PSYS Psychiatric Solutions, Inc. (MM)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934

Filed by the Registrant		þ
Filed by a Party other than the Registrant		o

Check the appropriate box:

o		Preliminary Proxy Statement
o		Confidential, for use of the Commission Only (as permitted by Rule 14a-6(e)(2))
þ		Definitive Proxy Statement
o		Definitive Additional Materials
o		Soliciting Material Pursuant to § 240.14a-12

PSYCHIATRIC SOLUTIONS, INC.

(Name of Registrant as Specified in its Charter)

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

o		No fee required.
o		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

(1)

Title of each class of securities to which transaction applies: Common stock, par value $.01 per share, of Psychiatric Solutions, Inc. (“Common Stock”).

	(2)		Aggregate number of securities to which transaction applies:
			55,922,050 shares of Common Stock
			1,316,477 shares of restricted Common Stock
			6,447,308 options to purchase shares of Common Stock

(3)

Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee is calculated and state how it was determined): The filing fee was determined based upon the sum of (A) the product of the sum of (i) 55,922,050 shares of Common Stock and (ii) 1,316,477 shares of restricted Common Stock multiplied by the merger consideration of $33.75 per share, and (B) options to purchase 5,120,007 shares of Common Stock (only includes the options with an exercise price less than $33.75 per share) multiplied by $10.33 (which is the difference between $33.75 and the weighted average exercise price of $23.42 per share). The filing fee was calculated by multiplying 0.0000713 by the sum of the amounts calculated pursuant to clauses (A) and (B) of the preceding sentence.

(4)

Proposed maximum aggregate value of transaction: $1,984,689,959

(5)

Total fee paid: $141,508

þ		Fee paid previously with preliminary materials.

o Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.

(1)		Amount previously paid:
(2)		Form, Schedule or Registration Statement No.:
(3)		Filing party:
(4)		Date filed:

 

6640 CAROTHERS PARKWAY

SUITE 500

FRANKLIN, TENNESSEE 37067

 

September 8, 2010

 

TO OUR STOCKHOLDERS:

 

On May 16, 2010, Psychiatric Solutions, Inc., a Delaware corporation (the “Company”), entered into an Agreement and Plan of Merger (the “merger agreement”) with Universal Health Services, Inc., a Delaware corporation (“UHS”), and Olympus Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of UHS (“Merger Sub”). Under the terms of the merger agreement, Merger Sub will be merged with and into the Company, with the Company continuing as the surviving corporation and a wholly-owned subsidiary of UHS (the “merger”). If the merger is completed, you will be entitled to receive $33.75 in cash, without interest and less any applicable withholding taxes, for each share of the Company’s common stock that you own as of the effective time of the merger.

 

A special meeting of our stockholders will be held on Tuesday, October 5, 2010, at 9:00 a.m. (Central Time) to vote on a proposal to adopt the merger agreement so that the merger can occur. The special meeting will be held at our executive offices located at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067. Notice of the special meeting and the related proxy statement is enclosed.

 

The accompanying proxy statement gives you detailed information about the special meeting and the merger, and includes the merger agreement as Annex A. The receipt of cash in exchange for shares of the Company’s common stock in the merger will constitute a taxable transaction to U.S. persons for U.S. federal income tax purposes. We encourage you to read the proxy statement and the merger agreement carefully.

 

Our board of directors has determined that the merger is advisable and that the terms of the merger are fair to and in the best interests of the Company and its stockholders, and approved the merger agreement and the transactions contemplated thereby, including the merger. This recommendation is based, in part, upon the unanimous recommendation of the special committee of the board of directors consisting of four independent and disinterested directors.

 

Your vote is very important.   We cannot complete the merger unless holders of a majority of all outstanding shares of the Company’s common stock entitled to vote on the matter vote to adopt the merger agreement. Our board of directors recommends that you vote “FOR” the proposal to adopt the merger agreement. The failure of any stockholder to vote on the proposal to adopt the merger agreement will have the same effect as a vote against the adoption of the merger agreement.

 

Whether or not you plan to attend the special meeting, please complete, date, sign and return, as promptly as possible, the enclosed proxy in the accompanying reply envelope, or submit your proxy by telephone or the Internet. Stockholders who attend the meeting may revoke their proxies and vote in person.

 

 

Neither the Securities and Exchange Commission nor any state securities regulatory agency has approved or disapproved the merger, passed upon the merits or fairness of the merger or passed upon the adequacy or accuracy of the disclosure in this document. Any representation to the contrary is a criminal offense.

 

The proxy statement is dated September 8, 2010, and is first being mailed to stockholders on or about September 8, 2010.

 

6640 CAROTHERS PARKWAY

SUITE 500

FRANKLIN, TENNESSEE 37067

 

NOTICE OF SPECIAL MEETING OF STOCKHOLDERS

TO BE HELD ON OCTOBER 5, 2010

 

TO OUR STOCKHOLDERS:

 

PLEASE TAKE NOTICE that a special meeting of stockholders of Psychiatric Solutions, Inc., a Delaware corporation (the “Company”), will be held on Tuesday, October 5, 2010, at 9:00 a.m. (Central Time), at our executive offices located at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067, for the following purposes:

 

(1) To consider and vote on a proposal to adopt the Agreement and Plan of Merger (the “merger agreement”), dated as of May 16, 2010, by and among the Company, Universal Health Services, Inc., a Delaware corporation (“UHS”), and Olympus Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of UHS (“Merger Sub”), as the merger agreement may be amended from time to time;

 

(2) To approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the special meeting to adopt the merger agreement;

 

(3) To consider and vote on the amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan previously approved by stockholders at the Company’s 2010 annual meeting of stockholders; and

 

(4) To act upon other business as may properly come before the special meeting and any and all adjourned or postponed sessions thereof.

 

IMPORTANT NOTICE REGARDING THE AVAILABILITY OF PROXY MATERIALS FOR
THE STOCKHOLDER MEETING TO BE HELD ON OCTOBER 5, 2010.

 

The Company’s Proxy Statement and form of proxy card are available at http://www.psysolutions.com.

 

The record date for the determination of stockholders entitled to notice of and to vote at the special meeting is August 24, 2010. Accordingly, only stockholders of record as of the close of business on that date will be entitled to notice of and to vote at the special meeting or any adjournment or postponement thereof. A list of our stockholders entitled to vote at the special meeting will be available at our principal executive offices located at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067, during ordinary business hours for ten days prior to the special meeting.

 

We urge you to read the accompanying proxy statement carefully as it sets forth details of the proposed merger and other important information related to the merger.

 

Your vote is important, regardless of the number of shares of the Company’s common stock you own. The adoption of the merger agreement requires the affirmative approval of the holders of a majority of the outstanding shares of the Company’s common stock entitled to vote thereon. The adjournment proposal and the proposal to approve the amendment to the Company’s equity incentive plan each requires the affirmative vote of a majority of the shares of the Company’s common stock present at the special meeting and entitled to vote thereon. Even if you plan to attend the special meeting in person, we request that you complete, sign, date and return the enclosed proxy or submit your proxy by telephone or the Internet prior to the special meeting and thus ensure that your shares will be represented at the special meeting if you are unable to attend. If you fail to return your proxy card or fail to submit your proxy by telephone or the Internet and do not attend the special meeting in person, your shares will not be counted for purposes of determining whether a

quorum is present at the meeting and will have the same effect as a vote against the adoption of the merger agreement, but will not affect the outcome of the vote regarding the adjournment proposal and the proposal to approve the amendment to the equity incentive plan.

 

Please note that space limitations make it necessary to limit attendance at the special meeting to stockholders. Registration will begin at 8:30 a.m. (Central Time). If you attend, please note that you may be asked to present valid picture identification. “Street name” holders will need to bring a copy of a brokerage statement reflecting stock ownership as of the record date. Cameras, recording devices and other electronic devices will not be permitted at the special meeting. To obtain directions to attend the special meeting and vote in person, please contact Brent Turner, our Executive Vice President, Finance and Administration, by mail at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067, or by phone at (615) 312-5700.

 

Stockholders of the Company who do not vote in favor of the adoption of the merger agreement will have the right to seek appraisal of the fair value of their shares of the Company’s common stock if they deliver a demand for appraisal before the vote is taken on the merger agreement and comply with all requirements of Delaware law, which are summarized in the accompanying proxy statement.

 

WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE COMPLETE, DATE, SIGN AND RETURN, AS PROMPTLY AS POSSIBLE, THE ENCLOSED PROXY IN THE ACCOMPANYING REPLY ENVELOPE, OR SUBMIT YOUR PROXY BY TELEPHONE OR THE INTERNET. STOCKHOLDERS WHO ATTEND THE MEETING MAY REVOKE THEIR PROXIES AND VOTE IN PERSON.

 

By Order of the Board of Directors,

 

 

Joey A. Jacobs
Chairman, President and Chief Executive Officer

 

Franklin, Tennessee

September 8, 2010

 

TABLE OF CONTENTS

 

References to the “Company,” “we,” “our” or “us” in this proxy statement refer to Psychiatric Solutions, Inc. and its subsidiaries unless otherwise indicated by context.

 

This Summary, together with the “Questions and Answers About the Special Meeting and the Merger,” summarizes the material information in this proxy statement. You should carefully read this entire proxy statement and the other documents to which this proxy statement refers you for a more complete understanding of the matters being considered at the special meeting. See “Where You Can Find More Information” beginning on page 75.

 

The Parties to the Merger (see page 12).   Psychiatric Solutions, Inc., a Delaware corporation, offers an extensive continuum of behavioral health programs to critically ill children, adolescents and adults and is the largest operator of owned or leased freestanding psychiatric inpatient facilities with more than 11,000 beds in 32 states, Puerto Rico and the U.S. Virgin Islands. We also manage freestanding psychiatric inpatient facilities for government agencies and psychiatric inpatient units within medical/surgical hospitals owned by others. Universal Health Services, Inc., a Delaware corporation (“UHS”), is one of the nation’s largest hospital companies operating, through its subsidiaries, acute care hospitals, behavioral health care facilities and ambulatory centers located throughout the United States and Puerto Rico. UHS also acts as the advisor to Universal Health Realty Income Trust, a real estate investment trust whose stock is publicly traded on the New York Stock Exchange (the “NYSE”). Olympus Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of UHS (“Merger Sub”), was formed solely for the purpose of completing the proposed merger (as defined below). Merger Sub has not engaged in any business except as contemplated by the merger agreement (as defined below).

 

The Merger (see page 16).   You are being asked to vote to adopt an agreement and plan of merger (the “merger agreement”) providing for Merger Sub to be merged with and into the Company (the “merger”), with the Company continuing as the surviving corporation and a wholly-owned subsidiary of UHS (the “surviving corporation”). As a result of the merger, the Company will cease to be an independent, publicly-traded company. See “The Merger Agreement” beginning on page 50.

 

Merger Consideration (see page 50).   If the merger is completed, you will be entitled to receive $33.75 in cash, without interest and less any applicable withholding taxes, for each share of the Company’s common stock, par value $.01 per share (the “Common Stock”), that you own as of the effective time of the merger. See “The Merger Agreement — Merger Consideration” beginning on page 50.

 

Treatment of Outstanding Options and Restricted Common Stock (see page 50) .  Upon consummation of the merger, all outstanding options to acquire Common Stock will become fully vested and exercisable (to the extent not already vested and exercisable) and will be cancelled and converted into the right to receive a cash payment equal to the number of shares of Common Stock underlying the option multiplied by the amount (if any) by which $33.75 exceeds the applicable option exercise price, without interest and less any applicable withholding taxes. Additionally, upon consummation of the merger, each outstanding share of restricted Common Stock will become fully vested and transferable and cancelled and converted into the right to receive $33.75 in cash, without interest and less any applicable withholding taxes. See “The Merger — Interests of the Company’s Directors and Executive Officers in the Merger” and “The Merger Agreement — Treatment of Options and Other Awards” beginning on pages 38 and 50, respectively.

 

Restrictions on Solicitations of Other Offers (see page 55).   The merger agreement provides that from and after the date of the merger agreement until the effective time of the merger or, if earlier, the termination of the merger agreement, we are generally not permitted to:

 

 

Notwithstanding these restrictions, prior to the adoption of the merger agreement by our stockholders, under certain circumstances, our board of directors (acting through the special committee or otherwise) may respond to an unsolicited written proposal for an alternative acquisition or terminate the merger agreement and enter into an acquisition agreement with respect to a superior proposal, so long as the Company complies with certain terms of the merger agreement described under “The Merger Agreement — Recommendation Withdrawal/Termination in Connection with a Superior Proposal,” beginning on page 56, including, if required, paying a termination fee.

 

Conditions to the Merger (see page 58).   The consummation of the merger depends on the satisfaction or waiver of a number of conditions, including, among others, the following:

 

 

 

 

Termination of the Merger Agreement (see page 59).   The merger agreement may be terminated:

 

 

 

 

 

 

 

 

 

Termination Fee (see page 60).   The Company will be obligated to pay a termination fee of $71.5 million as directed by UHS if the merger agreement is terminated under certain circumstances (including the termination of the merger agreement due to a superior proposal). In certain other circumstances, we will be obligated to pay all of the expenses of UHS incurred in connection with the transactions contemplated by the merger agreement (which would be credited against the termination fee to the extent it subsequently becomes due). The payment to UHS or its designees of the termination fee and/or reimbursement of UHS’ expenses will be the sole and exclusive remedy of UHS for any loss suffered by UHS or Merger Sub as a result of the failure of the merger to be consummated and upon such payment, we will not have any further liability or obligation relating to or arising out of the merger agreement (except in the case of fraud or a breach by the Company of the merger agreement). See the circumstances in which we are required to pay a termination fee or reimburse expenses in “The Merger Agreement — Termination Fee” beginning on page 60.

 

Specific Performance; Remedies (see page 62).   The parties to the merger agreement will be entitled to enforce any provision of the merger agreement by a decree of specific performance and to temporary, preliminary and permanent injunctive relief to prevent breaches or threatened breaches of any of the provisions of the merger agreement without posting any bond or other undertaking.

 

The Special Meeting (see page 13).   The special meeting will be held on Tuesday, October 5, 2010 at 9:00 a.m. (Central Time), at the Company’s executive offices located at 6640 Carothers Parkway, Franklin, Tennessee 37067. At the special meeting, you will be asked to vote on the proposal to adopt the merger agreement and, if necessary, the proposal to adjourn the special meeting to solicit additional proxies. See “Questions and Answers About the Special Meeting and the Merger” beginning on page 6 and “The Special Meeting” beginning on page 13.

 

The Special Committee and its Recommendation (see page 24).   The special committee is a committee of our board of directors that was formed on March 4, 2010 for the purpose of evaluating, accepting or rejecting strategic alternatives available to the Company, including a possible transaction relating to the sale of the Company and any alternative thereto. The special committee is comprised of four independent and disinterested directors. The members of the special committee are Christopher Grant, Jr. (Chair), David M. Dill, Richard D. Gore and Edward K. Wissing. The special committee unanimously determined that the merger agreement and the transactions contemplated thereby, including the merger, are fair to and in the best interests of the Company and our stockholders, recommended to our board of directors that the merger and the merger agreement be approved and declared advisable by our board of directors, and that our board of directors submit the merger agreement to our stockholders and recommend that our stockholders adopt the merger agreement. For a discussion of the material factors considered by the special committee in reaching its

conclusions, see “The Merger — Reasons for the Merger; Recommendation of the Special Committee and of Our Board of Directors” beginning on page 24.

 

Board Recommendation (see page 27).   The Company’s board of directors, acting upon the unanimous recommendation of the special committee, recommends that the Company’s stockholders vote “FOR” the adoption of the merger agreement, and “FOR” the adjournment of the special meeting, if necessary, to solicit additional proxies. For a discussion of the material factors considered by the board of directors in reaching its conclusions, see “The Merger — Reasons for the Merger; Recommendation of the Special Committee and of Our Board of Directors” beginning on page 24.

 

Shares Owned by Our Directors and Executive Officers (see page 14).   As of August 24, 2010, the record date, our directors and executive officers held and were entitled to vote, in the aggregate, shares of Common Stock representing approximately 2.51% of the outstanding shares of Common Stock. See “The Special Meeting — Shares Owned by Our Directors and Executive Officers” beginning on page 14.

 

Interests of Our Directors and Executive Officers in the Merger (see page 38).   In considering the proposed merger, you should be aware that some of our directors and executive officers have interests in the merger that are different from, or in addition to, the interests of our stockholders generally. These interests include, among other things, the treatment of shares (including shares of restricted Common Stock) and options held by the directors and executive officers, as well as indemnification and insurance arrangements with executive officers and directors and change in control severance benefits that may become payable to certain executive officers and employees. These interests are more fully described, together with a more detailed description of the total cash payments our directors and executive officers will receive in connection with the merger, under “The Merger — Interests of the Company’s Directors and Executive Officers in the Merger” beginning on page 38.

 

Opinion of Goldman, Sachs & Co. as Financial Advisor to the Special Committee (see page 27) . Goldman, Sachs & Co. (“Goldman Sachs”) rendered its oral opinion to the special committee (subsequently confirmed in writing) to the effect that, as of May 16, 2010 and based upon and subject to the factors and assumptions set forth in its written opinion, the per share merger consideration to be paid to the holders of shares of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement was fair from a financial point of view to those holders.

 

The full text of the written opinion of Goldman Sachs, dated May 16, 2010, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement. Goldman Sachs provided its opinion for the information and assistance of the special committee in connection with its consideration of the merger. The Goldman Sachs opinion does not constitute a recommendation as to how any holder of Common Stock should vote with respect to the merger or any other matter. Pursuant to an engagement letter between the Company and Goldman Sachs, the Company has agreed to pay Goldman Sachs a fee of approximately $20 million for its services in connection with the transaction, $3.25 million of which became due prior to the consummation of the transaction.

 

Financing of the Merger (see page 38).   The consummation of the merger is not conditioned on the receipt of financing by UHS. Funding of the debt financing is subject to the satisfaction of the conditions set forth in the commitment letter pursuant to which the financing will be provided. The debt financing will provide the necessary financing for the merger, including the payment of related transaction costs, charges, fees and expenses. On May 16, 2010, UHS entered into a financing commitment letter with JPMorgan Chase Bank, N.A. (“JPMorgan”), Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Deutsche Bank AG New York Branch (“Deutsche Bank”), pursuant to which JPMorgan and Deutsche Bank have, taken together, committed to provide the financing necessary to consummate the merger and to refinance certain existing indebtedness. See “The Merger — Financing of the Merger” beginning on page 38.

 

Regulatory Approvals (see page 37).   Under the HSR Act and related rules, the merger may not be completed until notification and report forms have been filed with the Federal Trade Commission (“FTC”) and the Antitrust Division of the United States Department of Justice (“DOJ”) and the applicable waiting period has expired or been terminated. The Company and UHS filed their respective notification and report forms under the HSR Act with the FTC and the Antitrust Division of the DOJ on May 28, 2010. After discussions with the FTC, UHS withdrew its notification and report form effective as of June 25, 2010, and refiled on June 28, 2010. The Company and UHS each received a Request for Additional Information (“Second

Request”) from the FTC on July 28, 2010. The Second Request has the effect of extending the waiting period for an additional 30 calendar days from the date of both of the parties’ substantial compliance with the Second Request, unless the waiting period is terminated sooner by the FTC or voluntarily extended by the parties.

 

Though not a condition to the consummation of the merger, U.S. federal and state laws and regulations may require that we or UHS obtain approvals, consents or certificates of need from, file new license and/or permit applications with, and/or provide notice to applicable governmental authorities in connection with the merger. See “The Merger Agreement — Efforts to Complete the Merger,” beginning on page 57, for information on the obligations of the parties under the merger agreement to obtain the regulatory approvals required to consummate the merger.

 

U.S. Federal Income Tax Consequences (see page 47).   If you are a U.S. Holder (as defined below), the merger will be a taxable transaction for U.S. federal income tax purposes under the Internal Revenue Code of 1986, as amended (the “Code”). Your receipt of cash in exchange for your shares of Common Stock in the merger generally will cause you to recognize gain or loss measured by the difference, if any, between the amount of cash you receive in the merger (determined before the deduction of any applicable withholding taxes) and your adjusted tax basis in your shares of Common Stock. If you are a Non-U.S. Holder (as defined below), any gain realized on your receipt of cash in the merger generally will not be subject to U.S. federal income tax unless you have certain connections to the United States. Because of the complexities of the tax laws, we advise you to consult your personal tax advisors concerning the applicable U.S. federal, state, local, foreign and other tax consequences of the merger to you. See “Material U.S. Federal Income Tax Consequences of the Merger to Our Stockholders” beginning on page 47.

 

Appraisal Rights (see page 64).   Under Delaware law, holders of Common Stock who do not vote in favor of adopting the merger agreement will have the right to seek appraisal of the fair value of their shares, as determined by the Delaware Court of Chancery, if the merger is completed, but only if they comply with all requirements of Delaware law, which are summarized in this proxy statement. The appraisal amount you would receive could be more than, the same as or less than the amount a stockholder would be entitled to receive under the terms of the merger agreement. Any holder of Common Stock intending to exercise his, her or its appraisal rights must, among other things, submit a written demand for an appraisal to us prior to the stockholder vote on the adoption of the merger agreement and must not vote or otherwise submit a proxy in favor of adoption of the merger agreement. Your failure to follow exactly the procedures specified under Delaware law will result in the loss of your appraisal rights. See “The Special Meeting — Rights of Stockholders Who Object to the Merger” and “Appraisal Rights” beginning on pages 15 and 64, respectively, and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex C to this proxy statement.

 

Market Price of Common Stock (see page 67).   The closing sale price of Common Stock on The NASDAQ Global Select Market (the “NASDAQ”) on May 14, 2010, the last trading day prior to the announcement of the execution of the merger agreement, was $32.63 per share. On March 9, 2010, which was the last trading day prior to the day we publicly announced that we had been approached by third parties in connection with a potential acquisition of the Company, the closing price of our common stock was $23.91 per share. The $33.75 per share to be paid for each share of Common Stock in the merger represents a premium of approximately 41.15% to the closing price on March 9, 2010. See “Market Price and Dividend Data” beginning on page 67.

 

Amendment to Equity Incentive Plan (see page 71).   The Company’s stockholders approved an amendment to the Psychiatric Solutions, Inc. Equity Incentive Plan (the “equity incentive plan”) at the Company’s annual meeting of stockholders in May 2010. The amendment increased the number of shares of Common Stock subject to grant under the equity incentive plan by 900,000 and restricted the repricing of options. As part of the resolution of certain stockholder lawsuits filed in connection with the merger, the Company agreed to allow the stockholders to revote on the proposal to amend the equity incentive plan. The Company’s board of directors recommends that the Company’s stockholders vote “FOR” the amendment to the equity incentive plan. See “Approval of an Amendment to the Equity Incentive Plan (Proposal No. 3)” beginning on page 71.

 

The following questions and answers are intended to address briefly some commonly asked questions regarding the merger, the merger agreement and the special meeting. These questions and answers do not address all questions that may be important to you as a stockholder of the Company. Please refer to the “Summary” and the more detailed information contained elsewhere in this proxy statement, the annexes to this proxy statement and the documents referred to in this proxy statement, which you should read carefully.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

This proxy statement, and the documents to which we refer you in this proxy statement, contain forward-looking statements based on estimates and assumptions. Forward-looking statements include information concerning possible or assumed future results of operations of the Company, the expected completion and timing of the merger and other information relating to the merger. There are forward-looking statements throughout this proxy statement, including, without limitation, under the headings “Summary” and “The Merger” and in statements containing the words “believes,” “plans,” “expects,” “anticipates,” “intends,” “estimates” or other similar expressions. You should be aware that forward-looking statements involve known and unknown risks and uncertainties. Although we believe that the expectations reflected in these forward-looking statements are reasonable, we cannot assure you that the actual results or developments we anticipate will be realized, or even if realized, that they will have the expected effects on the business or operations of the Company. These forward-looking statements speak only as of the date on which the statements were made and we undertake no obligation to publicly update or revise any forward-looking statements made in this proxy statement or elsewhere as a result of new information, future events or otherwise. In addition to other factors and matters contained in this proxy statement, we believe the following factors could cause actual results to differ materially from those discussed in the forward-looking statements:

 

 

 

 

 

 

 

and other risks detailed in our current filings with the SEC, including our most recent filings on Form 10-Q and Form 10-K. See “Where You Can Find More Information” beginning on page 75. Many of the factors that will determine our future results are beyond our ability to control or predict. In light of the significant uncertainties inherent in the forward-looking statements contained herein, readers should not place undue reliance on forward-looking statements, which reflect management’s views only as of the date hereof. We cannot guarantee any future results, levels of activity, performance or achievements. The statements made in this proxy statement represent our views as of the date of this proxy statement, and it should not be assumed that the statements made herein remain accurate as of any future date. Moreover, we assume no obligation to update forward-looking statements or update the reasons that actual results could differ materially from those anticipated in forward-looking statements, except as required by law.

 

The Company

 

Psychiatric Solutions, Inc. is a Delaware corporation with its headquarters in Franklin, Tennessee. We are a leading provider of inpatient behavioral health care services in the United States, and offer an extensive continuum of behavioral health programs to critically ill children, adolescents and adults. We operate 94 inpatient behavioral health care facilities with approximately 11,000 beds in 32 states, Puerto Rico, and the U.S. Virgin Islands. The Company offers these services through a combination of acute inpatient behavioral facilities and residential treatment centers. We also manage freestanding psychiatric inpatient facilities for government agencies and psychiatric inpatient units within medical/surgical hospitals owned by others.

 

Our principal executive offices are located at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067, and our telephone number is (615) 312-5700. For more information about us, please visit our website at www.psysolutions.com. Our website address is provided as an inactive textual reference only. The information provided on our website is not part of this proxy statement, and therefore is not incorporated by reference. We are publicly traded on the NASDAQ under the symbol “PSYS.”

 

UHS

 

Universal Health Services, Inc. is a Delaware corporation with its headquarters in King of Prussia, Pennsylvania. UHS is one of the nation’s largest hospital companies operating, through its subsidiaries, acute care hospitals, behavioral health care facilities and ambulatory centers located throughout the United States and Puerto Rico. UHS also acts as the advisor to Universal Health Realty Income Trust, a real estate investment trust whose stock is publicly traded on the New York Stock Exchange.

 

UHS’ principal executive offices are located at Universal Corporate Center, 367 South Gulph Road, King of Prussia, Pennsylvania 19406, and its telephone number is (610) 768-3300. For more information about UHS, please visit its website at www.uhsinc.com. UHS’ website address is provided as an inactive textual reference only. The information provided on UHS’ website is not part of this proxy statement, and therefore is not incorporated by reference. UHS’ common stock is publicly traded on the NYSE under the symbol “UHS.”

 

Merger Sub

 

Olympus Acquisition Corp. is a Delaware corporation that was formed solely for the purpose of completing the proposed merger. Upon the consummation of the proposed merger, Olympus Acquisition Corp. will cease to exist and the Company will continue as the surviving corporation and wholly-owned subsidiary of UHS. Merger Sub is wholly-owned by UHS and has not engaged in any business except as contemplated by the merger agreement.

 

Merger Sub’s principal executive offices are located at Universal Corporate Center, 367 South Gulph Road, King of Prussia, Pennsylvania 19406, and its telephone number is (610) 768-3300.

 

This proxy statement is furnished in connection with the solicitation of proxies by our board of directors in connection with the special meeting of our stockholders relating to the merger.

Date, Time and Place of the Special Meeting

 

The special meeting is scheduled to be held as follows:

 

 

At the special meeting, you will be asked (i) to vote on a proposal to adopt the merger agreement, (ii) to approve the adjournment of the special meeting, if necessary or appropriate, to solicit additional proxies if there are insufficient votes at the time of the meeting to adopt the merger agreement and (iii) to vote on an amendment to the equity incentive plan previously approved by stockholders at the Company’s 2010 annual meeting of stockholders. A copy of the merger agreement is attached as Annex A to this proxy statement and a copy of the amendment to the equity incentive plan is attached as Annex D to this proxy statement.

 

We have fixed the close of business on August 24, 2010 as the record date for the special meeting, and only holders of record of Common Stock on the record date are entitled to vote at the special meeting. On the record date, there were 57,270,488 shares of Common Stock outstanding and entitled to vote.

 

Each share of Common Stock entitles its holder to one vote on all matters properly coming before the special meeting. The presence in person or represented by proxy of stockholders entitled to cast a majority of the votes of all issued and outstanding shares entitled to vote will constitute a quorum for the purpose of considering the proposals. Shares of Common Stock represented at the special meeting, but not voted, including shares of Common Stock for which proxies have been received but for which stockholders have abstained, will be treated as present at the special meeting for purposes of determining the presence or absence of a quorum for the transaction of all business. In the event that a quorum is not present at the special meeting, it is expected that the meeting will be adjourned or postponed to solicit additional proxies. Any adjournment may be made without notice (if the adjournment is not more than 30 days) by an announcement at the special meeting of the time, date and place of the adjourned meeting.

 

Adoption of the merger agreement requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock entitled to vote on the matter. For the proposal to adopt the merger agreement, you may vote FOR, AGAINST or ABSTAIN. Abstentions will count for the purpose of determining whether a quorum is present and will count as shares present and entitled to vote on the proposal to adopt the merger agreement. If you abstain, it will have the same effect as if you vote AGAINST the adoption of the merger agreement . In addition, if your shares are held in the name of a broker, bank or other nominee, your broker, bank or other nominee will not be entitled to vote your shares in the absence of specific instructions. These non-voted shares, or “broker non-votes,” will be counted for purposes of determining a quorum, but will have the same effect as a vote AGAINST the adoption of the merger agreement . Your broker, bank or nominee will vote your shares only if you provide instructions on how to vote by following the instructions provided to you by your broker, bank or nominee.

 

The proposal to adjourn the special meeting, if necessary or appropriate, to solicit additional proxies requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock present or represented by proxy at the special meeting and entitled to vote on the matter. For the proposal to adjourn

the special meeting, if necessary or appropriate, to solicit additional proxies, you may vote FOR, AGAINST or ABSTAIN. Abstentions and broker non-votes will count for the purpose of determining whether a quorum is present. Abstentions will be counted as shares present and entitled to vote on the proposal to adjourn the meeting and will have the same effect as a vote AGAINST the proposal to adjourn the meeting. Broker non-votes will not count as shares present and entitled to vote on the proposal to adjourn the meeting. As a result, broker non-votes will have no effect on the vote to adjourn the special meeting, which requires the vote of the holders of a majority of the shares of Common Stock present or represented by proxy at the meeting and entitled to vote on the matter.

 

The proposal to amend the equity incentive plan requires the affirmative vote of the holders of a majority of the outstanding shares of Common Stock present or represented by proxy at the special meeting and entitled to vote on the matter. For this proposal, you may vote FOR, AGAINST or ABSTAIN. Abstentions and broker non-votes will count for the purpose of determining whether a quorum is present. Abstentions will be counted as shares present and entitled to vote on the proposal to amend the equity incentive plan and will have the same effect as a vote AGAINST the proposal to amend the equity incentive plan. Broker non-votes will not count as shares present and entitled to vote on the proposal to amend the equity incentive plan. As a result, broker non-votes will have no effect on the vote to amend the equity incentive plan, which requires the vote of the holders of a majority of the shares of Common Stock present or represented by proxy at the meeting and entitled to vote on the matter.

 

As of August 24, 2010, the record date, our directors and executive officers held and were entitled to vote, in the aggregate, 1,435,405 shares of Common Stock, representing approximately 2.51% of the outstanding Common Stock. If our directors and executive officers vote their shares in favor of adopting the merger agreement, 2.51% of the outstanding shares of Common Stock will have voted for the proposal to adopt the merger agreement. This means that additional holders of approximately 47.50% of all shares entitled to vote at the special meeting would need to vote for the proposal to adopt the merger agreement in order for it to be adopted.

 

Stockholders of record may submit proxies by mail, by telephone or over the Internet. Stockholders who wish to submit a proxy by mail should mark, date, sign and return the proxy card in the envelope furnished. If you hold your shares in your name as a stockholder of record, you may vote by telephone or electronically through the Internet by following the instructions included with your proxy card. Stockholders who hold shares beneficially through a nominee (such as a bank or broker) may be able to submit a proxy by mail, or by telephone or over the Internet if those services are offered by the nominee.

 

Proxies received at any time before the special meeting, and not revoked or superseded before being voted, will be voted at the special meeting. Where a specification is indicated by the proxy, it will be voted in accordance with the specification. If you sign your proxy card without indicating your vote, your shares will be voted “FOR” the adoption of the merger agreement, “FOR” the adjournment of the special meeting, if necessary, to solicit additional proxies and “FOR” the approval of the amendment to the equity incentive plan, and in accordance with the recommendations of our board of directors on any other matters properly brought before the special meeting for a vote.

 

You have the right to revoke your proxy at any time before the vote taken at the special meeting:

 

 

 

Please do not send in your stock certificates with your proxy card.   When the merger is completed, a separate letter of transmittal will be mailed to you that will enable you to tender your stock certificates and receive the merger consideration.

 

Our stockholders are entitled to appraisal rights under Delaware law in connection with the merger. This means that you are entitled to have the value of your shares determined by the Delaware Court of Chancery and to receive payment based on that valuation. The ultimate amount you receive as a dissenting stockholder in an appraisal proceeding may be more than, the same as or less than the amount you would have received under the merger agreement.

 

To exercise your appraisal rights, you must submit a written demand for appraisal to the Company before the vote is taken on the merger agreement and you must not vote in favor of the adoption of the merger agreement. Your failure to follow exactly the procedures specified under Delaware law will result in the loss of your appraisal rights. See “Appraisal Rights” beginning on page 64 and the text of the Delaware appraisal rights statute reproduced in its entirety as Annex C to this proxy statement.

 

This proxy solicitation is being made and paid for by us on behalf of our board of directors. In addition, we have retained Innisfree to assist in the solicitation. We will pay Innisfree approximately $50,000, plus out-of-pocket expenses, for its assistance. Our directors, executive officers and employees also may solicit proxies by personal interview, mail, e-mail, telephone, facsimile or other means of communication. These persons will not be paid additional remuneration for their efforts. We also will request brokers and other fiduciaries to forward proxy solicitation materials to the beneficial owners of shares of Common Stock that the brokers and fiduciaries hold of record. We will reimburse them for their reasonable out-of-pocket expenses. In addition, we will indemnify Innisfree against any losses arising out of that firm’s proxy soliciting services on our behalf.

 

We currently are not aware of any business to be acted upon at the special meeting other than the matters discussed in this proxy statement. Under our by-laws, business transacted at the special meeting is limited to the purposes stated in the notice of the special meeting, which is provided at the beginning of this proxy statement. If other matters do properly come before the special meeting, or at any adjournment or postponement of the special meeting, we intend that shares of Common Stock represented by properly submitted proxies will be voted in accordance with the recommendations of our board of directors.

 

If you have questions about the merger or other matters in this proxy statement or how to submit your proxy, or if you need additional copies of this proxy statement or the enclosed proxy card or voting instructions, please call our proxy solicitor, Innisfree, toll-free at (877) 456-3510 (banks and brokers call collect at (212) 750-5833), or contact us in writing at our principal executive offices at 6640 Carothers Parkway, Suite 500, Franklin, Tennessee 37067, Attention: Brent Turner, Executive Vice President, Finance and Administration, or by telephone at (615) 312-5700.

 

The reports, opinions or appraisals referenced in this proxy statement will be made available for inspection and copying at the principal executive offices of the Company during our regular business hours by any interested holder of Common Stock.

 

This discussion of the merger is qualified by reference to the merger agreement, which is attached to this proxy statement as Annex A. You should read the entire merger agreement carefully as it is the legal document that governs the merger.

 

In 2007 and early 2008, in the context of exploring a potential acquisition by the Company of the behavioral health business of UHS, the Company held discussions with four private equity firms regarding a possible equity investment in the Company. The Company submitted a preliminary offer to acquire UHS’ behavioral health business with the assistance of one of these private equity firms. The Company’s offer was not accepted and there were no further discussions between the Company and UHS with respect to that potential transaction. In November and December 2009, three of these private equity firms contacted the Company and requested an opportunity to update their due diligence review of the Company for the purpose of determining whether they would be interested in a possible equity investment in the Company or potentially acquiring the entire Company. The Company entered into confidentiality agreements with these private equity firms on November 16, 2009, November 23, 2009, and December 18, 2009, and provided them confidential information concerning the Company. In connection with their due diligence efforts, each of the private equity firms met with members of the Company’s senior management, including Messrs. Jacobs, Turner, Fincher, Polson and Howard. From November 2009 into the spring of 2010, management had informal discussions regarding potential strategic transaction structures and issues with investment banks with whom the Company had pre-existing relationships. In November 2009, Mr. Jacobs informed two of the Company’s independent directors that the Company had been contacted by private equity firms with whom it had pre-existing relationships. Mr. Jacobs did not inform the other directors given the preliminary nature of the discussions with the private equity firms. After meeting with senior management and conducting due diligence reviews during November and December 2009 and January and February 2010, each of the three private equity firms determined not to pursue an investment in or acquisition of the Company at that time.

 

In September 2009, the Company explored the possible acquisition of a company owned by another private equity firm, which private equity firm is referred to in this proxy statement as Potential Purchaser One. The Company elected not to pursue the acquisition.

 

In December 2009, Potential Purchaser One contacted the Company to discuss the possibility of an equity investment in or an acquisition of the entire Company and entered into a confidentiality agreement with the Company on December 21, 2009. The Company provided confidential information concerning the Company to Potential Purchaser One in December 2009 and January and February 2010. Mr. Jacobs briefly informed one of the independent directors of discussions with Potential Purchaser One in December 2009 and briefly updated him on the status of those discussions in late February 2010. In January and February 2010, senior management, including Messrs. Jacobs, Turner, Fincher, Polson and Howard, met with Potential Purchaser One and its representatives to discuss Potential Purchaser One’s evaluation of the Company and the possibility of Potential Purchaser One acquiring the entire Company.

 

On February 22, 2010, members of the Company’s senior management made presentations to three different investment banks regarding possible debt financing such banks would provide to Potential Purchaser One in connection with a potential acquisition of the Company.

 

In late February 2010, Potential Purchaser One, through its legal counsel, conducted further due diligence on the Company, including at the Company’s corporate headquarters and the offices of the Company’s legal counsel, from February 23 through February 26, 2010.

 

On February 24, 2010, Mr. Jacobs informed the members of the audit committee of the Company’s board of directors that members of senior management were in discussions with Potential Purchaser One regarding a potential transaction. On February 25, 2010, Mr. Jacobs informed the full board of directors via e-mail that a potential transaction would be discussed at an upcoming board meeting. On March 2, 2010, at a telephonic meeting of the board of directors, management advised the board of directors of its discussions with Potential

Purchaser One and the three other private equity firms regarding a possible acquisition of the Company. Management advised the board of directors that the three private equity firms were no longer interested in pursuing a potential transaction, but that Potential Purchaser One remained interested. The board of directors determined that it should consider establishing a special committee comprised of independent, disinterested directors to review, evaluate and consider such a transaction, as well as potential strategic alternatives available to the Company. At the meeting, representatives of Waller Lansden Dortch & Davis, LLP (“Waller Lansden”), counsel for the Company, advised the board of directors regarding its fiduciary duties in engaging in a possible strategic review process.

 

On March 4, 2010, acting by unanimous written consent, the board of directors established a special committee, comprised of Messrs. Grant, Dill, Gore and Wissing. The board of directors determined that the special committee should be comprised solely of independent, disinterested directors who had sufficient time to devote to the evaluation and consideration of any potential transaction with respect to the Company. Although Mr. Clein, an independent director, was not formally a member of the special committee due to his other time commitments, he was invited to attend all meetings of the special committee and attended a significant number of such meetings. The board of directors granted the special committee the exclusive power and authority to, among other things, review, evaluate and consider all strategic alternatives available to the Company, including determining whether pursuing a possible sale of the Company would be in the best interests of the Company and its stockholders, and, as appropriate, to reject or to recommend to the board of directors any strategic alternatives it considered.

 

Mr. Grant interviewed representatives of Shearman & Sterling LLP (“Shearman & Sterling”) as potential legal counsel for the special committee and discussed with the special committee the results of his interview. The special committee determined to engage Shearman & Sterling as its legal advisor, based upon Shearman & Sterling’s reputation and experience. A meeting of the special committee was held by telephone on March 4, 2010. At the meeting, representatives of Shearman & Sterling reviewed with the special committee its fiduciary duties in connection with its consideration of strategic alternatives available to the Company. The special committee selected Mr. Grant as its chairman and discussed the engagement of an independent financial advisor. The special committee arranged interviews with four candidates, including representatives of Goldman Sachs.

 

In early March 2010, the Company received a subpoena from the DOJ seeking various documents relating to compensation, stock sales, option awards, option exercises and personnel records for certain current and former senior level executives since 2006 and a subpoena from the DOJ seeking various other stock related documents including, but not limited to, communications with investment firms and investors. The Company disclosed the receipt of these subpoenas to Potential Purchaser One, and to other potential parties to a strategic transaction described below, in the course of their due diligence reviews of the Company, and publicly disclosed the receipt of these subpoenas in its quarterly report on Form 10-Q for the quarter ended March 31, 2010 filed with the SEC. The Company has been cooperating, and will continue to cooperate, with the DOJ in connection with these inquiries.

 

On March 5, 2010, the board of directors received a written proposal from Potential Purchaser One regarding an acquisition of the Company at a price of $27.75 per share. The proposal indicated that Potential Purchaser One had secured fully committed financing in connection with its proposal. The proposal also indicated that Potential Purchaser One would need permission from the independent directors to discuss with senior management compensation arrangements that Potential Purchaser One would propose to enter into with senior management, and the special committee instructed senior management not to have any discussions with Potential Purchaser One or any other potential purchaser at such time.

 

On March 8, 2010, the independent members of the Company’s board of directors met at the offices of Shearman & Sterling in New York to interview candidates to serve as the special committee’s financial advisor. After these interviews, the special committee determined to engage Goldman Sachs as its financial advisor, based upon Goldman Sachs’ qualifications, expertise and reputation. Also on March 8, 2010, at the request of Potential Purchaser One, representatives of Potential Purchaser One met with the independent directors to review the proposal submitted by Potential Purchaser One on March 5, 2010.

 

On March 10, 2010, the online edition of The Wall Street Journal reported that the Company was in talks with Bain Capital regarding an acquisition of the Company. The Company issued a press release later the same day in response to The Wall Street Journal article confirming that it had been approached by third parties in connection with a potential acquisition of the Company and that it had established a special committee, which had retained Goldman Sachs and Shearman & Sterling as its financial and legal advisors, respectively. The Company’s common stock, which closed at $23.91 on the day prior to The Wall Street Journal report, closed at $29.00 on March 10, 2010.

 

At a telephonic meeting of the special committee on March 11, 2010, representatives of Goldman Sachs informed the special committee that, following The Wall Street Journal article, they had received calls from parties expressing interest in pursuing a potential transaction with the Company, including UHS, two of the private equity firms that had entered into confidentiality agreements with the Company in late 2009, and other private equity and strategic buyers. Additionally, Potential Purchaser One contacted representatives of Goldman Sachs to express its continued interest in pursuing a potential transaction with the Company.

 

Also on March 11, 2010, representatives of Goldman Sachs and Shearman & Sterling met with members of management at the Company’s offices in Franklin, Tennessee and received a presentation regarding the Company’s business and financial results. During a telephonic meeting of the special committee on March 12, 2010, representatives of Goldman Sachs updated the special committee regarding those presentations and advised the special committee that they continued to receive calls from parties expressing interest in pursuing a potential transaction with the Company.

 

Although Company management prepares an annual budget, the Company does not in the ordinary course of business prepare long-term projections as to future revenues, earnings or other operating results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. The Company has followed this practice since its inception. However, to assist the special committee with its evaluation of strategic alternatives available to the Company, the special committee requested the Company’s management to prepare a five-year business plan for the Company. At a telephonic meeting of the special committee on March 17, 2010, the special committee determined to schedule a meeting with management for the following week so that members of management could present additional financial and other information regarding the Company to the special committee and representatives of Goldman Sachs. On March 24, 2010, the special committee and its legal and financial advisors met with members of management at the offices of Shearman & Sterling in New York to discuss management’s preliminary views with respect to a five-year business plan.

 

The special committee directed representatives of Goldman Sachs to apply certain sensitivity adjustments to management’s preliminary five-year plan following the meeting on March 24, 2010, and to consult with management as management continued to modify and refine its five-year business plan. At a telephonic meeting of the special committee on March 31, 2010, representatives of Goldman Sachs discussed with the special committee modifications that management had made to its preliminary five-year plan, as well as sensitivity adjustments representatives of Goldman Sachs had applied to management’s five-year plan at the direction of the special committee, which included an increase in the Company’s total indebtedness of $500 million and the repurchase by the Company of approximately 30% of its outstanding shares. The special committee discussed the modifications and sensitivities and directed representatives of Goldman Sachs to discuss with management further refinements to management’s five-year plan. The special committee further directed representatives of Goldman Sachs to prepare financial analyses for various strategic alternatives available to the Company.

 

On March 26, 2010, the Company received a request from the Financial Institutions Regulatory Authority (“FINRA”) for information concerning trading in the Company’s securities on rumors of a potential strategic transaction involving the Company. The Company responded to FINRA’s request on April 19, 2010.

 

On April 5, 2010, the special committee held a meeting at the offices of Shearman & Sterling in New York, during which representatives of Goldman Sachs discussed with the special committee its preliminary financial analyses of various strategic alternatives available to the Company, including remaining an independent company, pursuing a sale or merger with a company within the health care industry, pursuing a leveraged buyout transaction with a private equity firm, conducting a share repurchase program, issuing a

special dividend payment, pursuing acquisitions of additional facilities, divesting selected facilities and converting the Company into a real estate investment trust. Following discussions, the special committee directed representatives of Goldman Sachs to explore on behalf of the special committee both a possible sale of the Company as well as other alternatives available to the Company if the Company remained independent, including a leveraged recapitalization or an extraordinary dividend.

 

At a telephonic meeting of the special committee on April 7, 2010, representatives of Goldman Sachs discussed with the special committee further modifications that management had made to its five-year plan, including modifications to management’s assumptions regarding the Company’s future pricing. The special committee discussed the modifications and directed representatives of Goldman Sachs to discuss with management further refinements to management’s five-year plan. At a telephonic meeting of the special committee on April 9, 2010, representatives of Goldman Sachs reviewed with the special committee management’s further revised five-year plan and discussed with the special committee its preliminary financial analyses of strategic alternatives available to the Company that they had updated since the special committee’s April 5 meeting based on the further revised five-year plan. After discussion, the special committee directed representatives of Goldman Sachs to use the operating forecasts reflected in management’s revised five-year plan for purposes of any further financial analyses. Management’s revised five-year business plan is described under “Certain Financial Projections” beginning on page 34. The special committee also directed representatives of Goldman Sachs to use, for purposes of any further financial analyses, capital structure assumptions provided by the special committee, which included an increase in the Company’s total indebtedness of $500 million and the repurchase by the Company of approximately 30% of its outstanding shares. The special committee directed representatives of Goldman Sachs to use these assumptions because the special committee had concluded that, in the event that the Company remained independent, the Company would likely return value to the Company’s stockholders by increasing the Company’s indebtedness to repurchase a portion of its outstanding shares.

 

Also at the April 9 meeting, the special committee discussed the initial proposal from Potential Purchaser One to acquire the Company for $27.75 per share. After considering various factors, including Goldman Sachs’ preliminary financial analyses, the special committee directed representatives of Goldman Sachs to inform Potential Purchaser One that the special committee was not prepared to explore a possible sale of the company at a price of $27.75 per share. The special committee also instructed representatives of Goldman Sachs to inform Potential Purchaser One that it was welcome to continue its due diligence on the Company if it agreed to certain amendments to the confidentiality agreement it had entered into with the Company, including the addition of a customary standstill provision prohibiting it from, among other things, acquiring the stock or assets of the Company without the special committee’s consent. Representatives of Goldman Sachs then reviewed with the special committee a list of 19 potential strategic, private equity and real estate investment trust parties that representatives of Goldman Sachs could contact to gauge their interest in pursuing a possible transaction with the Company. The 19 potential parties were those that Goldman Sachs believed, based on publicly available information and its knowledge of the parties and experience, could potentially be interested in pursuing a possible transaction with the Company. Certain of these identified parties had previously indicated to Goldman Sachs their interest in pursuing a possible transaction with the Company. After discussion, the special committee authorized representatives of Goldman Sachs to contact each of the 19 parties identified by representatives of Goldman Sachs, as well as three other strategic parties identified by the special committee. Of these 22 parties, 12 were private equity firms, five were strategic companies and five were real estate investment trusts. The special committee also instructed representatives of Goldman Sachs to discuss with management other possible strategic alternatives, including a share repurchase program and the payment of an extraordinary dividend.

 

As directed by the special committee, in the days following the April 9 meeting, representatives of Goldman Sachs contacted the 22 parties previously identified with the special committee, and the Company entered into confidentiality agreements with five of those parties, including UHS, two private equity firms jointly exploring a possible transaction with the Company (with the consent of the special committee), a third private equity firm and one real estate investment trust. Additionally, a private equity firm that had executed a confidentiality agreement and conducted a due diligence review of the Company in December 2009 and

January 2010 indicated to representatives of Goldman Sachs that it was only interested in evaluating a possible transaction with the Company jointly with Potential Purchaser One. The special committee consented to such a joint evaluation, but stated that both parties (which are collectively referred to in this proxy statement as the “co-bidders”) would need to enter into amendments to their confidentiality agreements before they would be allowed to proceed further. The special committee requested that both parties amend their confidentiality agreements to include provisions that provided additional protection for the Company and its stockholders, including standstill provisions. At the direction of the special committee, representatives of Goldman Sachs advised each of the interested parties that preliminary indications of interest with respect to a possible acquisition of the Company would be due by April 30, 2010.

 

At a telephonic meeting of the special committee held on April 26, 2010, representatives of Goldman Sachs informed the special committee that the co-bidders had advised representatives of Goldman Sachs that they would not improve upon Potential Purchaser One’s initial proposal to acquire the Company for $27.75 per share until all interested parties were required to submit their final proposals.

 

On April 27, 2010, the real estate investment trust that had entered into a confidentiality agreement with the Company informed representatives of Goldman Sachs that it was no longer interested in pursuing an acquisition of the Company.

 

Between the time each of the parties entered into confidentiality agreements with the Company and April 30, 2010, the parties conducted due diligence reviews of the Company, and members of management conducted separate due diligence sessions for each requesting party.

 

On April 30, 2010, UHS submitted a non-binding preliminary indication of interest to acquire the Company for a price in the range of $32.00 to $34.00 per share in cash and stated that its offer was not subject to a financing condition. The co-bidders advised representatives of Goldman Sachs that, while they would be willing to “meaningfully improve” upon the $27.75 per share price that Potential Purchaser One had initially indicated in its preliminary proposal submitted on March 5, 2010, they would not propose an increased price until all parties were required to submit their final proposals. Also on April 30, 2010, three other private equity firms (two of which were acting jointly) submitted preliminary proposals to acquire the Company for a price in the range of $27.00 to $28.00 per share in cash, and unlike the co-bidders, these parties did not indicate an ability to increase their purchase price beyond this price range.

 

On the morning of May 3, 2010, at a telephonic meeting of the special committee, representatives of Goldman Sachs described for the special committee the terms of the preliminary indications of interest, including the price ranges that the parties had submitted. After discussion, the special committee directed representatives of Goldman Sachs to advise the private equity parties proposing $27.00 to $28.00 per share that the special committee was not prepared to pursue a transaction in that price range. The special committee also concluded that it would be advisable to focus on securing improved and definitive proposals from UHS and the co-bidders. Neither the proposal from UHS nor the proposal from the co-bidders was conditioned upon the agreement of senior management to remain with the surviving company. The special committee determined that it was in the best interests of the Company and its stockholders to continue to explore the possibility of a transaction with both UHS and the co-bidders on an expedited basis in light of, among other things, speculative press reports concerning a possible transaction. The special committee directed representatives of Goldman Sachs to inform UHS and the co-bidders that the special committee required final proposals by May 14, 2010. At a telephonic meeting of the special committee in the afternoon of May 3, 2010, representatives of Shearman & Sterling reviewed with the special committee the provisions commonly found in merger agreements for transactions such as those proposed by UHS and the co-bidders, including provisions relating to antitrust and other regulatory matters, and discussed with the special committee the draft agreements they would send to each of UHS and the co-bidders.

 

Between May 3, 2010 and May 14, 2010, UHS and the co-bidders continued their due diligence reviews of the Company, and the Company entered into amended confidentiality agreements with the co-bidders. At the direction of the special committee, representatives of Shearman & Sterling sent initial drafts of the merger agreements to each of UHS and the co-bidders on May 4, 2010. Also at the direction of the special committee, between May 4, 2010 and May 14, 2010, representatives of Shearman & Sterling had multiple

meetings with members of the Company’s management and with counsel for each of UHS and the co-bidders regarding antitrust and other regulatory matters, and negotiated the terms of the draft merger agreements with counsel for each of UHS and the co-bidders.

 

On May 14, 2010, representatives of Shearman & Sterling and Goldman Sachs had multiple discussions with UHS and the co-bidders regarding the proposals they were expected to submit later that day, including, in the case of Shearman & Sterling, the terms of the draft merger agreements each of the parties indicated it would be willing to accept. Later that day, UHS submitted a proposal to acquire the Company at a price of $32.50 per share, and the co-bidders submitted a proposal to acquire the Company at a price of $30.50 per share.

 

A meeting of the special committee was held at the offices of Shearman & Sterling in New York on May 14, 2010. At the meeting, representatives of Shearman & Sterling reviewed with the special committee its fiduciary duties in connection with the evaluation of a proposal to acquire the Company. Representatives of Shearman & Sterling also discussed with the special committee the status of negotiations regarding the draft merger agreements with each of UHS and the co-bidders, and the principal provisions and other terms of the draft merger agreements submitted by the two parties, including provisions relating to certainty of closing and remedies with respect to breaches of the agreements, such as the ability of the Company to pursue specific performance if the co-bidders or UHS failed to satisfy their respective obligations. Pursuant to the respective terms of the draft merger agreements with UHS and the co-bidders, the Company would be permitted to pursue specific performance against UHS but not against the co-bidders. Additionally, representatives of Shearman & Sterling reviewed with the special committee the antitrust and other regulatory matters with respect to a potential transaction with each party. Representatives of Goldman Sachs discussed with the special committee its updated financial analyses regarding strategic alternatives available to the Company and the proposed purchase prices offered by UHS and the co-bidders. Mr. Jacobs met separately with the special committee and encouraged the special committee not to end the auction process prematurely and to proceed in the manner the special committee concluded was in the best interests of the Company and all of its stockholders.

 

The special committee discussed the viability and potential benefits to the Company’s stockholders of various strategic alternatives available to the Company, including remaining independent and pursuing a leveraged stock repurchase. In addition, the special committee evaluated the relative benefits expected to be realized by the Company’s stockholders from the available strategic alternatives and from a sale of the Company to UHS or the co-bidders, and ultimately determined that a sale would be in the best interests of the Company’s stockholders.

 

In considering the competing proposals from UHS and the co-bidders, the special committee considered the strategic alternatives available to the Company, the purchase prices submitted by the parties, as well as the terms of the draft merger agreements each of the parties indicated it would be willing to accept. In assessing certainty of closing, the special committee considered the potential adverse impact on the Company and its business if an announced sale failed to close. On the basis of the foregoing, the special committee determined that it would be in the best interests of the Company’s stockholders to continue discussions with the co-bidders and authorized its advisors to communicate to the co-bidders its request that they improve their price and the terms of their draft merger agreement with respect to certainty of closing, and to provide the special committee with its best, final proposal by mid-afternoon on the following day. The special committee also directed representatives of Shearman & Sterling to inform counsel to UHS that the special committee would be proceeding with another party over the weekend regarding a transaction involving the Company and that Goldman Sachs was instructed not to engage with UHS’ financial advisors. Upon receipt of this information, counsel to UHS expressed its objection to such an approach.

 

Following the meeting on May 14, 2010 and throughout the day on May 15, 2010, at the direction of the special committee, representatives of Shearman & Sterling continued to negotiate the terms of the draft merger agreement with the co-bidders and representatives of Goldman Sachs continued to have discussions with the co-bidders regarding the co-bidders’ ability to improve their proposed purchase price. On May 15, 2010, the special committee received a revised proposal from the co-bidders, which increased the price they would be willing to pay to acquire the Company to $31.25 per share and included improved terms relating to certainty

of closing, including less stringent conditions to the co-bidders’ obligation to close in the event regulatory consents were not obtained.

 

At a telephonic meeting of the special committee in the afternoon of May 15, 2010, the special committee discussed the revised proposal that the co-bidders had submitted. The special committee reviewed and considered the relative value and certainty of closing provided by the proposals submitted by the co-bidders and by UHS and determined that the proposal from the co-bidders was more favorable to the Company and its stockholders. Nevertheless, the special committee also determined to provide UHS with an opportunity to improve its proposal. The special committee authorized its advisors to communicate to UHS that the special committee was prepared to recommend to the Company’s board of directors a transaction with a third party, unless UHS was able to meaningfully improve its offer to acquire the Company. The special committee also directed representatives of Goldman Sachs to inform the co-bidders that the special committee had determined to approach a third party and offer it an opportunity to improve its proposal.

 

At the special committee’s direction, immediately following the meeting on May 15, 2010, representatives of Shearman & Sterling telephoned counsel to UHS and advised it that the special committee had a proposal from another party that it considered more attractive than the proposal from UHS, and that the special committee was prepared to execute a merger agreement with that other party unless UHS improved both its price and the terms of its draft merger agreement with respect to certainty of closing, including with respect to obtaining regulatory approvals. UHS’ legal and financial advisors subsequently informed representatives of Shearman & Sterling and Goldman Sachs, respectively, that UHS would submit a revised and improved proposal the following morning.

 

At a telephonic meeting of the special committee on the morning of May 16, 2010, representatives of Goldman Sachs and Shearman & Sterling discussed with the special committee a revised proposal received earlier that morning from UHS pursuant to which UHS increased its proposed purchase price by $1.00 to $33.50 per share and agreed to revisions to the draft merger agreement that improved terms relating to the timing and certainty of closing. Representatives of Goldman Sachs also discussed with the special committee the fact that UHS’ financial advisor had indicated that the revised proposal reflected UHS’ best offer and that they had offered their highest price. After discussion of this revised proposal and the improved terms offered by UHS (including with respect to UHS’ commitment to obtain antitrust approval), the special committee determined that UHS’ proposal was more favorable to the Company and its stockholders than the proposal from the co-bidders and directed representatives of Shearman & Sterling and Goldman Sachs to finish negotiations with UHS prior to the meetings of the special committee and board of directors scheduled for that evening. The special committee also requested that representatives of Goldman Sachs inform the co-bidders that the special committee expected to recommend to the Company’s board of directors by the end of the day that the Company enter into a transaction with another party.

 

The special committee held a telephonic meeting in the late afternoon of May 16, 2010, during which representatives of Goldman Sachs discussed with the special committee the conversation they had with the co-bidders earlier that day at the direction of the special committee. Representatives of Goldman Sachs informed the special committee that the co-bidders had advised representatives of Goldman Sachs that they may be able to increase their $31.25 price proposal, but not by a material amount. The special committee then discussed a revised proposal submitted by the co-bidders after the co-bidders’ conversation with representatives of Goldman Sachs, which increased their offer by $0.75 to $32.00 per share, with an indication that, if the incremental move would be of interest to the special committee, the co-bidders may be able to offer up to $33.00 per share subject to receiving agreement from their financing sources. Representatives of Shearman & Sterling informed the special committee that the merger agreement with UHS had been finalized and reviewed with the special committee the resolution of the issues that had remained open as of that morning, and the special committee discussed the financial and other terms of the revised proposal submitted by UHS. After considering the relative value and certainty of closing provided by the revised proposals submitted by the co-bidders and by UHS, the special committee concluded that even if the co-bidders could submit a proposal at $33.00 per share, the UHS offer was more favorable to the Company and its stockholders, in light of, among other things, the fact that UHS was offering a higher purchase price and greater closing certainty, including because the Company’s sole remedy if the co-bidders failed to consummate the transaction would be to seek

payment of a specified reverse termination fee (as opposed to requiring them to consummate the transaction). The special committee determined that, if the co-bidders submitted a proposal at $33.00 per share, the special committee would seek an increase from UHS to the per share purchase price proposed by UHS. Representatives of Goldman Sachs reviewed with the special committee its financial analyses and rendered to the special committee Goldman Sachs’ oral opinion to the effect that, as of the date of the merger agreement and subject to the factors and assumptions described in the opinion, the per share merger consideration to be paid to the holders of shares of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders. The special committee unanimously agreed to recommend to the entire board of directors that it approve and declare advisable the merger and the merger agreement with UHS, and that the board of directors submit the merger agreement to the Company’s stockholders and resolve to recommend that the Company’s stockholders adopt the merger agreement.

 

Immediately following the special committee meeting, a telephonic meeting of the entire board of directors was convened at which members of senior management of the Company and representatives of Waller Lansden, Shearman & Sterling and Goldman Sachs were in attendance. At the meeting, the special committee recommended to the board of directors that it approve and declare advisable the merger and the merger agreement with UHS at $33.50 per share, and that the board of directors submit the merger agreement to the Company’s stockholders and resolve to recommend that the Company’s stockholders adopt the merger agreement. Representatives of Goldman Sachs confirmed to the board of directors that they had rendered to the special committee Goldman Sachs’ oral opinion to the effect that, as of the date of the merger agreement and subject to the factors and assumptions described in the Goldman Sachs opinion, the per share merger consideration to be paid to the holders of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders. During discussion of the UHS proposal and the recommendation of the special committee, representatives of Goldman Sachs received an e-mail from the co-bidders increasing the per share purchase price being offered by the co-bidders to $33.00. Mr. Jacobs then suggested that the special committee should consider the co-bidders’ revised proposal and request UHS to improve the per share purchase price it proposed to pay to acquire the Company. The board of directors determined that it would be appropriate to temporarily adjourn the meeting to permit the special committee to separately discuss the revised proposal from the co-bidders.

 

A telephonic meeting of the special committee was convened during which the special committee discussed the revised proposal submitted by the co-bidders. After discussion, the special committee concluded that while the co-bidders’ proposal continued to be less favorable in terms of price and closing certainty than the current proposal submitted by UHS, it would be in the stockholders’ best interests to request that UHS improve the financial terms of its offer in light of the revised proposal from the co-bidders. The special committee meeting was temporarily adjourned and Mr. Grant and representatives of Goldman Sachs requested UHS to improve the financial terms of its offer. UHS indicated that it would be willing to increase its proposed purchase price, but only if it could submit its revised proposal at a meeting of the board of directors at which none of the non-independent directors were present.

 

The special committee meeting was reconvened and the special committee discussed UHS’ response. After further discussion, the special committee unanimously agreed to recommend to the board of directors that UHS be permitted to submit its revised proposal at a meeting of the board of directors at which Messrs. Jacobs and Petrie, the non-independent directors, were not present. Representatives of Goldman Sachs then confirmed the opinion rendered to the special committee, which was subsequently confirmed in writing, to the effect that, as of the date of the merger agreement and subject to the factors and assumptions described in the opinion, the per share merger consideration to be paid to the holders of shares of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders. The full text of the written opinion of Goldman Sachs, dated May 16, 2010, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement.

 

When the meeting of the board of directors reconvened, the special committee informed the board of directors of its determination that the proposal from the co-bidders continued to be inferior to the proposal from UHS. The special committee also informed the board of directors that, in response to a request from the

special committee, UHS had indicated that it would improve its proposal if it were permitted to present its revised proposal at a meeting of the board of directors at which Messrs. Jacobs and Petrie, the non-independent directors, were not present. After discussion, Mr. Jacobs requested that the independent directors and the special committee’s advisors pursue the highest purchase price per share possible from UHS, and Messrs. Jacobs and Petrie, the members of senior management and representatives of Waller Lansden recused themselves from the meeting. Counsel to UHS joined the meeting and stated that UHS would increase its proposed per share purchase price by $0.25 to $33.75. After discussion, the Company’s board of directors (other than Messrs. Jacobs and Petrie, who had recused themselves) unanimously approved and deemed advisable the merger and the merger agreement with UHS, resolved to submit the merger agreement to the Company’s stockholders and to recommend that the Company’s stockholders adopt such merger agreement. Thereafter, the Company, UHS and Merger Sub executed the merger agreement.

 

Immediately prior to the end of the meeting of the board of directors at which Messrs. Jacobs and Petrie were not present, representatives of Goldman Sachs informed the independent directors that the co-bidders had just informed them that they would be willing to participate in a discussion to solicit best and final offers from all bidders. The independent directors discussed the communication from the co-bidders and the fact that if either UHS or the co-bidders failed to consummate a merger transaction with the Company, the Company’s sole remedy against the co-bidders would be to seek payment from them of the reverse termination fee, whereas the Company could pursue specific performance against UHS. As a result, the agreement with UHS provided greater closing certainty, and the special committee believed that it was unlikely that the co-bidders would amend the terms of their previous proposal to provide closing certainty comparable to UHS. The special committee discussed the fact that when it previously requested the co-bidders’ best, final proposal the co-bidders made their $31.25 per share proposal and informed representatives of Goldman Sachs that they could not increase their proposal by a material amount. In addition, the special committee discussed the fact that the communication from the co-bidders provided no certainty that the co-bidders would improve the financial and other terms of their offer to be comparable to the agreement reached with UHS. Thereafter, the independent directors directed representatives of Goldman Sachs to inform the co-bidders that the Company had already reached an agreement to sell the Company to a third party.

 

The Special Committee

 

The special committee, acting with the advice and assistance of its independent legal and financial advisors, evaluated and negotiated the merger proposal, including the terms and conditions of the merger agreement, with UHS and Merger Sub. The special committee unanimously determined that the merger is advisable and that the terms of the merger are fair to and in the best interests of the Company and its stockholders and recommended to the board of directors that it approve and declare advisable the merger and the merger agreement with UHS, and that the board of directors submit the merger agreement to the Company’s stockholders and resolve to recommend that the Company’s stockholders adopt the merger agreement.

 

In the course of reaching its determination, the special committee considered a number of substantive factors that the special committee believed supported its decision, including the following:

 

 

 

 

The special committee also considered a variety of risks and other potentially negative factors concerning the merger agreement and the merger, including the following:

 

 

The foregoing discussion summarizes the material factors considered by the special committee in its consideration of the merger. After considering these factors, the special committee concluded that the positive factors relating to the merger agreement and the merger outweighed the potential negative factors. In view of the wide variety of factors considered by the special committee, and the complexity of these matters, the special committee did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual members of the special committee may have assigned different weights to various factors. The special committee approved and recommends the merger agreement and the merger based upon the totality of the information it considered.

 

Our Board of Directors

 

Our board of directors, acting upon the unanimous recommendation of the special committee and without Messrs. Jacobs and Petrie present, at a meeting described above on May 16, 2010, (i) determined that the merger agreement and the transactions contemplated thereby, including the merger, are advisable, fair to and in the best interests of the Company and its stockholders, (ii) approved the merger agreement and the transactions contemplated thereby, including the merger, (iii) determined to submit the merger agreement to the Company’s stockholders for adoption and (iv) recommended the adoption by the Company’s stockholders of the merger agreement. In reaching these determinations, the board of directors (without the participation of Messrs. Jacobs and Petrie) considered (i) the fact that the special committee received an opinion rendered by Goldman Sachs that the per share merger consideration to be paid to the holders of shares of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement was fair from a financial point of view to such holders as of May 16, 2010 (the full text of the written opinion of Goldman Sachs, dated May 16, 2010, which sets forth the assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement) and the fact that representatives of Goldman Sachs discussed with the special committee the financial analyses performed by Goldman Sachs in connection with rendering such opinion, and (ii) the unanimous recommendation and analysis of the special committee, as described above, and adopted such recommendation and analysis in reaching its determinations.

 

The foregoing discussion summarizes the material factors considered by the board of directors in its consideration of the merger. In view of the wide variety of factors considered by our board of directors, and the complexity of these matters, our board of directors did not find it practicable to quantify or otherwise assign relative weights to the foregoing factors. In addition, individual members of the board of directors may have assigned different weights to various factors. The board of directors by unanimous action of the independent directors approved and recommends the merger agreement and the merger based upon the totality of the information it considered.

 

Our board of directors recommends that you vote “FOR” the adoption of the merger agreement.

 

Goldman Sachs rendered its oral opinion to the special committee of the board of directors of the Company (subsequently confirmed in writing) to the effect that, as of May 16, 2010 and based upon and subject to the factors and assumptions set forth in its written opinion, the per share merger consideration to be paid to the holders of shares of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement was fair from a financial point of view to those holders.

 

The full text of the written opinion of Goldman Sachs, dated May 16, 2010, which sets forth assumptions made, procedures followed, matters considered and limitations on the review undertaken in connection with the opinion, is attached as Annex B to this proxy statement. Goldman Sachs provided its opinion for the information and assistance of the special committee in connection with its consideration of the transaction contemplated by the merger agreement. The Goldman Sachs opinion does not constitute a recommendation as to how any stockholder of the Company should vote with respect to the merger or any other matter.

In connection with rendering the opinion described above and performing its related financial analyses, Goldman Sachs reviewed, among other things:

 

 

Goldman Sachs also held discussions with members of the senior management of the Company regarding their assessment of the past and current business operations, financial condition and future prospects of the Company; reviewed the reported price and trading activity for the shares of the Common Stock; compared certain financial and stock market information for the Company with similar information for certain other companies with publicly traded securities; reviewed the financial terms of certain recent business combinations in the behavioral health industry specifically and in other industries generally; and performed such other studies and analyses, and considered such other factors, as it deemed appropriate.

 

For purposes of rendering its opinion described above, Goldman Sachs relied upon and assumed, without assuming any responsibility for independent verification, the accuracy and completeness of all of the financial, legal, regulatory, tax, accounting and other information provided to, discussed with or reviewed by it, and Goldman Sachs did not assume any responsibility for any such information. In that regard, Goldman Sachs assumed with the consent of the special committee that the internal operating forecasts for the Company prepared by its management, and approved for Goldman Sachs’ use by the special committee, were reasonably prepared on a basis reflecting the best currently available estimates and judgments of the management of the Company. Goldman Sachs did not make an independent evaluation or appraisal of the assets and liabilities (including any contingent, derivative or other off-balance-sheet assets and liabilities) of the Company or any of its subsidiaries, nor was any evaluation or appraisal of the assets or liabilities of the Company or any of its subsidiaries furnished to Goldman Sachs. Goldman Sachs assumed that all governmental, regulatory or other consents and approvals necessary for the consummation of the merger will be obtained without any adverse effect on the expected benefits of the merger in any way meaningful to its analysis. Goldman Sachs also assumed that the merger will be consummated on the terms set forth in the merger agreement, without the waiver or modification of any term or condition the effect of which would be in any way meaningful to its analysis.

 

Goldman Sachs’ opinion did not address the underlying business decision of the Company to engage in the merger, or the relative merits of the merger compared to any strategic alternatives that may be available to the Company; nor did it address any legal, regulatory, tax or accounting matters. Goldman Sachs’ opinion addresses only the fairness from a financial point of view, as of May 16, 2010, of the $33.75 per share in cash to be paid to the holders of the shares of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement.

 

Goldman Sachs’ opinion did not express any view on, and did not address, any other term or aspect of the merger agreement or the merger or any term or aspect of any other agreement or instrument contemplated by the merger agreement or entered into or amended in connection with the merger, including, without limitation, the fairness of the merger to, or any consideration received in connection therewith by, the holders of any other class of securities, creditors, or other constituencies of the Company; nor as to the fairness of the amount or nature of any compensation to be paid or payable to any of the officers, directors or employees of the Company, or class of such persons, in connection with the merger, whether relative to the $33.75 per share in cash to be paid to the holders of shares of Common Stock (other than UHS and its affiliates) pursuant to

the merger agreement or otherwise. Goldman Sachs did not express any opinion as to the impact of the merger on the solvency or viability of the Company or UHS or the ability of the Company or UHS to pay its obligations when they come due. Goldman Sachs’ opinion was necessarily based on economic, monetary, market and other conditions as in effect on, and the information made available to it as of, the date of the opinion, and Goldman Sachs assumed no responsibility for updating, revising or reaffirming its opinion based on circumstances, developments or events occurring after the date of its opinion. Goldman Sachs’ opinion was approved by a fairness committee of Goldman Sachs.

 

The following is a summary of the material financial analyses performed by Goldman Sachs in connection with rendering the opinion described above. The following summary, however, does not purport to be a complete description of the financial analyses performed by Goldman Sachs, nor does the order of analyses described represent relative importance or weight given to those analyses by Goldman Sachs. Some of the summaries of the financial analyses include information presented in tabular format. The tables must be read together with the full text of each summary and are alone not a complete description of Goldman Sachs’ financial analyses. Except as otherwise noted, the following quantitative information, to the extent that it is based on market data, is based on market data as it existed on or before May 14, 2010, and is not necessarily indicative of current market conditions.

 

Analysis of Implied Premia and Multiples.   Goldman Sachs calculated that the $33.75 per share in cash to be paid to the stockholders of the Company pursuant to the merger agreement represented implied premia of:

 

 

Goldman Sachs also calculated the following implied multiples for the Company:

 

 

Goldman Sachs calculated these multiples using enterprise values for the Company based upon and using share prices for the Company equal to:

 

 

The enterprise values for the Company used by Goldman Sachs were calculated by multiplying each of the foregoing share prices by the number of fully diluted outstanding shares of the Company, adjusted to reflect the special committee’s capital structure assumptions, and adding to the result the Company management’s estimate of the Company’s net debt (total debt less cash and cash equivalents) as of June 30, 2010, adjusted to reflect the special committee’s capital structure assumptions, and the Company management’s estimate of the Company’s minority interest amount as of June 30, 2010. The special committee’s capital structure assumptions reflected an increase in the Company’s total indebtedness of approximately $500 million and the repurchase by the Company of approximately 30% of its outstanding shares. For the foregoing multiple calculations, Goldman Sachs utilized the EBITDA results for the Company for the LTM period adjusted to reflect the special committee’s capital structure assumptions and estimates for 2010 and 2011 derived by applying the special committee’s capital structure assumptions to both Company management’s operating forecasts and estimates derived from the median estimates for the Company most recently published by Institutional Broker’s Estimate System (“IBES”) as of May 14, 2010.

Goldman Sachs compared the multiples it calculated for the Company to the median of similar multiples it calculated for the following publicly traded corporations in the health care services industry (the “selected health care services companies”):

 

 

Although none of the selected health care services companies is directly comparable to the Company, these companies were chosen because they are publicly traded companies in the health care services industry with operations and equity market values that for purposes of analysis may be considered similar to the current operations and equity market value of the Company.

 

For purposes of calculating multiples for the selected health care services companies, Goldman Sachs utilized an enterprise value for each company calculated by multiplying the number of fully diluted outstanding shares of that company derived from the company’s most recent public filings with the SEC by that company’s closing share price on May 14, 2010, and adding to that result the company’s net debt (total debt less cash and cash equivalents) as reflected in its most recent public filings with the SEC. For purposes of its calculations with respect to the selected health care services companies, Goldman Sachs utilized each company’s EBITDA results for the LTM period derived from its most recent public filings with the SEC and estimates for each company derived from the median estimates for that company most recently published by IBES as of May 14, 2010.

 

The following table shows the multiples Goldman Sachs calculated for the Company and the median of similar multiples it calculated for the selected health care services companies:

 

 

Illustrative Present Value of Future Share Prices.   Goldman Sachs performed an illustrative analysis of the implied present value of the future price per share of the Common Stock. This analysis is intended to provide an indication of implied present values of theoretical future share prices of the Common Stock. For purposes of this analysis, Goldman Sachs first derived theoretical future share prices for the Common Stock for each of the years from 2010 through 2015 by applying illustrative forward price per share as multiples (“P/E multiples”) of estimated EPS of 9.0x and 13.0x to EPS estimates derived by applying the special committee’s capital structure assumptions to the Company management’s operating forecasts for each of those years. The illustrative forward P/E multiples utilized for purposes of this analysis were selected by Goldman Sachs based on its professional judgment and experience taking into account current and historical trading data and current P/E multiples for the Company and the selected health care services companies. By applying illustrative discount rates of 10.5% and 12.0% to the theoretical future share prices, Goldman Sachs derived implied present values per share of Common Stock ranging from $19.48 to $31.42.

 

For purposes of its analysis, Goldman Sachs applied discount rates of 10.5% and 12.0% derived by utilizing a cost of equity capital analysis based on the capital asset pricing model and taking into account certain financial metrics, including beta, for the Company, as well as certain financial metrics for the United States equity markets generally. The applied discount rates of 10.5% and 12.0% were based upon Goldman Sachs’ judgment of an illustrative range based upon the above analysis.

 

Illustrative Discounted Cash Flow Analysis.   Goldman Sachs performed an illustrative discounted cash flow analysis utilizing estimates of the Company’s unlevered free cash flow for the period from January 1, 2010 through December 31, 2015 derived from the Company management’s operating forecasts for those years to determine illustrative ranges of implied present values per share of Common Stock as of April 1, 2010. For purposes of this analysis, unlevered free cash flow was derived by taking the Company management’s estimate of EBITDA, subtracting taxes (calculated by multiplying the tax rate contained in the Company management’s forecasts by the Company management’s estimate of earnings before interest and taxes), adding the Company management’s estimate of the increase in deferred tax liability, subtracting its estimate of capital expenditures and subtracting its estimate of the amount of increase in net working capital. In addition, stock based compensation expense was treated as a cash expense for purposes of determining unlevered free cash flow.

 

Using discount rates ranging from 7.5% to 9.0%, Goldman Sachs derived illustrative ranges of implied present values per share of the Common Stock by discounting to present value (a) estimates of the Company’s unlevered free cash flows for the period from January 1, 2010 through December 31, 2015 and (b) illustrative terminal values for the Company as of December 31, 2015 derived by applying perpetuity growth rates ranging from 2.0% to 3.0% to estimates of the Company’s unlevered free cash flows for 2015.

 

Based on the forgoing calculations, Goldman Sachs derived an illustrative range of implied present values of $22.67 to $43.18 per share of the Common Stock.

 

For purposes of its analysis, Goldman Sachs applied a range of discount rates from 7.5% to 9.0%, derived by utilizing a weighted average cost of capital analysis based on the capital asset pricing model and taking into account certain financial metrics, including beta, for the Company, as well as certain financial metrics for the United States equity markets generally. The applied discount rates ranging from 7.5% to 9.0% were based upon Goldman Sachs’ judgment of an illustrative range based upon the above analysis.

 

Selected Companies Analysis.   Goldman Sachs reviewed and compared certain public financial information for the Company to corresponding financial information, ratios and public market multiples for the selected health care services companies. Although none of the selected health care services companies are directly comparable to the Company, the selected health care services companies were chosen by Goldman Sachs because they are publicly traded companies with operations that for purposes of analysis may be considered similar to certain operations of the Company.

 

The Company operates inpatient behavioral health care facilities that offer a wide range of inpatient behavioral health care services through a combination of acute inpatient behavioral facilities and residential treatment centers offering longer term treatment programs primarily for children and adolescents with chronic behavioral health problems. The selected health care companies chosen by Goldman Sachs included

companies that operate acute care hospitals as well as companies that provide post-acute care services or operate other alternative site treatment facilities.

 

Goldman Sachs compared the following multiples it calculated for the Company based on the closing price per share on May 14, 2010, the last trading day prior to the announcement of the merger agreement, to similar multiples it calculated for the selected health care services companies:

 

 

All of these multiples for the Company and the selected health care services companies were calculated using estimates for each company derived from the median estimates for that company most recently published by IBES as of May 14, 2010, without any adjustment to reflect the special committee’s capital structure assumptions.

 

The results of these calculations are summarized as follows:

 

 

Selected Precedent Transactions Analysis.   Goldman Sachs analyzed certain publicly available information relating to 13 selected transactions that involved companies in the health care services industry that were announced since 2004 and involved aggregate enterprise value of between $430 million and $33.1 billion.

 

While none of the selected transactions is directly comparable to the transaction between the Company and UHS, the aggregate equity consideration paid in the selected transactions and the companies that participated in the selected transactions are such that, for purposes of analysis, the transactions may be considered similar to the transaction between the Company and UHS.

 

Goldman Sachs calculated and reviewed the enterprise value of the target company as a multiple of EBITDA for the four-quarter period prior to the announcement of the applicable transaction (“LTM EBITDA”). For purposes of this analysis, the target companies’ enterprise values were calculated by multiplying the announced per-share transaction price by the number of that company’s fully diluted outstanding shares as disclosed in the company’s most recent filings with the SEC prior to the announcement of the applicable transaction and adding to that result the company’s net debt as disclosed in the company’s most recent public filings with the SEC prior to the announcement of the applicable transaction.

 

The selected transactions, the multiples calculated for each transaction and the mean and median multiples calculated for all of the selected transactions are as follows:

 

 

The multiples reflected in the above table were calculated by Goldman Sachs to allow for a comparison with the multiples calculated by Goldman Sachs and described under “— Analysis of Implied Premia and Multiples .”

 

General.   The preparation of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth above, without considering the analyses as a whole, could create an incomplete view of the processes underlying Goldman Sachs’ opinion. In arriving at its fairness determination, Goldman Sachs considered the results of all of its analyses and did not attribute any particular weight to any factor or analysis considered by it. Rather, Goldman Sachs made its determination as to fairness on the basis of its experience and professional judgment after considering the results of all of its analyses. No company or transaction used in the above analyses as a comparison is directly comparable to the Company or the contemplated merger.

 

Goldman Sachs prepared these analyses for purposes of providing its opinion to the special committee that, as of May 16, 2010 and based upon and subject to the factors and assumptions set forth therein, the $33.75 per share in cash to be paid to the holders of shares of Common Stock (other than UHS and its affiliates) pursuant to the merger agreement was fair from a financial point of view to those holders. These analyses do not purport to be appraisals nor do they necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by these analyses.

Because these analyses inherently are subject to uncertainty, being based upon numerous factors or events beyond the control of the parties or their respective advisors, none of the Company, UHS, Goldman Sachs or any other person assumes responsibility if future results are materially different from those forecast.

 

The merger consideration of $33.75 per share in cash was determined through arm’s-length negotiations between the special committee and UHS and, consistent with the recommendation of the special committee, was approved by the board of directors of the Company. Goldman Sachs provided advice to the special committee during these negotiations. Goldman Sachs did not, however, recommend any specific amount of consideration to the Company, the special committee or the board of directors or that any specific amount of consideration constituted the only appropriate consideration for the merger.

 

As described above, Goldman Sachs’ opinion to the special committee was one of many factors taken into consideration by the special committee in making its determination to recommend that the board of directors approve the merger agreement and by the board of directors in making its determination to approve the merger agreement. The foregoing summary does not purport to be a complete description of the analyses performed by Goldman Sachs in connection with the fairness opinion and is qualified in its entirety by reference to the written opinion of Goldman Sachs attached as Annex B to this proxy statement.

 

Goldman Sachs and its affiliates are engaged in investment banking and financial advisory services, commercial banking, securities trading, investment management, principal investment, financial planning, benefits counseling, risk management, hedging, financing, brokerage activities and other financial and non-financial activities and services for various persons and entities. In the ordinary course of these activities and services, Goldman Sachs and its affiliates may at any time make or hold long or short positions and investments, as well as actively trade or effect transactions, in the equity, debt and other securities (or related derivative securities) and financial instruments (including bank loans and other obligations) of third parties, the Company, UHS or any of their respective affiliates or any currency or commodity that may be involved in the merger for their own account and for the accounts of their customers. Goldman Sachs acted as financial advisor to the special committee in connection with, and participated in certain of the negotiations leading to, the merger. Goldman Sachs has not otherwise been engaged to provide investment banking or other financial services to the Company during the two-year period ending May 16, 2010. Goldman Sachs has provided certain investment banking and other financial services to UHS and its affiliates from time to time for which the investment banking division of Goldman Sachs has received, and may receive, compensation, including having acted as co-manager with respect to UHS’ offering of 7.125% Notes due 2016 (aggregate principal amount of $150,000,000) in May 2008. Goldman Sachs also may provide investment banking and other financial services to the Company and UHS and their respective affiliates in the future for which the investment banking division of Goldman Sachs may receive compensation.

 

The special committee selected Goldman Sachs as its financial advisor because it is an internationally recognized investment banking firm that has substantial experience in transactions similar to the merger. Pursuant to a letter agreement, dated March 8, 2010, the special committee engaged Goldman Sachs to act as its financial advisor in connection with the contemplated merger. Pursuant to the terms of this engagement letter, the Company has agreed to pay Goldman Sachs a fee of approximately $20 million for its services in connection with the transaction, $3.25 million of which became due prior to the consummation of the transaction. In addition, the Company has agreed to reimburse Goldman Sachs for its expenses, including attorneys’ fees and disbursements, and to indemnify Goldman Sachs and related persons against various liabilities, including certain liabilities under the federal securities laws.

 

The Company does not as a matter of course prepare or make public long-term projections as to future revenues, earnings or other results due to, among other reasons, the uncertainty of the underlying assumptions and estimates. In particular, the yearly fluctuations in federal and state budgets directly impact our revenue since the majority of our revenue comes from the Medicare and Medicaid programs and various state agencies, making it difficult to accurately forecast our results. The Company has followed this practice since its inception. At the request of the special committee, however, the Company’s management developed a five-

year business plan for the Company (the “financial projections”). In developing the financial projections, the Company’s management discussed the financial projections with the special committee and Goldman Sachs. The financial projections were subsequently disclosed to UHS and other parties that expressed an interest in pursuing a potential transaction involving the sale of the Company. None of the Company, UHS or their respective affiliates assumes any responsibility for the accuracy of the financial projections. The financial projections set forth below are included in this proxy statement solely because this information was provided to Goldman Sachs and to UHS (and other interested bidders), and not to influence your decision as to whether to vote for the proposal to adopt the merger agreement. The inclusion of the financial projections in this proxy statement should not be regarded as an indication that the Company, the board of directors, the special committee, Goldman Sachs, UHS or any other recipient of the financial projections considered, or now considers, them to be material or to be reliable predictions of future results, and they should not be relied upon as such.

 

At the time the financial projections set forth below were prepared, the projections represented the best estimates and judgments of the Company’s management concerning the future financial performance of the Company. While the financial projections were prepared in good faith, they are forward-looking statements that are subjective in many respects, and reflect numerous judgments, estimates and assumptions that are inherently uncertain, many of which are beyond the Company’s control, including estimates and assumptions regarding general economic conditions, federal and state budgets, unemployment levels and payrolls and the impact of such factors on the Company’s business and its behavioral health facilities. Important factors that may affect actual results and cause the financial projections not to be accurate include, but are not limited to, employment trends, risks and uncertainties relating to the Company’s business (including its ability to achieve strategic goals, objectives and targets over the applicable periods), industry performance, government regulation, the rate at which the Company is reimbursed by the federal and state governments and other third parties for its services, general business and economic conditions, competition and other factors described under the captions “Risk Factors” and “Forward-Looking Statements” in our most recent annual and quarterly reports filed with the SEC on Forms 10-K and 10-Q, respectively, and under “Special Note Regarding Forward-Looking Statements” beginning on page 11 of this proxy statement. In addition, the financial projections do not reflect any events that could affect the Company’s prospects, including changes in general business or economic conditions, the passage of health care reform bills by the U.S. Congress or any other transaction or event that has occurred since, or that may occur and that was not anticipated at, the time the financial projections were prepared. The financial projections also cover multiple years and by their nature become subject to greater uncertainty with each successive year. There can be no assurance that the financial projections are or will be accurate or that the Company’s future financial results will not vary, even materially, from the financial projections. None of the Company, UHS or their respective affiliates, representatives or agents undertakes any obligation to update or otherwise to revise the financial projections to reflect circumstances existing or arising after the date such financial projections were generated or to reflect the occurrence of future events, even if any or all of the underlying estimates and assumptions are shown to be in error or to have changed.

 

Set forth below is a summary of the financial projections which were provided to UHS (and other interested bidders) in their respective evaluations of a possible transaction with the Company.

 

 

 

 

As described in the section entitled “Opinion of Goldman, Sachs & Co. as Financial Advisor to the Special Committee” beginning on page 27, at the direction of the special committee, Goldman Sachs performed its financial analyses in connection with the rendering of its fairness opinion to the special committee using the above summary financial projections and certain capital structure assumptions provided by the special committee. The special committee’s capital structure assumptions reflected an increase in the Company’s total indebtedness of approximately $500 million and the repurchase by the Company of approximately 30% of its outstanding shares, which resulted in diluted EPS amounts for the years 2010E-2015E of $2.29, $2.63, $2.86, $3.09, $3.41 and $3.98, respectively, which amounts were used by Goldman Sachs to perform its financial analyses in connection with the rendering of its fairness opinion to the special committee. In addition to the financial projections above, the Company’s unlevered free cash flow was estimated by taking the Company management’s estimate of EBITDA, and then (i) subtracting taxes (calculated by multiplying the tax rate contained in the Company management’s forecasts by the Company management’s estimate of earnings before interest and taxes), (ii) adding the Company management’s estimated increase in deferred tax liability of $4 million to $5 million annually from 2010 to 2015, (iii) subtracting its estimate of capital expenditures ranging from $95 million for 2010 to $119 million for 2015 and (iv) subtracting its estimated increase in net working capital of $8 million to $11 million annually from 2010 to 2015.

 

Each of Adjusted EBITDA and EBITDA is not a measure recognized by U.S. generally accepted accounting principles (“GAAP”). Non-GAAP financial measures are not intended to be substitutes for any GAAP financial measure and, as calculated, may not be comparable to similarly titled measures of other companies.

 

The financial projections should be read together with the historical financial statements of the Company, which have been filed with the SEC. See “Where You Can Find More Information” on page 75. The financial projections were not prepared with a view toward public disclosure and, accordingly, do not comply with published guidelines of the SEC, the Public Company Accounting and Oversight Board or the American Institute of Certified Public Accountants for preparation and presentation of prospective financial information. Neither our independent registered public accounting firm nor any other independent accountant has compiled, examined or performed any procedures with respect to the prospective financial information contained in the financial projections, nor have they expressed any opinion or given any form of assurance on the financial projections or their achievability, and accordingly assume no responsibility for them or their achievability.

 

There can be no assurance that any financial projections will be, or are likely to be, realized, or that the assumptions on which they are based will prove to be, or are likely to be, correct. None of the Company, UHS or their respective affiliates, advisors, officers, directors or representatives has made or makes any representation to any stockholders or any other person regarding the ultimate performance of the Company compared to the financial projections set forth above. The Company has not made any representation to UHS, in the merger agreement or otherwise, concerning the financial projections. You are cautioned not to place undue reliance on this information in making a decision as to whether to vote for the proposal to adopt the merger agreement.

 

If the merger agreement is adopted by the Company’s stockholders and the other conditions to the closing of the merger are either satisfied or waived, Merger Sub will be merged with and into the Company, with the Company being the surviving corporation and becoming a wholly-owned subsidiary of UHS.

 

Upon the consummation of the merger, each share of Common Stock issued and outstanding immediately prior to the effective time of the merger (other than shares held in the treasury of the Company, shares owned by UHS or Merger Sub immediately prior to the effective time of the merger or shares held by stockholders who are entitled to, and who properly exercise, appraisal rights under Delaware law) will be converted into the right to receive $33.75 in cash, without interest and less any applicable withholding taxes. Upon the consummation of the merger, all outstanding options to acquire Common Stock will become fully vested and exercisable (to the extent not already vested and exercisable) and will be cancelled and converted into the right to receive a cash payment equal to the number of shares of Common Stock underlying the option multiplied by the amount (if any) by which $33.75 exceeds the applicable option exercise price, without interest and less any applicable withholding taxes. Upon the consummation of the merger, each outstanding

share of restricted Common Stock will become fully vested and transferable and cancelled and converted into the right to receive $33.75 in cash, without interest and less any applicable withholding taxes.

 

The Common Stock currently is registered under the Exchange Act and is traded on the NASDAQ under the symbol “PSYS.” As a result of the merger, the Company will be a wholly-owned subsidiary of UHS, and there will be no public market for its common stock. After the merger, the Common Stock will cease to be traded on the NASDAQ, and price quotations with respect to sales of shares of common stock in the public market no longer will be available. In addition, registration of the Common Stock under the Exchange Act will be terminated.

 

At the effective time of the merger, the directors of Merger Sub will become the directors of the surviving corporation, and the current officers of the Company will become the initial officers of the surviving corporation. The amended and restated certificate of incorporation of the Company will be amended and restated as provided in the merger agreement. The by-laws of the Company will be amended and restated as provided in the merger agreement.

 

If the merger agreement is not adopted by our stockholders or if the merger is not completed for any other reason, stockholders will not receive any payment for their shares in connection with the merger. Instead, we will remain an independent public company and the Common Stock will continue to be listed and traded on the NASDAQ. In addition, if the merger is not completed, we expect that management will operate the business in a manner similar to that in which it is being operated today and that our stockholders will continue to be subject to the same risks and opportunities as they currently are, including, among other things, in connection with the nature of the behavioral health care industry on which our business largely depends, and general industry, economic, regulatory and market conditions. Accordingly, if the merger is not consummated, there can be no assurance as to the effect of these risks and opportunities on the future value of your shares of Common Stock. From time to time, our board of directors (acting through the special committee or otherwise) will evaluate and review, among other things, the business, operations, properties, dividend policy and capitalization of the Company and make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value. If the merger agreement is not adopted by our stockholders or if the merger is not consummated for any other reason, there can be no assurance that any other transaction acceptable to us will be offered, or that the business, prospects or results of operations of the Company will not be adversely impacted.

 

If the merger is completed, the Common Stock will be delisted from the NASDAQ and deregistered under the Exchange Act. We will no longer file periodic reports with the SEC on account of the Common Stock.

 

Under the HSR Act and related rules, the merger cannot be completed until the Company and UHS file a notification and report form with the FTC and the Antitrust Division of the DOJ and the applicable waiting period has expired or been terminated. The Company and UHS filed their respective notification and report forms under the HSR Act with the FTC and the Antitrust Division of the DOJ on May 28, 2010. The initial HSR Act 30-day waiting period was set to expire on June 28, 2010. After discussions with the FTC, UHS withdrew its notification and report form effective as of June 25, 2010, and refiled on June 28, 2010. Refiling restarted the initial HSR Act 30-day waiting period. The Company and UHS each received a Second Request from the FTC on July 28, 2010. The Second Request has the effect of extending the waiting period for an additional 30 calendar days from the date of both of the parties’ substantial compliance with the Second Request, unless the waiting period is terminated sooner by the FTC or voluntarily extended by the parties. At any time before or after consummation of the merger, the FTC could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of the Company or UHS. At any time before or after the

consummation of the merger, any state could take such action under the antitrust laws as it deems necessary or desirable in the public interest. Such action could include seeking to enjoin the consummation of the merger or seeking divestiture of substantial assets of the Company or UHS. Private parties also may seek to take legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the merger on antitrust grounds will not be made or, if such a challenge is made, that it would not be successful.

 

It is possible that the FTC may seek additional regulatory concessions or impose additional conditions or states or private parties may commence litigation to prevent the completion of the merger. There can be no assurance that:

 

 

The merger is also subject to review under state antitrust laws and could be the subject of challenges by states or private parties under the antitrust laws. The Attorneys General of three states are investigating the merger in tandem with the FTC.

 

Though not a condition to the consummation of the merger, United States federal and state laws and regulations may require that the Company or UHS obtain approvals, file new licenses and/or permit applications with, and/or provide notice to, applicable governmental authorities in connection with the merger.

 

See “The Merger Agreement — Efforts to Complete the Merger” for information on the obligations of the parties under the merger agreement to obtain the regulatory approvals required to consummate the merger.

 

UHS estimates that the total amount of funds necessary to complete the proposed merger and the related transactions is approximately $3.63 billion, which includes approximately $1.98 billion to be paid to the Company’s stockholders, with the remaining funds to be used to refinance certain existing indebtedness, and to pay customary fees and expenses in connection with the proposed merger, the financing arrangements and the related transactions.

 

The merger agreement does not contain any condition relating to the receipt of financing by UHS. Funding of the debt financing is subject to the satisfaction of the conditions set forth in the commitment letter pursuant to which the financing will be provided. The debt financing will provide the necessary financing for the merger, including the payment of related transaction costs, charges, fees and expenses. On May 16, 2010, UHS entered into a financing commitment letter with JPMorgan, Deutsche Bank Securities Inc., J.P. Morgan Securities Inc. and Deutsche Bank, pursuant to which JPMorgan and Deutsche Bank have, taken together, committed to provide the financing necessary to consummate the merger and to refinance certain existing indebtedness. Since May 16, 2010, JPMorgan and Deutsche Bank have assigned, and certain other financial institutions approved by UHS have assumed, a portion of the commitments originally provided by JPMorgan and Deutsche Bank. The financing commitment letter provides for senior secured credit facilities in an aggregate amount of $4.15 billion, comprised of (i) a $500 million “tranche A” term loan facility, (ii) a $2.85 billion “tranche B” term loan facility and (iii) an $800 million revolving credit facility. The amount of the “tranche B” term loan facility will be reduced by an amount equal to the gross cash proceeds (if any) obtained by UHS prior to the closing of the merger from the issuance and sale of senior unsecured notes.

 

In considering the recommendation of the board of directors, the Company’s stockholders should be aware that certain of the Company’s directors and executive officers have interests in the transaction that are different from, or in addition to, the interests of the Company’s stockholders generally. The special committee and our board of directors were aware of these potential conflicts of interest and considered them, among other matters, in reaching their decisions to approve the merger agreement and to recommend that our stockholders vote in favor of adopting the merger agreement.

The Company’s Equity Compensation Plans

 

Upon the consummation of the merger, all of our equity compensation awards (including awards held by our executive officers and directors) will be subject to the following treatment:

 

 

See “The Merger Agreement — Treatment of Options and Other Awards” and “The Merger Agreement — Employee Benefits” for a more complete discussion of the treatment of these plans and awards.

 

All of the preceding cash payments will be without interest and subject to applicable withholding taxes.

 

In the second quarter of 2009, the compensation committee of the Company’s board of directors (the “compensation committee”) retained Pearl Meyer & Partners (“PM&P”) to review the compensation of the Company’s executive officers compared to companies in its peer group. PM&P issued two reports in the third quarter of 2009 evaluating the compensation of Mr. Jacobs and the Company’s other executive officers, respectively. The reports indicated that the amount of annual long-term equity awards historically granted to the Company’s executive officers was generally low relative to its peer group. After consideration of various factors, including these reports, the compensation committee determined to grant the executive officers equity awards at a more competitive level.

 

As part of its determination to grant annual long-term equity awards at a more competitive level, and based on the PM&P reports and a review of the equity compensation programs of the Company’s peer group, on December 18, 2009, the compensation committee adopted the Amended 2009 Long-Term Equity Compensation Plan (the “2009 Equity Compensation Plan”) and adopted the 2010 Long-Term Equity Compensation Plan (the “2010 Equity Compensation Plan”) for eligible employees, including the Company’s executive officers. The compensation committee took these actions to more closely align the Company’s long-term incentive compensation with those of its peers. According to PM&P, the Company’s historical compensation strategy was unique in that it required that financial performance goals for a fiscal year be met in advance of equity awards being granted for such year. By contrast, the vesting of equity awards granted by peer companies may be subject to the achievement of performance goals, but the number of awards that might be granted usually are not conditioned upon the achievement of performance goals. However, the Company’s equity compensation plans historically set financial performance goals to determine whether and, if so, how many equity awards will be available for grant to employees, including executive officers, for a particular year. The compensation committee would then determine the number and allocation of equity awards for a particular year only after the end of the year based on the Company’s financial results relative to the performance goals for that year.

 

2009 Equity Compensation Plan.   The 2009 Equity Compensation Plan revised the criteria set forth in the 2009 Long-Term Equity Compensation Plan adopted by the compensation committee on March 2, 2009, and provided that the compensation committee would grant stock options to purchase up to 1.5% of the issued and outstanding shares of Common Stock as of the grant date if the Company’s 2009 adjusted earnings per share (“EPS”) was equal to or greater than $2.11. Additional equity awards could be granted if the Company’s adjusted EPS for 2009 exceeded the Company’s adjusted EPS for 2008 by at least 14%. At the discretion of the compensation committee, restricted stock could be issued in lieu of stock options.

 

Because equity awards made under the Company’s equity compensation plans historically have been based on the prior year’s performance, grants typically have been made in February shortly after the completion of the Company’s audited financial statements. On February 11, 2010, the compensation committee met to determine whether and the extent to which the performance goals set forth in the 2009 Equity Compensation Plan had been achieved. Based on the Company’s 2009 financial performance in relation

to the performance goals set forth in the 2009 Equity Compensation Plan, the compensation committee could have issued options to purchase 1,405,640 shares of Common Stock. For purposes of the 2009 Equity Compensation Plan, the compensation committee determined that each share of restricted Common Stock was equivalent to an option to purchase 2.5 shares of Common Stock, which determination was based on information provided by PM&P and guidelines established by RiskMetrics Group. Pursuant to the 2009 Equity Compensation Plan, on February 11, 2010, the compensation committee approved the grant of a total of 560,000 shares of restricted Common Stock, the equivalent of 1,400,000 options. At the time these grants were approved, discussions concerning a potential transaction were ongoing with Potential Purchaser One, which had executed a confidentiality agreement and commenced due diligence. The restricted Common Stock awards were effective on February 26, 2010 and vest 25% per year over four years. Of the shares of restricted stock granted, 458,000 shares were granted to the Company’s executive officers.

 

2010 Equity Compensation Plan.   For 2010, the compensation committee transitioned to an equity compensation plan in which the maximum equity awards available for grant are set at the beginning of the year and equity grants are made during the year for which the plan was adopted, which methodology is more comparable to peer company equity plans. Pursuant to the 2010 Equity Compensation Plan, on February 11, 2010, the compensation committee had the discretion to grant stock options to purchase up to 1.5% of the Company’s issued and outstanding shares of Common Stock as of the grant date, which amounted to options to purchase a maximum of 843,000 shares. On February 11, 2010, pursuant to the terms of the 2010 Equity Compensation Plan, the compensation committee approved the grant of options to purchase a total of 816,750 shares of Common Stock, of which options to purchase 621,000 shares of Common Stock were granted to the Company’s executive officers. At the time these grants were approved, discussions concerning a potential transaction were ongoing with Potential Purchaser One, which had executed a confidentiality agreement and commenced due diligence. The options to purchase Common Stock were effective on February 26, 2010, and vest and become exercisable in equal installments over four years. The exercise price of the stock options is $21.00 per share, which was the closing price of the Common Stock on the NASDAQ on February 25, 2010. Consistent with prior years, the exercise price of annual option grants was the closing price of the Common Stock on the NASDAQ on the second trading day after the issuance of the Company’s fourth quarter earnings release and the effective date of the grants was the first day thereafter.

 

The compensation committee also had the discretion to grant shares of restricted Common Stock in an amount up to 1.5% of the Company’s issued and outstanding shares of Common Stock as of the grant date divided by 2.5 (the exchange ratio for restricted stock determined based on information provided by PM&P and guidelines established by RiskMetrics Group). This amounted to a maximum of 337,356 shares of restricted Common Stock. On February 11, 2010, pursuant to the terms of the 2010 Equity Compensation Plan, the compensation committee approved the grant of a total of 336,000 shares of restricted Common Stock, of which 230,000 shares were granted to the Company’s executive officers. These restricted stock grants were effective on February 26, 2010, and vest 25% per year over four years; provided, however, that all shares of restricted stock will be forfeited if a certain financial performance goal is not met in 2010.

 

Prior Equity Awards.   The table below sets forth the equity awards granted to the Company’s executive officers during 2010, 2009 and 2008.

 

 

 

 

 

Outstanding Equity Awards.   The table below sets forth, for each person who has been a director or executive officer of the Company at any time since January 1, 2009, the aggregate number of shares of Common Stock subject to outstanding vested and unvested options as of August 24, 2010, the aggregate number of shares of Common Stock subject to outstanding unvested options that will become fully vested in connection with the merger, the weighted average exercise price per share and the value of such unvested options, and the weighted average exercise price per share and value of vested and unvested options (in all cases before applicable withholding taxes). The information assumes that all such options remain outstanding on the closing date of the merger.

 

 

 

 

The following table identifies, for each person who has been a director or executive officer of the Company at any time since January 1, 2009, the aggregate number of shares of restricted stock as of August 24, 2010 and the value of such restricted stock that will become fully vested and transferable in connection with the merger. The information assumes that all such shares of restricted stock remain outstanding on the closing date of the merger.

 

 

 

 

Change in Control Severance Agreements and Potential Severance Payments

 

Each of our current executive officers (other than Mr. Jacobs) is party to a change in control severance agreement (“CIC Agreement”) with the Company. During March and April 2010, the compensation committee, at the request of senior management, discussed the implementation of change in control severance arrangements with certain of the Company’s key officers, as a retention and performance incentive. Since competitors with behavioral health businesses had shown interest in potentially acquiring the Company, the compensation committee was concerned with retaining and motivating certain members of the Company’s senior management, and determined it would be in the best interests of the Company and its stockholders to enter into change in control arrangements with these key officers. The compensation committee retained PM&P to assist it in evaluating the terms of such arrangements and met on April 5, 2010 to discuss the same, including the fact that such arrangements, in the opinion of PM&P, were reasonable and comparable to severance agreements with senior executives at other publicly-traded health care companies. Following discussions with the Company’s other independent directors, the compensation committee approved such agreements for each of the Company’s executive officers (other than Mr. Jacobs) and Steven T. Davidson and Kathy L. Bolmer on April 15, 2010. At the time these CIC Agreements were approved, Potential Purchaser One had already submitted an offer to acquire the Company for $27.75 per share, and the Company’s senior management had participated in due diligence calls with two different investment banks regarding possible debt financing such banks would provide to Potential Purchaser One in connection with a potential acquisition of the Company.

 

The CIC Agreements provide for certain compensation and benefits to be paid to the executive officers in the event of the involuntary or constructive termination of such executive officer’s employment within 12 months following a change in control of the Company, other than as a result of such executive officer’s death or disability. The compensation and benefits payable under the CIC Agreements include a lump sum

payment equal to the sum of: (i) the earned but unpaid base pay due to the executive officer; (ii) two times the sum of the executive officer’s base pay plus incentive pay in an amount equal to the higher of (A) the highest annual amount of incentive pay paid to or earned by the executive officer with respect to any of the three fiscal years prior to the fiscal year in which the change in control occurs and (B) 100% of the incentive pay amount that would be payable to the executive officer, assuming that both the Company and the executive officer satisfy 100% (but not in excess of 100%) of the performance objectives specified in or pursuant to the applicable agreement, policy, plan, program or arrangement and communicated to the executive officer for the fiscal year in which the change in control occurs; (iii) the executive officer’s accrued but unused paid time off or sick pay and unreimbursed business expenses; (iv) any other compensation or benefits payable to the executive officer in accordance with the terms of the Company’s existing plans and programs; and (v) a pro-rata portion of the incentive pay amount that would be payable to the executive officer, assuming both the Company and the executive officer satisfy 100% (but not in excess of 100%) of the performance objectives specified in or pursuant to the applicable agreement, policy, plan, program or arrangement and communicated to the executive officer for the fiscal year in which the separation date occurs. Additionally, the executive officer will be entitled to (a) full vesting of stock options and restricted stock or other equity-based awards that have not otherwise become vested, (b) the provision of certain health and welfare benefits for 24 months following the termination of employment and (c) reimbursement of up to $25,000 for outplacement counseling expenses and related benefits for 12 months following the termination of employment.

 

The CIC Agreements provide that if the executive officer receives payments or distributions that constitute “parachute payments” within the meaning of Section 280G of the Code, and the net after-tax amount of the aggregate parachute payments is less than the net after-tax amount if the aggregate parachute payments to be made to the executive officer were three times the executive officer’s “base amount” (as defined in Section 280G(b)(3) of the Code) less $1.00, then the aggregate of the amounts constituting the parachute payment will be reduced to an amount that will equal three times the executive officer’s base amount, less $1.00. The Company does not anticipate that this reduction provision of the CIC Agreements will apply to any of the executive officers.

 

For purposes of the CIC Agreements, a constructive termination is a termination of employment by the executive officer upon the occurrence of certain events, including: (i) a material adverse change in the nature or scope of the executive officer’s responsibilities or duties; (ii) a reduction in the executive officer’s base or incentive pay; (iii) certain changes in the executive officer’s principal location of work; or (iv) a change in business circumstances which materially hinders the executive officer’s performance or materially reduces his responsibilities or duties.

 

For 2010, all of our executive officers participate in the Company’s Executive Performance Incentive Plan (the “Executive Plan”), which was approved by the Company’s stockholders in May 2006. The Executive Plan provides for the payment of cash incentive bonuses to participants based upon the achievement of objective performance goals established annually by the compensation committee. Under Section 162(m) of the Code, the Company may not deduct for federal income tax purposes compensation paid to certain employees (generally the chief executive officer and the four highest paid executive officers other than the chief executive officer) in any taxable year to the extent that any of these persons receives more than $1 million in compensation in any one taxable year. However, if the Company pays compensation that is “performance-based” under Section 162(m), it can receive a federal income tax deduction for the compensation even if such compensation exceeds $1 million in a single taxable year. Payments to executives pursuant to the Executive Plan are designed to qualify for the “performance-based” exception under Section 162(m) of the Code.

 

The Executive Plan provides that in the event the Company experiences a change in control, the executives participating in the plan will receive the maximum amount payable under an award pursuant to the plan, whether or not the performance goals specified in the award have been achieved. Therefore, the bonus amounts for 2010 payable to the Company’s executive officers have been determined in accordance with the Executive Plan.

 

Assuming that the merger is completed and the executive officers are terminated on December 1, 2010, and that the executive officers were entitled to full benefits available under their respective CIC Agreements

and the Executive Plan, the executive officers would receive approximately the amounts set forth in the table below. The table does not include (i) any earned but unpaid base pay due to the executive officer; (ii) the value of any accrued but unused paid time off or sick pay and unreimbursed business expenses; (iii) the value of continued medical benefits or outplacement counseling and related benefits that could be received by the executive officers; or (iv) the value of any equity-based awards.

 

 

Joey A. Jacobs Employment Agreement

 

Concurrently with the compensation committee’s consideration of the adoption of the CIC Agreements, the compensation committee discussed amending the severance provisions of Mr. Jacobs’ employment agreement. The compensation committee considered that competitors with behavioral health businesses had shown interest in potentially acquiring the Company, and determined, after consulting PM&P and reviewing similar arrangements with chief executive officers of comparable companies, that to retain and further incentivize performance, it would be in the best interests of the Company and its stockholders to amend Mr. Jacobs’ employment agreement in April 2010. The amendment was approved by written consent of the compensation committee on April 15, 2010. At the time the Amendment was approved, Potential Purchaser One had already submitted an offer to acquire the Company for $27.75 per share, and the Company’s senior management had participated in due diligence calls with two different investment banks regarding possible debt financing such banks would provide to Potential Purchaser One in connection with a potential acquisition of the Company.

 

Mr. Jacobs’ employment agreement provides that upon Mr. Jacobs’ voluntary or involuntary separation from service with the Company, other than as a result of his death or disability, within 12 months following a change in control, Mr. Jacobs will be entitled to a lump sum payment equal to the sum of: (i) Mr. Jacobs’ earned but unpaid base salary through the termination date; (ii) three times the sum of Mr. Jacobs’ base salary plus an amount equal to the higher of (A) the highest annual amount of bonus compensation paid to or earned by Mr. Jacobs with respect to the three fiscal years prior to the fiscal year in which the change in control occurs, and (B) 100% of the bonus compensation amount that would be payable to Mr. Jacobs, assuming that both the Company and Mr. Jacobs satisfy 100% (but not in excess of 100%) of the performance objectives specified in or pursuant to the applicable agreement, policy, plan, program or arrangement and communicated to Mr. Jacobs for the fiscal year in which the change in control occurs; (iii) Mr. Jacobs’ accrued but unused paid time off or sick pay and unreimbursed business expenses; (iv) any other compensation or benefits payable to Mr. Jacobs in accordance with any plans or programs of the Company; and (v) a pro-rata portion of the bonus compensation amount that would be payable to Mr. Jacobs, assuming both the Company and Mr. Jacobs satisfy 100% (but not in excess of 100%) of the performance objectives specified in or pursuant to the applicable agreement, policy, plan, program or arrangement and communicated to Mr. Jacobs for the fiscal year in which the termination date occurs. Additionally, Mr. Jacobs will be entitled to (a) full vesting of stock options and restricted stock or other equity-based awards that have not otherwise become vested, (b) the provision of certain health and welfare benefits for 36 months following the termination of employment and (c) reimbursement of up to $25,000 for outplacement counseling expenses and related benefits for 12 months following the termination of employment.

 

Mr. Jacobs participates in the Executive Plan. Therefore, the bonus amount for 2010 payable to him has been determined in accordance with the Executive Plan.

 

Pursuant to the employment agreement and the Executive Plan, assuming that the merger is completed and Mr. Jacobs’ employment terminates on December 1, 2010, he would be entitled to receive a potential estimated cash severance payment of $14,164,161. This amount does not include (i) any earned but unpaid base pay due to Mr. Jacobs; (ii) the value of any accrued but unused paid time off or sick pay and

unreimbursed business expenses; (iii) the value of continued medical benefits or outplacement counseling and related benefits that could be received by Mr. Jacobs; or (iv) the value of any equity-based awards.

 

Compensation to the Independent Directors

 

Our board of directors has authorized the payment of $150,000 to the chairman of the special committee and $100,000 to each of the other members of the special committee, as compensation for their service on the special committee. In addition, the board of directors has authorized a payment to Mark P. Clein, an independent director, in an amount equal to a percentage of $100,000 which is proportionate to the number of meetings of the special committee that he attended compared to the total number of meetings of the special committee held as compensation for his service to the special committee. The board has also authorized the reimbursement to each of these independent directors of out-of-pocket expenses incurred in connection with his service on the special committee. The compensation and reimbursement to be paid to these independent directors are not contingent upon the completion of any transaction or any favorable recommendation of the special committee.

 

Indemnification and Insurance

 

For a period of six years following the effective time of the merger, UHS and the surviving corporation have agreed to indemnify and hold harmless, to the fullest extent permitted by law, each of the present and former directors and officers of the Company and its subsidiaries against any and all costs and expenses (including attorneys’ fees), judgments, fines, losses, claims, damages, liabilities and settlement amounts paid in connection with any claim, action, suit, proceeding or investigation (whether arising before or after the effective time of the merger), whether civil, criminal, administrative or investigative, arising out of or pertaining to any action or omission in their capacity as an officer, director, employee, fiduciary or agent, whether occurring on or before the effective time of the merger. Also, the surviving corporation has agreed to honor and fulfill in all respects the obligations of the Company and its subsidiaries under all indemnification agreements between the Company or any of its subsidiaries and any of its or their respective present or former directors and officers.

 

The merger agreement requires that the surviving corporation either (i) cause to be obtained at the effective time of the merger “tail” insurance policies with a claims period of at least six years from the effective time of the merger with respect to directors’ and officers’ liability insurance in amount and scope at least as favorable as the Company’s existing policies for claims arising from facts or events that occurred on or prior to the effective time of the merger, or (ii) maintain in effect for six years from the effective time of the merger, if available, the current directors’ and officers’ liability insurance policies maintained by the Company (provided that the surviving corporation may substitute policies of at least the same coverage containing terms and conditions that are not less favorable than the current policies) with respect to matters occurring prior to the effective time of the merger. If the annual premiums of insurance coverage exceed 300% of the Company’s current annual premiums, UHS or the surviving corporation must obtain as much coverage as is possible under substantially similar policies for a cost not exceeding 300% of the current annual premiums paid by the Company.

 

Between May 17, 2010 and June 2, 2010, seven putative class action complaints were filed on behalf of alleged public stockholders of the Company. Two of the lawsuits, Carpenters Pension Fund of West Virginia v. Psychiatric Solutions, Inc., et al. , Case No. 38359, and Pedric v. Psychiatric Solutions, Inc., et al. , Case No. 38391, were filed in the Chancery Court for Williamson County, Tennessee. One of the lawsuits, Smith v. Psychiatric Solutions, Inc., et al. , Case No. 10-862-II, was filed in the Chancery Court for Davidson County, Tennessee. The Smith case was transferred to Williamson County. Another three lawsuits, Oklahoma Police Pension and Retirement System v. Jacobs, et al. , Case No. CA 5514, City of Miami Police Relief and Pension Fund v. Jacobs, et al. , Case No. 5515, and Plumbers & Pipefitters, Local 152 Pension Fund v. Psychiatric Solutions, Inc., et al. , Case No. 5532, were filed in the Court of Chancery for the State of Delaware. A seventh lawsuit, Rosinek v. Psychiatric Solutions, Inc., et al. , Case No. 3:10-cv-00534, was filed in the United States District Court for the Middle District of Tennessee. The defendants generally include the Company,

members of the Company’s board of directors and, in certain of the cases, officers of the Company. UHS and/or its affiliates are named as defendants in some of the lawsuits. The lawsuits allege, among other things, that the Company’s directors breached their fiduciary duties in connection with the proposed merger by failing to maximize stockholder value. The lawsuits also allege that the directors have put their personal interests ahead of those of the stockholders, including by approving the merger to extinguish any personal liability they could suffer from previously asserted derivative claims related to, among other things, violations of fiduciary duties and federal securities laws and also by negotiating a merger agreement that includes broad director and officer insurance and indemnification provisions protecting them against civil and criminal claims for six years from the date of the merger agreement. Certain of the lawsuits allege that various individual defendants will receive improper change of control payments and merger consideration in connection with equity awards that plaintiffs contend were improper. Certain of the lawsuits also allege that the Company and UHS aided and abetted the various breaches of fiduciary duty. Certain of the lawsuits also allege that various individual defendants caused the Company to issue a proxy statement containing materially false and misleading statements and omissions in connection with the Company’s 2010 annual stockholder meeting. Among other things, the lawsuits seek to enjoin the Company and our directors from consummating the merger and also seek rescission of the allegedly improper equity awards. The three Delaware cases were consolidated and set for trial beginning on August 5, 2010. The three Tennessee state court cases were consolidated in Williamson County, and then stayed in favor of the consolidated Delaware action by agreed order of the Williamson County court. The Tennessee federal court case was also stayed by way of agreed order.

 

After substantially completing fact discovery in the consolidated Delaware action, without admitting liability on the part of any of the defendants, the parties to the consolidated Delaware action, the consolidated Tennessee state court action and the Tennessee federal court action have agreed in principle to terms of settlement as follows: (1) requiring additional disclosures in this proxy statement regarding, among other things, the background of and negotiations relating to the merger, the Executive Plan, the amendment to the Company’s 2009 Long-Term Equity Compensation Plan and adoption of the 2010 Equity Compensation Plan, the circumstances surrounding the compensation committee’s approval of equity and restricted stock grants in February 2010, and the financial disclosures relating to the transaction, including the discounted cash flow and other analyses performed by Goldman Sachs; (2) allowing the Company’s stockholders to revote on the proposal to amend the equity incentive plan to increase the number of shares of Common Stock subject to grant under the equity incentive plan by 900,000 and to restrict the repricing of options, which was approved by the Company’s stockholders at the Company’s annual meeting of stockholders in May 2010; (3) requiring the release by the class of stockholders entitled to vote on the merger of any and all claims that have been or could have been made against any of the defendants relating to the merger, the disclosures made by or on behalf of the Company through and including consummation of the merger, and the compensation received by any defendant through and including the consummation of the merger; and (4) requiring the Company to pay plaintiffs’ reasonable attorneys’ fees and expenses in the amounts negotiated and agreed to by the parties, or, if no agreement can be reached, amounts ordered by the court or courts. The settlements in those actions are subject to court approval, which has not yet been obtained. The settlement will not affect the form or amount of the consideration to be received by the Company’s stockholders in the merger. The defendants have denied and continue to deny any wrongdoing or liability with respect to all claims, events, and transactions complained of in the aforementioned lawsuits or that they have engaged in any wrongdoing. The defendants have entered into the settlement to eliminate the uncertainty, burden, risk, expense and distraction of further litigation.

 

In addition, the plaintiff in a case already pending in the United States District Court for the Middle District of Tennessee, James Pedric v. Joey Jacobs, et al. , Case No. 3:09-cv-01211 ( “Pedric I” ), a purported stockholder derivative lawsuit, amended his complaint to allege that the February 2010 stock option awards were improper in light of the merger, and that the Company’s executive officers and directors entered into the merger agreement to escape liability in Pedric I . The defendants in Pedric I are the Company as a nominal defendant, along with each of the members of the board of directors and certain of the Company’s executive officers. Because Pedric I is a purported stockholder derivative action, upon consummation of the merger, any potential derivative liability of the Pedric I defendants may be extinguished by operation of law. Defendants filed a motion to dismiss the Pedric I amended complaint on August 5, 2010. The Pedric I defendants believe that the suit is meritless and are defending the suit vigorously.

 

The following summary is a general discussion of certain material U.S. federal income tax consequences of the merger to U.S. Holders and Non-U.S. Holders, each as defined below, whose shares of Common Stock are converted into the right to receive cash in the merger. This summary generally is limited to holders who hold their shares of Common Stock as capital assets (generally, property held for investment) and does not deal with special tax situations including, but not limited to, those that may apply to particular holders such as tax-exempt organizations, holders subject to the U.S. federal alternative minimum tax, brokers, dealers in securities or currencies, banks or other financial institutions, hybrid entities, real estate investment trusts, traders in securities that elect to use a mark-to-market method of accounting for their securities holdings, insurance companies, regulated investment companies, controlled foreign corporations, passive foreign investment companies, individual retirement and other tax-deferred accounts, partnerships or other pass-through entities for U.S. federal income tax purposes or investors in such entities, U.S. Holders whose “functional currency” is not the U.S. dollar, and persons who hold their shares of Common Stock in connection with a hedging, straddle, conversion or other risk reduction transaction.

 

This discussion does not address any tax consequences to stockholders who acquired their shares of Common Stock through the exercise of employee stock options or other compensation arrangements. Such stockholders should consult their own tax advisor for a full understanding of the tax consequences of the receipt of cash in connection with the cancellation of options to purchase shares of Common Stock or shares of restricted Common Stock, including the transactions described in this proxy statement relating to other equity compensation and benefit plans.

 

If an entity or arrangement treated as a partnership for U.S. federal income tax purposes (a “Tax Partnership”) is a beneficial owner of shares of Common Stock, the tax treatment of a partner in the Tax Partnership will generally depend upon the status of the partner and the activities of the Tax Partnership. A beneficial owner that is a Tax Partnership and partners in such a Tax Partnership should consult their tax advisors about the U.S. federal income tax consequences of the merger.

 

This discussion does not address any alternative minimum tax consequences, U.S. federal estate or gift tax laws, or the tax laws of any state, local or foreign government that may be applicable to stockholders.

 

The U.S. federal income tax considerations set forth below are based upon the Code, Treasury regulations promulgated thereunder, court decisions, and rulings and pronouncements of the Internal Revenue Service (the “IRS”), all as in effect on the date hereof and all of which are subject to change, possibly on a retroactive basis. No ruling has been or is expected to be sought from the IRS with respect to the statements made and the conclusions reached in this discussion, and the IRS would not be precluded from taking contrary positions. There can be no assurance that the IRS will not take a different position concerning the U.S. federal income tax consequences of the merger or that any such position would not be sustained.

 

As used herein, the term “U.S. Holder” means a beneficial owner of shares of Common Stock that is, for U.S. federal income tax purposes:

 

 

Exchange of Shares of Common Stock for Cash in the Merger

 

The exchange of shares of Common Stock for cash in the merger will be a taxable transaction to U.S. Holders for U.S. federal income tax purposes. In general, a U.S. Holder whose shares of Common Stock are converted into the right to receive cash in the merger will recognize capital gain or loss for U.S. federal income tax purposes equal to the difference, if any, between the amount of cash received with respect to such shares (determined before the deduction of any applicable withholding taxes) and the U.S. Holder’s adjusted tax basis in such shares. Gain or loss will be determined separately for each block of shares (i.e., shares acquired at the same cost in a single transaction) of Common Stock held by a U.S. Holder.

 

In general, capital gain or loss realized will be long-term capital gain or loss if the U.S. Holder has held its shares of Common Stock for more than one year at the effective time of the merger. Non-corporate U.S. Holders may be subject to a lower U.S. federal income tax rate on their net long-term capital gains than the rate that is applicable to ordinary income. Short-term capital gains are taxed at ordinary income rates. The deductibility of capital losses is subject to limitations.

 

Backup Withholding and Information Reporting

 

A U.S. Holder generally will be subject to backup withholding (currently at the rate of 28%) on cash payments received in the merger unless the U.S. Holder provides the paying agent with such U.S. Holder’s correct taxpayer identification number (“TIN”) and certifies, under penalties of perjury, that the U.S. Holder is a United States person as defined in the Code, the TIN is correct and the U.S. Holder either (a) is exempt from backup withholding, (b) has not been informed by the IRS that backup withholding is required due to underreporting of interest or dividends or (c) has been informed by the IRS that backup withholding is no longer required. Each U.S. Holder should complete and sign, under penalty of perjury, the Substitute Form W-9 included as part of the letter of transmittal and return it to the paying agent in order to provide the information and certification necessary to avoid backup withholding, unless an exemption applies and is established in a manner satisfactory to the paying agent. U.S. Holders should consult their tax advisors as to their qualification for exemption from backup withholding and the procedure for obtaining such exemption.

 

Backup withholding is not an additional tax. Any amounts withheld from cash payments to a U.S. Holder pursuant to the merger under the backup withholding rules will be allowable as a refund or a credit against such holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS.

 

Cash payments made pursuant to the merger also will be subject to information reporting unless an exemption applies.

 

As used herein, a “Non-U.S. Holder” means a beneficial owner of shares of Common Stock that is neither a U.S. Holder, a Tax Partnership, nor a former citizen or long-term resident of the United States. Non-U.S. Holders are subject to special U.S. federal income tax considerations, some of which are discussed below.

 

Exchange of Shares of Common Stock for Cash in the Merger

 

Any gain realized on the receipt of cash in the merger by a Non-U.S. Holder generally will not be subject to U.S. federal income tax unless:

 

 

 

If a Non-U.S. Holder is engaged in a trade or business in the United States and gain from the disposition of the shares of Common Stock in the merger is effectively connected with the conduct of that trade or business (and, if required by an applicable income tax treaty, is attributable to a United States permanent establishment of the Non-U.S. Holder), then such Non-U.S. Holder will be subject to U.S. federal income tax on that gain on a net income basis in the same manner as if such Non-U.S. Holder were a U.S. Holder. In addition, if such a Non-U.S. Holder is a corporation, it may be subject to a branch profits tax equal to 30% (or, if applicable, a lower treaty rate) of the effectively connected earnings and profits attributable to such gain, subject to adjustments.

 

In addition, any gain to a Non-U.S. Holder upon the exchange of shares of Common Stock for cash in the merger may be subject to U.S. federal income tax if such stock constitutes a U.S. real property interest by reason of the Company’s status as a U.S. real property holding corporation (a “USRPHC”) during the relevant statutory period. We believe that we currently are not a USRPHC. In the event we were a USRPHC during the relevant statutory period, as long as the Common Stock is regularly traded on an established securities market, such stock will be treated as a U.S. real property interest only with respect to a Non-U.S. Holder that has actually or constructively held more than 5% of the outstanding Common Stock.

 

Each Non-U.S. Holder should consult with its own tax advisors regarding whether it will be subject to U.S. federal income tax as a result of the merger and whether any applicable income tax treaty may provide for rules different from those set forth above.

 

Backup Withholding and Information Reporting

 

Backup withholding of tax (currently at the rate of 28%) may apply to cash payments made to a non-corporate Non-U.S. Holder in the merger, unless the holder or other payee certifies under penalty of perjury that it is a Non-U.S. Holder (and the payor does not have actual knowledge or reason to know that the holder is a United States person as defined in the Code), in the manner described in the letter of transmittal and otherwise complies with the backup withholding rules or otherwise establishes an exemption in a manner satisfactory to the paying agent.

 

Backup withholding is not an additional tax. Any amounts withheld from cash payments to a Non-U.S. Holder pursuant to the merger under the backup withholding rules will be allowable as a refund or a credit against such holder’s U.S. federal income tax liability, if any, provided the required information is timely furnished to the IRS.

 

Cash payments made pursuant to the merger also will be subject to information reporting, unless an exemption applies.

 

The U.S. federal income tax consequences set forth above are not intended to constitute a complete description of all tax consequences relating to the merger. Because individual circumstances may differ, each stockholder should consult the stockholder’s tax advisor regarding the applicability of the rules discussed above to the stockholder and the particular tax effects to the stockholder of the merger in light of such stockholder’s particular circumstances, the application of state, local and foreign tax laws, and, if applicable, the tax consequences of the receipt of cash in connection with the cancellation of shares of restricted Commons Stock or options to purchase shares of Common Stock, including the transactions described in this proxy statement relating to our other equity compensation and benefit plans.

 

This section of the proxy statement describes the material provisions of the merger agreement but does not purport to describe all of the terms of the merger agreement. The following summary is qualified in its entirety by reference to the complete text of the merger agreement, which is attached as Annex A to this proxy statement and incorporated into this proxy statement by reference. We urge you to carefully read the full text of the merger agreement because it is the legal document that governs the merger. It is not intended to provide you with any other factual information about us. Such information can be found elsewhere in this proxy statement and in the public filings we make with the SEC, as described in the section entitled “Where You Can Find More Information” below.

 

The merger agreement provides for the merger of Merger Sub with and into the Company upon the terms, and subject to the conditions, of the merger agreement. The merger will be effective at the time the certificate of merger is filed with the Secretary of State of the State of Delaware (or at a later time, if agreed upon by the parties and specified in the certificate of merger). We expect to complete the merger as promptly as practicable following the satisfaction or waiver of all conditions to the obligations of the respective parties to the merger agreement to complete the merger.

 

As the surviving corporation, the Company will become a wholly-owned subsidiary of UHS at the effective time of the merger. Upon consummation of the merger, the directors of Merger Sub will be the initial directors of the surviving corporation, and the officers of the Company will be the initial officers of the surviving corporation. All directors and officers of the surviving corporation will hold their positions until their successors are duly elected or appointed and qualified or until the earlier of their death, resignation or removal.

 

We or UHS may terminate the merger agreement prior to the consummation of the merger in some circumstances, whether before or after the approval of the merger agreement by our stockholders. Additional details regarding the termination of the merger agreement appear in “— Termination of the Merger Agreement.”

 

Each share of Common Stock issued and outstanding immediately before the merger will be cancelled and converted into the right to receive $33.75 in cash, without interest and less any applicable withholding taxes, other than:

 

 

After the merger is effective, each holder of any shares of Common Stock (other than shares for which appraisal rights have been properly demanded and perfected under Delaware law) will no longer have any rights with respect to the shares, except for the right to receive the merger consideration. See “Appraisal Rights.”

 

Upon the consummation of the merger, each outstanding option to acquire Common Stock under the Company’s equity incentive plans will become fully vested and exercisable (to the extent not already vested and exercisable) and will be cancelled and converted into the right to receive a cash payment equal to the number of shares of Common Stock underlying the option multiplied by the amount (if any) by which $33.75 exceeds the applicable option exercise price, without interest and less any applicable withholding taxes. Additionally, each outstanding share of restricted Common Stock will, upon the consummation of the merger,

become fully vested and transferable and be cancelled and converted into the right to receive $33.75 in cash, without interest and less any applicable withholding taxes.

 

The effect of the merger upon our stock purchase and certain other employee benefit plans is described below under “— Employee Benefits.”

 

Before the merger, UHS will designate a paying agent reasonably satisfactory to us to make payment of the merger consideration as described above. At the effective time of the merger, UHS will deposit, or cause the surviving corporation to deposit, with the paying agent, for the benefit of the stockholders, cash in an amount sufficient to pay the aggregate merger consideration required to be paid pursuant to the merger agreement.

 

At the effective time of the merger, we will close the Company’s stock transfer books, and there will be no further registration of transfers of shares of Common Stock that were outstanding immediately prior to the effective time of the merger on the records of the Company.

 

As promptly as practicable after the consummation of the merger, UHS will cause to be mailed to each stockholder of record at the effective time of the merger a letter of transmittal and instructions advising how to surrender stock certificates or non-certificated shares represented by book-entry in exchange for the merger consideration. The paying agent will pay each stockholder of record at the effective time of the merger its merger consideration after (1) in the case of certificated shares, such stockholder surrenders its stock certificates to the paying agent for cancellation, together with a duly completed and validly executed letter of transmittal, or (2) in the case of non-certificated shares, the paying agent receives an “agent’s message,” together with any other required documents. Interest will not be paid or accrue in respect of the merger consideration. The paying agent, UHS or the surviving corporation will reduce the amount of any merger consideration paid to you by any applicable withholding taxes. YOU SHOULD NOT FORWARD YOUR STOCK CERTIFICATES TO THE PAYING AGENT WITHOUT A LETTER OF TRANSMITTAL, AND YOU SHOULD NOT RETURN YOUR STOCK CERTIFICATES WITH THE ENCLOSED PROXY.

 

If any cash deposited with the paying agent is not claimed within 12 months following the effective time of the merger, such cash will be returned to the surviving corporation upon demand. Any holders of Common Stock that have not complied with the exchange procedure by that time must look only to UHS or the surviving corporation for, and UHS and the surviving corporation will remain liable for, payment of their claim for the merger consideration. Any unclaimed amounts remaining immediately prior to when such amounts would escheat to or become property of any governmental authority will, to the extent permitted by applicable law, become the property of UHS free and clear of any prior claims or interest of any person previously entitled thereto.

 

If the paying agent is to pay some or all of the merger consideration to a person other than the person in whose name the certificated or non-certificated shares are registered, the person requesting payment must have all documents required to evidence the transfer of shares and, with respect to certificated shares, stock certificates properly endorsed or otherwise in proper form for transfer, and the person requesting payment must pay any fiduciary or surety bonds or any transfer or other taxes payable by reason of the transfer or establish to UHS’ reasonable satisfaction that the taxes have been paid or are not required to be paid.

 

The instructions to the letter of transmittal will tell you what to do if you have lost your stock certificate, or if it has been stolen or destroyed. You will have to provide an affidavit to that fact and, if required by the surviving corporation, post a bond in form and substance and with surety reasonably satisfactory to the surviving corporation as indemnity against any claim that may be made against it in respect of the certificate.

 

The merger agreement contains representations and warranties made by us to UHS and Merger Sub and representations and warranties made by UHS and Merger Sub to us. The representations and warranties contained in the merger agreement were made solely for purposes of the merger agreement and as of specified

dates, were solely for the benefit of the parties to the merger agreement and may be subject to important qualifications and limitations agreed by the parties in connection with negotiating its terms. The representations and warranties may have been made for purposes of allocating contractual risk between the parties to the merger agreement instead of establishing these matters as facts and may be subject to standards of materiality or material adverse effect applicable to the contracting parties that differ from those applicable to investors. You should not rely on the representations, warranties and covenants or any descriptions thereof as characterizations of the actual state of facts or condition of the Company, UHS or Merger Sub or any of their respective subsidiaries or affiliates. In addition, the representations and warranties contained in the merger agreement may be qualified by information in confidential disclosure schedules provided by the Company in connection with the signing of the merger agreement and such information may have been disclosed for purposes of allocating contractual risk between the parties to the agreement instead of establishing these matters as facts. These confidential disclosure schedules contain information that modifies, qualifies and creates exceptions to the Company’s representations and warranties set forth in the merger agreement. Moreover, information concerning the subject matter of the representations and warranties may change after the date of the merger agreement, which subsequent information may or may not be fully reflected in the Company’s or UHS’ public disclosures.

 

In the merger agreement, the Company, UHS and Merger Sub each made representations and warranties relating to, among other things:

 

 

In the merger agreement, UHS also made representations and warranties relating to the availability of the funds necessary to perform its obligations under the merger agreement.

 

The Company also made representations and warranties relating to, among other things:

 

 

 

Many of our representations and warranties are qualified by a material adverse effect standard. For purposes of the merger agreement, “material adverse effect” for the Company is defined to mean (i) any event, circumstance, state of facts, change or effect that is materially adverse to the business, financial condition or results of operations of the Company and its subsidiaries, taken as a whole, or (ii) any event, circumstance, state of facts, change or effect that would prevent or materially delay the consummation of the merger or otherwise prevent us from performing the Company’s obligations under the merger agreement; provided, however, that in no event will any of the following, alone or in combination, be deemed to constitute, nor will any of the following be taken into account in determining whether there has been or would reasonably be expected to be, a material adverse effect (except, in the case of clauses (A)(1), (A)(2) or (A)(4) below, to the extent any of the matters referred to therein has had or would reasonably be expected to have a disproportionate adverse effect on the Company and its subsidiaries, taken as a whole, as compared to other for-profit and comparable or similar companies operating in the industries in which the Company and its subsidiaries operate, after taking into account the Company’s size relative to such other for-profit companies): (A) any event, circumstance, state of facts, change or effect resulting from or relating to (1) a change in general economic, political or financial market conditions, including interest or exchange rates, (2) a change generally affecting the industries in which the Company and its subsidiaries operate (including seasonal fluctuations) or general economic conditions that generally affect the industries in which the Company and its subsidiaries conduct business, (3) any change in accounting requirements or principles required by generally accepted accounting principles (or any interpretations thereof) or required by any change in applicable laws (or any interpretations thereof), (4) any adoption, implementation, promulgation, repeal, modification, reinterpretation or proposal of any law after the date of the merger agreement, (5) any legal action, investigation, review or examination undertaken by a governmental authority, or any sanction, fine, operating restriction or other similar penalty arising as a result thereof, with respect to any health care business or health care facility the Company and its subsidiaries operate, that is currently pending or arises after the date of the merger agreement, in each case to the extent such regulatory condition is consistent in nature, scope and impact on the Company and its subsidiaries, taken as a whole, with regulatory conditions arising and fully resolved from time to time in the conduct of the business of the Company and its subsidiaries on or before December 31, 2009, (6) any acts of terrorism or war or any weather related event, fire or natural disaster or any escalation thereof, (7) the announcement of the execution of the merger agreement or the pendency or consummation of the merger and the other transactions contemplated by the merger agreement, including any legal actions, challenges or investigations to the extent relating to the merger agreement or the transactions contemplated thereby made or brought by any of the current or former stockholders of the Company (on their own behalf or on behalf of the Company), (8) the identity of UHS or any of its affiliates as the acquiror of the Company or any facts or circumstances concerning UHS or any of its affiliates, or (9) compliance with the terms of, the taking of any action required or the failure to take any action prohibited by, the merger agreement or the taking of any action consented to or requested by UHS; or (B) any failure, in and of itself, to meet internal or published projections, forecasts, performance measures, operating statistics or revenue or earnings predictions for any period or a decline in the price or trading volume of the Common Stock (provided that, except as otherwise identified in the definition of “material adverse effect,” the underlying causes of such failure or decline may be taken into account in determining whether there is a material adverse effect on the Company).

 

We have agreed in the merger agreement that, subject to certain exceptions, until the consummation of the merger, we will conduct our business in the ordinary course of business, and we will use our reasonable

best efforts to preserve substantially intact our business organization and our current relationships with any persons with which we have material business relations.

 

We also have agreed that, subject to certain exceptions, until the consummation of the merger, except as expressly contemplated or permitted by the merger agreement or consented to in writing by UHS, we will not:

 

 

 

Pursuant to the merger agreement, we have agreed not to:

 

 

Notwithstanding the foregoing restrictions, at any time prior to the adoption of the merger agreement by our stockholders, we or our board of directors (through the special committee or otherwise) are permitted to furnish information to, or engage in negotiations or discussions with, any party that submits a written acquisition proposal after May 16, 2010 to the extent that:

 

 

 

In such cases, we (A) will promptly notify UHS within two business days of the existence of an acquisition proposal from a third party and provide the material terms and conditions of such acquisition proposal and the identity of the person making such acquisition proposal, and will keep UHS reasonably informed of any material developments with respect to such acquisition proposal and (B) promptly provide to UHS any material non-public information concerning us or our subsidiaries provided to such other party which was not previously provided to UHS.

 

An “acquisition proposal” means any bona fide proposal or offer (including any proposal from or to our stockholders) from any party other than UHS or Merger Sub relating to (A) any direct or indirect acquisition of (1) more than 15% of the assets of us and our subsidiaries, taken as a whole, or (2) more than 15% of any class of our equity securities; (B) any tender offer or exchange offer, as defined pursuant to the Exchange Act, that if consummated would result in any person beneficially owning, directly or indirectly, 15% or more of any class of our equity securities; or (C) any merger, consolidation, business combination, recapitalization, liquidation, dissolution or other similar transaction involving us.

 

A “superior proposal” means a bona fide written acquisition proposal that (A) relates to more than 50% of our outstanding Common Stock or more than 50% of the assets of us and our subsidiaries, taken as a whole, (B) is on terms that our board of directors determines in good faith (after consultation with its financial and legal advisors and after taking into account all financial, legal, regulatory and other aspects of such acquisition proposal and of the merger agreement, including the relative risks of non-consummation and any changes to the terms of the merger agreement proposed by UHS to us during the notice period described below in response to such acquisition proposal or otherwise) are more favorable to our stockholders than the terms of the merger agreement and (C) our board of directors determines is reasonably capable of being consummated.

 

Except as set forth below, our board of directors (acting through the special committee or otherwise) will not, and will not publicly propose to, (A) withhold, withdraw or modify, in a manner adverse to UHS or Merger Sub, its recommendation that our stockholders adopt the merger agreement; (B) approve or recommend any acquisition proposal; or (C) approve or recommend, or cause or permit us or any of our subsidiaries to enter into, any letter of intent, merger agreement, acquisition agreement or similar agreement (other than a confidentiality agreement on certain terms) with respect to any acquisition proposal.

 

Notwithstanding the foregoing, prior to the adoption of the merger agreement by our stockholders:

 

 

Notwithstanding the foregoing, our board of directors may not take either of the actions described above until at least five business days after the Company provides UHS with written notice advising that our board of directors intends to take such action and specifying the reasons for doing so, including, if the basis of the proposed action by our board of directors is a superior proposal from a third party, the material terms and conditions of any such superior proposal. During the five-day notice period we will, and will cause our financial advisors and outside legal counsel to, negotiate with UHS in good faith (to the extent UHS desires to negotiate). Any amendment to the terms of a superior proposal will require us to send a new written notice to UHS and extend the notice period by an additional two business days. In determining whether to take either of the actions described above, our board of directors will take into account any changes to the terms of the merger agreement proposed by UHS in response to the aforementioned notice or otherwise.

 

If we terminate the merger agreement because our board of directors (acting through the special committee or otherwise) is approving and recommending a superior proposal (or any acquisition agreement with respect to such superior proposal), then we must concurrently pay to UHS the termination fee as described in further detail below in “— Termination Fee.”

 

Subject to the terms and conditions set forth in the merger agreement, each of the parties to the merger agreement has agreed to use reasonable best efforts to:

 

 

Each party also has agreed to make as promptly as practicable its respective filing pursuant to the HSR Act and any other applicable antitrust, competition or trade regulation law with respect to the merger and to supply as promptly as practicable to the appropriate governmental authorities any additional information and documentary material that may be requested pursuant to the HSR Act and any other applicable antitrust, competition or trade regulation law.

 

Pursuant to the merger agreement, UHS has agreed to take any and all steps necessary to avoid or eliminate each and every impediment under any antitrust, competition or trade regulation law that may be asserted by any governmental authority or any other party so as to enable the parties to consummate the transactions contemplated by the merger agreement, including proposing, negotiating, committing to and effecting, by consent decree, hold separate orders, or otherwise, the sale, divestiture or disposition of such of its assets, properties or businesses or of the assets, properties or businesses to be acquired by it pursuant to the merger agreement. However any such sale, divestiture, disposition or other arrangement must be conditioned upon the consummation of the transactions contemplated by the merger agreement. In addition, UHS has agreed to defend through litigation on the merits any claim asserted in court by any party in order to avoid entry of, or to have vacated or terminated, any decree, order or judgment (whether preliminary or permanent) that would prevent closing prior to the date on which the merger agreement is terminated pursuant to its terms. In no event, however, will UHS or any of its subsidiaries be required to agree to or take any action that, individually or in the aggregate, would result in it making proposals, executing or carrying out agreements

(including consent decrees) or submitting to laws (A) providing for the license, sale or other disposition or holding separate (through the establishment of a trust or otherwise) of any assets or categories of assets of UHS, the Company or any of their respective subsidiaries or the holding separate of the capital stock of the Company or any such subsidiary or (B) imposing or seeking to impose any limitation on the ability of UHS, the Company or any of their respective subsidiaries to conduct their respective businesses (including with respect to market practices and structure) or to own such assets or to acquire, hold or exercise full rights of ownership of the business of the Company or our subsidiaries or of UHS or its subsidiaries, that would, individually or in the aggregate, reasonably be expected to result in a material adverse effect upon the Company and its subsidiaries and the behavioral health care services business of UHS and its subsidiaries, taken as a whole.

 

We have agreed to provide all reasonable cooperation in connection with the arrangement of any financing necessary to consummate the merger as may be reasonably requested by UHS and that is necessary or customary in connection with UHS’ efforts to obtain such financing; provided that (A) we are not required to pay any commitment fee or any other fee or incur any other liability in connection with such financing prior to the effective time of the merger, and (B) the effectiveness of any documentation we execute in connection with such financing will be subject to the consummation of the merger. UHS and Merger Sub have agreed to indemnify and hold harmless us and our subsidiaries for and against any and all liabilities, losses, damages and expenses suffered or incurred by us in connection with the arrangement of such financing and any information utilized in connection therewith.

 

We have agreed to commence as soon as reasonably practicable after the receipt of a written request from UHS to do so, offers to purchase and related consent solicitations with respect to any or all of our outstanding debt securities specified by UHS and permitted by applicable law on the terms and subject to conditions reasonably requested by UHS. UHS will prepare, subject to our review, all necessary documentation in connection with any such offers or consent solicitations. The offers to purchase the debt securities will be conditioned on the closing of the merger. See “The Merger — Financing of the Merger” for a description of the financing arranged by UHS to fund the proposed merger and related transactions.

 

Conditions to Each Party’s Obligations.   Each party’s obligation to consummate the merger is subject to the satisfaction or waiver (where permissible) of the following conditions:

 

 

Conditions to UHS’ and Merger Sub’s Obligations.   The obligations of UHS and Merger Sub to consummate the merger are subject to the satisfaction or waiver (where permissible) of the following additional conditions:

 

 

 

Conditions to the Company’s Obligations.   Our obligation to complete the merger is subject to the satisfaction or waiver of the following additional conditions:

 

 

If a failure to satisfy one or more of these conditions to the merger is not considered by our board of directors to be material to our stockholders, the board of directors (acting through the special committee or otherwise) can waive compliance with such condition or conditions. Our board of directors is not aware of any condition to the merger that cannot be satisfied. Under Delaware law, after the merger agreement has been adopted by our stockholders, the merger consideration cannot be changed and the merger agreement cannot be altered in a manner adverse to our stockholders without re-submitting the revisions to our stockholders for their approval.

 

The merger agreement may be terminated and the merger may be abandoned at any time prior to the consummation of the merger, whether before or after stockholder approval has been obtained: