<PAGE> 1
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 000-21505
INTENSIVA HEALTHCARE CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 43-1690769
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
7733 FORSYTH BLVD., 11TH FLOOR 63105
ST. LOUIS, MISSOURI (Zip Code)
(Address of principal executive offices)
</TABLE>
Registrant's telephone number, including area code: (314) 725-0112
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.001 PER SHARE
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No __
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
On February 28, 1996 the aggregate market value of the Registrant's voting
stock held by non-affiliates was $21,323,000.
On February 28, 1996 there were 9,905,062 shares of Common Stock
outstanding.
Part III incorporates information by reference from the definitive Proxy
Statements to be used in connection with the Registrant's Annual Meeting of
Shareholders to be held on May 23, 1997, and to be filed no later than 120 days
after Registrant's fiscal year end.
================================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS
FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-K, in press releases of Intensiva
HealthCare Corporation ("Intensiva" or the "Company"), and in oral statements
made by or with the approval of an authorized executive officer of the Company,
constitute "forward-looking statements", as that term is defined under the
Private Securities Litigation Reform Act of 1995 (the "Act") and releases issued
by the Securities and Exchange Commission. Words such as "believe", "expect",
"anticipate", "intend", "estimate", and other expressions which are predictions
of or indicate future events and trends and which do not relate to historical
matters identify forward-looking statements. Reliance should not be placed on
forward-looking statements because they involve known and unknown risks,
uncertainties and other factors, which may cause the actual results, performance
or achievements of the Company to differ materially from anticipated future
results, performance or achievements expressed or implied by such
forward-looking statements. The Company undertakes no obligation to publicly
update or revise any forward looking statement, whether as a result of new
information, future events or otherwise.
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 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 the costs associated
with 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 February 28, 1997, the Company operated ten
hospitals in five states (352 beds), had two additional lease agreements to open
acute long-term care hospitals (66 beds) and had entered into three letters of
intent to open additional hospitals (approximately 101 beds).
On October 10, 1996, the Company completed an initial public offering of
2,500,000 shares of common stock, the net proceeds from which aggregated
approximately $13.2 million. On November 7, 1996, the underwriters exercised
their overallotment option, resulting in the sale of 375,000 additional shares
of common
1
<PAGE> 3
stock by the Company, the net proceeds of which aggregated approximately $2.1
million. 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.
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 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.
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
hospitals. 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 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. 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.
2
<PAGE> 4
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.
The Company's ability to implement its business strategy will depend on
numerous factors, many of which are beyond the control of the Company. Much of
the Company's recent revenue growth was the result of the Company's success in
identifying and penetrating underserved secondary markets. There can be no
assurance that such growth will occur or that the Company will be able to
successfully penetrate such markets.
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, nutritional therapy,
pain control and wound management. In addition, the Company's patients are often
dependent on sophisticated technology for continued life support.
FACILITIES
In each market in which Intensiva operates, the Company establishes a fully
licensed 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 or two floors of the Host Hospital. The initial
lease term is five or more years and may be renewed or extended under varying
renewal/extension terms.
Intensiva currently operates five PPS-exempt long-term care hospitals, two
hospitals awaiting final notification of PPS-exempt long-term care status, three
hospitals in the qualification period to obtain PPS-exempt status as long-term
care hospitals, has entered into two additional leases to open acute long-term
care
3
<PAGE> 5
hospitals and has three letters of intent with Host Hospitals to open acute
long-term care hospitals. 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 summarized information on the Company's
facilities:
<TABLE>
<CAPTION>
AVERAGE DAILY
CENSUS IN
TYPE OF FACILITY NO. OF FACILITIES LICENSED BEDS FEB. 1997(4)
---------------- ----------------- ------------- -------------
<S> <C> <C> <C>
PPS-exempt long-term care hospitals................... 5 182(1) 88.4
Hospitals awaiting notification of Medicare long-term
certification....................................... 2 72(2) 10.9
Hospitals in qualification period for Medicare
long-term certification............................. 3 98(3) 12.7
</TABLE>
- -------------------------
(1) The number of beds shown includes beds not being utilized as of February 28,
1997, but for which the Company has contractual rights to operate at its
option. At February 28, 1997, the Company utilized 20 beds out of 34
licensed beds at one facility.
(2) The number of beds shown includes beds not being utilized as of February 28,
1997, but for which the Company has contractual rights to operate at its
option. At February 28, 1997, the Company utilized 31 beds at these two
facilities.
(3) One lease provides for 40 beds initially, with the option under certain
conditions to lease space for an additional 20 beds while another lease
provides for 27 beds initially, with the option under certain conditions to
lease space for an additional eight beds.
(4) Average Daily Census ("ADC") is computed by dividing total patient days
during the month for all facilities within a group by the number of calendar
days in the applicable month that each facility group was open. ADC at any
one facility for any particular month will vary based upon a variety of
factors, however, the February 1997 ADC figures are consistent with the
Company's expectations that hospitals in the qualification period for
Medicare long-term certification will have a lower ADC than PPS-exempt
long-term care hospitals. The Company does not believe that month-by-month
ADC figures would provide additional meaningful information.
The Company has entered into a lease agreement with Hurley Medical Center,
located in Flint, Michigan, to open an acute long-term care hospital. The lease
provides for 19 beds initially, with an option under certain conditions to lease
space for an additional 17 beds, which the Company intends to exercise.
The Company has entered into a lease agreement with St. Mary's Health
System, located in Knoxville, Tennessee, to open an acute long-term care
hospital. A certificate of need is being sought to operate 30 beds at this
location.
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 34 beds.
The Company has entered into a letter of intent with St. Joseph's Mercy
Hospitals and Health Services, located in Clinton Township, Michigan, 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 36 beds.
The Company has entered into a letter of intent with McKennan Hospital,
located in Sioux Falls, South Dakota, 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 31 beds.
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
4
<PAGE> 6
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".
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.
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
fifteen 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>
YEAR ENDED
DECEMBER 31,
----------------
1996 1995
---- ----
<S> <C> <C>
Medicare.................................................... 73.2% 44.4%
Medicaid.................................................... 0.9 2.3
All other payors(1)......................................... 25.9 53.3
----- -----
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 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.
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 medical advisory 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
5
<PAGE> 7
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. 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 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. The regulatory environment affects the Company's business
activities, requires licensure and certification of its hospitals, regulates
relationships between health care providers and controls reimbursement to the
Company for services provided.
Each Company hospital is a fully licensed 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. Currently, seven of the Company's ten hospitals have been in operation for
six months or more and each had patients with an average length of stay in
excess of 25 days and had either been certified or is awaiting notification of
certification as a long-term care hospital. The Company intends to and has
to-date operated all of its hospitals to achieve an average length of stay of
greater than 25 days.
6
<PAGE> 8
HEALTH CARE REFORM. In recent years, a 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 1998 budget proposal would put a moratorium on the exemption
from PPS for new long-term care hospitals and implement a number of other
cost-containment measures on Medicare reimbursement for long-term care
hospitals. The effect of the moratorium would be to reimburse new long-term care
hospitals under PPS on the same, more restrictive basis that general acute care
hospitals are reimbursed. If this proposal were adopted in its current form, it
would effectively preclude the Company from opening new long-term care hospitals
and significantly reduce its revenues on its existing long-term care hospitals.
The President's current proposals on these issues are similar to proposals
contained in his 1996 and 1997 budget proposals, which were not enacted. Other
proposals to reform Medicare that contain changes similar to the President's
budget proposal and other changes to Medicare are being actively considered.
Although the Company cannot predict whether or when health care or budget
reform legislation may be enacted by Congress or any state legislatures or the
terms of any such legislation, if any such legislation were to be enacted, it
could have a material adverse effect on the Company's business, financial
condition or results of operations.
In August 1996, President Clinton signed into law the Health Insurance
Portability and Accountability Act of 1996, which has several provisions that
affect long-term care hospitals, including a provision for mandatory exclusion
from Medicare and state health care programs of those individuals convicted of a
felony related to health care fraud and permissive exclusion of individuals
convicted of certain misdemeanors. 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
this 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. The
Company has two signed agreements to open hospitals in states that require a
CON. There can be no assurance that the Company will be able to obtain the
required CON.
State licensing of hospitals is a prerequisite to the operation of each
hospital and 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. A substantial portion of Intensiva's net revenues
are derived from patients covered by Medicare. As of December 31, 1996, only
0.9% of Intensiva's net patient revenues were derived from state Medicaid
programs. Payments received by a health care provider under Medicare and
Medicaid are heavily regulated.
For example, 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. All of Intensiva's operating hospitals are participating in the
Medicare program and are in various stages of the certification process as
stated above. A loss of or failure to obtain certification could adversely
effect Intensiva's ability to receive payments under the Medicare program.
7
<PAGE> 9
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 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 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. In addition, the Medicare and Medicaid Anti-Kickback
statute and the Medicare and Medicaid Patient and Program Protection Act of 1987
(the "Anti-Kickback Laws") prohibit the payment of remuneration to any person in
return for the referral of Medicare or Medicaid patients. Sanctions for
violating the Anti-Fraud Amendments and the Anti-Kickback Laws include criminal
and civil penalties and exclusion from Medicare and Medicaid programs.
The Omnibus Reconciliation Act of 1989 and the Omnibus Budget
Reconciliation Act of 1993, provide that a physician who has a financial
relationship with certain designated health services, inpatient and outpatient
hospital services, among others, is generally prohibited from referring patients
to them. If any such financial relationship exists, the entity is generally
prohibited from receiving reimbursement payments for services under the Medicare
or Medicaid programs. Intensiva believes it is in compliance with these laws and
regulations.
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") which would reduce federal spending in
order to remove the excess deficit. 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.
8
<PAGE> 10
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. Intensiva believes it is
in compliance with such regulations.
ACCREDITATION
Hospitals may receive accreditation from JCAHO, a nationwide
non-governmental commission which establishes standards relating to the physical
plant, 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. Eight
of Intensiva's hospitals have received JCAHO accreditation and the remaining two
have scheduled surveys in April 1997.
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.
EMPLOYEES
The Company had approximately 349 full-time employees and 223 part-time
employees as of February 28, 1997. The Company believes its relationship with
its employees is good.
EXECUTIVE OFFICERS OF THE COMPANY
As of February 28, 1997, the executive officers of the Company were as
follows:
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
9
<PAGE> 11
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 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 from January 1995 until November 1996. In November 1996, Mr.
Torrente was promoted to the position of Executive Vice President, Business
Development for the Company. 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.
ITEM 2. PROPERTIES
As of December 31, 1996, the Company leased approximately 15,000 square
feet for each of its ten hospital facilities. 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. The Company has recently entered into an
agreement to lease approximately 12,000 square feet for its corporate
headquarters in St. Louis, Missouri. The Company expects to move to this new
location in June 1997.
10
<PAGE> 12
ITEM 3. 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 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
11
<PAGE> 13
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
As of February 28, 1997, the Company had 30 shareholders of record.
The Company's Common Stock is listed and traded on the National Market
System of the NASDAQ Stock Market under the symbol "IHCC". The Company began
trading on the NASDAQ on October 10, 1996. The high and low sale prices as
reported on the NASDAQ were 11 3/8 and 6, respectively, for the period October
10 through December 31, 1996.
The Company has never declared or payed dividends on its common stock from
July 18, 1994 (inception) through December 31, 1996, and does not anticipate
paying dividends for the foreseeable future.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
PERIOD FROM
JULY 18, 1994
YEAR ENDED DECEMBER 31, THROUGH
------------------------ DECEMBER 31,
1996 1995 1994
---- ---- -------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Statement of Operations Data:
Net revenues............................................. $18,748 $ 1,488 $ --
Operating expenses....................................... 18,863 2,521 --
General and administrative............................... 3,247 1,884 214
Provision for doubtful accounts.......................... 1,176 139 --
Depreciation and amortization............................ 817 29 --
--------- --------- ---------
Operating loss........................................... (5,355) (3,085) (214)
Interest income (expense), net........................... 369 238 (1)
--------- --------- ---------
Net loss................................................. $(4,986) $(2,847) $(215)
========= ========= =========
Loss per share........................................ $(1.48) $(1.81) $(0.21)
========= ========= =========
Weighted average shares outstanding................... 3,357,798 1,570,525 1,024,822
========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents................................. $ 5,105 $11,261 $ 190
Working capital........................................... 19,691 11,207 4,173
Total assets.............................................. 28,464 13,698 4,560
Long-term obligations..................................... 635 291 --
Stockholders' equity...................................... 22,146 11,790 4,238
</TABLE>
The Company completed an initial public offering of its common stock during
1996, netting $15.3 million for 2,875,000 shares (including the underwriters
over-allotment option).
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATION 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
12
<PAGE> 14
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 (unless another
form of exemption is obtained earlier), 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 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 up to
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 qualification
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 direct operating losses (exclusive of general and
administrative expenses) of $1.2 million from all other facilities during fiscal
1995.
During 1996, four additional hospitals obtained Medicare certification as
long-term care hospitals. The five Medicare certified long-term care hospitals
generated net revenue of $12.9 million and an operating margin (exclusive of
general and administrative expenses) of $1.1 million, or 8.5%, from long-term
care operations during 1996. In contrast, all other clinical operations
generated net revenue of $5.8 million and had operating losses (exclusive of
general and administrative expenses) of $3.1 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 ten facilities in five states. In addition,
the Company has one other facility under development, which the Company
anticipates will begin operations in the second quarter of 1997. The Company has
also entered into an additional lease agreement and three letters of intent to
open additional hospitals. 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.
13
<PAGE> 15
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
consolidated statements of operations:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
------------------
1996 1995
---- ----
<S> <C> <C>
Net revenues................................................ 100.0% 100.0%
Expenses:
Operating expenses........................................ 100.6 169.4
Corporate general and administrative expenses............. 17.3 126.6
Provision for doubtful accounts........................... 6.3 9.4
Depreciation and amortization............................. 4.4 1.9
----- ------
Total expenses......................................... 128.6 307.3
----- ------
Operating loss.............................................. (28.6) (207.3)
Interest income, net........................................ 2.0 16.0
----- ------
Net loss.................................................... (26.6)% (191.3)%
===== ======
</TABLE>
As indicated in the above table, operating expenses, corporate general and
administrative expenses, and the provision for doubtful accounts 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 December 31, 1996, the Company had approximately fifteen 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>
YEAR ENDED
DECEMBER 31,
-----------------
1996 1995
---- ----
<S> <C> <C>
Medicare.................................................... 73.2% 44.4%
Medicaid.................................................... 0.9 2.3
Indemnity and other insurance providers..................... 16.0 42.1
HMO......................................................... 1.4 2.5
PPO......................................................... 6.5 2.7
Other negotiated arrangements............................... 2.0 6.0
----- -----
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. The decrease
in indemnity and other insurance net revenues as a percentage of total net
revenues corresponds to the net increase in Medicare revenues as noted above.
14
<PAGE> 16
YEARS ENDED DECEMBER 31, 1996 AND 1995
Net Revenues. Net revenues for the year ended December 31, 1996 were $18.7
million compared to $1.5 million for the comparable period in 1995. The Company
had ten operational sites at December 31, 1996 as compared to two operational
sites at December 31, 1995. Prior to March 1995 the Company was a development
stage company.
Operating Expenses. Operating expenses for the year ended December 31, 1996
increased $16.3 million from the comparable period in 1995. This increase is
attributable to the new facilities opened during 1996. As a percentage of net
revenues, operating expenses decreased from 169% to 101%. The Company expects
this percentage to continue to decline as its facilities mature.
General and Administrative. General and administrative expenses for the
year ended December 31, 1996 increased $1.4 million, or 72%, to $3.2 million
from the comparable period in 1995. The increase in expenses was primarily
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
127% to 17%. 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.
Provision for Doubtful Accounts. The provision for doubtful accounts for
the year ended December 31, 1996 increased $1.0 million to $1.2 million from the
comparable period in 1995. The increase is attributable to the growth in net
revenues. As a percentage of net revenues, the provision for doubtful accounts
decreased from 9% to 6%. The Company expects this percentage to stabilize as the
Company matures.
Depreciation and Amortization. Depreciation and amortization for the year
ended December 31, 1996 increased $787,000 to $816,000 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 ten open hospitals at
December 31, 1996. Property and equipment increased from $588,000 at December
31, 1995 to $3.4 million at December 31, 1996. A computer software license was
obtained in December 1995 for $500,000 with an addendum in September 1996 for
$52,000 and is being amortized over the three-year license period.
Organizational and preopening costs totaled $234,000 and $163,000 during 1996
and 1995, respectively, with an unamortized balance of $147,000 at December 31,
1996.
Income Taxes. The Company has paid minimal income taxes to date and has
approximately $4.7 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.
LIQUIDITY AND CAPITAL RESOURCES
Through December 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
15
<PAGE> 17
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 $2.7 million and
$600,000 during the years ended December 31, 1996 and 1995, respectively.
Additional equipment was acquired through capital leases, amounting to
approximately $950,000 and $600,000 for the years ended December 31, 1996 and
1995, respectively.
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 third-party received warrants to purchase 15,950 shares of
common stock 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). At December 31, 1996, the
Company had utilized $553,000 of the available line of credit.
Accounts receivable balances have increased $6.6 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 December 31, 1996 was $19.7 million,
representing an increase of $8.5 million from December 31, 1995 which was
primarily attributable to the initial public offering of the Company's stock as
discussed below offset by support of ongoing operations, investments in new
facilities and development activities. The Company expects to invest up to $1.0
million per facility to fund capital renovations, preopening costs and working
capital requirements before a facility achieves profitability.
The Company leases space from Host Hospitals under operating lease
agreements having initial terms of five or more years. Minimum annual lease
payments on noncancellable operating leases with maturities in excess of one
year are as follows: $4.0 million in 1997, $4.4 million in 1998, $4.4 million in
1999, $4.4 million in 2000, $4.0 million in 2001 and $3.8 million thereafter.
On October 10, 1996, the Company completed an initial public offering (the
"Offering") of 2,500,000 shares of common stock, the net proceeds from which
aggregated approximately $13.2 million. On November 7, 1996, the underwriters
exercised their over-allotment option, resulting in the sale of 375,000
additional shares of common stock by the Company, the net proceeds of which
aggregated approximately $2.1 million. The principal reasons for this Offering
were 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. 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.
HEALTH CARE LEGISLATION
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.
Management cannot predict whether such proposed legislation will be adopted or
if adopted, what effect, if any, such proposed legislation would have on the
operations of the Company. Also see Business -- Health Care Reform.
16
<PAGE> 18
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.
FORWARD LOOKING STATEMENTS
Certain of the statements made herein are forward looking statements, as
that term is defined under the Private Securities Litigation Reform Act of 1995
and releases issued by the Securities and Exchange Commission. The Company
cautions readers that actual results could be materially different as a result
of various possibilities and differences between anticipated and actual
developments. Factors that could cause actual results to differ from anticipated
results include, but are not limited to, changes in health care regulation
and/or health care reform, changes in the regulation of relationships among
health care providers, difficulty in obtaining necessary licenses or
certifications, ability to collect accounts receivable, changes in reimbursement
policies or procedures, changes in payor mix, changes in referral source
practices, changes in relationships with Host Hospitals and/or the leases with
such Host Hospitals, competition, and the adequacy of professional liability
insurance. The Company undertakes no obligation to publicly release the results
of any revisions to any forward looking statements contained herein which may be
made to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
17
<PAGE> 19
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995
(WITH INDEPENDENT AUDITORS' REPORT THEREON)
18
<PAGE> 20
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Intensiva HealthCare Corporation:
We have audited the accompanying consolidated balance sheets of Intensiva
HealthCare Corporation and subsidiaries (the Company) as of December 31, 1996
and 1995, and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years ended December 31, 1996 and 1995 and the
period from July 18, 1994 (inception) through December 31, 1994. 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, 1996 and 1995, and
the results of their operations and their cash flows for the years ended
December 31, 1996 and 1995 and the period from July 18, 1994 (inception) through
December 31, 1994, in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick
February 7, 1997
19
<PAGE> 21
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 5,105,096 $11,261,422
Short-term investments.................................... 10,767,101 --
Accounts receivable, less allowance for doubtful accounts
of $1,270,478 and $139,508, respectively............... 7,579,922 985,697
Inventories............................................... 254,177 9,087
Prepaid expenses.......................................... 583,204 134,318
----------- -----------
Total current assets................................. 24,289,500 12,390,524
Property and equipment, net................................. 3,434,560 587,904
Organizational and preopening costs, net.................... 147,117 164,158
Other assets................................................ 593,185 555,467
----------- -----------
$28,464,362 $13,698,053
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current installments of long-term obligations............. 484,966 210,290
Accounts payable and accrued expenses..................... 3,077,326 483,707
Accrued salaries, wages, and benefits..................... 1,036,071 224,139
Note payable -- stockholder............................... -- 265,200
----------- -----------
Total current liabilities............................ 4,598,363 1,183,336
----------- -----------
Long-term obligations, less current installments............ 634,781 291,208
Deferred rent expense....................................... 1,085,300 433,333
Stockholders' equity:
Series A convertible preferred stock, $0.001 par value,
3,465,000 shares authorized, issued and outstanding in
1995................................................... -- 3,465
Series B convertible preferred stock, $0.001 par value,
2,232,962 shares authorized, issued, and outstanding in
1995................................................... -- 2,233
Common stock, $0.001 par value, 70,000,000 shares
authorized, 9,905,062 and 1,332,100 shares issued and
outstanding, respectively.............................. 9,905 1,332
Additional paid-in capital................................ 30,184,544 14,846,051
Accumulated deficit....................................... (8,048,531) (3,062,905)
----------- -----------
Total stockholders' equity........................... 22,145,918 11,790,176
----------- -----------
$28,464,362 $13,698,053
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<PAGE> 22
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND PERIOD
FROM JULY 18, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net patient service revenues........................... $18,748,042 $ 1,488,389 $ --
Costs and expenses:
Operating expenses................................... 18,863,038 2,520,873 --
General and administrative........................... 3,246,989 1,884,063 213,739
Provision for doubtful accounts...................... 1,176,308 139,508 --
Depreciation and amortization........................ 816,389 29,494 475
----------- ----------- ----------
Total costs and expenses........................ 24,102,724 4,573,938 214,214
----------- ----------- ----------
Operating loss.................................. (5,354,682) (3,085,549) (214,214)
Interest income........................................ 450,449 266,668 1,026
Interest expense....................................... (81,393) (28,604) (2,232)
----------- ----------- ----------
Net loss........................................ $(4,985,626) $(2,847,485) $ (215,420)
=========== =========== ==========
Loss per share.................................. $(1.48) $(1.81) $(0.21)
=========== =========== ==========
Weighted average outstanding shares............. 3,357,798 1,570,525 1,024,822
=========== =========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
21
<PAGE> 23
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND PERIOD
FROM JULY 18, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED STOCK ------------------ ADDITIONAL TOTAL
------------------- NUMBER OF PAID-IN ACCUMULATED STOCKHOLDERS'
SERIES A SERIES B 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
Conversion of preferred
stock................. (3,465) (2,233) 5,697,962 5,698 -- -- --
Issuance of 2,875,000
shares of common
stock, net of issuance
costs................. -- -- 2,875,000 2,875 15,338,493 -- 15,341,368
Net loss........... -- -- -- -- -- (4,985,626) (4,985,626)
------ ------- --------- ------ ----------- ----------- -----------
Balance, December 31,
1996.................. $ -- $ -- 9,905,062 $9,905 $30,184,544 $(8,048,531) $22,145,918
====== ======= ========= ====== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
22
<PAGE> 24
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995 AND PERIOD
FROM JULY 18, 1994 (INCEPTION) THROUGH DECEMBER 31, 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss............................................. $ (4,985,626) $(2,847,485) $(215,420)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization..................... 816,389 29,494 475
Provision for doubtful accounts................... 1,176,308 139,508 --
Increase in accounts receivable................... (7,770,533) (1,125,205) --
Increase in inventories, prepaid expenses, and
other assets.................................... (796,458) (130,665) (7,526)
Increase in accounts payable and accrued
expenses........................................ 2,593,619 438,320 45,387
Increase in accrued salaries, wages, and
benefits........................................ 811,932 212,871 11,268
Increase in accrued rent differential............. 651,967 433,333 --
------------ ----------- ---------
Net cash used in operating activities........... (7,502,402) (2,849,829) (165,816)
------------ ----------- ---------
Cash flows from investing activities:
Additions to property and equipment.................. (2,670,071) (555,171) (3,468)
Proceeds from sale of equipment...................... 337,792 -- --
Organizational and preopening costs.................. (233,655) (162,881) (5,632)
Purchase of short-term investments................... (11,505,006) -- --
Maturities of short-term investments................. 737,905 -- --
------------ ----------- ---------
Net cash used in investing activities........... (13,333,035) (718,052) (9,100)
------------ ----------- ---------
Cash flows from financing activities:
Proceeds from issuance of preferred and common
stock............................................. 15,341,368 14,704,900 100,000
Proceeds from issuance of note payable --
stockholder....................................... -- -- 265,200
Repayment of note payable -- stockholder............. (265,200) -- --
Payments on long-term obligations.................... (397,057) (65,881) --
------------ ----------- ---------
Net cash provided by financing activities....... 14,679,111 14,639,019 365,200
------------ ----------- ---------
(Decrease) increase in cash and cash
equivalents.................................. (6,156,326) 11,071,138 190,284
Cash and cash equivalents, beginning of period......... 11,261,422 190,284 --
------------ ----------- ---------
Cash and cash equivalents, end of period............... $ 5,105,096 $11,261,422 $ 190,284
============ =========== =========
Supplemental cash flow information -- cash paid for
interest............................................. $ 81,393 $ 28,604 $ 2,232
============ =========== =========
Supplemental information -- noncash investing and
financing activity:
Acquisition of software license...................... $ 52,250 $ 512,500 $ --
Acquisition of equipment through capital leases...... 897,960 54,609 --
============ =========== =========
</TABLE>
See accompanying notes to consolidated financial statements.
23
<PAGE> 25
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 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 long-term, acute care hospitals in certain health care
markets across the United States. Activities in 1994 and 1995 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) Short-term Investments
Short-term investments consist of U.S. Treasury Notes, mortgage-backed
securities and commercial paper with maturities of less than one year. These
investments are classified as held-to-maturity and are recorded at cost. The
difference between cost and market value at December 31, 1996 was not material.
(e) 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.
(f) Property and Equipment
Property and equipment are stated at cost. Equipment under capital leases
is stated at the present value of minimum lease payments. Property and equipment
of the Company are reviewed for impairment whenever events or circumstances
indicate that the asset's undiscounted expected cash flows are not sufficient to
recover its carrying amount. The Company measures an impairment loss by
comparing the fair value of the asset to its carrying amount. Fair value of an
asset is calculated as the present value of expected future cash flows.
Depreciation and amortization is calculated using the straight-line method
over the estimated useful lives of the assets. Useful lives for equipment range
from 3-15 years. Leasehold improvements are amortized over the shorter of the
lease term or estimated useful life of the asset.
(g) Organizational and Preopening 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.
(h) Other Assets
Other assets primarily consist of notes receivable from officers (see note
9) and a software license agreement of approximately $490,000. The software
license agreement will be amortized into expense over the three-year estimated
useful life of the license.
24
<PAGE> 26
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(i) Deferred Rent Expense
Certain of the leases on the Company's health care facilities include
scheduled base rent increases over the terms of the leases. The total 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.
(j) 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.
(k) 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 73% and 44% of the Company's net patient service revenues for
1996 and 1995, respectively, were derived from funds under the Medicare program,
and approximately 83% and 66% of the Company's net accounts receivable at
December 31, 1996 and 1995, respectively, 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 has been approximately seven months long for the
Company) Medicare typically 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.
(l) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements. Estimates also affect the reported amounts of revenues and expenses
during the period. Actual results may differ from those estimates.
(m) 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
25
<PAGE> 27
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
net loss per share as if they were outstanding for all periods prior to the
effective date of the IPO. 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.
(n) Stock Option
The Company adopted the disclosure-only option under Statement of Financial
Accounting Standard No. 123 (SFAS 123), Accounting for Stock-Based Compensation,
as of January 1, 1996. The effect of such adoption was not material to the
financial statements. Further, the pro forma effects, on net loss and loss per
share for the years ended December 31, 1996 and 1995, if the Company had used
the fair value method of accounting for stock-based compensation arrangements
prescribed by SFAS 123 were not material.
(2) ALLOWANCE FOR DOUBTFUL ACCOUNTS
Activity in the allowance for doubtful accounts is as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Balance at beginning of period.......................... $ 139,508 $ --
Provision for doubtful accounts......................... 1,176,308 139,508
Accounts written off.................................... (45,338) --
Recoveries.............................................. -- --
---------- --------
Balance at end of period................................ $1,270,478 $139,508
========== ========
</TABLE>
(3) PROPERTY AND EQUIPMENT
Property and equipment as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Leasehold improvements.................................. $2,195,080 $210,331
Equipment............................................... 764,525 351,902
Equipment under capital leases.......................... 952,569 54,609
---------- --------
3,912,174 616,842
Less accumulated depreciation and amortization.......... 477,614 28,938
---------- --------
Property and equipment, net........................... $3,434,560 $587,904
========== ========
</TABLE>
(4) 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 third party received warrants to purchase 15,950 shares of the
Company's common stock. The warrants are exercisable for up to seven years at a
price of $3.76 per share. The net book value of assets sold and subsequently
leased back 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 1996. As
part of this agreement, the Company has an available line of credit (up to $1.0
million) to finance additional capital expenditures. Borrowings under this line
of credit are secured by certain equipment, bear interest at 8% and are
repayable monthly through September 2000. Borrowings outstanding of $458,700 are
included in capital lease obligations at December 31, 1996.
26
<PAGE> 28
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Capital lease obligations with interest at 8% to 12% due
monthly through 2001.................................. $ 820,886 $ 40,248
7.8% note payable due monthly through January 1998...... 298,861 461,250
---------- --------
1,119,747 501,498
Less current installments............................... 484,966 210,290
---------- --------
$ 634,781 $291,208
========== ========
</TABLE>
Capital lease obligations at December 31, 1996 consist of various medical
equipment at each facility such as ventilators, x-ray machines, IV pumps, and
cardiac monitors. The note payable at December 31, 1996 relates to a software
license agreement.
The aggregate maturities of long-term obligations at December 31, 1996 are
as follows:
<TABLE>
<S> <C>
1997........................................................ $ 573,409
1998........................................................ 278,558
1999........................................................ 271,988
2000........................................................ 148,123
2001........................................................ 44,233
----------
1,316,311
Less interest on capital lease obligations.................. 196,564
----------
$1,119,747
==========
</TABLE>
(6) STOCKHOLDERS' EQUITY
On October 10, 1996, the Company completed its initial public offering
(IPO) of 2,500,000 shares of common stock, the net proceeds from which
aggregated approximately $13.2 million. On November 7, 1996, the Underwriters'
exercised the over-allotment option resulting in the sale of 375,000 additional
shares of common stock, the net proceeds from which aggregated approximately
$2.1 million.
Prior to the Company's IPO, the Company had two series of convertible
preferred stock outstanding. Series A and B convertible preferred stock required
a cumulative dividend of 8% per annum. Preferred dividends in arrears at
December 31, 1995 were $522,562. Each share of preferred stock was convertible
into one share of common, or under certain circumstances, the Company could
redeem the shares for cash or force conversion into common shares. In connection
with the Company's IPO, all preferred stock then outstanding was converted into
5,697,962 shares of common stock.
On January 26, 1995, the Board of Directors of the Company approved the
Intensiva HealthCare Corporation Stock Option Plan (Stock Plan) pursuant to
which incentive stock options may be granted to employees. 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 1996, options to
purchase 39,050 shares were granted under the Stock Plan at prices ranging from
$3.76 to $6.00 per share. During 1995, options to purchase 536,800 shares were
granted at $0.08 per share. As of December 31, 1996, options to purchase
27
<PAGE> 29
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
204,328 shares (at prices from $0.08 to $6.00 per share) had vested and were
exercisable. In each of the years ended December 31, 1996 and 1995, none of the
options granted have expired, been exercised, or cancelled.
(7) 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 up to 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. Expense for this Plan totaled $48,600 for
the year ended December 31, 1996. For the years ended December 31, 1995 and
1994, no expense was incurred by the Company related to the Plan.
(8) INCOME TAXES
The tax effects of temporary differences that give rise to significant
portions of deferred tax assets at December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Net operating loss carryforwards...................... $1,609,229 $ 834,230
Allowance for doubtful accounts....................... 399,945 47,433
Deferred rent expense................................. 369,002 147,333
Other................................................. 147,017 12,392
---------- ----------
2,525,193 1,041,388
Less valuation allowance.............................. 2,525,193 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 $4,700,000 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 1996 or 1995.
(9) RELATED PARTY TRANSACTIONS
Other assets as of December 31, 1996 and 1995 include notes receivable from
two executive officers aggregating $24,230 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 as of December 31, 1995 represented unsecured
advances received from a minority stockholder bearing interest at 1% over the
prime rate published by a local bank (9.75% at December 31, 1995). Amounts were
payable in quarterly installments, with the final installment made during March
1996.
28
<PAGE> 30
INTENSIVA HEALTHCARE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(10) COMMITMENTS AND CONTINGENCIES
The Company's health care facilities are located in space leased from acute
care health care providers (Host Hospitals) under operating lease agreements
with Host Hospitals of initial terms of five or more years, with varying renewal
terms. The Company leases corporate office space under a noncancellable
operating lease which expires in the year 2000.
Minimum annual lease payments on noncancellable operating leases with
maturities in excess of one year are as follows: $4,010,200 in 1997, $4,423,100
in 1998, $4,432,400 in 1999, $4,402,100 in 2000, $3,985,300 in 2001, and
$3,842,800 thereafter. Rent expense was approximately $2,361,000, $965,400 and
$0 in 1996, 1995, and 1994, respectively.
29
<PAGE> 31
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
30
<PAGE> 32
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT
Registrant hereby incorporates by reference portions of Registrant's
definitive Proxy Statement to be filed within 120 days of Registrant's fiscal
year end. Information respecting executive officers is set forth as a part of
Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Registrant hereby incorporates by reference portions of Registrant's
definitive Proxy Statement to be filed within 120 days of Registrant's fiscal
year end.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Registrant hereby incorporates by reference portions of Registrant's
definitive Proxy Statement to be filed within 120 days of Registrant's fiscal
year end.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Registrant hereby incorporates by reference portions of Registrant's
definitive Proxy Statement to be filed within 120 days of Registrant's fiscal
year end.
31
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) Those Financial Statements, Financial Statement Schedules, and Exhibits
required by Item 601 of Regulation S-K and by paragraph (a) of Item 14: The
following financial statements, financial statement schedules, notes thereto,
and auditor's report are set forth in Item 8 to this Form 10-K.
<TABLE>
<CAPTION>
PAGE(S)
-------
<S> <C>
Independent auditors' report................................ 19
Consolidated balance sheets, as of December 31, 1996 and
1995...................................................... 20
Consolidated statements of operations, for the years ended
December 31, 1996 and 1995 and for the period from July
18, 1994 (inception) through December 31, 1994............ 21
Consolidated statements of stockholders' equity, for the
years ended December 31, 1996 and 1995 and for the period
from July 18, 1994 (inception) through December 31,
1994...................................................... 22
Consolidated statements of cash flows, for the years ended
December 31, 1996 and 1995 and for the period from July
18, 1994 (inception) through December 31, 1994............ 23
Notes to consolidated financial statements.................. 24
</TABLE>
(b) Reports on Form 8-K: The Company filed no reports on Form 8-K for the
three months ended December 31, 1996.
(c) Exhibits: The exhibits to this Form 10-K are set forth on the Exhibit
Index filed herewith and are incorporated herein by this reference.
32
<PAGE> 34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Intensiva HealthCare Corporation
By /s/ DAVID W. CROSS
--------------------------------------
David W. Cross, President
and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ DAVID W. CROSS Director and Chief Executive
- ------------------------------------------------ Officer March 24, 1997
David W. Cross
/s/ JEFFREY J. COLLINSON Director March 26, 1997
- ------------------------------------------------
Jeffrey J. Collinson
/s/ WILFRED E. JAEGER, M.D. Director March 26, 1997
- ------------------------------------------------
Wilfred E. Jaeger, M.D.
/s/ JOHN P. KEEFE Principal Financial Officer and
- ------------------------------------------------ Principal Accounting Officer March 24, 1997
John P. Keefe
/s/ PHILLIP M. NUDELMAN, PH.D. Director March 24, 1997
- ------------------------------------------------
Phillip M. Nudelman, Ph.D.
/s/ DAVID L. STEFFY Director March 27, 1997
- ------------------------------------------------
David L. Steffy
Director
- ------------------------------------------------
James B. Tananbaum, M.D.
</TABLE>
33
<PAGE> 35
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
3(i).1 The Company's Amended and Restated Certificate of
Incorporation was previously filed as Exhibit 3(i).1 to the
Company's Registration Statement on Form S-1 (Reg. No.
333-08899) and is incorporated herein by this reference.
3(i).2 The Company's Certificate of Amendment to Amended and
Restated Certificate of Incorporation was previously filed
as Exhibit 3(i).2 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
3(i).3 The Company's Third Amended and Restated Certificate of
Incorporation was previously filed as Exhibit 3(i).1 to the
Company's Form 10-Q for the quarter ended September 30, 1996
and is incorporated herein by this reference.
3(i).4 The Company's Certificate of Amendment to Amended and
Restated Certificate of Incorporation was previously filed
as Exhibit 3(i).4 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
3(ii).1 The Company's By-Laws were previously filed as Exhibit
3(ii).1 to the Company's Registration Statement on Form S-1
(Reg. No. 333-08899) and are incorporated herein by this
reference.
3(ii).2 The Company's Amended and Restated By-Laws were previously
filed as Exhibit 3(ii).2 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-08899) and is
incorporated herein by this reference.
4.1 The Company's specimen Certificate of Shares of Common
Stock, $0.001 par value, of the Company was previously filed
as Exhibit 4.1 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
4.2 The Company's Amended and Restated Stockholders' Agreement,
dated December 20, 1995 was previously filed as Exhibit 4.2
to the Company's Registration Statement on Form S-1 (Reg.
No. 333-08899) and is incorporated herein by this reference.
4.3 The Company's Amended and Restated Registration Rights
Agreement, dated December 20, 1995 was previously filed as
Exhibit 4.3 to the Company's Registration Statement on Form
S-1 (Reg. No. 333-08899) and is incorporated herein by this
reference.
10.1 The Company's form of Lease Agreement with Host Hospitals
was previously filed as Exhibit 10.1 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-08899) and
is incorporated herein by this reference.
10.2 The 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 was previously filed as Exhibit 10.2
to the Company's Registration Statement on Form S-1 (Reg.
No. 333-08899) and is incorporated herein by this reference.
10.3 The Master Lease Agreement by and between the Company and
Comdisco, Inc., dated December 11, 1995 was previously filed
as Exhibit 10.3 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.4 The Agreement by and between the Company and Healthcare
Management Systems, Inc., dated November 29, 1995 was
previously filed as Exhibit 10.4 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-08899) and
is incorporated herein by this reference.
10.5 The Escrow Agreement by and among the Company, Healthcare
Management Systems, Inc. and Wyatt, Tarrant & Combs, dated
November 29, 1995 was previously filed as Exhibit 10.5 to
the Company's Registration Statement on Form S-1 (Reg. No.
333-08899) and is incorporated herein by this reference.
</TABLE>
34
<PAGE> 36
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.6 The Second Amended and Restated Employment Agreement of
David W. Cross, by and between the Company and David W.
Cross, dated June 12, 1996 was previously filed as Exhibit
10.6 to the Company's Registration Statement on Form S-1
(Reg. No. 333-08899) and is incorporated herein by this
reference.
10.7 The Second Amended and Restated Employment Agreement of John
R. Lewis, by and between the Company and John R. Lewis,
dated June 12, 1996 was previously filed as Exhibit 10.7 to
the Company's Registration Statement on Form S-1 (Reg. No.
333-08899) and is incorporated herein by this reference.
10.8 The Employment Agreement of John P. Keefe, by and between
the Company and John P. Keefe, dated June 1, 1995 was
previously filed as Exhibit 10.8 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-08899) and
is incorporated herein by this reference.
10.9 The Employment Agreement of Samuel A. Morse, by and between
the Company and Samuel A. Morse, dated December 2, 1994 was
previously filed as Exhibit 10.9 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-08899) and
is incorporated herein by this reference.
10.11 The Employment Agreement of James D. Pomeroy, by and between
the Company and James D. Pomeroy, dated December 28, 1994
was previously filed as Exhibit 10.11 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-08899) and
is incorporated herein by this reference.
10.12 The Employment Agreement of Kathie Nohre, R.N., by and
between the Company and Kathie Nohre, R.N., dated November
6, 1995 was previously filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (Reg. No.
333-08899) and is incorporated herein by this reference.
10.13 The Transitional Care of America, Inc. Stock Option Plan was
previously filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1 (Reg. No. 333-08899) and
is incorporated herein by this reference.
10.14 The 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 was previously filed as
Exhibit b.14 to the Company's Registration Statement on Form
S-1 (Reg. No. 333-08899) and is incorporated herein by this
reference.
10.15 The Stockholders' Agreement by and among the Company,
RehabCare Corporation, David L. Steffy, David W. Cross and
John L. Lewis, dated September 22, 1994 was previously filed
as Exhibit 10.15 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.16 The Transition Agreement by and among the Company, RehabCare
Corporation, David W. Cross and John R. Lewis, dated
September 22, 1994 was previously filed as Exhibit 10.16 to
the Company's Registration Statement on Form S-1 (Reg. No.
333-08899) and is incorporated herein by this reference.
10.17 The TCA Non-Compete, Non-Hire, Non-Disclosure and Release
Agreement by and between the Company and RehabCare
Corporation, dated September 22, 1994 was previously filed
as Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.18 The RehabCare Non-Compete, Non-Hire, Non-Disclosure and
Release Agreement by and between the Company and RehabCare
Corporation, dated September 22, 1994 was previously filed
as Exhibit 10.18 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
</TABLE>
35
<PAGE> 37
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<C> <S>
10.19 The Steffy/RehabCare Non-Development, Non-Hire and Release
Agreement, by and between David L. Steffy and RehabCare
Corporation, dated September 22, 1994 was previously filed
as Exhibit 10.19 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.20 The Cross Non-Compete, Non-Hire, Non-Disclosure and Release
Agreement by and between David W. Cross and RehabCare
Corporation, dated September 22, 1994 was previously filed
as Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.21 The Lewis Non-Compete, Non-Hire, Non-Disclosure and Release
Agreement by and between John R. Lewis and RehabCare
Corporation, dated September 22, 1994 was previously filed
as Exhibit 10.21 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.22 The Series A Convertible Preferred Stock Purchase Agreement
by and among the Company and certain purchasers named
therein, dated December 30, 1994 was previously filed as
Exhibit 10.22 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.23 The Stock Repurchase Agreement by and between the Company
and David W. Cross, dated December 30, 1994 was previously
filed as Exhibit 10.23 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-08899) and is
incorporated herein by this reference.
10.24 The Stock Repurchase Agreement by and between the Company
and John R. Lewis, dated December 30, 1994 was previously
filed as Exhibit 10.24 to the Company's Registration
Statement on Form S-1 (Reg. No. 333-08899) and is
incorporated herein by this reference.
10.25 The Series B Convertible Preferred Stock Purchase Agreement
by and among the Company and certain purchasers named
therein, dated December 20, 1994 was previously filed as
Exhibit 10.25 to the Company's Registration Statement on
Form S-1 (Reg. No. 333-08899) and is incorporated herein by
this reference.
10.26 The Employment Agreement of Tony J. Torrente, by and between
the Company and Tony J. Torrente, dated December 2, 1996.
21.1 Subsidiaries of the Company
27.1 Financial Data Schedule
</TABLE>
36
<PAGE> 1
EXHIBIT 10.26
AMENDED AND RESTATED EMPLOYMENT AGREEMENT
ANTHONY J. TORRENTE
THIS EMPLOYMENT AGREEMENT is made and entered into as of the date last
below written, by and between INTENSIVA HEALTHCARE CORPORATION, a Delaware
corporation, formerly known as Transitional Care of America, Inc., ("EMPLOYER"
or the "COMPANY"), and ANTHONY J. TORRENTE, 16151 Wilson Manor Drive,
Chesterfield, Missouri 63005 ("EMPLOYEE").
WHEREAS, the Company and Employee entered into an Employment Agreement
dated as of December 8, 1994, and the Company and Employee desire to amend and
restate said Employment Agreement; and
WHEREAS, the Company desires to retain the services of Employee, and
Employee desires to continue his employment with the Company, upon the terms and
conditions hereinafter set forth; and
WHEREAS, as an ancillary and integral part of this Agreement, the Company
desires to obtain Employee's covenant not to compete and other covenants, and
Employee desires to make a covenant not to compete and such other covenants as
hereinafter set forth.
NOW, THEREFORE, in consideration of the premises and agreements herein
contained, and other good and valuable consideration, the receipt and adequacy
of which are hereby forever acknowledged and confessed, the parties agree as
follows:
1. EMPLOYMENT. Employer hereby employs Employee, and Employee hereby
accepts such employment by Employer, upon the terms and conditions specified
herein for the "Term of Employment" (as hereinafter defined).
2. DUTIES OF EMPLOYEE. During the Term of Employment, Employee is hereby
employed as the Executive Vice President, Business Development and shall report
directly to the Company's Chief Executive Officer. Employee shall be responsible
for management of the Company's business development efforts for long term care
hospitals within hospitals, and for business development in such states or areas
as shall be assigned to Employee by the Company's Chief Executive Officer.
Employee will devote 25 percent of his full and entire working time and
attention to management of the Company's business development, and 75 percent of
his full and entire working time and attention to developing new long term care
hospitals within hospitals for the Company.
Employee shall have such authority and shall perform such duties as are
specified by the Chief Executive Officer from time to time in his sole
discretion. In furtherance of the foregoing, Employee shall, subject to the
direction and instruction of Employer: (a) devote Employee's full and entire
working time, attention and energies to Employer, and will diligently and to the
best of employee's ability perform all duties incident to Employee's employment
hereunder; (b) use Employee's best efforts to promote the interests of the
Company; and (c) perform such other duties as the Company may from time to time
direct.
The Company, in its sole discretion, shall establish development criteria
that define the hospitals for which Employee shall devote his development
efforts. The Company and Employee agree that during each year of the Initial
Term and successive terms, if any, of this Employment Agreement, Employee is
expected through his own personal development efforts, (a) to procure contracts
and open four (4) long term care hospitals within hospitals, and (b) in his
capacity as manager of the Company's business development efforts to open eleven
(11) long term care hospitals within hospitals (including the four (4) hospitals
that Employee is directly responsible for opening). Employee understands that he
will be required to travel extensively in the performance of his duties.
3. FINANCIAL ARRANGEMENTS.
3.1 Compensation. As compensation for Employee's services hereunder and in
consideration of Employee's covenant not to compete and other covenants as set
forth herein, the Company shall pay Employee a salary of One Hundred Thousand
Dollars ($100,000.00) per year, payable on a semi-monthly basis, subject to
38
<PAGE> 2
such payroll and withholding deductions as may be required by law. Employee's
base salary is subject to annual review.
Employee shall be reimbursed for all the reasonable actual costs and
expenses incurred by him in the performance of his duties. Employee shall be
entitled to an two (2) weeks paid vacation time each year and other benefits
(e.g., sick leave and health insurance) in accordance with Employer's policies
as from time to time established. Employee shall also be eligible to participate
in any other benefit plan adopted by Employer, including, but not limited to,
the Company's Stock Option Plan, subject to such terms as shall be approved by
the Company's Board of Directors or Compensation Committee thereof.
3.2 Commission. Employee shall be entitled to be paid a commission upon the
opening of each long term care hospital within a hospital for which Employee was
responsible for procuring the contract and opening such hospital through his own
personal development efforts; provided such hospital meets the development
criteria established by the Company. The target commission shall be in the
amount of $35,000 for any hospital that meets the average of the development
criteria. For hospitals that do not meet such average but do meet at least the
minimum development criteria, the commission shall be in an amount determined by
the Company, in its sole discretion, to represent the value of such contract to
the Company but in no event shall the commission be less than $25,000. For
contracts with hospitals that exceed such average the commission shall be in an
amount determined by the Company, in its sole discretion, to represent the value
of such contract to the Company but in no event shall such commission exceed
$50,000. The Company reserves the right to amend this commission plan at any
time in its sole discretion and such amendment shall not be a breach of this
Agreement.
3.3 Supplemental Management Commission. As compensation for Employee's
management of the Company's business development efforts, Employee shall be paid
a supplemental management commission upon the opening of each long term care
hospital within a hospital, except those hospitals for which employee receives a
commission pursuant to SECTION 3.2. The amount of such supplemental management
commission shall be equal to 13 percent of the commission paid by the Company to
the employee responsible for the procuring the contract and opening the long
term care hospital in a hospital. The Company reserves the right to amend this
supplemental management commission plan at any time in its sole discretion and
such amendment shall not be a breach of this Agreement.
4. CONFIDENTIALITY. Employee agrees to keep confidential and not to use or
to disclose to others, except as expressly consented to in writing by Employer,
or as required by law to be disclosed, any trade secrets or confidential
technology, proprietary information, customer lists, or knowledge belonging to
or relating to the affairs or Employer or any subsidiary or parent of Employer
(an "AFFILIATE"), or any matter or thing ascertained by Employee through
Employee's association with Employer or an Affiliate, the use or disclosure of
which matter or thing might reasonably be construed to be contrary to the best
interests of Employer or an Affiliate. Employee further agrees that should
Employee leave the active service of Employer, Employee will neither take nor
retain, without prior written authorization from Employer, any papers, data,
client lists, books, records, files, or other documents (or copies thereof) or
other confidential information of any kind belonging to Employer or an Affiliate
pertaining to the business, sales, financial condition, products or other
activities thereof.
5. ITEM OWNERSHIP. All patents, formulae, inventions, ideas of inventions,
processes, copyrights, know-how, proprietary information, trademarks, tradenames
or other developments, or future improvements thereto (collectively "ITEMS"),
developed or conceived by Employee during the term of this Agreement are the
property of Employer and shall be promptly disclosed to Employer. Employee shall
further execute an assignment of such Items to Employer and execute such other
instruments as Employer shall request to protect Employer's interest in such
Items. Employee represents that his performance of this Agreement does not and
will not breach any agreement to keep in confidence items acquired by him in
confidence or in trust prior to his employment with Employer. Employee agrees
not to disclose to Employer or induce Employer to use any Items belonging to any
previous employer or others. Employee further agrees not to enter into any
agreement, either written or oral, in conflict herewith. This covenant shall be
perpetual and shall survive the termination or expiration of this Agreement.
39
<PAGE> 3
6. NON-COMPETITION AGREEMENT. Employee recognizes that Employer's entering
into this Agreement is induced primarily because of the covenants and assurances
made by Employee, that Employee's covenant not to compete is necessary to insure
that continuation of the business of Employer and its Affiliates, and that
irreparable harm and damage will be done to Employer and its Affiliates in the
event that Employee competes with Employer or its Affiliates within the
geographic areas described below. Therefore, Employee agrees that during the
Term of Employment, and for a period of twelve (12) months thereafter Employee
will not directly or indirectly own, manage, operate, control, participate in
the management or control of, be employed by, lend Employee's name to or
maintain or continue any interest whatsoever in any enterprise (a) having to do
with the provision, distribution, marketing, promotion, or advertising of any
type(s) of service(s) or product(s) in direct competition to those offered by
Employer within (i) the fifty (50) states of the United States, (ii) United
States territories and possessions, and (iii) each foreign country, possession
or territory in which Employer may be engaged in business at the termination of
Employee's employment or at any time within twelve (12) months prior thereto;
but only if Employee was directly or indirectly responsible for such business
while he was employed by Employer or if Employee was directly or indirectly
involved or exposed to plans for such business at any time within twelve (12)
months prior to termination. Employee further agrees that if any restriction
contained in this SECTION 6 is held by any court to be unenforceable or
unreasonable, a lesser restriction shall be severable therefrom and be enforced
in its place, and the remaining restrictions contained herein shall be
enforceable independently of each other.
7. TERM AND TERMINATION OF AGREEMENT.
7.1 Term of Employment. As used herein, "Term of Employment" shall mean the
period commencing on December 2, 1996 and expiring at 12:00 A.M. CST on the
second (2nd) anniversary of such date.
7.2 Termination.
(a) Death. Employee's employment hereunder shall terminate immediately
upon death.
(b) For Cause. Employer may terminate Employee's employment hereunder
at any time, effective immediately upon written notice, for cause. For the
purpose of this Agreement "cause" shall mean:
i. The willful and continued failure by Employee to substantially
perform Employee's duties hereunder, other than any such failure
resulting from Employee's incapacity due to physical or mental illness,
or resulting from a diminution of Employee's duties following a Change
of Control. For purposes of this Agreement, a "Change of Control" shall
mean and be deemed to have occurred if: (a) there shall be consummated
(x) any consolidation or merger of Employer with another corporation or
entity and, as a result of such consolidation or merger, less than sixty
percent (60%) of the outstanding voting securities of the surviving or
resulting corporation or entity shall be owned in the aggregate by the
stockholders of Employer, other than affiliates (within the meaning of
the Securities Exchange Act of 1934, as amended) of any party to such
consolidation or merger, as the same shall have existed immediately
prior to such consolidation or merger, or (y) any sale, lease, exchange
or other transfer (in one transaction or a series of related
transactions) of all, or substantially all, of the assets of Employer,
or (b) the stockholders of Employer shall have approved any plan or
approval for the liquidation or dissolution of the company, or (c) any
"person" (as such term is used in Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934), shall have become the beneficial owner
(within the meaning of Rule 13d-3 under the Exchange Act), of twenty
percent (20%) or more of Employer's outstanding common stock, without
the prior approval of Employer's Board of Directors, or (d) if the
majority of the Directors of Employer are replaced in a contested
election.
ii. The willful engaging by Employee in conduct which is
demonstrably and materially injurious to Employer, monetarily or
otherwise.
iii. Employee's conviction of, or plea of nolo contendere to a
felony, provided any right of appeal has been exercised or has lapsed.
iv. Employee's failure to achieve in any year the expected openings
set forth in SECTION 2.
40
<PAGE> 4
In the event that Employee is terminated for cause, Employer shall pay
Employee's salary through the date of termination, and shall thereafter have no
further obligation to Employee, provided, however, that Employee's obligations
pursuant to the Non-Competition Agreement contained herein shall continue in
full force and effect for a period equal to the balance of the Term of
Employment had this Agreement not been terminated and for twelve (12) months
thereafter. For purposes of this section, no act, or failure to act, on the part
of the Employee shall be deemed "willful" unless done, or omitted to be done, by
the Employee without good faith and without reasonable belief that the action or
omission was in the best interest of Employer.
(c) Long-Term Disability. Should Employee commence a Long-Term
Disability, as hereinafter defined, Employee's base compensation shall be
continued during the first six (6) months of such disability. Should such
Long-Term Disability continue beyond six (6) months, Employee's employment
hereunder shall automatically terminate and Employer shall have no further
obligations to Employee. Employee shall have commenced a "Long-Term
Disability" if: (i) Employee cannot perform the essential functions of his
employment position, with or without a reasonable accommodation for his
disability; or (ii) Employee cannot perform the essential functions of his
employment position without an accommodation that would be an undue
hardship for Employer to provide. The foregoing definition of Long-Term
Disability is not intended to and shall not affect the definition of
"disability" or any similar term in any insurance policy Employer may
provide.
(d) Without Cause. Employee's employment hereunder may be terminated
by Employer at any time, effective upon two (2) weeks written notice of
termination; provided, however, if Employer shall terminate Employee's
employment hereunder without cause, then upon any such termination, and as
a condition to the effectiveness thereof, Employer shall be obligated to
pay to Employee as severance pay an amount equal to Employee's salary for
one (1) year, payable in substantially equal semi-monthly installments at
the level then being paid to Employee, and the Employee's obligations
pursuant to the Non-Competition Agreement contained herein shall continue
in full force and effect for a period of twelve (12) months. In such event,
Employee will only be eligible for the accrued bonus payable.
(e) By Employee.
(i) Employee may resign his employment for cause and receive the
same benefits as he would be entitled to and be bound by the same
obligations as if the Employer terminated his employment pursuant to the
provisions of SECTION 7(D) above if (a) the Company breaches a material
provision of this Agreement and the Company has not cured such breach
within thirty (30) days after receipt of written notice of such breach,
(b) the Company significantly alters Employee's employment as set forth
in SECTION 2 above to the detriment of Employee, (c) there is a Change
of Control, or (d) Employee is required to move his residence to a
location which is not acceptable.
(ii) If Employee resigns without cause (including any resignation
or repudiation of this Agreement after the date of its execution but
before the date that the Employee commences work) (a) all compensation
and benefits Employee is to receive pursuant to the terms of this
Agreement shall cease as of the effective date of such resignation, and
(b) Employee will be subject to the obligations of the Non-Competition
Agreement contained herein for what would have been the remaining term
of the Agreement and for twelve (12) months thereafter.
41
<PAGE> 5
8. ADDITIONAL PROVISIONS.
8.1 Notices. Any notice, demand, or communication required, permitted, or
desired to be given hereunder, shall be deemed effectively given when personally
delivered or mailed by prepaid, certified mail, return receipt requested,
addressed as follows:
<TABLE>
<CAPTION>
EMPLOYEE EMPLOYER
-------- --------
<S> <C>
Anthony J. Torrente Intensiva HealthCare Corporation
16151 Wilson Manor Drive 7733 Forsyth Boulevard
Chesterfield, Missouri 63005 Suite 1100
St. Louis, Missouri 63105
Attention: Mr. David W. Cross
</TABLE>
or to such other address, and to the attention of such other person(s) or
officer(s) as either party may designate by written notice.
8.2 Governing Law. This Agreement has been executed and delivered in, and
shall be interpreted, construed, and enforced pursuant to and in accordance with
the laws of Missouri.
8.3 Assignment. This Agreement and the rights and obligations hereunder
shall bind and inure to the benefit of any successor or successors of the
Company by way of reorganization, merger or consolidation, and any assignee of
all or substantially all of its business and properties, but, except as to any
such successor or assignee of the Company, neither this Agreement nor any rights
or benefits hereunder may be assigned by either party.
8.4 Waiver of Breach. The waiver by either party of a breach or violation
of any provision of this Agreement shall not operate as, or be construed to be,
a waiver of any subsequent breach of the same or other provision hereof.
8.5 Enforcement. Without limiting other possible remedies to Employer for
the breach of this Agreement, Employee agrees that injunctive or other equitable
relief shall be available to enforce the covenants set forth in Sections 4, 5
and 6, such relief to be without the necessity of posting a bond, cash or
otherwise. Employee further agrees that if any restriction contained in any such
Section is held by any court to be unenforceable or unreasonable, a lesser
restriction shall be enforced in its place and all remaining restrictions
contained herein shall be enforced independently of each other.
8.6 Gender and Number. Whenever the context hereof requires, the gender of
all words shall include the masculine, feminine and neuter, and the number of
all words shall include the singular and plural.
8.7 Additional Assurances. The provisions of this Agreement shall be
self-operative and shall not require further agreement by the parties except as
may be herein specifically provided to the contrary; provided, however, at the
request of Employer, Employee shall execute such additional instruments and take
such additional acts as Employer may deem necessary to effectuate this
Agreement.
8.8 Severability. In the event any provision of this Agreement is held to
be unenforceable for any reason, the unenforceability thereof shall not effect
the remainder of this Agreement, which shall remain in full force and effect and
enforceable in accordance with its terms.
8.9 Headings. The headings contained in this Agreement are for reference
purposes only and shall not affect in any way the meaning or interpretation of
this Agreement.
8.10 Entire Agreement. This Agreement supersedes all previous contracts,
and constitutes the entire Agreement between parties. Employee shall be entitled
to no other benefits than those specified herein. No oral statements or prior
written material not specifically incorporated herein shall be of any force and
effect, and no changes in or additions to this Agreement shall be recognized
unless incorporated herein by amendment as provided herein, such amendment(s) to
become effective on the date stipulated therein. Employee specifically
acknowledges that in entering into and executing this Agreement, Employee relies
solely upon the representations and agreements contained in this Agreement and
no others.
42
<PAGE> 6
IN WITNESS WHEREOF the parties have executed this Agreement as of the 2nd
day of December, 1996.
EMPLOYER: INTENSIVA HEALTHCARE CORPORATION
By: /s/ DAVID W. CROSS
------------------------------------
David W. Cross, President
EMPLOYEE: By: /s/ ANTHONY J. TORRENTE
------------------------------------
Anthony J. Torrente
43
<PAGE> 1
EXHIBIT 21.1
Subsidiaries of Registrant
As of December 31, 1996, the following were wholly-owned subsidiaries of the
registrant:
Intensiva Hospital of Akron, Inc.
Intensiva Hospital of Columbus, Inc.
Intensiva Hospital of Corpus Christi, Inc.
Intensiva Hospital of Eastern Oklahoma, Inc.
Intensiva Hospital of Evansville, Inc.
Intensiva Hospital of Flint, Inc.
Intensiva Hospital of Fort Wayne, Inc.
Intensiva Hospital of Greater St. Louis, Inc.
Intensiva Hospital of Indianapolis, Inc.
Intensiva Hospital of Kansas City, Inc.
Intensiva Hospital of Muskegon, Inc.
Intensiva Hospital of Northwest Indiana, Inc.
Intensiva Hospital of Oklahoma City, Inc.
Intensiva Hospital of Topeka, Inc.
37
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM INTENSIVA
HEALTHCARE CORPORATION'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31,1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 5,105,096
<SECURITIES> 10,767,101
<RECEIVABLES> 7,579,922
<ALLOWANCES> 1,270,478
<INVENTORY> 254,177
<CURRENT-ASSETS> 24,289,500
<PP&E> 3,434,560
<DEPRECIATION> 477,614
<TOTAL-ASSETS> 28,464,362
<CURRENT-LIABILITIES> 4,598,363
<BONDS> 0
0
0
<COMMON> 9,905
<OTHER-SE> 22,136,013
<TOTAL-LIABILITY-AND-EQUITY> 28,464,362
<SALES> 0
<TOTAL-REVENUES> 18,748,042
<CGS> 0
<TOTAL-COSTS> 18,863,038
<OTHER-EXPENSES> 3,246,989
<LOSS-PROVISION> 1,176,308
<INTEREST-EXPENSE> 81,393
<INCOME-PRETAX> (4,985,626)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,985,626)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (4,985,626)
<EPS-PRIMARY> (1.48)
<EPS-DILUTED> (1.48)
</TABLE>
