<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 10, 1996
REGISTRATION STATEMENT NO. 333-08899
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
INTENSIVA HEALTHCARE CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 8069 43-1690769
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF
INCORPORATION OR CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
ORGANIZATION)
7733 FORSYTH BLVD., 11TH FLOOR
ST. LOUIS, MISSOURI 63105
(314) 725-0112
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICE)
</TABLE>
------------------------
DAVID W. CROSS, PRESIDENT
INTENSIVA HEALTHCARE CORPORATION
7733 FORSYTH BLVD., 11TH FLOOR
ST. LOUIS, MISSOURI 63105
(314) 725-0112
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
<TABLE>
<S> <C>
LARRY K. HARRIS, ESQ. JOHN J. EGAN III, ESQ.
SUELTHAUS & WALSH, P.C. GOODWIN, PROCTER & HOAR LLP
7733 FORSYTH BLVD., 12TH FLOOR EXCHANGE PLACE
ST. LOUIS, MISSOURI 63105 BOSTON, MASSACHUSETTS 02109
(314) 727-7676 (617) 570-1000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM PROPOSED MAXIMUM
SECURITIES TO BE AMOUNT TO OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
REGISTERED BE REGISTERED(1) SHARE(2) PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
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Common Stock, $0.001 par
value................. 2,875,000 Shares $8.00 $23,000,000 $7,931.04(3)
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</TABLE>
(1) Includes 375,000 shares of Common Stock which the underwriters have the
option to purchase solely to cover over-allotments, if any.
(2) Estimated solely for purposes of calculating the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
(3) Registrant previously paid $14,570.00.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
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<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED OCTOBER 10, 1996
PROSPECTUS
2,500,000 SHARES
INTENSIVA LOGO
COMMON STOCK
All 2,500,000 shares of common stock (the "Common Stock") offered hereby
are being sold by Intensiva HealthCare Corporation (the "Company"). Up to
250,000 shares of Common Stock offered hereby may be purchased by affiliates of
Weiss, Peck & Greer, an existing stockholder of the Company.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price for the Common Stock will be between $7.00 and $8.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price. The Common Stock has been approved for
quotation on the Nasdaq National Market upon completion of the offering under
the trading symbol "IHCC."
------------------
THE SHARES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK FACTORS" ON
PAGE 6.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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<TABLE>
<S> <C> <C> <C>
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share................................... $ $ $
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Total(3).................................... $ $ $
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</TABLE>
(1) See "Underwriting" for indemnification arrangements with the several
Underwriters.
(2) Before deducting expenses payable by the Company estimated at $600,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to 375,000 additional shares of Common Stock solely to cover
over-allotments, if any. To the extent that the option is exercised, the
Underwriters will offer the additional shares at the Price to Public set
forth above. If all such shares are purchased, the total Price to Public,
Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , respectively. See "Underwriting."
------------------
The shares of Common Stock are offered by the several Underwriters, subject
to prior sale, receipt and acceptance by them, and subject to the right of the
Underwriters to reject any order in whole or in part and certain other
conditions. It is expected that certificates for such shares will be available
for delivery on or about , 1996, at the offices of the agent of
Hambrecht & Quist LLC in New York, New York.
HAMBRECHT & QUIST
ROBERTSON, STEPHENS & COMPANY
NEEDHAM & COMPANY, INC.
, 1996
<PAGE> 3
INTENSIVA LOGO
HIGHLY SPECIALIZED MEDICAL SERVICES FOR CRITICALLY ILL OR INJURED PATIENTS
PATIENT PROFILE CHART
<TABLE>
<CAPTION>
PATIENT PROFILES
CLINICAL MEDICALLY UNSTABLE CRITICALLY ILL OR INJURED, MEDICALLY STABLE,
REQUIREMENTS WITH UNDETERMINED UNSTABLE WITH MULTIPLE REQUIRING MEDICAL
DIAGNOSTIC/INVASIVE MEDICAL CONDITIONS MAINTENANCE AND
INTERVENTIONS REHABILITATION
<S> <C> <C> <C>
DIAGNOSTIC STUDIES Frequent/Expensive ROUTINE/LESS EXPENSIVE Infrequent/Inexpensive
IMAGING STUDIES Frequent/Expensive INFREQUENT/LESS EXPENSIVE Seldom/Inexpensive
SURGICAL INTERVENTIONS Yes MINOR PROCEDURES None
SPECIALIZED MONITORING Yes YES No
PHYSICIAN VISITS Daily DAILY 1-2 Times Per Week
NURSING HOURS PER PATIENT DAY Intensive Care 12+ 8-10 3-5
General Care 5-6
TREATMENT METHODOLOGY Individual Patient PROGRAMMATIC CARE FOR Programmatic Care for
Protocols MEDICALLY UNSTABLE PATIENTS Medically Stable Patients
AVERAGE LENGTH OF STAY 4-6 Days 30-60 DAYS 15-20 Days
COST EFFECTIVE SETTING General Acute ACUTE LONG-TERM CARE HOSPITAL Subacute/Skilled
Care Hospital Nursing Facilities
MEDICARE REIMBURSEMENT PPS/DRG COST BASED; PPS/DRG EXEMPT Primarily Cost Based
</TABLE>
"Intensiva HealthCare" is a trademark of the Company.
------------------------
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH MAY STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON
STOCK OF THE COMPANY AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE
OPEN MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including notes thereto, appearing
elsewhere in this Prospectus. Investors should carefully consider the
information set forth under the heading "Risk Factors."
THE COMPANY
Intensiva HealthCare Corporation ("Intensiva" or the "Company") provides
highly specialized, acute long-term care for critically ill or injured patients
who require intensive medical monitoring and treatment, and who often have
multiple medical conditions and are medically unstable. The Company provides
high quality, cost effective, specialized care for its patients, who typically
require an average length of stay of greater than 25 days in an intensive
inpatient setting. Intensiva's medical staffs provide specialized medical
services, as well as nursing and respiratory care, and the Company is developing
disease-specific pathways to treat patients with pulmonary, cancer, renal and
cardiac conditions, among others. The Company's clinical programs utilize
specialized staff, equipment and protocols for the treatment of its patients.
Extended stay critically ill or injured patients are difficult and
expensive to treat and, as a result, are in danger of becoming disenfranchised
by the current health care system. These patients generally require an
interdisciplinary team of specialists due to their multiple system deficits and
the critical nature of their illnesses or injuries. Traditional acute care
hospitals serve a general population which consists primarily of short-stay
patients. These hospitals are not well positioned to provide the most cost
effective services to critically ill and injured extended stay patients because
of their focus and lack of critical mass with respect to these patients.
Traditional hospitals have an incentive to discharge these patients to other
specialty care providers as soon as practicable. In addition, payors are seeking
specialized clinical programs that provide high quality, predictable outcomes
that demonstrate reduced cost for this disenfranchised, expensive patient
population. The Company estimates that the cost of treatment for this discrete
patient population exceeds $2 billion annually.
Intensiva leases underutilized space from general acute care hospitals
("Host Hospitals") in underserved secondary markets, creating a separate
"hospital within a hospital." By leasing space from the Host Hospital, Intensiva
is able to minimize capital and overhead costs, including owning and operating
the physical plant and expensive medical and diagnostic equipment. The Company
is able to purchase certain services from its Host Hospitals, such as laboratory
and radiology (MRI, CAT Scan, X-Ray), as well as hotel services such as laundry,
housekeeping, dietary and property management. The Company's business model
provides for each of its specialized hospitals to become certified by Medicare
as a "long-term care hospital" and exempt from Medicare's Prospective Payment
System ("PPS") after a minimum of six months of operations, and receive
cost-based reimbursement, which the Company believes is more appropriate given
the medical condition of its patients.
The Company's objective is to be a leading provider of high quality,
clinically appropriate, cost effective care for critically ill or injured
patients requiring extended lengths of stay. To achieve this goal the Company
intends to: (i) penetrate underserved secondary markets, defined as service area
populations of one million or less; (ii) maintain and develop key referral
sources, including managed care organizations and insurance companies; (iii)
explore the development of management services organizations; (iv) maintain a
highly focused admissions process; (v) expand its clinical protocols to address
the needs of patients with similar diagnoses; and (vi) leverage its existing
infrastructure. As of October 1, 1996, the Company operated seven clinical
programs in four states (254 beds), had an additional three clinical programs
under development in three states (98 beds), and had entered into a letter of
intent to open an additional clinical program (30 beds).
3
<PAGE> 5
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by the Company................... 2,500,000 shares
Common Stock to be outstanding after the Offering..... 9,530,067 shares(1)
Use of proceeds....................................... For development of additional
facilities, working capital and
general corporate purposes,
including possible acquisitions. See
"Use of Proceeds."
Nasdaq National Market symbol......................... IHCC
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED STATISTICAL DATA)
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM ENDED
JULY 18, 1994 YEAR JUNE 30,
THROUGH ENDED --------------------------
DEC. 31, 1994 DEC. 31, 1995 1995 1996
-------------- ------------- ----------- -----------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues............................ $ -- $ 1,488 $ 165 $ 6,076
Operating expenses...................... -- 2,521 714 6,305
General and administrative.............. 214 1,884 736 1,324
Provision for doubtful accounts......... -- 139 30 150
Depreciation and amortization........... -- 29 14 249
Operating income (loss)................. (214) (3,085) (1,329) (1,952)
Interest (expense) income, net.......... (1) 238 128 202
Net income (loss)....................... $ (215) $(2,847) $ (1,201) $(1,750)
Pro forma:(2)
Net income (loss) per share.......... $(0.39) $(0.24)
Weighted average shares
outstanding........................ 7,268 7,268
SELECTED STATISTICAL DATA:
Long-term exempt hospitals:
Open at end of period................ -- 1 -- 1
Average daily census(3).............. -- 6 -- 17
Medicare revenue(4).................. -- 44.4% -- 45.5%
All other facilities:
Open at end of period................ -- 1 1 5
Average daily census(3).............. -- 1 4 18
Medicare revenue(4).................. -- 100.0% 92.3% 90.9%
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------------
PRO FORMA
ACTUAL PRO FORMA(2) AS ADJUSTED(5)
------- ------------ --------------
<S> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents.............................. $ 5,217 $ 5,217 $ 22,055
Working capital........................................ 8,564 8,564 25,402
Total assets........................................... 13,431 13,431 30,269
Long-term obligations.................................. 710 710 710
Stockholders' equity................................... 10,040 10,040 26,878
</TABLE>
See notes on following page.
4
<PAGE> 6
(1) Does not include 15,950 shares issuable upon the exercise of warrants at a
weighted average exercise price of $3.76 and 575,850 shares issuable upon
the exercise of options at a weighted average exercise price of
approximately $0.74, in each case outstanding as of August 31, 1996. See
"Capitalization," "Management" and Notes 4 and 9 of Notes to Consolidated
Financial Statements.
(2) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of net loss per share, weighted average shares
outstanding and pro forma balance sheet information.
(3) Average daily census for all applicable facilities. Computed by dividing
total patient days by the number of days in the applicable period that each
facility was open.
(4) As a percentage of net revenues. Excludes net revenues from managed care
organizations including Medicare managed care, traditional indemnity
insurers, third-party administrators and other non-governmental payors.
(5) Adjusted to give effect to the sale of Common Stock offered hereby at an
assumed initial public offering price of $7.50, and application of the net
proceeds therefrom and conversion of the Convertible Preferred Stock into
Common Stock. See "Use of Proceeds" and "Capitalization."
Except as otherwise stated, all information in this Prospectus assumes no
exercise by the Underwriters of their option to purchase from the Company up to
375,000 shares of Common Stock to cover over-allotments, if any, and has been
adjusted to reflect the occurrence of the following transactions on or before
closing of this Offering: (i) conversion of the Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock (the "Convertible Preferred
Stock") into 5,697,967 shares of Common Stock; and (ii) the filing and
effectiveness of the Company's Third Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation").
5
<PAGE> 7
RISK FACTORS
In addition to the other information in this Prospectus, the following risk
factors should be considered carefully in evaluating the Company and its
business before purchasing the Common Stock offered hereby. This Prospectus
contains forward-looking statements which involve risks and uncertainties. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors, including those set
forth in the following risk factors and elsewhere in this Prospectus.
History of Operating Losses; Uncertainty of Profitability. As a result of
its early stage of development, the Company has generated limited revenue to
date, has experienced operating losses since its inception in 1994, and has not
yet achieved profitability. The Company had operating losses of approximately
$2.0 million for the six-month period ending June 30, 1996, and an accumulated
deficit of approximately $4.8 million at June 30, 1996. At the present time, the
Company anticipates that it will continue to generate losses through at least
the second quarter of 1997. There can be no assurance that the Company will
successfully penetrate the market for its targeted patient population or that
the Company will ever produce significant levels of net revenues or achieve
sustainable profitability. In addition, the Company may fail to attract
sufficient patients, develop acceptance among referral sources and payors or
receive adequate reimbursement from governmental and non-governmental payors,
any of which may limit the Company's ability to achieve profitability. The
likelihood of the Company's success must be considered in light of these and
other challenges, expenses, complications and delays frequently encountered in
connection with the formation of a new business and the development and
commercialization of new services. The Company may also experience fluctuations
in net revenues and earnings as a result of its rate of development of new
facilities and other factors such as the mix of non-exempt and exempt hospitals.
See "Management Discussion and Analysis of Financial Condition and Results of
Operations" "--Dependence on Host Hospitals," "--Reliance Upon Referral Sources"
and "--Payor Mix."
Limited Operating Experience. The Company has limited experience operating
acute long-term care facilities and providing care to critically ill and injured
patients. Further, the Company is seeking to substantially expand the number of
facilities it operates. There can be no assurance that the Company will be able
to successfully operate its business, particularly in light of the Company's
expansion plans. Failure to successfully operate the Company's business would
have a material adverse effect on the Company's business, financial condition or
results of operation.
Health Care Reform; Reliance Upon Government Programs; Possible Reduction
in Reimbursement. Approximately 44% and 65% of the Company's net revenues in
1995, and the six months ended June 30, 1996, respectively, were derived from
payments made by Medicare. The Company's hospitals operate under an exemption
from Medicare's Prospective Payment System ("PPS") pursuant to which non-exempt
hospitals are reimbursed based upon diagnosis-related groups ("DRGs"). This
exemption, created in 1983, was intended to be temporary. Efforts to eliminate
this exemption, coupled with increasing budgetary pressures may lead to
substantial changes in government-sponsored health care programs. Currently,
there are various proposals which, if enacted, would affect Medicare and
Medicaid reimbursement for long-term care hospitals. President Clinton's 1997
budget proposal would put a moratorium on the exemption from PPS for new
long-term care hospitals. The moratorium would be effective upon enactment of
the proposed legislation, or possibly retroactive to October 1, 1995. The effect
of the moratorium would be to reimburse new long-term care hospitals under PPS
on the same basis that general acute care hospitals are reimbursed. From an
economic perspective, the Company could not open new long-term care hospitals
under that reimbursement system, and if existing Company hospitals (none of
which were certified as long-term care hospitals as of October 1, 1995) are
included within the scope of the moratorium, those hospitals would also be
reimbursed at rates below incurred costs, rendering these hospitals
unprofitable. For existing long-term care hospitals, the President's budget
proposal would rebase cost limits for all long-term care hospitals, capping
reimbursable operating costs at 150% of the national mean inpatient operating
costs for all long-term care hospitals. Because of the high acuity of the
patients in the Company's hospitals, the Company's costs for Medicare patients
would probably exceed the amount of Medicare reimbursement for those
6
<PAGE> 8
patients if the President's proposal is enacted. Further, for existing long-term
care hospitals, the President's budget proposal would reduce capital payments by
15%, reduce future increases in the operating cost limits, eliminate incentive
payments for long-term care hospitals that reduce costs below cost ceilings and
treat a move from a PPS hospital to a PPS exempt setting as a transfer rather
than a discharge. All of the President's budget proposals would reduce Medicare
reimbursement to the Company's hospitals. The President's current proposals on
these issues are similar to those contained in his 1996 budget proposal. In the
Balanced Budget Act of 1995, which was vetoed by President Clinton, long-term
care hospitals' reimbursable operating costs would have been limited to 130% of
the average payment amount for all long-term care hospitals based on cost
reports for cost years beginning in 1991. Implementation of this proposal could
have imposed a de facto moratorium on the creation of new long-term care
hospitals that treat high acuity Medicare patients. Also, the Balanced Budget
Act of 1995 would have reduced capital payments to long-term care hospitals as
well as reduced future ceilings for operating cost increases. It is anticipated
that the Republican's 1997 budget plan would include most of the same provisions
for Medicare providers contained in the Balanced Budget Act of 1995. All of
these additional potential proposals would reduce Medicare payments to the
Company's hospitals. Other proposals to reform Medicare that contain these and
other changes to Medicare are being actively considered. The Company cannot
predict what or when legislation, if any, may be enacted. Any such legislation
may have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business--Government Regulation."
Start-Up Costs; Licensure and Certification Risks. The Company incurs
substantial costs in opening and initially operating new hospitals, including
leasing costs, renovation and equipment costs and working capital needs. The
Company seeks to have its hospitals certified by Medicare as long-term care
hospitals, which are exempt from the PPS limitations and thus eligible to
receive cost-based reimbursement for services rendered to Medicare patients. The
certification process to qualify for cost-based reimbursement takes a minimum of
six months (the "qualification period"). In order to successfully complete the
certification process, the Company's patients must have an average length of
stay of greater than 25 days. Failure to maintain an average length of stay
greater than 25 days would result in the loss of certification and qualification
to receive cost-based reimbursement. Reimbursement under PPS results in lower
payments to the hospital than under cost-based reimbursement and is not received
until after a patient is discharged, rather than periodically as costs are
incurred. If the Company is unable to receive Medicare certification as a
long-term care hospital on a timely basis for one or more of its facilities and
other exemptions from PPS are not available, the Company's business, financial
condition or results of operations may be adversely affected. In addition, the
Company expects to incur substantial losses with respect to each of its
hospitals during the certification process. Depending on the rate at which the
Company opens new hospitals, such losses could have a material adverse effect on
the Company's business, financial condition or results of operations.
The Company's plans to expand its business are dependent in part upon its
ability to obtain requisite licenses, certifications, permits, approvals and
certificates of need. In some states, for example, health care providers have
experienced delays in obtaining Medicare certification or certification as a
long-term care hospital. As another example, the Company is seeking to overturn
an administrative ruling that Missouri's certificate of need process was
applicable to a proposed Company hospital in Missouri. See "Business--Legal
Proceedings." No assurance can be given that the requisite licenses and
certifications will be granted by the applicable regulatory agencies for all, or
even any, of the Company's future hospitals or those currently under
development. Failure to obtain requisite licenses, certifications, permits,
approvals or certificates of need for any hospital or the delay in issuance of
any such licenses, certifications, permits, approvals or certificates of need
could have a material adverse effect on the Company's business, financial
condition or results of operations. See "Business--Government Regulation."
Collection and Reimbursement Risks. The Company assumes the financial risk
related to collection of its accounts receivable, including the potential
uncollectibility of accounts and delays and adjustments attendant to
reimbursement by third party payors, such as government programs, private
7
<PAGE> 9
insurance plans and managed care plans. In addition, the nature of the services
rendered by the Company can result in the incurrence of significant charges with
respect to individual patients, which can be difficult to collect from patients
and/or payors. Because the Company is in the early stages of developing its
facilities, credit risk is concentrated in a small number of its patients and/or
payors. Failure to adequately manage the collection risks and working capital
demands could have a material adverse effect on the Company's business,
financial condition or results of operations. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and
"Business--Government Regulation."
Payor Mix. For services provided to patients covered by Medicare, the
Company receives reimbursement that is either limited by PPS, or, if the
applicable Company hospital is exempt from PPS, is based upon the Company's
reasonable costs. The Company has or anticipates entering into contracts with
managed care organizations that provide for per diem, per discharge or other
capitated forms of payment. Most of the Company's agreements with managed care
organizations also provide for significant discounts from the Company's routine
charges. The Company receives payment for other patients based upon fee for
service arrangements or negotiated rates. The Company's success will be
determined in part upon its ability to achieve the anticipated mix of payors and
to enter into contractual arrangements with managed care organizations and other
payors that will allow the Company to be paid in excess of the costs incurred in
rendering services. Failure to achieve the anticipated payor mix could have a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Sources of Revenue."
Reliance Upon Referral Sources. The Company's patient admissions are
dependent upon establishing and maintaining relationships with unrelated third
parties who refer patients to the Company. The Company believes that its ability
to obtain referrals is based upon demonstrating high quality of care,
convenience to referral sources and cost effective outcomes. The Company
believes it will continue to receive a large number of referrals from its Host
Hospitals. To the extent that a Host Hospital's census, reputation or general
acceptance in the community declines, or to the extent the Company does not
adequately manage its relationships with referral sources, there could be a
material adverse effect on the Company's business, financial condition or
results of operations. See "Business--Government Regulation--Regulation of
Relationships Among Health Care Providers."
Dependence on Host Hospitals. The Company relies upon its Host Hospitals to
provide a variety of necessary services and amenities. Typically, each Intensiva
facility will contract with a Host Hospital to provide diagnostic and other
support, hotel and ancillary services such as laundry and linen, dietary and
waste disposal, as well as for access to certain medical services, such as
laboratory and radiology (MRI, CAT Scan, X-Ray). Should the Host Hospital fail
to adequately provide these services, it is uncertain whether another cost
effective source could be found or effectively utilized. Further, should the
Host Hospital cease or significantly reduce operations, it is unlikely the
Intensiva facility could continue operations at that location.
Non-renewal or Termination of Leases. The Company's facilities have leases
that have an initial term of five or more years. Intensiva has been operating
for approximately one and one-half years. Accordingly, none of its leases have
come up for renewal. It is unknown whether the Host Hospitals will renew such
leases upon expiration of their initial terms, or what new payments or other
lease terms the Host Hospital will negotiate upon renewal. In addition, a lease
could be terminated because of a breach of the lease by either the Company or
the Host Hospital. Recently the Company received notice of termination of a
lease agreement which the Company had with a hospital in Corpus Christi, Texas.
The Company has been informed that such hospital has executed a master lease for
its principal facility where Intensiva's hospital was to be located. See
"Business--Facilities." Failure to renew leases with adequate financial terms
upon expiration or early termination of a lease could have a material adverse
effect on the Company's business, financial condition or results of operation.
Relocation of Oklahoma City Facility. The Company's facility in Oklahoma
City, Oklahoma, is currently located in Southwest Medical Center. Subsequent to
the opening of that facility, Southwest
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<PAGE> 10
Medical Center merged with Integris/Baptist Medical Center of Oklahoma
("Baptist"). At the request of the merged entity, the Company has entered into a
lease to relocate its facility to Baptist. Relocation is expected to be
completed before 1997. Such relocation could have a material adverse effect upon
the operations of that facility due principally to potential disruption of
operations associated with the move, which is contributing a substantial amount
of the Company's net revenues. As of June 30, 1996, this was the only Company
facility with a positive cash flow and producing operating income.
Regulation of Relationships Among Health Care Providers. Federal and state
laws regulate the relationships among providers of health care services,
physicians and other clinicians. These laws include the fraud and abuse
provisions of the Medicare and Medicaid statues, which prohibit the
solicitation, payment, receipt or offering of any direct or indirect
remuneration for the referral of Medicare or Medicaid patients or for
recommendation, leasing, arranging, ordering or purchasing of Medicare or
Medicaid covered services, as well as laws that impose significant penalties for
false or improper restrictions on physician referrals for designated health
services to entities with which they have financial relationships. While the
Company believes it has complied with all applicable requirements in its leases
with Host Hospitals and contracts and relationships with its medical staff,
other entities and individuals, there can be no assurance that, if reviewed, the
arrangements would be found to be in compliance. Violations of these laws may
result in substantial civil or criminal penalties for individuals or entities,
including large civil money penalties and exclusion from participation in
Medicare and Medicaid programs. Such exclusion and penalties, if applied to the
Company, could result in significant loss of reimbursement, and could have a
materially adverse effect on the Company's business, financial condition or
results of operations. See "Business--Government Regulation."
Management Systems. The Company's success will depend in part on its
ability to develop, implement, protect and maintain its management systems,
particularly as they relate to the growth of the Company. There can be no
assurance that the Company's management systems will be adequate to support the
Company's anticipated growth or meet future patient care, reimbursement or
outcome reporting requirements. In addition, some of the Company's management
systems are licensed from third parties and there can be no assurance that such
systems will be maintained and updated so as to meet the Company's ongoing
requirements. There can be no assurance that the Company's systems do not
infringe upon the proprietary rights of others. See "Business--Management
Systems."
Competition. The services provided by the Company are subject to
substantial competition. Competition exists from several sources, including
regional and local hospitals and other health care organizations providing
competitive services. Certain of the Company's competitors are larger and better
capitalized, have greater experience in providing acute long-term care hospital
services and may have longer established relationships with the referral sources
and payors for such services. While general acute care hospitals cannot
currently qualify for cost-based reimbursement as long-term care hospitals on
their existing campuses, in certain urban markets rapid consolidation of general
acute care hospitals is occurring and hospital operators could apply for PPS
exemption for long-term care hospitals that are not located on the same campus
as their general acute care hospitals, and thereby compete with the Company on a
similar basis. The regulations could also change to permit general acute care
hospitals to operate exempt long-term care hospitals located on their campuses.
As a result of this competition, the Company may not be able to maintain or
increase its market share, achieve profitability or continue its operations. See
"Business--Competition."
Professional Liability and Uncertainty of Adequate Insurance. The Company's
medical staffs provide care to critically ill and injured patients. A certain
percentage of these patients are expected to deteriorate in condition, and some
will die. The Company may be subject to professional liability claims and costs.
In addition, the Company's leases with Host Hospitals generally require the
Company to indemnify the Host Hospitals for losses resulting from the negligence
of the Company, its employees and those affiliated with the Company. The Company
maintains professional and general liability insurance. While the Company
believes it has adequate professional and general liability coverage, there can
be no assurance that the insurance maintained by the Company would be sufficient
to fully cover the Company in the event of a claim. Furthermore, there can be no
assurance that the Company
9
<PAGE> 11
will be able to obtain liability insurance in the future with adequate coverages
or at acceptable costs. Any claim against the Company could have a material
adverse effect on the Company's reputation, patient referrals, business,
financial conditions or results of operations. "See Business--Insurance."
Expansion; Capital Requirements. The Company's expansion plans depend in
part on its ability to lease excess capacity from general acute care hospitals
and to develop acute long-term care hospitals in such space. There can be no
assurance that the Company will be able to successfully select new geographic
markets and Host Hospitals or otherwise develop new hospital facilities. The
Company's expansion strategy may also divert management's attention from the
operation of the Company's existing hospitals. In addition, the Company's growth
strategy requires substantial capital for the development of additional acute
long-term care hospitals. Development of additional new acute long-term care
hospitals requires capital for renovation, expansion and working capital. The
Company believes that its existing cash resources, together with the net
proceeds from the sale of shares of Common Stock offered by the Company hereby,
will be sufficient to meet the Company's anticipated expansion and working
capital needs through year end 1997. However, there can be no assurance that
additional capital will not be needed. See "Use of Proceeds."
Dependence on Key Personnel; Recruitment. The Company is highly dependent
on the principal members of its management and development team, the loss of
whose services might impede the achievement of the Company's business
objectives. The loss of David W. Cross, President and Chief Executive Officer,
John R. Lewis, Executive Vice President and Chief Operating Officer, or other
key personnel, could have a material adverse effect on the Company. The Company
has employment agreements with Messrs. Cross and Lewis and other key personnel.
Among other things, these agreements prohibit such executive employees from
competing with the Company under certain conditions for a specific period
following termination, subject to certain exceptions. There can be no assurance
that these non-competition agreements are enforceable under all circumstances.
Currently the Company has key person life insurance in the amount of $1.0
million on the lives of each of Messrs. Cross and Lewis. In addition, as the
Company grows, recruiting and retaining additional qualified personnel to
supervise and manage the Company's development and operations will be important
to the Company's success. Competition exists for qualified personnel, and there
can be no assurance that the Company will be able to attract and retain skilled
and experienced management, development and operations personnel on acceptable
terms. See "Management."
Control by Directors and Executive Officers. Upon completion of this
Offering, the directors and executive officers of the Company, and their
affiliates, as a group will beneficially own approximately 44% of the
outstanding shares of Common Stock of the Company. As a result, these
stockholders acting together would be able to exert considerable influence over
the election of the Company's directors and the outcome of most corporate
actions requiring stockholder approval, such as certain amendments to the
Certificate of Incorporation. Additionally, such directors and executive
officers will have significant influence over the policies and operations of the
Company's management and the conduct of the Company's business. Such
concentration of ownership may have the effect of delaying, deferring or
preventing a change of control of the Company and consequently could affect the
market price of the Common Stock. See "Management--Executive Officers and
Directors" and "Principal Stockholders."
Board of Directors and Management Control of Use of Proceeds. Of the
Company's estimated $16.8 million in net proceeds from this Offering, the
Company expects to use substantially all the proceeds for development of
additional facilities through the end of fiscal 1997, and the balance for
working capital and other general corporate purposes, including the possible
acquisition of long-term care hospitals. Accordingly, management and the Board
of Directors of the Company will have complete discretion as to the application
of substantially all of the funds raised in this Offering. See "Use of
Proceeds."
Anti-Takeover Effect of Certain Charter, By-Law and Delaware Law
Provisions; Possible Issuance of Preferred Stock. Certain provisions of the
Company's Certificate of Incorporation, Amended and Restated By-laws
("By-laws"), and Delaware law could, together or separately, discourage
potential acquisition proposals, delay or prevent a change in control of the
Company and limit the price that
10
<PAGE> 12
certain investors might be willing to pay in the future for shares of the Common
Stock. These provisions, among other things, provide for advance notice
provisions and other limitations on the right to call a special meeting of
stockholders, to nominate directors and to submit proposals to be considered at
stockholders' meetings. The Certificate of Incorporation provides for a
staggered Board of Directors, with one-third of the board members being elected
each year to a three-year term. Directors may be removed only for "cause," as
defined in the Certificate of Incorporation. The Company is also subject to
Section 203 of the Delaware General Corporation Law which, subject to certain
exceptions, prohibits a Delaware corporation from engaging in a broad range of
business combinations with any "interested stockholder" for a period of three
years following the date that such stockholder became an interested stockholder.
In addition, the Company's Certificate of Incorporation authorizes the Board of
Directors to issue preferred stock with no par value ("Undesignated Preferred
Stock") without stockholder approval and upon such terms as the Board of
Directors may determine. While no shares of Undesignated Preferred Stock will be
outstanding upon the consummation of this Offering, and the Company has no
present plans to issue any shares of Undesignated Preferred Stock, the rights of
the holders of Common Stock will be subject to, and may be adversely affected
by, the rights of any holders of Undesignated Preferred Stock that may be issued
in the future. See "Description of Capital Stock."
No Prior Public Market; Possible Volatility of Stock Price. Prior to this
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market will develop or be sustained after
this Offering or that the market price of the Common Stock will not decline
below the initial public offering price. The initial public offering price of
the Common Stock has been determined through negotiations between the Company
and the Representatives of the Underwriters. Factors such as market acceptance
of the Company's services, development of additional hospitals, physician
referrals, regulatory reform as well as other government regulations, investor
perception of the Company, fluctuations in the Company's operating results and
general market conditions in the industry may cause the market price of the
Common Stock to fluctuate significantly. In addition, the stock market in
general has recently experienced extreme price and volume volatility. These
broad market fluctuations may have a material adverse effect on the market price
of the Common Stock. See "Underwriting."
Shares Eligible for Future Sale; Registration Rights. Sales of a
substantial number of shares of Common Stock in the public market following this
Offering could have a material adverse effect on the market price of the Common
Stock and the Company's ability to raise capital in the capital markets at a
time and on terms favorable to the Company. The Company, its executive officers
and directors and certain other of its stockholders who, in the aggregate,
currently hold 6,703,780 shares of Common Stock, have agreed pursuant to lock-up
agreements that they will not, without the prior written consent of Hambrecht &
Quist LLC, sell or otherwise dispose of any shares of Common Stock or any
securities convertible into or exchangeable or exercisable for Common Stock
beneficially owned by them for a period of 180 days from the date of this
Prospectus (the "Effective Date"). Upon the expiration of these lock-up
agreements, certain of these shares will become eligible for sale in the public
market, and other shares will become eligible for sale in the public market from
time to time after the date of this Prospectus, subject to the exemptive
provisions of the Securities Act of 1933, as amended (the "Securities Act"), and
Rule 144 promulgated thereunder.
The holders of approximately 7,050,000 shares of Common Stock, including
shares issuable upon the exercise of outstanding warrants and issuable upon
conversion of the Convertible Preferred Stock, are entitled to certain
registration rights with respect to such shares. If such holders, by exercising
their registration rights, cause a large number of shares to be sold in the
public market pursuant to such a registration, such sales could have a material
adverse effect on the market price for the Common Stock. See "Shares Eligible
for Future Sale" and "Description of Capital Stock."
Dilution. The existing stockholders of the Company acquired their shares of
Common Stock at an average cost substantially below the initial public offering
price set forth on the cover page of this Prospectus. Accordingly, investors in
this Offering will experience immediate and substantial dilution. See
"Dilution."
11
<PAGE> 13
THE COMPANY
The Company was incorporated as a Delaware corporation in July 1994. The
original name of the Company was Transitional Care of America, Inc. Its
principal executive offices are located at 7733 Forsyth Blvd., 11th Floor, St.
Louis, Missouri 63105, and its telephone number is (314) 725-0112.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $16.8 million ($19.5 million if
the Underwriters' over-allotment option is exercised in full), assuming an
initial public offering price of $7.50 per share and after deduction of
estimated underwriting discounts and commissions and offering expenses payable
by the Company. The principal reasons for this Offering are to increase the
Company's equity capital and to create a public market for the Company's Common
Stock, which will help facilitate future access to capital, enhance the ability
to pursue acquisitions and provide a means for attracting and retaining key
employees. The Company expects to use substantially all the proceeds for
development and operation of additional facilities, and the balance for working
capital and other general corporate purposes, including the possible acquisition
of other facilities through 1997. Although the Company has had preliminary
discussions from time to time regarding possible acquisition opportunities, the
Company has no agreements, understandings or commitments with respect to any
such opportunity nor has the Company allocated any portion of the net proceeds
hereunder for any specific acquisition. There can be no assurance that any
future acquisition will be consummated. Pending application of the net proceeds
as described above, the Company intends to invest the net proceeds of the
Offering in interest-bearing securities of investment grade.
DIVIDEND POLICY
The Company has never declared or paid dividends on its Common Stock and
does not anticipate declaring or paying any dividends in the foreseeable future.
The Company currently intends to retain all of its earnings, if any, for use in
the operation and expansion of its business. The payment of future dividends, if
any, will be at the discretion of the Company's Board of Directors and will be
dependent upon the Company's future earnings, financial condition, capital
requirements and other relevant factors.
12
<PAGE> 14
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 (i) on an actual basis, (ii) on a pro forma basis, assuming the
Convertible Preferred Stock was converted to Common Stock, and (iii) as adjusted
to reflect the sale of Common Stock offered hereby at an assumed initial public
offering price of $7.50 per share, and application of the estimated net proceeds
therefrom as described under "Use of Proceeds." This table should be read in
conjunction with the Consolidated Financial Statements and Notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," appearing elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------- --------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Long-term obligations......................................... $ 710 $ 710 $ 710
-------- -------- --------
Stockholders' equity:
Undesignated Preferred stock, 30,000,000 shares authorized,
no shares issued......................................... -- -- --
Series A Convertible Preferred Stock, 3,465,000 shares
issued and outstanding--actual; no shares issued--pro
forma and pro forma as adjusted.......................... 3 -- --
Series B Convertible Preferred Stock, 2,232,967 shares
issued and outstanding--actual; no shares issued--pro
forma and pro forma as adjusted.......................... 2 -- --
Common Stock, 1,332,100 shares issued and
outstanding--actual; 7,030,067 shares issued--pro forma
and 9,530,067 shares issued--pro forma as adjusted(1).... 1 7 10
Additional paid-in capital.................................. 14,847 14,846 31,681
Accumulated deficit......................................... (4,813) (4,813) (4,813)
-------- -------- --------
Total stockholders' equity............................... 10,040 10,040 26,878
-------- -------- --------
Total capitalization................................ $10,750 $10,750 $27,588
======== ======== ========
</TABLE>
- ------------------------------
(1) Includes 5,697,967 shares of Common Stock issuable upon conversion of the
Convertible Preferred Stock immediately prior to consummation of the sale of
shares of Common Stock hereunder. Outstanding shares exclude 15,950 shares
issuable upon exercise of warrants at a weighted average exercise price of
$3.76 and 575,850 shares issuable upon exercise of options at a weighted
average exercise price of $0.74, in each case outstanding as of August 31,
1996.
13
<PAGE> 15
DILUTION
The net tangible book value of the Company at June 30, 1996, was
approximately $9.8 million, or $1.39 per share of Common Stock assuming the
conversion of the 5,697,967 shares of Convertible Preferred Stock into Common
Stock upon the completion of this Offering. "Net tangible book value" represents
the amount of total tangible assets less total liabilities. Net tangible book
value per share is determined by dividing the number of outstanding shares of
Common Stock into the net tangible book value of the Company. After giving
effect to the sale of 2,500,000 shares offered by the Company hereby and the
receipt and application of net proceeds therefrom the pro forma net tangible
book value of the Company at June 30, 1996, would have been approximately $26.6
million, or $2.79 per share. This represents an immediate increase in pro forma
net tangible book value of $1.40 per share to existing shareholders and an
immediate dilution of $4.71 per share to new investors. The following table
illustrates the per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share...................... $ 7.50
Pro forma net tangible book value per share at June 30, 1996....... $1.39
Increase per share attributable to new investors................... 1.40
-----
Pro forma net tangible book value per share after the Offering....... 2.79
-----
Dilution per share to new investors.................................. $ 4.71
=====
</TABLE>
The following table sets forth on a pro forma basis, as of June 30, 1996,
the number of shares of Common Stock purchased from the Company, the total
consideration paid to the Company and the average price paid per share by (i)
the existing stockholders of the Company (assuming conversion of the Convertible
Preferred Stock), and (ii) the purchasers of 2,500,000 shares sold by the
Company in this Offering (at an assumed public offering price of $7.50 per
share):
<TABLE>
<CAPTION>
SHARES TOTAL
PURCHASED CONSIDERATION AVERAGE
--------------------- ----------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing stockholders(1)....... 7,030,067 73.8% $14,853,103 44.2% $ 2.11
New stockholders............... 2,500,000 26.2 18,750,000 55.8 7.50
--------- ----- ----------- -----
Total........................ 9,530,067 100.0% $33,603,103 100.0%
========= ===== =========== =====
</TABLE>
The foregoing tables do not take into account the exercise of the
Underwriters' over-allotment option or the exercise of outstanding stock options
or warrants. There were 575,850 shares of Common Stock issuable upon exercise of
options outstanding at a weighted average exercise price of $0.74 per share,
15,950 shares of Common Stock issuable upon exercise of warrants at a weighted
average exercise price of $3.76 per share, and 209,550 additional shares of
Common stock reserved for issuance upon exercise of options that may be granted
in the future under the Company's Stock Option Plan, in each case as of August
31, 1996. To the extent that these options or warrants are exercised, there will
be further dilution to new investors. See "Management--Executive Compensation,"
"Description of Capital Stock--Stock Option Plan," "Shares Eligible for Future
Sale" and Note 1 of Notes to Consolidated Financial Statements.
- ---------------
(1) Does not include up to 250,000 shares of Common Stock which may be purchased
in this Offering by affiliates of existing stockholders of the Company.
14
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data set forth below for the period
from July 18, 1994 (inception) through December 31, 1994, and the year ended
December 31, 1995, have been derived from the consolidated financial statements
of the Company included elsewhere in this Prospectus which have been audited by
KPMG Peat Marwick LLP, independent certified public accountants. Data at June
30, 1996, and for the six month periods ended June 30, 1995, and 1996, is
unaudited. Results for the six months ended June 30, 1996, are not necessarily
indicative of the results to be expected for the full fiscal year. The selected
consolidated financial data set forth below should be read in conjunction with
the consolidated financial statements of the Company and related notes thereto
and "Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
PERIOD FROM ENDED
JULY 18, 1994 YEAR JUNE 30,
THROUGH ENDED --------------------------
DEC. 31, 1994 DEC. 31, 1995 1995 1996
------------- ------------- ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE AND SELECTED STATISTICAL
DATA)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net revenues...................................... $ -- $ 1,488 $ 165 $ 6,076
Expenses:
Operating expenses.............................. -- 2,521 714 6,305
General and administrative...................... 214 1,884 736 1,324
Provision for doubtful accounts................. -- 139 30 150
Depreciation and amortization................... -- 29 14 249
----- ------- ------- -------
Total expenses............................. 214 4,573 1,494 8,028
Operating income (loss)........................... (214) (3,085) (1,329) (1,952)
Interest (expense) income, net.................... (1) 238 128 202
----- ------- ------- -------
Net income (loss)................................. $ (215) $(2,847) $ (1,201) $(1,750)
Pro forma:(1)
Net income (loss) per share..................... $ (0.39) $ (0.24)
Weighted average shares outstanding............. 7,268 7,268
SELECTED STATISTICAL DATA:
Long-term exempt hospitals:
Open at end of period........................... -- 1 -- 1
Average daily census(2)......................... -- 6 -- 17
Medicare revenue(3)............................. -- 44.4% -- 45.5%
All other facilities:
Open at end of period........................... -- 1 1 5
Average daily census(2)......................... -- 1 4 18
Medicare revenue(3)............................. -- 100.0% 92.3% 90.9%
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30, 1996
------------------ ------------------------
1994 1995 ACTUAL PRO FORMA(4)
------ ------- ------- ------------
<S> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and cash equivalents................................ $ 190 $11,261 $ 5,217 $ 22,055
Working capital.......................................... 4,173 11,207 8,564 25,402
Total assets............................................. 4,560 13,698 13,431 30,269
Long-term obligations.................................... -- 291 710 710
Stockholders' equity..................................... 4,238 11,790 10,040 26,878
</TABLE>
- ------------------------------
(1) See Note 1 of Notes to Consolidated Financial Statements for information
concerning the calculation of net loss per share, weighted average shares
outstanding and pro forma balance sheet information.
(2) Average daily census for applicable facilities. Computed by dividing total
patient days by the number of days in the applicable period that each
facility was open.
(3) As a percentage of net revenues. Excludes net revenues from managed care
organizations including Medicare managed care, traditional indemnity
insurers, third-party administrators and other non-governmental payors.
(4) Adjusted to give effect to the sale of Common Stock offered hereby at an
assumed initial public offering price of $7.50, and application of the net
proceeds therefrom and conversion of the Convertible Preferred Stock into
Common Stock. See "Use of Proceeds" and "Capitalization."
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Intensiva provides highly specialized, acute long-term care for critically
ill or injured patients who require intensive medical monitoring and treatment,
and who often have multiple medical conditions and are medically unstable. The
Company provides high quality, cost effective, specialized care for its
patients, who typically require an average length of stay of greater than 25
days in an intensive inpatient setting. Intensiva's medical staffs provide
specialized medical services, as well as nursing and respiratory care, and the
Company is developing disease-specific pathways to treat pulmonary, cancer,
renal and cardiac conditions, among others. The Company's clinical programs
utilize specialized staff, equipment and protocols for the treatment of its
patients.
Intensiva leases underutilized space from Host Hospitals in underserved
secondary markets, creating a separate "hospital within a hospital." By leasing
space from the Host Hospital, Intensiva is able to minimize capital and overhead
costs including owning and operating the physical plant and expensive medical
and diagnostic equipment. The Company is able to purchase certain services from
its Host Hospitals, such as laboratory and radiology (MRI, CAT Scan, X-Ray), as
well as hotel services such as laundry, housekeeping, dietary and property
management. The Company's business model provides for each of its specialized
hospitals to become certified by Medicare as a "long-term care hospital" and
exempt from PPS after approximately seven months of operations, and receive
cost-based reimbursement, which the Company believes is more appropriate given
the medical condition of its patients. In addition, the Company's business model
seeks to maintain the anticipated payor mix which includes both non-governmental
and governmental payors. The Company is reimbursed by non-governmental payors on
per diem, per discharge or other capitated forms of payment and upon fee for
service arrangements or negotiated charges.
Operations begin approximately four months after an agreement is executed
with a Host Hospital. During the qualification period, the Company spends
approximately one million dollars on renovation costs, equipment purchases,
pre-opening costs and working capital before the facility becomes eligible for
certification as a long-term care hospital. Patient volumes are lower during the
non-exempt phase while physicians, case managers and payors are educated as to
the benefits of the Company's clinical services.
During 1995, the Company's first certified long-term care hospital
generated net revenues of $690,000 and had an operating loss of $13,000 in its
first two months of PPS-exempt operations. In contrast, the Company generated
net revenues of $800,000 and operating losses (exclusive of general and
administrative expenses) of $1.2 million from all other facilities during fiscal
1995.
During the first six months of 1996, the Company's first certified
long-term care hospital generated revenue of $3.3 million and an operating
margin of $800,000, or 24%. In contrast, all other clinical operations generated
net revenues of $2.8 million and had operating losses (exclusive of general and
administrative expenses) of $1.4 million during the same period. The Company
anticipates that it will continue to realize operating losses for at least the
first seven months of operations at each location.
The Company currently operates seven facilities in four states. In
addition, the Company has three other facilities under development, all of which
the Company anticipates will begin operations in 1996. The Company has also
entered into a letter of intent to open an additional clinical program. The
Company has generated historical operating losses as a result of its rapid
growth and anticipates that it will continue to incur such losses through at
least the second quarter of 1997.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated, the percentages
of net revenues represented by certain items reflected in the Company's
statements of operations:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------ -------
<S> <C> <C> <C>
Net revenues............................................ 100.0% 100.0% 100.0 %
Expenses:
Operating expenses.................................... 169.4 432.7 103.8
General and administrative expenses................... 126.6 446.1 21.8
Provision for doubtful accounts....................... 9.4 18.2 2.4
Depreciation and amortization......................... 1.9 8.5 4.1
--------- ------ -----
Total expenses..................................... 307.3 905.5 132.1
--------- ------ -----
Operating loss.......................................... (207.3) (805.5) (32.1)
Interest income, net.................................... 16.0 77.6 3.3
--------- ------ -----
Net loss................................................ (191.3)% (727.9)% (28.8)%
--------- ------ -----
--------- ------ -----
</TABLE>
As indicated in the above table, operating expenses, corporate general and
administrative expenses, the provision for doubtful accounts and depreciation
and amortization as a percentage of operating revenues have declined over time
as the Company has developed additional facilities and increased net revenues.
SOURCES OF REVENUES
The Company receives payment for health care services primarily from
non-governmental payors such as managed care organizations (e.g., preferred
provider and health maintenance organizations) and other commercial health
insurance carriers (e.g., traditional indemnity insurance plans), and the
federal government and state governments under the Medicare, Medicaid and other
governmental programs. Consistent with initiatives to control health care costs,
the Company generally negotiates payments with non-governmental payors based
upon the type and extent of services to be provided to individual patients. As
of August 31, 1996, the Company had approximately ten managed care contracts to
provide services to participating members. These managed care agreements consist
primarily of negotiated discounts from established charges, although a small
percentage of patients are treated under per diem contracts. The following table
sets forth the approximate percentages of the Company's net patient service
revenues derived from the specified payor sources indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Medicare......................................................... 44.4% 65.4%
Medicaid......................................................... 2.3 1.7
Indemnity and other insurance providers.......................... 42.1 22.3
HMO.............................................................. 2.5 1.5
PPO.............................................................. 2.7 4.6
Other negotiated arrangements.................................... 6.0 4.5
------ ----------
100.0% 100.0%
========== ========
</TABLE>
The increase in Medicare net revenues as a percentage of total net revenues
is primarily attributable to the addition of new facilities in the early stages
of operation. The Company historically experienced a trend toward higher
percentages of Medicare patients in the early months of operation.
17
<PAGE> 19
The decrease in fee for service net revenues as a percentage of total net
revenues corresponds to the net increase in Medicare revenues as noted above.
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
Net Revenues. Net revenues for the six months ended June 30, 1996 were $6.1
million compared to $200,000 for the comparable period in 1995. Approximately
$2.8 million of this revenue growth is attributed to new facilities, and the
remaining $3.3 million was generated by the Company's Oklahoma City, Oklahoma,
facility. The Company opened its first location in Oklahoma, City, Oklahoma, in
March 1995 and had six operational sites at June 30, 1996. Prior to March 1995,
the Company was a development stage company.
Operating Expenses. Operating expenses for the six months ended June 30,
1996 increased $5.6 million from the comparable period in 1995. Approximately
$3.2 million of this increase is attributable to new facilities, while the
remaining $2.4 million was generated by the Company's Oklahoma City, Oklahoma,
facility. As a percentage of net revenues, operating expenses decreased from
433% to 104%. The Company expects this percentage to continue to decline as its
facilities mature.
General and Administrative. General and administrative expenses for the six
months ended June 30, 1996 increased $600,000, or 80%, to $1.3 million for the
comparable period in 1995. The increase in expenses was partially attributable
to salaries, related payroll taxes and employee benefits relating to additional
personnel retained to support the Company's growth strategy. As a percentage of
net revenues, general and administrative expenses decreased from 446% to 22%.
The Company expects that its general and administrative expenses will continue
to decrease as a percentage of net revenues as the Company grows and achieves
certain economies of scale.
Depreciation and Amortization. Depreciation and amortization for the six
months ended June 30, 1996 increased $235,000 to $250,000 from the comparable
period in 1995. The increase relates to the acquisition of additional property
and equipment and the amortization of a computer software license, and
organizational and pre-opening costs associated with the six open hospitals at
June 30, 1996. Property and equipment increased from $300,000 at June 30, 1995
to $2.0 million at June 30, 1996. A computer software license was obtained in
December 1995 for $500,000 and is being amortized over the three-year estimated
useful life of the license. Organizational and preopening costs increased from
$5,328 at June 30, 1995 to $200,000 at June 30, 1996.
Income Taxes. The Company has paid minimal income taxes to date and has
approximately $2.5 million of net operating loss carryforwards for income tax
purposes, which, subject to limitations on use, if unused, will begin to expire
in the year 2009.
YEAR ENDED DECEMBER 31, 1995 AND PERIOD (SINCE INCEPTION--JULY 18, 1994) ENDED
DECEMBER 31, 1994
The Company began providing patient services in late March 1995. Prior to
that time, the Company was a development stage company. Activities in 1994
consisted primarily of raising capital, organizing administrative functions and
initial development activities. The Company's focus during 1995 was directed
toward market selection and the opening and operation of its first facility. In
addition, considerable effort was concentrated on preparations for opening its
Hammond, Indiana (December 1995) and Beech Grove, Indiana (January 1996)
facilities.
SELECTED QUARTERLY FINANCIAL RESULTS
The Company's quarterly financial position and results of operations have
fluctuated due to its emerging from the development stage status in March 1995,
obtaining PPS-exempt status for its first facility in November 1995, and the
opening of additional facilities in December 1995, January 1996, February 1996,
April 1996 and June 1996. The following table presents unaudited quarterly
operating results for each of the six quarters in the period from January 1,
1995 through June 30, 1996. The Company believes that all necessary adjustments
have been included in the amounts stated below to
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<PAGE> 20
present fairly the following selected quarterly information when read in
conjunction with the financial statements included elsewhere in this Prospectus.
The information includes all normal recurring adjustments the Company considers
necessary for a fair presentation thereof, in accordance with generally accepted
accounting principles.
<TABLE>
<CAPTION>
THREE MONTHS ENDED
-----------------------------------------------------------------------
MARCH 31, JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30,
STATEMENT OF OPERATIONS DATA: 1995 1995 1995 1995 1996 1996
--------- -------- --------- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Net revenues........................ $ -- $ 165 $ 459 $ 864 $ 2,509 $ 3,567
Operating loss...................... (572) (756) (838) (919) (834) (1,118)
Net loss............................ (504) (696) (772) (875) (729) (1,021)
</TABLE>
The Company anticipates relocating its Oklahoma City, Oklahoma operations
to a new location during the fourth quarter of 1996. The new Host Hospital is a
member of the same health care system as the Company's current Host Hospital.
This relocation could have a material adverse effect on the 1996 fourth quarter
results of operations, due principally to potential disruption of operations
associated with this move.
LIQUIDITY AND CAPITAL RESOURCES
Through June 1996, the Company has financed its operations primarily
through proceeds from the sale of the Company's equity securities. Cash flows
from operations have not been sufficient to support ongoing operations primarily
due to losses incurred during the qualification period and the continuing
development of new facilities in accordance with the Company's growth strategy.
Cash flows used in investing activities have consisted primarily of capital
renovations, equipment purchases, a software license acquisition, and
organizational and preopening costs incurred prior to providing patient services
at each new facility. In addition to the sale of the Company's equity
securities, financing activities have included borrowings under capital leases
and a sale-leaseback agreement.
The Company made capital expenditures of approximately $600,000 and $1.4
million during the year ended December 31, 1995 and the six months ended June
30, 1996, respectively. Additional equipment was acquired through capital
leases, amounting to approximately $600,000 for both the year ended December 31,
1995 and the six months ended June 30, 1996.
During March 1996, the Company entered into a sale-leaseback agreement with
a third party to take advantage of favorable borrowing rates and maintain
liquidity. This party received warrants for the Company's equity securities as a
part of this transaction. The net book value of assets sold and subsequently
leased under this agreement totaled $342,244. Net proceeds were $337,792,
resulting in a net loss of $4,452. As part of this agreement, the Company has an
available line of credit to finance additional capital expenditures (up to $1.0
million in the aggregate).
Accounts receivable balances have increased $3.8 million since December 31,
1995. Most of the increase is a result of additional new facilities and their
corresponding increase in accounts receivable.
At December 31, 1995, the Company's working capital was $11.2 million,
compared to $4.2 million at December 31, 1994, representing an increase of $7.0
million. This increase was primarily attributable to the issuance of 200,000
additional shares of Series A Convertible Preferred Stock and 405,994 shares of
Series B Convertible Preferred Stock totaling $2.0 million and $8.4 million,
respectively. Working capital at June 30, 1996 was $8.6 million, representing a
decrease of $2.6 million from December 31, 1995 which was primarily attributable
to the financing of current operations. The Company expects to invest
approximately $1.0 million per facility to fund capital renovations for
preopening costs and working capital requirements before a facility achieves
profitability.
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<PAGE> 21
The Company leases space from Host Hospitals under operating lease
agreements having initial terms of five or more years. The Company leases
corporate office space under a noncancellable operating lease which expires in
the year 2000. Minimum annual lease payments on noncancellable operating leases
with maturities in excess of one year are as follows: $1.8 million in 1996, $3.1
million in 1997, $3.2 million in 1998, $3.2 million in 1999, $3.3 million in
2000 and $2.3 million each year thereafter.
The Company estimates that the net proceeds from the Offering, together
with existing or planned financing commitments, will be sufficient to fund its
continued development and meet anticipated cash needs of the Company through at
least 1997. However, there can be no assurance that the Company will not be
required to seek additional capital.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of, which requires impairment losses to be
recorded on long-lived assets used in operations when indicators of impairment
are present and the undiscounted cash flows estimated to be generated by those
assets are less than the assets' carrying amount. Statement 121 also addresses
the accounting for long-lived assets that are expected to be disposed of. The
Company adopted Statement 121 in the first quarter of 1996 and the effect was
not material to the Company's operations or financial position taken as a whole.
Under Statement 121, 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 calculated as the
present value of expected future cash flows.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to Accounting Principles
Board Opinion No. 25. Accounting for Stock Issued to Employees, in accounting
for stock-based compensation issued to employees. Statement No. 123 allows for a
fair value-based method of accounting for employee stock options and similar
equity instruments. However, for companies that continue to account for
stock-based compensation arrangements under Opinion No. 25, Statement No. 123
requires disclosure of the pro forma effect on net income and earnings per share
of its fair value-based accounting for those arrangements. The Company adopted
Statement No. 123 in the first quarter of 1996 and has elected to continue to
account for stock-based compensation arrangements under APB Opinion No. 25.
IMPACT OF INFLATION
To date, inflation has not had a significant impact on the business,
financial condition or results of operations of the Company. Inflation could,
however, affect the Company's future net revenues and results of operation. As a
result, the Company may not be able to increase revenues to account fully for
increased operating expenses. In structuring its charges, the Company attempts
to anticipate inflation levels, but there can be no assurance that the Company
will be able to anticipate fully or otherwise respond to any future inflationary
pressures.
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<PAGE> 22
BUSINESS
OVERVIEW
Intensiva HealthCare Corporation ("Intensiva" or the "Company") provides
highly specialized, acute long-term care for critically ill or injured patients
who require intensive medical monitoring and treatment, and who often have
multiple medical conditions and are medically unstable. The Company provides
high quality, cost effective, specialized care for its patients, who typically
require an average length of stay of greater than 25 days in an intensive
inpatient setting. Intensiva's medical staffs provide specialized medical
services, as well as nursing and respiratory care, and the Company is developing
disease-specific pathways to treat patients with pulmonary, cancer, renal and
cardiac conditions, among others. The Company's clinical programs utilize
specialized staff, equipment and protocols for the treatment of its patients.
Intensiva leases underutilized space from general acute care hospitals
("Host Hospitals") in underserved secondary markets, creating a separate
"hospital within a hospital." By leasing space from the Host Hospital, Intensiva
is able to minimize capital and overhead costs, including owning and operating
the physical plant and expensive medical and diagnostic equipment. The Company
is able to purchase certain services from its Host Hospitals, such as laboratory
and radiology (MRI, CAT Scan, X-Ray), as well as hotel services such as laundry,
housekeeping, dietary and property management. The Company's business model
provides for each of its specialized hospitals to become certified by Medicare
as a "long-term care hospital" and exempt from Medicare's Prospective Payment
System ("PPS") after a minimum of six months of operations, and receive
cost-based reimbursement, which the Company believes is more appropriate given
the medical condition of its patients.
Intensiva believes that it offers medical and financial advantages to
patients, physicians, payors and Host Hospitals. For the patient, advantages
include immediate access to the services provided by the general acute care
hospital, the convenience of not being transferred to a different location for
extended specialized acute care services, increased physician continuity and
lower cost. For the treating physician, the Company's facilities offer a
specialized and dedicated treatment environment that is convenient, efficient
and cost effective. For the payor, the primary benefits are reduced cost and
higher quality of care. The Company's programs allow Host Hospitals to generate
revenues from underutilized space. In addition, the Host Hospital can offer a
continuum of services including the specialized extended stay clinical programs
provided by the Company. As of October 1, 1996, the Company operated seven
clinical programs in four states (254 beds), had an additional three programs
under development in three states (98 beds) and had entered into a letter of
intent to open an additional clinical program (30 beds).
INDUSTRY BACKGROUND
The health care system in the United States continues to undergo
significant change. As the elderly population grows more rapidly than the
overall population and as advances in medicine and technology continue to
increase life expectancies, national health care costs are expected to outstrip
the availability of resources from government sponsored health care programs.
Accordingly, health care reform proposals have increased their focus on cost
containment. Payors, led by managed care networks, are demanding higher quality
patient care at lower cost tied to predictable outcomes. These demographic
changes, technological advances and cost containment pressures are changing
medical practice patterns, resulting in an increasing proportion of complex
medical care being delivered outside of the general acute care hospital, in more
cost effective settings. As a result, the patient population has become
increasingly segmented.
Extended stay critically ill or injured patients are difficult and
expensive to treat and, as a result, are in danger of becoming disenfranchised
by the current health care system. These patients generally require an
interdisciplinary team of specialists due to their multiple system deficits and
the critical nature of their illnesses or injuries. Traditional acute care
hospitals serve a general population which consists primarily of short-stay
patients. These hospitals are not well positioned to provide the most
21
<PAGE> 23
cost effective services to critically ill and injured extended stay patients
because of their focus and lack of critical mass with respect to these patients.
Traditional hospitals have an incentive to discharge these patients to other
specialty care providers as soon as practicable. In addition, payors are seeking
specialized clinical services that provide high quality, predictable outcomes at
reduced cost for this disenfranchised, expensive patient population. The Company
estimates that the cost of treatment for this discrete patient population
exceeds $2 billion annually.
The following table highlights the Company's view of various patient
populations and outlines the medical and economic characteristics which
distinguish how and where their treatment is provided:
[PATIENT PROFILE CHART]
<TABLE>
<CAPTION>
PATIENT PROFILES
CLINICAL MEDICALLY UNSTABLE CRITICALLY ILL OR INJURED, MEDICALLY STABLE,
REQUIREMENTS WITH UNDETERMINED UNSTABLE WITH MULTIPLE REQUIRING MEDICAL
DIAGNOSTIC/INVASIVE MEDICAL CONDITIONS MAINTENANCE, AND
INTERVENTIONS REHABILITATION
<S> <C> <C> <C>
DIAGNOSTIC STUDIES Frequent/Expensive ROUTINE/LESS EXPENSIVE Infrequent/Inexpensive
IMAGING STUDIES Frequent/Expensive INFREQUENT/LESS EXPENSIVE Seldom/Inexpensive
SURGICAL INTERVENTIONS Yes MINOR PROCEDURES None
SPECIALIZED MONITORING Yes YES No
PHYSICIAN VISITS Daily DAILY 1-2 Times Per Week
NURSING HOURS PER PATIENT DAY Intensive Care 12+ 8-10 3-5
General Care 5-6
TREATMENT METHODOLOGY Individual Patient PROGRAMMATIC CARE FOR Programmatic Care for
Protocols MEDICALLY UNSTABLE Medically stable
PATIENTS Patients
AVERAGE LENGTH OF STAY 4-6 Days 30-60 DAYS 15-20 Days
COST EFFECTIVE SETTING General Acute Care ACUTE LONG-TERM HOSPITAL Subacute/Skilled
Hospital Nursing Facilities
MEDICARE REIMBURSEMENT PPS/DRG COST BASED; PPS/DRG EXEMPT Primarily Cost Based
</TABLE>
STRATEGY
The Company's objective is to be a leading provider of high quality,
clinically appropriate, cost effective care for critically ill and injured
patients requiring extended lengths of stay. To achieve this goal, the Company
intends to:
PENETRATE UNDERSERVED SECONDARY MARKETS. The Company believes it has one of
the most experienced and proven development teams for building a network of new
clinical programs. This team utilizes specific criteria for selecting and
entering new markets, including regulatory and reimbursement environments,
population demographics and trends and extent of competition. The Company seeks
to enter secondary markets, defined as service area populations of one million
or less, which are either void of or underserved by services similar to the
Company's. The average service area population for Intensiva hospitals is
approximately 600,000. The Company believes secondary markets will not support
large, freestanding, competitive hospitals, but will support Intensiva's
business and financial model. As a result, the Company's entry into these
markets responds to existing unmet market needs which can reduce the market
attractiveness to any future competitors.
MAINTAIN AND DEVELOP KEY REFERRAL SOURCES. The Company maintains and
develops relationships with key referral sources including general acute care
hospitals, managed care companies and
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<PAGE> 24
insurance companies. Intensiva educates physicians general acute care hospitals,
payors and case managers on the benefits of the Company's specialized clinical
services. The Company believes that creating an interactive, responsive
relationship with referral sources will be crucial in maintaining long-term
relationships and growing its business.
EXPLORE DEVELOPMENT OF MANAGEMENT SERVICES ORGANIZATIONS. The Company is
considering the possibility of selectively developing management services
organizations ("MSOs") to help manage relationships with key physicians, to
facilitate the further development of its clinical protocols and pathways and to
be better positioned to negotiate attractive managed care contracts.
MAINTAIN A HIGHLY FOCUSED PATIENT ADMISSION PROCESS. The Company strives to
maintain a patient focus through a disciplined admission process, enabling it to
utilize specialized medical personnel, equipment and interdisciplinary treatment
strategies yielding high-quality clinically appropriate patient care. This
disciplined admission process should enable the Company to admit patients most
likely to benefit from its clinical services.
EXPAND CLINICAL PROTOCOLS. The Company is developing standardized clinical
pathways to address the medical requirements of critically ill or injured
patients with similar diagnoses. The Company believes the use of well defined
clinical protocols will increase consistency of care, measurability of outcomes,
cost efficiency and will ultimately improve outcomes and quality of care. The
Company is expanding its clinical protocols and developing clinical pathways to
address the unique and specific needs of patients with pulmonary, cancer, renal
and cardiac conditions, among others.
LEVERAGE EXISTING INFRASTRUCTURE. The Company continues to centralize
business office and accounting operations to improve overall efficiency. The
Company is also negotiating system-wide vendor agreements to decrease per-site
costs of supplies, and plans to decrease per-site labor costs by refining its
care delivery models.
PATIENTS SERVED
The Company provides acute care services for critically ill or injured
patients suffering from multiple medical conditions and requiring an extended
length of stay of typically 30 to 60 days. Extended hospital stays are medically
necessary due to a combination of conditions, including:
- Respiratory conditions resulting from chronic obstructive pulmonary
disease and cancer. Many of the Company's patients require a tracheostomy
or ventilator care and/or weaning.
- Cancer conditions, including the management of patients undergoing
radiation therapy or chemotherapy. Many patients also require specialized
pain management.
- Cardiac conditions, including complicated myocardial infarction with or
without congestive heart failure, cardiac dysrhythmias requiring
intravenous drug therapy, post operative coronary bypass and aortic
aneurysm surgery.
- Renal conditions, ranging from acute kidney and urinary tract infections
to acute and/or chronic renal failure. These include management of renal
transplant patients.
- Neurological conditions, including cerebral vascular accidents,
craniotomies and other post-surgical conditions, brain and spinal cord
injuries and Guillain Barre and other degenerative syndromes.
Many of the Company's patients suffer from combinations of these conditions and
often require long-term intravenous antibiotic therapy, clinical nutrition, pain
control and wound management. In addition, the Company's patients are often
dependent on sophisticated technology for continued life support.
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<PAGE> 25
CLINICAL PATHWAYS
The Company delivers high quality patient care by following an
interdisciplinary care management model. The delivery model aligns quality,
costs and measurable outcomes with patient needs. Once a referral is made, the
relevant information is reviewed with the interdisciplinary team to determine if
it falls within established admission criteria. The team then processes the
referral and reports back promptly to the referral source. After admission, an
interdisciplinary clinical team consisting of a physician, the admissions
director, the medical director and nursing and therapy personnel complete a
comprehensive assessment of the patient. This provides for a coordinated
approach to the patient's care and sets internally developed benchmarks to be
monitored throughout treatment of the patient.
The overall goals of the Company's clinical pathways are to restore maximum
functioning, manage pain and assist the patient to return to normal activities
of daily living. Components of these pathways will be integrated, as needed, to
treat medically complex conditions, will be directed by an appropriate
specialist and will be combined with medical and psychological counseling, case
management and discharge planning. Among the clinical pathways under development
by the Company are the following:
Pulmonary Pathway. The Company weans patients from the use of
ventilators when physically possible. In addition, the interdisciplinary
team evaluates the patient and develops a treatment plan to provide upper
airway management, reduce aspiration, reduce lung infection and minimize
medical complications. The pulmonary pathway will be directed by a
pulmonologist.
Cancer Pathway. The cancer pathway is being designed to provide a
broad spectrum of care including pain management, nutritional care,
chemotherapy and access to radiation therapy. In addition, education and
counseling is provided to patients and families experiencing life changes
from cancer.
Renal Pathway. Renal diseases are among the most complex body system
failures, often requiring lengthy peritoneal or hemodialysis treatments,
non-invasive cardiopulmonary and metabolic monitoring, fluid and
electrolyte management and complex polydrug therapy. Directed by a
nephrologist, this pathway will use technologically sophisticated
equipment.
Cardiac Pathway. This pathway will be guided by cardiologists and will
offer specialized monitoring capabilities, physical and cardiac
rehabilitation and management of operative local and systemic
complications.
POTENTIAL MANAGEMENT SERVICES ORGANIZATION DEVELOPMENT
In response to the continued growth of managed care and the importance of
physicians in the Company's operating strategy, the Company is exploring the
formation of structured relationships, including MSOs, with key physicians in
selected markets. Through the joint development of treatment protocols and
benchmarks, the Company believes that it will be able to align its outcomes and
quality goals with those of its physicians. The Company also believes that more
structured physician relationships will enhance its ability to accept risk under
managed care arrangements with the objective of reducing costs and demonstrating
high quality outcomes. In addition, through a collaborative physician
arrangement, the Company may be better able to collect data and establish
clinical pathways to identify "best practices" and optimum treatment plans for
patient specific acute episodes of care.
SITE LOCATION/DEVELOPMENT CRITERIA
The Company's growth strategy is to continue to penetrate underserved
secondary markets in strong Host Hospitals. To achieve this objective, the
Company has developed a comprehensive, disciplined methodology to evaluate
potential geographic locations and identify the most attractive potential Host
Hospitals within those markets.
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<PAGE> 26
In evaluating geographic markets, Intensiva considers a number of factors.
First, the Company examines the state regulatory environment, reviewing and
discussing with the appropriate regulatory bodies the applicability of
certificate of need laws to the Company's operations and other regulatory
requirements. Next, the Company examines the reimbursement environment,
including the nature and penetration of managed care and the prevailing rates
for medical services. The Company then considers population demographics and
trends, including size, density, age, employment and income. Finally, the
Company considers the extent of any existing or contemplated competition,
including the size and reputation of other providers of similar services. In
considering competition, the Company's strategy is to target markets that have
no current competitive services and which, after the Company's entrance, would
be less attractive for any future competitor.
Once the Company has selected an attractive geographic market, it evaluates
potential Host Hospitals, targeting strong general acute care facilities in the
community, taking into account licensed bed capacity and occupancy rate, the
composition of the medical staff, reputation, financial strength and size and
scope of its network. The Company believes that having a strong host will
provide the Company with a number of advantages. Host Hospitals refer a
substantial number of patients to Intensiva hospitals, and the larger, stronger
general acute care hospital in a community generally will have a significant
proportion of the patient population sought by the Company. In addition, strong
hospitals tend to have highly qualified medical staffs. A significant portion of
the Company's medical staff will also be on staff at the Host Hospital. Also, by
being located within a strong Host Hospital, the Host Hospital's facilities are
immediately available if a patient requires access to its sophisticated
diagnostic equipment.
In each market in which Intensiva operates, the Company establishes a fully
licensed acute care hospital to be certified as a long-term care hospital by
Medicare. Intensiva's hospitals have an average of approximately 35 licensed
beds and generally are located on one floor of the Host Hospital. The initial
lease term is five or more years and may be renewed or extended under varying
renewal/extension terms.
FACILITIES
Intensiva currently operates two PPS-exempt long-term care hospital, five
hospitals in the qualification period to obtain PPS-exempt status as long-term
care hospitals, has entered into three additional leases to open acute long-term
care hospitals and has a letter of intent with a Host Hospital to open an acute
long-term care hospital. Once a lease has been signed, it takes approximately
four months to open the hospital and a minimum additional six months to receive
Medicare certification as a long-term care hospital. All of the Company's
hospitals are located within general acute care hospitals.
The following table presents information on the locations where the Company
provides its services:
<TABLE>
<CAPTION>
DATE OF
MEDICARE AVERAGE HOST
CERTIFICATION DAILY HOSPITAL SERVICE
DATE AS LONG-TERM LICENSED CENSUS IN LICENSED AREA
FACILITY OPENED HOSPITAL(1) BEDS AUGUST 1996(6) BEDS POPULATION
- ---------------------------- ---------- ------------ -------- -------------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Oklahoma City, Oklahoma..... 3/16/95 Nov. 95 38 17.5 298 1,015,000
Hammond, Indiana............ 12/26/95 Aug. 96 43 12.0 592 560,000
Beech Grove, Indiana........ 1/18/96 (Sept. 96) 37 8.5 420 460,000
Muskogee, Oklahoma.......... 2/29/96 (Oct. 96) 30 4.0 225 410,000
Kansas City, Kansas......... 4/29/96 (Nov. 96) 34(3) 3.4 249 640,000
Evansville, Indiana......... 6/19/96 (Jan. 97) 36(3) 3.5 416 795,000
Akron, Ohio................. 7/18/96 (Mar. 97) 36(3) 3.5 275 460,000
Muskegon, Michigan.......... Oct. 96(2) (June 97) 31 -- 228 440,000
Columbus, Ohio.............. Dec. 96(2) (Aug. 97) 40(4) -- 680 940,000
Fort Wayne, Indiana......... Dec. 96(2) (Aug. 97) 27(5) -- 262 360,000
</TABLE>
See notes on following page.
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<PAGE> 27
(1) Dates shown in parentheses are the anticipated effective dates as of which
the Company believes that it will receive long-term care hospital
certification from Medicare. Since the effective dates for such
certifications are based upon the date of review for the applicable
facility, the written confirmations of certification as a long-term care
hospital are typically received two or more months after the effective date.
There can be no assurance that certifications will be achieved as of such
effective date, or at all.
(2) Forecasted opening.
(3) The number of beds shown includes beds not being utilized as of August 31,
1996, but for which the Company has contractual rights to operate at its
option. At August 31, 1996, the Company utilized 20 beds in Kansas City,
Kansas, 15 beds in Evansville, Indiana, and 16 beds in Akron, Ohio.
(4) The lease provides for 40 beds initially, with the option under certain
conditions to lease space for an additional 20 beds.
(5) The lease provides for 27 beds initially, with the option under certain
conditions to lease space for an additional eight beds.
(6) Average Daily Census ("ADC") is computed by dividing total patient days
during the month by the number of calendar days in the applicable month that
each facility was open. ADC at any one facility for any particular month
will vary based upon a variety of factors, however, the August 1996 ADC
figures are consistent with the Company's expectations that hospitals in the
pre-PPS-exempt phase will have lower ADC than PPS-exempt facilities. The
Company does not believe that month-by-month ADC figures would provide
additional meaningful information.
The Company's hospital in Oklahoma City, Oklahoma is currently located in
Southwest Medical Center. Subsequent to the opening of that hospital, Southwest
Medical Center merged with Integris/Baptist Medical Center of Oklahoma, Inc.
("Baptist"). At the request of the merged entity, the Company has entered into a
lease to relocate its hospital to Baptist. Baptist has 529 licensed beds and an
occupancy rate of 69%. The lease has a seven-year term commencing on the date
that the Company's hospital relocates to Baptist, at which time the lease with
Southwest Medical Center will terminate. The Company has been notified by the
State of Oklahoma Department of Health that the move to Baptist may be
accomplished under the hospital's existing license. The Health Care Financing
Administration has informed the Company that the move will not result in a
change in the hospital's status as a certified Medicare provider exempt from
PPS. The Company believes that moving its clinical program will be beneficial to
its performance.
The Company has entered into a letter of intent with St. Francis Hospital
and Medical Center, located in Topeka, Kansas, and is currently negotiating a
lease for a hospital to be located within that general acute care hospital. The
letter of intent specifies that the lease will provide space for 30 to 35 beds.
St. Francis Hospital and Medical Center has 320 licensed beds and an occupancy
rate of 65%.
The Company entered into a lease with Deaconess Hospital in St. Louis,
Missouri, on September 14, 1995, to open an acute long-term care hospital. The
Company's request to the state regulatory agency for a determination that it was
not required to obtain a certificate of need was denied. The Company has filed a
lawsuit appealing that decision which is pending. See "--Legal Proceedings."
In connection with a lease between the Company and a hospital located in
Corpus Christi, Texas, the Company received a letter dated October 1, 1996, from
the hospital which purports to terminate the lease. The Company believes such
termination is in violation of the hospital's obligations thereunder and is
unjustified. Accordingly, the Company is reviewing available remedies.
Regardless of whether any effective remedies are available to it, the Company
does not believe the termination of this lease will have a material adverse
effect upon the Company's business, financial conditions or results of
operations.
Most of the Company's hospital leases contain non-competition provisions
pursuant to which the Host Hospital will not provide similar services within a
certain mile radius of the Host Hospital. In return, the Company agrees not to
own or operate another acute long-term care program or competitive business
within a certain radius of the Host Hospital.
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The Company leases approximately 4,000 square feet in St. Louis, Missouri,
for its corporate headquarters. The Company considers all of its physical
properties to be in good operating condition and suitable for the purposes for
which they are being used.
SOURCES OF REVENUE
The Company receives payment for health care services primarily from
non-governmental payors such as managed care organizations (PPOs, HMOs and
similar organizations) and other commercial health insurance carriers (e.g.
traditional indemnity insurance plans) and the federal government and state
governments under Medicare, Medicaid and other governmental programs. Consistent
with initiatives to control health care costs, the Company generally negotiates
payments with non-governmental payors based upon the type and extent of services
to be provided to individual patients. The Company currently has approximately
ten managed care contracts to provide services to participating members. These
managed care agreements are composed of per diem contracts and contracts with
negotiated discounts from established charges. The following table sets forth
the approximate percentages of the Company's net revenues derived from the
specified payor sources indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
1995 1996
------------ ----------
<S> <C> <C>
Medicare.............................................. 44.4% 65.4%
Medicaid.............................................. 2.3 1.7
All other payors(1)................................... 53.3 32.9
------ ----------
100.0% 100.0%
========== ========
</TABLE>
- ------------------------------
(1) Includes managed care organizations including Medicare managed care,
traditional indemnity insurers, third-party administrators and other
non-governmental payors.
The increase in the percentage of net revenues from Medicare for the six
months ended June 30, 1996, is due to the additional four hospitals opened
during that period. More than 90% of the net revenues of those four hospitals
was derived from Medicare during that period. For the one hospital certified as
a long-term care hospital for the period ended June 30, 1996, Medicare payments
constituted 46% of its revenue.
PATIENT REFERRAL AND ADMISSION
The Company's relationships with referral sources has a significant impact
on its operations. These referral sources make decisions based upon several
factors, including quality of care, ability to match intensity of care to
diagnosed condition, convenience for family and physicians, access to ongoing
clinical information, outcomes management and cost. Intensiva's single focus on
the critically ill or injured patient, its development of clinical pathways, its
location within a general acute care hospital, its management systems and its
low cost structure specifically address these key factors and make it an
attractive provider to payors and referral services.
Four major referral sources generate the majority of the Company's
admissions: general acute care hospitals, physicians, managed care organizations
and insurance companies. Key decision makers in the referral process include
treating physicians, discharge planners, case managers, social workers and
third-party administrators. The majority of the Company's patients are referred
directly from general acute care hospitals.
The Company seeks to maintain patient focus by carefully screening
potential patients. The criteria considered include length of stay, diagnoses,
complications and intensity and mix of services needed. This assessment is
coordinated by a Nurse Liaison.
Each facility has a Vice President of Provider Relations and a Nurse
Liaison who regularly visit referral sources to educate them about the services
and benefits of the Company's programs. The Vice President of Provider Relations
develops an annual admission plan for the clinical program, with
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<PAGE> 29
assistance from the on-site executive management team. The admission plan takes
into account a variety of factors, including population, demographic
characteristics, physician practice patterns and incidence of disability
statistics.
MANAGEMENT SYSTEMS
The Company provides each of its facilities with several key financial,
administrative, clinical and performance measurement systems, part of which was
developed by a national hospital systems vendor. The Company believes that by
standardizing these systems it has improved the efficiency and effectiveness of
its hospital operations and gives the Company the capability of integrating
financial, demographic and clinical information both locally and centrally. The
performance measurement system includes a wide variety of financial and
non-financial indicators that help monitor each Intensiva facility's results.
The Company also contracts with a national information services
organization which has developed a set of clinical outcomes measures which may
be used for external comparisons. The information is submitted to the vendor,
which maintains a nationwide data base used to generate periodic comparative
reports.
The Company has developed various other administrative and clinical systems
in template form which are being implemented at each of its facilities. The
Company believes its standardization strategy leverages the Company's knowledge,
experience and resources obtained from its exclusive focus on critically ill and
injured patients, for use in multiple locations.
MEDICAL ADVISORY BOARD
The Company intends to form a medical advisory board to provide the Company
with input on quality and efficiency of care initiatives. The board initially
will be composed of Intensiva physicians selected because of their expertise and
commitment to improving cost effective care through programmatic initiatives.
The board will serve a number of specific functions. Its central role will be in
the further development and roll-out of the Company's clinical pathways and
outcomes measurement system. It will also assist in the evaluation of clinical
performance compared to established outcomes indicators. Finally, it will assist
in the review of medical literature and keeping the Company appraised of
relevant medical research developments.
QUALITY ASSURANCE
Intensiva has implemented a Quality Assurance and Improvement Plan which
focuses on the continuing refinement of patient care services and work processes
to improve patient outcomes, increase efficiency, decrease costs and position
the Company as the preferred choice for critically ill and injured patients.
Each Intensiva facility has an Organizational Improvement Coordinator to
implement and monitor this plan, and each of Intensiva's program services is
designed to conform to industry guidelines including those set by the Joint
Commission on Accreditation of Healthcare Organizations ("JCAHO") and federal
and state regulatory authorities.
COMPETITION
A number of health care providers compete with the Company for the
admission and treatment of critically ill or injured patients. In each of the
Company's geographic markets, general acute care hospitals provide services
comparable to those offered by the Company. In addition, other health care
providers certified by Medicare as long-term care hospitals provide similar
services to those provided by the Company and some of which are in the Company's
geographic markets. Among these competitors are Vencor, Inc., American
Transitional Hospitals, Inc. and Transitional Hospitals Corporation. Many of
these general acute care hospitals and long-term care hospitals are larger and
more established than the Company's operations. Certain hospitals that compete
with the Company are operated by not-for-profit, non-taxpaying or governmental
agencies, which can finance capital
28
<PAGE> 30
expenditures on a tax-exempt basis, and which receive funds and charitable
contributions unavailable to the Company.
Cost containment efforts by federal and state governments and other
third-party payors designed to encourage more efficient utilization of acute
care services have generally resulted in lower hospital occupancy rates in
recent years. As a result of these efforts, a number of acute care hospitals
have converted to specialized care facilities. The Company may experience
increased competition from existing general acute care hospitals and converted
facilities.
Competition for patients covered by non-governmental reimbursement sources
is intense. The primary competitive factors among acute long-term care providers
include quality of services, charges for services, outcomes and responsiveness
to the needs of patients, families, payors and physicians. Other companies have
entered into the acute long-term care market with licensed hospitals that
compete with the Company, many of which are larger and have greater financial
resources than the Company.
PROFESSIONAL STAFF
Each of the Company's facilities is staffed with an interdisciplinary team
of health care professionals including physicians, nurses and therapists, who
specialize in areas needed for the treatment of the critically ill or injured.
Each Company facility has its own Medical Director and its own Vice President of
Patient Care Services. A professional nursing staff trained to care for the
extended stay acute patient is on duty 24 hours each day in each of the
Company's facilities. Other professional staff include respiratory therapists,
physical therapists, occupational therapists, speech/language pathologists,
social services and psychological services. Each Company facility has a Chief
Executive Officer who supervises and is responsible for day-to-day operations
and an Organizational Improvement Coordinator to direct an integrated quality
assurance and improvement program. The Company's corporate headquarters provides
services in the areas of system design, development, training, human resource
management, reimbursement expertise, financial control, legal advice, technical
accounting support, purchasing and facilities management.
GOVERNMENT REGULATION
The health care industry is subject to regulation by a number of
governmental agencies. Regulatory activities affect the Company's business
activities, requiring licensure and certification of its hospitals, regulating
relationships between health care providers and controlling reimbursement to the
Company for services provided.
Each Company hospital is a fully licensed acute care specialty hospital and
each has a separate Medicare provider agreement. Under the Medicare program,
after a hospital has been in operation for a minimum of six months, it is
certified as a long-term care hospital if its patients have an average length of
stay of at least 25 days. The Company's first hospital to be in operation for
six months or more has patients with an average length of stay in excess of 25
days and has been certified as a long-term care hospital. The Company is
awaiting written confirmation that its second hospital in operation in excess of
six months has been certified as a long-term care hospital (this hospital has
experienced an average length of stay in excess of 25 days).
The Company intends to operate all of its hospitals to achieve an average
length of stay of greater than 25 days. At August 31, 1996, the average length
of stay for all Intensiva hospitals was in excess of 30 days.
HEALTH CARE REFORM. In recent years, an increasing number of legislative
proposals have been introduced or proposed in Congress and in some state
legislatures which could affect major changes in the health care system. Several
of these legislative proposals have included provisions that affect long-term
care hospitals. Currently, there are various proposals which, if enacted, would
affect Medicare and Medicaid reimbursement for long-term care hospitals.
President Clinton's 1997 budget proposal would put a moratorium on the exemption
from PPS for new long-term care hospitals. The moratorium would be effective
upon enactment of the proposed legislation, or possibly retroactive to October
1,
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<PAGE> 31
1995. The effect of the moratorium would be to reimburse new long-term care
hospitals under PPS on the same basis that general acute care hospitals are
reimbursed. From an economic perspective, the Company could not open new
long-term care hospitals under that reimbursement system, and if existing
Company hospitals are included within the scope of the moratorium (none of which
were certified as long-term care hospitals as of October 1, 1995), those
hospitals would also be reimbursed at rates below incurred costs, rendering
these hospitals unprofitable. For existing long-term care hospitals, the
President's budget proposal would rebase cost limits for all long-term care
hospitals, capping reimbursable operating costs at 150% of the national mean
inpatient operating costs for all long-term care hospitals. Because of the high
acuity of the patients in the Company's hospitals, the Company's costs for
Medicare patients would probably exceed the amount of Medicare reimbursement for
those patients if the President's proposal is enacted. Further, for existing
long-term care hospitals, the President's budget proposal would reduce capital
payments by 15%, reduce future increases in the operating cost limits, eliminate
incentive payments for long-term care hospitals that reduce costs below cost
ceilings, and treat a move from a PPS hospital to a PPS-exempt setting as a
transfer rather than a discharge. All of the President's budget proposals would
reduce Medicare reimbursement to the Company's hospital. The President's current
proposals on these issues are similar to those contained in his 1996 budget
proposal. In the Balanced Budget Act of 1995, which was vetoed by President
Clinton, long-term care hospitals' reimbursable operating costs would have been
limited to 130% of the average payment amount for all long-term care hospitals
based on cost reports for cost years beginning in 1991. Implementation of this
proposal could have imposed a de facto moratorium on the creation of new
long-term care hospitals that treat high acuity Medicare patients. Also, the
Balanced Budget Act of 1995 would have reduced capital payments to long-term
care hospitals, as well as reduced future ceilings for operating cost increases.
It is anticipated that the Republican's 1997 budget plan would include most of
the same provisions for Medicare providers contained in the Balanced Budget Act
of 1995. All of these additional anticipated proposals would reduce Medicare
payments to the Company's hospitals. Other proposals to reform Medicare that
contain these and other changes to Medicare are being actively considered.
The proposals under consideration or others which may be proposed, could,
if adopted, have a material adverse effect on the Company's business, financial
condition or results of operations. However, the Company cannot predict the form
of any additional health care or budget reform legislation which may be proposed
in Congress or in state legislatures in the future, or whether any currently
proposed or new legislation, if any, will be adopted. Accordingly, the Company
is unable to assess the effect of any such legislation on its business. There
can be no assurance that any legislation will not have a material adverse effect
on the Company's business, financial condition or results of operation.
In August 1996 President Clinton signed into law the Health Insurance
Portability and Accountability Act of 1996, which has several provisions that
affect acute long-term care hospitals. In addition to establishing a national
health care fraud and abuse control program, this Act provides for mandatory
exclusion from Medicare and state health care programs of those individuals
convicted of a felony related to health care fraud. Permissive exclusion of
individuals convicted of misdemeanor criminal health care offenses for a
specified minimum period is also provided for in the Act. In addition, it
authorizes permissive exclusion from Medicare and state health care programs of
entities owned, controlled or managed by a sanctioned individual. Finally, the
bill would impose administrative sanctions up to $10,000 for each instance of
medically improper or unnecessary health care services. Although the Company
believes that it operates in compliance with this Act, there can be no assurance
that regulatory authorities will not challenge Intensiva's current or future
activities under the Act.
CERTIFICATE OF NEED AND STATE LICENSING. Certificate of Need ("CON")
regulations control the development and expansion of health care services and
facilities in certain states. CON laws generally provide that approval must be
obtained from the designated state health planning agency prior to expansion of
existing facilities, construction of new facilities, addition of beds,
acquisition of major items of equipment or introduction of new services. Because
of the additional regulatory burden and cost of complying with CON programs, as
of the date of the offering the Company operates hospitals
30
<PAGE> 32
only in states in which it is either exempt from the CON program or no CON
program exists. CONs may be required in connection with Intensiva's future
hospital expansion. There can be no assurance that the Company will be able to
obtain the CONs necessary for all of such projects. If the Company is unable to
obtain requisite CONs its growth and business could be adversely effected.
State licensing of hospitals is a prerequisite to the operation of each
hospital and to participation in government programs. Once a hospital becomes
licensed and operational, it must continue to comply with federal, state and
local licensing requirements in addition to local building and life-safety
codes. All of the Intensiva hospitals in operation have obtained the necessary
licenses to conduct business. Failure to obtain a necessary license or loss of
such a license, would necessitate not opening or halting operations of the
hospital. See "Business--Legal Proceedings."
MEDICARE AND MEDICAID. Medicare is a federal program that provides certain
hospital and medical insurance benefits to persons age 65 and over and to
certain disabled persons. Medicaid is a medical assistance program administered
by each state pursuant to which hospital benefits are available to certain low
income patients. Within the Medicare and Medicaid statutory framework, there are
substantial areas subject to administrative rulings, interpretations and
discretion which may affect payments received by a health care provider under
Medicare and Medicaid. A substantial portion of Intensiva's net revenues are
derived from patients covered by Medicare.
In order to receive Medicare reimbursement, a hospital must meet the
applicable Conditions of Participation set forth by the Department of Health and
Human Services ("HHS") relating to the type of hospital, its equipment,
personnel and standards of medical care, as well as comply with state and local
laws and regulations. Hospitals undergo periodic on-sight Medicare certification
surveys, which are generally limited if the hospital is accredited by JCAHO. As
of August 31, 1996, all seven of Intensiva's operating hospitals were certified
as Medicare providers and two of Intensiva's hospitals participate in their
respective state's Medicaid programs. A loss of certification could adversely
effect Intensiva's ability to receive payments under the Medicare and Medicaid
programs.
Prior to 1983, Medicare reimbursed hospitals for the reasonable direct and
indirect costs of the services provided to beneficiaries. The Social Security
Act Amendments of 1983 implemented PPS as a means of controlling health care
costs. Under PPS, Medicare inpatient costs are reimbursed based upon a fixed
payment amount per discharge based upon diagnosis-related groups ("DRGs").
Although the average length of stay varies for each DRG, the average stay for
all Medicare patients subject to PPS is approximately six days. An additional
outlier payment is made for patients with unusually extended lengths of stay or
higher treatment costs. Outlier payments are designed to cover only marginal
costs.
The Social Security Act Amendments of 1983 exempted psychiatric,
rehabilitation, cancer, children and general long-term hospitals from PPS. A
long-term hospital is defined as a hospital which has an average length of stay
of greater than 25 days. Inpatient operating costs for hospitals certified as
long-term hospitals are exempt from PPS and are reimbursed by Medicare under a
cost-based reimbursement system. Hospitals that receive cost-based reimbursement
establish a hospital specific cost per discharge ceiling in their second full
cost report year, which serves as a ceiling for future reimbursable costs. This
cost per discharge is subject to annual cost increases. Prior to setting that
ceiling, a hospital is reimbursed based on its reasonable allowable costs.
Hospitals may not be certified as long-term hospitals until they have operated
for at least six months. Prior to such time, reimbursement is based upon PPS
(unless another exemption from PPS is available).
Unlike the situation in the rehabilitation industry, general acute care
hospitals that have their own acute long-term care hospital facilities within
their hospital or on the same physical campus as their hospital are severely
restricted in terms of reimbursement. Current Medicare regulations establish a
more favorable reimbursement mechanism for hospitals within hospitals that have
a separate governing body, separate medical staff, separate chief medical
officer and separate chief executive officer, and that are not under the control
of their host facility. General acute care hospitals attempting to
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<PAGE> 33
operate their own hospitals within hospitals (including hospitals on the same
physical campus) cannot meet the independence criteria to be exempt from PPS.
Federal regulations provide that admission to and utilization of hospitals
by Medicare and Medicaid patients must be reviewed by Peer Review Organizations
("PRO") consisting of groups of practicing physicians and other health care
professionals, in order to insure efficient utilization of hospitals and
services. A PRO may conduct such a review either prospectively or retroactively
and may, as appropriate, recommend denial of payments for services provided to a
patient. Such review is subject to administrative and judicial appeal.
ANTI-FRAUD LEGISLATION. Medicare and Medicaid Anti-Fraud and Abuse
Amendments codified under Section 1128B(b) of the Social Security Act (the
"Anti-Fraud Amendments") prohibit certain business practices and relationships
that might affect provision and cost of health care services reimbursable under
Medicare and Medicaid. Sanctions for violating the Anti-Fraud Amendments
includes criminal and civil penalties and exclusion from Medicare and Medicaid
programs.
In December 1989, as part of the Omnibus Reconciliation Act of 1989,
Congress amended the Social Security Act passing the Ethics in Patient Referral
Act (commonly known as "Stark I") which provides that a physician who has a
financial relationship with a clinical laboratory is generally prohibited from
referring patients to that laboratory. The Omnibus Budget Reconciliation Act of
1993 contains provisions further amending the Social Security Act to greatly
expand the scope of Stark I which provisions are commonly referred to as Stark
II and with Stark I collectively referred to as the "Stark Provisions."
Effective January 1995, Stark II broadened the referral limitations of Stark I
to include, among other designated health services, inpatient and outpatient
hospital services. The Stark Provisions prohibit referrals for designated health
services for which Medicare and Medicaid would otherwise pay to entities in
which the referring physician, or a member of the physician's immediate family,
has a financial relationship. Under the Stark Provisions, a "financial
relationship" is defined as (i) an ownership or investment interest, (ii) a
compensation arrangement between the physician and the entity or (iii) an
interest in an entity that holds an ownership or investment interest in any
entity providing designated health services. If any such financial relationship
exists, the entity is generally prohibited from receiving reimbursement payments
for services under the Medicare or Medicaid programs.
In addition to the Stark Provisions, Congress has enacted the Medicare and
Medicaid Anti-Kickback statute and the Medicare and Medicaid Patient and Program
Protection Act of 1987 (the "Anti-Kickback Laws") which prohibit the payment of
remuneration to any person in return for the referral of Medicare or Medicaid
patients. Under the Anti-Kickback Laws, it is a felony punishable by up to a
$25,000 fine and/or up to five years in prison to knowingly or willfully offer,
pay, solicit or receive any remuneration, direct or indirect, in cash or in kind
for referring an individual for the furnishing of any item or service for which
payment may be made in whole or in part under the Medicare program or a state
health care program like Medicaid. In addition, civil sanctions in the form of
exclusions from participation in the Medicare and Medicaid programs may be
imposed for violations. Additionally, some private parties have asserted
violations of the Anti-Kickback Laws to invalidate leases between health care
providers.
Under each of the Anti-Fraud Amendments, the Stark Provisions and the
Anti-Kickback Laws, Congress authorized the creation of certain "safe harbor"
regulations which describe relationships and transactions that would not be
subject to prosecution under such statutes. Compensation arrangements are
generally exempted from these statutes if, among other things, the compensation
to be paid is set in advance, does not exceed fair market value and is not
determined in a manner that takes into account the volume or value of any
referrals or other business generated between the parties. Although, Intensiva
believes it is in compliance with these laws and regulations, there can be no
assurance that federal or state regulatory authorities will not challenge
Intensiva's current or future activities under these laws.
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GRAMM-RUDMAN-HOLLINGS ACT. The Company's Medicare revenues may be adversely
effected by the Balanced Budget and Emergency Deficit Control Act of 1985, as
amended (the "Gramm-Rudman-Hollings Act"). Under the Gramm-Rudman-Hollings Act,
if the Office of Management and Budget in the Congressional Budget Office
determines that the federal deficit will exceed certain specified levels for a
federal fiscal year, sufficient reductions in federal spending must be made to
remove the excess deficit. One-half of these reductions must be made in
non-defense programs. Although Medicaid funding is exempt from reductions under
the Gramm-Rudman-Hollings Act, the Medicare program may be reduced by up to four
percent. If reductions are made in the Medicare program, payments to providers
that are paid on a reasonable cost basis may be reduced.
STATE REGULATORY ENVIRONMENT. Certain states regulate hospital rates. At
this time, the Company does not operate any hospitals in any states that
regulate rates. However, the adoption of such legislation or other cost
containment measures in states in which the Company operates could have a
material adverse effect on the Company's hospitals and revenues and operating
income. The Company is unable to predict whether and in what form any such
legislation might be adopted. The Company's business, financial condition or
results of operations could be affected by other state rate setting laws.
Certain states in which the Company operates require hospitals to disclose
specified financial information. In addition to federal anti-fraud and
anti-kickback statutes, many states have enacted statewide limitations on
physician referrals to entities providing services reimbursed by Medicare,
Medicaid or other third-party payors. State laws governing physician referrals
vary from notice requirements to absolute prohibitions. Although Intensiva
believes it is in compliance with such regulations, there can be no assurance
that state regulatory authorities will not challenge current or future
relationships Intensiva has with physicians.
ACCREDITATION
Hospitals may receive accreditation from JCAHO, a nationwide
non-governmental commission which establishes standards relating to the physical
plan, administration, quality of patient care and operation of medical staffs of
hospitals. The purpose of this accreditation is to (i) promote ongoing
compliance with industry recognized standards for hospitals, (ii) assist
management in analyzing each hospital to identify opportunities to improve
patient care, and (iii) assist in patient attraction. Generally, hospitals and
certain other health care facilities are required to have been in operation for
at least six months in order to be eligible for accreditation by JCAHO. After
conducting on-site surveys, JCAHO awards accreditation for up to three years to
hospitals found to be in substantial compliance with JCAHO standards. Accredited
hospitals are periodically resurveyed, at the option of JCAHO, upon a major
change in facilities or organizations and after merger or consolidation. All
seven Intensiva hospitals have received JCAHO accreditation.
INSURANCE
The Company maintains professional liability coverage on each of its
facilities in addition to coverage for the customary risks inherent in the
operation of health care facilities and business in general. The current
policies provide coverage on an occurrence basis. The Company's management
believes that it has adequate professional liability coverage. The Company also
currently maintains a directors' and officers' liability insurance policy. The
Company believes that it will be able to continue to maintain adequate
insurance; however, there can be no assurance that adequate insurance will be
available on terms acceptable to the Company.
LEGAL PROCEEDINGS
The Company is not aware of any asserted or unasserted claims against it.
However, it can be expected that in the ordinary course of business various
claims may arise from time to time. The Company filed suit on February 16, 1996,
in the Circuit Court of Cole County, Missouri, against the Missouri Health
Facilities Review Committee. In the lawsuit, the Company seeks to overturn the
determination by the Missouri Health Facilities Review Committee that a
certificate of need is
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<PAGE> 35
required to open an acute long-term care hospital in St. Louis, Missouri. The
Company contends that it is not required to obtain a certificate of need because
its budgeted expenditures for capital expenditures and equipment fall below the
standard required for a certificate of need. This proceeding has been stayed
pending the outcome of similar litigation involving another party. Certificate
of need regulations generally control the development and expansion of health
care services and facilities in certain states, including Missouri. See
"Business--Government Regulation--Certificate of Need and State Licensing."
EMPLOYEES
The Company had approximately 158 full-time employees and 113 part-time
employees as of August 31, 1996. The Company believes its relationship with its
employees is good.
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<PAGE> 36
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers, directors and significant employees of the Company
are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------ --- ----------------------------------------------------
<S> <C> <C>
David W. Cross...................... 49 President and Chief Executive Officer, Director
John R. Lewis....................... 50 Executive Vice President and Chief Operating Officer
John P. Keefe....................... 47 Chief Financial Officer
Samuel A. Morse..................... 53 Executive Vice President, Operations
Kathie Nohre, R.N................... 51 Vice President, Professional Services
James D. Pomeroy.................... 49 Vice President, Business Development
Anthony J. Torrente................. 38 Vice President, Business Development
Jeffrey J. Collinson(1)............. 54 Director
Wilfred E. Jaeger, M.D.(1)(2)....... 40 Director
Phillip M. Nudelman, Ph.D........... 60 Director
David L. Steffy(1)(2)............... 53 Director
James B. Tananbaum, M.D.(2)......... 33 Director
</TABLE>
- ------------------------------
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
David W. Cross is a founder of the Company and has served as President and
Chief Executive Officer and as a Director since the Company's inception in 1994.
Prior to founding the Company, Mr. Cross was a founder, the President and Chief
Executive Officer, and a director of Advanced Rehabilitation Resources, Inc.,
serving 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.
Mr. Cross currently serves on the board of directors of Odyssey Healthcare,
Inc., a hospice health care company, and he is a Trustee and President-elect of
the Long Term Acute Care Hospital Association of America, a trade association.
Mr. Cross holds a B.A. from the University of California at Fullerton.
John R. Lewis is a founder of the Company and has served as Executive Vice
President and Chief Operating Officer since its inception in 1994. Prior to
joining the Company, Mr. Lewis was a co-founder of Advanced Rehabilitation
Resources, Inc. and served as its Chief Operating Officer from 1990 to 1993.
From 1984 until 1990, he served as the Chief Operating Officer of RehabCare
Group, Inc. and in 1993 and 1994 served in various senior executive positions
including Chief Operating Officer with RehabCare Group, Inc. Mr. Lewis holds an
M.A. from Ohio University.
John P. Keefe has served as Chief Financial Officer for the Company since
June 1995. From 1993 to 1995, Mr. Keefe served as Northwestern Region Area
Manager for Sons of Norway, a fraternal insurance company, and from 1988 to
1993, he served as Chief Financial Officer and Senior Vice President for
Safecare Health Services, a hospital management company. From 1980 until 1988,
he held senior level financial positions with American Medical International, a
hospital management company. He also served as the Chief Financial Officer for
the George Washington University Health Plan. Mr. Keefe is a certified public
accountant and holds a B.A. in business administration from Georgia State
University.
Samuel A. Morse has served as Executive Vice President, Operations for the
Company since February 1995. Prior to joining the Company, Mr. Morse was Vice
President of the acute long-term care division of Cornerstone Health Management,
Inc., a health care services company from 1994 to 1995. From 1992 to 1994, he
served as a Chief Executive Officer of the CPC Hospital in Arlington, Texas.
From 1991 to 1992, Mr. Morse served as Chief Executive Officer of the Charter
Hospital in Little
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<PAGE> 37
Rock, Arkansas. From 1990 to 1991, he served in active military service, as
Commander of an air Transportable Hospital during Operation Desert Storm.
Formerly, he served as Chief Executive Officer in both proprietary and
not-for-profit hospitals and hospital systems. Mr. Morse is a Fellow in the
American College of Healthcare Executives. He holds a B.S. in business
administration from Abilene Christian University and an M.S. in health care
administration from Trinity University.
Kathie Nohre, R.N. has served as Vice President, Professional Services
since November 1995. Prior to joining the Company, from 1994 to 1995, Ms. Nohre
was Regional Vice President of Operations for Postacute Services, Management
Division for Integrated Health Services, a publicly traded health care services
company. Prior to that she was Assistant Vice President of Patient Care Services
for Lake Forest Hospital from 1993 to 1994, and Assistant Executive Director of
Nursing for Humana Hospital, Hoffman Estates from 1989 to 1993. Ms. Nohre holds
a B.S. in nursing from the University of Phoenix and an M.B.A. from Illinois
Benedictine College.
James D. Pomeroy has served as Vice President, Business Development since
January 1995. Mr. Pomeroy served as President of Rehabilitation Consulting
Services from July 1990, until joining the Company. From 1984 to 1990, Mr.
Pomeroy was Executive Vice President of Business Development for Rehabilitation
Institutes of America. Mr. Pomeroy holds a B.S.W. and M.A. from Southern
Illinois University-Edwardsville.
Anthony J. Torrente has served as Vice President, Business Development for
the Company since January 1995. Prior to joining the Company, Mr. Torrente was
Group Vice President, New Markets for RehabCare Group, Inc. from 1993 to 1995,
and Vice President, Business Development with Advanced Rehabilitation Resources,
Inc. from 1991 to 1993. Formerly, he served as a development officer for The
Rader Institute, a health care services company, from 1988 to 1991. Mr. Torrente
holds a B.S. in business administration from Southeast Missouri State
University.
Jeffrey J. Collinson has served as a director of the Company since December
1994. Since 1990, Mr. Collinson has served as President of Collinson Howe
Venture Partners Inc. (formerly named Schroder Venture Advisers, Inc.), a
venture capital management firm, and from 1983 to 1990, was President of
Schroder Venture Managers, Inc., a venture capital firm. Mr. Collinson is also a
Director of Incyte Pharmaceuticals, Inc., Neurogen Corporation and Spare,
Kaplan, Bischel & Associates.
Wilfred E. Jaeger, M.D. has served as a director of the Company since
December 1994. Dr. Jaeger is a founding General Partner of the lead investor in
Intensiva, Three Arch Partners, a venture capital firm that focuses exclusively
on health care investments. Prior to joining Three Arch Partners in 1993, he was
a partner at Schroder Venture Advisors, Inc. from 1992 to 1993. From 1991 to
1992, Dr. Jaeger was an Associate and then General Partner of The Phoenix
Partners, a venture capital firm. Dr. Jaeger received his medical degree from
the University of British Columbia in Vancouver, Canada. He practiced medicine
for six years before earning an M.B.A. from Stanford University.
Phillip M. Nudelman, Ph.D. has served as a director of the Company since
June 1996. Since 1991, Dr. Nudelman has served as President and Chief Executive
Officer of Group Health Cooperative of Puget Sound, a not-for-profit managed
healthcare system with 10,000 employees that provides health care services to
over 650,000 people. Dr. Nudelman joined Group Health in 1973, and has served in
various senior level positions. Dr. Nudelman served on the White House Task
Force on Healthcare Reform and serves on the board of SpaceLabs Medical, Inc.,
Advanced Technology Laboratories, Inc., Cell Therapeutics, Inc., and Cytran,
Inc. He holds degrees in microbiology and pharmacy from the University of
Washington and an M.B.A. and a Ph.D. in Health Systems Management from Pacific
Western University.
David L. Steffy is a founder of the Company and has served as a director
since its inception. From 1985 to 1996, Mr. Steffy was Vice Chairman and
Director of Community Health Systems, a company he co-founded. From 1979 to
1985, he held management positions and was a co-founder of Republic Health
Corporation as well as a senior manager of Hospital Affiliates International.
Until 1979, Mr. Steffy served as Director, Hospital Administration of the Ohio
State University.
36
<PAGE> 38
James B. Tananbaum, M.D. has served as a director of the Company since
December 1994. Since 1993, Dr. Tananbaum has served as a venture partner with
Sierra Ventures, a leading venture capital firm. From 1991 to 1993, Dr.
Tananbaum held various executive positions with Merck, Inc. Dr. Tananbaum is a
co-founder and Director of GelTex Pharmaceuticals, Inc., a biopolymer
pharmaceutical company. Dr. Tananbaum is the founding Chairman of Orange Coast
Managed Care Services, a physician practice management company in Southern
California. Dr. Tananbaum holds a medical degree from Harvard Medical School, an
M.B.A. from Harvard Business School, and a B.S.E.E. and B.S. from Yale
University.
DIRECTOR COMPENSATION
Non-employee directors other than Mr. Collinson and Drs. Jaeger and
Tananbaum receive $2,500 for each board meeting attended. After the first
election of directors subsequent to the closing of this offering, all
non-employee directors will receive $2,500 for each board meeting attended. The
Company anticipates four regularly scheduled board meetings per year.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: an Audit Committee and
a Compensation Committee. The Audit Committee has general responsibility for
supervision of financial controls as well as accounting and audit activities of
the Company. The Audit Committee annually reviews the qualifications of the
Company's independent certified public accountants, makes recommendations to the
Board of Directors concerning the selection of the accountants and reviews the
planning, fees and results of the accountants' audit. The Compensation Committee
has the authority to (i) administer the Company's stock option plan, including
the selection of optionees and the timing of option grants, and (ii) review and
monitor key employee compensation and benefits policies and administer the
Company's management compensation plans. The current members of the Audit
Committee are Messrs. Jeffrey J. Collinson, David L. Steffy, and Dr. Wilfred E.
Jaeger. The current members of the Compensation Committee are David L. Steffy
and Drs. Jaeger and Tananbaum.
EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth for the year
ended December 31, 1995, the compensation paid by the Company to Mr. Cross, the
Company's President and Chief Executive Officer and each of the other four most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers") who earned salary and bonuses in excess of $100,000 during
1995 for all services rendered in all capacities in which they served:
<TABLE>
<CAPTION>
OTHER ANNUAL
NAME AND PRINCIPAL POSITION SALARY($) BONUS($) COMPENSATION($)
- ---------------------------------------------------------- --------- -------- ---------------
<S> <C> <C> <C>
David W. Cross, President and Chief Executive Officer..... $ 125,000 $93,750 $ 7,800
John R. Lewis, Executive Vice President................... 100,000 75,000 7,800
Samuel A. Morse, Executive Vice President................. 88,936 44,000 --
Anthony J. Torrente, Vice President, Business
Development............................................. 90,000 46,250 --
John P. Keefe, Chief Financial Officer.................... 70,000 50,765(1) --
</TABLE>
- ------------------------------
(1) Includes a relocation bonus payment of $36,765. In connection with Mr.
Keefe's relocation to St. Louis, the Company loaned Mr. Keefe $154,000,
without interest, for a bridge loan on his St. Louis home until his prior
home was sold. The loan was secured by deeds of trust on both homes and was
repaid in full upon sale of his prior home which occurred prior to December
31, 1995.
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<PAGE> 39
Option Grants During 1995. The following table sets forth the option grants
during 1995 to the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
--------------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK PRICE
SECURITIES TOTAL OPTIONS APPRECIATION FOR
UNDERLYING GRANTED TO EXERCISE OPTION TERM
OPTIONS EMPLOYEES IN OR BASE EXPIRATION -------------------
NAME GRANTED(#) FISCAL YEAR PRICE ($/SH) DATE 5%($) 10%($)
- -------------------------- ---------- ------------- ------------ ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
David W. Cross............ 33,000 6.1% $ 0.08 12/15/2005 $1,650 $ 4,290
John R. Lewis............. 33,000 6.1% 0.08 12/15/2005 1,650 4,290
Samuel A. Morse........... 107,800 20.1% 0.08 2/13/2005 5,390 14,014
Anthony J. Torrente....... 80,850 15.1% 0.08 1/26/2005 4,043 10,511
Anthony J. Torrente....... 19,250 3.6% 0.08 11/27/2005 963 2,503
John P. Keefe............. 107,800 20.1% 0.08 7/28/2005 5,390 14,014
</TABLE>
Option Exercises and Year-End Option Values. There were no option exercises
during 1995 by the Named Executive Officers.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each of Messrs.
Cross, Lewis, Morse, Torrente and Keefe, providing for annual salaries of
$175,000, $140,000, $125,000, $90,000 and $135,000, respectively. All the
agreements provide for discretionary bonuses except for Mr. Torrente's, which
provides for additional compensation in the form of commissions. Messrs. Cross'
and Lewis' agreements provide that, as a supplemental bonus, certain notes made
by each of them and acquired by the Company from RehabCare Group, Inc. will be
forgiven, if they are employed by the Company on September 22, 1997. Messrs.
Cross' and Lewis' agreements provide for a term of employment through September
1999, while the other agreements provide for two-year initial terms. The
agreements provide that if the Company terminates employment without cause (as
defined in the agreements) severance benefits of one year's salary will be paid
(six months' salary in the case of Mr. Torrente). All of the agreements provide
that the employee will not compete with the Company for 12 months following
termination of employment (six months in the case of Mr. Torrente).
STOCK OPTION PLAN
Under the Company's Stock Option Plan (the "Stock Option Plan"), which was
adopted on January 26, 1995, 785,400 shares of Common Stock are reserved for
issuance upon exercise of stock options. The Stock Option Plan is designed as a
means to retain and motivate key employees and directors. The Compensation
Committee of the Board of Directors administers and interprets the Stock Option
Plan and is authorized to grant options thereunder to all eligible employees and
directors of the Company, except that no incentive stock options (as defined in
Section 422 of the Internal Revenue Code of 1986, as amended) may be granted to
a director who is not also an employee of the Company or a subsidiary.
The Stock Option Plan provides for the granting of both incentive stock
options and nonqualified stock options. Options are granted under the Stock
Option Plan on such terms and at such prices as determined by the Compensation
Committee, except that the per share exercise price of incentive stock options
cannot be less than the fair market value of the Common Stock on the date of
grant. Each option is exercisable after the period or periods specified in the
option agreement, but no option may be exercisable after the expiration of ten
years from the date of grant. Options granted to an individual who owns (or is
deemed to own) at least 10% of the total combined voting power of all classes of
stock of the Company must have an exercise price of at least 110% of the fair
market value of the Common Stock on the date of grant and a term of no more than
five years. Options granted under the Stock Option Plan are not transferable
other than by will or by the laws of descent and distribution. The
38
<PAGE> 40
Board of Directors has the authority to amend or terminate the Stock Option
Plan, provided that no such action may impair the rights of the holder of any
outstanding option without the written consent of such holder, and provided
further that certain amendments of the Stock Option Plan are subject to
stockholder approval. Unless terminated sooner, the Stock Option Plan will
continue in effect until all options granted thereunder have expired or been
exercised, provided that no options may be granted after 10 years from the date
the Board of Directors adopted the Stock Option Plan.
As of August 31, 1996, the Company had outstanding options to purchase an
aggregate of 575,850 shares of Common Stock under the Stock Option Plan at a
weighted average exercise price of approximately $0.74 per share.
401(k) PLAN
As of September 22, 1995, the Company adopted a 401(k) plan (the "401(k)
Plan"), effective January 1, 1996. All employees of the Company (other than
officers of the Company) and all employees of subsidiaries of the Company
adopting the 401(k) Plan who are at least 21 years old and have performed one
month of service are eligible to participate in the 401(k) Plan on the first day
of the month following the date such an employee meets the 401(k) Plan's
eligibility requirements. The Company contributes to the 401(k) Plan an amount
equal to the participant's salary reduction election, in an amount up to 15% of
the participant's salary, plus an amount equal to 25% of each participant's
salary reduction contributions for a plan year. The 401(k) Plan also allows the
Company to make other discretionary matching contributions, which will be
determined by the Board of Directors from time to time.
The Company's matching contributions on behalf of an eligible employee
generally become fully vested if such employee reaches normal retirement age,
dies or becomes disabled while an employee. Such matching contributions vest on
a pro rata basis over a five-year period from the date of the employee's
commencement of employment with the Company or a related employer.
An employee generally will be entitled to payment of such employee's total
account balance under the 401(k) Plan upon such employee's retirement, death or
permanent disability. In the event employment is terminated for any other
reason, an employee will be entitled to payment of such employee's vested
account balance. See Note 5 of Notes to Consolidated Financial Statements.
39
<PAGE> 41
CERTAIN TRANSACTIONS
On September 22, 1994, 1,305,148 shares of the Company's Common Stock (as
adjusted for subsequent stock splits) were sold to the following investors:
David W. Cross 326,287 shares; John R. Lewis 326,287 shares; David L. Steffy
326,287 shares; and RehabCare Group, Inc. 326,287 shares. In connection with
that transaction, the Company entered into a Transition Agreement with RehabCare
Group, Inc., Messrs. Cross and Lewis. Pursuant to the terms of the Transition
Agreement, RehabCare Group, Inc. loaned the Company a total of $265,200 pursuant
to the terms of a revolving credit note with interest at the rate of one percent
above the interest rate announced from time to time by The Boatmen's National
Bank of St. Louis as its corporate base rate. The Company repaid this loan in
full on March 29, 1996. Under the Transition Agreement, RehabCare Group, Inc.
was obligated to provide certain start-up services to the Company and to make
available certain purchased services at fair market value. The Transition
Agreement terminated on December 30, 1994.
On September 22, 1994, the Company also entered into a Stockholders'
Agreement, which has subsequently terminated, with Messrs. Cross, Lewis and
Steffy, and RehabCare Group, Inc., concerning, among other things, the
disposition of any shares of Common Stock owned by the stockholders, rights to
purchase additional shares of Common Stock, election of directors and officers,
and certain special voting procedures. On September 22, 1994, the Company and
RehabCare Group, Inc. also entered into Non-Compete, Non-Hire, Non-Disclosure
and Release Agreement whereby the Company and RehabCare Group, Inc. agreed for a
certain defined period not to compete, not to hire the other Company's employees
and not to disclose any confidential information, and also released each other
from any claims that might exist. Messrs. Cross, Lewis and Steffy also entered
into similar agreements with RehabCare Group, Inc. The non-hire and
non-competition covenants in said agreements have terminated.
On December 30, 1994, and January 6, 1995, the Company sold a total of
630,000 shares of its Series A Convertible Preferred Stock (the "Series A
Transactions"), convertible into an aggregate of 3,465,000 shares of Common
Stock, at an as converted price of $1.82 per share (as adjusted for subsequent
stock splits) to investors that included, among others, the following 5%
stockholders, directors and entities associated with directors: ALTA V Limited
Partnership, 98,960 shares; Customs House Partners, 1,040 shares; Sierra
Ventures IV, L.P., 192,300 shares; Sierra Ventures IV International, L.P., 7,700
shares; Weiss, Peck & Greer Venture Associates III, L.P., 41,160 shares; WPG
Enterprise Fund II, L.P., 58,840 shares; Schroder Ventures Limited Partnership,
60,000 shares; Schroder Ventures U.S. Trust, 15,000 shares; Schroders
Incorporated, 50,000 shares; Three Arch Partners, L.P., 81,600 shares; and Three
Arch Associates, L.P., 18,400 shares.
As part of the Series A Transactions, the Company entered into a
Stockholders' Agreement with all of the Company's stockholders that provided,
among other things, for certain rights upon disposition of any securities by a
stockholder, rights to purchase additional securities issued by the Company,
election of directors and the conduct of the Company's business. The
Stockholders' Agreement was amended and restated on December 20, 1995, in
connection with the issuance of the Company's Series B Convertible Preferred
Stock. The Amended and Restated Stockholders' Agreement terminates on the
closing of this Offering.
Holders of shares of Series A Convertible Preferred Stock and Series B
Convertible Preferred Stock and Messrs. Cross, Lewis, Steffy and RehabCare
Group, Inc. are entitled to certain registration rights in respect of the Common
Stock issued or issuable on conversion thereof. See "Description of Capital
Stock--Registration Rights."
On December 22, 1995, the Company sold a total of 405,994 shares of its
Series B Convertible Preferred Stock, convertible into an aggregate of 2,232,967
shares of Common Stock, at an as converted price of $3.76 per share (as adjusted
for subsequent stock splits) to investors that included, among others, the
following 5% stockholders, directors and entities associated with directors:
ALTA V Limited Partnership, 47,830 shares; Customs House Partners, 503 shares;
Sierra Ventures IV, L.P., 69,708 shares; Sierra Ventures IV International, L.P.,
2,791 shares; Weiss, Peck & Greer Venture Associates III, L.P.,
40
<PAGE> 42
21,943 shares; WPG Enterprise Fund II, L.P., 26,390 shares; Schroder Ventures
Limited Partnership, 8,159 shares; Schroder Ventures U.S. Trust, 2,040 shares;
Schroders Incorporated, 6,800 shares; Three Arch Partners, L.P., 39,456 shares;
Three Arch Associates, L.P., 8,877 shares; Mayfield VIII, 162,922 shares; and
Mayfield Associates Fund II, 8,575 shares.
For a description of compensation of officers and directors of the Company
and the eligibility of officers and directors of the Company to participate in
the Company's employee benefit plans, see "Management--Director Compensation"
and "--Executive Compensation."
For a description of limitations of liability and certain indemnification
arrangements with respect to the Company's directors and officers, see
"Description of Capital Stock--Director Liability and Indemnification."
41
<PAGE> 43
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to the beneficial
ownership of the Company's outstanding Common Stock as of August 31, 1996, and
as adjusted to reflect the sale of the Common Stock offered hereby by (i) each
person known by the Company to be the beneficial owner of more than 5% of the
outstanding shares of Common Stock, (ii) each director or executive officer of
the Company who beneficially owns any shares, and (iii) all directors and
executive officers of the Company as a group. Except as otherwise indicated, the
persons listed below have sole voting and investment power with respect to all
shares of Common Stock owned by them, except to the extent such power may be
shared with a spouse.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR TO THE SHARES BENEFICIALLY OWNED
OFFERING(1) NUMBER OF AFTER THE OFFERING(1)
----------------------- SHARES --------------------------
BENEFICIAL OWNER NUMBER PERCENT(2) OFFERED NUMBER PERCENT(2)
- ------------------------------------------ --------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Sierra Ventures(3)........................ 1,498,744 21.3% -0- 1,498,744 15.7%
3000 Sand Hill Road
Building Four, Suite 210
Menlo Park, California 94025
James B. Tananbaum, M.D.(4)............... 1,498,744 21.3 -0- 1,498,744 15.7
Schroder(5)............................... 780,994 11.1 -0- 780,994 8.2
c/o Collinson Howe Venture Partners
1055 Washington Boulevard
Stamford, Connecticut 06901
Jeffrey J. Collinson(6)................... 780,994 11.1 -0- 780,994 8.2
Weiss, Peck & Greer(7).................... 815,831 11.6 -0- 1,065,831(19) 11.2
555 California Street
Suite 4760
San Francisco, California 94104
Funds affiliated with
Burr, Egan, DeLeage & Co.(8).............. 815,831 11.6 -0- 815,831 8.6
One Embarcadero Center
Suite 4050
San Francisco, California 94111
Three Arch(9)............................. 842,781 12.0 -0- 842,781 8.8
2800 Sand Hill Road
Suite 270
Menlo Park, California 94025
Wilfred E. Jaeger, M.D.(10)............... 842,781 12.0 -0- 842,781 8.8
Mayfield(11).............................. 943,233 13.4 -0- 943,233 9.9
2800 Sand Hill Road
Menlo Park, California 94025
David W. Cross(12)........................ 326,287 4.6 -0- 326,287 3.4
John R. Lewis(13)......................... 326,287 4.6 -0- 326,287 3.4
David L. Steffy........................... 326,287 4.6 -0- 326,287 3.4
John P. Keefe(14)......................... 26,950 0.4 -0- 26,950 0.3
Samuel A. Morse(15)....................... 39,526 0.6 -0- 39,526 0.4
Anthony J. Torrente(16)................... 29,645 0.4 -0- 29,645 0.3
James D. Pomeroy(17)...................... 32,340 0.5 -0- 32,340 0.3
Kathie Nohre, R.N.(18).................... -0- -0- -0- -0- 0
RehabCare Group, Inc...................... 326,287 4.6 -0- 326,287 3.4
All Directors and Executive Officers
as a Group (11 Persons)................. 4,229,841 59.1% -0- 4,229,841 43.8%
</TABLE>
- ------------------------------
(1) All numbers based upon 7,030,067 shares of Common Stock issued and
outstanding prior to this Offering and 9,530,067 shares of Common Stock
issued and outstanding immediately after this
42
<PAGE> 44
Offering. This includes 5,697,967 shares of Common Stock to be issued upon
conversion of the Convertible Preferred Stock immediately prior to
consummation of the sale of Common Stock pursuant to this offering, but
does not include 15,950 shares issuable upon exercise of warrants.
(2) Pursuant to rules of the Securities and Exchange Commission certain shares
of Common Stock which a person has the right to acquire within 60 days of
the date hereof pursuant to the exercise of stock options are deemed to be
outstanding for the purpose of computing the percentage ownership of such
person, but are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(3) Includes 1,441,044 shares held by Sierra Ventures IV, L.P. and 57,700
shares held by Sierra Ventures IV International, L.P. (collectively these
entities are referred to as "Sierra Ventures"). James B. Tananbaum, M.D., a
director of the Company, shares voting and investment powers with respect
to such shares. Dr. Tananbaum disclaims beneficial ownership of shares held
by Sierra Ventures, except to the extent of his proportionate interest
therein.
(4) Includes 1,441,044 shares held by Sierra Ventures IV, L.P. and 57,700
shares held by Sierra Ventures IV International, L.P. (collectively these
entities are referred to as "Sierra Ventures"). James B. Tananbaum, M.D., a
director of the Company, shares voting and investment powers with respect
to such shares. Dr. Tananbaum disclaims beneficial ownership of shares held
by Sierra Ventures, except to the extent of his proportionate interest
therein.
(5) Includes 312,400 shares held by Schroders Incorporated, 374,874 shares held
by Schroder Ventures Limited Partnership and 93,720 shares held by Schroder
Ventures U.S. Trust (collectively these entities are referred to as
"Schroder"). Jeffrey J. Collinson, a director of the Company, shares voting
and investment power with respect to such shares. Mr. Collinson disclaims
beneficial ownership of shares held by the Schroder entities, except to the
extent of his proportionate interest therein.
(6) Includes 312,400 shares held by Schroders Incorporated, 374,874 shares held
by Schroder Ventures Limited Partnership and 93,720 shares held by Schroder
Ventures U.S. Trust (collectively these entities are referred to as
"Schroder"). Jeffrey J. Collinson, a director of the Company, shares voting
and investment power with respect to such shares. Mr. Collinson disclaims
beneficial ownership of shares held by the Schroder entities, except to the
extent of his proportionate interest therein.
(7) Includes 347,066 shares held by Weiss, Peck & Greer Venture Associates III,
L.P. and 468,765 shares held by WPG Enterprise Fund II, L.P. (collectively
these entities are referred to as "Weiss, Peck & Greer"). Ellen M. Feeney
shares voting and investment power with respect to such shares. Ms. Feeney
disclaims beneficial ownership of shares held by Weiss, Peck & Greer,
except to the extent of her proportionate interest therein.
(8) Includes 807,345 shares held by ALTA V Limited Partnership and 8,486 shares
held by Customs House Partners. The respective general partners of these
funds exercise sole voting and investment powers with respect to shares
held by these funds. Mr. Guy Nohra is a general partner of ALTA V
Management Partners, L.P. (which is the general partner of ALTA V Limited
Partnership) and as a general partner of the fund he may be deemed to share
voting and investment power with respect to shares held by ALTA V Limited
Partnership. Mr. Nohra disclaims beneficial ownership of shares held by
ALTA V Limited Partnership, except to the extent of his proportionate
pecuniary interest therein. Mr. Nohra disclaims all beneficial ownership of
all shares held by Customs House Partners.
(9) Includes 687,797 shares held by Three Arch Partners, L.P. and 154,984
shares held by Three Arch Associates, L.P. (collectively these entities are
referred to as "Three Arch"). Wilfred E. Jaeger, M.D. shares voting and
investment power with respect to such shares. Dr. Jaeger disclaims
beneficial ownership of shares held by Three Arch, except to the extent of
his proportionate interest therein. Messrs. Lewis and Steffy are limited
partners of Three Arch Partners, L.P., but do not have voting or investment
power with respect to such shares.
(10) Includes 687,797 shares held by Three Arch Partners, L.P. and 154,984
shares held by Three Arch Associates, L.P. (collectively these entities are
referred to as "Three Arch"). Wilfred E. Jaeger, M.D., a director of the
Company, shares voting and investment power with respect to such shares.
Dr. Jaeger disclaims beneficial ownership of shares held by Three Arch,
except to the extent of his proportionate interest therein. Messrs. Lewis
and Steffy are limited partners of
43
<PAGE> 45
Three Arch Partners, L.P., but do not have voting or investment power with
respect to such shares.
(11) Includes 896,071 shares held by Mayfield VIII and 47,162 shares held by
Mayfield Associates Fund II (collectively these entities are referred to as
"Mayfield"). Wende S. Hutton shares voting and investment power with
respect to such shares held by Mayfield VIII, but has no voting or
investment power with respect to shares held by Mayfield Associates Fund
II. Ms. Hutton disclaims beneficial ownership of shares held by Mayfield,
except to the extent of her proportionate interest therein.
(12) Mr. Cross holds options for 33,000 shares, of which none are exercisable
within 60 days and none are included in shares beneficially owned.
(13) Mr. Lewis holds options for 33,000 shares, of which none are exercisable
within 60 days of August 31, 1996, and none are included in the shares
beneficially owned.
(14) Mr. Keefe holds options for 107,800 shares, of which 26,950 are exercisable
within 60 days of August 31, 1996, and are included in the shares
beneficially owned.
(15) Mr. Morse holds options for 107,800 shares, of which 39,526 are exercisable
within 60 days of August 31, 1996, and are included in the shares
beneficially owned.
(16) Mr. Torrente holds options for 100,100 shares, of which 29,645 are
exercisable within 60 days of August 31, 1996, and are included in the
shares beneficially owned.
(17) Mr. Pomeroy holds options for 80,850 shares, of which 32,340 are
exercisable within 60 days of August 31, 1996, and are included in the
shares beneficially owned.
(18) Ms. Nohre holds options for 27,500 shares, of which none are exercisable
within 60 days of August 31, 1996, and none are included in the shares
beneficially owned.
(19) Includes up to 250,000 shares which may be purchased by affiliates of
Weiss, Peck & Greer in this Offering.
RehabCare Group, Inc. was one of the founders of the Company, and James M.
Usdan, President and Chief Executive Officer of RehabCare Group, Inc. served as
a director of the Company from September 1994 through July 1996. See "Certain
Transactions."
Assuming conversion of the Convertible Preferred Stock, there are 18
holders of record of the Company's Common Stock as of August 31, 1996.
44
<PAGE> 46
DESCRIPTION OF CAPITAL STOCK
The statements made under this section include summaries of certain
provisions contained in the Company's Third Amended and Restated Certificate of
Incorporation ("Certificate of Incorporation") and in its Amended and Restated
By-Laws ("By-Laws"), each of which will become effective prior to this Offering.
These statements do not purport to be complete and are qualified in their
entirety by reference to the Certificate of Incorporation and By-Laws, copies of
which are filed as exhibits to the Registration Statement of which this
Prospectus is a part.
Prior to the filing and effectiveness of the Certificate of Incorporation,
a total of 70,000,000 shares of Common Stock, par value $0.001 per share,
630,000 shares of Series A Convertible Preferred Stock, par value $0.001 per
share, 405,994 shares of Series B Convertible Preferred Stock, par value $0.001
per share, and 30,000,000 shares of Preferred Stock, par value $0.001 per share
(the "Undesignated Preferred Stock") are authorized. Upon filing and
effectiveness of the Certificate of Incorporation, only the Common Stock and the
Undesignated Preferred Stock will be authorized, of which 7,030,067 shares of
Common Stock will be outstanding and no shares of Undesignated Preferred Stock
will be outstanding. As of August 31, 1996, 1,332,100 shares of Common Stock
were issued and outstanding. In addition, 575,850 shares of Common Stock are
issuable pursuant to options granted under the Company's Stock Option Plan,
15,950 shares of Series B Convertible Preferred Stock are issuable upon exercise
of outstanding warrants to purchase such shares, 5,697,967 shares of Common
Stock are issuable pursuant to conversion of the Convertible Preferred Stock,
and 209,550 shares are available for the grant of additional options under the
Stock Option Plan.
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders (except for
certain matters upon which the holders of Convertible Preferred Stock are
entitle to vote upon as a class) and do not have cumulative voting rights.
Subject to preferences that may be applicable to any outstanding shares of
Convertible Preferred Stock and the Undesignated Preferred Stock, holders of
Common Stock are entitled to receive ratably such dividends, if any, as may be
declared from time to time by the Board of Directors of the Company out of funds
legally available therefor. See "Dividend Policy." All outstanding shares of
Common Stock are, and the shares to be sold in this Offering when issued and
paid for will be, fully paid and nonassessable, and the holders thereof will
have no preferences or conversion, exchange or preemptive rights. In the event
of any liquidation, dissolution or winding up of the affairs of the Company,
holders of Common Stock will be entitled to share ratably in the assets of the
Company remaining after payment or provision for payment of all of the Company's
debts and obligations and liquidation payments to holders of outstanding shares
of Convertible Preferred Stock and Undesignated Preferred Stock, if any.
UNDESIGNATED PREFERRED STOCK
The Certificate of Incorporation authorizes the designation and issuance by
the Company of 30,000,000 shares of Undesignated Preferred Stock issuable in one
or more series or classes. Under the Certificate of Incorporation the Company's
Board of Directors is authorized, without further shareholder action, to provide
for the issuance of Undesignated Preferred Stock in one or more classes or
series in such number of shares, and with such voting rights, designations,
preferences, limitations and special or relative rights (if any) as shall be set
forth in resolutions providing for the issuance thereof adopted by the Board of
Directors. The Board of Directors is authorized to determine, among other
things, with respect to each class or series of Undesignated Preferred Stock:
(i) the number of shares constituting that class or series; (ii) the dividend
rate, whether dividends will be cumulative, and, if so, from which date or
dates; (iii) whether, and upon what terms, such class or series will have voting
rights, in addition to any voting rights provided by law; (iv) whether, and upon
what terms, such class or series will have conversion privileges (including
rights to convert such stock into other capital stock of the Company or any
other entity (so-called "poison pill" stock)); (v) whether, and upon what
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<PAGE> 47
terms, such class or series will be redeemable at the option of the Company or
the holder (or both); (vi) the rights of the shares of that class or series in
the event of voluntary or involuntary liquidation, dissolution or winding up of
the Company; and (vii) any other relative rights, preferences and limitations of
that class or series as may be permitted or required by law.
It is not possible to state the actual effect of the authorization of the
Undesignated Preferred Stock upon the rights of holders of the Common Stock
until the Board of Directors determines the specific rights of the holders of a
series of Undesignated Preferred Stock. However, the issuance of shares of
Undesignated Preferred Stock could adversely affect the rights of the holders of
Common Stock. Such effects might include: (i) restrictions on dividends on the
Common Stock if dividends on the Undesignated Preferred Stock have not been
paid; (ii) dilution of the voting power of the Common Stock to the extent that
the Undesignated Preferred Stock has voting rights; (iii) dilution of the equity
interest of the Common Stock to the extent that the Undesignated Preferred Stock
is converted into Common Stock; or (iv) the Common Stock not being entitled to
share in the Company's assets upon liquidation until satisfaction of any
liquidation preference granted the holders of the Undesignated Preferred Stock.
Additionally, the issuance by the Board of Directors of any shares of
Undesignated Preferred Stock, while providing desired flexibility in connection
with possible acquisitions and other corporate purposes, may be used to deter,
discourage or make more difficult the assumption of control of the Company by
another corporation or person through a tender offer, merger, proxy context or
similar transaction or series of transactions.
DELAWARE LAW AND CERTAIN CHARTER AND BY-LAW PROVISIONS
Certain provisions of the Delaware General Corporation Law and of the
Company's Certificate of Incorporation and By-laws, summarized in the following
paragraphs, may be considered to have an anti-takeover effect and may delay,
deter or prevent a tender offer, proxy contest or other takeover attempt that a
stockholder might consider to be in such stockholder's best interest, including
such an attempt as might result in payment of a premium over the market price
for shares held by stockholders. These provisions, together with the classified
Board of Directors and the ability of the Board of Directors to issue
Undesignated Preferred Stock without further stockholder action, also could
delay or frustrate the removal of incumbent directors or the assumption of
control by stockholders, even if such removal or assumption would be beneficial
to stockholders of the Company. The Board of Directors of the Company believes
that these provisions are appropriate to protect the interests of the Company
and all of its stockholders.
Board of Directors. The By-laws provide, subject to the rights of the
holders of the Undesignated Preferred Stock, if and when issued, that the number
of directors shall be fixed by the Board of Directors. The directors, other than
those who may be elected by the holders of Undesignated Preferred Stock, if and
when issued, are divided into three classes, as nearly equal in number as
possible, with each class serving for a three-year term. Subject to any rights
of the holders of Undesignated Preferred Stock, if and when issued, to elect
directors, and to remove any director whom the holders of any such stock had the
right to elect, any director of the Company may be removed from office only with
cause and by the affirmative vote of at least two-thirds of the total votes
eligible to be cast by stockholders in the election of such director. Any
vacancies on the Board of Directors shall be filled by the Board of Directors.
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The By-laws establish an advance notice procedure with
regard to the nomination by the stockholders of the Company of candidates for
election as directors (the "Nomination Procedure") and with regard to other
matters to be brought by stockholders before a meeting of stockholders of the
Company (the "Business Procedure").
The Nomination Procedure requires that a stockholder give written notice,
delivered to or mailed and received at the principal executive offices of the
corporation not less than 60 days nor more than
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<PAGE> 48
90 days prior to the meeting, in proper form, of a planned nomination for the
Board of Directors to the Secretary of the Company. Detailed requirements as to
the form and timing of that notice are specified in the By-laws. If the Board of
Directors (or any committee designated by the Board of Directors) determines
that a person was not nominated in accordance with the Nomination Procedure,
such person will not be eligible for election as a director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give written notice, delivered to or mailed
and received at the principal executive offices of the corporation not less than
60 days nor more than 90 days prior to the meeting, in proper form, to the
Secretary of the Company. Detailed requirements as to the form and timing of
that notice are specified in the By-laws. If the Board of Directors (or any
committee designated by the Board of Directors) determines that the other
business was not properly brought before such meeting in accordance with the
Business Procedure, such business will not be conducted at such meeting.
Although the By-laws do not give the Board of Directors any power to
approve or disapprove stockholder nominations for the election of directors or
of any other business desired by stockholders to be conducted at an annual or
any other meeting, the By-laws (i) may have the effect of precluding a
nomination for the election of directors or precluding the conduct of business
at a particular annual meeting if the proper procedures are not followed or (ii)
may discourage or deter a third party from conducting a solicitation of proxies
to elect its own slate of directors or otherwise attempting to obtain control of
the Company, even if the conduct of such solicitation or such attempt might be
beneficial to the Company and its stockholders.
Special Meetings of the Stockholders of the Company. The Company's By-laws
provide that a special meeting of the stockholders of the Company may be called
only by the affirmative vote of a majority of the Board of Directors. Under this
provision the stockholders are unable to call a special meeting of stockholders
and the provision potentially limits the stockholders' ability to offer
proposals at meetings of stockholders, if no special meetings are otherwise
called by the Board of Directors.
Written Action in Lieu of Special Meeting of Stockholders. The Company's
Certificate of Incorporation precludes stockholders from taking action by
written consent. This provision prohibits stockholders from taking formal action
without the holding of a special or annual meeting of stockholders.
Delaware Takeover Statute. The Company is subject to Section 203 of the
Delaware General Corporation Law which, with certain exceptions, prohibits a
Delaware corporation from engaging in any of a broad range of business
combinations with any "interested stockholder" for a period of three years
following the date that such stockholder became an interested stockholder,
unless: (i) prior to such date, the Board of Directors of the corporation
approved either the business combination or the transaction which resulted in
the stockholder becoming an interested stockholder; (ii) upon consummation of
the transaction which resulted in the stockholder becoming an interested
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
(a) by persons who are directors and officers, and (b) by employee stock plans
in which employee participants do not have the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer; or (iii) on or after such date, the business combination is approved by
the Board of Directors and authorized at an annual or special meeting of
stockholders by the affirmative vote of at least 66 2/3% of the outstanding
voting stock which is not owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder.
Although Section 203 of the Delaware General Corporation Law permits a
corporation to elect not to be governed by Section 203, the Company to date has
not made this election.
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<PAGE> 49
Amendment of Certificate of Incorporation. The Certificate of Incorporation
provides that an amendment thereof must first be approved by a majority of the
Board of Directors and (with certain exceptions) thereafter approved by the
holders of a majority of the total votes eligible to be cast by holders of
voting stock, voting by class with respect to such amendment or repeal; provided
however, that the affirmative vote of not less than two-thirds of the total
votes eligible to be cast by holders of voting stock, voting by class, is
required to amend the provisions with respect to shareholder action, provisions
regarding directors, limitation of liability and amendment of the By-laws and
Certificate of Incorporation.
Amendment of By-laws. The Certificate of Incorporation provides that the
By-laws may be amended or repealed by the Board of Directors or by the
stockholders. Such action by the Board of Directors requires the affirmative
vote of a majority of the directors then in office. Such action by the
stockholders requires the affirmative vote of the holders of at least two-thirds
of the total votes eligible to be cast by holders of voting stock with respect
to such amendment or repeal at an annual meeting of stockholders or a special
meeting called for such purpose, unless the Board of Directors recommends that
the stockholders approve such amendment or repeal at such meeting, in which case
such amendment or repeal shall only require the affirmative vote of a majority
of the total votes eligible to be cast by holders of voting stock with respect
to such amendment or repeal.
DIRECTOR LIABILITY AND INDEMNIFICATION
The Company's Certificate of Incorporation provides that no director of the
Company will be personally liable to the Company or to its stockholders for
monetary damages for breach of fiduciary duty as a director; provided, however,
that such provision will not eliminate or limit the liability of a director: (i)
for any breach of the director's duty of loyalty to the Company or to its
stockholders; (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law; (iii) for the payment of a
dividend or the payment for the purchase or redemption of the Company's stock in
violation of Section 174 of the Delaware General Corporation Law; or (iv) for
any transaction from which the director derived an improper personal benefit. In
essence, stockholders of the Company may not seek to hold the directors,
directly or through a derivative action, personally liable for damages for
breach of their fiduciary duty involving negligent or grossly negligent acts or
omissions. These provisions may have the effect of discouraging stockholders'
derivative actions against directors and officers. The personal liability of a
director for violation of the federal securities laws is not limited or
otherwise affected. In addition, these provisions do not affect the ability of
stockholders to obtain injunctive or other equitable relief from the courts with
respect to a transaction which is the product of negligence. Nor would these
provisions preclude an action by stockholders for damages against the director
for breach of the duty of loyalty, failure to act in good faith, intentional
misconduct, knowing violation of law, payment of an unlawful dividend or
approval of an unlawful stock repurchase or any transaction in which the
director obtained an improper personal benefit or actions by third parties
against the Company.
The Company's By-laws provide that the Company shall indemnify any person
who was or is involved in any manner or was or is threatened to be made so
involved in any threatened, pending or completed investigation, claim, action,
suit or proceeding, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was a director or officer of the Company or is
or was serving at the request of the Company as a director or officer of the
corporation or other enterprise against all expenses, liability and loss
actually and reasonably incurred by him in connection with such proceeding. The
Company may confer on such person the right to receive payment of any expenses
incurred by the person being indemnified in connection with such proceeding in
advance of the final disposition of the proceeding, consistent with applicable
law as then in effect.
The right of indemnification, including the right, if any, to receive
payment in advance of expenses, conferred by the Company's By-laws is not
exclusive of any other rights to which any person seeking indemnification may
otherwise be entitled. The By-laws also specify certain procedures,
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<PAGE> 50
presumptions and remedies that apply with respect to the right to
indemnification and the advancement of expenses provided for therein.
The Company intends to maintain directors' and officers' liability
insurance.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock of the Company is
Boatmen's Trust Company, St. Louis, Missouri.
REGISTRATION RIGHTS
The holders of 5,697,967 shares of Common Stock issuable upon conversion of
Convertible Preferred Stock prior to this Offering, the holder of a warrant
exercisable for 15,950 shares of Common Stock, and the holders of 1,332,100
shares of Common Stock (the "Registrable Stock") are entitled to certain rights
with respect to the registration of the sale of such shares under the Securities
Act. These rights are provided under the terms of an Amended and Restated
Registration Rights Agreement between the Company and the holders of Registrable
Securities and in a Warrant Agreement. Subject to certain limitations in the
Amended and Restated Registration Rights Agreement, the holders of at least 40%
of the Registrable Stock may require, on two occasions at any time after six
months from the effective date of this Offering, that the Company use its best
efforts to register the Registrable Stock for public resale. If the Company
registers for sale or resale any of its Common Stock either for its own account
or for the account of other security holders, the holders of Registrable Stock
are entitled to include their shares of Common Stock in such registration. A
holder's right to include shares in the underwritten registration is subject to
the ability of the underwriters to limit the number of shares included in the
offering. Holders of at least 40% of the Registrable Stock may also require the
Company to register for resale all or a portion of their Registrable Stock on
Form S-3 when use of such form becomes available to the Company, provided, among
other limitations, that the proposed aggregate price to the public of the shares
sold would exceed $1.0 million. All fees, costs and expenses of such
registrations must be borne by the Company and all selling expenses (including
underwriting discounts, selling commissions and stock transfer taxes) relating
to Registrable Stock must be borne by the holders of the securities being
registered.
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<PAGE> 51
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of this Offering, the Company will have outstanding
9,530,067 shares of Common Stock (based on the number of shares of Common Stock
outstanding as of August 31, 1996, and assuming conversion of the Convertible
Preferred Stock). Of these shares the 2,500,000 shares of Common Stock sold by
the Company in this Offering will be freely tradable in the public market
without restriction under the Securities Act, except that any shares purchased
by affiliates ("Affiliates") of the Company, as that term is defined in Rule 144
("Rule 144") adopted under the Securities Act, may generally only be sold in
compliance with the applicable provisions of Rule 144.
The remaining 7,030,067 shares ("Restricted Shares") are deemed to be
"restricted securities" under Rule 144 because they were originally issued and
sold by the Company in private transactions in reliance upon exemptions from
registration under the Securities Act. Approximately 1,305,148 Restricted Shares
will become eligible for sale in the public market pursuant to Rule 144
beginning 90 days after the date of this Prospectus (subject to compliance with
the volume and other limitations of Rule 144 described below), of which 978,861
shares are subject to the lock-up agreements described below. Additional
Restricted Shares will become subject to sale under Rule 144 from time to time.
The Company and its executive officers, directors and certain other
stockholders of the Company who in the aggregate will hold 6,703,780 shares of
Common Stock upon completion of this Offering, have agreed pursuant to certain
agreements (the "Lock-up Agreements") that they will not without the prior
written consent of Hambrecht & Quist LLC, offer, sell or otherwise dispose of
any shares of Common Stock or any securities convertible into or exchangeable or
exercisable for any shares of Common Stock for a period of 180 days from the
date of this Prospectus.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated), including an Affiliate, who has beneficially owned
Restricted Shares for at least two years from the later of the date such
Restricted Shares were acquired from the Company or the date they were acquired
from an Affiliate, is entitled to sell within any three-month period a number of
shares that does not exceed the greater of (x) 1% of the then outstanding shares
of the Common Stock, or (y) the average weekly trading volume in the Common
Stock in the over-the-counter market during the four calendar weeks preceding
the date on which notice of such sale was filed under Rule 144. Sales under Rule
144 are also subject to certain provisions relating to the manner and notice of
sale and availability of current public information about the Company.
Affiliates may sell shares not constituting Restricted Securities in accordance
with the foregoing volume limitations and other restrictions, but without regard
to the two-year holding period.
Further, under Rule 144(k), after three years have elapsed from the later
of the date Restricted Shares were acquired from the Company or the date they
were acquired from an Affiliate, a holder of such Restricted Shares who is not
an Affiliate at the time of the sale and has not been an Affiliate for at least
three months prior to the sale would be entitled to sell the shares immediately
without regard to the volume limitations and other conditions described above.
The Securities and Exchange Commission has recently proposed amendments to
Rule 144 and Rule 144(k) that would permit resales of Restricted Shares under
Rule 144 after a one-year, rather than a two-year holding period, subject to
compliance with the other provisions of Rule 144, and would permit resale of
Restricted Shares by non-Affiliates under Rule 144(k) after a two-year, rather
than a three-year holding period. Assuming adoption of such amendments,
approximately 1,305,148 restricted securities will be eligible for sale in the
public market immediately after this offering pursuant to Rule 144(k), of which
978,861 shares are subject to the Lock-up Agreements, and approximately
3,491,950 Restricted Shares will become eligible for sale in the public market
pursuant to Rule 144 beginning 90 days after the date of this Prospectus
(subject to compliance with the volume and other limitations of Rule 144), all
of which shares are subject to the Lock-up Agreements. Additional Restricted
Shares will become eligible for sale under Rule 144 from time to time.
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The Company intends to file registration statements on Form S-8 under the
Securities Act to register issuance of up to 575,850 shares of Common Stock
subject to options which may be granted under the Company's Stock Option Plan.
See "Management--Executive Compensation."
Prior to this Offering, there has been no public market for the Common
Stock of the Company, and no precise prediction can be made as to the effect, if
any, that market sales of shares of Common Stock or the availability of shares
of Common Stock for sale will have on the market price of the Common Stock
prevailing from time to time. Nevertheless, sales of substantial amounts of
Common Stock of the Company in the public market could have a material adverse
effect on prevailing market prices and could impair the Company's future ability
to raise capital through the sale of its equity securities.
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<PAGE> 53
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below (the "Underwriters") through their representatives
Hambrecht & Quist LLC, Robertson, Stephens & Company and Needham & Company, Inc.
(the "Representatives"), have severally agreed to purchase from the Company the
following respective number of shares of Common Stock set forth opposite the
name of each such Underwriter below at the initial public offering price less
the underwriting discount set forth on the cover of this Prospectus:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
---------
<S> <C>
Hambrecht & Quist LLC..............................................
Robertson, Stephens & Company LLC..................................
Needham & Company, Inc. ...........................................
----------
Total............................................................ 2,500,000
==========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent, including the absence
of any material adverse change in the Company's business and the receipt of
certain certificates, opinions and letters from the Company, their counsel and
the Company's independent auditors. The nature of the Underwriters' obligation
is such that they are committed to purchase all shares of Common Stock offered
hereby if any such shares are purchased.
The Underwriters propose to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus and to certain dealers at such price less a concession not in excess
of $ per share. The Underwriters may allow and such dealers may reallow
a concession not in excess of $ per share to certain other dealers.
After the initial public offering of the shares, the offering price and other
selling terms may be changed by the Representatives of the Underwriters.
The Company has granted to the Underwriters an option, exercisable no later
than 30 days after the date of this Prospectus, to purchase up to an additional
375,000 shares of Common Stock, at the initial public offering price, less the
underwriting discounts set forth on the cover page of this Prospectus. To the
extent that the Underwriters exercise this option, each of the Underwriters will
have a firm commitment to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
above table bears to the total number of shares of Common Stock offered hereby.
The Company will be obligated, pursuant to the option, to sell shares to the
Underwriters to the extent the option is exercised. The Underwriters may
exercise such option only to cover over-allotments made in connection with the
sale of shares of Common Stock offered hereby.
The offering of the shares is made for delivery when, as, and if accepted
by the Underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The Underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, and to contribute
to payments the Underwriters may be required to make in respect thereof.
The officers and directors of the Company and certain stockholders are
subject to lock-up agreements which provide that they will not, without the
prior written consent of Hambrecht & Quist
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LLC, during the 180-day period following the date of this Prospectus sell,
offer, contract to sell, make any short sale, pledge, transfer or otherwise
dispose of, directly or indirectly, any shares of Common Stock, any options,
rights or warrants to purchase any shares of Common Stock or any securities
convertible into or exchangeable for shares of Common Stock owned by them or
with respect to which the holder has the power of disposition. In addition, the
Company has agreed that it will not, without the prior written consent of
Hambrecht & Quist LLC, issue, sell, offer, contract to sell, make any short
sale, pledge, issue or 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 shares of Common Stock, or securities
exchangeable for or convertible into or exercisable for any rights to purchase
or acquire any shares of Common Stock during the 180-day period following the
date of this Prospectus, except that the Company may issue shares upon the
exercise of options granted prior to the date hereof and may grant additional
options under its stock option plans. Hambrecht & Quist LLC may, in its sole
discretion, release any of the shares subject to lock-up agreements at any time,
without prior notice.
Prior to this Offering, there has been no public market for the Common
Stock. The initial public offering price for the Common Stock will be determined
by negotiation between the Company and the Representatives of the Underwriters.
Among the factors to be considered in determining the initial public offering
price are prevailing market and economic conditions, revenues and earnings of
the Company, market valuations of other companies engaged in activities similar
to the Company, estimates of the business potential and prospects of the
Company, the present state of the Company's business operations, an assessment
of the Company's management and other factors deemed relevant.
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LEGAL MATTERS
The validity of the issuance of the shares of Common Stock offered hereby
will be passed upon for the Company by Suelthaus & Walsh, P.C., St. Louis,
Missouri. As of September 1, 1996, Thomas M. Walsh, President of Suelthaus &
Walsh, P.C. and general counsel to the Company, beneficially owned 35,750 shares
of Common Stock. The Company leases its corporate offices in St. Louis,
Missouri, pursuant to a sublease with Suelthaus & Walsh, P.C., which expires
March 30, 2000, and provides for payments of $7,000 per month, increasing to
$8,333 per month on April 1, 1998.
EXPERTS
The consolidated financial statements of Intensiva HealthCare Corporation
and subsidiaries as of December 31, 1994 and 1995 and for the period from July
18, 1994 (inception) through December 31, 1994 and the year ended December 31,
1995 have been included herein and in the Registration Statement in reliance
upon the report of KPMG Peat Marwick LLP, independent certified public
accountants, appearing elsewhere herein and in the Registration Statement upon
the authority of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-l, including amendments
thereto, relating to the Common Stock offered hereby. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. Statements contained in this Prospectus as to the contents of
any contract or other document referred to are not necessarily complete, and in
each instance reference is made to the copy of such contract or other document
filed as an exhibit to the Registration Statement, each such statement being
qualified in all respects by such reference. For further information with
respect to the Company and the Common Stock offered hereby, reference is made to
such Registration Statement, exhibits and schedules. A copy of the Registration
Statement may be inspected without charge at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and will also be available for inspection and
copying at the regional offices of the Commission located at 7 World Trade
Center, New York, New York 10048 and at Northwestern Atrium Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such material may
also be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The Commission
maintains a world wide web site at http://www.sec.gov. This web site contains
reports, proxy and information statements filed electronically with the
Commission.
The Company intends to furnish its stockholders annual reports containing
financial statements audited by its independent certified public accountants.
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INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent auditors' report......................................................... F-1
Consolidated balance sheets, as of December 31, 1994 and 1995........................ F-2
Consolidated statements of operations, period from July 18, 1994 (inception) through
December 31, 1994 and the year ended December 31, 1995............................. F-3
Consolidated statements of stockholders' equity, period from July 18, 1994
(inception) through December 31, 1994 and the year ended December 31, 1995......... F-4
Consolidated statements of cash flows, period from July 18, 1994 (inception) through
December 31, 1994 and the year ended December 31, 1995............................. F-5
Notes to consolidated financial statements........................................... F-6
Condensed consolidated balance sheet and pro forma condensed consolidated balance
sheet, as of June 30, 1996 (unaudited)............................................. F-11
Condensed consolidated statements of operations, six months ended June 30, 1995 and
1996 (unaudited)................................................................... F-12
Condensed consolidated statements of cash flows, six months ended June 30, 1995 and
1996 (unaudited)................................................................... F-13
Notes to condensed consolidated financial statements (unaudited)..................... F-14
</TABLE>
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INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Intensiva HealthCare Corporation and subsidiaries:
We have audited the accompanying consolidated balance sheets of Intensiva
HealthCare Corporation and subsidiaries (the Company) as of December 31, 1994
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the period from July 18, 1994 (inception) through
December 31, 1994 and the year ended December 31, 1995. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Intensiva
HealthCare Corporation and subsidiaries as of December 31, 1994 and 1995, and
the results of their operations and their cash flows for the period from July
18, 1994 (inception) through December 31, 1994 and the year ended December 31,
1995, in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
St. Louis, Missouri
January 31, 1996, except as to note 9,
which is as of September 10, 1996
F-1
<PAGE> 58
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1994 AND 1995
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents......................................... $ 190,284 $11,261,422
Receivable on sale of common and preferred stock.................. 4,304,900 --
Accounts receivable, less allowance for doubtful accounts of
$139,508 in 1995............................................... -- 985,697
Inventories....................................................... -- 9,087
Prepaid expenses.................................................. -- 134,318
---------- ------------
Total current assets........................................... 4,495,184 12,390,524
Property and equipment, net......................................... 2,993 587,904
Organizational and preopening costs, net............................ 5,632 164,158
Other assets........................................................ 55,707 555,467
---------- ------------
$4,559,516 $13,698,053
========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations..................... $ -- $ 210,290
Accounts payable.................................................. 45,387 483,707
Accrued salaries, wages, and benefits............................. 11,268 224,139
Note payable--stockholder......................................... 265,200 265,200
---------- ------------
Total current liabilities...................................... 321,855 1,183,336
---------- ------------
Long-term obligations, less current installments.................... -- 291,208
Deferred rent expense............................................... -- 433,333
Stockholders' equity:
Preferred stock, $0.001 par value, 30,000,000 shares authorized,
no shares issued............................................... -- --
Series A convertible preferred stock, $0.001 par value, 3,465,000
shares authorized; 2,365,000 and 3,465,000 shares issued and
outstanding for 1994 and 1995, respectively.................... 2,365 3,465
Series B convertible preferred stock, $0.001 par value, 2,232,967
shares authorized; 2,232,967 shares issued and outstanding in
1995........................................................... -- 2,233
Common stock, $0.001 par value, 70,000,000 shares authorized;
1,332,100 shares issued and outstanding........................ 1,332 1,332
Additional paid-in capital........................................ 4,449,384 14,846,051
Accumulated deficit............................................... (215,420) (3,062,905)
---------- ------------
Total stockholders' equity..................................... 4,237,661 11,790,176
---------- ------------
$4,559,516 $13,698,053
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE> 59
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
PERIOD FROM JULY 18, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Net patient service revenues........................................ $ -- $ 1,488,389
Costs and expenses:
Operating expenses................................................ -- 2,520,873
General and administrative........................................ 213,739 1,884,063
Provision for doubtful accounts................................... -- 139,508
Depreciation and amortization..................................... 475 29,494
---------- ------------
Total costs and expenses..................................... 214,214 4,573,938
---------- ------------
Operating loss............................................... (214,214) (3,085,549)
Interest income..................................................... 1,026 266,668
Interest expense.................................................... (2,232) (28,604)
---------- ------------
Net loss..................................................... $(215,420) $(2,847,485)
========== ============
Pro forma loss per share..................................... $ (0.39)
============
Pro forma weighted average outstanding shares................ 7,268,492
============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 60
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
PERIOD FROM JULY 18, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK ------------------ ADDITIONAL TOTAL
------------------- NUMBER PAID-IN ACCUMULATED STOCKHOLDERS'
SERIES A SERIES B OF SHARES AMOUNT CAPITAL DEFICIT EQUITY
-------- -------- --------- ------ ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
Initial capitalization,
issuance of common
stock.................. $-- $-- 1,305,150 $1,305 $ 146,876 $ -- $ 148,181
Issuance of common
stock.................. -- -- 26,950 27 4,873 -- 4,900
Issuance of Series A
convertible preferred
stock, 2,365,000
shares................. 2,365 -- -- -- 4,297,635 -- 4,300,000
Net loss................. -- -- -- -- -- (215,420) (215,420)
------- ------- ---------- ------- ------------ ------------ ------------
Balance, December 31,
1994................... 2,365 -- 1,332,100 1,332 4,449,384 (215,420) 4,237,661
Issuance of Series A
convertible preferred
stock, 1,100,000
shares................. 1,100 -- -- -- 1,998,900 -- 2,000,000
Issuance of Series B
convertible preferred
stock, 2,232,967
shares................. -- 2,233 -- -- 8,397,767 -- 8,400,000
Net loss................. -- -- -- -- -- (2,847,485) (2,847,485)
------- ------- ---------- ------- ------------ ------------ ------------
Balance, December 31,
1995................... $3,465 $2,233 1,332,100 $1,332 $14,846,051 $(3,062,905) $ 11,790,176
======= ======= ========== ======= ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 61
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
PERIOD FROM JULY 18, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
AND YEAR ENDED DECEMBER 31, 1995
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................................... $(215,420) $(2,847,485)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................... 475 29,494
Provision for doubtful accounts................................. -- 139,508
Increase in accounts receivable................................. -- (1,125,205)
Increase in inventories, prepaid expenses, and other assets..... (7,526) (130,665)
Increase in accounts payable.................................... 45,387 438,320
Increase in accrued salaries, wages, and benefits............... 11,268 212,871
Increase in accrued rent differential........................... -- 433,333
---------- ------------
Net cash used in operating activities......................... (165,816) (2,849,829)
---------- ------------
Cash flows from investing activities:
Additions to property and equipment................................ (3,468) (555,171)
Organizational and preopening costs................................ (5,632) (162,881)
---------- ------------
Net cash used in investing activities......................... (9,100) (718,052)
---------- ------------
Cash flows from financing activities:
Proceeds from issuance of preferred and common stock............... 100,000 14,704,900
Proceeds from issuance of note payable stockholder................. 265,200 --
Payments on long-term obligations.................................. -- (65,881)
---------- ------------
Net cash provided by financing activities....................... 365,200 14,639,019
---------- ------------
Increase in cash and cash equivalents........................... 190,284 11,071,138
Cash and cash equivalents, beginning of period....................... -- 190,284
---------- ------------
Cash and cash equivalents, end of period............................. $ 190,284 $11,261,422
========== ============
Supplemental cash flow information--cash paid for interest........... $ 2,232 $ 28,604
========== ============
Supplemental information--noncash activity:
Acquisition of software license.................................... $ -- $ 512,500
Acquisition of equipment through capital leases.................... -- 54,609
Notes receivable received for exchange of common stock............. 48,181 --
Receivable for common and preferred stock subscribed............... 4,304,900 --
========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 62
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1994 AND 1995
(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 is developing and
operating a network of acute long-term care hospitals in certain health care
markets across the United States. Activities in 1994 primarily consisted of
raising capital, obtaining financing, and organizing administrative functions.
(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 Equivalents
Cash equivalents consist of interest-bearing money market accounts and debt
instruments with maturities of three months or less.
(d) 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.
(e) Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments.
Depreciation and amortization is calculated using the straight-line method
over the estimated useful lives of the assets (leasehold improvements are
amortized over the shorter of the lease term or estimated useful life of the
asset). Useful lives for property and equipment are leasehold improvements--5
years and equipment--3-10 years.
(f) Organizational, Preopening, and Other Costs
Organizational and preopening costs consist of legal, consulting, and other
start-up 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 facilities at the
corporate level are expensed as incurred.
(g) Other Assets
Other assets consist of notes receivable from officers (see note 7) and a
software license agreement obtained at a cost of $512,500 with a national
hospital systems vendor. The software license agreement will be amortized into
expense over the three-year estimated useful life of the license.
(h) Deferred Rent Expense
The leases on the Company's health care facilities include scheduled base
rent increases over the terms of the leases. The total amount of the base rent
payments is being charged to expense on the straight-line method over the term
of the lease. Deferred rent expense represents the excess of rent expense over
cash payments since inception of the various leases.
F-6
<PAGE> 63
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(i) 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.
(j) Revenue Recognition
The Company recognizes revenue as services are provided to patients.
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, including estimated 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.
Approximately 44% of the Company's net patient service revenues for 1995
were derived from funds under the Medicare program, and approximately 66% of the
Company's net accounts receivable at December 31, 1995 are from this source.
The Company has agreements with third-party payors that provide for patient
care reimbursement at rates which differ from the customary charges for such
care. During the qualification period to become certified as a long-term care
hospital (which historically have been approximately 7 months long for the
Company) Medicare reimburses the Company under the Prospective Payment System
which provides for payment at predetermined amounts based on the discharge
diagnosis. Upon obtaining certification as a long-term care hospital, the
Company's hospitals receive cost-based reimbursement from Medicare. 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.
(k) Use of Estimates
Management has made a number of estimates and assumptions relating to the
reporting of assets and liabilities and the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in conformity
with generally accepted accounting principles. Actual results could differ from
those estimates.
(l) Net Loss Per Share
The Company's net loss per share calculations are based upon the weighted
average number of shares of common stock outstanding. Pursuant to the
requirements of the Securities and Exchange Commission Staff Accounting Bulletin
No. 83, options to purchase common stock issued at prices below the initial
public offering price during the twelve months immediately preceding the
contemplated initial filing of the registration statement relating to the
initial public offering (IPO), have been included in the computation of net loss
per share as if they were outstanding for all periods presented. Other shares
issuable upon the exercise of stock options or conversion of convertible
preferred stock have been excluded from historical per share amounts because the
effect of their inclusion would be anti-dilutive.
F-7
<PAGE> 64
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(m) Impact of Recently Issued Accounting Standards
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows estimated to be generated by those assets are less than the assets'
carrying amount. Statement 121 also addresses the accounting for long-lived
assets that are expected to be disposed of. The Company adopted Statement 121 in
the first quarter of 1996 and the effect was not material to the Company's
operations or financial position taken as a whole. Under SFAS No. 121, 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 calculated as the present value of expected future cash flows.
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which provides an alternative to APB Opinion No. 25,
Accounting for Stock Issued to Employees, in accounting for stockbased
compensation issued to employees. The Statement allows for a fair value-based
method of accounting for employee stock options and similar equity instruments.
However, for companies that continue to account for stock-based compensation
arrangements under Opinion No. 25, Statement No. 123 requires disclosure of the
pro forma effect on net income and earnings per share of its fair value-based
accounting for those arrangements. The Company adopted Statement No. 123 in the
first quarter of 1996 and has elected to continue to account for stock-based
compensation arrangements under APB Opinion No. 25.
(2) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------ --------
<S> <C> <C>
Leasehold improvements..................................... $ -- $210,331
Equipment.................................................. 3,468 351,902
Equipment under capital leases............................. -- 54,609
------- --------
3,468 616,842
Less accumulated depreciation and amortization............. 475 28,938
------- --------
Property and equipment, net........................... $2,993 $587,904
======= ========
</TABLE>
(3) LONG-TERM OBLIGATIONS
Long-term obligations at December 31, 1995 consist of various capital
leases and a software license agreement aggregating $501,498, with a combined
effective interest rate of approximately 8%, and maturities from three to five
years.
The aggregate maturities of long-term obligations at December 31, 1995 are
as follows:
<TABLE>
<S> <C>
1996............................................................... $239,168
1997............................................................... 259,797
1998............................................................... 32,448
1999............................................................... 10,916
2000............................................................... 4,964
---------
547,293
Less interest on capital lease obligations......................... 45,795
---------
$501,498
=========
</TABLE>
F-8
<PAGE> 65
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(4) STOCKHOLDERS' EQUITY
The Company and its stockholders have entered into an Amended and Restated
Stockholders' Agreement, dated December 20, 1995 (the Agreement) which expires
on December 20, 1999, or the completion of an IPO, whichever occurs first. The
Agreement includes provisions which restrict stockholders as to the sale or
transfer of stock and restrict the Company as to the issuance or repurchase of
stock and payment of dividends on common stock.
Series A convertible preferred stock and Series B convertible preferred
stock require an 8% annual, cumulative dividend payable quarterly. Each share of
preferred stock is convertible into one share of common stock, subject to
antidilution provisions. Under certain circumstances, the Company can force
conversion of the preferred stock or, at the Company's option, redeem for cash
the Series A convertible preferred stock and the Series B convertible preferred
stock for $1.8181 and $3.7618 per share, respectively, plus accrued dividends.
Preferred stock dividends in arrears as of December 31, 1994 and 1995 totaled
$942 and $522,562, respectively.
On January 26, 1995, the Board of Directors of the Company approved a stock
option plan (Stock Plan) pursuant to which incentive stock options and
nonqualified stock options may be granted. Under the Stock Plan, options to
purchase 785,400 common shares may be for a term not to exceed 10 years (five
years with respect to a person who owns more than 10% of the capital stock of
the Company). The exercise price of all stock options must be at least equal to
the fair market value of the shares of stock, as determined by the Company's
Board of Directors (110% of fair market value for a person who owns more than
10% of the capital stock of the Company). During 1995, options to purchase
536,800 shares were granted under the Stock Plan at an exercise price of $0.08
per share. As of December 31, 1995, options to purchase 69,702 shares had vested
and were exercisable.
The Company has reserved for issuance 6,483,367 shares of common stock for
purposes of conversion of preferred stock and exercise of stock options.
(5) EMPLOYEE BENEFITS
As of September 22, 1995, the Company adopted an employee savings plan (the
Plan), a defined contribution plan qualified under Section 401(k) of the
Internal Revenue Code, which covers substantially all employees. Each
participant may make an annual contribution to their account of 15% of their
compensation, subject to certain limitations. The Company's matching
contribution is 25% of participant contributions. The Company may make 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. Forfeitures of contributions related
to nonvested participant balances will be used to reduce the Company's
contributions and/or plan expenses. For the year ended December 31, 1995, no
expense had been incurred by the Company related to the Plan.
F-9
<PAGE> 66
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
(6) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------- ----------
<S> <C> <C>
Net operating loss carryforwards......................... $73,243 $ 834,230
Allowance for doubtful accounts.......................... -- 47,433
Deferred rent expense.................................... -- 147,333
Other.................................................... -- 12,392
------- ----------
73,243 1,041,388
Less valuation allowance................................. 73,243 1,041,388
------- ----------
$ -- $ --
======= ==========
</TABLE>
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 $2,500,000 of net operating loss
carryforwards for income tax purposes, which, if unused, will begin to expire in
the year 2009. No cash was paid for taxes in 1994 or 1995.
(7) RELATED PARTY TRANSACTIONS
Other assets as of December 31, 1994 and 1995 include notes receivable from
two executive officers aggregating $48,181 and $42,967, respectively. Pursuant
to employment agreements with these two officers, amounts receivable are
forgiven through their service to the Company over a period which extends
through September 22, 1997.
Note payable - stockholder represents unsecured advances received from a
minority stockholder which bear interest at 1% over the prime rate published by
a local bank (9.75% at December 31, 1995), and are payable in quarterly
installments, with the final installment due June 30, 1996.
(8) 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 with 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 2000.
Minimum annual lease payments on noncancellable operating leases with
maturities in excess of one year are as follows: $1,097,250 in 1996, $2,094,000
in 1997, $2,100,667 in 1998, $2,110,000 in 1999, and $2,168,333 in 2000. Rent
expense was approximately $965,000 in 1995.
(9) SUBSEQUENT EVENTS
On September 10, 1996, the Company filed a Certificate of Amendment to its
Amended and Restated Certificate of Incorporation that provides for (a) the
authorization of 30 million shares of preferred stock, par value $0.001 per
share, the terms of which may be determined by the Board of Directors from time
to time, and (b) the authorization of 70 million shares of common stock, $0.001
par value. On September 10, 1996, the Company also effected a 5 1/2 for 1 stock
split of its common stock in the form of a stock dividend. Accordingly, the
stock split and the changes in preferred and common stock have been given
retroactive effect in the accompanying consolidated financial statements.
Each share of Series A and Series B convertible preferred stock will be
converted into 5 1/2 shares of common stock immediately prior to the Company's
initial public offering. Accordingly, the pro forma loss per share, presented
for the current year only, assumes the conversion of the Series A and B
convertible preferred stock as of January 1, 1995.
F-10
<PAGE> 67
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
<TABLE>
<CAPTION>
PRO FORMA
JUNE 30, JUNE 30,
1996 1996
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents........................................ $ 5,217,325 $ 5,217,325
Accounts receivable, less allowance for doubtful accounts of
$103,800...................................................... 4,835,737 4,835,737
Inventories...................................................... 119,982 119,982
Prepaid expenses................................................. 267,208 267,208
------------ ------------
Total current assets.......................................... 10,440,252 10,440,252
Property and equipment, net........................................ 2,038,391 2,038,391
Organizational and preopening costs, net........................... 252,273 252,273
Other assets....................................................... 700,524 700,524
------------ ------------
$13,431,440 $13,431,440
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations.................... $ 214,799 $ 214,799
Accounts payable and accrued expenses............................ 1,133,579 1,133,579
Accrued salaries, wages, and benefits............................ 527,661 527,661
------------ ------------
Total current liabilities..................................... 1,876,039 1,876,039
------------ ------------
Long-term obligations, less current installments................... 710,049 710,049
Deferred rent expense.............................................. 805,125 805,125
Stockholders' equity:
Preferred stock, $0.001 par value, 30,000,000 shares authorized,
no shares issued.............................................. -- --
Series A convertible preferred stock, $0.001 par value, 3,465,000
shares authorized; 3,465,000 and no shares issued and
outstanding, respectively..................................... 3,465 --
Series B convertible preferred stock, $0.001 par value, 2,232,967
shares authorized; 2,232,967 and no shares issued and
outstanding, respectively..................................... 2,233 --
Common stock, $0.001 par value, 70,000,000 shares authorized,
1,332,100 and 7,030,067 shares issued and outstanding,
respectively.................................................. 1,332 7,030
Additional paid-in capital....................................... 14,846,073 14,846,073
Accumulated deficit.............................................. (4,812,876) (4,812,876)
------------ ------------
Total stockholders' equity.................................... 10,040,227 10,040,227
------------ ------------
$13,431,440 $13,431,440
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-11
<PAGE> 68
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Net patient service revenues....................................... $ 165,721 $ 6,076,075
Costs and expenses:
Operating expenses............................................... 714,189 6,304,812
General and administrative....................................... 736,036 1,323,748
Provision for doubtful accounts.................................. 30,000 150,036
Depreciation and amortization.................................... 13,979 248,879
---------- ----------
Total costs and expenses...................................... 1,494,204 8,027,475
---------- ----------
Operating loss................................................ (1,328,483) (1,951,400)
Interest income.................................................... 143,522 235,601
Interest expense................................................... (15,875) (34,172)
---------- ----------
Net loss...................................................... $(1,200,836) $(1,749,971)
========== ==========
Pro forma loss per share........................................... $ (0.24)
==========
Pro forma weighted average outstanding shares...................... 7,268,492
==========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-12
<PAGE> 69
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------------
1995 1996
----------- -----------
<S> <C> <C>
Cash flows from operating activities:
Net loss......................................................... $(1,200,836) $(1,749,971)
Adjustments to reconcile net loss to net cash used in operating
activities:
Depreciation and amortization................................. 13,979 248,879
Provision for doubtful accounts............................... 30,000 150,036
Increase in accounts receivable............................... (217,217) (3,814,680)
Increase in inventories, prepaid expenses, and other assets... (86,558) (621,535)
Increase in accounts payable and accrued expenses............. 113,167 649,872
Increase in accrued salaries, wages, and benefits............. 60,117 303,522
Increase in accrued rent differential......................... 173,333 371,792
------------ ------------
Net cash used in operating activities....................... (1,114,015) (4,462,085)
------------ ------------
Cash flows from investing activities:
Additions to property and equipment.............................. (273,328) (1,372,543)
Proceeds from sale of equipment.................................. -- 337,792
Organizational and preopening costs.............................. -- (117,879)
------------ ------------
Net cash used in investing activities....................... (273,328) (1,152,630)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of preferred and common stock............. 6,304,900 22
Proceeds from issuance of note payable--stockholder.............. -- (265,200)
Payments on long-term obligations................................ (7,398) (164,204)
------------ ------------
Net cash provided by (used in) financing activities......... 6,297,502 (429,382)
------------ ------------
Increase in cash and cash equivalents....................... 4,910,159 6,044,097
Cash and cash equivalents, beginning of period..................... 190,284 11,261,422
------------ ------------
Cash and cash equivalents, end of period........................... $ 5,100,443 $ 5,217,325
============ ============
Supplemental cash flow information--cash paid for interest......... $ 15,875 $ 34,172
============ ============
Supplemental information--noncash activity:
Acquisition of equipment through capital leases.................. $ 57,218 $ 587,554
============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
F-13
<PAGE> 70
INTENSIVA HEALTHCARE CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(1) BASIS OF PRESENTATION
The condensed consolidated balance sheet as of June 30, 1996 and condensed
consolidated statements of operations and cash flows for the six months ended
June 30, 1995 and 1996 contained herein, which are unaudited, include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany accounts have been eliminated in consolidation. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Adjustments consist only of normal recurring
items. The results of operations for the six months ended June 30, 1995 and
1996, are not necessarily indicative of the results to be expected for the full
fiscal year.
The condensed consolidated financial statements do not include all
information and footnotes necessary for a complete presentation of financial
position, results of operations and cash flows in conformity with generally
accepted accounting principles. Reference is made to the Company's 1994 and 1995
audited financial statements and the related notes which provide additional
disclosures and a further description of accounting policies.
(2) SALE LEASEBACK AGREEMENT
During March 1996, the Company entered into a sale leaseback agreement with
a third party to take advantage of favorable borrowing rates and maintain
liquidity. This party received warrants to purchase 15,950 shares of the
Company's Series B convertible preferred stock at $3.76 per share. The net book
value of assets sold and subsequently leased under this agreement totaled
$342,244. Net proceeds were $337,792, resulting in a net loss of $4,452 which
was charged to operations in March 1996. As part of this agreement, the Company
has an available line of credit (up to $1.0 million) to finance additional
capital expenditures.
(3) SUBSEQUENT EVENTS
On September 10, 1996, the Company filed a Certificate of Amendment to its
Amended and Restated Certificate of Incorporation that provides for (a) the
authorization of 30 million shares of preferred stock, par value $0.001 per
share, the terms of which may be determined by the Board of Directors from time
to time, and (b) the authorization of 70 million shares of common stock, $0.001
par value. On September 10, 1996, the Company also effected a 5 1/2 for 1 stock
split of its common stock in the form of a stock dividend. Accordingly, the
stock split and the changes in preferred and common stock have been given
retroactive effect in the accompanying condensed consolidated financial
statements.
Each share of Series A and Series B convertible preferred stock will be
converted into 5 1/2 shares of common stock immediately prior to the Company's
initial public offering. According, the accompanying pro forma balance sheet as
of June 30, 1996 assumes that these securities were converted as of June 30,
1996. The pro forma loss per share assumes the conversion of the Series A and B
convertible preferred stock as of the beginning of the period.
F-14
<PAGE> 71
------------------------------------------------------------
------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS, AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER OF ANY SECURITIES OTHER THAN THOSE TO WHICH IT RELATES
OR AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY
CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS
CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................... 3
Risk Factors................................. 6
The Company.................................. 12
Use of Proceeds.............................. 12
Dividend Policy.............................. 12
Capitalization............................... 13
Dilution..................................... 14
Selected Consolidated Financial Data......... 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................. 16
Business..................................... 21
Management................................... 35
Certain Transactions......................... 40
Principal Stockholders....................... 42
Description of Capital Stock................. 45
Shares Eligible for Future Sale.............. 50
Underwriting................................. 52
Legal Matters................................ 54
Experts...................................... 54
Additional Information....................... 54
Index to Financial Statements................ 55
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
2,500,000 SHARES
INTENSIVA LOGO
COMMON STOCK
--------------------
PROSPECTUS
--------------------
HAMBRECHT & QUIST
ROBERTSON, STEPHENS & COMPANY
NEEDHAM & COMPANY, INC.
, 1996
------------------------------------------------------------
------------------------------------------------------------
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following is an itemization of all estimated expenses incurred or
expected to be incurred by the Registrant in connection with the issuance and
distribution of the securities being registered hereby, other than underwriting
discounts and commissions.
<TABLE>
<CAPTION>
ITEM AMOUNT(1)
-----------
<S> <C>
SEC Registration Fee............................................. $ 14,570.00
NASD Filing Fee.................................................. 4,725.30
Nasdaq National Market Listing Fee............................... 17,500.00
Blue Sky Filing Fees and Expenses................................ 22,000.00
Printing and Engraving Costs..................................... 125,000.00
Transfer Agent Fees.............................................. 600.00
Legal Fees and Expenses.......................................... 250,000.00
Accounting Fees and Expenses..................................... 55,000.00
Miscellaneous.................................................... 110,604.70
----------
Total.......................................................... $600,000.00
</TABLE>
- ------------------------------
(1) All amounts are estimated except for the SEC Registration Fee, the NASD
Filing Fee and the Nasdaq National Market Listing Fee.
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Certificate of Incorporation contains a provision eliminating
or limiting director liability to the Company and its stockholders for monetary
damages arising from acts or omissions in the director's capacity as a director.
The provision does not, however, eliminate or limit the personal liability of a
director (i) for any breach of such director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under the Delaware
statutory provision making directors personally liable, under a negligence
standard, for unlawful dividends or unlawful stock purchases or redemptions or
(iv) for any transaction from which the director derived an improper personal
benefit. This provision offers persons who serve on the Board of Directors of
the Company protection against awards of monetary damages resulting from
breaches of their duty of care (except as indicated above). As a result of this
provision, the ability of the Company or a stockholder thereof to successfully
prosecute an action against a director for a breach of his duty of care is
limited. However, the provision does not affect the availability of equitable
remedies such as an injunction or rescission based upon a director's breach of
the duty of care. The Securities and Exchange Commission (the "Commission") has
taken the position that the provision will have no effect on claims arising
under the federal securities laws.
In addition, the Certificate of Incorporation and the Company's By-laws
provide for mandatory indemnification rights, subject to limited exceptions, for
any director or officer of the Company who by reason of the fact that he or she
is a director or officer of the Company, is involved in a legal proceeding of
any nature. Such indemnification rights include reimbursement for expenses
incurred by such director or officer in advance of the final disposition of such
proceeding in accordance with the applicable provisions of Delaware General
Corporation Law. The Company may from time to time agree to provide similar
indemnifications to certain employees and other agents.
The Company also maintains directors' and officers' liability insurance.
II-1
<PAGE> 73
In addition, the Underwriting Agreement provides for indemnification by the
Underwriters of the Registrant, its directors and officers against certain
liabilities, including liabilities under the Securities Act of 1933, as amended
(the "Act").
15. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth sales of securities by the Company within
the past three years that were not sold pursuant to a registered offering. All
sales of Common Stock, warrants for Common Stock, Series A Convertible Preferred
Stock and Series B Convertible Preferred Stock were pursuant to transactions by
the issuer not involving any public offer, and thus were exempt from
registration pursuant to Section 4(2) of the Securities Act. Grants of options
of Common Stock were made with receipt of no consideration by the Company and
were exempt for all of the following reasons: (a) the transactions did not
constitute a public offer pursuant to Section 4(2) of the Securities Act; (b)
the grants did not constitute a sale; and (c) the grants constituted a
transaction exempt pursuant to Rule 701 et seq. promulgated under the Securities
Act. None of the securities were sold through underwriters. Share numbers have
not been adjusted for the 5.5:1 stock split to be effected immediately prior to
the closing of the Company's initial public offering.
<TABLE>
<CAPTION>
NUMBER OF
SHARES
SECURITY/PURCHASER DATE SOLD/GRANTED SOLD/GRANTED CONSIDERATION
- ---------------------------------------------- ------------------ ------------ -------------
<S> <C> <C> <C>
COMMON STOCK
David W. Cross................................ September 22, 1994 59,325 $ 25,000
John R. Lewis................................. September 22, 1994 59,325 $ 25,000
David L. Steffy............................... September 22, 1994 59,325 $ 25,000
RehabCare Group, Inc.......................... September 22, 1994 59,325 $ 73,181(1)
Three Arch Partners, L.P...................... December 30, 1994 3,998 $ 3,998
Three Arch Associates, L.P.................... December 30, 1994 902 $ 902
WARRANTS FOR SERIES B CONVERTIBLE PREFERRED
STOCK
Comdisco, Inc................................. February 15, 1996 2,900 (2)
OPTIONS FOR COMMON STOCK
James D. Pomeroy.............................. January 2, 1995 14,700 N/A
Anthony J. Torrente........................... January 2, 1995 14,700 N/A
Thomas M. Walsh............................... January 27, 1995 6,500 N/A
Samuel A. Morse............................... February 13, 1995 19,600 N/A
John P. Keefe................................. July 28, 1995 19,600 N/A
Anthony J. Torrente........................... November 27, 1995 3,500 N/A
Kathie Nohre, R.N............................. November 27, 1995 5,000 N/A
Madalene Roedl................................ November 27, 1995 2,000 N/A
David W. Cross................................ December 15, 1995 6,000 N/A
John R. Lewis................................. December 15, 1995 6,000 N/A
Phillip M. Nudelman, Ph.D..................... June 28, 1996 1,000 N/A
Robert H. Grimes.............................. June 28, 1996 500 N/A
Barbara C. Bentrup............................ June 28, 1996 200 N/A
Patrick L. Burton............................. June 28, 1996 150 N/A
SERIES A CONVERTIBLE PREFERRED STOCK
ALTA V Limited Partnership.................... December 30, 1994 98,960 $ 989,600
Customs House Partners........................ December 30, 1994 1,040 $ 10,400
Sierra Ventures IV, L.P....................... December 30, 1994 192,300 $ 1,923,000
Sierra Ventures IV International, L.P......... December 30, 1994 7,700 $ 77,000
Weiss, Peck & Greer Venture Associates III,
L.P......................................... January 6, 1995 41,160 $ 411,600
WPG Enterprise Fund II, L.P................... January 6, 1995 58,840 $ 588,400
Life Science Entrepreneur Fund................ December 30, 1994 5,000 $ 50,000
Schroder Ventures Limited Partnership......... December 30, 1994 60,000 $ 600,000
Schroder Ventures U.S. Trust.................. December 30, 1994 15,000 $ 150,000
Schroders Incorporated........................ December 30, 1994 50,000 $ 500,000
</TABLE>
II-2
<PAGE> 74
<TABLE>
<CAPTION>
NUMBER OF
SHARES
SECURITY/PURCHASER DATE SOLD/GRANTED SOLD/GRANTED CONSIDERATION
- ---------------------------------------------- ------------------ ------------ -------------
<S> <C> <C> <C>
Three Arch Partners, L.P...................... January 6, 1995 81,600 $ 816,000
Three Arch Associates, L.P.................... January 6, 1995 18,400 $ 184,000
SERIES B CONVERTIBLE PREFERRED STOCK
ALTA V Limited Partnership.................... December 22, 1995 47,830 $ 989,602.70
Customs House Partners........................ December 22, 1995 503 $ 10,407.07
Sierra Ventures IV, L.P. ..................... December 22, 1995 69,708 $1,442,258.52
Sierra Ventures IV International, L.P. ....... December 22, 1995 2,791 $ 57,745.79
Weiss, Peck & Greer Venture Associates III,
L.P. ....................................... December 22, 1995 21,943 $ 454,000.67
WPG Enterprise Fund II, L.P. ................. December 22, 1995 26,390 $ 546,009.10
Schroder Ventures Limited Partnership......... December 22, 1995 8,159 $ 168,809.71
Schroder Ventures U.S. Trust.................. December 22, 1995 2,040 $ 42,207.60
Schroders Incorporated........................ December 22, 1995 6,800 $ 140,692.00
Three Arch Partners, L.P. .................... December 22, 1995 39,456 $ 816,344.64
Three Arch Associates, L.P. .................. December 22, 1995 8,877 $ 183,665.13
Mayfield VIII................................. December 22, 1995 162,922 $3,370,856.18
Mayfield Associates Fund II................... December 22, 1995 8,575 $ 177,416.75
</TABLE>
- ------------------------------
(1) Purchase price consisted of $25,000 in cash, and transfer of certain
promissory notes of David W. Cross and John R. Lewis (issued with respect to
transactions unrelated to the Company).
(2) Granted as part of consideration for entering into capital lease
arrangement.
16. EXHIBITS
(a) EXHIBITS
A list of exhibits included as part of this Registration Statement is set
forth in the Exhibit Index which immediately precedes such exhibits and is
hereby incorporated by reference herein.
(b) FINANCIAL STATEMENT SCHEDULES
Schedules have been omitted because they are not applicable, are not
required, or because the information is included elsewhere in the Consolidated
Financial Statements or the Notes thereto.
17. UNDERTAKINGS
(a) The undersigned Registrant hereby undertakes to provide to the
Underwriters at the Closing as specified in the Underwriting Agreement
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 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 Commission, such indemnification is against
public policy as expressed in the 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 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 Act, the
information omitted from the form of prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and
II-3
<PAGE> 75
contained in a form of prospectus filed by the Registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-4
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this amended Registration Statement to be signed on its behalf
by the undersigned, thereunto duly authorized in St. Louis, Missouri on the 10th
day of October, 1996.
INTENSIVA HEALTHCARE CORPORATION
By: /s/ DAVID W. CROSS
--------------------------------------
David W. Cross, President
Pursuant to the requirements of the Securities Act of 1933, this amended
Registration Statement has been signed by the following persons in the
capacities and on the date indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
------------------------------------- ----------------------------- -------------------
<S> <C> <C> <C>
</TABLE>
<TABLE>
<S> <C> <C> <C>
/s/ David W. Cross President, Chief Executive October 10, 1996
------------------------------------- Officer (Principal Executive
David W. Cross Officer) and Director
* Director October 10, 1996
-------------------------------------
Jeffrey J. Collinson
* Director October 10, 1996
-------------------------------------
Wilfred E. Jaeger, MD
* Director October 10, 1996
-------------------------------------
James B. Tananbaum, MD
* Director October 10, 1996
-------------------------------------
David L. Steffy
* Director October 10, 1996
-------------------------------------
Phillip M. Nudelman, Ph.D.
* Chief Financial Officer October 10, 1996
------------------------------------- (Principal Financial and
John P. Keefe Accounting Officer)
*By /s/ David W. Cross
-------------------------------------
David W. Cross
As attorney-in-fact
for the persons indicated
</TABLE>
II-5
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------
<S> <C>
</TABLE>
<TABLE>
<S> <C>
1.1 Form of Underwriting Agreement
++3(i).1 Amended and Restated Certificate of Incorporation
++3(i).2 Certificate of Amendment to Amended and Restated Certificate of Incorporation
++*3(i).3 Form of Third Amended and Restated Certificate of Incorporation
++3(i).4 Certificate of Amendment to Amended and Restated Certificate of Incorporation
++3(ii).1 By-Laws
++*3(ii).2 Form of Amended and Restated By-Laws
4.1 Specimen Certificate of Shares of Common Stock, $0.001 par value, of the Company
++4.2 Amended and Restated Stockholders' Agreement, dated December 20, 1995
++4.3 Amended and Restated Registration Rights Agreement, dated December 20, 1995
++5.1 Form of Opinion of Suelthaus & Walsh, P.C., regarding legality of securities being
offered
++10.1 Form of Lease Agreement with Host Hospitals
++10.2 Warrant Agreement to Purchase Shares of Series B Convertible Preferred Stock of
Transitional Care of America, Inc., by and between the Company and Comdisco, Inc.,
dated as of February 15, 1996
++10.3 Master Lease Agreement by and between the Company and Comdisco, Inc., dated
December 11, 1995
++10.4 Agreement by and between the Company and Healthcare Management Systems, Inc., dated
November 29, 1995
++10.5 Escrow Agreement by and among the Company, Healthcare Management Systems, Inc. and
Wyatt, Tarrant & Combs, dated November 29, 1995
++10.6 Second Amended and Restated Employment Agreement of David W. Cross, by and between
the Company and David W. Cross, dated June 12, 1996
++10.7 Second Amended and Restated Employment Agreement of John R. Lewis, by and between
the Company and John R. Lewis, dated June 12, 1996
++10.8 Employment Agreement of John P. Keefe, by and between the Company and John P.
Keefe, dated June 1, 1995
++10.9 Employment Agreement of Samuel A. Morse, by and between the Company and Samuel A.
Morse, dated December 2, 1994
++10.10 Employment Agreement of Tony J. Torrente, by and between the Company and Tony J.
Torrente, dated December 8, 1994
++10.11 Employment Agreement of James D. Pomeroy, by and between the Company and James D.
Pomeroy, dated December 28, 1994
++10.12 Employment Agreement of Kathie Nohre, R.N., by and between the Company and Kathie
Nohre, R.N., dated November 6, 1995
++10.13 Transitional Care of America, Inc. Stock Option Plan
++10.14 Subscription Agreement for the sale of Common Stock of the Company, by and among
the Company, RehabCare Corporation, David L. Steffy, David W. Cross, and John R.
Lewis, dated September 22, 1994
++10.15 Stockholders' Agreement by and among the Company, RehabCare Corporation, David L.
Steffy, David W. Cross and John L. Lewis, dated September 22, 1994
++10.16 Transition Agreement by and among the Company, RehabCare Corporation, David W.
Cross and John R. Lewis, dated September 22, 1994
++10.17 TCA Non-Compete, Non-Hire, Non-Disclosure and Release Agreement by and between the
Company and RehabCare Corporation, dated September 22, 1994
</TABLE>
II-6
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------- -----------------------------------------------------------------------------------
<S> <C>
++10.18 RehabCare Non-Compete, Non-Hire, Non-Disclosure and Release Agreement by and
between the Company and RehabCare Corporation, dated September 22, 1994
++10.19 Steffy/RehabCare Non-Development, Non-Hire and Release Agreement, by and between
David L. Steffy and RehabCare Corporation, dated September 22, 1994
++10.20 Cross Non-Compete, Non-Hire, Non-Disclosure and Release Agreement by and between
David W. Cross and RehabCare Corporation, dated September 22, 1994
++10.21 Lewis Non-Compete, Non-Hire, Non-Disclosure and Release Agreement by and between
John R. Lewis and RehabCare Corporation, dated September 22, 1994
++10.22 Series A Convertible Preferred Stock Purchase Agreement by and among the Company
and certain purchasers named therein, dated December 30, 1994
++10.23 Stock Repurchase Agreement by and between the Company and David W. Cross, dated
December 30, 1994
++10.24 Stock Repurchase Agreement by and between the Company and John R. Lewis, dated
December 30, 1994
++10.25 Series B Convertible Preferred Stock Purchase Agreement by and among the Company
and certain purchasers named therein, dated December 20, 1994
++11.1 Statement Re Computation of Earnings Per Share
21.1 Subsidiaries of the Company
++23.1 Consent of Suelthaus & Walsh, P.C. (consent included in Exhibit 5.1)
23.2 Consent of KPMG Peat Marwick LLP
++24.1 Power of Attorney (included as part of Signature Page to Registration Statement)
++27.1 Financial Data Schedule
</TABLE>
- ------------------------------
* To be effective immediately prior to effectiveness of the Registration
Statement.
+ To be filed by amendment.
++ Previously filed.
II-7
<PAGE> 1
FORM OF UNDERWRITING AGREEMENT
INTENSIVA HEALTHCARE CORPORATION
2,500,000 Shares *
Common Stock
, 1996
--------
HAMBRECHT & QUIST LLC
ROBERTSON, STEPHENS & COMPANY LLC
NEEDHAM & COMPANY, INC.
as Representatives of the Several Underwriters
c/o Hambrecht & Quist LLC
One Bush Street
San Francisco, CA 94104
Ladies and Gentlemen:
Intensiva HealthCare Corporation, a Delaware corporation (herein called
the Company), proposes to issue and sell 2,500,000 shares (said shares being
herein called the Underwritten Stock) of its authorized but unissued Common
Stock, $0.001 par value per share (herein called the Common Stock). The Company
proposes to grant to the Underwriters (as hereinafter defined) an option to
purchase up to 375,000 additional shares of Common Stock (herein called the
Option Stock and with the Underwritten Stock herein collectively called the
Stock). The Common Stock is more fully described in the Registration Statement
and the Prospectus hereinafter described.
The Company hereby confirms the agreements made with respect to the
purchase of the Stock by the several underwriters, for whom you are acting,
named in Schedule I hereto (herein collectively called the Underwriters, which
term shall also include any underwriter purchasing Stock pursuant to Section
4(b) hereof). You represent and warrant that you have been authorized by each
of the other Underwriters to enter into this Agreement on its behalf and to act
for it in the manner herein provided.
- ------------------------------
* Plus an option to purchase from the Company up to 375,000 additional
shares to cover over-allotments.
<PAGE> 2
1. REGISTRATION STATEMENT. The Company has filed with the Securities and
Exchange Commission (herein called the Commission) a registration statement on
Form S-1 (No. 333-08899), including the related preliminary prospectus, for the
registration of the Stock under the Securities Act of 1933, as amended (herein
called the Securities Act). Copies of such registration statement and of each
amendment thereto, if any, including the related preliminary prospectus
(meeting the requirements of Rule 430A of the rules and regulations of the
Commission) heretofore filed by the Company with the Commission have been
delivered to you. The term Registration Statement as used in this Agreement
shall mean such registration statement, including all exhibits and financial
statements and all information omitted therefrom in reliance upon Rule 430A and
contained in the Prospectus referred to below, in the form in which it became
effective, and any registration statement increasing the size of the offering
filed pursuant to Rule 462(b) of the rules and regulations of the Commission
with respect to the Stock (herein called a Rule 462(b) Registration Statement),
and, in the event of any amendment thereto after the effective date of such
registration statement (herein called the Effective Date), the term
Registration Statement shall also mean (from and after the effectiveness of
such amendment) such registration statement as so amended (including any Rule
462(b) Registration Statement). The term Prospectus as used in this Agreement
shall mean the prospectus relating to the Stock first filed with the Commission
pursuant to Rule 424(b) and Rule 430A or (if no such filing is required) as
included in the Registration Statement, and, in the event of any supplement or
amendment to such prospectus after the Effective Date, shall also mean (from
and after the filing with the Commission of such supplement or the
effectiveness of such amendment) such prospectus as so supplemented or amended.
The term Preliminary Prospectus as used in this Agreement shall mean each
preliminary prospectus included in such registration statement prior to the
time it becomes effective.
2. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents and warrants to the Underwriters as follows:
(a) The Registration Statement, in the form delivered to you, has been
declared effective under the Securities Act, and other than a 462(b)
Registration Statement, if any, no post-effective amendment to the Registration
Statement has been filed as of the date of this Agreement. No stop order
suspending the effectiveness of the Registration Statement has been issued and
no proceeding for that purpose has been initiated or, to the knowledge of the
Company, threatened by the Commission. The Company has caused to be delivered
to you copies of the Registration Statement and each Preliminary Prospectus and
has consented to the use of such copies for the purposes permitted by the
Securities Act.
(b) The Company does not own or control, directly or indirectly, any
corporation, association or other entity other than the subsidiaries listed in
Exhibit 21.1 of the Registration Statement. The Company and each of its
subsidiaries have been duly incorporated and each is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has full corporate power and authority to own or lease its
properties and conduct its business as described in the Registration Statement
and the
2
<PAGE> 3
Prospectus and as being conducted, and is duly qualified as a foreign
corporation and in good standing in all jurisdictions in which the character of
the property owned or leased or the nature of the business transacted by it
makes qualification necessary (except where the failure to be so qualified
would not have a material adverse effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company and its subsidiaries, taken as a whole). The outstanding shares of
capital stock of each such subsidiary have been duly authorized and validly
issued, are fully paid and nonassessable and are owned by the Company free and
clear of all liens, encumbrances and security interests; and no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in any such subsidiary are outstanding. The Company and
each of its subsidiaries has all requisite power and authority, and now hold,
and at the Closing Date (as defined in Section 6(a) hereof) will hold, all
necessary consents, approvals, authorizations, orders, registrations,
qualifications, licenses, certificates and permits of and from all federal,
state and other regulatory and governmental agencies and bodies necessary to
own, lease and operate their properties and conduct their business, taken as a
whole, as now being conducted as described in the Registration Statement and
the Prospectus (except where the failure to hold such consent, approval,
authorization, order, registration, qualification, license, certificate or
permit would not have a material adverse effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company and its subsidiaries, taken as a whole). No such consent, approval,
authorization, order, registration, qualification, license, certificate or
permit contain a materially burdensome restriction not adequately disclosed in
the Registration Statement and the Prospectus. Neither the Company nor any of
its subsidiaries has provided or provides monetary compensation to the medical
community in return for patient referrals in violation of any applicable law,
rule or regulation.
(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, there has not been any material
adverse change in the business, properties, operations, financial condition or
results of operations or prospects of the Company and its subsidiaries taken as
a whole, whether or not arising from transactions in the ordinary course of
business, other than as set forth in the Registration Statement and the
Prospectus. Since such dates neither the Company nor any of its subsidiaries
has entered into any material transaction not referred to in the Registration
Statement and the Prospectus other than in the ordinary course of business.
(d) The Commission has not issued any order preventing or suspending
the use of any Preliminary Prospectus or the Prospectus, nor instituted
proceedings for that purpose. The Registration Statement and the Prospectus
comply, and on the Closing Date (as hereinafter defined) and any later date on
which Option Stock is to be purchased, the Registration Statement and the
Prospectus will comply, in all material respects, with the provisions of the
Securities Act and the rules and regulations of the Commission thereunder. On
the Effective Date and on the Closing Date and any later date on which Option
Stock may be purchased, neither the Registration Statement nor any amendment
thereto, and neither the Prospectus nor any supplements thereto, contains or
will contain any untrue statement of a
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<PAGE> 4
material fact or omits or will omit to state any material fact required to be
stated therein or necessary in order to make the statements therein, in light
of the circumstances under which such statements were made, not misleading.
None of the representations and warranties in this subparagraph (d) shall apply
to statements in, or omissions from, the Registration Statement or the
Prospectus made in reliance upon and in conformity with information furnished
in writing to the Company by or on behalf of the Underwriters for use in the
Registration Statement or the Prospectus. There are no contracts or documents
of the Company or any of its subsidiaries which would be required by the
Securities Act or by the rules and regulations of the Commission to be filed as
exhibits to the Registration Statement which have not been so filed.
(e) The authorized, issued and outstanding capital stock of the Company
and the outstanding long-term debt of the Company and its subsidiaries is as
described in the Prospectus. All of the issued shares of capital stock of the
Company have been duly and validly authorized and issued, are fully paid and
non-assessable, and conform to the description thereof contained in the
Prospectus. All of the issued shares of capital stock of each subsidiary of the
Company have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly or indirectly by the Company, free and
clear of all liens, encumbrances, security interests and claims whatsoever. The
Stock is duly and validly authorized and will be, when issued and sold to the
Underwriters as provided herein duly and validly issued, fully paid,
nonassessable, free of pre-emptive rights and conforms to the description
thereof in the Prospectus. There are no outstanding options, warrants or other
rights granted to or by the Company to purchase shares of Common Stock or other
securities of the Company other than as described in the Prospectus; and no
such option, warrant or other right has been granted to any person, the
exercise of which would cause such person to own more than five percent of the
Common Stock outstanding immediately after the offering other than as described
in the Prospectus. No Person or entity holds a right to require or participate
in the registration under the Securities Act of shares of Common Stock of the
Company which right has not been waived by the holder thereof as of the date
hereof with respect to the registration of shares pursuant to the Registration
Statement, and except as described in the Prospectus, no person holds a right
to require registration under the Securities Act of shares of Common Stock of
the Company at any other time. No person or entity has a right of participation
with respect to the sale of shares of the Stock by the Company. No further
approval or authority of the stockholders or the Board of Directors of the
Company will be required for the issuance and sale of the Stock by the Company
as contemplated herein.
(f) The Company and its subsidiaries now hold, and at the Closing Date
(as defined in Section 6(a) hereof) will hold, all material licenses,
certificates and permits from state, federal and other regulatory authorities
which are necessary for the conduct of the business of the Company and its
subsidiaries, taken as a whole; neither the Company nor any of its subsidiaries
is in violation of its corporate charter or by-laws, or in default in the
performance or observance of any provision of any obligation, agreement,
covenant or condition contained in any bond, debenture or material contract,
lease, indenture, mortgage, loan agreement, joint venture or other agreement or
instrument to which the Company or such subsidiary is a party or by which it or
any of its properties is bound or is in violation of any
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<PAGE> 5
law, order, rule, regulation, writ, injunction or decree of any government,
governmental instrumentality or court, domestic or foreign, including without
limitation, all applicable local, stated and federal environmental regulations.
(g) Except as disclosed in the Prospectus, the Company and its
subsidiaries have all necessary trademarks, trade names, patent rights, mask
works, copyrights, licenses, approvals and governmental authorizations to
conduct their businesses as now conducted and as proposed to be conducted,
without any conflicts with the rights of others; and the Company has no
knowledge of any material infringement by the Company or its subsidiaries of
trademark, trade name rights, patent rights, mask works, copyrights, licenses,
trade secret or other similar rights of others, and there is no litigation or
other proceedings pending or threatened against the Company or its subsidiaries
regarding trademark, trade name, patent, mask work, copyright, license, trade
secret or other infringement which singly or in the aggregate could have a
material adverse effect on the condition (financial or otherwise), business,
results of operations or prospects of the Company and its subsidiaries, nor, to
the best of the Company's knowledge, is there any basis therefor.
(h) This Agreement has been duly authorized, executed and delivered by
the Company; the performance of this Agreement and the consummation of the
transactions herein contemplated will not result in a breach or violation of
any of the terms and provisions of, or constitute a default under, (i) any
indenture, mortgage, deed of trust, loan agreement or other material agreement
or instrument to which the Company or any of its subsidiaries is a party or by
which the property of the Company or any of the subsidiaries is bound, (ii) the
corporate charter or by-laws of the Company or any of the subsidiaries or (iii)
(assuming the making of all filings required under Rule 424(b) or Rule 430A and
the due qualification of the Stock for public offering by the Underwriters
under state and foreign securities laws) any statute or any order, rule or
regulation of any court or governmental agency or body having jurisdiction over
the Company or any of its subsidiaries or over the properties of the Company.
(i) Except as set forth in the Prospectus, there is not any action,
suit or proceeding before any court or administrative agency, at law or in
equity, pending against the Company or any subsidiary or of which any property
of the Company or any of its subsidiaries is the subject which, if determined
adversely to the Company or any subsidiary, would individually or in the
aggregate materially adversely affect the business, properties, operations,
financial condition, income or business prospects of the Company and the
subsidiaries, taken as a whole, or prevent consummation of the transactions
contemplated hereby; and, to the best of the Company's knowledge, no such
proceedings are threatened or contemplated by governmental authorities or
threatened by others.
(j) The consolidated financial statements of the Company and its
subsidiaries, together with the related notes and schedules as set forth in the
Registration Statement, present fairly the consolidated financial position and
the results of operations of the Company and its subsidiaries, at the indicated
dates and for the indicated periods. Such financial statements have been
prepared in accordance with generally accepted accounting
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<PAGE> 6
principles consistently applied throughout the periods involved, and all
adjustments necessary for a fair presentation of results for such periods have
been made. The summary financial and statistical data included in the
Registration Statement present fairly the information shown therein and have
been compiled on a basis consistent with the financial statements presented
therein.
(k) The Company and its subsidiaries have filed all federal, state and
foreign income tax returns which have been required to be filed (or have filed
extensions therefor or obtained any required extensions in connection
therewith), and have paid all taxes indicated by said returns and all
assessments received by them or any of them to the extent that such taxes have
become due and are not being contested in good faith.
(l) Each approval, consent, order authorization, designation,
declaration or filing by or with any United States regulatory, administrative
or other governmental body necessary in connection with the execution and
delivery by the Company of this Agreement and the consummation by the Company
of the transactions herein contemplated (except (i) such additional steps as
may be required by the National Association of Securities Dealers, Inc. (the
"NASD"), (ii) as may be necessary to make the Registration Statement effective
(and to maintain such effectiveness) and to qualify the Stock for public
offering by the Underwriters under state and foreign securities laws or (iii)
filings required under Rule 424(b) or Rule 430(A)) has been obtained or made
and is in full force and effect.
(m) KPMG Peat Marwick LLP, who have certified the financial statements
of the Company and its subsidiaries filed with the Commission as part of the
Registration Statement, are independent public accountants as required by the
Securities Act and the rules and regulations of the Commission thereunder.
(n) The Company and the subsidiaries have good and marketable title or
leasehold title, as the case may be, to all of the properties and assets
reflected in the financial statements (or as described in the Registration
Statement) hereinabove described, subject to no lien, mortgage, pledge, charge
or encumbrance of any kind except those reflected in such financial statements
(or as described in the Registration Statement) or which are not material in
amount.
(o) Neither the Company nor any of its subsidiaries is involved in any
material labor dispute nor, to the knowledge of the Company, is any such
dispute threatened.
(p) The Company and each of its subsidiaries maintain insurance of the
types and in the amounts generally deemed adequate for their business,
including, but not limited to, medical malpractice insurance and insurance
covering real and personal property owned or leased by the Company or any of
its subsidiaries against theft, damage, destruction, acts of vandalism and all
other risks customarily insured against, all of which insurance is in full
force and effect.
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<PAGE> 7
(q) The Company is not aware that (A) any executive officer, key
employee or significant group of employees of the Company or any of its
subsidiaries plans to terminate employment with the Company or any of its
subsidiaries or (B) any such executive officer or key employee is subject to
any non-competition, non-disclosure, confidentiality, employment, consulting or
similar agreement that would be violated by the present or proposed business
activities of the Company or any of its subsidiaries.
(r) The statements set forth in the Prospectus under the caption
"Description of Capital Stock", insofar as they purport to constitute a summary
of the terms of the Stock, are an accurate and complete description of such
terms in all material respects.
(s) The Company is not and, after giving effect to the offering and
sale of the Stock, will not be an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the
Investment Company Act of 1940, as amended.
(t) The Company has filed a registration statement pursuant to Section
12(g) of the Securities Exchange Act of 1934, as amended (hereinafter the
Exchange Act), to register the Stock, has filed an application to list the
Stock on the Nasdaq National Market, and has received notification that such
listing has been approved, subject to official notice of issuance and sale.
(u) Neither the Company nor its subsidiaries are engaged in the
practice of medicine. Neither the Company nor any of its subsidiaries exercises
any influence or control over the practice of medicine by the physicians
attending patients at the facilities of the Company or of its subsidiaries in
violation of any law, rule or regulation.
(v) Neither the Company nor any of its subsidiaries nor any employee or
agent of the Company or any physician has made any payment of funds of the
Company or any subsidiary of the Company or received or retained any funds in
violation of any law, rule or regulation, including laws and regulations
prohibiting fee-splitting or fees for the referral of patients.
(w) There are no material Medicare, Medicaid or other managed care
recoupment or recoupments of any third-party payor being sought, threatened,
requested or claimed against the Company or any of its subsidiaries.
(x) The Company and its subsidiaries conduct the business now operated
by them in the manner required pursuant to Federal law, including without
limitation 42 U.S.C. Section 1886(1)(B)(iv) of the Social Security Act, in
order to be exempt and to preserve their exemption as general long term care
hospitals.
3. [INTENTIONALLY OMITTED]
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<PAGE> 8
4. PURCHASE OF THE STOCK BY THE UNDERWRITERS.
(a) On the basis of the representations and warranties and subject to
the terms and conditions herein set forth, the Company agrees to issue and sell
2,500,000 shares of the Underwritten Stock to the several Underwriters, and
each of the Underwriters agrees to purchase from the Company the respective
aggregate number of shares of Underwritten Stock set forth opposite its name in
Schedule I. The price at which such shares of Underwritten Stock shall be sold
by the Company and purchased by the several Underwriters shall be
__________________ per share. The obligation of each Underwriter to the Company
shall be to purchase from the Company that number of shares of the Underwritten
Stock which represents the same proportion of the total number of shares of the
Underwritten Stock to be sold by the Company pursuant to this Agreement as the
number of shares of the Underwritten Stock set forth opposite the name of such
Underwriter in Schedule I hereto represents of the total number of shares of
the Underwritten Stock to be purchased by all Underwriters pursuant to this
Agreement, as adjusted by you in such manner as you deem advisable to avoid
fractional shares. In making this Agreement, each Underwriter is contracting
severally and not jointly; except as provided in paragraphs (b) and (c) of this
Section 4, the agreement of each Underwriter is to purchase only the respective
number of shares of the Underwritten Stock specified in Schedule I.
(b) If for any reason one or more of the Underwriters shall fail or
refuse (otherwise than for a reason sufficient to justify the termination of
this Agreement under the provisions of Section 9 or Section 10 hereof) to
purchase and pay for the number of shares of Stock agreed to be purchased by
such Underwriter or Underwriters, the Company shall immediately give notice
thereof to you, and the non-defaulting Underwriters shall have the right within
twenty-four (24) hours after the receipt by you of such notice to purchase, or
procure one or more other Underwriters to purchase, in such proportions as may
be agreed upon between you and such purchasing Underwriter or Underwriters and
upon the terms herein set forth, all or any part of the shares of Stock which
such defaulting Underwriter or Underwriters agreed to purchase. If the
non-defaulting Underwriters fail so to make such arrangements with respect to
all such shares, the number of shares of Stock that each non-defaulting
Underwriter is otherwise obligated to purchase under this Agreement shall be
automatically increased on a pro rata basis to absorb the remaining shares
which the defaulting Underwriter or Underwriters agreed to purchase; provided,
however, that the non-defaulting Underwriters shall not be obligated to
purchase the shares which the defaulting Underwriter or Underwriters agreed to
purchase if the aggregate number of such shares of Stock exceeds 10% of the
total number of shares of Stock that all Underwriters agreed to purchase
hereunder. If the total number of shares of Stock that the defaulting
Underwriter or Underwriters agreed to purchase shall not be purchased or
absorbed in accordance with the two preceding sentences, the Company shall have
the right, within twenty-four (24) hours next succeeding the 24-hour period
referred to above to make arrangements with other underwriters or purchasers
satisfactory to you for the purchase of such shares on the terms herein set
forth. In any such case, either you, or the Company, shall have the right to
postpone the Closing Date determined as provided in Section 6 hereof for not
more than seven business days after the
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<PAGE> 9
date originally fixed as the Closing Date pursuant to said Section 6 in order
that any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made. If neither the non-defaulting
Underwriters nor the Company shall make arrangements within the 24-hour periods
stated above for the purchase of all the shares of Stock that the defaulting
Underwriter or Underwriters agreed to purchase hereunder, this Agreement shall
be terminated without further act or deed and without any liability on the part
of the Company to any non-defaulting Underwriter and without any liability on
the part of any non-defaulting Underwriter to the Company. Nothing in this
paragraph (b), and no action taken hereunder, shall relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
(c) On the basis of the representations, warranties and covenants
herein contained, and subject to the terms and conditions herein set forth, the
Company grants an option to the several Underwriters to purchase, severally and
not jointly, up to 375,000 shares in the aggregate, of the Option Stock from
the Company at the same price per share as the Underwriters shall pay for the
Underwritten Stock. Said options may be exercised only to cover over-allotments
in the sale of the Underwritten Stock by the Underwriters and may be exercised
in whole or in part at any time (but not more than once) on or before the
thirtieth (30th) day after the date of this Agreement upon written or
telegraphic notice by you to the Company setting forth the aggregate number of
shares of the Option Stock as to which the several Underwriters are exercising
the option(s). Delivery of certificates for the shares of Option Stock, and
payment therefor, shall be made as provided in Section 6 hereof. The number of
shares of the Option Stock to be purchased by each Underwriter shall be the
same percentage of the total number of shares of the Option Stock to be
purchased by the several Underwriters as such Underwriter is purchasing of the
Underwritten Stock, as adjusted by you in such manner as you deem advisable to
avoid fractional shares.
5. OFFERING BY UNDERWRITERS.
(a) The terms of the initial public offering by the Underwriters of the
Stock to be purchased by them shall be as set forth in the Prospectus. The
Underwriters may from time to time change the public offering price after the
closing of the initial public offering and increase or decrease the concessions
and discounts to dealers as they may determine.
(b) The information set forth in the last paragraph on the front cover
page and under "Underwriting" in the Registration Statement, any Preliminary
Prospectus and the Prospectus (insofar as such information relates to the
Underwriters) constitutes the only information furnished by the Underwriters to
the Company for inclusion in the Registration Statement, any Preliminary
Prospectus, and the Prospectus, and you on behalf of the respective
Underwriters represent and warrant to the Company that the statements made
therein are correct.
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<PAGE> 10
6. DELIVERY OF AND PAYMENT FOR THE STOCK.
(a) Delivery of certificates for the shares of the Underwritten Stock
and the Option Stock (if the options granted by Section 4(c) hereof shall have
been exercised not later than 7:00 a.m., San Francisco time, on the date two
business days preceding the Closing Date), and payment therefor, shall be made
at the office of Hambrecht & Quist LLC, One Bush Street, San Francisco,
California 94104 at 7:00 a.m., San Francisco time, on the third business day
after the date of this Agreement, or at such time on such other day, not later
than seven full business days after such third business day, as shall be agreed
upon in writing by the Company and you. The date and hour of such delivery and
payment (which may be postponed as provided in Section 4(b) hereof) are herein
called the Closing Date.
(b) If the options granted by Section 4(c) hereof shall be exercised
after 7:00 a.m., San Francisco time, on the date two business days preceding
the Closing Date, and on or before the 30th day after the date of this
Agreement, delivery of certificates for the shares of Option Stock, and payment
therefor, shall be made at the office of Hambrecht & Quist LLC, One Bush
Street, San Francisco, California 94104 at 7:00 a.m., San Francisco time, on
the third business day after the exercise of such option.
(c) Payment for the Stock purchased from the Company shall be made to
the Company or its order by one or more certified or official bank check or
checks in next day funds (and the Company agrees not to deposit any such check
in the bank on which drawn until the day following the date of its delivery to
the Company). Such payment shall be made upon delivery of certificates for the
Stock to you for the respective accounts of the several Underwriters against
receipt therefor signed by you. Certificates for the Stock to be delivered to
you shall be registered in such name or names and shall be in such
denominations as you may request at least two business days before the Closing
Date, in the case of Underwritten Stock, and at least two business days prior
to the purchase thereof, in the case of the Option Stock. Such certificates
will be made available to the Underwriters for inspection, checking and
packaging at the offices of Lewco Securities Corporation, 2 Broadway, New York,
New York 10004, at least two business days prior to the Closing Date or, in the
case of the Option Stock, by 3:00 p.m., New York time, at least two business
days preceding the date of purchase. Time shall be of the essence and delivery
at the time and place specified above is a further condition to the obligations
of the Underwriters.
It is understood that you, individually and not on behalf of the
Underwriters, may (but shall not be obligated to) make payment to the Company
for shares to be purchased by any Underwriter whose check shall not have been
received by you on the Closing Date or any later date on which Option Stock is
purchased for the account of such Underwriter. Any such payment by you shall
not relieve such Underwriter from any of its obligations hereunder.
7. FURTHER AGREEMENTS OF THE COMPANY. The Company covenants and agrees as
follows:
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(a) The Company will prepare and timely file with the Commission under
Rule 424(b) a Prospectus containing information previously omitted at the time
of effectiveness of the Registration Statement in reliance on Rule 430A;
provided, however, that the Company will not file such Prospectus under Rule
424(b) or any amendment to the Registration Statement or supplement to the
Prospectus of which you shall not previously have been advised and furnished
with a copy or to which you shall have reasonably objected in writing or which
is not in compliance with the Securities Act or the rules and regulations of
the Commission. The Company will provide evidence satisfactory to the
Underwriters of the timely filing of the Prospectus filed under Rule 424(b) and
any registration statement filed under Rule 462(b).
(b) If the Company elects to rely on Rule 462(b), the Company shall
file a 462(b) Registration Statement with the Commission in compliance with
Rule 462(b) by 10:00 p.m., Washington D.C. time, on the date of this Agreement,
and the Company shall at the time of filing either pay to the Commission the
filing fee for the Rule 462(b) Registration Statement or give irrevocable
instructions for the payment of such fee pursuant to Rule 111(b) under the Act.
(c) The Company will promptly notify each Underwriter in the event of
(i) the request by the Commission for amendment of the Registration Statement
or for any supplement to the Prospectus or for any additional information, (ii)
the issuance by the Commission of any stop order suspending the effectiveness
of the Registration Statement, (iii) the institution or notice of intended
institution of any action or proceeding for that purpose, (iv) the receipt by
the Company of any notification with respect to the suspension of the
qualification of the Stock for sale in any jurisdiction, or (v) the receipt by
the Company of notice of the initiation or threatening of any proceeding for
such purpose. The Company will make every reasonable effort to prevent the
issuance of such a stop order and, if such an order shall at any time be
issued, to obtain the withdrawal thereof at the earliest possible moment.
(d) The Company will (i) on or before the date hereof and, with respect
to documents filed after the date hereof, on or before the Closing Date,
deliver to you a signed copy of the Registration Statement as originally filed
and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a signed
copy of each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless previously furnished
to you) and will also deliver to you, for distribution to the Underwriters, a
sufficient number of additional conformed copies of each of the foregoing (but
without exhibits) so that a sufficient number of copies of each may be
distributed to each Underwriter, (ii) as promptly as possible deliver to you
and send to the several Underwriters, at such office or offices as you may
designate, as many copies of the Prospectus as you may reasonably request, and
(iii) thereafter from time to time during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, likewise send to
the Underwriters as many additional copies of the Prospectus and as many copies
of any supplement to the Prospectus and of any amended
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<PAGE> 12
prospectus, filed by the Company with the Commission, as you may reasonably
request for the purposes contemplated by the Securities Act.
(e) If at any time during the period in which a prospectus is required
by law to be delivered by an Underwriter or dealer any event relating to or
affecting the Company, or of which the Company shall be advised in writing by
you, shall occur as a result of which it is necessary, in the opinion of
counsel for the Company or of counsel for the Underwriters, to supplement or
amend the Prospectus in order to make the Prospectus not misleading in light of
the circumstances existing at the time it is delivered to a purchaser of the
Stock, the Company will forthwith prepare and file with the Commission, at its
own expense, a supplement to the Prospectus or an amended prospectus so that
the Prospectus as so supplemented or amended will not contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances existing at
the time such Prospectus is delivered to such purchaser, not misleading. If,
after the initial public offering of the Stock by the Underwriters and during
such period, the Underwriters shall propose to vary the terms of the offering
thereof by reason of changes in general market conditions or otherwise, you
will advise the Company in writing of the proposed variation, and, if in the
opinion either of counsel for the Company or of counsel for the Underwriters
such proposed variation requires that the Prospectus be supplemented or
amended, the Company will forthwith prepare and file with the Commission, at
its own expense, a supplement or amendment to the Prospectus setting forth such
variation. The Company authorizes the Underwriters and all dealers to whom any
of the Stock may be sold by the several Underwriters to use the Prospectus, as
from time to time amended or supplemented, in connection with the sale of the
Stock in accordance with the applicable provisions of the Securities Act and
the applicable rules and regulations thereunder for such period.
(f) Prior to the filing thereof with the Commission, the Company will
submit to you, for your information, a copy of any post-effective amendment to
the Registration Statement and any supplement or amendment to the Prospectus
proposed to be filed.
(g) The Company will cooperate, when and as requested by you, in the
qualification of the Stock for offer and sale under the securities or blue sky
laws of such jurisdictions as you may designate and, during the period in which
a prospectus is required by law to be delivered by an Underwriter or dealer, in
keeping such qualifications in good standing under said securities or blue sky
laws; 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 in
any jurisdiction in which it is not so qualified. The Company will, from time
to time, prepare and file such statements, reports, and other documents as are
or may be required to continue such qualifications in effect for so long a
period as you may reasonably request for distribution of the Stock.
(h) During a period of five years commencing with the date hereof, the
Company will furnish to you, and to each Underwriter who may so request in
writing, copies
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of all periodic and special reports furnished to stockholders of the Company
and of all information, documents and reports filed with the Commission
(including the Report on Form SR required by Rule 463 of the Commission under
the Securities Act).
(i) Not later than the 45th day following the end of the fiscal quarter
first occurring after the first anniversary of the Effective Date, the Company
will make generally available to its securityholders an earnings statement in
accordance with Section 11(a) of the Securities Act and Rule 158 thereunder.
(j) Whether or not the transactions contemplated hereunder are
consummated or this Agreement is terminated, the Company agrees to pay all
costs and expenses incident to the performance of the obligations of the
Company under this Agreement, including all costs and expenses incident to (i)
the preparation, printing and filing with the Commission and the National
Association of Securities Dealers, Inc. ("NASD") of the Registration Statement,
any Preliminary Prospectus and the Prospectus, (ii) the furnishing to the
Underwriters of copies of any Preliminary Prospectus and of the several
documents required by paragraph (d) of this Section 7 to be so furnished, (iii)
the printing of this Agreement and related documents delivered to the
Underwriters, (iv) the preparation, printing and filing of all supplements and
amendments to the Prospectus referred to in paragraph (e) of this Section 7,
(v) the furnishing to you and the Underwriters of the reports and information
referred to in paragraph (h) of this Section 7 and (vi) the printing and
issuance of stock certificates, including the transfer agent's fees.
(k) The Company agrees to reimburse you, for the account of the several
Underwriters, for blue sky fees and related disbursements (including, without
limitation, filing fees, counsel fees and disbursements and the cost of
printing memoranda for the Underwriters) paid by or for the account of the
Underwriters or their counsel in qualifying the Stock under state securities or
blue sky laws and for filing fees incident to the review of the offering by the
NASD.
(l) The provisions of paragraphs (j) and (k) of this Section are
intended to relieve the Underwriters from the payment of the expenses and costs
which the Company hereby agrees to pay.
(m) The Company agrees that, without the prior written consent of
Hambrecht & Quist LLC on behalf of the Underwriters, the Company will not for a
period of 180 days following the Closing Date, directly or indirectly, (i)
issue, sell, offer, contract to sell, make any short sale, pledge, issue or
sell any option or contract to purchase, purchase any option or contract to
sell, grant any option, right, warrant to purchase or otherwise transfer or
dispose of any of the Company's equity securities or any securities convertible
into or exchangeable or exercisable for or any rights to purchase or acquire
any of the Company's equity securities or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic consequences
or ownership of any other Company's equity securities, whether any such
transaction described in clause (i) or (ii) above is to be settled by
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<PAGE> 14
delivery of any of the Company's equity securities, in cash or otherwise. The
foregoing sentence shall not apply to (A) the Stock to be sold to the
Underwriters pursuant to this Agreement, (B) shares of Common Stock issued by
the Company upon the exercise of options granted under the stock option plans
of the Company, as described in the Prospectus (the "Option Plans"), and (C)
options to purchase Common Stock granted under the Option Plans as described in
the Prospectus. For purposes of this paragraph (1), a sale, offer, or other
disposition shall be deemed to include any sale to an institution which can,
following such sale, sell Common Stock to the public in reliance on Rule 144A.
(n) If at any time during the 25-day period after the Registration
Statement becomes effective any rumor, publication or event relating to or
affecting the Company shall occur as a result of which in your opinion the
market price for the Stock has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising the Company to the effect set forth above, forthwith
prepare, consult with you concerning the substance of, and disseminate a press
release or other public statement, reasonably satisfactory to you, responding
to or commenting on such rumor, publication or event.
(o) The Company is familiar with the Investment Company Act of 1940, as
amended, and has in the past conducted its affairs, and will in the future
conduct its affairs, in such a manner to ensure that the Company was not and
will not be an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended,
and the rules and regulations thereunder.
(p) The Company will apply the net proceeds of the sale of the Stock
sold by it substantially in accordance with its statements under the caption
"Use of Proceeds" in the Prospectus.
8. INDEMNIFICATION AND CONTRIBUTION.
(a) The Company agrees to indemnify and hold harmless each Underwriter
and each person (including each partner or officer thereof) who controls any
Underwriter within the meaning of Section 15 of the Securities Act from and
against any and all losses, claims, damages or liabilities, joint or several,
to which such indemnified parties or any of them may become subject under the
Securities Act, the Exchange Act, the common law or otherwise, and the Company
agrees to reimburse each such Underwriter and controlling person for any legal
or other expenses (including, except as otherwise hereinafter provided,
reasonable fees and disbursements of counsel) incurred by the respective
indemnified parties in connection with defending against any such losses,
claims, damages or liabilities or in connection with any investigation or
inquiry of, or other proceeding which may be brought against, the respective
indemnified parties, in each case arising out of or based upon (i) any untrue
statement or alleged untrue statement of a material fact contained in the
Registration Statement (including the Prospectus constituting a part thereof
and any Rule 462(b)
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<PAGE> 15
Registration Statement) or any post-effective amendment thereto (including any
Rule 462(b) Registration Statement), or the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, or (ii) any untrue statement or
alleged untrue statement of a material fact contained in any Preliminary
Prospectus or the Prospectus (as amended or as supplemented if the Company
shall have filed with the Commission any amendment thereof or supplement
thereto) or the omission or alleged omission to state therein a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided, however,
that (1) the indemnity agreements of the Company contained in this paragraph
(a) shall not apply to any such losses, claims, damages, liabilities or
expenses if such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of any Underwriter for use in any Preliminary Prospectus or the Registration
Statement or the Prospectus or any such amendment thereof or supplement
thereto, and (2) the indemnity agreement contained in this paragraph (a) with
respect to any Preliminary Prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims, damages,
liabilities or expenses purchased the Stock which is the subject thereof (or to
the benefit of any person controlling such Underwriter) if at or prior to the
written confirmation of the sale of such Stock a copy of the Prospectus (or the
Prospectus as amended or supplemented) was not sent or delivered to such person
and the untrue statement or omission of a material fact contained in such
Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as
amended or supplemented) unless the failure is the result of noncompliance by
the Company with paragraph (d) of Section 7 hereof. The indemnity agreements of
the Company contained in this paragraph (a) and the representations and
warranties of the Company contained in Section 2 hereof, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any indemnified party and shall survive the delivery of and payment
for the Stock.
(b) Each Underwriter severally agrees to indemnify and hold harmless
the Company, each of its officers who signs the Registration Statement on his
own behalf or pursuant to a power of attorney, and each of its directors, each
other Underwriter and each person (including each partner or officer thereof)
who controls the Company or any such other Underwriter within the meaning of
Section 15 of the Securities Act, from and against any and all losses, claims,
damages or liabilities, joint or several, to which such indemnified parties or
any of them may become subject under the Securities Act, the Exchange Act, the
common law or otherwise and to reimburse each of them for any legal or other
expenses (including, except as otherwise hereinafter provided, reasonable fees
and disbursements of counsel) incurred by the respective indemnified parties in
connection with defending against any such losses, claims, damages or
liabilities or in connection with any investigation or inquiry of, or other
proceeding which may be brought against, the respective indemnified parties, in
each case arising out of or based upon (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement
(including the Prospectus constituting a part thereof and any Rule 462(b)
Registration Statement) or any post-effective amendment thereto (including any
Rule 462(b) Registration Statement) or the omission or alleged omission to
state
15
<PAGE> 16
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading or (ii) any untrue statement or alleged
untrue statement of a material fact contained in the Prospectus (as amended or
as supplemented if the Company shall have filed with the Commission any
amendment thereof or supplement thereto) or the omission or alleged omission to
state therein a material fact necessary in order to make the statements
therein, in the light of the circumstances under which they were made, not
misleading, if such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of such indemnifying Underwriter for use in the Registration Statement or the
Prospectus or any such amendment thereof or supplement thereto. The indemnity
agreement of each Underwriter contained in this paragraph (b) shall remain
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Stock.
(c) Each party indemnified under the provision of paragraphs (a) and
(b) of this Section 8 agrees that, upon the service of a summons or other
initial legal process upon it in any action or suit instituted against it or
upon its receipt of written notification of the commencement of any
investigation or inquiry of, or proceeding against it in respect of which
indemnity may be sought on account of any indemnity agreement contained in such
paragraphs, it will promptly give written notice (herein called the Notice) of
such service or notification to the party or parties from whom indemnification
may be sought hereunder. No indemnification provided for in such paragraphs
shall be available to any party who shall fail so to give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related and
was prejudiced by the failure to give the Notice, but the omission so to notify
such indemnifying party or parties of any such service or notification shall
not relieve such indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of such indemnity agreement. Any indemnifying party shall be entitled
at its own expense to participate in the defense of any action, suit or
proceeding against, or investigation or inquiry of, an indemnified party. Any
indemnifying party shall be entitled, if it so elects within a reasonable time
after receipt of the Notice by giving written notice (herein called the Notice
of Defense) to the indemnified party, to assume (alone or in conjunction with
any other indemnifying party or parties) the entire defense of such action,
suit, investigation, inquiry or proceeding, in which event such defense shall
be conducted, at the expense of the indemnifying party or parties, by counsel
chosen by such indemnifying party or parties and reasonably satisfactory to the
indemnified party or parties; provided, however, that (i) if the indemnified
party or parties reasonably determine that there may be a conflict between the
positions of the indemnifying party or parties and of the indemnified party or
parties in conducting the defense of such action, suit, investigation, inquiry
or proceeding or that there may be legal defenses available to such indemnified
party or parties different from or in addition to those available to the
indemnifying party or parties, then counsel for the indemnified party or
parties shall be entitled to conduct the defense to the extent reasonably
determined by such counsel to be necessary to protect the interests of the
indemnified party or parties and (ii) in any event, the indemnified party or
parties shall be entitled to have counsel chosen by such indemnified party or
parties participate in, but not
16
<PAGE> 17
conduct, the defense. If, within a reasonable time after receipt of the Notice,
an indemnifying party gives a Notice of Defense and the counsel chosen by the
indemnifying party or parties is reasonably satisfactory to the indemnified
party or parties, the indemnifying party or parties will not be liable under
paragraphs (a) through (c) of this Section 8 for any legal or other expenses
subsequently incurred by the indemnified party or parties in connection with
the defense of the action, suit, investigation, inquiry or proceeding, except
that (A) the indemnifying party or parties shall bear the legal and other
expenses incurred in connection with the conduct of the defense as referred to
in clause (i) of the proviso to the preceding sentence and (B) the indemnifying
party or parties shall bear such other expenses as it or they have authorized
to be incurred by the indemnified party or parties. If, within a reasonable
time after receipt of the Notice, no Notice of Defense has been given, the
indemnifying party or parties shall be responsible for any legal or other
expenses incurred by the indemnified party or parties in connection with the
defense of the action, suit, investigation, inquiry or proceeding.
(d) If the indemnification provided for in this Section 8 is
unavailable or insufficient to hold harmless an indemnified party under
paragraph (a) or (b) of this Section 8, then each indemnifying party, in lieu
of indemnifying such indemnified party, shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities referred to in paragraph (a) or (b) of this Section 8 (i) in such
proportion as is appropriate to reflect the relative benefits received by each
indemnifying party from the offering of the Stock or (ii) if the allocation
provided by clause (i) above is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of each indemnifying party
in connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total net proceeds from the offering of the Stock received
by the Company and the total underwriting discount received by the
Underwriters, as set forth in the table on the cover page of the Prospectus,
bear to the aggregate public offering price of the Stock. Relative fault shall
be determined by reference to, among other things, whether the untrue or
alleged untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information supplied by each indemnifying
party and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The parties agree that it would not be just and equitable if contributions
pursuant to this paragraph (d) were to be determined by pro rata allocation
(even if the Underwriters were treated as one entity for such purpose) or by
any other method of allocation which does not take into account the equitable
considerations referred to in the first sentence of this paragraph (d). The
amount paid by an indemnified party as a result of the losses, claims, damages
or liabilities, or actions in respect thereof, referred to in the first
sentence of this paragraph (d) shall be deemed to include any legal or other
expenses reasonably incurred by such indemnified party in connection with
investigation, preparation to defend or defense against
17
<PAGE> 18
any action or claim which is the subject of this paragraph (d). Notwithstanding
the provisions of this paragraph (d), no Underwriter shall be required to
contribute any amount in excess of the underwriting discount applicable to the
Stock purchased by such Underwriter. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations in this paragraph
(d) to contribute are several in proportion to their respective underwriting
obligations and not joint.
Each party entitled to contribution agrees that upon the service of a
summons or other initial legal process upon it in any action instituted against
it in respect of which contribution may be sought, it will promptly give
written notice of such service to the party or parties from whom contribution
may be sought, but the omission so to notify such party or parties of any such
service shall not relieve the party from whom contribution may be sought from
any obligation it may have hereunder or otherwise (except as specifically
provided in paragraph (c) of this Section 8).
(e) The Company will not without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification may be sought hereunder (whether or not such Underwriter or any
person who controls such Underwriter within the meaning of Section 15 of the
Securities Act or Section 20 of the Exchange Act is a party to such claim,
action, suit or proceeding) unless such settlement, compromise or consent
includes an unconditional release of such Underwriter and each such controlling
person from all liability arising out of such claim, action, suit or
proceeding.
9. TERMINATION. This Agreement may be terminated by you at any time prior
to the Closing Date by giving written notice to the Company if after the date
of this Agreement trading in the Common Stock shall have been suspended, or if
there shall have occurred (i) the engagement in hostilities or an escalation of
major hostilities by the United States or the declaration of war or a national
emergency by the United States on or after the date hereof, (ii) any outbreak
of hostilities or other national or international calamity or crisis or change
in economic or political conditions if the effect of such outbreak, calamity,
crisis or change in economic or political conditions in the financial markets
of the United States would, in the Underwriters' reasonable judgment, make the
offering or delivery of the Stock impracticable, (iii) suspension of trading in
securities generally or a material adverse decline in value of securities
generally on the New York Stock Exchange, the American Stock Exchange, the NASD
Automated Quotation System or the Nasdaq National Market, or limitations on
prices (other than limitations on hours or numbers of days of trading) for
securities on either such exchange or system, (iv) the enactment, publication,
decree or other promulgation of any federal or state statute, regulation, rule
or order of, or commencement of any proceeding or investigation by, any court,
legislative body, agency or other governmental authority which in the
Underwriters' reasonable opinion materially and adversely affects or will
materially or adversely affect the business or operations of the Company, (v)
declaration of a banking moratorium by either federal or New York State
authorities or (vi) the taking of any action by
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<PAGE> 19
any federal, state or local government or agency in respect of its monetary or
fiscal affairs which in the Underwriters' reasonable opinion has a material
adverse effect on the securities markets in the United States. If this
Agreement shall be terminated pursuant to this Section 9, there shall be no
liability of the Company to the Underwriters and no liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination the Company agrees to indemnify and hold harmless the Underwriters
from all costs or expenses incident to the performance of the obligations of
the Company under this Agreement, including all costs and expenses referred to
in paragraphs (j) and (k) of Section 7 hereof.
10. CONDITIONS OF UNDERWRITERS' OBLIGATIONS. The obligations of the
several Underwriters to purchase and pay for the Stock shall be subject to the
accuracy of the representations and warranties on the part of the Company
herein set forth and the performance by the Company of all of their respective
obligations to be performed hereunder, in each case at or prior to the Closing
Date and on any later date on which Option Stock is to be purchased, as the
case may be, and to the following further conditions:
(a) The Registration Statement shall have become effective no later
than 2 p.m., San Francisco time, on the date of this Agreement; if the
filing of the Prospectus is required pursuant to Rule 424(b), the
Prospectus shall have been filed in the manner and within the time period
required by Rule 424(b); if a registration statement is required under
Rule 462(b), such registration statement shall have been filed and become
effective in accordance with Rule 462(b) by 10:00 p.m., Washington D.C.
time, on the date of this Agreement; and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceedings therefor shall be pending or threatened by the Commission.
(b) The legality and sufficiency of the sale of the Stock hereunder and
the validity and form of the certificates representing the Stock, all
corporate proceedings and other legal matters incident to the foregoing,
and the form of the Registration Statement and of the Prospectus (except
as to the financial statements contained therein), shall have been
approved at or prior to the Closing Date by Goodwin, Procter & Hoar LLP,
counsel for the Underwriters.
(c) You shall have received from Suelthaus & Walsh, P.C., counsel for
the Company, an opinion, addressed to the Underwriters and dated the
Closing Date, covering the matters set forth in Annex A hereto. If Option
Stock is purchased at any date after the Closing Date, you shall receive
additional opinions from each such counsel, addressed to the Underwriters
and dated such later date, confirming that the opinions expressed as of
the Closing Date in each such opinion letter remain valid as of such later
date.
(d) You shall be satisfied that (i) as of the Effective Date, the
statements made in the Registration Statement and the Prospectus were true
and correct and neither the Registration Statement nor the Prospectus
omitted to state any material fact
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<PAGE> 20
required to be stated therein or necessary in order to make the statements
therein, respectively, not misleading, (ii) since the Effective Date, no
event has occurred which should have been set forth in a supplement or
amendment to the Prospectus which has not been set forth in such a
supplement or amendment filed with the Commission, (iii) since the
respective dates as of which information is given in the Registration
Statement in the form in which it originally became effective and the
Prospectus contained therein, there has not been any material adverse
change or any development involving a prospective material adverse change
in or affecting the business, properties, financial condition or results
of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary course of
business, neither the Company nor any of its subsidiaries has entered into
any material transaction not referred to in the Registration Statement in
the form in which it originally became effective and the Prospectus
contained therein, (iv) neither the Company nor any of its subsidiaries
has any material contingent obligations which are not disclosed in the
Registration Statement and the Prospectus, (v) there are not any pending
or known threatened legal proceedings to which the Company or any of its
subsidiaries is a party or of which property of the Company or any of its
subsidiaries is the subject which are material and which are not disclosed
in the Registration Statement and the Prospectus, (vi) there are not any
franchises, contracts, leases or other documents which are required to be
filed as exhibits to the Registration Statement which have not been filed
as required, (vii) the representations and warranties of the Company
herein are true and correct in all material respects as of the Closing
Date and on any later date on which Option Stock is to be purchased, as
the case may be, and (viii) there has not occurred any circumstance
described in clauses (i), (ii), (iii), (iv), (v) or (vi) of Section 9
hereof.
(e) You shall have received on the Closing Date and on any later date
on which Option Stock is purchased a certificate, dated the Closing Date
or such later date, as the case may be, and signed by the Chief Executive
Officer and the Chief Financial officer of the Company, stating that the
respective signers of said certificate have carefully examined the
Registration Statement in the form in which it originally became effective
and the Prospectus contained therein and any supplements or amendments
thereto, and that the statements included in clauses (i) through (vii) of
paragraph (d) of this Section 10 are true and correct.
(f) You shall have received from KPMG Peat Marwick LLP, a letter or
letters, addressed to the Underwriters and dated the Closing Date and any
later date on which Option Stock is purchased, confirming that they are
independent public accountants with respect to the Company and this
subsidiaries within the meaning of the Securities Act and the applicable
published rules and regulations thereunder and based upon the procedures
described in its letter delivered to you concurrently with the execution
of this Agreement (herein called the Original Letter), but carried out to
a date not more than three business days prior to the Closing Date or such
later date on which Option Stock is purchased (i) confirming, to the
extent true, that the statements
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<PAGE> 21
and conclusions set forth in the Original Letter are accurate as of the
Closing Date or such later date, as the case may be, and (ii) setting
forth any revisions and additions to the statements and conclusions set
forth in the Original Letter which are necessary to reflect any changes in
the facts described in the Original Letter since the date of the Original
Letter or to reflect the availability of more recent financial statements,
data or information. The letters shall not disclose any change, or any
development involving a prospective change, in or affecting the business
or properties of the Company or any of its subsidiaries which, in your
sole judgment, makes it impractical or inadvisable to proceed with the
public offering of the Stock or the purchase of the Option Stock as
contemplated by the Prospectus.
(g) You shall have received from KPMG Peat Marwick LLP, a letter
stating that their review of the Company's system of internal accounting
controls, to the extent they deemed necessary in establishing the scope of
their examination of the Company's financial statements as of and as at
June 30, 1996, did not disclose any weakness in internal controls that
they considered to be material weaknesses.
(h) You shall have been furnished evidence in usual written or
telegraphic form from the appropriate authorities of the several
jurisdictions, or other evidence satisfactory to you, of the qualification
referred to in paragraph (k) of Section 7 hereof.
(i) Prior to the Closing Date, the Stock to be issued and sold by the
Company shall have been duly authorized for inclusion on the Nasdaq
National Market upon official notice of issuance.
(j) On or prior to the Closing Date, you shall have received from all
holders of the outstanding Common Stock or options therefor, stockholders
agreements in form reasonably satisfactory to Hambrecht & Quist LLC,
stating that without the prior written consent of Hambrecht & Quist LLC on
behalf of the Underwriters, each such holder will not, for a period of 180
days following the commencement of the public offering of the Stock by the
Underwriters, directly or indirectly, (i) sell, offer, contract to sell,
make any short sale, pledge, 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 shares of
Common Stock or any securities convertible into or exchangeable or
exercisable for or any rights to purchase or acquire Common Stock any of
the Company's equity securities or (ii) enter into any swap or other
agreement that transfers, in whole or in part, any of the economic
consequences or ownership of any other Company's equity securities,
whether any such transaction described in clause (i) or (ii) above is to
be settled by delivery of any of the Company's equity securities, in cash
or otherwise. Notwithstanding the foregoing, such holder may transfer any
shares of Common Stock or securities convertible into or exchangeable or
exercisable for Common Stock either during his or her lifetime or on death
(i) by gift, will or intestacy or (ii) to his or her immediate family or
to a trust the beneficiaries of which are exclusively the undersigned
and/or a member or members of
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<PAGE> 22
his or her immediate family; provided, however, that prior to any such
transfer each transferee shall execute an agreement, reasonably
satisfactory to Hambrecht & Quist LLC, pursuant to which each transferee
shall agree to receive and hold such shares of Common Stock, or securities
exercisable or convertible into or exchangeable for Common Stock, subject
to identical restrictions on transfer, and there shall be no further
transfer except in accordance with such agreement.
For the purposes of this paragraph, "immediate family" shall mean spouse,
lineal descendant, father, mother, brother, sister, niece or nephew of the
transferor.
All the agreements, opinions, certificates and letters mentioned above or
elsewhere in this Agreement shall be deemed to be in compliance with the
provisions hereof only if Goodwin, Procter & Hoar LLP, counsel for the
Underwriters, shall be reasonably satisfied that they comply in form and scope.
In case any of the conditions specified in this Section 10 shall not be
fulfilled, this Agreement may be terminated by you by giving notice to the
Company. Any such termination shall be without liability of the Company to the
Underwriters and without liability of the Underwriters to the Company;
provided, however, that (i) in the event of such termination, the Company
agrees to indemnify and hold harmless the Underwriters from all costs or
expenses incident to the performance of the obligations of the Company under
this Agreement, including all costs and expenses referred to in paragraphs (j)
and (k) of Section 7 hereof and (ii) if this Agreement is terminated by you
because of any refusal, inability or failure on the part of the Company to
perform any agreement herein, to fulfill any of the conditions herein, or to
comply with any provision hereof other than by reason of a default by any of
the Underwriters, the Company will reimburse the Underwriters severally upon
demand for all out-of-pocket expenses (including reasonable fees and
disbursements of counsel) that shall have been incurred by them in connection
with the transactions contemplated hereby.
11. CONDITIONS OF THE OBLIGATION OF THE COMPANY. The obligation of the
Company to deliver the Stock shall be subject to the conditions that (a) the
Registration Statement shall have become effective and (b) no stop order
suspending the effectiveness thereof shall be in effect and no proceedings
therefor shall be pending or threatened by the Commission. In case either of
the conditions specified in this Section 11 shall not be fulfilled, this
Agreement may be terminated by the Company by giving notice to you and such
failure of condition is not because of any refusal, inability or failure of the
Company to perform any agreement herein, to fulfill any condition herein or to
comply with any provisions hereof. Any such termination shall be without
liability of the Company to the Underwriters and without liability of the
Underwriters to the Company; provided, however, that in the event of any such
termination (I) the Company agrees to indemnify and hold harmless the
Underwriters from all costs or expenses incident to the performance of the
obligations of the Company under this Agreement, including all costs and
expenses referred to in paragraphs (j) and (k) of Section 7 hereof.
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<PAGE> 23
12. REIMBURSEMENT OF CERTAIN EXPENSES. In addition to their other
obligations under Section 8 of this Agreement, the Company hereby agrees to
reimburse on a quarterly basis the Underwriters for all reasonable legal and
other expenses incurred in connection with investigating or defending any
claim, action, investigation, inquiry or other proceeding arising out of or
based upon any statement or omission, or any alleged statement or omission,
described in paragraph (a) of Section 8 of this Agreement, notwithstanding the
absence of a judicial determination as to the propriety and enforceability of
the obligations under this Section 12 and the possibility that such payments
might later be held to be improper; provided, however, that (i) to the extent
any such payment is ultimately held to be improper, the persons receiving such
payments shall promptly refund them, and (ii) such persons shall provide to the
Company, upon request, reasonable assurances of their ability to effect any
refund, when and if due.
13. PERSONS ENTITLED TO BENEFIT OF AGREEMENT. This Agreement shall inure
to the benefit of the Company and the several Underwriters and, with respect to
the provisions of Section 8 hereof, the several parties (in addition to the
Company, and the several Underwriters) indemnified under the provisions of said
Section 8, and their respective personal representatives, successors and
assigns. Nothing in this Agreement is intended or shall be construed to give to
any other person, firm or corporation any legal or equitable remedy or claim
under or in respect of this Agreement or any provision herein contained. The
term "successors and assigns" as herein used shall not include any purchaser,
as such purchaser, of any of the Stock from any of the several Underwriters.
14. NOTICES. Except as otherwise provided herein, all communications
hereunder shall be in writing or by telegraph and, if to the Underwriters,
shall be mailed, telegraphed or delivered to Hambrecht & Quist LLC, One Bush
Street, San Francisco, California 94104; and if to the Company, shall be
mailed, telegraphed or delivered to it at its office, 7733 Forsyth Boulevard,
11th Floor, St. Louis, Missouri 63105, Attention: David W. Cross, President.
All notices given by telegraph shall be promptly confirmed by letter.
15. MISCELLANEOUS. The reimbursement, indemnification and contribution
agreements contained in this Agreement and the representations, warranties and
covenants in this Agreement shall remain in full force and effect regardless of
(a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof, or by or on behalf of
the Company or their respective directors or officers, and (c) delivery and
payment for the Stock under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of Section 7
hereof (other than paragraphs (j) and (k) thereof) shall be of no further force
or effect.
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of California.
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<PAGE> 24
Please sign and return to the Company the enclosed duplicates of this
letter, whereupon this letter will become a binding agreement among the Company
and the several Underwriters in accordance with its terms.
Very truly yours,
INTENSIVA HEALTHCARE
CORPORATION
By:
----------------------------------------
David W. Cross
President and Chief Executive Officer
The foregoing Agreement is hereby
confirmed and accepted as of the date first
above written.
HAMBRECHT & QUIST LLC
ROBERTSON, STEPHENS & COMPANY LLC
NEEDHAM & COMPANY, INC.
By Hambrecht & Quist LLC
By:
--------------------------------------
Managing Director
Acting on behalf of the several
Underwriters, including themselves, named
in Schedule I hereto.
24
<PAGE> 25
SCHEDULE I
UNDERWRITERS
NUMBER OF
SHARES
TO BE
UNDERWRITERS PURCHASED
------------ ---------
Hambrecht & Quist LLC . . . . . . . . . . . . . .
Robertson, Stephens & Company LLC . . . . . . . .
Needham & Company, Inc. . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . .
25
<PAGE> 26
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF
COUNSEL FOR THE COMPANY
(i) Each of the Company and its subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, is duly qualified as a foreign corporation
and in good standing in each jurisdiction in which the character of the
property owned or leased or the nature of the business transacted by it makes
qualification necessary (except where the failure to be so qualified would not
have a material adverse effect on the business, properties, operations,
financial condition, results of operations or prospects of the Company and its
subsidiaries, taken as a whole), and has full corporate power and authority to
own or lease its properties and to conduct its business as described in the
Registration Statement, the Prospectus and as being conducted; all the issued
and outstanding capital stock of each of the subsidiaries of the Company has
been duly authorized and validly issued and is fully paid and nonassessable,
and is owned by the Company free and clear of all liens, encumbrances and
security interests, and to the best of such counsel's knowledge, no options,
warrants or other rights to purchase, agreements or other obligations to issue
or other rights to convert any obligations into shares of capital stock or
ownership interests in such subsidiaries are outstanding;
(ii) the authorized capital stock of the Company will consist of
30,000,000 shares of Preferred Stock, no par value, of which no shares will be
outstanding, and 70,000,000 shares of Common Stock, $0.001 par value, of which
[__________________] shares will be outstanding (including the Underwritten
Stock and the Option Stock); proper corporate proceedings have been taken to
validly authorize such authorized capital stock; all of the outstanding shares
of such capital stock (including the Underwritten Stock and the shares of
Option Stock issued, if any) have been duly and validly issued and are fully
paid and nonassessable; any Option Stock purchased after the Closing Date, when
issued and delivered to and paid for by the Underwriters as provided in the
Underwriting Agreement, would have been duly and validly issued and be fully
paid and nonassessable; and no preemptive rights of, or rights of refusal in
favor of, stockholders exist with respect to the Stock, or the issue and sale
thereof, pursuant to the Certificate of Incorporation or By-laws of the Company
and, to the knowledge of such counsel, there will be no contractual preemptive
rights that have not been waived or rights of first refusal or rights of
co-sale which exist with respect to the issue and sale of the Stock;
(iii) except as disclosed in or specifically contemplated by the
Registration Statement, to the knowledge of such counsel, there are no
outstanding options, warrants or other rights calling for the issuance of, and
no commitments, plans or arrangements to issue, any shares of Capital Stock of
the Company or any security convertible or exchangeable for Capital Stock of
the Company;
A-1
<PAGE> 27
(iv) the Registration Statement has become effective under the
Securities Act and, to the knowledge of such counsel, (A) no stop order
suspending the effectiveness of the Registration Statement or suspending or
preventing the use of the Prospectus is in effect and (B) no proceedings for
that purpose have been instituted or are pending or contemplated by the
Commission;
(v) the Registration Statement and the Prospectus (except as to the
financial statements and schedules and other financial data contained therein,
as to which such counsel need express no opinion) comply as to form in all
material respects with the requirements of the Securities Act and with the
rules and regulations of the Commission thereunder;
(vi) the information required to be set forth in the Registration
Statement in answer to Item 9, Item 10 (insofar as it relates to such counsel)
and Item 11(c) of Form S-1 is to the best of such counsel's knowledge
accurately and adequately set forth therein in all material respects or no
response is required with respect to such Items; and, to the best of such
counsel's knowledge the description of the Company's stock option plan and the
options granted and which may be granted thereunder and the options granted
otherwise than under such plan set forth in the Prospectus accurately and
fairly presents in all material respects the information required to be shown
with respect to said plan and options to the extent required by the Securities
Act and the rules and regulations of the Commission thereunder;
(vii) such counsel do not know of any franchises, contracts, leases,
documents or legal or governmental proceedings, pending or threatened, which in
the opinion of such counsel are of a character required to be described in the
Registration Statement or the Prospectus or to be filed as exhibits to the
Registration Statement, which are not described and filed as required; and each
of the Company and its subsidiaries has and is in compliance with all material
franchises, grants, authorizations, licenses, permits, easements, consents,
certificates and orders required for the conduct of its business, all of which
are valid and in full force and effect;
(viii) the Underwriting Agreement has been duly authorized, executed and
delivered by the Company;
(ix) the issuance and sale by the Company of the shares of Stock sold by
the Company and the consummation of the transactions as contemplated by the
Underwriting Agreement will not conflict with or result in a breach of, or a
default under, the Certificate of Incorporation or By-laws of the Company or
any of its subsidiaries or any indenture, mortgage, deed of trust, agreement or
instrument known to such counsel to which the Company or any of its
subsidiaries is a party or by which the Company or any of its subsidiaries is
bound or to which any of the property or assets of the Company or any of its
subsidiaries is subject, or any applicable law or regulation, insofar as is
known to such counsel, any order, writ, injunction or decree, of any
jurisdiction, court or governmental instrumentality;
A-2
<PAGE> 28
(x) all holders of securities of the Company having rights to the
registration of shares of Common Stock, or other securities, because of the
filing of the Registration Statement by the Company have waived such rights or
such rights have expired by reason of lapse of time following notification of
the Company's intent to file the Registration Statement;
(xi) no consent, approval, authorization or order of any court or
governmental agency or body is required for the issuance or sale of the Stock
or the consummation of the transactions contemplated in the Underwriting
Agreement, except such as have been obtained under the Securities Act and such
as may be required under state securities or blue sky laws in connection with
the purchase and distribution of the Stock by the Underwriters;
(xii) the Stock issued and sold by the Company has been duly authorized
for listing by the Nasdaq National Market upon official notice of issuance and
sale;
(xiii) the Company and its subsidiaries are in all material respects in
compliance with and conduct their business in conformity with all applicable
Federal and state laws, rules and regulations; otherwise than are set forth in
the Registration Statement and the Prospectus, no respective change in any of
such Federal or state laws, rules or regulations has been adopted which, when
made effective would have a material adverse effect on the operations of the
Company and its subsidiaries prospective; and the statements made in the
Registration Statement under the caption "Regulation" are true and correct and
fairly represent the information required to be disclosed; and
(xiv) neither the Company nor any of its subsidiaries is an "investment
company" or an entity "controlled" by an "investment company," as such terms
are defined in the Investment Company Act of 1940.
In addition to the matters set forth above, counsel rendering the
foregoing opinion shall also include a statement to the effect that (it being
understood that such counsel will not have independently verified the accuracy
or completeness of the information contained in the Registration Statement or
the Prospectus, and except as otherwise expressly set forth in such counsels
opinion letter, is not responsible for, and need not pass upon, the accuracy,
completeness or fairness of the statements contained in the Registration
Statement or the Prospectus) nothing has come to the attention of such counsel
that leads them to believe that the Registration Statement (except as to the
financial statements and schedules and other financial data contained or
incorporated by reference therein, as to which such counsel need not express
any opinion or belief) at the Effective Date contained any 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
Prospectus (except as to the financial statements and schedules and other
financial data contained or incorporated by reference therein as to which such
counsel need not express any opinion or belief) as of its date or at the
Closing Date (or any later date on which Option Stock is purchased), contained
or contains any untrue statement of a material fact or omitted or omits to
state a material fact necessary in
A-3
<PAGE> 29
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law
not involving the laws of the United States, the State of Delaware or of the
State of Missouri, upon opinions of local counsel satisfactory in form and
scope to counsel for the Underwriters. Copies of any opinions so relied upon
shall be delivered to the Representatives and to counsel for the Underwriters
and the foregoing opinion shall also state that counsel knows of no reason the
Underwriters are not entitled to rely upon the opinions of such local counsel.
A-4
<PAGE> 1
EXHIBIT 4.1
- --------------- ---------------
NUMBER SHARES
[INTENSIVA HEALTHCARE LOGO]
C
- --------------- ---------------
COMMON STOCK
INCORPORATED UNDER THE LAWS
OF THE STATE OF DELAWARE CUSIP 45815Y 10 5
SEE REVERSE FOR
CERTAIN DEFINITIONS
This certifies that
[SPECIMEN]
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF COMMON STOCK, PAR VALUE $0.001 PER
SHARE, OF
INTENSIVA HEALTHCARE CORPORATION
transferable on the books of the Corporation by the owner in person or by duly
authorized attorney upon surrender of this certificate properly endorsed. This
certificate and the shares represented hereby are issued and shall be held
subject to all the provisions of the Third Amended and Restated Certificate of
Incorporation and Bylaws of the Corporation and all amendments thereto (copies
of which are on file with the Transfer Agent), to all of which the holder by
acceptance hereof, assents. This certificate is not valid unless countersigned
by the Transfer Agent and registered by the Registrar.
In Witness Whereof, the Corporation has caused this certificate to be executed
by the facsimile signatures of its duly authorized officers and has caused a
facsimile of its Corporate Seal to be hereunto affixed.
Dated:
<TABLE>
<S> <C> <C>
/s/ David W. Cross COUNTERSIGNED AND REGISTERED:
BOATMEN'S TRUST COMPANY
PRESIDENT AND [CORPORATE SEAL] TRANSFER AGENT AND REGISTRAR
CHIEF EXECUTIVE OFFICER
BY
/s/ Thomas M. Walsh
AUTHORIZED SIGNATURE
SECRETARY
</TABLE>
<PAGE> 2
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM -- as tenants in common
TEN ENT -- as tenants by the entireties
JT TEN -- as joint tenants with right of survivorship and not as tenants
in common
TOD -- transfer on death direction in event of owner's death, to person
named on face
UNIF GIFT MIN ACT -- __________ as Custodian for _________
(Cust) (Minor)
under Uniform Gifts to Minors
Act______________
(State)
UNIF TRAN MIN ACT -- __________ as Custodian for _________
(Cust) (Minor)
under Uniform Transfer to Minors
Act______________
(State)
Additional abbreviations may also be used though not in the above list.
INTENSIVA HEALTHCARE CORPORATION
Keep this certificate in a safe place. If it is lost, stolen or destroyed
the Corporation may require a bond of indemnity as a condition to the issuance
of a replacement certificate.
The Corporation will furnish without charge to each stockholder who so
requests the powers, designations, preferences and relative, participating,
optional, or other special rights of each class of stock or series thereof and
the qualifications, limitations or restrictions of such preferences and/or
rights.
For Value Received, _________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
INDENTIFYING NUMBER OF ASSIGNEE
- --------------------------------------
- --------------------------------------
________________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE OF ASSIGNEE)
________________________________________________________________________________
________________________________________________________________________________
__________________________________________________________________________shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within-named Corporation with
full power of substitution in the premises.
Dated ________________
X___________________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THE CERTIFI-
CATE IN EVERY PARTICULAR, WITH-
OUT ALTERATION OR ENLARGEMENT
OR ANY CHANGE WHATEVER. X___________________________________________
- --------------------------------------------------------------------------------
ALL GUARANTEES MUST BE MADE BY A FINANCIAL INSTITUTION (SUCH AS A BANK OR
BROKER) WHICH IS A PARTICIPANT IN THE SECURITIES TRANSFER AGENTS MEDALLION
PROGRAM ("STAMP"), THE NEW YORK STOCK EXCHANGE, INC. MEDALLION SIGNATURE
PROGRAM ("MSP"), OR THE STOCK EXCHANGES MEDALLION PROGRAM ("SEMP") AND MUST NOT
BE DATED. GUARANTEES BY A NOTARY PUBLIC ARE NOT ACCEPTABLE.
- --------------------------------------------------------------------------------
<PAGE> 1
EXHIBIT 21.1
SUBSIDIARIES OF THE COMPANY
NAME STATE OF INCORPORATION
---- ----------------------
Intensiva Hospital of Oklahoma City, Inc. Missouri
Intensiva Hospital of Greater St. Louis, Inc. Missouri
Intensiva Hospital of Eastern Oklahoma, Inc. Missouri
Intensiva Hospital of Indianapolis, Inc. Missouri
Intensiva Hospital of Evansville, Inc. Missouri
Intensiva Hospital of Northwest Indiana, Inc. Missouri
Intensiva Hospital of Kansas City, Inc. Missouri
Intensiva Hospital of Akron, Inc. Missouri
Intensiva Hospital of Corpus Christi, Inc. Missouri
Intensiva Hospital of Columbus, Inc. Missouri
Intensiva Hospital of Muskegon, Inc. Missouri
Intensiva Hospital of Fort Wayne, Inc. Missouri
Exhibit 21.1
<PAGE> 1
EXHIBIT 23.2
Independent Auditors' Consent
The Board of Directors
Intensiva HealthCare Corporation and Subsidiaries:
We consent to the inclusion of our report dated January 31, 1996, except as to
note 9, which is as of September 10, 1996, relating to the consolidated balance
sheets of Intensiva HealthCare Corporation and Subsidiaries as of December
31, 1994 and 1995, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the period from July 18, 1994
(inception) through December 31, 1994 and the year ended December 31, 1995,
included in the registration statement and to the references to our firm under
the headings "Selected Consolidated Financial Data" and "Experts" in the
prospectus.
KPMG Peat Marwick LLP
St. Louis, Missouri
October 10, 1996
