Headnote
MI 11-102 and NP 11-203 as applicable – Relief granted from having to present a reconciliation in accordance with Canadian GAAP for annual and interim acquisition statements and a Canadian GAAP reconciliation of proforma financial information in the business acquisition report required to be filed in connection with an acquisition – Acquiror has filed US GAAP financial statements for year ended December 31, 2007 with comparatives for 2006 – acquiree is a US GAAP filer – Relief granted on the basis that there is a consistent basis of accounting, i.e. US GAAP
Applicable Legislative Provisions
National Instrument 52-107Acceptable Accounting Principles, Auditing Standards and Reporting Currency – ss. 6.1(5)(b) and 7.1(2)
Date: July 14, 2008
IN THE MATTER OF
THE SECURITIES LEGISLATION OF ONTARIO
(THE “JURISDICTION”)
AND
IN THE MATTER OF
THE PROCESS FOR EXEMPTIVE RELIEF
APPLICATIONS IN MULTIPLE JURISDICTIONS
AND
IN THE MATTER OF
SXC HEALTH SOLUTIONS CORP.
(the “Filer”)
Decision Document
Background
The principal regulator in the Jurisdiction has received an application from the Filer for a decision under the securities legislation of the Jurisdiction (the “Legislation”) for an exemption from the requirements of Parts 6 and 7 of National Instrument 52-107 Acceptable Accounting Principles, Auditing Standards and Reporting Currency (“NI 52-107”) to present a reconciliation in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) of the Annual and Interim Acquisition Statements (as defined below) and a Canadian GAAP reconciliation of the Proforma Financial Information (as defined below) in the business acquisition report (the “BAR”) required to be filed in connection with SXC’s acquisition of National Medical Health Card Systems, Inc. (“NMHC”) on April 30, 2008 (the “Exemptive Relief Sought”).
Under the Process for Exemptive Relief Applications in Multiple Jurisdictions:
(a) the Ontario Securities Commission is the principal regulator for this application, and
(b) the Filer has provided notice that section 4.7(1) of Multilateral Instrument 11-102 Passport System is intended to be relied upon in British Columbia, Alberta, Saskatchewan, Manitoba, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland and Labrador.
Interpretation
Terms defined in National Instrument 14-101 Definitions have the same meaning in this decision, unless otherwise defined.
Representations
The decision is based on the following facts represented by the Filer:
SXC is a corporation existing under the Business Corporations Act (Yukon) and is an SEC issuer, as defined under Part 1.1 of NI 52-107.
SXC’s head office is located at 2441 Warrenville Road, Suite 610, Lisle, IL, 60532-3642.
SXC is a reporting issuer in each of British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Quebec, New Brunswick, Nova Scotia, Prince Edward Island and Newfoundland (collectively, the “Jurisdictions”).
The common shares of SXC are listing and posted for trading on the Toronto Stock Exchange and NASDAQ.
SXC is not in default of any of its obligations as a reporting issuer in any of the Jurisdictions.
Effective January 1, 2008, SXC adopted United States generally accepted accounting principles as defined in Part 1.1 of NI 52-107 (“US GAAP”) as the comprehensive basis of accounting and financial reporting. SXC filed its fiscal 2007 consolidated financial statements prepared in accordance with Canadian GAAP and including a reconciliation to US GAAP on SEDAR on March 18, 2008. In addition, SXC filed its fiscal 2007 annual report included on Form 10-K as its Annual Information Form on SEDAR on March 17, 2008. Form 10-K included its fiscal 2007 consolidated financial statements prepared in accordance with US GAAP.
On April 29, 2008, SXC, through its indirect wholly-owned subsidiary, Comet Merger Corporation (“Comet”), completed an exchange offer (the “Offer”) for all of the outstanding shares of NMHC and approximately 11,729,145 shares of NMHC common stock were exchanged in the Offer at a per share price of (i) $7.70 in cash, without interest, and (ii) 0.217 of a common share of SXC.
On April 30, 2008, Comet merged with and into NMHC, pursuant to the short-form merger procedure available under Delaware law (the “Merger”). As a result of the Merger, NMHC became an indirect, wholly-owned subsidiary of SXC and each share of NMHC common stock outstanding immediately prior to the Merger (other than shares of NMHC common stock held in NMHC’s treasury or owned by NMHC, SXC or any of its subsidiaries and shares for which dissenter’s rights were perfected) were converted into the right to receive $7.70 in cash, without interest, and 0.217 of a common share of SXC. In addition, 170,500 NMHC restricted stock units were assumed by SXC and converted into 126,731 SXC restricted stock units and all NMHC stock options outstanding at the effective time of the Merger were converted into the right to receive consideration based on the intrinsic value, if any, of such options.
In connection with the Offer and the Merger (collectively, the “Acquisition”), SXC issued approximately 2.8 million common shares and paid, through its subsidiaries, approximately $100 million in cash in exchange for all of the outstanding shares of NMHC common stock. Of the cash paid, approximately $54 million was cash on hand and $46 million was funds borrowed from a new term loan facility.
In connection with the Acquisition, SXC is required to file a BAR in accordance with Part 8 of National Instrument 51-102 Continuous Disclosure Obligations (“NI 51-102”) on or before July 14, 2008. NMHC is more than 20% significant to SXC as set out in Part 8 of NI 51-102.
In accordance with Part 4 of NI 52-107, SXC intends to present a reconciliation of US and Canadian GAAP differences that relate to recognition, measurement and presentation differences, and to provide disclosure consistent with disclosure requirements of Canadian GAAP applicable to public enterprises for all interim and annual filings ending December 31, 2009. The Canadian GAAP reconciliation information was included in SXC’s first quarter interim filing for the three months ended March 31, 2008 and 2007. The significant Canadian-US GAAP differences identified in note 11 to these interim consolidated financial statements were limited to accounting for income tax uncertainties and stock based compensation.
The BAR is expected to contain the following financial information prepared in accordance with US GAAP:
(a) The audited financial statements for NMHC as at June 30, 2007 and 2006, and for the years ended June 30, 2007, 2006 and 2005 prepared in accordance with US GAAP as set out in it annual report on Form 10-K, and the auditors’ report thereon (“Annual Acquisition Statements”).
(b) The unaudited interim financial statements of NMHC as at March 31, 2008 and for the three month and nine month periods ended March 31, 2008 and 2007 prepared in accordance with US GAAP. These interim statements were not filed with the SEC. (“Interim Acquisition Statements”) (Item 12 (a) and (b), collectively, the “Acquisition Statements”).
(c) The proforma combined balance sheet of SXC and NMHC as at March 31, 2008 and the proforma combined income statement of SXC and NMHC for the year ended December 31, 2007 and for the three month interim period ended March 31, 2008 based on the US GAAP information of the companies (collectively, the “Proforma Financial Information”).
Part 6.1(5)(b) of NI 52-107 requires that the Annual and Interim Acquisition Statements of NMHC be reconciled to Canadian GAAP consistent with Item 11 above. Part 7.1(2) of NI 52-107 requires that the Proforma Financial Information prepared in accordance with US GAAP also be reconciled to Canadian GAAP applicable to public enterprises.
As SXC (i) has previously filed consolidated financial statements for the period ended December 31, 2007 with comparatives for 2006 using the same accounting principles used to prepare the Acquisition Statements, i.e. US GAAP, and (ii) effective January 1, 2008, has adopted US GAAP as the comprehensive basis of accounting and financial reporting, a Canadian GAAP reconciliation of the Acquisition Statements is not necessary in order for investors to have a consistent basis of accounting for the Acquisition Statements and SXC's financial statements
SXC management will consolidate the results of operations of the acquired business from the acquisition date and, as part of that process, will conform the accounting policies of the acquired business to those of SXC. SXC will continue to present a Canadian GAAP reconciliation for the consolidated financial statements of SXC in its interim and annual filings through December 31, 2009.
Decision
The principal regulator is satisfied that the decision meets the test set out in the Legislation for the Decision Maker to make the decision.
The decision of the principal regulator under the Legislation is that the Exemptive Relief sought is granted.
“Lisa Enright”
Assistant Manager, Corporate Finance
Ontario Securities Commission