this prospectus.
(j) Includes 16,457 common shares issued to Patricia A. Rice and Jesse W. Rice
as Trustees under the Patricia Ann Rice Living Trust, 32,832 common shares
held in an I.R.A. with Mellon PSFS as custodian for the benefit of
Patricia A. Rice and options to purchase 34,560 common shares that are
currently exercisable or exercisable within 60 days of the date of this
prospectus.
(k) Includes options to purchase 40,320 common shares that are currently
exercisable or exercisable within 60 days of the date of this prospectus.
(l) Includes options to purchase 48,384 common shares which are currently
exercisable or exercisable within 60 days of the date of this prospectus.
DESCRIPTION OF CAPITAL STOCK
General
The following summary assumes the amendment and restatement of our certificate of incorporation and bylaws to read in their entirety as provided in the forms of restated certificate of incorporation and bylaws filed as exhibits to the registration statement of which this prospectus forms a part. It also reflects changes to our capital structure that will become effective prior to or upon the closing of this offering, including the redemption of the Class A Preferred Stock, the conversion of the Class B Preferred Stock into shares of our common stock and a reverse 1 to .576 common stock split. Upon completion of this offering, our authorized capital stock will consist of 200,000,000 shares of common stock, par value $.01 per share, and 10,000,000 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. See "Use of Proceeds." The 16,000,000 shares of Class B Preferred Stock outstanding will automatically convert into 9,216,000 shares of our common stock. Upon completion of this offering, we will have approximately 46,951,359 shares (48,826,359 shares if the underwriters' overallotment 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 December 31, 2000, there were 25,475,407 shares of our common stock issued and outstanding. This does not give effect to 9,216,000 shares of common stock issuable upon the conversion of our Class B Preferred Stock, which will occur upon the completion of this offering, and includes 240,048 shares of common stock that will be transferred to us upon the repayment in full of the 10% Senior Subordinated Note due 2009, which we intend to repay upon the completion of this offering.
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 33,713,087 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 by our board of directors or our stockholders in a prescribed manner, or unless the interested stockholder owns at least 85% of our voting stock (excluding for this purpose shares held by our directors and officers). 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 15% or more of our voting stock, or who is an affiliate or an associate of us who, within the three years prior to the date the determination is to be made, did own 15% or more of our 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 our 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, if any). 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 bylaws provide that our board of directors will consist of not less than five or more than nine directors, 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 bylaws authorize our board of directors to 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 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. We believe that these provisions are necessary to attract and retain qualified persons as directors and officers.
Shareholder Rights Plan. We have included in our certificate of incorporation a provision that authorizes our board of directors to create and issue rights entitling the holders of those rights to purchase our securities or the securities of another corporation. The issuance of these rights may have the effect of delaying, deferring or preventing a change in control of us without further action by the holders of our common or preferred stock. In addition, the issuance of these rights 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 such rights.
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, depending on the subject provision. 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 Mellon Investor 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 46,951,705 shares of our common stock outstanding (assuming no exercise of the underwriters' overallotment option and no exercise of outstanding options and warrants). Of these shares, the 12,500,000 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, 34,451,705 "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. These shares will become eligible for sale subject to compliance with Rule 144 upon the expiration of the agreements not to sell such shares entered into between the underwriters and our executive officers, directors and substantially all of our stockholders as described below. 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 469,517 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 and our executive officers, directors and substantially all of our existing stockholders 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, subject to certain limited exceptions. However, Merrill Lynch may in its sole discretion, at any time without notice, consent to the release of all or any portion of the shares subject to lock-up agreements. Merrill Lynch does not have any current intention to release shares of common stock subject to these lock-up agreements. Any determination to release any shares subject to the lock-up agreements would be based on a number of factors at the time of any such determination, including the market price of the common stock, the liquidity of the trading market for the common stock, general market conditions, the number of shares proposed to be sold, and the timing of the proposed sale. See "Underwriting."
The holders of 33,713,087 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 named below and elsewhere through the international managers. 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 1,875,000 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.............................................
J.P. Morgan Securities Inc. ......................................
Credit Suisse First Boston Corporation............................
CIBC World Markets Corp. .........................................
SG Cowen Securities Corporation...................................
First Union Securities, Inc. .....................................
----------
Total........................................................ 10,625,000
==========
|
We have also entered into an international purchase agreement with Merrill Lynch International, J.P. Morgan Securities Ltd., Credit Suisse First Boston (Europe) Limited, CIBC World Markets plc, SG Cowen Securities Corporation and First Union Securities, Inc., the international managers, for sale of the shares outside the U.S. and Canada. Subject to the terms and conditions in the international purchase agreement, and concurrently with the sale of 10,625,000 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 1,875,000 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. underwriters have advised us that they 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 overallotment 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 $2.0 million and are payable by us.
Overallotment Option
We have granted an option to the U.S. underwriters to purchase up to 1,593,750 additional shares at the public offering price less the underwriting discount. The U.S. underwriters may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the U.S. underwriters exercise this option, 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 an option to the international managers, exercisable for 30 days from the date of this prospectus, to purchase up to 281,250 additional shares to cover any overallotments on terms similar to the option 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. See "Shares Eligible for Future Sale." 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. 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 have received approval for the shares to be quoted 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 will not confirm sales of the shares to any account over which they exercise discretionary authority without the prior written specific approval of the customer.
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 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. Credit Suisse First Boston Corporation has agreed to act as qualified independent underwriter for the offering. The price of the shares will be no higher than that recommended by Credit Suisse First Boston Corporation.
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, mergers and acquisitions advisory services 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 J.P. Morgan Securities Inc. acts as administrative agent, and affiliates of 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, 2000 and December 31, 1999 and for each of the three years in the period ended December 31, 2000 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 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.
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.
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) as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years ended December 31, 2000, 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 our opinion.
/s/ PricewaterhouseCoopers LLP Harrisburg, Pennsylvania February 16, 2001, except for |
paragraph 8 of Note 7,
which is dated
March 28, 2001
Select Medical Corporation
Consolidated Balance Sheets
(in thousands, except share and per share amounts)
December 31,
1999 2000
-------- --------
Assets
Current Assets:
Cash and cash equivalents.................... $ 4,067 $ 3,151
Escrow receivable............................ 29,948 --
Accounts receivable, net of allowance for
doubtful accounts of $69,492 and $75,517 in
1999 and 2000, respectively................. 184,148 196,505
Prepaid income taxes......................... 283 1,093
Assets held for sale......................... 13,000 --
Other current assets......................... 21,264 21,083
-------- --------
Total Current Assets.......................... 252,710 221,832
Property and equipment, net................... 85,072 84,976
Intangible assets............................. 258,079 251,399
Other assets.................................. 24,857 28,593
-------- --------
Total Assets.................................. $620,718 $586,800
======== ========
Liabilities and Stockholders' Equity
Pro forma,
(unaudited)
Current Liabilities:
Bank overdrafts.............................. $ 6,966 $ 14,218
Current portion of long-term debt and notes
payable..................................... 21,127 18,746
Accounts payable............................. 27,489 28,795
Accrued payroll.............................. 17,865 21,466
Accrued vacation............................. 4,065 7,701
Accrued restructuring........................ 9,357 4,701
Accrued other................................ 15,621 15,451
Due to third party payors.................... 17,622 1,511
-------- --------
Total Current Liabilities..................... 120,112 112,589
Long-term debt, net of current portion........ 319,694 284,042
-------- --------
Total liabilities............................. 439,806 396,631
Commitments and Contingencies (Note 17)
Minority interest in consolidated subsidiary
companies..................................... 10,671 12,098
Preferred stock--Class A, non-voting, $1,000
per share redemption value
Authorized shares--55,000, Issued and
outstanding shares--52,848 and 52,838 in
1999 and 2000, respectively................. 60,398 65,481 $ 65,481
Convertible preferred stock--Class B, non-
voting, $3.75 per share redemption value:
Authorized shares--16,000,000, Issued and
outstanding shares--16,000,000............... 60,406 64,092 4,092
Stockholders' Equity:
Common stock--$.01 par value: Authorized
shares--78,000,000, Issued shares--
25,525,000, 25,697,000 and 34,913,000
(unaudited) in 1999, 2000 and pro forma,
respectively................................ 255 257 349
Capital in excess of par..................... 79,502 73,069 132,977
Accumulated deficit.......................... (29,469) (23,757) (23,757)
Treasury stock, at cost--189,000 and 221,000
shares in 1999 and 2000, respectively....... (829) (1,039) (1,039)
Accumulated other comprehensive loss......... (22) (32) (32)
-------- -------- --------
Total Stockholders' Equity.................... 49,437 48,498 $108,498
-------- -------- --------
Total Liabilities and Stockholders' Equity.... $620,718 $586,800
======== ========
|
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
December 31,
----------------------------
1998 1999 2000
-------- -------- --------
Net operating revenues.......................... $149,043 $455,975 $805,897
-------- -------- --------
Costs and expenses:
Cost of services.............................. 128,910 383,453 656,461
General and administrative.................... 12,526 21,420 28,431
Bad debt expense.............................. 4,014 8,858 29,335
Depreciation and amortization................. 4,942 16,741 30,401
Special charge................................ 10,157 5,223 --
-------- -------- --------
Total costs and expenses........................ 160,549 435,695 744,628
-------- -------- --------
Income (loss) from operations................... (11,506) 20,280 61,269
Other income and expense:
Interest income................................. (406) (362) (939)
Interest expense................................ 5,382 21,461 36,126
-------- -------- --------
Income (loss) before minority interests and
income taxes................................... (16,482) (819) 26,082
Minority interest in consolidated subsidiary
companies...................................... 1,744 3,662 4,144
-------- -------- --------
Income (loss) before income taxes............... (18,226) (4,481) 21,938
Income tax expense (benefit).................... (182) 2,811 9,979
-------- -------- --------
Net income (loss) before extraordinary item..... (18,044) (7,292) 11,959
Extraordinary item.............................. -- 5,814 6,247
-------- -------- --------
Net income (loss)............................... $(18,044) $(13,106) $ 5,712
Less: Preferred dividends....................... 2,540 5,175 8,780
-------- -------- --------
Net loss available to common stockholders....... $(20,584) $(18,281) $ (3,068)
======== ======== ========
Net income (loss) per common share:
Basic:
Income (loss) before extraordinary item..... $ (1.64) $ (0.50) $ 0.13
Extraordinary item.......................... -- (0.24) (0.25)
-------- -------- --------
Loss per common share....................... $ (1.64) $ (0.74) $ (0.12)
Diluted:
Income (loss) before extraordinary item..... $ (1.64) $ (0.50) $ 0.12
Extraordinary item.......................... -- (0.24) (0.24)
-------- -------- --------
Loss........................................ $ (1.64) $ (0.74) $ (0.12)
Weighted average shares outstanding:
Basic......................................... 12,517 24,557 25,457
Diluted....................................... 12,517 24,557 25,907
|
The accompanying notes are an integral part of these financial statements.
Select Medical Corporation
Consolidated Statements of Changes in Stockholders' Equity
(in thousands)
Common Retained Accumulated
Stock Capital Earnings/ Other
Common Par in Excess (Accumulated Treasury Comprehensive Comprehensive
Stock Value of Par Deficit) Stock Loss Income (Loss)
------ ------ --------- ------------ -------- ------------- -------------
Balance at December 31,
1997.................... 11,685 $ 117 $ 3,264 $ 1,681 $ -- $ --
Net loss............... -- -- -- (18,044) -- -- $(18,044)
Accumulated other
comprehensive loss.... -- -- -- -- -- (27) (27)
--------
Total comprehensive
loss.................. -- -- -- -- -- -- $(18,071)
========
Issuance of common
stock................. 12,708 127 74,878 -- -- --
Issuance of warrants... -- -- 1,086 -- -- --
Redemption of common
stock................. -- -- -- -- (48) --
Preferred stock
dividends............. -- -- (2,540) -- -- --
------ ----- -------- -------- ------- ----
Balance at December 31,
1998.................... 24,393 244 76,688 (16,363) (48) (27)
Net loss............... -- -- -- (13,106) -- -- $(13,106)
Accumulated other
comprehensive income.. -- -- -- -- -- 5 5
--------
Total comprehensive
loss.................. -- -- -- -- -- -- $(13,101)
========
Issuance of common
stock................. 1,132 11 6,239 -- -- --
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.................... 25,525 255 79,502 (29,469) (829) (22)
Net income............. -- -- -- 5,712 -- -- $ 5,712
Accumulated other
comprehensive loss.... -- -- -- -- -- (10) (10)
--------
Total comprehensive
income................ -- -- -- -- -- -- $ 5,702
========
Issuance of common
stock................. 172 2 1,116 -- -- --
Purchase of treasury
shares................ -- -- -- -- (210) --
Issuance of warrants... -- -- 1,104 -- -- --
Valuation of non-
employee options...... -- -- 127 -- -- --
Preferred stock
dividends............. -- -- (8,780) -- -- --
------ ----- -------- -------- ------- ----
Balance at December 31,
2000.................... 25,697 $ 257 $ 73,069 $(23,757) $(1,039) $(32)
====== ===== ======== ======== ======= ====
|
The accompanying notes are an integral part of these financial statements.
Select Medical Corporation
Consolidated Statements of Cash Flows
(in thousands)
For the Year Ended
December 31,
------------------------------
1998 1999 2000
--------- --------- --------
Operating activities
Net income (loss)............................. $ (18,044) $ (13,106) $ 5,712
Adjustments to reconcile net income (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................ 4,942 16,741 30,401
Provision for bad debts...................... 4,014 8,858 29,335
Special charge............................... 10,157 5,223 --
Extraordinary item........................... -- 5,814 6,247
Loss (gain) on sale of assets................ -- (215) 111
Minority interests........................... 1,744 3,662 4,144
Changes in operating assets and liabilities,
net of effects from acquisition
of businesses:
Accounts receivable........................ (17,513) (47,290) (36,964)
Other current assets....................... 3,229 (1,728) (2,692)
Other assets............................... (1,539) (10,868) (5,019)
Accounts payable........................... (2,591) 29 1,380
Due to third-party payors.................. (1,279) 8,715 (17,673)
Accrued expenses........................... (5,535) (2,688) (17)
Income taxes............................... (2,287) 1,696 7,548
--------- --------- --------
Net cash provided by (used in) operating
activities.................................... (24,702) (25,157) 22,513
--------- --------- --------
Investing activities
Purchases of property and equipment, net...... (6,423) (10,896) (22,430)
Escrow receivable............................. -- -- 29,948
Proceeds from disposal of assets held for
sale.......................................... -- -- 13,000
Proceeds from disposal of assets.............. -- 988 2,947
Earnout payments.............................. -- -- (3,430)
Acquisition of businesses, net of cash
acquired...................................... (203,058) (171,354) (5,838)
--------- --------- --------
Net cash provided by (used in) investing
activities.................................... (209,481) (181,262) 14,197
--------- --------- --------
Financing activities
Proceeds from issuance of debt................ 103,898 68,194 --
Net proceeds (repayments) on credit facility
debt.......................................... 31,173 86,655 (12,000)
Principal payments on seller and other debt... (6,482) (10,064) (27,577)
Net proceeds from issuance of Class A
redeemable preferred stock.................... 47,616 -- --
Net proceeds from issuance of Class B
convertible preferred stock................... -- 59,361 --
Proceeds from issuance of common stock........ 65,719 1,041 1,118
Purchase of treasury stock.................... (48) (781) (210)
Redemption of preferred stock................. (19) (214) (11)
Proceeds from bank overdrafts................. 2,073 4,893 7,253
Payment of deferred financing costs........... (1,314) (10,883) (4,563)
Distributions to minority interests........... (318) (722) (1,626)
--------- --------- --------
Net cash provided by (used in) financing
activities.................................... 242,298 197,480 (37,616)
--------- --------- --------
Effect of exchange rate changes on cash and
cash equivalents.............................. 27 5 (10)
--------- --------- --------
Net increase (decrease) in cash and cash
equivalents................................... 8,142 (8,934) (916)
Cash and cash equivalents at beginning of
year.......................................... 4,859 13,001 4,067
--------- --------- --------
Cash and cash equivalents at end of year...... $ 13,001 $ 4,067 $ 3,151
========= ========= ========
Supplemental Cash Flow Information
Cash paid for interest........................ $ 2,185 $ 15,500 $ 36,125
Cash paid for income taxes.................... $ 261 $ 2,112 $ 3,476
|
The accompanying notes are an integral part of these financial statements.
Select Medical Corporation
Notes to Consolidated Financial Statements
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, 1999 and 2000, the Company operated 39, 44 and 54 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, 1999 and 2000, the Company had operations in Canada and 19, 33 and 35 states, respectively.
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.
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 |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
1. Organization and Accounting Policies (continued)
Qualified internally developed software costs for internal use are capitalized subsequent to both the preliminary project stage and when management has committed to funding, in accordance with Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use." The carrying value of all internally developed software costs was $1,416,000, $2,541,000 and $2,210,000 at December 31, 1998, 1999 and 2000, respectively.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash balances and accounts receivable. The Company invests its excess cash with large banks. The Company grants unsecured credit to its patients, most of whom reside in the service area of the Company's facilities and are insured under third-party payor agreements. Because of the geographic diversity of the Company's facilities and non-governmental third-party payors, Medicare represents the Company's only concentration of credit risk.
Assets Held for Sale
Assets held for sale were stated at their net realizable value less approximated costs to sell. The results of operations related to the assets held for sale were excluded from the Company's operating results and were reflected as an adjustment to the purchase price when the assets were sold. No depreciation or amortization was 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. 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. 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)
1. Organization and Accounting Policies (continued)
The useful life for each class of intangible asset is as follows:
Goodwill........................................................ 40 years Trademarks...................................................... 40 years Management service agreements................................... 20 years Assembled workforce............................................. 7 years |
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 10).
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.
Insurance Risk Programs
The Company is insured for malpractice claims based on a claims made or claims incurred policy purchased in the commercial market. A liability is estimated for the premium cost for such coverage. The Company has the unilateral right to purchase tail coverage for its claims made policy at a fixed price.
Certain insurable risks such as workers' compensation are self-insured by the Company. Accruals for claims under the Company's self-insurance program are recorded on a claim-incurred basis.
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, the effect of which is removed from the Company's consolidated results of operations.
Treasury Stock
Treasury stock is carried at cost, determined by the first-in, first-out method.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
1. Organization and Accounting Policies (continued)
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 net of provisions for contractual allowances from third party payors and patients. The Company has agreements with third-party payors that provide for payments to the Company at amounts different from its established rates. The differences between the estimated program reimbursement rates and standard billing rates are accounted for as contractual adjustments, which are deducted from gross revenues to arrive at net operating revenues. Payment arrangements include prospectively determined rates per discharge, reimbursed costs, discounted charges, and per diem payments. Net patient service revenue is reported net of provision for contractual allowance from third-party payors, patients 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. Accounts receivables resulting from such payment arrangements are recorded net of contractual allowances. Net operating revenues generated directly from the Medicare program represented approximately 38%, 48%, and 35% of the Company's consolidated net operating revenues for the years ended December 31, 1998, 1999 and 2000, respectively. Approximately 33% and 31% of the Company's gross accounts receivable at December 31, 1999 and 2000, 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. Management fee receivables resulting from such management services are included in other assets.
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.
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
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
1. Organization and Accounting Policies (continued)
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.
Recent Accounting Pronouncements
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. 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. Because of the limited use of derivative instruments, management does not believe that there will be a material effect on the Company's consolidated financial statements.
In March 2000, the FASB issued interpretation No. 44, or FIN 44
"Accounting for Certain Transactions Involving Stock Compensation," which is an
interpretation of Accounting Principles Board Opinion No. 25, or APB Opinion
25. This interpretation, which clarifies the definition of an employee
noncompensatory plan, accounting consequences of various modifications to
previously fixed stock options or awards and the exchange of stock compensation
awards in a business combination. The adoption of FIN 44 did not have an impact
on the Company's consolidated financial statements.
2. Acquisitions, Disposal and Management Services Agreements
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.
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.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
2. Acquisitions, Disposal and Management Services Agreements (continued)
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 and $56,491,000 liabilities assumed. The purchase was funded through the sale of 10,697,000 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 to 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 sale 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. In November 1999, the Company recorded a $29,948,000 receivable related to the receivable collection and severance indemnification. Of this amount $29,400,000 represents the change in estimate for allowance for doubtful accounts recorded in the NovaCare July 1, 1999 to November 19, 1999 financial statements. On July 6, 2000, the Company received proceeds of $29,948,000 from the escrow account established in connection with its acquisition of NovaCare from NovaCare's former owner, 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. 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 divested the Occupational Health segment of NovaCare with total sale proceeds of $13,000,000. The net proceeds of this sale and the cash flows of this segment until it was sold were allocated to assets held for sale in the allocation of the NovaCare purchase price. Differences between the actual and expected amount were recorded as an adjustment to goodwill during 2000.
Certain purchase agreements require additional payments to the former owners if specific financial targets are met. At December 31, 2000, aggregate contingent payments in connection with all acquisitions of
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
2. Acquisitions, Disposal and Management Services Agreements (continued)
approximately $7,400,000 have not been included in the initial cost of the business since the additional amount of such contingent consideration that may be paid in the future, if any, is not presently determinable.
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.
For the Year Ended December 31, 2000
During 2000, the Company acquired controlling interests in four outpatient therapy businesses. Outpatient therapy acquisitions consisted of Delta Rehab Group, Inc. on January 20, 2000, S.T.A.R. Rehab, Inc. on March 31, 2000, Crisan Physiotherapy and Sports Medicine Center, P.A. on May 31, 2000 and Rehab Health, Inc. on July 31, 2000.
The acquisitions were accounted for using the purchase method of accounting, and results of operations from acquired companies are included in these consolidated 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. The acquisitions completed during 2000 are not significant for pro forma disclosure. 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,
--------------------------
1998 1999
------------ ------------
(unaudited) (unaudited)
Revenues............................................ $572,021,000 $720,116,000
Loss before extraordinary items..................... (26,764,000) (78,569,000)
Net loss............................................ (26,764,000) (84,383,000)
|
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
2. Acquisitions, Disposal and Management Services Agreements (continued)
Information with respect to businesses acquired in purchase transactions is as follows:
For the year ended December 31,
------------------------------------
1998 1999 2000
------------ ------------ ----------
Cash paid (net of cash acquired).......... $203,058,000 $171,354,000 $5,838,000
Notes issued.............................. 18,343,000 7,783,000 3,207,000
Other consideration....................... 785,000 -- --
------------ ------------ ----------
222,186,000 179,137,000 9,045,000
Liabilities assumed....................... 105,286,000 65,744,000 255,000
------------ ------------ ----------
327,472,000 244,881,000 9,300,000
Fair value of assets acquired, principally
accounts receivable and property and
equipment................................ 159,554,000 144,623,000 1,606,000
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.......................... $150,609,000 $ 49,538,000 $7,694,000
============ ============ ==========
|
3. Property and Equipment
Property and equipment consists of the following:
December 31,
-----------------------
1999 2000
----------- -----------
Land................................................... $ 501,000 $ 501,000
Leasehold improvements................................. 19,800,000 29,836,000
Buildings.............................................. 17,000,000 17,000,000
Furniture and equipment................................ 64,572,000 74,170,000
Construction in progress............................... 661,000 366,000
----------- -----------
102,534,000 121,873,000
Less: accumulated depreciation and amortization........ 17,462,000 36,897,000
----------- -----------
Total property and equipment........................... $85,072,000 $84,976,000
=========== ===========
|
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
4. Intangible Assets
Intangible assets consist of the following:
December 31,
--------------------------
1999 2000
------------ ------------
Goodwill.......................................... $198,254,000 $201,171,000
Trademarks........................................ 40,000,000 40,000,000
Management services agreements.................... 10,343,000 10,343,000
Assembled workforce............................... 17,544,000 17,544,000
------------ ------------
266,141,000 269,058,000
Less: accumulated amortization.................... 8,062,000 17,659,000
------------ ------------
Total intangible assets........................... $258,079,000 $251,399,000
============ ============
The following summarizes the Company's intangible asset activity:
December 31,
--------------------------
1999 2000
------------ ------------
Beginning balance of intangibles, net............. $171,378,000 $258,079,000
Intangibles recorded for companies purchased in
current year..................................... 100,258,000 7,694,000
Intangibles adjusted for companies purchased in
prior year for:
Asset impairments................................. (3,691,000) --
Income tax benefits recognized.................... (1,314,000) (8,402,000)
Translation adjustment............................ 671,000 (441,000)
Other............................................. (3,471,000) 635,000
Earn out payments................................. -- 3,430,000
Amortization...................................... (5,752,000) (9,596,000)
------------ ------------
Net increase (decrease) in intangibles............ 86,701,000 (6,680,000)
------------ ------------
Ending balance of intangibles, net................ $258,079,000 $251,399,000
============ ============
|
5. Restructuring Charges
During December 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. During 2000, the Company revised its estimates for the NovaCare termination costs, severance liabilities and the anticipated closure of two central billing offices related to the NovaCare acquisition. The reserves for the billing office closures primarily included costs associated with lease buyouts and workforce reductions of 67 employees. These changes in estimates have been reflected as an adjustment to the purchase price of NovaCare.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
5. Restructuring Charges (continued)
The following summarizes the Company's restructuring activity:
Lease
Termination
Costs Severance Other Total
----------- ----------- ----------- -----------
January 1, 1999........... $ 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
Revision of estimate...... 214,000 841,000 184,000 1,239,000
Amounts paid in 2000...... (3,743,000) (601,000) (1,551,000) (5,895,000)
----------- ----------- ----------- -----------
December 31, 2000......... $ 3,685,000 $ 940,000 $ 76,000 $ 4,701,000
=========== =========== =========== ===========
|
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,
-------------------------
1999 2000
------------ ------------
Credit facility...................................... $209,076,000 $195,877,000
10% Senior Subordinated Notes, net of discount of
$9,286,000, $14,096,000 and $13,228,000 in 1998,
1999 and 2000, respectively......................... 75,904,000 76,772,000
Seller notes......................................... 53,702,000 27,888,000
Other................................................ 2,139,000 2,251,000
------------ ------------
Total debt........................................... 340,821,000 302,788,000
Less: current maturities............................. 21,127,000 18,746,000
------------ ------------
Total long-term debt................................. $319,694,000 $284,042,000
============ ============
|
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 credit facility replaced the Company's November 19, 1999 credit facility. The term debt begins quarterly amortization in September 2001, with a final maturity date of September 2005. The revolving commitment also matures in September 2005. The credit agreement requires mandatory repayment of a portion of the credit facility based on leverage ratio in the event the Company successfully completes an initial public offering of common stock. Borrowings under the facility bear interest at either LIBOR or prime rate, plus applicable margins based on financial covenant ratio tests (approximately 10.2% at December 31, 2000). Deferred financing costs related to the existing credit facility of approximately $6,247,000 were charged to expense as an extraordinary item during 2000. A commitment fee of .5% per annum was charged on the unused portion of the credit facility. The unused portion of the Revolving Commitment at December 31, 2000 was approximately $34 million. The credit facility is collateralized by equity interest in the Company and includes restrictions on certain payments by the Company including dividend payments, minimum net worth requirements and other covenants. The Company was authorized to issue up to $10,000,000 in letters of credit. Letters of credit reduced the capacity under the Revolving Commitment and bear interest at 3.5%. Approximately $3,600,000 in letters of credit were issued at December 31, 2000.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
6. Long-Term Debt and Notes Payable (continued)
The Company hedges foreign currency transactions related to its Canadian debt obligations by entering into forward exchange contracts. Gains and losses associated with currency rate changes on forward contracts hedging foreign currency transactions are recorded currently in earnings.
On November 19, 1999, the Company entered into a $225 million credit facility which would have expired on November 19, 2002. This credit facility replaced the Company's U.S. Credit Facility and its Canadian Credit Facility dated February 9, 1999. Proceeds from the facility were used for acquisitions and hospital development activities. The facility consisted of a $200 million Term Commitment and a $25 million Revolving Commitment. Borrowings bore interest at LIBOR plus 3.5% or Base Rate (approximately 10% at December 31, 1999) as defined in the agreement.
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 15, 1998.... $35,000,000 1,528,000 $6.08 $ 9,286,000 December 15, 2008
February 9, 1999..... 30,000,000 -- -- -- December 15, 2008
November 19, 1999.... 25,000,000 960,000 6.51 5,209,000 November 19, 2009
----------- --------- ----- -----------
Total................ $90,000,000 2,488,000 -- $14,495,000
|
In the event the Company repays the November 19, 1999 promissory notes on or before November 19, 2001, 240,048 shares of common stock attached to the notes will be transferred back to the Company.
The Company's obligations under its previous credit agreements were 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 864,000, 460,000 and 549,000 warrants to these shareholders in 1998, 1999 and 2000, respectively, that entitle the holder of each warrant to purchase one share of common stock at an exercise price of $6.08 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 and interest through maturity. Also, certain of the notes contain minimum net worth requirements. Interest rates are generally at 6% per annum.
Maturities of long-term debt for the years after 2001 are approximately as follows:
2002........................................................ $ 18,226,000 2003........................................................ 44,133,000 2004........................................................ 51,180,000 2005........................................................ 93,643,000 2006 and beyond............................................. 76,860,000 |
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
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 (52,838 shares outstanding at December 31, 1999 and 2000). 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, 1999 and 2000 are $2,805,000, $7,550,000 and $12,643,000, respectively, of accrued and undeclared dividends.
Class B Preferred Stock
In connection with the NovaCare acquisition (Note 2), the Company sold 16,000,000 shares of Class B Preferred Stock at a price of $3.75 per share for net proceeds of $59,361,000. 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 .576 shares 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 2000 are $406,000 and $4,092,000, 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 $9.77 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 .576 shares 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
In connection with the Intensiva acquisition in December 1998, the Company sold 10,697,000 shares of common stock at a price of $6.08 cash for proceeds, net of issuance costs of $685,000 totaling $64,362,000. In addition, 1,528,000 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 483,000. These shares were sold to management at prices ranging from $0.29 (adjusted for stock splits) to $6.08 cash for proceeds totaling $1,357,000.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
7. Redeemable Preferred Stock and Stockholders' Equity (continued)
Shares of common stock sold in 1999 totaled 172,000. The shares were sold to management at prices ranging from $6.08 to $6.51 for proceeds totaling $1,041,000. The Company purchased 173,000 shares as treasury stock during 1999 for $781,000. In addition, 960,000 shares of common stock were sold in conjunction with the Senior Subordinated Notes dated November 19, 1999 (Note 6).
Shares of common stock sold during 2000 totaled 172,000. The shares were sold to management at $6.51 for proceeds totaling $1,118,000. The Company purchased 32,000 shares as treasury stock during 2000 for $210,000.
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.
On March 28, 2001, the Company effected a 1 for .576 reverse common stock split of its common stock. Accordingly, all common issued and outstanding share and per share information has been retroactively restated to reflect the effects of this proposed stock split.
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 5,760,000 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. Generally, 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.
The plan was amended and restated to provide for the issuance of up to 5,760,000 shares of common stock plus any additional amount necessary to make the total shares available for issuance under the plan equal to the sum of 5,760,000 plus 14% of the total issued and outstanding common stock in excess of 34,560,000 shares, subject to adjustments for stock splits, stock dividends and similar changes in capitalization.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
8. Stock Option Plan (continued)
Transactions and other information related to the Stock Option Plan are as follows:
Weighted
Average
Price Exercise
Per Share Shares Price
-------------- --------- --------
Balance, December 31, 1997................... $ 1.74 41,000 $1.74
Granted...................................... 6.08 1,567,000 6.08
Exercised.................................... -- -- --
Forfeited.................................... 1.74 to 6.08 (29,000) 1.77
-------------- --------- -----
Balance, December 31, 1998................... 1.74 to 6.08 1,579,000 6.02
Granted...................................... 6.08 to 6.51 1,270,000 6.46
Exercised.................................... -- -- --
Forfeited.................................... 1.74 to 6.08 (88,000) 6.08
-------------- --------- -----
Balance, December 31, 1999................... 1.74 to 6.51 2,761,000 6.21
Granted...................................... 6.51 to 10.42 1,876,000 7.60
Exercised.................................... 6.08 (4,000) 6.08
Forfeited.................................... 1.74 to 6.51 (132,000) 6.65
-------------- --------- -----
Balance, December 31, 2000................... $1.74 to 10.42 4,501,000 $6.79
============== ========= =====
|
Additional information with respect to the outstanding options as of December 31, 1998, 1999 and 2000 is as follows:
Exercise Prices
----------------------------------
1.74 6.08 6.51 10.42
------ --------- --------- -------
Number outstanding at December 31, 1998.... 18,000 1,561,000 -- --
Options outstanding weighted average
remaining contractual life................ 8.86 9.91 -- --
Number of exercisable...................... 3,000 1,267,000 -- --
Number outstanding at December 31, 1999.... 18,000 1,636,000 1,107,000 --
Options outstanding weighted average
remaining contractual life................ 7.86 8.97 9.89 --
Number of exercisable...................... 6,000 1,327,000 1,092,000 --
Number outstanding at December 31, 2000.... 18,000 1,593,000 2,380,000 510,000
Options outstanding weighted average
remaining contractual life................ 6.86 7.97 8.99 9.79
Number of exercisable...................... 10,000 1,404,000 1,095,000 --
|
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. Accordingly, no compensation cost has been recognized for options granted to employees under the 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 $241,000 of additional compensation expense, net of tax, would have been recognized during the years ended December 31, 1998, 1999 and 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%.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
8. Stock Option Plan (continued)
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:
For the year ended
--------------------------
1998 1999 2000
-------- -------- ------
Net income (loss)--as reported..................... $(18,044) $(13,106) $5,712
Net income (loss)--pro forma....................... (19,344) (14,126) 5,471
Weighted average grant-date fair value............. 1.34 1.60 0.93
Basic earnings (loss) per share--as reported....... (1.64) (0.74) (0.12)
Basic earnings (loss) per share--pro forma......... (1.75) (0.79) (0.13)
Diluted earnings (loss) per share--as reported..... (1.64) (0.74) (0.12)
Diluted earnings (loss) per share--pro forma....... (1.75) (0.79) (0.13)
|
9. Income Taxes
Significant components of the Company's tax expense (benefit) for the years ended December 31, 1998, 1999 and 2000 are as follows:
1998 1999 2000
--------- ---------- ----------
Current:
Federal..................................... $ -- $ -- $ --
State and local............................. 755,000 1,497,000 1,275,000
Foreign..................................... -- -- 301,000
--------- ---------- ----------
Total current................................. 755,000 1,497,000 1,576,000
Deferred:
Federal..................................... (937,000) 1,314,000 8,403,000
State and local............................. -- -- --
--------- ---------- ----------
Total deferred................................ (937,000) 1,314,000 8,403,000
--------- ---------- ----------
Total income tax expense (benefit)............ $(182,000) $2,811,000 $9,979,000
========= ========== ==========
|
The difference between the expected income tax expense at the federal statutory rate of 34% and the income tax expense (benefit) recognized in the financial statements is as follows:
1998 1999 2000
----- ----- ----
Expected federal tax rate................................. (34.0%) (34.0%) 35.0%
State taxes, net of federal benefit....................... 2.7 22.1 3.8
Non-deductible goodwill................................... 2.0 36.4 6.7
Other permanent differences............................... 0.4 5.2 0.7
Valuation allowance....................................... 26.6 32.6 (0.2)
Other..................................................... 1.3 0.4 (0.5)
----- ----- ----
Total..................................................... (1.0%) 62.7% 45.5%
===== ===== ====
|
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)
9. Income Taxes (continued)
A summary of deferred tax assets and liabilities is as follows:
1999 2000
------------ ------------
Deferred tax assets--
current
Allowance for doubtful
accounts............... $ 13,735,000 $ 14,713,000
Compensation and benefit
related accruals....... 2,972,000 1,853,000
Expenses not currently
deductible for tax..... -- 339,000
------------ ------------
Net deferred tax asset--
current................ 16,707,000 16,905,000
------------ ------------
Deferred tax assets--non
current
Expenses not currently
deductible for tax..... 2,786,000 2,983,000
Net operating loss carry
forwards............... 18,698,000 14,887,000
Depreciation and
amortization........... 1,687,000 1,238,000
Other................... -- 120,000
------------ ------------
Net deferred tax asset--
non current............ 23,171,000 19,228,000
------------ ------------
Net deferred tax asset
before valuation
allowance.............. 39,878,000 36,133,000
Valuation allowance..... (38,941,000) (35,196,000)
------------ ------------
$ 937,000 $ 937,000
============ ============
|
The Company provided in 1999 and 2000 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.
Negative information considered by management included the Company's limited operating history, and that the Company has incurred cumulative losses of approximately $19,000,000 since inception through December 31, 2000. Additionally, each of the Company's significant acquisitions had losses prior to the acquisitions and had accumulated net operating loss carryforwards of approximately $31 million. Although the Company earned profits, net of an extraordinary item, of $15,691,000 for the year ended December 31, 2000, the company was still in a cumulative loss position.
The increase in the valuation allowance in 1999 is related to the increase in deferred tax assets primarily related to acquisitions. The decrease in the valuation allowance in 2000 is related to the utilization of net operating loss carryforwards, the benefit from which was allocated to reduce goodwill. The Company has approximately $24,800,000 in federal net operating loss carry forwards. Such carry forwards expire as follows:
2001........................................................ $ 441,000 2002........................................................ 461,000 2003........................................................ -- 2004........................................................ -- Thereafter through 2019..................................... 23,898,000 |
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)
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. The Company also recorded an impairment write down under FAS 121, on a held for use basis, related to certain outpatient rehabilitation facilities.
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 recorded during 1999 consists of the unamortized deferred financing costs of $5,814,000 related to the February 9, 1999 credit facility.
On September 22, 2000, the Company entered into a new $230 million credit facility. This credit facility replaced the Company's $225 million credit facility from November 19, 1999. The extraordinary item recorded during 2000 consists of the unamortized deferred financing costs of $6,247,000 related to the November 19, 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, and $4,083,000 during the years ended December 31, 1998, 1999 and 2000, respectively.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
12. Retirement Savings Plan (continued)
A subsidiary sponsored a noncontributory defined contribution retirement plan for its employees during 1998 and 1999. The plan was frozen during 2000 and the Company does not anticipate making future contributions to the plan. The subsidiary contributed 9.25% and 7.60% of employee salaries up to a maximum contribution of $15,000 and $13,000 per employee in 1998 and 1999, respectively. Approximately $700,000 and $560,000 of contributions related to this plan were expensed during the years ended December 31, 1998 and 1999.
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) specialty hospitals and (ii) outpatient rehabilitation. 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
------------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
------------ -------------- ------------ ------------
Net operating
revenues.............. $ 62,715,000 $ 83,059,000 $ 3,269,000 $149,043,000
EBITDA................. 3,147,000 12,598,000 (12,152,000) 3,593,000
Total assets........... 240,266,000 90,267,000 6,416,000 336,949,000
Capital expenditures... 3,632,000 2,042,000 749,000 6,423,000
Year Ended December 31, 1999
------------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
------------ -------------- ------------ ------------
Net operating
revenues.............. $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
Capital expenditures... 7,243,000 3,085,000 568,000 10,896,000
Year Ended December 31, 2000
------------------------------------------------------
Specialty Outpatient
Hospitals Rehabilitation All Other Total
------------ -------------- ------------ ------------
Net operating
revenues.............. $378,910,000 $416,775,000 $ 10,212,000 $805,897,000
EBITDA................. 44,550,000 65,420,000 (18,300,000) 91,670,000
Total assets........... 246,495,000 329,874,000 10,431,000 586,800,000
Capital expenditures... 13,677,000 6,399,000 2,354,000 22,430,000
|
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
13. Segment Information (continued)
A reconciliation of EBITDA to net income (loss) is as follows:
1998 1999 2000
------------ ------------ ------------
EBITDA................................ $ 3,593,000 $ 42,244,000 $ 91,670,000
Depreciation and amortization......... (4,942,000) (16,741,000) (30,401,000)
Special charge........................ (10,157,000) (5,223,000) --
Interest income....................... 406,000 362,000 939,000
Interest expense...................... (5,382,000) (21,461,000) (36,126,000)
Minority interest..................... (1,744,000) (3,662,000) (4,144,000)
Income tax (expense) benefit.......... 182,000 (2,811,000) (9,979,000)
Extraordinary item.................... -- (5,814,000) (6,247,000)
------------ ------------ ------------
Net income (loss)..................... $(18,044,000) $(13,106,000) $ 5,712,000
============ ============ ============
|
14. Net Income (Loss) 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:
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,
---------------------------------------
1998 1999 2000
------------ ------------ -----------
Numerator:
Income (loss) before extraordinary
item................................. $(18,044,000) $ (7,292,000) $11,959,000
Extraordinary item.................... -- (5,814,000) (6,247,000)
------------ ------------ -----------
Net income (loss).................... (18,044,000) (13,106,000) 5,712,000
Less: Preferred stock dividends...... 2,540,000 5,175,000 8,780,000
------------ ------------ -----------
Numerator for basic earnings per
share-income (loss) available to
common stockholders................. $(20,584,000) $(18,281,000) $(3,068,000)
============ ============ ===========
Denominator:
Denominator for basic earnings per
share-weighted average shares....... 12,517,000 24,557,000 25,457,000
Effect of dilutive securities:
a) Stock options..................... -- -- 316,000
b) Warrants.......................... -- -- 134,000
------------ ------------ -----------
Denominator for diluted earnings per
share-adjusted weighted average
shares and assumed conversions....... 12,517,000 24,557,000 25,907,000
============ ============ ===========
Basic earnings (loss) per share:
Income (loss) before extraordinary
item................................. $ (1.64) $ (0.50) $ 0.13
Extraordinary item................... -- (0.24) (0.25)
------------ ------------ -----------
Income (loss) per common share....... $ (1.64) $ (0.74) $ (0.12)
============ ============ ===========
Diluted earnings (loss) per share..... $ (1.64) $ (0.74) $ (0.12)
============ ============ ===========
|
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
14. Net Income (Loss) per Share (continued)
The following amounts are shown here for informational and comparative purposes only since their inclusion would be anti-dilutive.
For the year ended
December 31,
--------------------------
1998 1999 2000
------ --------- ---------
a) Stock options................................ 13,000 123,000 510,000
b) Warrants..................................... -- 10,000 --
c) Convertible preferred stock.................. -- 1,136,000 9,216,000
|
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.
The fair value of the Company's preferred stock is not practicable to estimate as it is untraded; accordingly it is recorded at its redemption value
16. Related Party Transactions
The Company has been party to various rental and other agreements with companies affiliated through common ownership. The Company made office rental, equipment rental and other payments aggregating $483,000, $1,228,000, and $1,295,000 during the years ended December 31, 1998, 1999 and 2000, respectively, to the affiliated companies.
As of December 31, 2000, future rental commitments under outstanding agreements with the affiliated companies are approximately as follows:
2001......................................................... $ 1,080,000
2002......................................................... 1,076,000
2003......................................................... 1,101,000
2004......................................................... 1,001,000
2005......................................................... 935,000
Thereafter................................................... 10,293,000
-----------
$15,486,000
===========
|
As further discussed in Note 6, the Company has issued warrants to two of the Company's principal stockholders in connection with its guarantees of previous credit agreements.
In December 1999, the Company acquired Select Air Corporation from a related party in exchange for consideration of $2,700,000, net of cash acquired.
In March 2000, the Company entered into three-year employment agreements with two of its principal shareholders. Under these agreements the two shareholders will receive a combined total annual salary of
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
16. Related Party Transactions
$1,500,000. Additionally, one such shareholder has a life insurance policy in which the Company will pay premiums for fiscal year 2000 of $2,000,000 and $1,250,000 each following fiscal year until 2010.
In April 2000, the Company sold all of the assets of Georgia Health Group, Inc., a clinic owned by the Occupational Health division for $5,000,000 to a company in which a principal stockholder has a majority owned interest.
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, 2000 are approximately as follows:
2001........................................................ $ 44,325,000
2002........................................................ 35,286,000
2003........................................................ 22,702,000
2004........................................................ 14,029,000
2005........................................................ 8,704,000
Thereafter.................................................. 10,846,000
------------
$135,892,000
============
|
Total rent expense for operating leases for the years ended December 31, 1998, 1999 and 2000 was approximately $11,132,000, $35,929,000 and $68,731,000, 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 clinic within the complex is currently scheduled for June 2001.
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, 2000. 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.
Select Medical Corporation
Notes to Consolidated Financial Statements--(Continued)
18. Supplemental Disclosures of Cash Flow Information
Non-cash investing and financing activities are comprised of the following for the years ended December 31, 1998, 1999 and 2000:
Description of Transaction 1998 1999 2000
-------------------------- ------------ ----------- ------------
Acquisitions paid for in stock (Note
2)..................................... $ 785,000 $ -- $ --
Notes issued with acquisitions (Note
2)..................................... $ 18,343,000 $ 7,783,000 $ 3,207,000
Liabilities assumed with acquisitions
(Note 2)............................... $105,286,000 $65,744,000 $ 255,000
Long-term debt discount (Note 6)........ $ 9,286,000 $ 5,209,000 $ --
Issuance of warrants (Note 6)........... $ 1,086,000 $ 2,389,000 $ 1,104,000
Related party acquisition (Note 16)..... $ -- $ 2,700,000 $ --
Credit facility refinancing (Note 6).... $ -- $ -- $187,000,000
Preferred stock dividends (Note 7)...... $ 2,540,000 $ 5,175,000 $ 8,780,000
|
19. Initial Public Offering
The Company filed a registration statement on Form S-1 to register 12,500,000 shares of common stock for sale to the public. The Company expects the net proceeds from the offering will be approximately $137,500,000 after deducting estimated expenses and underwriting discounts and commissions of $12,500,000 million. The expected net proceeds will be used to repay senior debt under the term loan portion and revolving portion of the Company's credit facility and redeem Class A Preferred Stock. The Company also expects to repay principal of the senior subordinated notes and accrued dividends on the Class A and Class B Preferred Stock. The Company expects to take an extraordinary charge of approximately $6 million related to unearned discounts and deferred financing costs associated with the repayment of the senior subordinated notes, if such debt is repaid.
The Company's Class B Preferred Stock will automatically convert into 9,216,000 shares of common stock upon the completion of the offering. Additionally, 240,048 shares of common stock that are currently issued and outstanding will be transferred back to the Company upon repayment of the senior subordinated notes described above.
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
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
--------
$533,346
========
|
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 and Other Intangible Assets: 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 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. The value assigned to non-compete agreements has been included in other assets.
The useful life for each class of intangible asset is as follows:
Goodwill........................................................ 40 years Covenants not-to-compete........................................ 5 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. It is not practicable to estimate these costs on a stand-alone basis, if the Group were a separate company.
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. The Group's share of the loss from joint ventures of $100 is included in selling, general and administrative expenses.
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 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 and bear interest generally at 6%. 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, depreciation and capital
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.
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 and Other Intangible Assets: 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 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. The value assigned to non-compete agreements has been included in other assets.
The useful life for each class of intangible assets is as follows:
Goodwill........................................................ 40 years Covenants not-to-compete........................................ 5 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
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)
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.
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
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)
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.
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. It is not practicable to estimate these costs on a stand-alone basis if the Group were a separate company.
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
==== ====
|
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
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
=======
|
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
======== =======
|
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
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.
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. The Group's share in the income (loss) from joint ventures of $514, $(16) and $78 is included in selling, general and administrative expenses.
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 including any adverse consequences related to the OIG matter discussed footnote 7 above.
[Inside Back Cover Page]
[Logo of Select Medical Corporation and collage of photographs of patients and hospital and rehabilitation clinic staff]
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.
12,500,000 Shares
[LOGO OF SELECT MEDICAL CORPORATION]
Common Stock
Merrill Lynch & Co.
JP Morgan
Credit Suisse First Boston
CIBC World Markets
SG Cowen
First Union Securities, Inc.
, 2001
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 March 30, 2001
PROSPECTUS
12,500,000 Shares
[LOGO OF SELECT MEDICAL CORPORATION]
Common Stock
This is Select Medical Corporation's initial public offering. Select Medical is selling all of the shares. The international managers are offering 1,875,000 shares outside of the U.S. and Canada and the U.S. underwriters are offering 10,625,000 shares in the U.S. and Canada.
We expect the public offering price to be between $11.00 and $13.00 per share. Currently, no public market exists for the shares. After pricing of the offering, we expect that the shares will be quoted 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 9 of this prospectus.
Per Share Total
--------- -----
Public offering price............................. $ $
Underwriting discount............................. $ $
Proceeds, before expenses, to Select Medical...... $ $
|
The international mangers may also purchase up to an additional 281,250 shares from Select Medical at the public offering price, less the underwriting discount, within 30 days from the date of this prospectus to cover overallotments. The U.S. underwriters may similarly purchase up to an additional 1,593,750 shares from Select Medical.
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 , 2001.
-----------
Merrill Lynch International JP Morgan
Credit Suisse First Boston
CIBC World Markets
SG Cowen
First Union Securities, Inc.
-----------
The date of this prospectus is , 2001.
|
UNDERWRITING
We intend to offer the shares outside the U.S. and Canada through the international managers named below and in the U.S. and Canada through the U.S. underwriters. Subject to the terms and conditions described in an international purchase agreement between us and the international managers, and concurrently with the sale of 10,625,000 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........................................
J.P. Morgan Securities Ltd. .......................................
Credit Suisse First Boston (Europe) Limited........................
CIBC World Markets plc.............................................
SG Cowen Securities Corporation....................................
First Union Securities, Inc. ......................................
---------
Total......................................................... 1,875,000
=========
|
We have also entered into a U.S. purchase agreement with Merrill Lynch, Pierce, Fenner & Smith Incorporated, J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation, CIBC World Markets Corp., SG Cowen Securities Corporation and First Union Securities, Inc., the U.S. underwriters, for sale of the shares in the U.S. and Canada. 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 purchase agreement, we have agreed to sell to the U.S. underwriters, and the U.S. underwriters severally have agreed to purchase 10,625,000 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 international managers have advised us that they 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 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 overallotment 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 $2.0 million and are payable by us.
Overallotment Option
We have granted an option to the international managers to purchase up to 281,250 additional shares at the public offering price less the underwriting discount. The international managers may exercise this option for 30 days from the date of this prospectus solely to cover any overallotments. If the international managers exercise this option, 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 an option to the U.S. underwriters, exercisable for 30 days from the date of this prospectus, to purchase up to 1,593,750 additional shares to cover any overallotments on terms similar to the option 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.
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. See "Shares Eligible for Future Sale." 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. 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 have received approval for the shares to be quoted 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 will not confirm sales of the shares to any account over which they exercise discretionary authority without the prior written specific approval of the customer.
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
. 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 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. Credit Suisse First Boston Corporation has agreed to act as qualified independent underwriter for the offering. The price of the shares will be no higher than that recommended by Credit Suisse First Boston Corporation.
Other Relationships
Some of the underwriters and their affiliates have engaged in, and may in the future engage in, investment banking, mergers and acquisitions advisory services 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 J.P. Morgan Securities Inc. acts as administrative agent, and affiliates of 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.
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.
12,500,000 Shares
[LOGO OF SELECT MEDICAL CORPORATION]
Common Stock
Merrill Lynch International
JP Morgan
Credit Suisse First Boston
CIBC World Markets
SG Cowen
First Union Securities, Inc.
, 2001
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................................... 600,000
Blue Sky Fees and Expenses..................................... 10,000
Legal Fees and Expenses........................................ 500,000
Transfer Agent and Registrar Fees and Expenses................. 25,000
Printing and Engraving Expenses................................ 500,000
Miscellaneous Fees and Expenses................................ 196,700
----------
Total...................................................... $2,000,000
==========
|
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.
II-1
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. The information below gives effect to a 1 for .576 reverse stock split to be completed prior to the consummation of this offering.
In January of 1998, the Registrant sold to two executive officers of the Registrant 123,938 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 $51,500. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to two executive officers of the Registrant, each of whom represented his 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.
On February 9, 1998, the Registrant sold to its financial sponsors and certain executive officers of the Registrant 11,600.01 shares of Class A Preferred Stock for an aggregate purchase price of $11,600,010. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to a small number of investors, all of whom were either affiliates of GTCR Golder Rauner, LLC, affiliates of Welsh Carson Anderson & Stowe, two partnerships controlled by Rocco A. Ortenzio and Robert A. Ortenzio or a small group of our executive officers, each of whom represented his or its 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.
On April 29, 1998, the Registrant sold to its financial sponsors and certain executive officers of the Registrant 8,200 shares of Class A Preferred Stock for an aggregate purchase price of $8,200,000. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to a small number of investors, all of whom were either affiliates of GTCR Golder Rauner, LLC, affiliates of Welsh Carson Anderson & Stowe, two partnerships controlled by Rocco A. Ortenzio and Robert A. Ortenzio or a small group of our executive officers, each of whom represented his or its 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.
On June 3, 1998, the Registrant sold to its financial sponsors and certain executive officers of the Registrant 13,000.03 shares of Class A Preferred Stock for an aggregate purchase price of $13,000,030. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to a small number of investors, all of whom were either affiliates of GTCR Golder Rauner, LLC, affiliates of Welsh Carson Anderson & Stowe, two partnerships controlled by Rocco A. Ortenzio and Robert A. Ortenzio or a small group of our executive officers, each of whom represented his or its 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.
On June 30, 1998, the Registrant sold to its financial sponsors and certain executive officers of the Registrant 3,999.98 shares of Class A Preferred Stock for an aggregate purchase price of $3,999,980. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to a small number of investors, all of whom were either affiliates of GTCR Golder Rauner, LLC, affiliates of Welsh Carson Anderson & Stowe, two partnerships controlled by Rocco A. Ortenzio and Robert A. Ortenzio or a small group of our executive officers, each of whom represented his or its 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.
On July 20, 1998 the Registrant sold to Rocco A. Ortenzio 140,838 shares of Common Stock for an aggregate purchase price of $40,760. This sale was exempt from registration under the Securities Act pursuant
II-2
to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to Rocco A. Ortenzio, who is the Chairman and Chief Executive Officer of the Registrant, who represented his 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.
On October 21, 1998 the Registrant sold to our financial sponsors, certain of their associates and certain executive officers of the Registrant 10,800.43 shares of Class A Preferred Stock for an aggregate purchase price of $10,800,430. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to a small number of investors, all of whom were either affiliates of GTCR Golder Rauner, LLC, affiliates or associates of Welsh Carson Anderson & Stowe, two partnerships controlled by Rocco A. Ortenzio and Robert A. Ortenzio or a small group of our executive officers, each of whom represented his or its 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.
On November 9, 1998 the Registrant sold to certain senior employees
218,517 shares of Common Stock for an aggregate purchase price of $1,327,795.
This issuance was exempt from registration under the Securities Act pursuant to
Section 4(2) thereof because it did not involve a public offering as the shares
were offered and sold only to a small group of senior employees of the
Registrant, each of whom represented his 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.
On December 15, 1998, the Registrant issued an aggregate of 12,225,306 shares of Common Stock, for a price of $6.08 per share. Of this amount, 4,633,919 shares were purchased by associates or affiliates of Welsh, Carson, Anderson & Stowe (other than WCAS Capital Partners III, L.P.), 2,454,171 shares were purchased by affiliates of GTCR Golder Rauner, LLC, 2,343,086 shares were purchased by Thoma Cressey Equity Partners and Bryan C. Cressey, 773,486 shares were purchased by Rocco A. Ortenzio, Robert A. Ortenzio and partnerships they control, and an additional 164,571 shares were purchased by two venture capital funds. The aggregate amount issued also included 1,528,163 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. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the securities were offered and sold only to our financial sponsors, Rocco A. Ortenzio, Robert A. Ortenzio, a partnership controlled by Rocco A. Ortenzio and Robert A. Ortenzio and a small number of private investors, each of whom represented his or its 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.
On January 31, 1999 the Registrant sold to three private investors and certain senior employees 128,367 shares of Common Stock for an aggregate purchase price of $780,007. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to three private investors and a small number of senior employees of the Registrant, each of whom represented his or its 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.
On August 20, 1999 the Registrant sold to Martin F. Jackson 42,789 shares of Common Stock for an aggregate purchase price of $260,001. The Registrant loaned Mr. Jackson $120,000 to purchase these shares. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to Martin F. Jackson, who is the Chief
II-3
Financial Officer of the Registrant, who represented his 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.
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. Under this
agreement to date, the Registrant has issued warrants to purchase
1,873,283 common shares. All warrants expire on June 30, 2003 and are
exercisable at $6.08 per share. This sale was exempt from registration under
the Securities Act pursuant to Section 4(2) thereof because it did not involve
a public offering as the warrants were offered and sold only to our financial
sponsors, Rocco A. Ortenzio and Robert A. Ortenzio, each of whom represented
his or its 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.
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 $3.75 per share. Of this amount, 7,933,333 shares were purchased by affiliates and associates of Welsh Carson, 1,983,333 shares were purchased by affiliates of Golder Thoma, 5,950,000 shares were purchased by Thoma Cressey and an additional 133,134 shares were purchased by two affiliated private investors. At the same time, WCAS Capital Partners III, L.P. purchased 960,192 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 240,048 Common Shares to the Registrant. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the securities were offered and sold only to our financial sponsors and a small number of private investors, each of whom represented his or its 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.
On February 29, 2000 the Registrant sold to three private investors and certain senior employees 139,688 shares of Common Stock for an aggregate purchase price of $909,428. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to three private investors and a small number of senior employees of the Registrant, each of whom represented his 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.
On June 20, 2000 the Registrant sold to one private investor and certain senior employees 28,800 shares of Common Stock for an aggregate purchase price of $187,500. This sale was exempt from registration under the Securities Act pursuant to Section 4(2) thereof because it did not involve a public offering as the shares were offered and sold only to one private investor and a small number of senior employees of the registrant, each of whom represented his 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.
Employees of the Company have exercised options to purchase 3,514 shares of our Common Stock under our 1997 Stock Option Plan for an aggregate exercise price of $21,350. These sales were exempt from registration under the Securities Act pursuant to Rule 701 promulgated thereunder.
Appropriate restrictive legends were affixed to the securities 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.
II-4
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 19, 1999 to Stock Purchase
Agreement dated as of October 1, 1999 by and among Select Medical
Corporation, NC Resources, Inc. and NovaCare, Inc.
2.5+ First Amendment to Stock Purchase Agreement dated as of June 30, 1998
by and among Select Medical Corporation, Beverly Enterprises, Inc. and
American Transitional Hospitals, Inc.
3.1 Form of Restated Certificate of Incorporation.
3.2 Form of 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.
4.3+ 10% Senior Subordinated Note due November 19, 2009, dated as of
November 19, 1999.
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.
|
II-5
Exhibit
Number Document
------- --------
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.
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, amended and restated
February 22, 2001.
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.
|
II-6
Exhibit
Number Document
------- --------
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.
10.37+ 10% Promissory Note dated January 16, 1998 issued to Rocco A.
Ortenzio.
10.38+ 10% Promissory Note dated January 30, 1998 issued to Rocco A.
Ortenzio.
10.39+ Cost Sharing Agreement, dated December 11, 2000, among Select
Transport, Inc., Select Medical Corporation and Select Air II
Corporation.
10.40+ Amended and Restated Deferred Compensation Agreement dated January 1,
2000 between Select Medical Corporation and Rocco A. Ortenzio.
10.41+ Stockholders 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. and certain of its
partners; Select Investments II; Select Partners, L.P.; Rocco A.
Ortenzio and Robert A. Ortenzio.
10.42+ Amendment No. 1 to the Stockholders Agreement, dated as of December
15, 1998.
10.43+ Amendment No. 2 to the Stockholders Agreement, dated as of November
19, 2000.
10.44 Settlement Agreement dated as of July 6, 2000 by and among Select
Medical Corporation, NC Resources, Inc, NAHC Inc., and NovaCare
Holdings, Inc.
10.45 First Amendment dated December 28, 2000 to the 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.
10.46 Second Amendment dated January 18, 2001 to the Amended 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.
10.47 Amendment No. 2 dated as of February 23, 2001 to Employment Agreement
dated as of March 1, 2000 between Select Medical Corporation and Rocco
A. Ortenzio.
10.48 Amendment No. 2 dated as of February 23, 2001 to Employment Agreement
dated as of March 1, 2000 between Select Medical Corporation and
Robert A. Ortenzio.
10.49 Amendment No. 2 dated as of February 23, 2001 to Employment Agreement
dated as of March 1, 2000 between Select Medical Corporation and
Patricia A. Rice.
10.50 Amendment No. 1 dated as of February 23, 2001 to Employment Agreement
dated as of May 22, 2000 between Select Medical Corporation and LeRoy
S. Zimmerman.
10.51 Amendment dated as of February 23, 2001 to Change of Control Agreement
dated as of March 1, 2000 between Select Medical Corporation and
Edward R. Miersch.
10.52 Amendment dated as of February 23, 2001 to Change of Control Agreement
dated as of March 1, 2000 between Select Medical Corporation and
Martin F. Jackson.
10.53 Amendment dated as of February 23, 2001 to Change of Control Agreement
dated as of March 1, 2000 between Select Medical Corporation and S.
Frank Fritsch.
10.54 Amendment dated as of February 23, 2001 to Change of Control Agreement
dated as of March 1, 2000 between Select Medical Corporation and
Michael E. Tarvin.
21.1 Subsidiaries of Select Medical Corporation.
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Ernst & Young LLP.
23.3 Consent of KPMG LLP.
23.4 Consent of Dechert, included in Exhibit 5.1.
23.5 Consent of PricewaterhouseCoopers LLP
24.1+ Power of Attorney, included on the signature page hereof.
24.2+ Power of Attorney of James E. Dalton, Jr.
|
(b) Financial Statement Schedule
II-7
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 February 16, 2001 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 February 16, 2001, except for |
paragraph 8 of Note 7,
which is dated
March 28, 2001
II-8
Schedule II-Valuation and Qualifying Accounts
Balance Balance
at Charged to at
Beginning Cost and End of
Description of Year Expenses Acquisitions (A) Write off Year
----------- --------- ---------- ---------------- --------- -------
Nine months ended
September 30, 2000
allowance for doubtful
accounts.............. $69,492 $29,335 $ -- $(23,310) $75,517
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,
2000 income tax
valuation allowance... $ 38,941 $ -- $(3,745) $ -- $35,196
Year ended December 31,
1999 income tax
valuation allowance... $ 18,867 $ -- $20,074 $ -- $38,941
Year ended December 31,
1998 income tax
valuation allowance... $ -- $ -- $18,867 $ -- $18,867
|
(A) Represents opening balance sheet reserves resulting from purchase accounting entries.
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.
II-9
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 30th day of March, 2001.
Select Medical Corporation
Michael E. Tarvin
By: _________________________________
Michael E. Tarvin
Senior Vice President, General
Counsel and Secretary
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
--------- ----- ----
* Chairman, Chief Executive March 30, 2001
______________________________________ Officer (principal
Rocco A. Ortenzio executive officer)
* Director, Chief Operating March 30, 2001
______________________________________ Officer
Robert A. Ortenzio
* Chief Financial Officer March 30, 2001
______________________________________ (principal financial
Martin F. Jackson officer)
Scott A. Romberger Chief Accounting Officer March 30, 2001
______________________________________ and Controller (principal
Scott A. Romberger accounting officer)
* Director March 30, 2001
______________________________________
Russell L. Carson
* Director March 30, 2001
______________________________________
Bryan C. Cressey
* Director March 30, 2001
______________________________________
James E. Dalton, Jr.
* Director March 30, 2001
______________________________________
Donald J. Edwards
* Director March 30, 2001
______________________________________
Meyer Feldberg
* Director March 30, 2001
______________________________________
LeRoy S. Zimmerman
*Attorney-in-Fact
Michael E. Tarvin
______________________________________
Michael E. Tarvin
|
II-10
SELECT MEDICAL CORPORATION
(a Delaware corporation)
o Shares of Common Stock
Dated:
Page
----
SECTION 1. Representations and Warranties........................................................ 4
(a) Representations and Warranties by the Company......................................... 4
(i) Compliance with Registration Requirements.................................... 4
(ii) Independent Accountants...................................................... 5
(iii) Financial Statements......................................................... 5
(iv) No Material Adverse Change in Business....................................... 6
(v) Good Standing of the Company................................................. 6
(vi) Good Standing of Subsidiaries................................................ 7
(vii) Capitalization............................................................... 8
(viii) Authorization of Agreement................................................... 8
(ix) Authorization and Description of Securities.................................. 8
(x) Authorization of Related Transactions........................................ 9
(xi) Absence of Defaults and Conflicts............................................ 9
(xii) Absence of Labor Dispute..................................................... 10
(xiii) Absence of Proceedings....................................................... 10
(xiv) Accuracy of Exhibits......................................................... 10
(xv) Possession of Intellectual Property.......................................... 10
(xvi) Absence of Further Requirements.............................................. 11
(xvii) Possession of Licenses and Permits........................................... 11
(xviii) Accounts Receivable.......................................................... 12
(xix) Compliance with Social Security Act and Other Federal Enforcement Initiatives 12
(xx) Regulatory Filings........................................................... 13
(xxi) Title to Property............................................................ 13
(xxii) Investment Company Act....................................................... 14
(xxiii) Environmental Laws........................................................... 14
(xxiv) Registration Rights.......................................................... 15
(xxv) Insurance.................................................................... 15
(xxvi) Tax Returns and Payment of Taxes............................................. 15
(xxvii) No Stabilization or Manipulation............................................. 16
(xxviii) Certain Transactions......................................................... 16
(xxix) Statistical and Market Data.................................................. 16
(xxx) Accounting and other Controls................................................ 16
(b) Officer's Certificates................................................................ 17
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing....................................... 17
(a) Initial Securities.................................................................... 17
(b) Option Securities..................................................................... 17
(c) Payment............................................................................... 17
(d) Denominations; Registration........................................................... 18
(e) Appointment of Qualified Independent Underwriter...................................... 18
SECTION 3. Covenants of the Company.............................................................. 19
(a) Compliance with Securities Regulations and Commission Requests........................ 19
|
Page
----
(b) Filing of Amendments.................................................................. 19
(c) Delivery of Registration Statements................................................... 19
(d) Delivery of Prospectuses.............................................................. 20
(e) Continued Compliance with Securities Laws............................................. 20
(f) Blue Sky Qualifications............................................................... 20
(g) Rule 158.............................................................................. 21
(h) Use of Proceeds....................................................................... 21
(i) Listing............................................................................... 21
(j) Restriction on Sale of Securities..................................................... 21
(k) Reporting Requirements................................................................ 22
(l) Compliance with NASD Rules............................................................ 22
(m) Compliance with Rule 463.............................................................. 22
SECTION 4. Payment of Expenses................................................................... 22
(a) Expenses.............................................................................. 22
(b) Termination of Agreement.............................................................. 23
SECTION 5. Conditions of U.S. Underwriters' Obligations.......................................... 23
(a) Effectiveness of Registration Statement............................................... 23
(b) Opinion of Counsel for Company........................................................ 24
(c) Opinion of Counsel for U.S. Underwriters.............................................. 24
(d) Officers' Certificate................................................................. 24
(e) Accountant's Comfort Letter........................................................... 25
(f) Bring-down Comfort Letter............................................................. 25
(g) Approval of Listing................................................................... 25
(h) No Objection.......................................................................... 25
(i) Lock-up Agreements.................................................................... 25
(j) Purchase of Initial International Securities ......................................... 25
(k) Related Transactions.................................................................. 25
(l) Certificate Concerning Predecessor Company Financial Information...................... 25
(m) Certificate of General Counsel of the Company......................................... 25
(n) Conditions to Purchase of U.S. Option Securities...................................... 26
(i) Officers' Certificate........................................................... 26
(ii) Opinion of Counsel for Company.................................................. 26
(iii) Opinion of Counsel for U.S. Underwriters........................................ 26
(iv) Bring-down Comfort Letter....................................................... 26
(v) Certificate of General Counsel of the Company................................... 26
(o) Additional Documents.................................................................. 27
(p) Termination of Agreement.............................................................. 27
SECTION 6. Indemnification....................................................................... 27
(a) Indemnification of U.S. Underwriters.................................................. 27
(b) Indemnification of Company, Directors and Officers.................................... 29
(c) Actions against Parties; Notification................................................. 29
(d) Settlement without Consent if Failure to Reimburse.................................... 30
|
Page
----
(e) Indemnification for Reserved Securities............................................... 30
SECTION 7. Contribution.......................................................................... 31
SECTION 8. Representations, Warranties and Agreements to Survive Delivery........................ 32
SECTION 9. Termination of Agreement.............................................................. 32
(a) Termination; General.................................................................. 32
(b) Liabilities........................................................................... 33
SECTION 10 Default by One or More of the U.S. Underwriters....................................... 33
SECTION 11 Notices............................................................................... 34
SECTION 12 Parties............................................................................... 34
SECTION 13 GOVERNING LAW AND TIME................................................................ 35
SECTION 14 Effect of Headings.................................................................... 35
|
SCHEDULES
Schedule A - List of Underwriters
Schedule B - Pricing Information
Schedule C - List of Persons Subject to Lock-Up
Schedule D - Document Amendments
Schedule 1 - Significant Subsidiaries
EXHIBITS
Exhibit A-1 - Form of Opinion of Dechert Exhibit A-2 - Form of Opinion of Company's Special Regulatory Counsel Exhibit A-3 - Form of Opinion of Company's Canadian Counsel Exhibit B - Form of Lock-Up Letter
SELECT MEDICAL CORPORATION
(a Delaware corporation)
Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
J.P. Morgan Securities Inc.
Credit Suisse First Boston Corporation
CIBC World Markets Corp.
SG Cowen Securities Corporation
First Union Securities, Inc.
as U.S. Representatives of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Select Medical Corporation, a Delaware corporation (the "Company"),
confirms its agreement with Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch") and each of the other U.S. Underwriters
named in Schedule A hereto (collectively, the "U.S. Underwriters", which term
shall also include any underwriter substituted as hereinafter provided in
Section 10 hereof), for whom Merrill Lynch, J.P. Morgan Securities Inc., Credit
Suisse First Boston Corporation, CIBC World Markets Corp., SG Cowen Securities
Corporation and First Union Capital Securities, Inc. are acting as
representatives (in such capacity, the "U.S. Representatives"), with respect to
the issue and sale by the Company and the purchase by the U.S. Underwriters,
acting severally and not jointly, of the respective numbers of shares of Common
Stock, par value $.01 per share, of the Company ("Common Stock") set forth in
said Schedule A, and with respect to the grant by the Company to the U.S.
Underwriters, acting severally and not jointly, of the option described in
Section 2(b)
hereof to purchase all or any part of additional shares of Common Stock to cover over-allotments, if any. The aforesaid shares of Common Stock (the "Initial U.S. Securities") to be purchased by the U.S. Underwriters and all or any part of the shares of Common Stock subject to the option described in Section 2(b) hereof (the "U.S. Option Securities") are hereinafter called, collectively, the "U.S. Securities".
It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "International Purchase Agreement") providing for the offering by the Company of an aggregate of shares of Common Stock (the "Initial International Securities") through arrangements with certain underwriters outside the United States and Canada (the "International Managers") for which Merrill Lynch International and J.P. Morgan Securities Ltd., Credit Suisse First Boston (Europe) Limited, CIBC World Markets plc, SG Cowen Securities Corporation and First Union Securities, Inc. are acting as lead managers (the "Lead Managers") and the grant by the Company to the International Managers, acting severally and not jointly, of an option to purchase all or any part of the International Managers' pro rata portion of up to additional shares of Common Stock solely to cover overallotments, if any (the "International Option Securities" and, together with the U.S. Option Securities, the "Option Securities"). The Initial International Securities and the International Option Securities are hereinafter called the "International Securities". It is understood that the Company is not obligated to sell and the U.S. Underwriters are not obligated to purchase, any Initial U.S. Securities unless all of the Initial International Securities are contemporaneously purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter collectively called the "Underwriters", the Initial U.S. Securities and the Initial International Securities are hereinafter collectively called the "Initial Securities", and the U.S. Securities, and the International Securities are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a public offering of the U.S. Securities as soon as the U.S. Representatives deem advisable after this Agreement has been executed and delivered.
The Company and the U.S. Underwriters agree that up to shares of the Initial U.S. Securities to be purchased by the U.S. Underwriters and that up to shares of the Initial International Securities to be purchased by the International Managers (collectively, the "Reserved Securities") shall be reserved for sale by the Underwriters to certain eligible employees and persons having business relationships with the Company,
as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. and all other applicable laws, rules and regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by such eligible employees and persons having business relationships with the Company by the end of the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-48856) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations. Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the U.S. Securities (the "Form of U.S. Prospectus") and one relating to the International Securities (the "Form of International Prospectus"). The Form of International Prospectus is identical to the Form of U.S. Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting." The information included in any such prospectus that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information." Each Form of U.S. Prospectus and Form of International Prospectus used before such registration statement became effective, and any prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of U.S. Prospectus and the final Form of International Prospectus in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "U.S. Prospectus" and the "International Prospectus," respectively, and collectively, the "Prospectuses." For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the U.S. Prospectus, the International Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
Immediately prior to or upon the consummation of the offering of the
Securities or, in the case of (iv) below, within 30 days following the Closing
Time or such other period as permitted under the applicable agreement (i) the
Company's certificate of incorporation and bylaws will be amended and restated
and the Company will file the amended and restated certificate of incorporation
with the Secretary of State of the State of Delaware (the "Charter Amendments");
(ii) a .576 for 1 reverse split of the Common Stock will be effected (the "Stock
Split"); (iii) conversion of 16,000,000 shares of Class B Preferred Stock of the
Company into 9,216,000 shares of Common Stock will be effected (the
"Conversion"); (iv) certain minority owners of the Company's outpatient
rehabilitation clinics who have exercised their put options to purchase Common
Stock as set forth in certain agreements between such minority owners and the
Company will have these exercises completed (the "Put Exercises"); (v) the
stockholders agreement among the Company and certain of its stockholders will be
terminated (the "Stockholder Agreement Termination"); and (vi) each of the
documents set forth on Schedule D hereto shall have been executed and delivered
(the "Document Amendments"); the Charter Amendments, the Stock Split, the
Conversion, the Put Exercises, the Stockholder Agreement Termination and the
Document Amendments are collectively referred to herein as the "Related
Transactions."
At the respective times the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendments thereto became effective and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), the Registration Statement, the Rule 462(b) Registration Statement and any amendments and supplements thereto complied and will comply in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations and did not and will not contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading, and the Prospectuses, the preliminary prospectuses dated March 7, 2001 and any supplement thereto or prospectus wrapper prepared in connection therewith, at their respective times
of issuance and at the Closing Time, complied and will comply in all material respects with any applicable laws or regulations of foreign jurisdictions in which the Prospectuses and such preliminary prospectuses, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither of the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any U.S. Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectuses made in reliance upon and in conformity with information furnished to the Company in writing by any U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement or the Prospectuses.
The preliminary prospectuses dated March 7, 2001 filed as part of the Registration Statement and the Prospectuses filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and the preliminary prospectuses and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(iii) Financial Statements. The consolidated financial statements included in the Registration Statement and the Prospectuses, together with the related schedules and notes, present fairly the financial position of the Company and its consolidated subsidiaries, and NovaCare Physical Rehabilitation and Occupational Health Group, Intensiva Healthcare Corporation and Subsidiaries, and American Transitional Hospitals, Inc. (collectively, the "Acquired Entities"), at the dates indicated and the statement of operations, stockholders' equity and cash flows of the Company, its consolidated subsidiaries and the Acquired Entities and for the periods specified; said financial statements have been prepared in conformity with generally accepted accounting principles ("GAAP") applied on a consistent basis throughout the periods involved. The supporting schedules included in the Registration Statement present fairly in accordance with GAAP the information required to be stated therein. The selected consolidated financial data and the summary consolidated financial information of the Company included in the Prospectuses present fairly the information shown
therein and have been compiled on a basis consistent with that of the audited financial statements included in the Registration Statement. The statement of operations data and balance sheet data of Sports Orthopedic Rehabilitation Services, PA ("SORS") for December 31, 1996 and the year then ended and the period January 1, 1997 through February 6, 1997 included in the Prospectus under the heading "Selected Consolidated Financial and Other Data" (the "SORS Financial Information") was derived from the compiled financial statements of SORS. The combined financial statements of SORS for the above referenced periods (i) fairly present the financial position of SORS at the dates indicated and the statement of operations data for the periods specified and (ii) were prepared in conformity with GAAP, except for the absence of footnotes, statements of cash flows and the exclusion of certain per share information. There are no material adjustments that would be required to be made to the SORS Financial Information if the above referenced financial statements of SORS were reissued to be in conformity with GAAP. The pro forma financial information and the related notes thereto included in the Registration Statement and the Prospectuses present fairly the information shown therein and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein; the as adjusted financial information included in the Registration Statement and the Prospectuses has been properly compiled on the basis described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein.
whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.
(B) Except to the extent disclosed in the Prospectuses under the caption "Selected Consolidated Financial and Other Data" and in the Company's consolidated financial statements included in the Prospectuses, each of the specialty acute care hospitals, outpatient rehabilitation clinics and occupational health centers (collectively, the "Facilities") described in the Prospectuses as owned by the Company is owned or leased and operated by a Subsidiary of which the Company directly or indirectly owns 100% of the outstanding ownership interests. Except as disclosed in the Prospectuses, there are no material encumbrances or restrictions on the ability of any Subsidiary (i) to pay any dividends or make any distributions on such Subsidiary's capital stock, (ii) to make any loans or advances to, or investments in, the Company or any Subsidiary, or (iii) to transfer any of its property or assets to the Company or any Subsidiary.
holder; and the issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company.
subsidiaries and all of the Company's and its subsidiaries' outpatient clinics that operate as "rehabilitation agencies" are "providers of service" as defined in the Social Security Act and the regulations promulgated thereunder and are eligible to participate in the Medicare and (to the extent disclosed in the prospectus) Medicaid programs.
benefit or payment fraudulently; (iv) knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind (a) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part by Medicare or Medicaid or any third party (where applicable federal or state law prohibits such payments to third parties), or (b) in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing or ordering of any good, facility, service, or item for which payment may be made in whole or in part by Medicare or Medicaid or any third party (where applicable federal or state law prohibits such payments to third parties); (v) knowingly and willfully referring an individual to a person with which they have ownership or certain other financial arrangements (where applicable federal law prohibits such referrals); and (vi) knowingly and willfully violating any enforcement initiative instituted by any governmental agency (including, without limitation, the Office of the Inspector General and the Department of Justice), except for any such activities which are specifically described in the Prospectus or which would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease, except where the failure to be in full force and effect or such claim would not reasonably be expected to have a Material Adverse Effect.
except for such events or circumstances that would not, singly or in the aggregate, result in a Material Adverse Effect.
Effect; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 1(a)(iii) above in accordance with GAAP in respect of all Federal, state, local and foreign taxes for all periods as to which the tax liability of the Company and its subsidiaries has not been finally determined or remains open to examination by applicable taxing authorities except (A) for taxes incurred after the date of the financial statements referred to in Section 1(a)(iii) or (B) where the failure to provide for such charges, accruals and reserves would not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any of its subsidiaries is a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Internal Revenue Code of 1986, as amended (the "Code").
(b) Officer's Certificates. Any certificate signed by any officer of the Company or any its subsidiaries delivered to the Global Coordinator, the U.S. Representatives or to counsel for the U.S. Underwriters shall be deemed a representation and warranty by the Company to each U.S. Underwriter as to the matters covered thereby.
(b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the U.S. Underwriters, severally and not jointly, to purchase up to an additional shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial U.S. Securities but not payable on the U.S. Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial U.S. Securities upon notice by the Global Coordinator to the Company setting forth the number of U.S. Option Securities as to which the several U.S. Underwriters are then exercising the option and the time and date of payment and delivery for such U.S. Option Securities. Any such time and date of delivery for the U.S. Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days nor, if after the Closing Time, later than seven nor less than two full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the U.S. Option Securities, each of the U.S. Underwriters, acting severally and not jointly, will purchase that proportion of the total number of U.S. Option Securities then being purchased which the number of Initial U.S. Securities set forth in Schedule A opposite the name of such U.S. Underwriter bears to the total number of Initial U.S. Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of certificates for, the Initial Securities shall be made at the offices of Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, or at such other place as shall be agreed upon by
the Global Coordinator and the Company, at 9:00 A.M. (Eastern time) on the third
(fourth, if the pricing occurs after 4:30 P.M. (Eastern time) on any given day)
business day after the date hereof (unless postponed in accordance with the
provisions of Section 10), or such other time not later than ten business days
after such date as shall be agreed upon by the Global Coordinator and the
Company (such time and date of payment and delivery being herein called "Closing
Time").
In addition, in the event that any or all of the U.S. Option Securities are purchased by the U.S. Underwriters, payment of the purchase price for, and delivery of certificates for, such U.S. Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the U.S. Representatives for the respective accounts of the U.S. Underwriters of certificates for the U.S. Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the U.S. Representatives, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial U.S. Securities and the U.S. Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the U.S. Underwriters, may (but shall not be obligated to) make payment of the purchase price for the Initial U.S. Securities or the U.S. Option Securities, if any, to be purchased by any U.S. Underwriter whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such U.S. Underwriter from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, shall be in such denominations and registered in such names as the U.S. Representatives may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial U.S. Securities and the U.S. Option Securities, if any, will be made available for examination and packaging by the U.S. Representatives in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby confirms its engagement of Credit Suisse First Boston Corporation as, and Credit Suisse First Boston Corporation hereby confirms its agreement with the Company to render services as, a "qualified independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the U.S. Securities. Credit Suisse First Boston Corporation, solely in its capacity as qualified independent underwriter and not otherwise, is referred to herein as the "Independent Underwriter."
(a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A and will notify the Global Coordinator as soon as practicably possible, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission regarding the Registration Statement or any of the information contained therein, the Common Stock or the transactions contemplated by this Agreement, the International Purchase Agreement or the Registration Statement (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information regarding the Registration Statement or any of the information contained therein, the Common Stock or the transactions contemplated by this Agreement, the International Purchase Agreement or the Registration Statement, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the U.S. Underwriters shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or will deliver to the U.S. Representatives and counsel for the U.S. Underwriters, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and copies of all signed consents and certificates of experts, and will also deliver to the U.S. Representatives, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each
of the U.S. Underwriters. The copies of the Registration Statement and each amendment thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each U.S. Underwriter, without charge, as many copies of each preliminary prospectus as such U.S. Underwriter reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each U.S. Underwriter, without charge, during the period when the U.S. Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may reasonably request. The U.S. Prospectus and any amendments or supplements thereto furnished to the U.S. Underwriters will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the International Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the judgment of the Company after consultation with counsel or in the opinion of counsel for the U.S. Underwriters or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the U.S. Underwriters such number of copies of such amendment or supplement as the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in
cooperation with the U.S. Underwriters, to qualify the Securities for offering
and sale under the applicable securities laws of such states and other
jurisdictions (domestic or foreign) as the Global Coordinator may designate and
to maintain such qualifications in effect for a period of not less than one year
from the later of the effective date of the Registration Statement and any Rule
462(b) Registration Statement; provided, however,
that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect and, for a reasonable period after Closing Time, which shall not be less than five years unless the Company engages in a transaction such as a merger or other business combination in which the Company is not the surviving entity, or going private transaction which by its terms provides otherwise and receives all required Company stockholder approval, maintain the quotation of the Securities on the Nasdaq National Market or the New York Stock Exchange (the "NYSE") and will file with the Nasdaq National Market or the NYSE, as applicable, all documents and notices required by the Nasdaq National Market or the NYSE, of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq National Market or on the NYSE.
(j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the International Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or
warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectuses, (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan, or (E) the issuance by the Company of shares of Common Stock in connection with any Put Exercises immediately prior to or after the consummation of the offering of the Securities or any other Related Transaction.
(k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release.
(m) Compliance with Rule 463. The Company will comply with the requirements of Rule 463 of the 1933 Act Regulations.
(n) Medicare Filings and Notices. The Company and its Subsidiaries will make all required filings and provide all required notices to update indirect ownership information that has been supplied in connection with the Company's facilities that particpate in the Medicare Program and other U.S. Federal programs ("Medicare Filings and Notices").
(a) Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including (i) the preparation, printing and filing of the Registration Statement (including financial statements and exhibits) as originally filed and of each amendment thereto, (ii) the preparation, printing and delivery to the Underwriters of this Agreement, any Agreement among Underwriters and such other documents as may be required in connection with the offering, purchase,
sale, issuance or delivery of the Securities, (iii) the preparation, issuance and delivery of the certificates for the Securities to the Underwriters, including any stock or other transfer taxes and any stamp or other duties payable upon the sale, issuance or delivery of the Securities to the Underwriters and the transfer of the Securities between the U.S. Underwriters and the International Managers, (iv) the fees and disbursements of the Company's counsel, accountants and other advisors, (v) the qualification of the Securities under securities laws in accordance with the provisions of Section 3(f) hereof, including filing fees and the reasonable fees and disbursements of counsel for the Underwriters in connection therewith and in connection with the preparation of the Blue Sky Survey and any supplement thereto, (vi) the printing and delivery to the Underwriters of copies of each preliminary prospectus and of the Prospectuses and any amendments or supplements thereto, (vii) the preparation, printing and delivery to the Underwriters of copies of the Blue Sky Survey and any supplement thereto, (viii) the fees and expenses of any transfer agent or registrar for the Securities, (ix) the filing fees incident to, and the reasonable fees and disbursements of counsel to the Underwriters in connection with, the review by the National Association of Securities Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and (x) the fees and expenses incurred in connection with the inclusion of the Securities in the Nasdaq National Market and (xi) all costs and expenses of the Underwriters, including the fees and disbursements of counsel for the Underwriters, in connection with matters related to the Reserved Securities which are designated by the Company for sale to directors, officers, employees, business associates and related persons of the Company, provided that such costs and expenses shall not exceed $25,000 in the aggregate (exclusive of any costs and expenses of foreign counsel).
(b) Termination of Agreement. If this Agreement is terminated by the U.S. Representatives in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the U.S. Underwriters.
(a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the U.S. Underwriters. A prospectus containing the Rule 430A Information shall have been filed
with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A).
(b) Opinion of Counsel for Company. At Closing Time, the U.S. Representatives shall have received the favorable opinions, dated as of Closing Time, of:
(i) Dechert, counsel for the Company, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters, to the effect set forth in Exhibit A-1 hereto and to such further effect as counsel to the U.S. Underwriters may reasonably request; (ii) Reed Smith LLP, special regulatory counsel for the Company, in form and substance satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters, to the effect set forth in Exhibit A-2 hereto and to such further effect as counsel to the U.S. Underwriters may reasonably request; and (iii) Torys, special Canadian counsel to the Company, in form and substance reasonably satisfactory to counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters to the effect set forth in Exhibit A-3 hereto and to such further effect as counsel for the U.S. Underwriters may reasonably request.
(c) Opinion of Counsel for U.S. Underwriters. At Closing Time, the U.S. Representatives shall have received the favorable opinion, dated as of Closing Time, of Debevoise & Plimpton, counsel for the U.S. Underwriters, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters in form and substance satisfactory to the U.S. Underwriters.
(d) Officers' Certificate. At Closing Time, there shall not have been,
since the date hereof or since the respective dates as of which information is
given in the Prospectuses, any material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or business
prospects of the Company and its subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, and the U.S.
Representatives shall have received a certificate of the Chief Executive
Officer, the President and Chief Operating Officer, and the Senior Vice
President and Chief Financial Officer of the Company, dated as of Closing Time,
to the effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop order suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose have been instituted or are
pending or threatened or, to their knowledge, are contemplated by the
Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the U.S. Representatives shall have received from PricewaterhouseCoopers LLP a letter dated such date, in form and substance satisfactory to the U.S. Representatives and PricewaterhouseCoopers LLP, together with signed or reproduced copies of such letter for each of the other U.S. Underwriters containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the Representatives shall have received from PricewaterhouseCoopers LLP, a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter previously furnished to the U.S. Underwriters at the time of execution of this Agreement pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the U.S. Representatives shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) Purchase of Initial International Securities. Contemporaneously with the purchase by the U.S. Underwriters of the Initial U.S. Securities under this Agreement, the International Managers shall have purchased the Initial International Securities under the International Purchase Agreement.
(k) Related Transactions. Prior to or upon the purchase of the Securities by the Underwriters, the Related Transactions, other than the Put Exercises, shall have been consummated.
(l) Certificate Concerning Predecessor Company Financial Information. Prior to the purchase of the Securities by the Underwriters, the U.S. Representatives shall have received a certificate of the Chief Financial Officer and the Controller of the Company concerning the financial information of SORS contained in the Prospectuses in form and substance reasonably satisfactory for counsel for the U.S. Representatives.
(m) Certificate of General Counsel of the Company. At Closing Time, the U.S. Representatives shall have received a certificate of Michael E. Tarvin, Senior Vice
President and General Counsel of the Company, in form and substance reasonably satisfactory to counsel the U.S. Representatives.
(n) Medicare Filings. All Medicare Filings and Notices required to be made prior to Closing Time shall have been made or provided.
(o) Conditions to Purchase of U.S. Option Securities. In the event that the U.S. Underwriters exercise their option provided in Section 2(b) hereof to purchase all or any portion of the U.S. Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the U.S. Representatives shall have received:
dated such Date of Delivery, in form and substance reasonably satisfactory to counsel for the U.S. Representatives.
(p) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the U.S. Underwriters shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the U.S. Representatives and counsel for the U.S. Underwriters.
(q) Termination of Agreement. If any condition specified in this Section shall not have been fulfilled when and as required to be fulfilled, this Agreement, or, in the case of any condition to the purchase of U.S. Option Securities on a Date of Delivery which is after the Closing Time, the obligations of the several U.S. Underwriters to purchase the relevant Option Securities, may be terminated by the U.S. Representatives by notice to the Company at any time at or prior to Closing Time or such Date of Delivery, as the case may be, and such termination shall be without liability of any party to any other party except as provided in Section 4 and except that Sections 1, 6, 7 and 8 shall survive any such termination and remain in full force and effect.
(a) Indemnification of U.S. Underwriters. (1) The Company agrees to indemnify and hold harmless each U.S. Underwriter and each person, if any, who controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of (A) the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered
and (B) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in any jurisdiction in connection with the reservation and sale of the Reserved Securities to directors, officers, employees, business associates and related persons of the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectuses or preliminary prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof, to the extent that any such expense is not paid under (i), (ii) or (iii) above;
damage or expense prior to the written confirmation or the sale of Securities to such person by such U.S. Underwriter as required by the 1933 Act or the 1933 Act Regulations, and (4) that the sending of the U.S. Prospectus to the person asserting such loss, liability, claim, damage or expense would have constituted a defense to the claim asserted by such person or persons.
(2) In addition to and without limitation of the Company's obligation to
indemnify Credit Suisse First Boston Corporation as an Underwriter, the Company
also agrees to indemnify and hold harmless the Independent Underwriter and each
person, if any, who controls the Independent Underwriter within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any
and all loss, liability, claim, damage and expense whatsoever, as incurred,
incurred as a result of the Independent Underwriter's participation as a
"qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. in
connection with the offering of the U.S. Securities.
(b) Indemnification of Company, Directors and Officers. Each U.S. Underwriter severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or any preliminary U.S. prospectus or the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such U.S. Underwriter through the U.S. Representatives expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the U.S. Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above, counsel to the indemnified parties shall be selected by Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b) above, counsel to the indemnified parties shall be selected by the Company. An indemnifying party may participate at its own expense in the defense of any such action; provided, however, that counsel to the indemnifying party shall not (except with the consent of the indemnified party) also be counsel to the indemnified party. In no event shall the indemnifying parties be liable for fees and expenses of more than one counsel (in addition to any local counsel) separate from their own counsel for all indemnified parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising
out of the same general allegations or circumstances; provided, that, if
indemnity is sought pursuant to Section 6(a)(2), then, in addition to the fees
and expenses of such counsel for the indemnified parties, the indemnifying party
shall be liable for the reasonable fees and expenses of not more than one
counsel (in addition to any local counsel) separate from its own counsel and
that of the other indemnified parties for the Independent Underwriter in its
capacity as a "qualified independent underwriter" and all persons, if any, who
control the Independent Underwriter within the meaning of Section 15 of the 1933
Act or Section 20 of 1934 Act in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances if, in the reasonable judgment of the
Independent Underwriter, there may exist a conflict of interest between the
Independent Underwriter and the other indemnified parties. Any such separate
counsel for the Independent Underwriter and such control persons of the
Independent Underwriter shall be designated in writing by the Independent
Underwriter. No indemnifying party shall, without the prior written consent of
the indemnified parties, settle or compromise or consent to the entry of any
judgment with respect to any litigation, or any investigation or proceeding by
any governmental agency or body, commenced or threatened, or any claim
whatsoever in respect of which indemnification or contribution could be sought
under this Section 6 or Section 7 hereof (whether or not the indemnified parties
are actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each indemnified party from all
liability arising out of such litigation, investigation, proceeding or claim and
(ii) does not include a statement as to or an admission of fault, culpability or
a failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, such indemnifying party
agrees that it shall be liable for any settlement of the nature contemplated by
Section 6(a)(1)(iii) effected without its written consent if (i) such settlement
is entered into more than 45 days after receipt by such indemnifying party of
the aforesaid request, (ii) such indemnifying party shall have received notice
of the terms of such settlement at least 30 days prior to such settlement being
entered into and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of such
settlement. Notwithstanding the immediately preceding sentence, if at any time
an indemnified party shall have requested an indemnifying party to reimburse the
indemnified party for fees and expenses of counsel, an indemnifying party shall
not be liable for any settlement of the nature contemplated by Section
6(a)(1)(iii) effected without its consent if such indemnifying party (i)
reimburses such indemnified party in accordance with such request to the extent
it considers such request to be reasonable and (ii) provides written notice to
the indemnified party specifying the basis for its claim that the unpaid balance
is unreasonable, in each case prior to the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a written request, to
indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of directors, officers, employees, business associates and related persons of the Company to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase.
The relative benefits received by the Company on the one hand and the U.S. Underwriters on the other hand in connection with the offering of the U.S. Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds (i.e., after deducting the total underwriting discount) from the offering of the U.S. Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the U.S. Underwriters, in each case as set forth on the cover of the U.S. Prospectus bear to the aggregate initial public offering price of the U.S. Securities as set forth on such cover.
The relative fault of the Company on the one hand and the U.S. Underwriters on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the U.S. Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof.
The Company and the U.S. Underwriters agree that Credit Suisse First Boston Corporation will not receive any additional benefits hereunder for serving as the Independent Underwriter in connection with the offering and sale of the U.S. Securities.
The Company and the U.S. Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation
(even if the U.S. Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the U.S. Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such U.S. Underwriter has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as such U.S. Underwriter, and each director of the Company, each officer of the Company who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act shall have the same rights to contribution as the Company. The U.S. Underwriters' respective obligations to contribute pursuant to this Section 7 are several, and in proportion to the number of Initial U.S. Securities set forth opposite their respective names in Schedule A hereto, and not joint.
(a) Termination; General. The U.S. Representatives may terminate this Agreement, by notice to the Company, at any time at or prior to Closing Time (i) if there has been, since the time of execution of this Agreement or since the respective dates as of which information is given in the U.S. Prospectus, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects
of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, or (ii) if there has occurred any material adverse change in the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the judgment of the U.S. Representatives, impracticable to market the Securities or to enforce contracts for the sale of the Securities, or (iii) if trading in any securities of the Company has been suspended or materially limited by the Commission on the Nasdaq National Market, or if trading generally on the American Stock Exchange or the New York Stock Exchange or in the Nasdaq National Market has been suspended or materially limited, or minimum or maximum prices for trading have been fixed, or maximum ranges for prices have been required, by any of said exchanges or by such system or by order of the Commission, the National Association of Securities Dealers, Inc. or any other governmental authority, or (iv) if a banking moratorium has been declared by either Federal or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect.
(a) if the number of Defaulted Securities does not exceed 10% of the number of U.S. Securities to be purchased on such date, each of the non- defaulting U.S. Underwriters shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the number of U.S. Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the U.S. Underwriters to purchase and of the Company to sell the Option Securities to
be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non-defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any defaulting U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a termination of this Agreement or, in the case of a Date of Delivery which is after the Closing Time, which does not result in a termination of the obligation of the U.S. Underwriters to purchase and the Company to sell the relevant U.S. Option Securities, as the case may be, either the U.S. Representatives or the Company shall have the right to postpone Closing Time or the relevant Date of Delivery, as the case may be, for a period not exceeding seven days in order to effect any required changes in the Registration Statement or Prospectus or in any other documents or arrangements. As used herein, the term "U.S. Underwriter" includes any person substituted for a U.S. Underwriter under this Section 10.
SECTION 12. Parties. This Agreement shall each inure to the benefit of and be binding upon the U.S. Underwriters and the Company and their respective successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the U.S. Underwriters and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the U.S. Underwriters and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any U.S. Underwriter shall be deemed to be a successor by reason merely of such purchase.
If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the U.S. Underwriters and the Company in accordance with its terms.
Very truly yours,
SELECT MEDICAL CORPORATION
By:______________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
J.P. Morgan Securities Inc.
Credit Suisse First Boston Corporation
CIBC World Markets Corp.
SG Cowen Securities Corporation
First Union Securities, Inc.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By: -----------------------------
Authorized Signatory
For themselves and as U.S.
Representatives of the other U.S.
Underwriters named in Schedule A
hereto.
Exhibit A-1
FORM OF OPINION OF DECHERT,
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in the jurisdictions listed on Exhibit A hereto.
(iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the U.S. Purchase Agreement and the International Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses or repurchases of an immaterial number of shares of the Company's capital stock held by former employees); the shares of issued and outstanding capital stock have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights (that were not subsequently waived) of any securityholder of the Company existing by virtue of the DGCL, the restated certificate of incorporation of the Company, the restated by-laws of the Company or any contract to which the Company is a party and which is filed as an exhibit to the Registration Statement or identified in a certificate of the General Counsel of the Company attached hereto as Exhibit B (that purports to identify all material contracts or group of similar contracts that are material in the aggregate to which the Company or any of its subsidiaries is a party); and the shares of issued and outstanding capital stock of the Company (including any shares of capital stock of the Company issued or to be issued in connection with the exercise of the put rights pursuant to the agreements set forth on Exhibit C hereto (that purports to identify the only agreements with respect to put rights), assuming such shares are issued and sold in accordance with the agreements set forth on Exhibit C hereto), have been issued or will be issued in compliance, in all material respects, with all federal securities laws.
A-1-1
(v) Based solely on a certificate from the Secretary of State or similar government official of each Subsidiary's respective jurisdiction of incorporation or organization, each Subsidiary has been duly incorporated or organized and is validly existing as a corporation or other entity in good standing under the laws of the jurisdiction of its incorporation or organization, has corporate or other power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction set forth on Schedule 1 hereto (that purports to identify all jurisdictions in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or be in good standing would not result in a Material Adverse Effect). Except as otherwise disclosed on Schedule 2 hereto, (a) all of the issued and outstanding capital stock of each such Subsidiary that is a corporation has been duly authorized and validly issued, is fully paid and non-assessable and, to our knowledge, is owned by the Company, directly or through subsidiaries and (b) all of the ownership interests of each such Subsidiary that is not a corporation have been duly authorized and, to our knowledge, are owned, by the Company, directly or through subsidiaries.
(vi) The Securities to be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth in the U.S. Purchase Agreement and the International Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder.
(vii) The issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company existing by virtue of the DGCL, the certificate of incorporation and by-laws of the Company in effect immediately prior to and at Closing Time or any contract to which the Company is a party and which is filed as an exhibit to the Registration Statement pursuant to Item 601(b)(2) or 601(b)(10) of Regulation S-K of the 1933 Act or identified in a certificate of the General Counsel of the Company attached hereto as Exhibit D (that purports to identify any agreements with respect to such preemptive or other similar rights).
(viii) The U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company.
(viii) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectuses pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to our knowledge, no stop order suspending the
A-1-2
effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information, the Prospectuses and each amendment or supplement to the Registration Statement and the Prospectuses filed on or before the date hereof as of their respective effective or issue dates (other than the financial statements, footnotes thereto, supporting schedules, other financial information and statistical information derived from the financial statements included therein or omitted therefrom, as to which we express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations.
(xi) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements and with any applicable requirements of the restated certificate of incorporation and the restated by-laws of the Company in effect at Closing Time.
(xii) Except as disclosed in the Prospectuses, there are no encumbrances or restrictions pursuant to any agreement filed as an exhibit to the Registration Statement pursuant to Item 601(b)(2) or 601(b)(10) of Regulation S-K of the 1933 Act or identified on a schedule provided by the General Counsel of the Company attached hereto as Exhibit E containing agreements that impose encumbrances or restrictions, on the ability of any Subsidiary (i) to pay any dividends or make any distributions on such Subsidiary's capital stock, (ii) to make any loans or advances to, or investments in, the Company or any such Subsidiary, or (iii) to transfer any of its property or assets to the Company or any such Subsidiary.
(xiii) To our knowledge, (A) there are no legal or governmental proceedings or investigations pending or threatened against the Company, or to which the Company, or any of its properties is subject, that are required to be described in the Registration Statement or Prospectuses (or any amendment or supplement thereto) that are not so described, (B) there are no agreements, franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments that are required to be described or referred to in the Registration Statement or the Prospectuses (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not so described or filed, as the case may be, and such descriptions are accurate in all material respects, and (C) there are no legal or governmental proceedings or investigations pending, or threatened in writing, that would materially affect the issuance, sale or delivery of the Shares to the Underwriters under the U.S. Purchase Agreement or the International Purchase Agreement or the performance by the Company of its obligation thereunder.
(xiv) The information in the Prospectuses under "Description of Capital Stock", "Management-Employment Agreements", "Management - Select Medical Corporation 1997 Amended and Restated Stock Option Plan", "Related Party Transactions", "Shares
A-1-3
Eligible for Future Sale" and "United States Federal Income Tax Considerations for Non-United States Holders" and in the Registration Statement under Items 14 and 15, to the extent that it constitutes matters of law, summaries of legal matters, summaries of the Company's restated certificate of incorporation and bylaws or legal conclusions, has been reviewed by us and is correct in all material respects.
(xv) To our knowledge, other than with respect to Health Care Laws (as to which we express no opinion), there are no Federal, Delaware or Pennsylvania statutes or regulations that are required to be described in the Prospectuses that are not described as required.
(xvi) To our knowledge, neither the Company nor any of the Subsidiaries is in violation of its restated certificate of incorporation or restated by-laws and no default by the Company or any of its subsidiaries exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed or incorporated by reference as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license, order, registration, qualification of or with any United States, New York, Pennsylvania or with respect to the DGCL, Delaware court or governmental authority or agency (other than under the 1933 Act and the 1933 Act Regulations or Form 8-A under 1934 Act or 1934 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the U.S. Purchase Agreement and the International Purchase Agreement or for the offering, issuance, sale or delivery of the Securities.
(xix) The execution, delivery and performance of the U.S. Purchase Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement and in the Registration Statement (including the completion of the Related Transactions and the issuance and sale of the Securities, and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and compliance by the Company with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreements) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument filed as an exhibit to the Registration Statement pursuant to Item 601(b)(2) or 601(b)(10) of Regulation S-K of the 1933 Act or any other material agreement of the
A-1-4
Company or any of its subsidiaries identified on a schedule provided by the General Counsel of the Company attached hereto as Exhibit B, to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that could not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any Subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their respective properties, assets or operations.
(xx) Except as disclosed in the Prospectuses, to our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company or any of its subsidiaries under the 1933 Act.
(xxi) Neither the Company or any of its subsidiaries is, and upon the issuance and sale of the Securities as contemplated in the Purchase Agreements and the application of the net proceeds therefrom as described in the Prospectuses none of them will be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act.
(xxii) The Stock Split and the Charter Amendments were duly authorized by the Company's Board of Directors and stockholders, the Stock Split has been consummated in accordance with its terms and the Charter Amendments have become effective.
Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
[The following statement shall be set forth in a separate letter]
We have participated in conferences with officers and other representatives of the Company and representatives of the U.S. Underwriters and their counsel during which the contents of the Registration Statement and related matters were discussed and reviewed and, although we do not pass upon and do not assume responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement (except to the extent described in paragraphs (xiii) and (xiv) in our separate opinion to you dated today), on the basis of the information that was developed in the course of the services referred to above, considered in the light of our understanding of the applicable law, that, nothing has come to our attention that would lead us to believe
A-1-5
that the Registration Statement or any amendment thereto, including the Rule 430A Information, (except for financial statements, footnotes and schedules, other financial data and statistical information derived from the financial statements included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective on or prior to the Closing Time, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements, footnotes and schedules, other financial data and statistical information derived from the financial statements included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented prospectus was issued on or prior to the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
A-1-6
Exhibit A-2
FORM OF OPINION OF COMPANY'S SPECIAL REGULATORY COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(ii)
(i) The information in the Prospectuses under "Risk Factors --If there are changes in the rates or methods of government reimbursements for our services, our services, our net operating revenues and income could decline", "Risk Factors --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", "Risk Factors --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", "Our Business-- Government Regulations", to the extent that it describes federal and state laws of the United States, has been reviewed by me and fairly presents the information set forth therein in all material respects.
(ii) Each of the 54 specialty acute care hospitals described in the Prospectuses as owned or operated by the Company or its subsidiaries is duly licensed as a hospital by the state in which it is located and is certified to participate in the federal Medicare program. This opinion is based solely upon our examination of originals or copies of such licenses and certifications presented to us by the Company, and a Certificate of the Company that such licenses and certifications are currently in effect.
(iii) We have reviewed the Certificate of the General Counsel of the Company attached hereto as Exhibit A concerning the outpatient therapy clinics owned, leased or operated by the Company or its subsidiaries. In the course of our representation of the Company as special regulatory counsel, nothing has come to our attention that would lead us to believe that the Certificate is not accurate.
(iv) Except as disclosed in the Prospectuses, in the course of our representation of the Company as special regulatory counsel, we have not become aware of any pending or threatened action, suit, proceeding, inquiry or investigation, relating to any Health Care Law, to which the Company or any of its subsidiaries is a party, brought by any court or governmental agency or body, which could reasonably be expected to result in a Material Adverse Effect.
(v) No filing with, or authorization, approval, consent, license, order, registration, qualification (collectively, "Approvals") of or with any (A) United States governmental authority or agency, is necessary or required under any federal Health Care Law, other than Medicare Filings and Notices that have been made or given or that are not yet required to be made or given or (B) Pennsylvania governmental authority or agency is necessary or required under any Pennsylvania Health Care Law, other than such Approvals as have been obtained or made, in connection with the due authorization, execution and delivery of the U.S. Purchase Agreement and the International Purchase
A-2-1
Agreement or for the offering, issuance, sale or delivery of the Securities. Without having investigated the laws of states other than Pennsylvania for purposes of this opinion, based on our experience as special regulatory counsel representing other issuers owning and operating other health care businesses, and our ongoing representation of the Company as special regulatory counsel, we are not aware of any Approvals under any other state Health Care Laws required to be obtained or made in connection with the execution delivery and performance of the U.S. Purchase Agreement and the International Purchase Agreement that, if not obtained or made, would result in a Material Adverse Effect.
In the course of our representation of the Company as special regulatory counsel, nothing has come to our attention that would lead us to believe that the information contained in the Registration Statement under "Risk Factors --If there are changes in the rates or methods of government reimbursements for our services, our services, our net operating revenues and income could decline", "Risk Factors --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", "Risk Factors --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", "Our Business-- Government Regulations" (A) at the time such Registration Statement or any such amendment thereto became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) at the time the Prospectuses were issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
For purposes of this opinion, the term "Health Care Laws" shall mean those statutes, rules and regulations, judgments, decrees or orders specifically regulating health care providers, as such, of the type owned and operated by the Company and its subsidiaries as described under the headings "Risk Factors --If there are changes in the rates or methods of government reimbursements for our services, our net operating revenues and income could decline", "Risk Factors -- 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", "Risk Factors -We conduct business in 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", "Our Business -- Government Regulations" in the Prospectus, including, without limitation, (a) health care licensure, permit and certificate of need requirements, (b) Title XVIII, XIX and XXI of the Social Security Act; (c) the Anti-Kickback Amendments (as defined in the Prospectus) and the regulations promulgated thereunder, (d) the Stark Laws (as defined in the Prospectus) and the regulations promulgated thereunder, (e) the False Claims Act, (f) Title II of the Health Insurance
A-2-2
Portability and Accountability Act of 1996, (g) Title IV of the Balanced Budget Act of 1997, (h) any initiatives under Operation Restore Trust and (i) state statutes, rules and regulations concerning matters similar to (b) through (h) above, but specifically excluding statutes, ordinances, administrative decisions, rules and regulations of countries, towns, municipalities or special political subsidiaries.
Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
A-2-3
Exhibit A-3
OPINION OF COMPANY'S SPECIAL CANADIAN COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)(iv)
(i) Each of Canadian Back Institute ("CBI") and Rehab Health Inc. ("Rehab Health") is incorporated and existing under the Business Corporations Act (Ontario).
(ii) Each of CBI Calgary Limited Partnership, CBI Etobicoke Limited Partnership, CBI Scarborough Limited Partnership, CBI South Calgary Limited Partnership, CBI Toronto Limited Partnership, CBI Victoria Limited Partnership, (collectively, the "Limited Partnerships") has been formed and exists as a limited partnership under the Limited Partnership Act (Ontario).
(iii) CBI has the corporate power and capacity to carry on its business as presently conducted (including, in the case of the Limited Partnerships, the business of the Limited Partnerships) and to own its properties and assets.
(iv) Rehab Health has the corporate power and capacity to carry on its business as presently conducted and to own its properties and assets.
A-3-1
[Form of lock-up from directors, officers or other stockholders pursuant to Section 5(i)]
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
J.P. Morgan Securities Inc.
Credit Suisse First Boston Corporation.
CIBC World Markets Corp.
SG Cowen Securities Corporation
First Union Securities, Inc.
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
Merrill Lynch International
J.P. Morgan Securities Ltd.
Credit Suisse First Boston (Europe) Limited
CIBC World Markets Corp.
SG Cowen Securities Corporation
First Union Securities, Inc.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Select Medical Corporation
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of Select
Medical Corporation, a Delaware corporation (the "Company"), understands that
(i) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and J.P. Morgan Securities Inc., Credit Suisse First Boston
Corporation, CIBC World Markets Corp., SG Cowen Securities Corporation and First
Union Securities, Inc. propose to enter into a U.S. Purchase Agreement (the
"U.S. Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $.01 per
share (the "Common Stock") and (ii) Merrill Lynch International, J.P. Morgan
Securities Ltd., Credit Suisse First Boston (Europe) Limited, CIBC World Markets
Corp., SG Cowen Securities Corporation and First Union Securities, Inc. propose
to enter into an International Purchase Agreement
with the Company providing for the public offering of the Common Stock of the Company (together with the U.S. Purchase Agreement, the "Purchase Agreements". In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreements that, during a period of 180 days from the date of the Purchase Agreements, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Notwithstanding the foregoing, Merrill Lynch's prior written consent is not required for transactions by persons not subject to Section 16 of the Securities Exchange Act of 1934, as amended, with respect to the Company, relating to (A) Reserved Securities, as defined in the U.S. Purchase Agreement, (B) shares of Common Stock or other securities of the Company acquired in open market transactions after the completion of the public offering and (C) sales of shares of Common Stock underlying employee stock options in connection with cashless exercises of those stock options by former employees of the Company that were not subject to Section 16 with respect to the Company while they were employed by the Company.
In addition, the undersigned agrees that the Company and/or Merrill Lynch may, and the undersigned will, (i) with respect to any shares of Common Stock for which the undersigned is the record holder, cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company and (ii) with respect to any shares of Common Stock for which the undersigned is the beneficial holder but not the record holder, cause the record holder of such shares of Common Stock to cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this letter agreement, and that, upon request, the undersigned will execute any additional documents necessary or desirable in connection with the enforcement hereof. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and any obligations of the undersigned
shall be binding upon the heirs, personal representatives, successors, and assigns of the undersigned.
Very truly yours,
Signature: ________________
Print Name:________________
SELECT MEDICAL CORPORATION
(a Delaware corporation)
o Shares of Common Stock
Dated:
Page
----
SECTION 1. Representations and Warranties............................................................ 4
(a) Representations and Warranties by the Company............................................. 4
(i) Compliance with Registration Requirements.......................................... 4
(ii) Independent Accountants............................................................ 5
(iii) Financial Statements............................................................... 5
(iv) No Material Adverse Change in Business............................................. 6
(v) Good Standing of the Company....................................................... 6
(vi) Good Standing of Subsidiaries...................................................... 7
(vii) Capitalization..................................................................... 8
(viii) Authorization of Agreement......................................................... 8
(ix) Authorization and Description of Securities........................................ 8
(x) Authorization of Related Transactions.............................................. 9
(xi) Absence of Defaults and Conflicts.................................................. 9
(xii) Absence of Labor Dispute........................................................... 10
(xiii) Absence of Proceedings............................................................. 10
(xiv) Accuracy of Exhibits............................................................... 10
(xv) Possession of Intellectual Property................................................ 10
(xvi) Absence of Further Requirements.................................................... 11
(xvii) Possession of Licenses and Permits................................................. 11
(xviii) Accounts Receivable................................................................ 12
(xix) Compliance with Social Security Act and Other Federal Enforcement Initiatives...... 12
(xx) Regulatory Filings................................................................. 13
(xxi) Title to Property.................................................................. 13
(xxii) Investment Company Act............................................................. 14
(xxiii) Environmental Laws................................................................. 15
(xxiv) Registration Rights................................................................ 15
(xxv) Insurance.......................................................................... 15
(xxvi) Tax Returns and Payment of Taxes................................................... 15
(xxvii) No Stabilization or Manipulation................................................... 16
(xxviii)Certain Transactions............................................................... 16
(xxix) Statistical and Market Data........................................................ 16
(xxx) Accounting and other Controls...................................................... 16
(b) Officer's Certificates.................................................................... 17
SECTION 2. Sale and Delivery to International Managers; Closing...................................... 17
(a) Initial Securities........................................................................ 17
(b) Option Securities......................................................................... 17
(c) Payment................................................................................... 18
(d) Denominations; Registration............................................................... 18
(e) Appointment of Qualified Independent Underwriter.......................................... 18
SECTION 3. Covenants of the Company.................................................................. 19
(a) Compliance with Securities Regulations and Commission Requests............................ 19
|
(b) Filing of Amendments...................................................................... 19
(c) Delivery of Registration Statements....................................................... 20
(d) Delivery of Prospectuses.................................................................. 20
(e) Continued Compliance with Securities Laws................................................. 20
(f) Blue Sky Qualifications................................................................... 21
(g) Rule 158.................................................................................. 21
(h) Use of Proceeds........................................................................... 21
(i) Listing................................................................................... 21
(j) Restriction on Sale of Securities......................................................... 21
(k) Reporting Requirements.................................................................... 22
(l) Compliance with NASD Rules................................................................ 22
(m) Compliance with Rule 463.................................................................. 22
(n) Medicare Filings and Notices.............................................................. 22
SECTION 4. Payment of Expenses....................................................................... 22
(a) Expenses.................................................................................. 23
(b) Termination of Agreement.................................................................. 23
SECTION 5. Conditions of International Managers' Obligations......................................... 23
(a) Effectiveness of Registration Statement................................................... 23
(b) Opinion of Counsel for Company............................................................ 24
(c) Opinion of Counsel for International Managers............................................. 24
(d) Officers' Certificate..................................................................... 24
(e) Accountant's Comfort Letter............................................................... 25
(f) Bring-down Comfort Letter................................................................. 25
(g) Approval of Listing....................................................................... 25
(h) No Objection.............................................................................. 25
(i) Lock-up Agreements........................................................................ 25
(j) Purchase of Initial International Securities.............................................. 25
(k) Related Transactions...................................................................... 25
(l) Certificate Concerning Predecessor Company Financial Information ......................... 25
(m) Certificate of General Counsel of the Company............................................. 26
(n) Medicare Filings.......................................................................... 26
(o) Conditions to Purchase of International Option Securities................................. 26
(i) Officers' Certificate............................................................... 26
(ii) Opinion of Counsel for Company...................................................... 26
(iii) Opinion of Counsel for International Managers....................................... 26
(iv) Bring-down Comfort Letter........................................................... 26
(v) Certificate of General Counsel of the Company....................................... 27
(p) Additional Documents...................................................................... 27
(q) Termination of Agreement.................................................................. 27
SECTION 6. Indemnification........................................................................... 27
(a) Indemnification of International Managers................................................. 27
(b) Indemnification of Company, Directors and Officers........................................ 29
|
(c) Actions against Parties; Notification..................................................... 29
(d) Settlement without Consent if Failure to Reimburse........................................ 30
(e) Indemnification for Reserved Securities................................................... 31
SECTION 7. Contribution.............................................................................. 31
SECTION 8. Representations, Warranties and Agreements to Survive Delivery............................ 32
SECTION 9. Termination of Agreement.................................................................. 33
(a) Termination; General...................................................................... 33
(b) Liabilities............................................................................... 33
SECTION 10. Default by One or More of the International Managers..................................... 33
SECTION 11. Notices.................................................................................. 34
SECTION 12. Parties.................................................................................. 34
SECTION 13. GOVERNING LAW AND TIME................................................................... 35
SECTION 14. Effect of Headings....................................................................... 35
|
SCHEDULES
Schedule A - List of Underwriters
Schedule B - Pricing Information
Schedule C - List of Persons Subject to Lock-Up
Schedule D - Document Amendments
Schedule 1 - Significant Subsidiaries
EXHIBITS
Exhibit A-1 - Form of Opinion of Dechert Exhibit A-2 - Form of Opinion of Company's Special Regulatory Counsel Exhibit A-3 - Form of Opinion of Company's Canadian Counsel Exhibit B - Form of Lock-Up Letter
SELECT MEDICAL CORPORATION
(a Delaware corporation)
Shares of Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
, 2001
MERRILL LYNCH INTERNATIONAL
J.P. Morgan Securities Ltd.
Credit Suisse First Boston (Europe) Limited
CIBC World Markets plc
SG Cowen Securities Corporation
First Union Securities, Inc.
as Lead Managers of the International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Select Medical Corporation, a Delaware corporation (the "Company"), confirms its agreement with Merrill Lynch International and each of the other International Managers named in Schedule A hereto (collectively, the "International Managers", which term shall also include any underwriter substituted as hereinafter provided in Section 10 hereof), for whom Merrill Lynch International, J.P. Morgan Securities Ltd., Credit Suisse First Boston (Europe) Limited, CIBC World Markets plc, SG Cowen Securities Corporation and First Union Capital Securities, Inc. are acting as representatives (in such capacity, the "Lead Managers"), with respect to the issue and sale by the Company and the purchase by the International Managers, acting severally and not jointly, of the respective numbers of shares of Common Stock, par value $.01 per share, of the Company ("Common Stock") set forth in said Schedule A, and with respect to the grant by the Company to the International Managers, acting severally and not jointly, of the option described in Section 2(b) hereof to purchase all or any part of additional shares of Common Stock to cover over- allotments, if any. The aforesaid shares of Common Stock (the "Initial International Securities") to be purchased by the International
Managers and all or any part of the shares of Common Stock subject to the option described in Section 2(b) hereof (the "International Option Securities") are hereinafter called, collectively, the "International Securities".
It is understood that the Company is concurrently entering into an agreement dated the date hereof (the "U.S. Purchase Agreement") providing for the offering by the Company of an aggregate of shares of Common Stock (the "Initial U.S. Securities") through arrangements with certain underwriters in the United States and Canada (the "U.S. Underwriters") for which Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), J.P. Morgan Securities Inc., Credit Suisse First Boston Corporation, CIBC World Markets Corp., SG Cowen Securities Corporation and First Union Securities, Inc. are acting as representatives (the "U.S. Representatives") and the grant by the Company to the U.S. Underwriters, acting severally and not jointly, of an option to purchase all or any part of the U.S. Underwriters' pro rata portion of up to additional shares of Common Stock solely to cover overallotments, if any (the "U.S. Option Securities" and, together with the International Option Securities, the "Option Securities"). The Initial U.S. Securities and the U.S. Option Securities are hereinafter called the "U.S. Securities". It is understood that the Company is not obligated to sell and the International Managers are not obligated to purchase, any Initial International Securities unless all of the Initial U.S. Securities are contemporaneously purchased by the U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter collectively called the "Underwriters", the Initial International Securities and the Initial U.S. Securities are hereinafter collectively called the "Initial Securities", and the International Securities, and the U.S. Securities are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate Agreement of even date herewith (the "Intersyndicate Agreement") providing for the coordination of certain transactions among the Underwriters under the direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated (in such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to make a public offering of the International Securities as soon as the International Managers deem advisable after this Agreement has been executed and delivered.
The Company and the International Managers agree that up to shares of the Initial International Securities to be purchased by the International Managers and that up to shares of the Initial U.S. Securities to be purchased by the U.S. Underwriters (collectively, the "Reserved Securities") shall be reserved for sale by the Underwriters to some of the Company's directors, officers, employees, business associates, and related persons, as part of the distribution of the Securities by the Underwriters, subject to the terms of this Agreement, the applicable rules, regulations and interpretations of the National Association of Securities Dealers, Inc. and all other applicable laws, rules and
regulations. To the extent that such Reserved Securities are not orally confirmed for purchase by such eligible employees and persons having business relationships with the Company by the end of the first business day after the date of this Agreement, such Reserved Securities may be offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (No. 333-48856) covering the registration of the Securities under the Securities Act of 1933, as amended (the "1933 Act"), including the related preliminary prospectus or prospectuses. Promptly after execution and delivery of this Agreement, the Company will prepare and file a prospectus in accordance with the provisions of Rule 430A ("Rule 430A") of the rules and regulations of the Commission under the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule 424(b)") of the 1933 Act Regulations. Two forms of prospectus are to be used in connection with the offering and sale of the Securities: one relating to the International Securities (the "Form of International Prospectus") and one relating to the U.S. Securities (the "Form of U.S. Prospectus"). The Form of U.S. Prospectus is identical to the Form of International Prospectus, except for the front cover and back cover pages and the information under the caption "Underwriting." The information included in any such prospectus that was omitted from such registration statement at the time it became effective but that is deemed to be part of such registration statement at the time it became effective pursuant to paragraph (b) of Rule 430A is referred to as "Rule 430A Information." Each Form of International Prospectus and Form of U.S. Prospectus used before such registration statement became effective, and any prospectus that omitted the Rule 430A Information that was used after such effectiveness and prior to the execution and delivery of this Agreement, is herein called a "preliminary prospectus." Such registration statement, including the exhibits thereto and schedules thereto at the time it became effective and including the Rule 430A Information, is herein called the "Registration Statement." Any registration statement filed pursuant to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule 462(b) Registration Statement," and after such filing the term "Registration Statement" shall include the Rule 462(b) Registration Statement. The final Form of International Prospectus and the final Form of U.S. Prospectus in the forms first furnished to the Underwriters for use in connection with the offering of the Securities are herein called the "International Prospectus" and the "U.S. Prospectus," respectively, and collectively, the "Prospectuses." For purposes of this Agreement, all references to the Registration Statement, any preliminary prospectus, the International Prospectus, the U.S. Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the copy filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
Immediately prior to or upon the consummation of the offering of the
Securities or, in the case of (iv) below, within 30 days following the Closing
Time an such other period as permitted under the applicable agreement (i) the
Company's certificate of incorporation and bylaws will be amended and restated
and the
Company will file the amended and restated certificate of incorporation with the Secretary of State of the State of Delaware (the "Charter Amendments"); (ii) a .576 for 1 reverse split of the Common Stock will be effected (the "Stock Split"); (iii) conversion of 16,000,000 shares of Class B Preferred Stock of the Company into 9,216,000 shares of Common Stock will be effected (the "Conversion"); (iv) certain minority owners of the Company's outpatient rehabilitation clinics who have exercised their put options to purchase Common Stock as set forth in certain agreements between such minority owners and the Company will have these exercises completed (the "Put Exercises"); (v) the stockholders agreement among the Company and certain of its stockholders will be terminated (the "Stockholder Agreement Termination"); and (vi) each of the documents set forth on Schedule D hereto shall have been executed and delivered (the "Document Amendments"); the Charter Amendments, the Stock Split, the Conversion, the Put Exercises, the Stockholder Agreement Termination and the Document Amendments are collectively referred to herein as the "Related Transactions."
At the respective times the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendments thereto became
effective and at the Closing Time (and, if any International Option Securities
are purchased, at the Date of Delivery), the Registration Statement, the Rule
462(b) Registration Statement and any amendments and supplements thereto
complied and will comply in all material respects with the requirements of the
1933 Act and the 1933 Act Regulations and did not and will not contain an untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading, and
the Prospectuses, the preliminary prospectuses dated March 7, 2001 and any
supplement thereto or prospectus wrapper prepared in connection therewith, at
their respective times of issuance and at the Closing Time, complied and will
comply in all material respects with any applicable laws or regulations of
foreign jurisdictions in which the Prospectuses
and such preliminary prospectuses, as amended or supplemented, if applicable, are distributed in connection with the offer and sale of Reserved Securities. Neither of the Prospectuses nor any amendments or supplements thereto (including any prospectus wrapper), at the time the Prospectuses or any amendments or supplements thereto were issued and at the Closing Time (and, if any International Option Securities are purchased, at the Date of Delivery), included or will include an untrue statement of a material fact or omitted or will omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties in this subsection shall not apply to statements in or omissions from the Registration Statement or the Prospectuses made in reliance upon and in conformity with information furnished to the Company in writing by any International Manager through the Lead Managers expressly for use in the Registration Statement or the Prospectuses.
The preliminary prospectuses dated March 7, 2001 filed as part of the Registration Statement and the Prospectuses filed pursuant to Rule 424 under the 1933 Act, complied when so filed in all material respects with the 1933 Act Regulations and the preliminary prospectuses and the Prospectuses delivered to the Underwriters for use in connection with this offering was identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
operations data and balance sheet data of Sports Orthopedic Rehabilitation Services, PA ("SORS") for December 31, 1996 and the year then ended and the period January 1, 1997 through February 6, 1997 included in the Prospectus under the heading "Selected Consolidated Financial and Other Data" (the "SORS Financial Information") was derived from the compiled financial statements of SORS. The financial statements of SORS for the above referenced periods (i) fairly present the financial position of SORS at the dates indicated and the statement of operations data for the periods specified and (ii) were prepared in conformity with GAAP, except for the absence of footnotes, statements of cash flows and the exclusion of certain per share information. There are no material adjustments that would be required to be made to the SORS Financial Information if the above referenced financial statements of SORS were reissued to be in conformity with GAAP. The pro forma financial information and the related notes thereto included in the Registration Statement and the Prospectuses present fairly the information shown therein and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein; the as adjusted financial information included in the Registration Statement and the Prospectuses has been properly compiled on the basis described therein, and the assumptions used in the preparation thereof are reasonable and the adjustments used therein are appropriate to give effect to the transactions and circumstances referred to therein.
business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect.
(vi) Good Standing of Subsidiaries. (A) Each subsidiary of the Company set forth on Schedule 1 hereto (each a "Subsidiary" and, collectively, the "Subsidiaries") has been duly organized and is validly existing as a corporation or other entity in good standing under the laws of the jurisdiction of its incorporation, has corporate or other power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation or other entity to transact business and is in good standing in each jurisdiction in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or to be in good standing would not result in a Material Adverse Effect; except as set forth on Schedule 1 hereto, (a) all of the issued and outstanding capital stock of each such Subsidiary that is a corporation has been duly authorized and validly issued, is fully paid and non-assessable and is owned, by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity, and (b) all of the ownership interests of each such Subsidiary that is not a corporation have been duly authorized and are owned, by the Company, directly or through subsidiaries, free and clear of any security interest, mortgage, pledge, lien, encumbrance, claim or equity; none of the outstanding shares of capital stock of any Subsidiary was issued in violation of the preemptive or similar rights of any securityholder of such Subsidiary. The only subsidiaries of the Company are (a) the subsidiaries listed on Exhibit 21 to the Registration Statement and (b) certain other subsidiaries which, considered in the aggregate as a single Subsidiary, do not constitute a "significant subsidiary" as defined in Rule 1-02 of Regulation S-X.
(B) Except to the extent disclosed in the Prospectuses under the
caption "Selected Consolidated Financial and Other Data" and in the Company's
consolidated financial statements included in the Prospectuses, each of the
specialty acute care hospitals, outpatient rehabilitation clinics and
occupational health centers, (collectively, the "Facilities") described in the
Prospectuses as owned by the Company is owned or leased and operated by a
Subsidiary of which the Company directly or indirectly owns 100% of the
outstanding ownership interests. Except as disclosed in the Prospectuses, there
are no material encumbrances or restrictions on the ability of any Subsidiary
(i) to pay any dividends or make any distributions on such Subsidiary's capital
stock, (ii) to make any loans or advances to, or investments in, the Company or
any Subsidiary, or (iii) to transfer any of its property or assets to the
Company or any Subsidiary.
(vii) Capitalization. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to this Agreement, pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses or repurchases of an immaterial number of shares of the Company's capital stock held by former employees). The shares of issued and outstanding capital stock of the Company have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights of any securityholder of the Company that were not subsequently waived. The shares of issued and outstanding capital stock of the Company, including any shares of capital stock of the Company issued or to be issued in connection with the exercise of any put right held by any prior owner of a Facility that was subsequently acquired by the Company, have been issued in compliance, in all material respects, with all federal and state securities laws. Except as disclosed in the Prospectuses, there are no outstanding options or warrants to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell, shares of the Company's capital stock or any such options, warrants, rights, convertible securities or obligations. The description of the Company's stock option and purchase plans and the options or other rights granted and exercised thereunder set forth in the Prospectuses accurately and fairly describe, in all material respects, the information required to be shown with respect to such plans, arrangements, options and rights.
the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company.
subsidiaries' outpatient clinics that operate as "rehabilitation agencies" are "providers of service" as defined in the Social Security Act and the regulations promulgated thereunder and are eligible to participate in the Medicare and (to the extent disclosed in the prospectus) Medicaid programs.
benefit or payment fraudulently; (iv) knowingly and willfully offering, paying, soliciting or receiving any remuneration (including any kickback, bribe or rebate), directly or indirectly, overtly or covertly, in cash or in kind (a) in return for referring an individual to a person for the furnishing or arranging for the furnishing of any item or service for which payment may be made in whole or in part by Medicare or Medicaid or any third party (where applicable federal or state law prohibits such payments to third parties), or (b) in return for purchasing, leasing or ordering or arranging for or recommending the purchasing, leasing or ordering of any good, facility, service, or item for which payment may be made in whole or in part by Medicare or Medicaid or any third party (where applicable federal or state law prohibits such payments to third parties); (v) knowingly and willfully referring an individual to a person with which they have ownership or certain other financial arrangements (where applicable federal law prohibits such referrals); and (vi) knowingly and willfully violating any enforcement initiative instituted by any governmental agency (including, without limitation, the Office of the Inspector General and the Department of Justice), except for any such activities which are specifically described in the Prospectus or which would not, singly or in the aggregate, reasonably be expected to result in a Material Adverse Effect.
(xx) Regulatory Filings. Neither of the Company or any of its subsidiaries or any of the Facilities operated by any of them has failed to file with applicable regulatory authorities any statement, report, information or form required by any applicable law, regulation or order, except where the failure to be so in compliance could not, individually or in the aggregate, have a Material Adverse Effect. Except as described in the Prospectus, all such filings or submissions were in compliance with applicable laws when filed and no deficiencies have been asserted by any regulatory commission, agency or authority with respect to any such filings or submissions, except for any such failures to be in compliance or deficiencies which would not, singly or in the aggregate, reasonably be expected to have a Material Adverse Effect.
has been asserted by anyone adverse to the rights of the Company or any of its subsidiaries under any of the leases or subleases mentioned above, or affecting or questioning the rights of the Company or such subsidiary to the continued possession of the leased or subleased premises under any such lease or sublease, except where the failure to be in full force and effect or such claim would not reasonably be expected to have a Material Adverse Effect.
except for such events or circumstances that would not, singly or in the aggregate, result in a Material Adverse Effect.
Effect; and adequate charges, accruals and reserves have been provided for in the financial statements referred to in Section 1(a)(iii) above in accordance with GAAP in respect of all Federal, state, local and foreign taxes for all periods as to which the tax liability of the Company and its subsidiaries has not been finally determined or remains open to examination by applicable taxing authorities except (A) for taxes incurred after the date of the financial statements referred to in Section 1(a)(iii) or (B) where the failure to provide for such charges, accruals and reserves would not reasonably be expected to result in a Material Adverse Effect. Neither the Company nor any of its subsidiaries is a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Internal Revenue Code of 1986, as amended (the "Code").
(b) Officer's Certificates. Any certificate signed by any officer of the Company or any its subsidiaries delivered to the Global Coordinator, the Lead Managers or to counsel for the International Managers shall be deemed a representation and warranty by the Company to each International Manager as to the matters covered thereby.
(a) Initial Securities. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company agrees to sell to each International Manager, severally and not jointly, and each International Manager, severally and not jointly, agrees to purchase from the Company, at the price per share set forth in Schedule B, the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager, plus any additional number of Initial International Securities which such Underwriter may become obligated to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company hereby grants an option to the International Managers, severally and not jointly, to purchase up to an additional shares of Common Stock at the price per share set forth in Schedule B, less an amount per share equal to any dividends or distributions declared by the Company and payable on the Initial International Securities but not payable on the International Option Securities. The option hereby granted will expire 30 days after the date hereof and may be exercised in whole or in part from time to time only for the purpose of covering over-allotments which may be made in connection with the offering and distribution of the Initial International Securities upon notice by the Global Coordinator to the Company setting forth the number of International Option Securities as to which the several International Managers are then exercising the option and the time and date of payment and delivery for such International Option Securities. Any such time and date of delivery for the International Option Securities (a "Date of Delivery") shall be determined by the Global Coordinator, but shall not be later than seven full business days nor, if after the Closing Time, later than seven nor less than two full business days after the exercise of said option, nor in any event prior to the Closing Time, as hereinafter defined. If the option is exercised as to all or any portion of the International Option Securities, each of the International Managers, acting severally and not jointly, will purchase that proportion of the total number of International Option Securities then being purchased which the number of Initial International Securities set forth in Schedule A opposite the name of such International Manager bears to the total number of Initial International Securities, subject in each case to such adjustments as the Global Coordinator in its discretion shall make to eliminate any sales or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of
Debevoise & Plimpton, 875 Third Avenue, New York, New York 10022, or at
such other place as shall be agreed upon by the Global Coordinator and the
Company, at 9:00 A.M. (Eastern time) on the third (fourth, if the pricing
occurs after 4:30 P.M. (Eastern time) on any given day) business day after
the date hereof (unless postponed in accordance with the provisions of
Section 10), or such other time not later than ten business days after such
date as shall be agreed upon by the Global Coordinator and the Company
(such time and date of payment and delivery being herein called "Closing
Time").
In addition, in the event that any or all of the International Option Securities are purchased by the International Managers, payment of the purchase price for, and delivery of certificates for, such International Option Securities shall be made at the above-mentioned offices, or at such other place as shall be agreed upon by the Global Coordinator and the Company, on each Date of Delivery as specified in the notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately available funds to a bank account designated by the Company, against delivery to the Lead Managers for the respective accounts of the International Managers of certificates for the International Securities to be purchased by them. It is understood that each U.S. Underwriter has authorized the Lead Managers, for its account, to accept delivery of, receipt for, and make payment of the purchase price for, the Initial International Securities and the International Option Securities, if any, which it has agreed to purchase. Merrill Lynch, individually and not as representative of the International Managers, may (but shall not be obligated to) make payment of the purchase price for the Initial International Securities or the International Option Securities, if any, to be purchased by any International Manager whose funds have not been received by the Closing Time or the relevant Date of Delivery, as the case may be, but such payment shall not relieve such International Manager from its obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial International Securities and the International Option Securities, if any, shall be in such denominations and registered in such names as the Lead Managers may request in writing at least one full business day before the Closing Time or the relevant Date of Delivery, as the case may be. The certificates for the Initial International Securities and the International Option Securities, if any, will be made available for examination and packaging by the Lead Mangers in The City of New York not later than 10:00 A.M. (Eastern time) on the business day prior to the Closing Time or the relevant Date of Delivery, as the case may be.
(e) Appointment of Qualified Independent Underwriter. The Company hereby confirms its engagement of Credit Suisse First Boston Corporation as, and Credit Suisse First Boston Corporation hereby confirms its agreement with the Company to
render services as, a "qualified independent underwriter" within the meaning of Rule 2720 of the Conduct Rules of the National Association of Securities Dealers, Inc. with respect to the offering and sale of the International Securities. Credit Suisse First Boston Corporation, solely in its capacity as qualified independent underwriter and not otherwise, is referred to herein as the "Independent Underwriter."
(a) Compliance with Securities Regulations and Commission Requests. The Company, subject to Section 3(b), will comply with the requirements of Rule 430A and will notify the Global Coordinator as soon as practicably possible, and confirm the notice in writing, (i) when any post-effective amendment to the Registration Statement shall become effective, or any supplement to the Prospectuses or any amended Prospectuses shall have been filed, (ii) of the receipt of any comments from the Commission regarding the Registration Statement or any of the information contained therein, the Common Stock or the transactions contemplated by this Agreement, the International Purchase Agreement or the Registration Statement (iii) of any request by the Commission for any amendment to the Registration Statement or any amendment or supplement to the Prospectuses or for additional information regarding the Registration Statement or any of the information contained therein, the Common Stock or the transactions contemplated by this Agreement, the International Purchase Agreement or the Registration Statement, and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or of any order preventing or suspending the use of any preliminary prospectus, or of the suspension of the qualification of the Securities for offering or sale in any jurisdiction, or of the initiation or threatening of any proceedings for any of such purposes. The Company will promptly effect the filings necessary pursuant to Rule 424(b) and will take such steps as it deems necessary to ascertain promptly whether the form of prospectus transmitted for filing under Rule 424(b) was received for filing by the Commission and, in the event that it was not, it will promptly file such prospectus. The Company will make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global Coordinator notice of its intention to file or prepare any amendment to the Registration Statement (including any filing under Rule 462(b)), or any amendment, supplement or revision to either the prospectus included in the Registration Statement at the time it became effective or to the Prospectuses, will furnish the Global Coordinator with copies of any such documents a reasonable amount of time prior to such proposed filing or use, as the case may be, and will not file or use any such document to which the Global Coordinator or counsel for the International Managers shall reasonably object.
(c) Delivery of Registration Statements. The Company has furnished or will deliver to the Lead Managers and counsel for the International Managers, without charge, signed copies of the Registration Statement as originally filed and of each amendment thereto (including exhibits filed therewith or incorporated by reference therein) and copies of all signed consents and certificates of experts, and will also deliver to the Lead Managers, without charge, a conformed copy of the Registration Statement as originally filed and of each amendment thereto (without exhibits) for each of the International Managers. The copies of the Registration Statement and each amendment thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each International Manager, without charge, as many copies of each preliminary prospectus as such International Manager reasonably requested, and the Company hereby consents to the use of such copies for purposes permitted by the 1933 Act. The Company will furnish to each International Manager, without charge, during the period when the International Prospectus is required to be delivered under the 1933 Act or the 1934 Act, such number of copies of the International Prospectus (as amended or supplemented) as such International Manager may reasonably request. The International Prospectus and any amendments or supplements thereto furnished to the International Managers will be identical to the electronically transmitted copies thereof filed with the Commission pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will comply with the 1933 Act and the 1933 Act Regulations so as to permit the completion of the distribution of the Securities as contemplated in this Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any time when a prospectus is required by the 1933 Act to be delivered in connection with sales of the Securities, any event shall occur or condition shall exist as a result of which it is necessary, in the judgment of the Company after consultation with counsel or in the opinion of counsel for the International Managers or for the Company, to amend the Registration Statement or amend or supplement any Prospectus in order that the Prospectuses will not include any untrue statements of a material fact or omit to state a material fact necessary in order to make the statements therein not misleading in the light of the circumstances existing at the time it is delivered to a purchaser, or if it shall be necessary, in the opinion of such counsel, at any such time to amend the Registration Statement or amend or supplement any Prospectus in order to comply with the requirements of the 1933 Act or the 1933 Act Regulations, the Company will promptly prepare and file with the Commission, subject to Section 3(b), such amendment or supplement as may be necessary to correct such statement or omission or to make the Registration Statement or the Prospectuses comply with such requirements, and the Company will furnish to the International Managers such number of copies of such amendment or supplement as the International Managers may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best efforts, in cooperation with the International Managers, to qualify the Securities for offering and sale under the applicable securities laws of such states and other jurisdictions (domestic or foreign) as the Global Coordinator may designate and to maintain such qualifications in effect for a period of not less than one year from the later of the effective date of the Registration Statement and any Rule 462(b) Registration Statement; provided, however, that the Company shall not be obligated to file any general consent to service of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Securities have been so qualified, the Company will file such statements and reports as may be required by the laws of such jurisdiction to continue such qualification in effect for a period of not less than one year from the effective date of the Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant to the 1934 Act as are necessary in order to make generally available to its securityholders as soon as practicable an earnings statement for the purposes of, and to provide the benefits contemplated by, the last paragraph of Section 11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds received by it from the sale of the Securities in the manner specified in the Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect and, for a reasonable period after Closing Time, which shall not be less than five years unless the Company engages in a transaction such as a merger or other business combination in which the Company is not the surviving entity, or going private transaction which by its terms provides otherwise and receives all required Company stockholder approval, maintain the quotation of the Securities on the Nasdaq National Market or the New York Stock Exchange (the "NYSE") and will file with the Nasdaq National Market or the NYSE, as applicable, all documents and notices required by the Nasdaq National Market or the NYSE, of companies that have securities that are traded in the over-the-counter market and quotations for which are reported by the Nasdaq National Market or on the NYSE.
(j) Restriction on Sale of Securities. During a period of 180 days from the date of the Prospectuses, the Company will not, without the prior written consent of the Global Coordinator, (i) directly or indirectly, offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase or otherwise transfer or dispose of any share of Common Stock or any securities convertible into or exercisable or exchangeable for Common Stock or file any registration statement under the 1933 Act with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that
transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction described in clause (i) or (ii) above is to be settled by delivery of Common Stock or such other securities, in cash or otherwise. The foregoing sentence shall not apply to (A) the Securities to be sold hereunder or under the U.S. Purchase Agreement, (B) any shares of Common Stock issued by the Company upon the exercise of an option or warrant or the conversion of a security outstanding on the date hereof and referred to in the Prospectuses, (C) any shares of Common Stock issued or options to purchase Common Stock granted pursuant to existing employee benefit plans of the Company referred to in the Prospectuses, (D) any shares of Common Stock issued pursuant to any non-employee director stock plan or dividend reinvestment plan, or (E) the issuance by the Company of shares of Common Stock in connection with any Put Exercises immediately prior to or after the consummation of the offering of the Securities or any other Related Transaction.
(k) Reporting Requirements. The Company, during the period when the Prospectuses are required to be delivered under the 1933 Act or the 1934 Act, will file all documents required to be filed with the Commission pursuant to the 1934 Act within the time periods required by the 1934 Act and the rules and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it will ensure that the Reserved Securities will be restricted as required by the National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules from sale, transfer, assignment, pledge or hypothecation for a period of three months following the date of this Agreement. The Underwriters will notify the Company as to which persons will need to be so restricted. At the request of the Underwriters, the Company will direct the transfer agent to place a stop transfer restriction upon such securities for such period of time. Should the Company release, or seek to release, from such restrictions any of the Reserved Securities, the Company agrees to reimburse the Underwriters for any reasonable expenses (including, without limitation, legal expenses) they incur in connection with such release.
(m) Compliance with Rule 463. The Company will comply with the requirements of Rule 463 of the 1933 Act Regulations.
(n) Medicare Filings and Notices. The Company and its Subsidiaries will make all required filings and provide all required notices to update indirect ownership information that has been supplied in connection with the Company's facilities that participate in the Medicare Program and other U.S. Federal programs ("Medicare Filings and Notices").
printing and filing of the Registration Statement (including financial
statements and exhibits) as originally filed and of each amendment thereto,
(ii) the preparation, printing and delivery to the Underwriters of this
Agreement, any Agreement among Underwriters and such other documents as may
be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and delivery of
the certificates for the Securities to the Underwriters, including any
stock or other transfer taxes and any stamp or other duties payable upon
the sale, issuance or delivery of the Securities to the Underwriters and
the transfer of the Securities between the International Managers and the
U.S. Underwriters, (iv) the fees and disbursements of the Company's
counsel, accountants and other advisors, (v) the qualification of the
Securities under securities laws in accordance with the provisions of
Section 3(f) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection therewith and
in connection with the preparation of the Blue Sky Survey and any
supplement thereto, (vi) the printing and delivery to the Underwriters of
copies of each preliminary prospectus and of the Prospectuses and any
amendments or supplements thereto, (vii) the preparation, printing and
delivery to the Underwriters of copies of the Blue Sky Survey and any
supplement thereto, (viii) the fees and expenses of any transfer agent or
registrar for the Securities, (ix) the filing fees incident to, and the
reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the National Association of Securities
Dealers, Inc. (the "NASD") of the terms of the sale of the Securities and
(x) the fees and expenses incurred in connection with the inclusion of the
Securities in the Nasdaq National Market and (xi) all costs and expenses of
the Underwriters, including the fees and disbursements of counsel for the
Underwriters, in connection with matters related to the Reserved Securities
which are designated by the Company for sale to directors, officers,
employees, business associates and related persons of the Company, provided
that such costs and expenses shall not exceed $25,000 in the aggregate
(exclusive of any costs and expenses of foreign counsel).
(b) Termination of Agreement. If this Agreement is terminated by the Lead Managers in accordance with the provisions of Section 5 or Section 9(a)(i) hereof, the Company shall reimburse the International Managers for all of their out-of-pocket expenses, including the reasonable fees and disbursements of counsel for the International Managers.
(a) Effectiveness of Registration Statement. The Registration Statement, including any Rule 462(b) Registration Statement, has become effective and at Closing Time no stop order suspending the effectiveness of the Registration Statement shall have
been issued under the 1933 Act or proceedings therefor initiated or threatened by the Commission, and any request on the part of the Commission for additional information shall have been complied with to the reasonable satisfaction of counsel to the International Managers. A prospectus containing the Rule 430A Information shall have been filed with the Commission in accordance with Rule 424(b) (or a post-effective amendment providing such information shall have been filed and declared effective in accordance with the requirements of Rule 430A).
(b) Opinion of Counsel for Company. At Closing Time, the Lead Managers shall have received the favorable opinions, dated as of Closing Time, of:
(i) Dechert, counsel for the Company, in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers, to the effect set forth in Exhibit A-1 hereto and to such further effect as counsel to the International Managers may reasonably request; (ii) Reed Smith LLP, special regulatory counsel for the Company, in form and substance satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers, to the effect set forth in Exhibit A-2 hereto and to such further effect as counsel to the International Managers may reasonably request; and (iii) Torys, special Canadian counsel to the Company, in form and substance reasonably satisfactory to counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers to the effect set forth in Exhibit A-3 hereto and to such further effect as counsel for the International Managers may reasonably request.
(c) Opinion of Counsel for International Managers. At Closing Time, the Lead Managers shall have received the favorable opinion, dated as of Closing Time, of Debevoise & Plimpton, counsel for the International Managers, together with signed or reproduced copies of such letter for each of the other International Managers in form and substance satisfactory to the International Managers.
(d) Officers' Certificate. At Closing Time, there shall not have been, since the date hereof or since the respective dates as of which information is given in the Prospectuses, any material adverse change in the condition, financial or otherwise, or in the earnings, business affairs or business prospects of the Company and its subsidiaries considered as one enterprise, whether or not arising in the ordinary course of business, and the Lead Managers shall have received a certificate of the Chief Executive Officer, the President and Chief Operating Officer, and the Senior Vice President and Chief Financial Officer of the Company, dated as of Closing Time, to the effect that (i) there has been no such material adverse change, (ii) the representations and warranties in Section 1(a) hereof are true and correct with the same force and effect as though expressly made at and as of Closing Time, (iii) the Company has complied with all
agreements and satisfied all conditions on its part to be performed or satisfied at or prior to Closing Time, and (iv) no stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened or, to their knowledge, are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of this Agreement, the Lead Managers shall have received from PricewaterhouseCoopers LLP a letter dated such date, in form and substance satisfactory to the Lead Managers and PricewaterhouseCoopers LLP, together with signed or reproduced copies of such letter for each of the other International Managers containing statements and information of the type ordinarily included in accountants' "comfort letters" to underwriters with respect to the financial statements and certain financial information contained in the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the Lead Managers shall have received from PricewaterhouseCoopers LLP, a letter, dated as of Closing Time, to the effect that they reaffirm the statements made in the letter previously furnished to the International Managers at the time of execution of this Agreement pursuant to subsection (e) of this Section, except that the specified date referred to shall be a date not more than three business days prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall have been approved for listing on the Nasdaq National Market, subject only to official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised any objection with respect to the fairness and reasonableness of the underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Lead Managers shall have received an agreement substantially in the form of Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) Purchase of Initial International Securities. Contemporaneously with the purchase by the International Managers of the Initial International Securities under this Agreement, the U.S. Underwriters shall have purchased the Initial U.S. Securities under the U.S. Purchase Agreement.
(k) Related Transactions. Prior to or upon the purchase of the Securities by the Underwriters, the Related Transactions, other than the Put Exercises, shall have been consummated.
(l) Certificate Concerning Predecessor Company Financial Information. Prior to the purchase of the Securities by the Underwriters, the Lead Managers shall have received a certificate of the Chief Financial Officer and the Controller of the Company
concerning the financial information of SORS contained in the Prospectuses in form and substance reasonably satisfactory for counsel for the International Managers.
(m) Certificate of General Counsel of the Company. At Closing Time, the Lead Managers shall have received a certificate of Michael E. Tarvin, Senior Vice President and General Counsel of the Company, in form and substance reasonably satisfactory to counsel the International Managers.
(n) Medicare Filings. All Medicare Filings and Notices required to be made or provided prior to Closing Time shall have been made or provided.
(o) Conditions to Purchase of International Option Securities. In the event that the International Managers exercise their option provided in Section 2(b) hereof to purchase all or any portion of the International Option Securities, the representations and warranties of the Company contained herein and the statements in any certificates furnished by the Company or any subsidiary of the Company hereunder shall be true and correct as of each Date of Delivery and, at the relevant Date of Delivery, the Lead Managers shall have received:
the letter furnished pursuant to this paragraph shall be a date not more than five days prior to such Date of Delivery.
(p) Additional Documents. At Closing Time and at each Date of Delivery, counsel for the International Managers shall have been furnished with such documents and opinions as they may reasonably require for the purpose of enabling them to pass upon the issuance and sale of the Securities as herein contemplated, or in order to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the conditions, herein contained; and all proceedings taken by the Company in connection with the issuance and sale of the Securities as herein contemplated shall be reasonably satisfactory in form and substance to the Lead Managers and counsel for the International Managers.
(q) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled, this
Agreement, or, in the case of any condition to the purchase of International
Option Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several International Managers to purchase the relevant
Option Securities, may be terminated by the Lead Managers by notice to the
Company at any time at or prior to Closing Time or such Date of Delivery, as the
case may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7 and
8 shall survive any such termination and remain in full force and effect.
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact included in any preliminary prospectus or the Prospectuses (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, arising out of (A) the violation of any applicable laws or regulations of foreign jurisdictions where Reserved Securities have been offered and (B) any untrue statement or alleged untrue statement of a material fact included in the supplement or prospectus wrapper material distributed in any jurisdiction in connection with the reservation and sale of the Reserved Securities to directors, officers, employees, business associates and related persons of the Company or the omission or alleged omission therefrom of a material fact necessary to make the statements therein, when considered in conjunction with the Prospectuses or preliminary prospectuses, not misleading;
(iii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof; provided that (subject to Section 6(d) below) any such settlement is effected with the written consent of the Company; and
(iv) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel chosen by Merrill Lynch), reasonably incurred in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission or in connection with any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof, to the extent that any such expense is not paid under (i), (ii) or (iii) above;
furnished copies of the International Prospectus in sufficient quantities to such International Manager, (3) that the Company shall have sustained the burden of proving that such International Manager failed to send or give a copy of the International Prospectus to the person asserting such loss, liability, claim, damage or expense prior to the written confirmation or the sale of Securities to such person by such International Manager as required by the 1933 Act or the 1933 Act Regulations, and (4) that the sending of the International Prospectus to the person asserting such loss, liability, claim, damage or expense would have constituted a defense to the claim asserted by such person or persons.
(2) In addition to and without limitation of the Company's obligation to
indemnify Credit Suisse First Boston Corporation as an Underwriter, the Company
also agrees to indemnify and hold harmless the Independent Underwriter and each
person, if any, who controls the Independent Underwriter within the meaning of
Section 15 of the 1933 Act or Section 20 of the 1934 Act, from and against any
and all loss, liability, claim, damage and expense whatsoever, as incurred,
incurred as a result of the Independent Underwriter's participation as a
"qualified independent underwriter" within the meaning of Rule 2720 of the
Conduct Rules of the National Association of Securities Dealers, Inc. in
connection with the offering of the International Securities.
(b) Indemnification of Company, Directors and Officers. Each International Manager severally agrees to indemnify and hold harmless the Company, its directors, each of its officers who signed the Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability, claim, damage and expense described in the indemnity contained in subsection (a) of this Section, as incurred, but only with respect to untrue statements or omissions, or alleged untrue statements or omissions, made in the Registration Statement (or any amendment thereto), including the Rule 430A Information, or any preliminary International prospectus or the International Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with written information furnished to the Company by such International Manager through the Lead Managers expressly for use in the Registration Statement (or any amendment thereto) or such preliminary prospectus or the International Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party shall give notice as promptly as reasonably practicable to each indemnifying party of any action commenced against it in respect of which indemnity may be sought hereunder, but failure to so notify an indemnifying party shall not relieve such indemnifying party from any liability hereunder to the extent it is not materially prejudiced as a result thereof and in any event shall not relieve it from any liability which it may have otherwise than on account of this indemnity agreement. In the case of parties indemnified pursuant to Section 6(a)(1) above, counsel to
the indemnified parties shall be selected by Merrill Lynch, and, in the
case of parties indemnified pursuant to Section 6(b) above, counsel to the
indemnified parties shall be selected by the Company. An indemnifying party
may participate at its own expense in the defense of any such action;
provided, however, that counsel to the indemnifying party shall not (except
with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local
counsel) separate from their own counsel for all indemnified parties in
connection with any one action or separate but similar or related actions
in the same jurisdiction arising out of the same general allegations or
circumstances; provided, that, if indemnity is sought pursuant to Section
6(a)(2), then, in addition to the fees and expenses of such counsel for the
indemnified parties, the indemnifying party shall be liable for the
reasonable fees and expenses of not more than one counsel (in addition to
any local counsel) separate from its own counsel and that of the other
indemnified parties for the Independent Underwriter in its capacity as a
"qualified independent underwriter" and all persons, if any, who control
the Independent Underwriter within the meaning of Section 15 of the 1933
Act or Section 20 of 1934 Act in connection with any one action or separate
but similar or related actions in the same jurisdiction arising out of the
same general allegations or circumstances if, in the reasonable judgment of
the Independent Underwriter, there may exist a conflict of interest between
the Independent Underwriter and the other indemnified parties. Any such
separate counsel for the Independent Underwriter and such control persons
of the Independent Underwriter shall be designated in writing by the
Independent Underwriter. No indemnifying party shall, without the prior
written consent of the indemnified parties, settle or compromise or consent
to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced
or threatened, or any claim whatsoever in respect of which indemnification
or contribution could be sought under this Section 6 or Section 7 hereof
(whether or not the indemnified parties are actual or potential parties
thereto), unless such settlement, compromise or consent (i) includes an
unconditional release of each indemnified party from all liability arising
out of such litigation, investigation, proceeding or claim and (ii) does
not include a statement as to or an admission of fault, culpability or a
failure to act by or on behalf of any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any time an
indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, such indemnifying
party agrees that it shall be liable for any settlement of the nature
contemplated by Section 6(a)(1)(iii) effected without its written consent
if (i) such settlement is entered into more than 45 days after receipt by
such indemnifying party of the aforesaid request, (ii) such indemnifying
party shall have received notice of the terms of such settlement at least
30 days prior to such settlement being entered into and (iii) such
indemnifying party shall not have reimbursed such indemnified party in
accordance with such request prior to the date of such settlement.
Notwithstanding the immediately preceding sentence, if at any time an
indemnified party shall have requested an indemnifying party to reimburse
the indemnified party for fees and expenses of counsel, an indemnifying
party shall not be liable for any settlement of the nature contemplated by
Section 6(a)(1)(iii) effected
without its consent if such indemnifying party (i) reimburses such indemnified party in accordance with such request to the extent it considers such request to be reasonable and (ii) provides written notice to the indemnified party specifying the basis for its claim that the unpaid balance is unreasonable, in each case prior to the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with the offer and sale of the Reserved Securities, the Company agrees, promptly upon a written request, to indemnify and hold harmless the Underwriters from and against any and all losses, liabilities, claims, damages and expenses incurred by them as a result of the failure of directors, officers, employees, business associates and related persons of the Company to pay for and accept delivery of Reserved Securities which, by the end of the first business day following the date of this Agreement, were subject to a properly confirmed agreement to purchase.
The relative benefits received by the Company on the one hand and the International Managers on the other hand in connection with the offering of the International Securities pursuant to this Agreement shall be deemed to be in the same respective proportions as the total net proceeds (i.e., after deducting the total underwriting discount) from the offering of the International Securities pursuant to this Agreement (before deducting expenses) received by the Company and the total underwriting discount received by the International Managers, in each case as set forth on the cover of the U.S. Prospectus bear to the aggregate initial public offering price of the International Securities as set forth on such cover.
The relative fault of the Company on the one hand and the International Managers on the other hand shall be determined by reference to, among other things, whether any such untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or by the
International Managers and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission or any violation of the nature referred to in Section 6(a)(1)(ii)(A) hereof.
The Company and the International Managers agree that Credit Suisse First Boston Corporation will not receive any additional benefits hereunder for serving as the Independent Underwriter in connection with the offering and sale of the International Securities.
The Company and the International Managers agree that it would not be just and equitable if contribution pursuant to this Section 7 were determined by pro rata allocation (even if the International Managers were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7. The aggregate amount of losses, liabilities, claims, damages and expenses incurred by an indemnified party and referred to above in this Section 7 shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in investigating, preparing or defending against any litigation, or any investigation or proceeding by any governmental agency or body, commenced or threatened, or any claim whatsoever based upon any such untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International Manager shall be required to contribute any amount in excess of the amount by which the total price at which the International Securities underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages which such International Manager has otherwise been required to pay by reason of any such untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning of
Section 11(f) of the 1933 Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Manager within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or Section
20 of the 1934 Act shall have the same rights to contribution as the Company.
The International Managers' respective obligations to contribute pursuant to
this Section 7 are several, and in proportion to the number of Initial
International Securities set forth opposite their respective names in Schedule A
hereto, and not joint.
certificates of officers of the Company or any of its subsidiaries submitted pursuant hereto, shall remain operative and in full force and effect, regardless of any investigation made by or on behalf of any International Manager or controlling person, or by or on behalf of the Company, and shall survive delivery of the Securities to the International Managers.
(b) Liabilities. If this Agreement is terminated pursuant to this Section, such termination shall be without liability of any party to any other party except as provided in Section 4 hereof, and provided further that Sections 1, 6, 7 and 8 shall survive such termination and remain in full force and effect.
(a) if the number of Defaulted Securities does not exceed 10% of the number of International Securities to be purchased on such date, each of the non- defaulting International Managers shall be obligated, severally and not jointly, to purchase the full amount thereof in the proportions that their respective underwriting obligations hereunder bear to the underwriting obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the number of International Securities to be purchased on such date, this Agreement or, with respect to any Date of Delivery which occurs after the Closing Time, the obligation of the International Managers to purchase and of the Company to sell the Option Securities to be purchased and sold on such Date of Delivery shall terminate without liability on the part of any non- defaulting International Manager.
No action taken pursuant to this Section shall relieve any defaulting International Manager from liability in respect of its default.
In the event of any such default which does not result in a termination of
this Agreement or, in the case of a Date of Delivery which is after the Closing
Time, which does not result in a termination of the obligation of the
International Managers to purchase and the Company to sell the relevant
International Option Securities, as the case may be, either the Lead Managers or
the Company shall have the right to postpone Closing Time or the relevant Date
of Delivery, as the case may be, for a period not exceeding seven days in order
to effect any required changes in the Registration Statement or Prospectus or in
any other documents or arrangements. As used herein, the term "International
Manager" includes any person substituted for an International Manager under this
Section 10.
successors. Nothing expressed or mentioned in this Agreement is intended or shall be construed to give any person, firm or corporation, other than the International Managers and the Company and their respective successors and the controlling persons and officers and directors referred to in Sections 6 and 7 and their heirs and legal representatives, any legal or equitable right, remedy or claim under or in respect of this Agreement or any provision herein contained. This Agreement and all conditions and provisions hereof are intended to be for the sole and exclusive benefit of the International Managers and the Company and their respective successors, and said controlling persons and officers and directors and their heirs and legal representatives, and for the benefit of no other person, firm or corporation. No purchaser of Securities from any International Manager shall be deemed to be a successor by reason merely of such purchase.
If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company a counterpart hereof, whereupon this instrument, along with all counterparts, will become a binding agreement between the International Managers and the Company in accordance with its terms.
Very truly yours,
SELECT MEDICAL CORPORATION
By:______________________
Name:
Title:
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
J.P. Morgan Securities Ltd.
Credit Suisse First Boston (Europe) Limited
CIBC World Markets plc
SG Cowen Securities Corporation
First Union Securities, Inc.
By: MERRILL LYNCH INTERNATIONAL
For themselves and as Lead
Managers of the other International
Managers named in Schedule A
hereto.
Exhibit A-1
FORM OF OPINION OF DECHERT,
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and corporate authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and to enter into and perform its obligations under the U.S. Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to transact business and is in good standing in the jurisdictions listed on Exhibit A hereto.
(iv) The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectuses in the column entitled "Actual" under the caption "Capitalization" (except for subsequent issuances, if any, pursuant to the U.S. Purchase Agreement and the International Purchase Agreement or pursuant to reservations, agreements or employee benefit plans referred to in the Prospectuses or pursuant to the exercise of convertible securities or options referred to in the Prospectuses or repurchases of an immaterial number of shares of the Company's capital stock held by former employees); the shares of issued and outstanding capital stock have been duly authorized and validly issued and are fully paid and non-assessable; none of the outstanding shares of capital stock of the Company was issued in violation of the preemptive or other similar rights that were not subsequently waived of any securityholder of the Company existing by virtue of the DGCL, the restated certificate of incorporation of the Company, the restated by-laws of the Company or any contract to which the Company is a party and which is filed as an exhibit to the Registration Statement or identified in a certificate of the General Counsel of the Company attached hereto as Exhibit B (that purports to identify all material contracts or group of similar contracts that are material in the aggregate to which the Company or any of its subsidiaries is a party); and the shares of issued and outstanding capital stock of the Company (including any shares of capital stock of the Company issued or to be issued in connection with the exercise of the put rights pursuant to the agreements set forth on Exhibit C hereto (that purports to identify the only agreements with respect to put rights), assuming such shares are issued and sold in accordance with the agreements set forth on Exhibit C hereto), have been issued or will be issued in compliance, in all material respects, with all federal securities laws.
A-1-1
(v) Based solely on a certificate from the Secretary of State or similar government official of each Subsidiary's respective jurisdiction of incorporation or organization, each Subsidiary has been duly incorporated or organized and is validly existing as a corporation or other entity in good standing under the laws of the jurisdiction of its incorporation or organization, has corporate or other power and authority to own, lease and operate its properties and to conduct its business as described in the Prospectuses and is duly qualified as a foreign corporation to transact business and is in good standing in each jurisdiction set forth on Schedule 1 hereto (that purports to identify all jurisdictions in which such qualification is required, whether by reason of the ownership or leasing of property or the conduct of business, except where the failure so to qualify or be in good standing would not result in a Material Adverse Effect). Except as otherwise disclosed on Schedule 2 hereto, (a) all of the issued and outstanding capital stock of each such Subsidiary that is a corporation has been duly authorized and validly issued, is fully paid and non-assessable and, to our knowledge, is owned by the Company, directly or through subsidiaries and (b) all of the ownership interests of each such Subsidiary that is not a corporation have been duly authorized and, to our knowledge, are owned, by the Company, directly or through subsidiaries.
(vi) The Securities to be purchased by the U.S. Underwriters and the International Managers from the Company have been duly authorized for issuance and sale to the Underwriters pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, and, when issued and delivered by the Company pursuant to the U.S. Purchase Agreement and the International Purchase Agreement, respectively, against payment of the consideration set forth in the U.S. Purchase Agreement and the International Purchase Agreement, will be validly issued and fully paid and non-assessable and no holder of the Securities is or will be subject to personal liability by reason of being such a holder.
(vii) The issuance of the Securities is not subject to the preemptive or other similar rights of any securityholder of the Company existing by virtue of the DGCL, the certificate of incorporation and by-laws of the Company in effect immediately prior to and at Closing Time or any contract to which the Company is a party and which is filed as an exhibit to the Registration Statement pursuant to Item 601(b)(2) or 601(b)(10) of Regulation S-K of the 1933 Act or identified in a certificate of the General Counsel of the Company attached hereto as Exhibit D (that purports to identify any agreements with respect to such preemptive or other similar rights).
(viii) The U.S. Purchase Agreement and the International Purchase Agreement have been duly authorized, executed and delivered by the Company.
(viii) The Registration Statement, including any Rule 462(b) Registration Statement, has been declared effective under the 1933 Act; any required filing of the Prospectuses pursuant to Rule 424(b) has been made in the manner and within the time period required by Rule 424(b); and, to our knowledge, no stop order suspending the
A-1-2
effectiveness of the Registration Statement or any Rule 462(b) Registration Statement has been issued under the 1933 Act and no proceedings for that purpose have been instituted or are pending or threatened by the Commission.
(x) The Registration Statement, including any Rule 462(b) Registration Statement, the Rule 430A Information, the Prospectuses and each amendment or supplement to the Registration Statement and the Prospectuses filed on or before the date hereof as of their respective effective or issue dates (other than the financial statements, footnotes thereto, supporting schedules, other financial information and statistical information derived from the financial statements included therein or omitted therefrom, as to which we express no opinion) complied as to form in all material respects with the requirements of the 1933 Act and the 1933 Act Regulations.
(xi) The form of certificate used to evidence the Common Stock complies in all material respects with all applicable statutory requirements and with any applicable requirements of the restated certificate of incorporation and the restated by-laws of the Company in effect at Closing Time.
(xii) Except as disclosed in the Prospectuses, there are no encumbrances or restrictions pursuant to any agreement filed as an exhibit to the Registration Statement pursuant to Item 601(b)(2) or 601(b)(10) of Regulation S-K of the 1933 Act or identified on a schedule provided by the General Counsel of the Company attached hereto as Exhibit E containing agreements that impose encumbrances or restrictions, on the ability of any Subsidiary (i) to pay any dividends or make any distributions on such Subsidiary's capital stock, (ii) to make any loans or advances to, or investments in, the Company or any such Subsidiary, or (iii) to transfer any of its property or assets to the Company or any such Subsidiary.
(xiii) To our knowledge, (A) there are no legal or governmental proceedings or investigations pending or threatened against the Company, or to which the Company, or any of its properties is subject, that are required to be described in the Registration Statement or Prospectuses (or any amendment or supplement thereto) that are not so described, (B) there are no agreements, franchises, contracts, indentures, mortgages, loan agreements, notes, leases or other instruments that are required to be described or referred to in the Registration Statement or the Prospectuses (or any amendment or supplement thereto) or to be filed as an exhibit to the Registration Statement that are not so described or filed, as the case may be, and such descriptions are accurate in all material respects, and (C) there are no legal or governmental proceedings or investigations pending, or threatened in writing, that would materially affect the issuance, sale or delivery of the Shares to the Underwriters under the U.S. Purchase Agreement or the International Purchase Agreement or the performance by the Company of its obligation thereunder.
(xiv) The information in the Prospectuses under "Description of Capital Stock", "Management-Employment Agreements", "Management - Select Medical Corporation 1997 Amended and Restated Stock Option Plan", "Related Party Transactions", "Shares
A-1-3
Eligible for Future Sale" and "United States Federal Income Tax Considerations for Non-United States Holders" and in the Registration Statement under Items 14 and 15, to the extent that it constitutes matters of law, summaries of legal matters, summaries of the Company's restated certificate of incorporation and bylaws or legal conclusions, has been reviewed by us and is correct in all material respects.
(xv) To our knowledge, other than with respect to Health Care Laws (as to which we express no opinion), there are no Federal, Delaware or Pennsylvania statutes or regulations that are required to be described in the Prospectuses that are not described as required.
(xvi) To our knowledge, neither the Company nor any of the Subsidiaries is in violation of its restated certificate of incorporation or restated by-laws and no default by the Company or any of its subsidiaries exists in the due performance or observance of any material obligation, agreement, covenant or condition contained in any contract, indenture, mortgage, loan agreement, note, lease or other agreement or instrument that is described or referred to in the Registration Statement or the Prospectuses or filed or incorporated by reference as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license, order, registration, qualification of or with any United States, New York, Pennsylvania or with respect to the DGCL, Delaware court or governmental authority or agency (other than under the 1933 Act and the 1933 Act Regulations or Form 8-A under 1934 Act or 1934 Act Regulations, which have been obtained, or as may be required under the securities or blue sky laws of the various states, as to which we express no opinion) is necessary or required in connection with the due authorization, execution and delivery of the U.S. Purchase Agreement and the International Purchase Agreement or for the offering, issuance, sale or delivery of the Securities.
(xix) The execution, delivery and performance of the U.S. Purchase Agreement and the International Purchase Agreement and the consummation of the transactions contemplated in the U.S. Purchase Agreement, the International Purchase Agreement and in the Registration Statement (including the completion of the Related Transactions and the issuance and sale of the Securities, and the use of the proceeds from the sale of the Securities as described in the Prospectuses under the caption "Use Of Proceeds") and compliance by the Company with its obligations under the U.S. Purchase Agreement and the International Purchase Agreement do not and will not, whether with or without the giving of notice or lapse of time or both, conflict with or constitute a breach of, or default or Repayment Event (as defined in Section 1(a)(x) of the Purchase Agreements) under or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company or any of its subsidiaries pursuant to any contract, indenture, mortgage, deed of trust, loan or credit agreement, note, lease or any other agreement or instrument filed as an exhibit to the Registration Statement pursuant to Item 601(b)(2) or 601(b)(10) of Regulation S-K of the 1933 Act or any other material agreement of the
A-1-4
Company or any of its subsidiaries identified on a schedule provided by the General Counsel of the Company attached hereto as Exhibit B, to which the Company or any of its subsidiaries is a party or by which it or any of them may be bound, or to which any of the property or assets of the Company or any of its subsidiaries is subject (except for such conflicts, breaches or defaults or liens, charges or encumbrances that could not have a Material Adverse Effect), nor will such action result in any violation of the provisions of the charter or by-laws of the Company or any Subsidiary, or any applicable law, statute, rule, regulation, judgment, order, writ or decree, known to us, of any government, government instrumentality or court, domestic or foreign, having jurisdiction over the Company or any of its subsidiaries or any of their respective properties, assets or operations.
(xx) Except as disclosed in the Prospectuses, to our knowledge, there are no persons with registration rights or other similar rights to have any securities registered pursuant to the Registration Statement or otherwise registered by the Company or any of its subsidiaries under the 1933 Act.
(xxi) Neither the Company or any of its subsidiaries is, and upon the issuance and sale of the Securities as contemplated in the Purchase Agreements and the application of the net proceeds therefrom as described in the Prospectuses none of them will be, an "investment company" or an entity "controlled" by an "investment company," as such terms are defined in the 1940 Act.
(xxii) The Stock Split and the Charter Amendments were duly authorized by the Company's Board of Directors and stockholders, the Stock Split has been consummated in accordance with its terms and the Charter Amendments have become effective.
Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
[The following statement shall be set forth in a separate letter]
We have participated in conferences with officers and other representatives of the Company and representatives of the U.S. Underwriters and their counsel during which the contents of the Registration Statement and related matters were discussed and reviewed and, although we do not pass upon and do not assume responsibility for the accuracy, completeness or fairness of the statements contained in the Registration Statement (except to the extent described in paragraphs (xiii) and (xiv) in our separate opinion to you dated today), on the basis of the information that was developed in the course of the services referred to above, considered in the light of our understanding of the applicable law, that, nothing has come to our attention that would lead us to believe
A-1-5
that the Registration Statement or any amendment thereto, including the Rule 430A Information, (except for financial statements, footnotes and schedules, other financial data and statistical information derived from the financial statements included therein or omitted therefrom, as to which we need make no statement), at the time such Registration Statement or any such amendment became effective on or prior to the Closing Time, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectuses or any amendment or supplement thereto (except for financial statements, footnotes and schedules, other financial data and statistical information derived from the financial statements included therein or omitted therefrom, as to which we need make no statement), at the time the Prospectuses were issued, at the time any such amended or supplemented prospectus was issued on or prior to the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
A-1-6
Exhibit A-2
FORM OF OPINION OF COMPANY'S SPECIAL REGULATORY COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(ii)
(i) The information in the Prospectuses under "Risk Factors --If there are changes in the rates or methods of government reimbursements for our services, our services, our net operating revenues and income could decline", "Risk Factors --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", "Risk Factors --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", "Our Business-- Government Regulations", to the extent that it describes federal and state laws of the United States, has been reviewed by me and fairly presents the information set forth therein in all material respects.
(ii) Each of the 54 specialty acute care hospitals described in the Prospectuses as owned or operated by the Company or its subsidiaries is duly licensed as a hospital by the state in which it is located and is certified to participate in the federal Medicare program. This opinion is based solely upon our examination of originals or copies of such licenses and certifications presented to us by the Company, and a Certificate of the Company that such licenses and certifications are currently in effect.
(iii) We have reviewed the Certificate of the General Counsel of the Company attached hereto as Exhibit A concerning the outpatient therapy clinics owned, leased or operated by the Company or its subsidiaries. In the course of our representation of the Company as special regulatory counsel, nothing has come to our attention that would lead us to believe that the Certificate is not accurate.
(iv) Except as disclosed in the Prospectuses, in the course of our representation of the Company as special regulatory counsel, we have not become aware of any pending or threatened action, suit, proceeding, inquiry or investigation, relating to any Health Care Law, to which the Company or any of its subsidiaries is a party, brought by any court or governmental agency or body, which could reasonably be expected to result in a Material Adverse Effect.
(v) No filing with, or authorization, approval, consent, license, order, registration, qualification (collectively, "Approvals") of or with any (A) United States governmental authority or agency, is necessary or required under any federal Health Care Law, other than Medicare Filings and Notices that have been made or given or that are not yet required to be made or given or (B) Pennsylvania governmental authority or agency is necessary or required under any Pennsylvania Health Care Law, other than such Approvals as have been obtained or made, in connection with the due authorization, execution and delivery of the U.S. Purchase Agreement and the International Purchase
A-2-1
Agreement or for the offering, issuance, sale or delivery of the Securities. Without having investigated the laws of states other than Pennsylvania for purposes of this opinion, based on our experience as special regulatory counsel representing other issuers owning and operating other health care businesses, and our ongoing representation of the Company as special regulatory counsel, we are not aware of any Approvals under any other State Health Care Laws required to be obtained or made in connection with the execution delivery and performance of the U.S. Purchase Agreement and the International Purchase Agreement that, if not obtained or made, would result in a Material Adverse Effect.
In the course of our representation of the Company as special regulatory counsel, nothing has come to our attention that would lead us to believe that the information contained in the Registration Statement under "Risk Factors --If there are changes in the rates or methods of government reimbursements for our services, our services, our net operating revenues and income could decline", "Risk Factors --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", "Risk Factors --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", "Our Business-- Government Regulations" (A) at the time such Registration Statement or any such amendment thereto became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading and (B) at the time the Prospectuses were issued, at the time any such amended or supplemented prospectus was issued or at the Closing Time, included or includes an untrue statement of a material fact or omitted or omits to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading.
For purposes of this opinion, the term "Health Care Laws" shall mean those statutes, rules and regulations, judgments, decrees or orders specifically regulating health care providers, as such, of the type owned and operated by the Company and its subsidiaries as described under the headings "Risk Factors --If there are changes in the rates or methods of government reimbursements for our services, our net operating revenues and income could decline", "Risk Factors -- 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", "Risk Factors -We conduct business in 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", "Our Business -- Government Regulations" in the Prospectus, including, without limitation, (a) health care licensure, permit and certificate of need requirements, (b) Title XVIII, XIX and XXI of the Social Security Act; (c) the Anti-Kickback Amendments (as defined in the Prospectus) and the regulations promulgated thereunder, (d) the Stark Laws (as defined in the Prospectus) and the regulations promulgated thereunder, (e) the False Claims Act, (f) Title II of the Health Insurance
A-2-2
Portability and Accountability Act of 1996, (g) Title IV of the Balanced Budget Act of 1997, (h) any initiatives under Operation Restore Trust and (i) state statutes, rules and regulations concerning matters similar to (b) through (h) above, but specifically excluding statutes, ordinances, administrative decisions, rules and regulations of counties, towns, municipalities or special political subdivisions.
Such opinion shall not state that it is to be governed or qualified by, or that it is otherwise subject to, any treatise, written policy or other document relating to legal opinions, including, without limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
A-2-3
Exhibit A-3
OPINION OF COMPANY'S SPECIAL CANADIAN COUNSEL
TO BE DELIVERED PURSUANT TO SECTION 5(b)(iv)
(i) Each of Canadian Back Institute ("CBI") and Rehab Health Inc. ("Rehab Health") is incorporated and existing under the Business Corporations Act (Ontario).
(ii) Each of CBI Calgary Limited Partnership, CBI Etobicoke Limited Partnership, CBI Scarborough Limited Partnership, CBI South Calgary Limited Partnership, CBI Toronto Limited Partnership, CBI Victoria Limited Partnership, (collectively, the "Limited Partnerships") has been formed and exists as a limited partnership under the Limited Partnership Act (Ontario).
(iii) CBI has the corporate power and capacity to carry on its business as presently conducted (including, in the case of the Limited Partnerships, the business of the Limited Partnerships) and to own its properties and assets.
(iv) Rehab Health has the corporate power and capacity to carry on its business as presently conducted and to own its properties and assets.
A-3-1
[Form of lock-up from directors, officers or other stockholders pursuant to
Section 5(i)]
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
J.P. Morgan Securities Inc.
Credit Suisse First Boston Corporation.
CIBC World Markets Corp.
SG Cowen Securities Corporation
First Union Securities, Inc.
as U.S. Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
Merrill Lynch International
J.P. Morgan Securities Ltd.
Credit Suisse First Boston (Europe) Limited
CIBC World Markets plc
SG Cowen Securities Corporation
First Union Securities, Inc.
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Select Medical Corporation
Dear Sirs:
The undersigned, a stockholder [and an officer and/or director] of Select
Medical Corporation, a Delaware corporation (the "Company"), understands that
(i) Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith Incorporated
("Merrill Lynch") and J.P. Morgan Securities Inc., Credit Suisse First Boston
Corporation, CIBC World Markets Corp., SG Cowen Securities Corporation and First
Union Securities, Inc. propose to enter into a U.S. Purchase Agreement (the
"U.S. Purchase Agreement") with the Company providing for the public offering of
shares (the "Securities") of the Company's common stock, par value $.01 per
share (the "Common Stock") and (ii) Merrill Lynch International, J.P. Morgan
Securities Ltd., Credit Suisse First Boston (Europe) Limited, CIBC World Markets
plc, SG Cowen Securities Corporation and First Union Securities, Inc. propose to
enter into an International Purchase Agreement with the
Company providing for the public offering of the Common Stock of the Company (together with the U.S. Purchase Agreement, the "Purchase Agreements". In recognition of the benefit that such an offering will confer upon the undersigned as a stockholder [and an officer and/or director] of the Company, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the undersigned agrees with each underwriter to be named in the Purchase Agreements that, during a period of 180 days from the date of the Purchase Agreements, the undersigned will not, without the prior written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Company's Common Stock or any securities convertible into or exchangeable or exercisable for Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition, or file any registration statement under the Securities Act of 1933, as amended, with respect to any of the foregoing or (ii) enter into any swap or any other agreement or any transaction that transfers, in whole or in part, directly or indirectly, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of Common Stock or other securities, in cash or otherwise. Notwithstanding the foregoing, Merrill Lynch's prior written consent is not required for transactions by persons not subject to Section 16 of the Securities Exchange Act of 1934, as amended, with respect to the Company, relating to (A) Reserved Securities, as defined in the U.S. Purchase Agreement, (B) shares of Common Stock or other securities of the Company acquired in open market transactions after the completion of the public offering and (C) sales of shares of Common Stock underlying employee stock options in connection with cashless exercises of those stock options by former employees of the Company that were not subject to Section 16 with respect to the Company while they were employed by the Company.
In addition, the undersigned agrees that the Company and/or Merrill Lynch may, and the undersigned will, (i) with respect to any shares of Common Stock for which the undersigned is the record holder, cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company and (ii) with respect to any shares of Common Stock for which the undersigned is the beneficial holder but not the record holder, cause the record holder of such shares of Common Stock to cause the transfer agent for the Company to note stop transfer instructions with respect to such shares of Common Stock on the transfer books and records of the Company.
The undersigned hereby represents and warrants that the undersigned has full power and authority to enter into this letter agreement, and that, upon request, the undersigned will execute any additional documents necessary or desirable in connection with the enforcement hereof. All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned and any obligations of the undersigned
shall be binding upon the heirs, personal representatives, successors, and assigns of the undersigned.
Very truly yours,
Exhibit 3.1
RESTATED CERTIFICATE OF INCORPORATION
SELECT MEDICAL CORPORATION
Select Medical Corporation, a corporation organized and existing under the laws of the State of Delaware hereby certifies as follows:
ARTICLE 1 The name of the corporation is Select Medical Corporation. The original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on December 10, 1996. The Certificate of Incorporation was thereafter restated on February 4, 1997, amended on March 11, 1997, September 2, 1997, September 3, 1998 December 15, 1998, corrected on December 18, 1998, and further amended on November 19, 1999 and September 21, 2000.
ARTICLE 2 Pursuant to Sections 228, 242 and 245 of the General Corporation Law of the State of Delaware (the "DGCL"), this Amended and Restated Certificate of Incorporation (this "Certificate") restates and integrates the provisions of the Certificate of Incorporation of this Corporation.
ARTICLE 3 Notwithstanding approval of this Certificate by the stockholders of the Corporation, prior to this Certificate becoming effective upon filing, the Board of Directors may abandon this Certificate without further action by the stockholders of this Corporation.
ARTICLE 4 The text of the Certificate of Incorporation as heretofore amended or supplemented is hereby restated in its entirety to read as follows:
The following is a statement of the designations, preferences, qualifications, limitations, restrictions and the special or relative rights granted to or imposed upon the shares of each such class.
A. PREFERRED STOCK.
(a) The Board of Directors is authorized to provide for the issuance of shares of Preferred Stock in one or more series and, by filing a certificate pursuant to the applicable provisions of the DGCL (a "Preferred Stock Certificate of Designation"), to establish from time to time the number of shares to be included in each such series, with such designations, preferences, and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof as are stated and expressed in the resolution or resolutions providing for the issue thereof adopted by the Board of Directors (as such resolutions may be amended by a resolution or resolutions subsequently adopted by the Board of Directors), and as are not stated and expressed in this Certificate of Incorporation including, but not limited to, determination of any of the following:
(i) the distinctive designation of the series, whether by number, letter or title, and the number of shares which will constitute the series, which number may be increased or decreased (but not below the number of shares then outstanding and except where otherwise provided in the applicable Preferred Stock Certificate of Designation) from time to time by action of the Board of Directors;
(ii) the dividend rate and the times of payment of dividends, if any, on the shares of the series, whether such dividends will be cumulative, and if so, from what date or dates, and the relation which such dividends, if any, shall bear to the dividends payable on any other class or classes of stock;
(iii) the price or prices at which, and the terms and conditions on which, the shares of the series may be redeemed at the option of the Corporation;
(iv) whether or not the shares of the series will be entitled to the benefit of a retirement or sinking fund to be applied to the purchase or redemption of such shares and, if so entitled, the amount of such fund and the terms and provisions relative to the operation thereof;
(v) whether or not the shares of the series will be convertible into, or exchangeable for, any other shares of stock of the Corporation or other securities, and if so convertible or exchangeable, the conversion price or prices, or the rates of exchange, and any adjustments thereof, at which such conversion or exchange may be made, and any other terms and conditions of such conversion or exchange;
(vi) the rights of the shares of the series in the event of voluntary or involuntary liquidation, dissolution or winding up of the affairs of the Corporation;
(vii) whether or not the shares of the series will have priority over or be on a parity with or be junior to the shares of any other series or class of stock in any respect, or will be entitled to the benefit of limitations restricting the issuance
of shares of any other series or class of stock, restricting the payment of dividends on or the making of other distributions in respect of shares of any other series or class of stock ranking junior to the shares of the series as to dividends or assets, or restricting the purchase or redemption of the shares of any such junior series or class, and the terms of any such restriction;
(viii) whether the series will have voting rights, in addition to any voting rights provided by law, and, if so, the terms of such voting rights; and
(ix) any other preferences, qualifications, privileges, options and other relative or special rights and limitations of that series.
B. COMMON STOCK.
The Common Stock shall be subject to the express terms of any series of Preferred Stock.
the holders of not less than 66-2/3% of the shares of stock entitled to vote generally in the election of Directors.
The Board of Directors, other than those who may be elected by the holders of any series of Preferred Stock, if any, shall be and is divided into three classes: Class I, Class II and Class III, which shall be as nearly equal in number as possible. Each Director shall serve for a term ending on the date of the third annual meeting of stockholders following the annual meeting at which the Director was elected; provided, however, that each initial Director in Class I shall hold office until the annual meeting of stockholders in 2002; each initial Director in Class II shall hold office until the annual meeting of stockholders in 2003; and each initial Director in Class III shall hold office until the annual meeting of stockholders in 2004. Notwithstanding the foregoing provisions of this Article, each Director shall serve until his successor is duly elected and qualified or until his death, resignation or removal.
In the event of any increase or decrease in the authorized number of Directors, (a) each Director then serving as such shall nevertheless continue as a Director of the class of which he is a member until the expiration of his current term, or his earlier resignation, removal from office or death, and (b) the newly created or eliminated directorship resulting from such increase or decrease shall be apportioned by the Board of Directors among the three classes of Directors so as to maintain such classes as nearly equal as possible.
(a) The initial purchase price per share or other unit of the stock or other securities or property to be purchased upon exercise of such rights.
(b) Provisions relating to the times at which and the circumstances under which such rights may be exercised or sold or otherwise transferred, either together with or separately from, any other stock or securities of the Corporation.
(c) Provisions which adjust the number or exercise price of such rights, or amount or nature of the stock or other securities or property receivable upon exercise of such rights, in the event of a combination, split or recapitalization of any stock of the Corporation, a change in ownership of the Corporation's stock or other securities or a reorganization, merger, consolidation, sale of assets or other occurrence relating to the Corporation or any stock of the Corporation, and provisions restricting the ability of the
Corporation to enter into any such transaction absent an assumption by the other party or parties thereof of the obligations of the Corporation under such rights.
(d) Provisions which deny the holder of a specified percentage of the outstanding stock or other securities of the Corporation the right to exercise such rights and/or cause the rights held by such holder to become void.
(e) Provisions which permit the Corporation to redeem such rights.
(f) The appointment of a rights agent with respect to such rights.
Neither any amendment nor repeal of this Article ELEVENTH, nor the adoption of any provision of this Certificate of Incorporation inconsistent with this Article ELEVENTH, shall eliminate or reduce the effect of this Article ELEVENTH in respect of any matter occurring, or any cause of action, suit or claim that, but for this repeal or adoption of an inconsistent provision.
IN WITNESS WHEREOF, the Corporation has caused this certificate to be duly executed by Michael E. Tarvin, its Senior Vice President, General Counsel and Secretary, this ___ day of _______, 2001.
SELECT MEDICAL CORPORATION
Exhibit 3.2
SELECT MEDICAL CORPORATION
AMENDED AND RESTATED BYLAWS
As adopted on ____________________
TABLE OF CONTENTS
Page
ARTICLE I STOCKHOLDERS........................................................... 1
Section 1.1 Annual Meetings.................................................... 1
Section 1.2 Special Meetings................................................... 1
Section 1.3 Notice of Meetings; Waiver......................................... 1
Section 1.4 Quorum............................................................. 2
Section 1.5 Voting............................................................. 2
Section 1.6 Voting by Ballot................................................... 2
Section 1.7 Adjournment........................................................ 2
Section 1.8 Proxies............................................................ 3
Section 1.9 Notice of Stockholder Business and Nominations..................... 3
Section 1.10 Organization; Procedure............................................ 5
Section 1.11 Inspectors of Elections............................................ 5
Section 1.12 Opening and Closing of Polls....................................... 6
Section 1.13 No Stockholder Action by Written Consent or Telephone Conference... 6
ARTICLE II BOARD OF DIRECTORS.................................................... 7
Section 2.1 General Powers..................................................... 7
Section 2.2 Number and Term of Office.......................................... 7
Section 2.3 Election of Directors.............................................. 7
Section 2.4 Annual and Regular Meetings........................................ 7
Section 2.5 Special Meetings; Notice........................................... 8
Section 2.6 Quorum; Voting..................................................... 8
Section 2.7 Adjournment........................................................ 8
Section 2.8 Action Without a Meeting........................................... 8
Section 2.9 Regulations; Manner of Acting...................................... 9
Section 2.10 Resignations....................................................... 9
Section 2.11 Removal of Directors............................................... 9
Section 2.12 Vacancies and Newly Created Directorships.......................... 9
Section 2.13 Reliance on Accounts and Reports, etc.............................. 10
ARTICLE III COMMITTEES OF DIRECTORS AND ADVISORY BOARD........................... 10
Section 3.1 Committees of Directors............................................ 10
Section 3.2 Proceedings........................................................ 10
Section 3.3 Quorum and Manner of Acting........................................ 10
Section 3.4 Action by Telephonic Communications................................ 11
Section 3.5 Absent or Disqualified Members..................................... 11
Section 3.6 Resignations....................................................... 11
Section 3.7 Removal............................................................ 11
Section 3.8 Vacancies.......................................................... 11
|
ARTICLE IV OFFICERS.............................................................. 11 Section 4.1 Number............................................................. 11 Section 4.2 Election........................................................... 12 Section 4.3 Compensation....................................................... 12 Section 4.4 Removal and Resignation; Vacancies................................. 12 Section 4.5 Authority and Duties of Officers................................... 12 Section 4.6 Chairman of the Board.............................................. 12 Section 4.7 Vice Chairman of the Board......................................... 13 Section 4.8 Chief Executive Officer............................................ 13 Section 4.9 President ......................................................... 13 Section 4.10 Vice Presidents.................................................... 13 Section 4.11 Secretary.......................................................... 13 Section 4.12 Assistant Secretary................................................ 14 Section 4.13 Treasurer.......................................................... 14 Section 4.14 Additional Officers................................................ 14 Section 4.15 Security........................................................... 14 ARTICLE V CAPITAL STOCK.......................................................... 15 Section 5.1 Certificates of Stock, Uncertificated Shares....................... 15 Section 5.2 Signatures; Facsimile.............................................. 15 Section 5.3 Lost, Stolen or Destroyed Certificates............................. 15 Section 5.4 Transfer of Stock.................................................. 15 Section 5.5 Record Date........................................................ 16 Section 5.6 Registered Stockholders............................................ 16 Section 5.7 Transfer Agent and Registrar....................................... 16 ARTICLE VI INDEMNIFICATION....................................................... 16 Section 6.1 Nature of Indemnity................................................ 16 Section 6.2 Successful Defense................................................. 17 Section 6.3 Determination that Indemnification is Proper....................... 18 Section 6.4 Advance Payment of Expenses........................................ 18 Section 6.5 Procedure for Indemnification of Directors and Officers............ 18 Section 6.6 Survival; Preservation of Other Rights............................. 19 Section 6.7 Insurance.......................................................... 19 Section 6.8 Severability....................................................... 19 Section 6.9 Limitation on Liability............................................ 20 Section 6.10 Appearance as a Witness............................................ 20 Section 6.11 Indemnification of Employees and Agents. ARTICLE VII OFFICES.............................................................. 20 Section 7.1 Registered Office and Agent........................................ 20 Section 7.2 Other Offices...................................................... 20 |
ARTICLE VIII GENERAL PROVISIONS.................................................. 21 Section 8.1 Dividends.......................................................... 21 Section 8.2 Reserves........................................................... 21 Section 8.3 Execution of Instruments........................................... 21 Section 8.4 Deposits........................................................... 21 Section 8.5 Checks............................................................. 21 Section 8.6 Sale, Transfer, etc................................................ 21 Section 8.7 Voting as Stockholder.............................................. 21 Section 8.8 Fiscal Year........................................................ 22 Section 8.9 Seal............................................................... 22 Section 8.10 Books and Records; Inspection...................................... 22 ARTICLE IX AMENDMENT OF BYLAWS................................................... 22 Section 9.1 Amendment.......................................................... 22 ARTICLE X CONSTRUCTION........................................................... 22 Section 10.1 Construction......................................................... 22 |
SELECT MEDICAL CORPORATION
BYLAWS
AMENDED AND RESTATED AS OF
____________, 2001
(a) Written or printed notice of the place, date and hour of the meeting of the stockholders, and, in the case of a special meeting, the purpose or purposes for which such meeting is called, shall be delivered not less than ten nor more than sixty days prior to the meeting, either personally or by mail, by or at the direction of the Board of Directors or person calling the meeting, to each stockholder of record entitled to vote at such meeting. If such notice is mailed, it shall be deemed to have been delivered to a stockholder on the third day after it is deposited in the United States mail, postage prepaid, addressed to the stockholder at his or her address as it appears on the record of stockholders of the Corporation, or, if he or she shall have filed with the Secretary of the Corporation a written request that notices to him or her be mailed
to some other address, then directed to him or her at such other address. Such further notice shall be given as may be required by law or otherwise by these Bylaws.
(b) No notice of any meeting of stockholders need be given to any stockholder who submits a signed waiver of notice, whether before or after the meeting. Neither the business to be transacted at, nor the purpose of, any regular or special meeting of the stockholders need be specified in a written waiver of notice. The attendance of any stockholder at a meeting of stockholders shall constitute a waiver of notice of such meeting, except when the stockholder attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business on the ground that the meeting is not lawfully called or convened.
as shall be determined by a vote of the holders of record of more than 50% of the then outstanding shares entitled to vote at such meeting of the stockholders. Upon the resumption of such adjourned meeting, any business may be transacted that might have been transacted at the meeting as originally called.
(1) Nominations of persons for election to the Board of Directors of the Corporation and the proposal of business to be considered by the stockholders may be made at an annual meeting of stockholders (i) by or at the direction of the Board of Directors or the Chairman of the Board, or (ii) by any stockholder of the Corporation who is entitled to vote at the meeting, who complies with the notice procedures set forth in clauses (2) and (3) of this paragraph and who was a stockholder of record at the time such notice is delivered to the Secretary or any Assistant Secretary of the Corporation.
(2) For nominations or other business to be properly brought before an annual meeting by a stockholder, pursuant to clause (ii) of paragraph (A)(1) of this Bylaw, the stockholder must have given timely notice thereof in writing to the Secretary or any Assistant Secretary of the Corporation. To be timely, a stockholder's notice shall be delivered to the Secretary or any Assistant Secretary at the principal executive offices of the Corporation not
less than ninety days nor more than one hundred and twenty days prior to the first anniversary of the preceding year's annual meeting; provided, that if the date of the annual meeting is advanced by more than twenty days or delayed by more than seventy days from such anniversary date, notice by the stockholder to be timely must be so delivered not earlier than one hundred and twenty days prior to such annual meeting and not later than the close of business on the later of the ninetieth day prior to such annual meeting or the tenth day following the day on which public announcement of the date of such meeting is first made. In no event shall the adjournment of an annual meeting commence a new time period for the giving of a stockholder's notice as described above. Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or reelection as a Director all information relating to such person that is required to be disclosed in solicitations of proxies for election of Directors, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and Rule 14a-11 thereunder, in each case including any successor Rule or Regulation thereto, including such person's written consent to being named in the proxy statement as a nominee and to serving as a Director if elected; (b) as to any other business that the stockholder proposes to bring before the meeting, a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest in such business of such stockholder and of any beneficial owner on whose behalf the proposal is made; and (c) as to the stockholder giving the notice and any beneficial owner on whose behalf the nomination or proposal is made (i) the name and address of such stockholder, as they appear on the Corporation's books, and of such beneficial owner and (ii) the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner.
(3) Notwithstanding anything in the second sentence of paragraph (A)(2) of this Bylaw to the contrary, in the event that the number of Directors to be elected to the Board of Directors of the Corporation is increased and there is no public announcement naming all of the nominees for Director or specifying the size of the increased Board of Directors made by the Corporation at least one hundred days prior to the first anniversary of the preceding year's annual meeting, a stockholder's notice under this paragraph shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the tenth day following the day on which such public announcement is first made by the Corporation.
of Directors may be made at such special meeting of stockholders if the stockholder's notice as required by paragraph (A)(2) of this Bylaw shall be delivered to the Secretary at the principal executive offices of the Corporation not earlier than the one hundred and twentieth day prior to such special meeting and not later than the close of business on the later of the ninetieth day prior to such special meeting or the tenth day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall the adjournment of a special meeting commence a new time period for the giving of a stockholder's notice as described above.
(1) Only persons who are nominated in accordance with the procedures set forth in this Bylaw shall be eligible to serve as Directors and only such business shall be conducted at a meeting of stockholders as shall have been brought before the meeting in accordance with the procedures set forth in this Bylaw. Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of the meeting shall have the power and duty to determine whether a nomination or any business proposed to be brought before the meeting was made in accordance with the procedures set forth in this Bylaw and, if any proposed nomination or business is not in compliance with this Bylaw, to declare that such defective proposal or nomination shall be disregarded.
(2) For purposes of this Bylaw, "public announcement"
shall mean disclosure in a press release reported by the Dow Jones News Service,
Associated Press or comparable national news service or in a document publicly
filed by the Corporation with the Securities and Exchange Commission pursuant to
Section 13, 14, or 15(d) of the Exchange Act.
(3) Notwithstanding the foregoing provisions of this Bylaw, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth in this Bylaw. Nothing in this Bylaw shall be deemed to affect any right of stockholders to request inclusion of proposals in the Corporation's proxy statement pursuant to Rule 14a-8 under the Exchange Act.
Each inspector, before entering upon the discharge of the duties of an inspector, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspector shall:
(a) ascertain the number of shares outstanding and the voting power of each,
(b) determine the shares represented at a meeting and the validity of proxies and ballots, count all votes and ballots,
(c) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors; and
(d) certify his or her determination of the number of shares represented at the meeting, and his or her count of all votes and ballots.
The inspector may appoint or retain other persons or entities to assist in the performance of the duties of inspector.
When determining the shares represented and the validity of proxies and ballots, the inspector shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 1.8 of these Bylaws, ballots and the regular books and records of the Corporation. The inspector may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers or their nominees or a similar person which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspector considers other reliable information as outlined in this section, the inspector, at the time of his or her certification pursuant to (d) of this section, shall specify the precise information considered, the person or persons from whom the information was obtained, when this information was obtained, the means by which the information was obtained, and the basis for the inspector's belief that such information is accurate and reliable.
Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of the stockholders of the Corporation, and the ability of the stockholders to consent in writing or by telephone to the taking of any action is specifically denied.
shall fix or change the time or place of any regular meeting, notice of such action shall be mailed promptly, or sent by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means to each Director who shall not have been present at the meeting at which such action was taken, addressed to him or her at his or her usual place of business, or shall be delivered to him or her personally.
effect as a unanimous vote at a meeting and may be stated as such in any document or instrument filed with the Secretary of State of Delaware, and the execution of such consent shall constitute attendance or presence in person at a meeting of the Board of Directors or any such committee, as the case may be. Subject to the requirements of law, the Certificate of Incorporation, or these Bylaws for notice of meetings, Directors, or members of any committee designated by the Board of Directors, may participate in and hold a meeting of the Board of Directors or any committee of Directors, as the case may be, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in such meeting shall constitute attendance and presence in person at such meeting, except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
office shall continue to act and such vacancies and newly created Directorships may be filled by a majority of the Directors then in office, although less than a quorum. A Director elected to fill a vacancy or a newly created Directorship shall hold office until the next election of the class of Directors for which such Director has been chosen and until his or her successor has been elected and qualified or until his or her earlier death, resignation or removal.
may be taken without a meeting if all members of such committee shall consent to such action in writing and such writing or writings are filed with the minutes of the proceedings of the committee. The members of any such committee shall act only as a committee, and the individual members of such committee shall have no power as such.
(a) He or she shall keep or cause to be kept a record of all the proceedings of the meetings of the stockholders and of the Board of Directors in books provided for that purpose.
(b) He or she shall cause all notices to be duly given in accordance with the provisions of these Bylaws and as required by law.
(c) Whenever any committee shall be appointed pursuant to a resolution of the Board of Directors, he or she shall furnish a copy of such resolution to the members of such committee.
(d) He or she shall be the custodian of the records and of the seal of the Corporation and cause such seal (or a facsimile thereof) to be affixed to all certificates representing shares of the Corporation prior to the issuance thereof and to all instruments the execution of which on behalf of the Corporation under its seal shall have been duly authorized in accordance with these Bylaws, and when so affixed he or she may attest the same.
(e) He or she shall properly maintain and file all books, reports, statements, certificates and all other documents and records required by law, the Certificate of Incorporation or these Bylaws.
(f) He or she shall have charge of the stock books and ledgers of the Corporation and shall cause the stock and transfer books to be kept in such manner as to show at any time the number of shares of stock of the Corporation of each class issued and outstanding, the names (alphabetically arranged) and the addresses of the holders of record of such shares, the number of shares held by each holder and the date as of which each became such holder of record.
(g) He or she shall sign (unless the Treasurer, an Assistant Treasurer or an Assistant Secretary shall have signed) certificates representing shares of the Corporation the issuance of which shall have been authorized by the Board of Directors.
(h) He or she shall perform, in general, all duties incident to the office of Secretary and such other duties as may be specified in these Bylaws or as may be assigned to him or her from time to time by the Board of Directors, the Chief Executive Officer or the President.
it may deem appropriate relating to the issue, transfer and registration of shares of the Corporation.
In order that the Corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights of the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto.
legal representative, is or was or has agreed to become a Director or officer of the Corporation, or is or was serving or has agreed to serve at the request of the Corporation as a director, officer, partner, venturer, proprietor, trustee, employee, agent, or similar functionary of another foreign or domestic corporation, limited liability company, partnership, joint venture, sole proprietorship, trust, employee benefit plan, or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by him or her or on his or her behalf in connection with such action, suit or proceeding and any appeal therefrom, provided that he or she acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding had no reasonable cause to believe his or her conduct was unlawful. The indemnification provided in this Article VI could involve indemnification for negligence or under theories of strict liability. In the case of an action or suit by or in the right of the Corporation to procure a judgment in its favor (1) the indemnification of a Director or officer shall be limited to expenses (including attorneys' fees) actually and reasonably incurred by such person in the defense or settlement of such action or suit, and (2) no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Delaware Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Delaware Court of Chancery or such other court shall deem proper. Notwithstanding the foregoing, but subject to Section 6.5 of these Bylaws, the Corporation shall not be obligated to indemnify a Director or officer of the Corporation in respect of a Proceeding (or part thereof) instituted by such Director or officer, unless such Proceeding (or part thereof) has been authorized by the Board of Directors.
The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which he or she reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that his or her conduct was unlawful.
The rights granted pursuant to this Article VI shall be deemed contract rights. No amendment, modification or repeal of this Article VI shall have the effect of limiting or denying any such rights with respect to actions taken or Proceedings arising prior to any such amendment, modification or repeal.
Corporation (including its Board of Directors, its independent legal counsel,
and its stockholders) to have made a determination prior to the commencement of
such action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in
Section 6.1 of these Bylaws, nor the fact that there has been an actual
determination by the Corporation (including its Board of Directors, its
independent legal counsel, and its stockholders) that the claimant has not met
such applicable standard of conduct, shall be a defense to such action or create
a presumption that the claimant has not met the applicable standard of conduct.
The indemnification and the advancement and payment of expenses provided by this Article VI shall not be deemed exclusive of any other rights to which those indemnified may be entitled under any Bylaw, common or statutory law, provision of the Certificate of Incorporation, agreement, vote of stockholders or disinterested Directors or otherwise, both as to action in his or her official capacity and as to action in another capacity while holding such office, and shall continue as to a person who has ceased to be a Director or officer and shall inure to the benefit of the heirs, executors and administrators of such a person.
applicable portion of this Article VI that shall not have been invalidated and to the fullest extent permitted by applicable law.
any corporation in which the Corporation may hold stock and to act, vote (or execute proxies to vote) and exercise in person or by proxy all other rights, powers and privileges incident to the ownership of such stock. Such officers acting on behalf of the Corporation shall have full power and authority to execute any instrument expressing consent to or dissent from any action of any such corporation without a meeting. The Board of Directors may by resolution from time to time confer such power and authority upon any other person or persons.
(a) by resolution adopted by a majority of the Board of Directors at any special or regular meeting of the Board of Directors without the assent or vote of the stockholders of the Corporation if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting; or
(b) at any regular or special meeting of the stockholders upon the affirmative vote of not less than two-thirds (66-2/3% of the holders of the combined voting power of the outstanding shares of the Corporation entitled to vote generally in the election of Directors if, in the case of such special meeting only, notice of such amendment, alteration or repeal is contained in the notice or waiver of notice of such meeting.
Corporation as in effect from time to time, the provisions of such Certificate of Incorporation shall be controlling.
Exhibit 5.1
[LETTERHEAD OF LAW OFFICES OF DECHERT]
March 30, 2001
Select Medical Corporation
4716 Old Gettysburg Road
P.O. Box 2034
Mechanicsburg, PA 17055
Gentlemen and Ladies:
We have acted as your counsel in connection with the preparation and filing of the Registration Statement on Form S-1 (Registration No. 333-48856) originally filed on October 27, 2000 with the Securities and Exchange Commission under the Securities Act of 1933, as amended (the "Securities Act"), and as subsequently amended by amendments thereto filed on December 7, 2000, December 22, 2000 and March 7, 2001, and an amendment to be filed today (the "Registration Statement"), relating to the proposed issuance of up to 14,375,000 shares (the "Shares") of your Common Stock, par value $.01 per share, ("Common Stock"), which will be sold to the Underwriters named in the Registration Statement pursuant to the Underwriting Agreements substantially in the form as those filed as Exhibit 1.1 and Exhibit 1.2 to the Registration Statement (the "Underwriting Agreements").
We have participated in the preparation of the Registration Statement and have made such legal and factual examination and inquiry as we have deemed advisable for the rendering of this opinion. In making our examination we have assumed the genuineness of all signatures, the authenticity of all documents submitted to us as originals and the conformity to all authentic original documents of all documents submitted to us as copies.
Based upon and subject to the foregoing, we are of the opinion that when (i) the Underwriting Agreements have been duly authorized, executed and delivered and (ii) certificates representing the Shares in the form of the specimen certificate examined by us have been manually signed by an authorized officer of the transfer agent and registrar for the Common Stock and registered by such transfer agent and registrar, and have been delivered to and paid for by the Underwriters at a price per share not less than the per share par value of the Common Stock as contemplated by the Underwriting Agreements, the issuance and sale of the Shares will have been duly authorized, and the Shares will be validly issued, fully paid and nonassessable.
The opinion expressed herein is rendered for your benefit in connection with the transactions contemplated herein. The opinion expressed herein may not be used or relied on by any other person, nor may this letter or any copies thereof be furnished to a third party, filed with a government agency, quoted, cited or otherwise referred to without our prior written consent, except as noted below.
We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name in the prospectuses contained therein under the caption "Legal Matters."
Very truly yours,
Dechert
Exhibit 10.31
SELECT MEDICAL CORPORATION
1997 STOCK OPTION PLAN
(Amended and Restated February 22, 2001)
Page
----
1. Purpose................................................................. 1
2. Administration.......................................................... 2
3. Eligibility............................................................. 3
4. Stock................................................................... 3
5. Granting of Options..................................................... 4
6. Annual Limit............................................................ 4
7. Terms and Conditions of Options......................................... 4
8. Option Agreements -- Other Provisions................................... 9
9. Capital Adjustments..................................................... 9
10. Certain Corporate Transactions.......................................... 10
11. Exercise Upon Change in Control......................................... 10
12. Amendment or Termination of the Plan.................................... 11
13. Company's Right of First Refusal and Right to Repurchase Common Stock;
Proxy or Voting Agreement............................................... 12
14. Rights.................................................................. 14
15. Indemnification of Board and Committee.................................. 14
16. Application of Funds.................................................... 15
17. Shareholder Approval.................................................... 15
18. No Obligation to Exercise Option........................................ 15
19. Termination of Plan..................................................... 15
20. Governing Law........................................................... 15
|
SELECT MEDICAL CORPORATION
WHEREAS, Select Medical Corporation, a Delaware corporation, (the "Company") desires to award incentive and nonqualified stock options to certain individuals;
NOW, THEREFORE, effective as of February 22, 2001, the Select Medical Corporation 1997 Stock Option Plan as adopted October 30, 1997 is hereby amended and restated under the following terms and conditions:
For purposes of the Plan, a "Related Corporation" shall mean, solely
in the case of incentive stock options, either a "subsidiary corporation" of the
Company, as defined in Section 424(f) of the Internal Revenue Code of 1986, as
amended (the "Code"), or the "parent corporation" of the Company, as defined in
Section 424(e) of the Code. The term "Related Corporation" shall mean, solely
in the case of nonqualified stock options, any of the following:
(a) A subsidiary corporation of the Company as defined in Section 424(f) of the Code;
(b) A parent corporation of the Company, as defined in Section 424(e) of the Code; or
(c) Any trade or business (whether or not incorporated) which is directly or indirectly owned 50 percent or more by the Company or is directly or indirectly controlled by the Company.
Further, as used in the Plan, (i) the term "ISO" shall mean an option which, at the time such option is granted, qualifies as an incentive stock option within the meaning of
Section 422 of the Code and is designated as an ISO in the "Option Agreement" (as defined in Section 8 hereof); and (ii) the term "NQSO" shall mean an option which, at the time such option is granted, does not qualify as an ISO, and is designated as a nonqualified stock option in the Option Agreement.
(a) The Plan shall be administered by the Company's Stock Option Committee (the "Committee"), the members of which shall be appointed by, and shall serve at the pleasure of, the Company's Board of Directors (the "Board"). The Board shall change the membership of the Committee, to the extent necessary, so that on and after the date the Company first registers equity securities under Section 12 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), the Committee shall consist solely of not fewer than two non- employee directors (within the meaning of Rule 16b-3(b)(3) under the Exchange Act, or any successor thereto) of the Company who are also outside directors (within the meaning of Treas. Reg. Section 1.162-27(e)(3), or any successor thereto) of the Company. Each member of the Committee, while serving as such, shall be deemed to be acting in his or her capacity as a director of the Company.
(b) In the event a committee has not been established in accordance with subsection (a) above, or cannot be constituted to vote on the grant of an Option (for example, because of state laws governing corporate self-dealing), the entire Board shall serve as the Committee for all purposes of the Plan; provided, however, that a member of the Board shall not participate in a vote approving the grant of an Option to himself or herself to the extent provided under the laws of the State of Delaware governing corporate self-dealing.
The Committee shall have full authority, subject to the terms of the Plan, to select the Key Employees, Non-Employee Directors and Consultants to be granted Options under the Plan, to grant Options on behalf of the Company, and to set the date of grant and the other terms of such Options in accordance with the Plan. The Committee may correct any defect, supply any omission, and reconcile any inconsistency in this Plan and in any Option granted hereunder in the manner and to the extent it deems desirable. The Committee may also, in its discretion, (i) cancel an Option and grant a new Option to replace the cancelled Option, or (ii) pay the Key Employee, Non-Employee Director or Consultant an amount equal to the excess of the fair market value of the Common Stock on the date of cancellation over the exercise price of Options which are exercisable at that time. However, if the Committee adjusts the price of an Option or replaces an Option, the resulting Option shall be treated as a new Option granted on the date of such change or replacement and shall comply with the terms of the Plan as such.
The Committee also shall have the authority to establish such rules and regulations, not inconsistent with the provisions of the Plan, for the proper
administration of the Plan, to amend, modify, or rescind any such rules and regulations, and to make such determinations and interpretations under, or in connection with, the Plan, as it deems necessary or advisable. All such rules, regulations, determinations, and interpretations shall be binding and conclusive upon the Company, its shareholders and all Key Employees, Non-Employee Directors and Consultants, upon their respective legal representatives, beneficiaries, successors, and assigns, and upon all other persons claiming under or through any of them.
No member of the Board or the Committee shall be liable for any action or determination made in good faith with respect to the Plan or any Option granted under it.
If any Option granted under the Plan expires or otherwise terminates for any reason whatsoever (including, without limitation, the Optionee's surrender thereof) without having been exercised, the shares subject to the unexercised portion of the Option shall continue to be available for the granting of Options under the Plan as fully as if the shares had never been subject to an Option; provided, however, that (i) if an Option is cancelled, the shares of Common Stock covered by the cancelled Option shall
be counted against the maximum number of shares for which Options may be granted to a single Key Employee, and (ii) if the exercise price of an Option is reduced after the date of grant, the transaction shall be treated as a cancellation of the original Option and the grant of a new Option for purposes of such maximum.
market value of such optioned shares, as determined by the Committee at the time the NQSO is granted.
The fair market value of a share of Common Stock shall mean (i) the
average of the closing prices of the sales of the class of Common Stock on all
securities exchanges on which such Common Stock may at the time be listed, or
(ii) if there have been no sales on any such exchange on any day, the average of
the highest bid and lowest asked prices on all such exchanges at the end of such
day, or (iii) if on any day such Common Stock is not so listed, the average of
the representative bid and asked prices quoted in the NASDAQ System as of 4:00
P.M., New York time, or (iv) if on any day such Common Stock is not quoted in
the NASDAQ System, the average of the highest bid and lowest asked prices on
such day in the domestic over-the-counter market as reported by the National
Quotation Bureau Incorporated or any similar successor organization. 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 shall be the
fair value of such Common Stock as determined in good faith by the Board.
Any exercisable Options may be exercised at any time up to the expiration or termination of the Option. Exercisable Options may be exercised, in whole or in part and from time to time, by giving written notice of exercise to the Company at its principal office, specifying the number of shares to be purchased and accompanied by payment in full of the aggregate Option exercise price for such shares. Only full shares shall be issued under the Plan, and any fractional share which might otherwise be issuable upon exercise of an Option granted hereunder may be forfeited at the Company's discretion.
The Option price shall be payable in the case of an ISO, if the Committee in its discretion causes the Option Agreement so to provide, and in the case of an NQSO, if the Committee in its discretion so determines at or prior to the time of exercise --
(1) in cash or its equivalent;
(2) in shares of Common Stock previously acquired by the
Optionee; provided that (i) if such shares of Common Stock were acquired through
the exercise of an ISO and are used to pay the Option price for ISOs, such
shares have been held by the Optionee for a period of not less than the holding
period described in Section 422(a)(1) of the Code on the date of exercise, or
(ii) if such shares of Common Stock were acquired through the exercise of an
NQSO and are used to pay the Option price of an ISO, or if such shares of Common
Stock were acquired through the exercise of an ISO or an NQSO and are used to
pay the Option price of an NQSO, such shares have been held by the Optionee for
a period of more than one year on the date of exercise;
(3) in shares of Common Stock newly acquired by the Optionee upon exercise of such Option (which shall constitute a disqualifying disposition in the case of an Option which is an ISO);
(4) by delivering a properly executed notice of exercise of the Option to the Company and a broker, with irrevocable instructions to the broker promptly to deliver to the Company the amount of sale or loan proceeds necessary to pay the exercise price of the Option; or
(5) if the Committee so determines, at the date of grant in the case of an ISO, or at or after the date of grant in the case of an NQSO, and if the Optionee thereafter so requests, (i) the Company will loan the Optionee the money required to pay the exercise price of the Option; (ii) any such loan to an Optionee shall be made only at the time the Option is exercised; and (iii) the loan will be made on the Optionee's personal negotiable demand promissory note, bearing interest at the lowest rate which will avoid imputation of interest under Section 7872 of the Code, with a pledge of the Common Stock acquired upon exercise (unless the Committee, at the time of grant, chooses to waive the pledge requirement), and including such other terms as the Committee may prescribe; or
(6) in any combination of (1), (2), (3), (4), and (5) above.
In the event the Option price is paid, in whole or in part, with shares of Common Stock, the portion of the Option price so paid shall be equal to the aggregate fair market value (determined under subsection (b) above, but as of the date of exercise of the Option, rather than the date of grant) of the Common Stock so surrendered in payment of the Option price.
number of shares with respect to which the Optionee could have exercised it on the date of such termination, or to any greater extent permitted by the Committee, by the Optionee at any time prior to the earlier of (i) the expiration date specified in such Option, or (ii) an accelerated expiration date determined by the Committee, in its discretion, and set forth in the Option Agreement; except that, such accelerated expiration date shall not be earlier than the date of the Optionee's termination of employment or service, and in the case of ISOs, such accelerated expiration date shall be no later than three months after such termination of employment or service.
fixed under subsection (e), (f), or (g) above; provided the Optionee or the Optionee's estate, personal representative, or beneficiary consents to such extension. In the case of an ISO, the Optionee or the Optionee's estate, personal representative, or beneficiary must also acknowledge in writing that such extension will cause the ISO to be treated as an NQSO thereafter.
If the exercise of any Option is subject to the withholding requirements of applicable federal tax law, the Committee, in its discretion, may permit or require the Key Employee to satisfy the federal withholding tax, in whole or in part, by electing to have the Company withhold shares of Common Stock subject to the exercise (or by returning previously acquired shares of Common Stock to the Company). The Company may not withhold shares in excess of the number necessary to satisfy the minimum federal income tax withholding requirements. Shares of Common Stock shall be valued, for purposes of this subsection, at their fair market value under subsection (b) above, but as of the date the amount attributable to the exercise of the Option is includable in income by the Key Employee under Section 83 of the Code (the "Determination Date"). If shares of Common Stock acquired by the exercise of an ISO are used to satisfy the withholding requirement described above, such shares of Common Stock must have been held by the Key Employee for a period of not less than the holding period described in Section 422(a)(1) of the Code as of the Determination Date.
The Committee shall adopt such withholding rules as it deems necessary to carry out the provisions of this subsection.
as are appropriate to reflect most nearly such straight mathematical adjustment. Such adjustments shall be made only as necessary to maintain the proportionate interest of Optionees, and preserve, without exceeding, the value of Options.
(a) make all outstanding Options that are not otherwise automatically vested by Section 11, immediately vested and exercisable;
(b) terminate all Options immediately prior to the date of any such transaction, provided that the Optionee shall have been given at least seven days written notice of such transaction and of the Company's intention to cancel all unexercised Options;
(c) cancel all unexercised Options in exchange for a payment in cash of an amount equal to the value of such Options.
(d) require that the Options be assumed by the successor corporation or that stock options of the successor corporation with equivalent value be substituted for such Options; or
(e) take such other action as the Committee shall determine to be reasonable under the circumstances to permit the Optionee to realize the value of the Optionee's Options.
The application of the foregoing provisions, including, without limitation, the issuance of any substitute stock options, shall be determined in good faith by the Committee in its sole discretion. Any adjustment may provide for the elimination of fractional shares. In taking any action described above, the Committee may in its discretion determine that the value of a Option equals the excess of the fair market value of the consideration to be received in the merger, consolidation, combination, acquisition or reorganization had such Option been exercised immediately prior thereto, over the Option exercise price of such Option.
(a) Notwithstanding any provision of this Plan, all outstanding Options shall become fully vested and exercisable upon a Change in Control.
(b) "Change in Control" shall be deemed to have taken place if:
(1) any person, including a group but excluding the Company or any stockholder of the Company as of February 22, 2001, becomes the beneficial owner of shares of the Company having 50 percent or more of the total number of votes that may be cast for the election of directors of the Company other than by acquiring such shares directly from the Company;
(2) there occurs any cash tender or exchange offer for shares of the Company, merger or other business combination, or sale of assets, or any combination of the foregoing transactions, and as a result of or in connection with any such event persons who were directors of the Company before the event shall cease to constitute a majority of the board of directors of the Company or any successor to the Company; or
(3) during any period of two consecutive calendar years beginning after the date of the initial public offering of the Common Stock, members of the Incumbent Board cease for any reason to constitute a majority of the Board; for this purpose, the "Incumbent Board" shall consist of the individuals who at the beginning of such period constitute the entire Board and any new director -- other than a director (i) designated or nominated by, or affiliated with, a person who has entered into an agreement with the Company to effect a transaction described in (2) above, or (ii) who initially assumed office as a result of either an actual or threatened "Election Contest" (as described in Rule 14a-11 under the Exchange Act) or other actual or threatened solicitation of proxies or contests by or on behalf of a person other than the Board (a "Proxy Contest"), including by reason of any agreement intended to avoid or settle any Election Contest or Proxy Contest -- whose election by the Board or nomination for election by the stockholders of the Company was approved by a vote of at least 2/3rds of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved.
(A) change the class of employees eligible to participate in the Plan;
(B) except as permitted under Section 9 hereof, increase the maximum number of shares of Common Stock with respect to which ISOs may be granted under the Plan; or
(C) extend the duration of the Plan under Section 19 hereof with respect to any ISOs granted hereunder.
(2) on and after the date the Company first registers equity securities under Section 12 of the Exchange Act, no amendment may be made which would require shareholder approval pursuant to Treas. Reg. Section 1.162- 27(e)(4)(vi) or any successor thereto.
Notwithstanding the foregoing, no such suspension, discontinuance or amendment shall materially impair the rights of any holder of an outstanding Option without the consent of such holder.
(1) by a method and in a degree that would be treated as adequate under applicable state law in the case of an action requiring shareholder approval (i.e., an action on which shareholders would be entitled to vote if the action were taken at a duly held shareholders' meeting or by a duly executed written consent); or
(2) by a majority of the votes cast (including abstentions, to the extent abstentions are counted as voting under applicable state law), in a separate vote at a duly held shareholders' meeting at which a quorum representing a majority of all outstanding voting stock is, either in person or by proxy, present and voting on the Plan.
An Optionee (or, if applicable, beneficiary) shall give the Company prior written notice (the "Sale Notice") of any proposed Transfer of shares of Common Stock to a third party (a "Transferee") (other than a Transfer in connection with a registered public offering of the Common Stock under the Securities Act or any sale to the public pursuant to Rule 144 promulgated under the Securities Act effected through a broker, dealer, or market maker), identifying the Transferee, the number of shares to be transferred, the amount of cash to be paid for the shares and the other terms and conditions of the proposed Transfer; provided, however in no event may an Optionee transfer any shares of the Common Stock pursuant to this Section for any consideration other than cash payable upon consummation of such Transfer or in installments over time. The Company shall have the right, exercisable by written notice to the Optionee (or beneficiary) within 60 calendar days following its receipt of the Sale Notice, to repurchase the shares intended to be transferred by the Optionee (or beneficiary). The purchase price to be paid to the Optionee (or beneficiary) upon any such repurchase shall be a cash amount equal to the cash amount the Optionee (or beneficiary) would have received from the proposed Transferee upon such Transfer.
Closing with respect to the repurchase of such shares of Common Stock shall take place at the Company's principal office not more than 30 calendar days following the date of the Company's notice of its intention to repurchase the shares intended to be transferred by the Optionee (or beneficiary). The purchase price of such shares shall be paid in cash, by check, or by wire transfer. The Company may pay the purchase price for such shares by offsetting amounts outstanding under any bona fide debts owed by the Optionee to the Company.
If the Company does not elect to repurchase the shares intended to be transferred by the Optionee (or beneficiary), then the Optionee (or beneficiary) may transfer such shares at a price and terms no more favorable to the proposed Transferee during the 60-day period immediately following the expiration of the 60-day period during which the Company could have elected to repurchase the shares. Any shares not transferred within such second 60-day period shall be subject to the provisions of this Section upon a subsequent proposed Transfer.
The restrictions contained in this Section 13 will not apply to (i) Transfers of shares of the Common Stock pursuant to applicable laws of descent and distribution, or (ii) Transfers of shares of the Common Stock among the Optionee's "Family Group" (as defined below); provided that such restrictions will continue to be applicable to the
Common Stock following any such Transfer and the Transferees of such Common Stock have agreed in writing to be bound by the provisions of this Section. For purposes hereof, "Family Group" shall mean the Optionee's spouse and descendants (whether natural or adopted) and any trust created solely for the benefit of the Optionee and/or the Optionee's spouse and/or descendants.
The fair market value of the shares of Common Stock shall be determined, in the case of an exercise of a Repurchase Right under this subsection (c), as of the date the Company gives the Optionee (or the Optionee's legal representative, estate, personal representative, or beneficiary) written notice of its exercise of the Repurchase Right.
Closing with respect to any such repurchase of shares of Common Stock by the Company pursuant to this subsection (c) shall be held as described in subsection (b) above. The purchase price of such shares shall be paid in cash, by check, or by wire transfer. The Company may pay the purchase price for such shares by offsetting amounts outstanding under any bona fide debts owed by the Optionee to the Company. The Company shall be entitled to receive customary representations and warranties from the sellers regarding such sale and to require all sellers' signatures to be guaranteed.
(d) Notwithstanding anything to the contrary contained in this Section, all repurchases of Common Stock by the Company shall be subject to applicable restrictions contained in the Delaware General Corporation Law and in the Company's and its Related Corporations' debt and equity financing agreements. If any such restrictions prohibit the repurchase of Common 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.
and all Options granted hereunder shall be null and void and no additional Options shall be granted hereunder.
EXHIBIT 10.44
SETTLEMENT AGREEMENT
This is a Settlement Agreement (the "Agreement") dated as of July 6, 2000 by and among Select Medical Corporation, a Delaware corporation ("Select"), NC Resources, Inc., a Delaware corporation ("NCR"), NAHC, Inc. (f/k/a/ NovaCare, Inc.), a Delaware corporation ("NAHC"), and NovaCare Holdings, Inc., a Delaware corporation and a wholly-owned indirect subsidiary of NAHC ("NH").
Select, NCR and NAHC entered into the Stock Purchase Agreement dated as of October 1, 1999, as amended (the "SPA"). Capitalized terms used but not defined herein shall have the meanings ascribed to them in the SPA. The parties are in dispute over various claims in connection with the SPA. LDN Stuyvie Partnership, a partnership organized under the laws of Oklahoma ("LDN") has made certain allegations against Select in connection with the SPA including allegations relating to NAHC's and NCR's authority to enter into the SPA. The parties hereto have negotiated a settlement with respect to such claims and now desire to memorialize such settlement.
NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound hereby, Select and NCR agree as follows:
NOW, THEREFORE, in consideration of the mutual covenants contained herein and intending to be legally bound hereby, the parties hereto agree as follows:
Date Amount -------- ----------------- October 2, 2000 $ 450,000 December 1, 2000 $ 450,000 January 2, 2001 $ 450,000 |
NAHC and NCR shall reimburse Select for all costs and expenses, including reasonable attorney's fees, of enforcing Select's rights under this Section 1.
(1) As security for the full, prompt and complete payment and performance of NAHC's and NCR's obligations under Article B, Section 1(a), including all costs, expenses and liabilities (including, without limitation, reasonable attorneys' fees) that may be incurred or advances that may be made by Select in any way in connection with NAHC's, NH's and NCR's obligations, or with respect to the enforcement thereof, or any collateral security therefor, NAHC, NCR and NH hereby grant to Select a security interest under the Pennsylvania Uniform Commercial Code, as amended, under the Delaware Uniform Commercial Code, as amended, and under any other applicable law, in and to any and all of NAHC's, NCR's and NH's accounts receivable, Medicare indemnification receivables or general intangibles, all
proceeds and products thereof and all parts thereof and all accessions thereto (collectively, the "Collateral"), and hereby pledges and assigns to Select all of their right, title and interest in and to the Collateral. If, at any time, the Collateral shall be evidenced by a promissory note or other instrument or chattel paper, NAHC, NCR and NH shall deliver and pledge to Select such note, instrument or chattel paper duly indorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to Select.
(2) As of the time any Collateral becomes subject to the security interest provided for hereby, each of NAHC, NCR and NH hereby warrants, or shall be deemed to warrant, that such Collateral and all papers and documents relating thereto are genuine and in all respects what they purport to be; that such Collateral is valid and subsisting and arises out of a bona fide sale of goods sold and delivered by NAHC, NCR and NH to, or in the process of being delivered to, or out of and for services theretofore actually rendered by NAHC, NCR and NH to the account debtor named therein; that the amount represented as owing is the correct amount actually owing from the account debtor, is not subject to any setoffs or deductions (other than normal trade discounts) or any counter-claim or other defense on the part of such account debtor; that no such Collateral is evidenced by any note unless such instrument or chattel paper has theretofore been endorsed and delivered to the Select; and that no surety bond was required or given in connection with said Collateral or the contracts or purchase orders out of which the same arose.
(1) NAHC, NCR and NH will, forthwith, upon the execution and delivery of this Agreement and thereafter from time to time, cause all required financing statements to be filed, registered and recorded in such manner and in such places as shall be necessary or desirable or as Select may request, to publish notice of and fully protect the lien thereof as it relates to the Collateral, and to continue such protection, refile, reregister and rerecord whenever necessary, and from time to time upon the request of Select will perform or cause to be performed any other act as provided by law and will execute or cause to be executed any and all further instruments for such publication and protection. Without limiting the foregoing, NAHC, NCR and NH hereby authorizes Select to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of NAHC, NCR and NH where permitted by law. A carbon, photographic or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law.
(2) NAHC, NCR and NH shall (i) pay all filing, registration and recording taxes and fees and any federal, or state taxes, duties, imposts, assessments and charges arising out of or in connection with any financing, continuation or termination statements and the security interests created hereby, (ii) sign and execute alone, or with Select, any financing statement or renewal, substitution or correction thereof, (iii) at its sole expense, procure any consents or documents and pay all incidental costs, and (iv) take any acts deemed necessary or desirable by Select, in each case, to protect the security interests of Select under this Agreement against the rights or interests of third parties or to carry into effect the purposes of this Agreement. NH hereby further agree to do any and all further things and to execute any and all further documents (including, without limitation, UCC-1 Financing Statements) as Select shall require and as shall be necessary to further perfect the security interest granted to Select hereunder or to assist Select in enforcing its rights hereunder or to effectuate the delivery (and, if requested, assignment) to Select of all items now or hereafter constituting Collateral.
(1) Any of the following events shall be considered an "Event of Default," if NAHC, NH and NCR do not cure such default or failure described in subsections (a), (b) and (c) hereto, within ten (10) calendar days following written notice of any such default or failure: (a) any default by NAHC and NCR in making any payment under Article B, Section 1(a) if NAHC and NCR; (b) any representation or warranty made by NAHC, NH or NCR in this Article B, Section 2 shall prove to have been incorrect in any material respect when made; or (c) NAHC, NH or NCR shall fail to perform or observe any other term or agreement contained in this Article B, Section 2. Upon the occurrence of an Event of Default, Select may exercise, in addition to all other rights and powers described herein or permitted under applicable law, all remedies available to a secured creditor under the Pennsylvania Uniform Commercial Code, as amended, and under any other applicable law.
(2) At any time after the occurrence of an Event of Default, Select shall have the right to notify any and all account debtors of the assignment of such Collateral to Select and to direct such account debtors or obligors to make payment of all amounts due or to become due to NAHC, NCR or NH thereunder directly to Select and, upon such notification and at the expense of NAHC, NH and NCR, to enforce collection of any such
Collateral, and to adjust, settle or compromise the amount or payment thereof, in the same manner and to the same extent as NAHC, NCR or NH might have done, and NAHC, NCR and NH shall not adjust, settle or compromise the amount or payment of any Collateral, or release wholly or partly any account debtors or obligor thereof, or allow any credit or discount thereon. Notwithstanding the anything to the contrary herein, prior to the occurrence of an Event of Default, NAHC, NCR and NH may use the proceeds of NAHC's, NCR's and NH's accounts receivable in the ordinary course of their business.
(3) Following such notification, the Collateral at any time received by NAHC, NCR or NH shall (unless Select shall otherwise elect in writing) be forthwith accounted for and transmitted to Select, or a bank designated by Select, to an account in its name in the same form as received (not less often than once per week) by NAHC, NCR or NH, shall be received in trust for Select and shall not be commingled with any other funds of NAHC, NH and NCR. In the event that Select shall at any time elect in writing not to have the proceeds transmitted to Select, Select nevertheless shall have and retain the right at any time thereafter to demand that such proceeds be delivered and transmitted to Select as set forth above. The proceeds of the Collateral so transmitted to Select or such designee bank may be handled and administered by Select in and through a remittance or similar account at Select or such bank, and NAHC, NH and NCR acknowledge that the maintenance of such an account by Select is solely for Select's own convenience and that NAHC and NCR does not have any right, title or interest in such remittance or similar account or any amounts at any time credited thereto. NAHC, NCR and NH shall accompany each transmission of proceeds to Select with a report in such form as Select shall require identifying the particular Collateral to which such proceeds apply. Upon the occurrence of an Event of Default, at the request of Select and NAHC, NCR and NH will enter into such lock box arrangements for payments of Collateral as Select shall request.
(4) NAHC, NCR and NH hereby irrevocably appoints Select its attorney-in-fact and proxy, with full authority in its place and stead, in its own name or in the name of NAHC, NCR and NH, from time to time in Select's discretion after the occurrence of an Event of Default, to take any action and to execute any instrument which Select may deem necessary or advisable to accomplish the purposes of this Agreement including, without limitation, to demand, collect, receive, sue for, compound and give acquittance for any and all amounts due or to become due on the Collateral and to endorse the name of NAHC, NCR and NH on all commercial paper given in payment or partial payment thereof and, in addition, may upon the occurrence of an Event of Default, in its discretion, file any claim or take any other action or proceeding which Select may deem necessary or appropriate to protect and preserve and realize upon the security interest of Select in the Collateral and the proceeds thereof.
a. As a material inducement to Select to enter into this Agreement, NCR and NAHC, on behalf of itself and all of its parent and subsidiary corporations and all of their respective officers, directors, employees, agents, shareholders, and assigns, and all persons claiming under or through it or any of them (collectively, "Releasors") hereby release any and all claims, liabilities, obligations, promises, agreements, controversies, damages, actions, causes of action, suits, rights, demands, costs, losses, debts and expenses (including attorneys' fees and costs incurred) of whatsoever kind or nature, whether know or unknown, suspected or unsuspected, that any of them can, shall, or may have against Select, and all of its parent and
c. As of the date hereof, Select is not aware of any Damages sustained or incurred by any Purchaser Indemnified Party based upon a breach by NAHC or NCR of Section 2.20 of the SPA. Select agrees that it will not sue or bring any action against NAHC or NCR for any breach of Section 2.20 of the SPA unless any person or entity makes any allegation inconsistent with the representations set forth in Section 2.20 of the SPA, that is substantially harmful, or potentially substantially harmful, to Select in Select's reasonable judgment.
a. Section 9.01(h) of the SPA is hereby deleted.
b. Section 9.01(m) of the SPA is hereby deleted.
c. Section 9.02(h) of the SPA is amended by replacing the words "twenty-five percent (25%)" with the words "one hundred percent (100%)".
d. Section 9.02 of the SPA is hereby amended by adding before the period at the end of the first sentence thereof, the following:
e. Section 9.04 of the SPA is hereby amended and restated in its entirety to read as follows:
f. Section 9.05(a) of the SPA is hereby deleted.
g. Section 9.05(b) of the SPA is amended by replacing the words "2.07, 2.21, 2.24, 8.15 and 8.20" with the words "2.07 and 2.21".
h. Section 9.08 of the SPA is hereby deleted.
i. Section 9.10 of the SPA is hereby deleted.
j. The SPA is hereby amended to add Section 9.11, as follows:
k. The SPA is hereby amended to add Exhibit 9.02(j) as set forth in Exhibit I hereto.
to recover from the other party all costs and expenses of such suit, including without limitation reasonable attorneys' fees and the reasonable costs of investigation and discovery.
(a) if to NAHC, NH or NCR, to:
NAHC, Inc.
1018 West Ninth Avenue
King of Prussia, Pennsylvania 19406
Attention: Chief Executive Officer
Telecopy: (610) 992-3396
(b) if to Select, to:
Select Medical Corp.
4718 Old Gettysburg Road
Mechanicsburg, PA 17055
Attention: General Counsel
Telecopy: (717) 975-9981
with a copy to:
Dechert Price & Rhoads
4000 Bell Atlantic Tower
1717 Arch Street
Philadelphia, PA 19103
Attention: Carmen J. Romano, Esquire
Telecopy: (215) 994-2222
a. Each party represents and warrants to the others that this Agreement has been duly authorized, executed and delivered by such party and constitutes a valid and legally binding obligation of such party, enforceable against such party in accordance with its terms.
b. This Agreement together with the SPA, as amended by this Agreement, sets forth the entire agreement between NAHC, NCR and Select, and supersedes any and all prior agreements or understandings between NAHC, NCR and Select pertaining to the subject matter hereof, including, without limitation, the letter agreement dated March 27, 2000 by and among NAHC, NCR and Select. Except as amended by this Agreement, the SPA remains in full force and effect.
c. The provisions of this Agreement are severable, and if any part is found to be unenforceable, all other paragraphs shall remain fully valid and enforceable. A finding that any portion of this Agreement is unenforceable shall not affect the validity of NAHC's and NCR's releases of Select in Section 3(a) hereto nor the validity of the termination of the representations set forth in Section 3(b) hereto. This Agreement shall survive the termination of any arrangements contained herein.
d. This Agreement 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.
e. This Agreement 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.
[Signatures Appear On Following Page]
IN WITNESS WHEREOF, the parties hereto have executed this Settlement Agreement the day and year first above written.
SELECT MEDICAL CORPORATION
By: /s/ Michael E. Tarvin ---------------------------------- Name: Michael E. Tarvin Title: Senior Vice President |
NAHC, INC.
By: /s/ David R. Burt ---------------------------------- Name: David R. Burt Title: CEO |
NC RESOURCES, INC.
By: /s/ Robert C. Campbell ---------------------------------- Name: Robert C. Campbell Title: Vice President |
NOVACARE HOLDINGS, INC.
By: /s/ David R. Burt ---------------------------------- Name: David R. Burt Title: CEO |
EXHIBIT 10.45
WHEREAS, the Borrowers have requested that the Lenders (such term and each other capitalized term used but not otherwise defined herein having the meaning assigned to it in the Credit Agreement) approve amendments to certain provisions of the Credit Agreement;
WHEREAS, the undersigned Lenders are willing, on the terms and subject to the conditions set forth herein, to approve such amendments to the Credit Agreement;
NOW, THEREFORE, in consideration of these premises, the Borrowers and the undersigned Lenders hereby agree as follows:
(a) The following definitions are inserted in appropriate alphabetical positions in Section 1.01:
(b) The last sentence of the definition of Collateral and Guarantee
Requirement in Section 1.01 is amended by deleting the word "and" at the end of
clause (ii) thereof and substituting in lieu thereof a comma, and inserting
immediately preceding the period at the end of such sentence the words ", and
(iv) the Obligations guaranteed by, and secured by any Mortgage on real property
of, the Houston Joint Venture may, at the Company's election, be limited to an
amount equal to the aggregate loans and advances made by the Company to the
Houston Joint Venture".
(c) Section 2.11(c) is amended by inserting the following sentence at the end of such Section:
Notwithstanding the foregoing, in the event that Net Proceeds of the Planned IPO are received by or on behalf of the Company or any Subsidiary, the prepayment requirements of this Section 2.11(c) with respect to such Net Proceeds shall be limited to the prepayment of US Term Loans in an amount equal to the sum of (i) $24,000,000 plus (ii) 50% of the excess of such Net Proceeds over $138,000,000.
(d) The words "within 90 days after the Effective Date" are deleted from Section 5.15(a) and the words "on or before March 31, 2001" are substituted in lieu thereof.
(e) The word "and" at the end of Section 6.11(d) is deleted, the period at the end of Section 6.11(e) is deleted and replaced with "; and", and a new Section 6.11(f) is inserted immediately following Section 6.11(e) which shall read as follows:
(f) Section 6.15 is amended and restated in its entirety to read as follows:
without any further action on the part of any Person on such date in an amount equal to the aggregate principal amount of such US Term Lender's outstanding US Term Loans prepaid on such date with the Net Proceeds of the Planned IPO. On the date of such prepayment, Schedule 2.01 shall be deemed to be modified to reflect the increase in the Revolving Commitment of each US Term Lender that indicates its agreement to the terms of this Section 2 on its signature page hereto (and the last sentence of the definition of "Revolving Commitment" shall be deemed to be modified to reflect the resulting increase in the aggregate Revolving Commitments pursuant to this Section 2). Following any increase of any of the Lenders' Revolving Commitments pursuant to this Section 2, any Revolving Loans outstanding prior to the effectiveness of such increase shall continue outstanding until the ends of the respective Interest Periods applicable thereto, and shall then be repaid or refinanced with new Revolving Loans made pursuant to Sections 2.01 and 2.03.
(a) The Administrative Agent (or its counsel) shall have received
copies hereof that, when taken together, bear (i) the signatures of the
Borrowers and the Required Lenders, (ii) the signatures of Canadian Term
Lenders having outstanding Canadian Term Loans and outstanding accepted
B/As representing more than 50% of the sum of the total outstanding
Canadian Term Loans and accepted B/As on the Amendment Effective Date and
(iii) the signatures of each Lender increasing its Revolving Commitment
pursuant to Section 2 of this Amendment.
(b) The Company shall have received gross cash proceeds from the Planned IPO of at least $150,000,000.
(c) The Administrative Agent shall have received a certificate of the President, a Vice President or a Financial Officer of the Company, confirming compliance as of the Amendment Effective Date with the conditions set forth in paragraphs (a) and (b) of Section 4.02 of the Credit Agreement.
(d) The Administrative Agent and the Lenders shall have received all fees, expenses and other consideration presented for payment on or before the date hereof.
Notwithstanding the foregoing, the amendments to the Credit Agreement contained
in Sections 1(b), 1(d) and 1(e) and the insertion of the definition of "Houston
Joint Venture" pursuant to Section 1(a) (and only such amendments) shall become
effective on the date when the conditions specified in clauses (a)(i), (c) and
(d) of this Section 3 are satisfied. The Administrative Agent shall notify the
Borrower and the Lenders of the occurrence of the Amendment Effective Date and
shall distribute to the Borrower and the Lenders an updated Schedule 2.01 on the
date when such Schedule may be modified pursuant to Section 2 hereof.
shall apply and be effective only with respect to the provisions of the Credit Agreement specifically referred to herein.
IN WITNESS WHEREOF, the Borrower and the undersigned Lenders have caused this Amendment to be duly executed by their duly authorized officers, all as of the date first above written.
SELECT MEDICAL CORPORATION,
by:/s/ Michael E. Tarvin _________________________ Name: Michael E. Tarvin Title: Senior Vice President |
CANADIAN BACK INSTITUTE LIMITED,
by:/s/ Michael E. Tarvin _________________________ Name: Michael E. Tarvin Title: Vice President |
THE CHASE MANHATTAN BANK,
individually and as US Agent
and US Collateral Agent,
by: /s/ Stephen P. Rochford __________________________ Name: Stephen P. Rochford Title: Vice President |
THE CHASE MANHATTAN BANK,
individually,
by: /s/ Stephen P. Rochford __________________________ Name: Stephen P. Rochford Title: Vice President |
THE CHASE MANHATTAN BANK OF
CANADA, individually and as
Canadian Agent and Canadian
Collateral Agent,
by: /s/ Drew McDonald __________________________ Name: Drew McDonald Title: Vice President by: /s/ Ralph Kern __________________________ Name: Ralph Kern Title: Vice President |
Name of Institution:
by /s/ Mario Biscardi
_____________________
Name: Mario Biscardi
Title: Commercial Lending
Specialist
by /s/ Sohail Farooq
_____________________
Name: Sohail Farooq
Title: Associate Commercial
Lending Specialist
|
To approve the increase in the above named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by _____________________ Name:
Title:
by _____________________
Name:
Title:
Name of Institution:
by /s/ Douglas J. Weir __________________________ Name: Douglas J. Weir Title: Executive Director by __________________________ Name: Title: |
To approve the increase in the above named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by /s/ Douglas J. Weir __________________________ Name: Douglas J. Weir Title: Executive Director by __________________________ Name: Title: |
Name of Institution:
by /s/ Keith S. Law ____________________ Name: Keith S. Law Title: Vice President by ____________________ Name: Title: |
To approve the increase in the above named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by /s/ Keith S. Law ____________________ Name: Keith S. Law Title: Vice President by ____________________ Name: Title: |
Name of Institution
by /s/ F. Berthelot ____________________ Name: F. Berthelot Title: Vice President by /s/ Michael J. Gibbons ______________________ Name: Michael J. Gibbons Title: Managing Director |
To approve the increase in the aboved named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by /s/ F. Berthelot ____________________ Name: F. Berthelot Title: Vice President by /s/ Michael J. Gibbons ______________________ Name: Michael J. Gibbons Title: Managing Director |
Name of Institution:
by /s/ Richard Bernal ____________________ Name: Richard Bernal Title: Vice President by ____________________ Name: Title: |
To approve the increase in the above named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by /s/ Richard Bernal ____________________ Name: Richard Bernal Title: Vice President by ____________________ Name: Title: |
Name of Institution:
by /s/ Lawrence W. Dessen ______________________ Name: Lawrence W. Dessen Title: Regional Vice President by ____________________ Name: Title: |
To approve the increase in the above named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by /s/ Lawrence W. Dessen ______________________ Name: Lawrence W. Dessen Title: Regional Vice President by ____________________ Name: Title: |
Name of Institution:
by /s/ Carol J.E. Feeley _____________________ Name: Carol J.E. Feeley Title: Vice President by ____________________ Name: Title: |
To approve the increase in the above named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by /s/ Carol J.E. Feeley _____________________ Name: Carol J.E. Feeley Title: Vice President by ____________________ Name: Title: |
Name of Institution:
by /s/ Marie T. Boyer ____________________ Name: Marie T. Boyer Title: by ____________________ Name: Title: |
To approve the increase in the above named institution's Revolving Commitment pursuant to Section 2 of the Amendment:
by /s/ Marie T. Boyer ____________________ Name: Marie T. Boyer Title: by ____________________ Name: Title: |
Exhibit 10.46
WHEREAS, the Borrowers have requested that the Lenders (such term and each other capitalized term used but not otherwise defined herein having the meaning assigned to it in the Credit Agreement) approve an amendment to the Credit Agreement and the First Amendment thereto;
WHEREAS, the undersigned Lenders are willing, on the terms and subject to the conditions set forth herein, to approve such amendments to the Credit Agreement;
NOW, THEREFORE, in consideration of these premises, the Borrowers and the undersigned Lenders hereby agree as follows:
IN WITNESS WHEREOF, the Borrower and the undersigned Lenders have caused this Amendment to be duly executed by their duly authorized officers, all as of the date first above written.
SELECT MEDICAL CORPORATION,
by:
/s/ Michael E. Tarvin
--------------------------
Name: Michael E. Tarvin
Title: Senior Vice
President
|
CANADIAN BACK INSTITUTE LIMITED,
by:
/s/ Michael E. Tarvin -------------------------- Name: Michael E. Tarvin Title: Vice President |
THE CHASE MANHATTAN BANK,
individually and as US Agent
and US Collateral Agent,
by:
/s/ Stephen P. Rochford -------------------------- Name: Stephen P. Rochford Title: Vice President |
THE CHASE MANHATTAN BANK OF
CANADA, individually and as
Canadian Agent and Canadian
Collateral Agent,
by:
/s/ Christine Chan -------------------------- Name: Christine Chan Title: Vice President |
by:
/s/ Drew McDonald -------------------------- Name: Drew McDonald Title: Vice President |
CIBC, INC.
by:
/s/ Douglas J. Weir -------------------------- Name: Douglas J. Weir Title: Executive Director |
CANADIAN IMPERIAL BANK OF COMMERCE,
by:
/s/ John Peebler -------------------------- Name: John Peebler Title: Director |
by:
/s/ Mario Biscardi
--------------------------
Name: Mario Biscardi
Title: Commerical Lending
Specialist
|
FIRST UNION NATIONAL BANK,
by:
/s/ Keith S. Law -------------------------- Name: Keith S. Law Title: Vice President |
MERRILL LYNCH CAPITAL CORP.,
by:
/s/ Carol J.E. Feeley -------------------------- Name: Carol J.E. Feeley Title: Vice President |
MORGAN GUARANTY TRUST CO. OF NY,
by:
/s/ Colleen B. Galle -------------------------- Name: Colleen B. Galle Title: Vice President |
PNC BANK, NATIONAL ASSOCIATION,
by:
/s/ Marie T. Boyer -------------------------- Name: Marie T. Boyer Title: Vice President |
SOCIETE GENERALE,
by:
/s/ Richard Bernal -------------------------- Name: Richard Bernal Title: Director |
SUMMIT BANK,
by:
/s/ Lawrence W. Dessen
--------------------------
Name: Lawrence W. Dessen
Title: Regional Vice
President
|
EXHIBIT 10.47
This is an Amendment dated February 23, 2001 (the "Amendment") to the Employment Agreement (as hereinafter defined) by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and ROCCO A. ORTENZIO, an individual (the "Employee").
A. The Employer and the Employee executed and delivered that certain Employment Agreement dated as of March 1, 2000 and that certain Amendment No. 1 to Employment Agreement dated as of August 8, 2000 (as amended, the "Employment Agreement"). The Employer and the Employee now desire to further amend the Employment Agreement as hereinafter provided.
B. Accordingly, and intended to be legally bound hereby, the Employer and the Employee agree as follows:
1. The Employment Agreement is hereby amended by the addition of the
following new Section 5.03 in its entirety, to be inserted immediately after
Section 5.02:
(A) A specific reference to pertinent provisions of this Agreement;
(B) A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this Section 5.03.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Employer's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were
serving as the Compensation Committee of the Board of Directors of the Employer immediately prior to the Change of Control. The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Employer prior to the Change of Control ("Prior Board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Employer (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Employer) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under Article 5 of this Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his claim for determination to any court having competent jurisdiction regardless of whether he has first exercised his right to have the Employer's decision reconsidered by the Appeal Committee."
2. Except as amended hereby, the Employment Agreement shall continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
SELECT MEDICAL CORPORATION
By:/s/ Michael E. Tarvin
--------------------------------
Michael E. Tarvin,
Senior Vice President
/s/ Rocco A. Ortenzio
-----------------------------------
Rocco A. Ortenzio
|
EXHIBIT 10.48
This is an Amendment dated February 23, 2001 (the "Amendment") to the Employment Agreement (as hereinafter defined) by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and ROBERT A. ORTENZIO, an individual (the "Employee").
A. The Employer and the Employee executed and delivered that certain Employment Agreement dated as of March 1, 2000 and that certain Amendment No. 1 to Employment Agreement dated as of August 8, 2000 (as amended, the "Employment Agreement"). The Employer and the Employee now desire to further amend the Employment Agreement as hereinafter provided.
B. Accordingly, and intended to be legally bound hereby, the Employer and the Employee agree as follows:
1. The Employment Agreement is hereby amended by the addition of the
following new Section 5.03 in its entirety, to be inserted immediately after
Section 5.02:
(A) A specific reference to pertinent provisions of this Agreement;
(B) A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this Section 5.03.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Employer's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were
serving as the Compensation Committee of the Board of Directors of the Employer immediately prior to the Change of Control. The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Employer prior to the Change of Control ("Prior Board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Employer (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Employer) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under Article 5 of this Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his claim for determination to any court having competent jurisdiction regardless of whether he has first exercised his right to have the Employer's decision reconsidered by the Appeal Committee."
2. Except as amended hereby, the Employment Agreement shall continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
SELECT MEDICAL CORPORATION
By:/s/ Michael E. Tarvin
-------------------------------
Michael E. Tarvin,
Senior Vice President
/s/ Robert A. Ortenzio
----------------------------------
Robert A. Ortenzio
|
EXHIBIT 10.49
This is an Amendment dated February 23, 2001 (the "Amendment") to the Employment Agreement (as hereinafter defined) by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and PATRICIA A. RICE an individual (the "Employee").
A. The Employer and the Employee executed and delivered that certain Employment Agreement dated as of March 1, 2000 and that certain Amendment No. 1 to Employment Agreement dated as of August 8, 2000 (as amended, the "Employment Agreement"). The Employer and the Employee now desire to further amend the Employment Agreement as hereinafter provided.
B. Accordingly, and intended to be legally bound hereby, the Employer and the Employee agree as follows:
1. The portion of the first sentence of Section 5.01(a) of the Employment Agreement which appears before clause (A) is hereby amended and restated as follows:
2. The Employment Agreement is hereby amended by the addition of the
following new Section 5.03 in its entirety, to be inserted immediately after
Section 5.02:
(A) A specific reference to pertinent provisions of this Agreement;
(B) A description of any additional material of information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this Section 5.03.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Employer's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were serving as the Compensation Committee of the Board of Directors of the Employer immediately prior to the Change of Control. The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Employer prior to the Change of Control ("Prior board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or her duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Employer (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Employer) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under Article 5 of this Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit her claim for
determination to any court having competent jurisdiction regardless of whether she has first exercised her right to have the Employer's decision reconsidered by the Appeal Committee."
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 Amendment as of the date first above written.
SELECT MEDICAL CORPORATION
By:/s/ Robert A. Ortenzio
----------------------------
Robert A. Ortenzio,
President
/s/ Patricia A. Rice
-------------------------------
Patricia A. Rice
|
EXHIBIT 10.50
This is an Amendment dated February 23, 2001 (the "Amendment") to the Employment Agreement (as hereinafter defined) by and between SELECT MEDICAL CORPORATION, a Delaware corporation (the "Employer"), and LEROY S. ZIMMERMAN, an individual (the "Employee").
A. The Employer and the Employee executed and delivered that certain Employment Agreement dated as of May 22, 2000 (the "Employment Agreement"). The Employer and the Employee now desire to amend the Employment Agreement as hereinafter provided.
B. Accordingly, and intended to be legally bound hereby, the Employer and the Employee agree as follows:
1. The Employment Agreement is hereby amended by the addition of the
following new Section 5.03 in its entirety, to be inserted immediately after
Section 5.02:
(A) A specific reference to pertinent provisions of this Agreement;
(B) A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this
Section 5.03.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Employer's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were serving as the Compensation Committee of the Board of Directors of the Employer immediately prior to the Change of Control. The Appeal Committee shall select from its membership a
chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Employer prior to the Change of Control ("Prior Board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Employer (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Employer) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under Article 5 of this Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his claim for determination to any court having competent jurisdiction regardless of whether he has first exercised his right to have the Employer's decision reconsidered by the Appeal Committee."
2. Except as amended hereby, the Employment Agreement shall continue in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have executed this Amendment as of the date first above written.
SELECT MEDICAL CORPORATION
By: /s/ Michael E. Tarvin
-----------------------
Michael E. Tarvin,
Senior Vice President
/s/ LeRoy S. Zimmerman
---------------------------
LeRoy S. Zimmerman
|
EXHIBIT 10.51
SELECT MEDICAL CORPORATION
P.O. Box 2034, 4716 Old Gettysburg Road
Mechanicsburg, Pennsylvania 17055
February 23, 2001
Mr. Edward R. Miersch
Select Medical Corporation
P.O. Box 2034
4716 Old Gettysburg Road
Mechanicsburg, PA 17055
Dear Mr. Miersch:
The following will confirm our desire to amend the Letter Agreement dated as of March 1, 2000 (the "Letter 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 Amendment to the Letter Agreement (the "Amendment"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
1. The portion of Section 1 of the Letter Agreement which appears before clause (ii) is hereby amended and restated as follows:
"A "Covered Termination" shall be deemed to occur if (i) within the five-year period immediately following a Change of Control (as defined below), (a) your employment with the Company is terminated by the Company without Cause (as defined below), (b) there is a reduction by the Company in your compensation from that in effect prior to such Change of Control, or (c) you are required to be based anywhere other than the Company's principal executive offices in (or within 25 miles of) King of Prussia, 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),"
2. Section 3(c) of the Letter Agreement is hereby amended and restated as follows:
3. The Letter Agreement is hereby amended by the addition of the following
Section 7 in its entirety, to be inserted immediately after Section 6 in its
entirety:
(A) A specific reference to pertinent provisions of this Letter Agreement;
(B) A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this Section 7.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Company's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were serving as the Compensation Committee of the Board of Directors of the Company immediately prior to the Change of Control. The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Company prior to the Change of Control ("Prior Board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Letter
Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Company (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Company) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under this Letter Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his or her claim for determination to any court having competent jurisdiction regardless of whether he or she has first exercised his or her right to have the Company's decision reconsidered by the Appeal Committee."
4. Except as amended hereby, the Letter Agreement shall continue in effect in accordance with its terms.
Please indicate your acceptance of the above Amendment 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 10.52
SELECT MEDICAL CORPORATION
P.O. Box 2034, 4716 Old Gettysburg Road
Mechanicsburg, Pennsylvania 17055
February 23, 2001
Mr. Martin F. Jackson
Select Medical Corporation
P.O. Box 2034
4716 Old Gettysburg Road
Mechanicsburg, PA 17055
Dear Mr. Jackson:
The following will confirm our desire to amend the Letter Agreement dated as of March 1, 2000 (the "Letter 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 Amendment to the Letter Agreement (the "Amendment"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
1. The portion of Section 1 of the Letter Agreement which appears before clause (ii) is hereby amended and restated as follows:
"A "Covered Termination" shall be deemed to occur if (i) within the five-year period immediately following a Change of Control (as defined below), (a) your employment with the Company is terminated by the Company without Cause (as defined below), (b) there is a reduction by the Company in your compensation from that in effect prior to such Change of Control, or (c) 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),"
2. Section 3(c) of the Letter Agreement is hereby amended and restated as follows:
3. The Letter Agreement is hereby amended by the addition of the following
Section 7 in its entirety, to be inserted immediately after Section 6 in its
entirety:
(A) A specific reference to pertinent provisions of this Letter Agreement;
(B) A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this Section 7.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Company's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were serving as the Compensation Committee of the Board of Directors of the Company immediately prior to the Change of Control. The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Company prior to the Change of Control ("Prior Board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Letter
Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Company (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Company) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under this Letter Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his or her claim for determination to any court having competent jurisdiction regardless of whether he or she has first exercised his or her right to have the Company's decision reconsidered by the Appeal Committee."
4. Except as amended hereby, the Letter Agreement shall continue in effect in accordance with its terms.
Please indicate your acceptance of the above Amendment 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 10.53
SELECT MEDICAL CORPORATION
P.O. Box 2034, 4716 Old Gettysburg Road
Mechanicsburg, Pennsylvania 17055
February 23, 2001
Mr. S. Frank Fritsch
Select Medical Corporation
P.O. Box 2034
4716 Old Gettysburg Road
Mechanicsburg, PA 17055
Dear Mr. Fritsch:
The following will confirm our desire to amend the Letter Agreement dated as of March 1, 2000 (the "Letter 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 Amendment to the Letter Agreement (the "Amendment"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
1. The portion of Section 1 of the Letter Agreement which appears before clause (ii) is hereby amended and restated as follows:
"A "Covered Termination" shall be deemed to occur if (i) within the five-year period immediately following a Change of Control (as defined below), (a) your employment with the Company is terminated by the Company without Cause (as defined below), (b) there is a reduction by the Company in your compensation from that in effect prior to such Change of Control, or (c) 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),"
2. Section 3(c) of the Letter Agreement is hereby amended and restated as follows:
3. The Letter Agreement is hereby amended by the addition of the following
Section 7 in its entirety, to be inserted immediately after Section 6 in its
entirety:
(A) A specific reference to pertinent provisions of this Letter Agreement;
(B) A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this Section 7.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Company's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were serving as the Compensation Committee of the Board of Directors of the Company immediately prior to the Change of Control. The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Company prior to the Change of Control ("Prior Board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Letter
Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Company (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Company) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under this Letter Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his or her claim for determination to any court having competent jurisdiction regardless of whether he or she has first exercised his or her right to have the Company's decision reconsidered by the Appeal Committee."
4. Except as amended hereby, the Letter Agreement shall continue in effect in accordance with its terms.
Please indicate your acceptance of the above Amendment 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/ S. Frank Fritsch
---------------------------
S. Frank Fritsch
|
EXHIBIT 10.54
SELECT MEDICAL CORPORATION
P.O. Box 2034, 4716 Old Gettysburg Road
Mechanicsburg, Pennsylvania 17055
February 23, 2001
Mr. Michael E. Tarvin
Select Medical Corporation
P.O. Box 2034
4716 Old Gettysburg Road
Mechanicsburg, PA 17055
Dear Mr. Tarvin:
The following will confirm our desire to amend the Letter Agreement dated as of March 1, 2000 (the "Letter 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 Amendment to the Letter Agreement (the "Amendment"), the Company and you hereby agree, intending to be legally bound hereby, as follows:
1. The portion of Section 1 of the Letter Agreement which appears before clause (ii) is hereby amended and restated as follows:
"A "Covered Termination" shall be deemed to occur if (i) within the five-year period immediately following a Change of Control (as defined below), (a) your employment with the Company is terminated by the Company without Cause (as defined below), (b) there is a reduction by the Company in your compensation from that in effect prior to such Change of Control, or (c) 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),"
2. Section 3(c) of the Letter Agreement is hereby amended and restated as follows:
3. The Letter Agreement is hereby amended by the addition of the following
Section 7 in its entirety, to be inserted immediately after Section 6 in its
entirety:
(A) A specific reference to pertinent provisions of this Letter Agreement;
(B) A description of any additional material or information necessary for the Claimant to perfect the claim if possible, and an explanation of why such material or information is needed; and
(C) An explanation of the claim review procedure set forth in this Section 7.
Within sixty (60) days of receipt of the information described above, the Claimant shall, if further review is desired, file a written request of reconsideration of the Company's decision with the Appeal Committee. The Appeal Committee shall consist of those individuals who were serving as the Compensation Committee of the Board of Directors of the Company immediately prior to the Change of Control. The Appeal Committee shall select from its membership a chairperson and a secretary and may adopt such rules and procedures as it deems necessary to carry out its functions. In the event any individual is unable to serve on the Appeal Committee, then the chairperson of the Appeal Committee shall appoint a successor provided such successor must have been a member of the Board of Directors of the Company prior to the Change of Control ("Prior Board Member"). So long as the Claimant's request for review is pending with the Appeal Committee (including such 60-day period), the Claimant, or his duly authorized representative, may review pertinent documents and may submit issues and comments in writing to the Appeal Committee. A final and binding decision shall be made by the Appeal Committee within thirty (30) days of the filing by the Claimant of the request for reconsideration. The Appeal Committee's decision shall be conveyed to the Claimant in writing and shall include specific reasons for the decision and specific references to the pertinent provisions of this Letter
Agreement on which the decision is based. The Appeal Committee shall discharge its duties under this claims procedure in accordance with the fiduciary standards of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and in doing so, to the extent permitted by law, shall be indemnified and held harmless by the Company (to the extent not indemnified or saved harmless under any liability insurance or other indemnification arrangement with the Company) for or against all liability to which the Appeal Committee may be subjected by reason of any act done in good faith with respect to the adjudication of any claim under this Letter Agreement, including reasonable expenses. Notwithstanding anything to the contrary herein contained, the Claimant shall be entitled to submit his or her claim for determination to any court having competent jurisdiction regardless of whether he or she has first exercised his or her right to have the Company's decision reconsidered by the Appeal Committee."
4. Except as amended hereby, the Letter Agreement shall continue in effect in accordance with its terms.
Please indicate your acceptance of the above Amendment 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 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 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 Champion Physical Therapy, Inc. Pennsylvania C.O.A.S.T. Institute Physical Therapy, Inc. California Connecticut NovaCare Ventures, Inc. Connecticut 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 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 Metro Rehabilitation Services, Inc. Michigan Michigan Therapy Centre, Inc. Michigan MidAtlantic Health Group, Inc. Delaware 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, 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 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 (Michigan), Inc. Delaware RCI (S.P.O.R.T.), Inc. 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 - 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 Network, Inc. Oregon Robert M. Bacci, R.P.T. Physical Therapy, Inc. California S.T.A.R.T., Inc. Massachusetts Select Air Corporation Delaware Select Employment Services, Inc. Delaware Select Hospital 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 - Akron II, Inc. Delaware 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 - 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 - Jackson, 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 SLMC Finance Corporation Delaware 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, Inc. 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 |
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 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 Yuma Rehabilitation Center, Inc. Arizona |
Canadian Subsidiaries Province of Incorporation --------------------- ------------------------- Canadian Back Institute Limited Ontario 1263568 Ontario Limited Ontario Dynamic Rehabilitation, Inc. Ontario Eastern Rehabilitation, Inc. Ontario U.S. Partnerships and Limited Liability Companies State of Formation ------------------------------------------------- ------------------ Avalon Rehabilitation & Healthcare, LLC Delaware Kentucky Orthopedic Rehabilitation, LLC Delaware Medical Information Management Systems, LLC Delaware Millennium Rehab Services, LLC Delaware NovaCare Health Group, LLC Delaware NW Rehabilitation Associates, L.P. Delaware Rehab Advantage Therapy Services, LLC Delaware Select Management Services, LLC Delaware Select - Houston Partners, L.P. Delaware Select Software Ventures, LLC Delaware Select Specialty Hospital - Houston, L.P. Delaware TJ Corporation I, L.L.C. 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 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
----------------------- ------------------
DVMC/U.S. Regional Partnership Pennsylvania
GP Therapy, L.L.C. Georgia
Garrett Rehab Services, LLC Maryland
Gill/Balsano Consulting, L.L.C. Delaware
Mercy/Joyner Associates Pennsylvania
Mt. Sinai/U.S. Regional Occupational
and Sports Medicine, Inc. Pennsylvania
Optima Rehabilitation Services, Ltd. Ohio
Optima Rehabilitation Services II, Ltd. Ohio
Pennsylvania Mt. Sinai/
U.S. Regional Occupational &
Sports Medicine, Inc. Pennsylvania
Work Horizons, Ltd. Ohio
Canadian Minority Interests Province of Incorporation
--------------------------- -------------------------
CBI Physical Therapy Inc. Ontario
CBI Physiotherapists Corp. Ontario
CBI Professional Services Inc. Ontario
Foreign Minority Interests Country of Incorporation
-------------------------- ------------------------
Raffles Insurance Limited Cayman Islands
-8-
|
Exhibit 23.1
We hereby consent to the use in this Registration Statement on Form S-1 of our reports dated February 16, 2001, except for paragraph 8 of Note 7 which is dated March 28, 2001, 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 Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP Harrisburg, Pennsylvania March 28, 2001 |
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 No. 333-48856) and related Prospectus of Select Medical Corporation for the registration of 12,500,000 shares of its common stock.
/s/ ERNST & YOUNG LLP
Nashville, Tennessee
March 27, 2001
|
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 (Registration No. 333-48856) of Select Medical Corporation, to be filed with the Securities and Exchange Commission on or about March 28, 2001 and to the reference to our firm under the heading "Experts" in the prospectus.
/s/ KPMG LLP St. Louis, Missouri March 28, 2001 |
Exhibit 23.5
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" and "Selected Financial Data" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 28, 2001 |