SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------
SCHEDULE 13E-4
ISSUER TENDER OFFER STATEMENT
(PURSUANT TO SECTION 13(E)(1) OF THE SECURITIES EXCHANGE
ACT OF 1934)
INTEGRATED HEALTH SERVICES, INC.
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(NAME OF ISSUER)
ROTECH MEDICAL CORPORATION
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(NAME OF PERSON(S) FILING STATEMENT)
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003 OF ROTECH MEDICAL
CORPORATION
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(TITLE OF CLASS OF SECURITIES)
778901 AB 4
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(CUSIP NUMBER OF CLASS OF SECURITIES)
MARSHALL A ELKINS, ESQ.
EXECUTIVE VICE PRESIDENT AND GENERAL COUNSEL
INTEGRATED HEALTH SERVICES, INC.
10065 RED RUN BOULEVARD
OWINGS MILLS, MARYLAND 21117
(410) 998-8400
(410) 998-8719 (FAX)
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(NAME AND ADDRESS AND TELEPHONE NUMBER OF PERSON AUTHORIZED TO RECEIVE NOTICES
AND COMMUNICATIONS ON BEHALF OF THE PERSON(S) FILING STATEMENT)
COPIES TO:
CARL E. KAPLAN, ESQ. LESLIE A. GLEW, ESQ.
FULBRIGHT & JAWORSKI L.L.P. INTEGRATED HEALTH SERVICES, INC.
666 FIFTH AVENUE 10065 RED RUN BOULEVARD
NEW YORK, NEW YORK 10103 OWINGS MILLS, MARYLAND 21117
(212) 318-3000 (410) 998-8573
(212) 752-5958 (FAX) (410) 998-8747 (FAX)
NOVEMBER 5,1997
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(Date tender offer first published, sent or given to security holders)
Calculation of filing fee
- --------------------------------------------------------------------------------
Transaction
valuation Amount of filing fee
- --------------------------------------------------------------------------------
$110,112,291.67 $22,022.46
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*The transaction valuation shown is only for the purpose of calculating the
filing fee. The amount shown reflects the cost of purchasing $110,000,000.00
principal amount of Debentures at the repurchase price (100% of the
<PAGE>
principal amount of the Debentures, plus accrued interest to the date of
repurchase) as of December 4, 1997 (the initial Expiration Date of the Offer).
The amount of the filing fee, calculated in accordance with Section 13(e)(3) of
the Securities Exchange Act of 1934, as amended, and Regulation 240.0-11
promulgated thereunder, equals 1/50 of 1% of the value of the Debentures to be
purchased.
[ ] CHECK BOX IF ANY PART OF THE FEE IS OFFSET AS PROVIDED BY RULE 0-11(A)(2)
AND IDENTIFY THE FILING WITH WHICH THE OFFSETTING FEE WAS PREVIOUSLY PAID.
IDENTIFY THE PREVIOUS FILING BY REGISTRATION STATEMENT NUMBER, OR THE FORM
OR SCHEDULE AND THE DATE OF ITS FILING.
Amount previously paid: _________________ Filing party: ____________
Form or registration no.: ________________ Date filed: ____________
<PAGE>
INTRODUCTION
This Schedule 13E-4 relates to a change of control offer (the "Offer")
by RoTech Medical Corporation, a Florida corporation ("RoTech"), to purchase for
cash, on the terms and subject to the conditions set forth in the attached
Change of Control Notice and Offer to Purchase dated November 5, 1997 (the
"Offer to Purchase") and the related Letter of Transmittal (the "Letter of
Transmittal"), all of the outstanding 5 1/4% Convertible Subordinated Debentures
due 2003 of RoTech (the "Debentures"). The Debentures are convertible into
shares of Common Stock, par value $.001 per share ("IHS Common Stock"), of
Integrated Health Services, Inc., a Delaware corporation ("IHS"), at a
conversion price of $45.21 per share of IHS Common Stock (22.119 shares per
$1,000 principal amount of Debentures). Copies of the Offer to Purchase and the
related Letter of Transmittal are filed as exhibits (a)(1) and (a)(2) hereto.
ITEM 1. SECURITY AND ISSUER
(a) The issuer of the Debentures is RoTech, a wholly-owned subsidiary
of IHS. The address of RoTech's principal executive office is 4506 L.B. McLeod
Road, Suite F, Orlando, Florida 32811. The Debentures are convertible into IHS
Common Stock. The address of IHS' principal executive office is 10065 Red Run
Boulevard, Owings Mills, Maryland 21117.
(b) The securities which are the subject of the Offer are the 5 1/4%
Convertible Subordinated Debentures due 2003 of RoTech. The Debentures are
convertible into IHS Common Stock at a conversion price of $45.21 per share of
IHS Common Stock (22.119 shares per $1,000 principal amount of Debentures). As
of November 5, 1997, there was $110,000,000.00 aggregate principal amount of
Debentures outstanding. The Offer is for any and all Debentures, in
denominations of $1,000 or integral multiples thereof, at 100% of the principal
amount of the Debentures, plus accrued interest to but excluding the date of
repurchase. To the best knowledge of RoTech, no Debentures are being purchased
from any executive officer, director or affiliate of RoTech or IHS.
(c) The information set forth in the Offer to Purchase under the
captions "Risk Factors-Limited Trading Market" and "The Offer-Market and Trading
Information" is incorporated herein by reference.
(d) RoTech is filing this statement. The address of RoTech is set forth
in Item l(a). RoTech is a wholly-owned subsidiary of IHS.
ITEM 2. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION.
(a) The information set forth in the Offer to Purchase under the
caption "The Offer-Source and Amount of Funds" is incorporated herein by
reference.
<PAGE>
(b) The information set forth in the Offer to Purchase under the
captions "The Offer-Source and Amount of Funds," "IHS Recent Developments-New
Credit Facility" and "Description of Certain IHS Indebtedness" is incorporated
herein by reference.
ITEM 3. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE ISSUER OR
AFFILIATE.
The information set forth in the Offer to Purchase under the caption
"The Offer-Purpose and Effects of the Offer" is incorporated herein by
reference. Upon repurchase, the Debentures will cease to be outstanding and will
be cancelled by PNC Bank, Kentucky, Inc., as Trustee.
(a) The information set forth in the Offer to Purchase under the
captions "Risk Factors-Limited Trading Market" and "The Offer-Purpose and
Effects of the Offer" is incorporated herein by reference.
(b) The information set forth in the Offer to Purchase under the
caption "IHS Recent Developments-Recent Acquisitions-RoTech Acquisition" is
incorporated herein by reference.
(c) The information set forth in the Offer to Purchase under the
caption "IHS Recent Developments-Recent Acquisitions-RoTech Acquisition" is
incorporated herein by reference.
(d) None.
(e) None.
(f) None.
(g) None.
(h) Not applicable.
(i) Not applicable.
(j) The information set forth in the Offer to Purchase under the
captions "Available Information" and "Risk Factors- Limited Trading Market" is
incorporated herein by reference.
<PAGE>
ITEM 4. INTEREST IN SECURITIES OF THE ISSUER.
Neither RoTech nor, to the best of RoTech's knowledge, any of RoTech's
or IHS' directors or executive officers has effected any transaction in the
Debentures during the 40 business days preceding the date of this Schedule
13E-4.
ITEM 5. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT
TO THE ISSUER'S SECURITIES.
The information set forth on the cover page of the Offer to Purchase
and in the Offer to Purchase under the captions "IHS Recent Developments-Recent
Acquisitions-RoTech Acquisition" and "The Offer-General" and "-Purpose and
Effects of the Offer" is incorporated herein by reference.
ITEM 6. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED.
The information set forth in the Offer to Purchase under the caption
"The Offer-Depositary and Information Agent" is incorporated herein by
reference.
ITEM 7. FINANCIAL INFORMATION.
(a) The information set forth in the Offer to Purchase under the
caption "Incorporation of Certain Documents by Reference" is incorporated herein
by reference.
(b) Not applicable.
ITEM 8. ADDITIONAL INFORMATION
(a) None.
(b) None, except for compliance with the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder and
compliance with applicable requirements of state securities or "blue sky" laws.
(c) None.
(d) None.
(e) Reference is hereby made to the exhibits hereto, which are
incorporated in their entirety herein by reference.
<PAGE>
ITEM 9. MATERIAL TO BE FILED AS EXHIBITS.
(a)(1) Change of Control Notice and Offer to Purchase dated November 5,
1997.
(a)(2) Letter of Transmittal.
(a)(3) Notice of Guaranteed Delivery.
(a)(4) Letter to brokers, dealers, commercial banks, trust companies
and other nominees.
(a)(5) Letter to clients.
(b)(1) $1,750,000,000 Revolving Credit and Term Loan Agreement, dated
as of September 15, 1997, among Integrated Health Services, Inc., the lenders
named therein, Citibank, N.A., as administrative agent, The Toronto-Dominion
Bank, as documentation agent, and Citicorp Securities, Inc., as arranger
(incorporated by reference to IHS' Current Report on Form 8-K dated September
15, 1997, as amended).
(c)(1) Indenture, dated as of June 1, 1996, between RoTech and PNC
Bank, Kentucky, Inc., as trustee (incorporated by reference to exhibit 4.2 to
RoTech's Annual Report on Form 10-K for the fiscal year ended July 31, 1996).
(c)(2) Supplemental Indenture, dated as of October 21, 1997, between
RoTech and PNC Bank, Kentucky, Inc., as trustee.
(d) Not applicable.
(e) Not applicable.
(f) Not applicable.
<PAGE>
SIGNATURE
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and correct.
ROTECH MEDICAL CORPORATION
By: /s/ W. Bradley Bennett
--------------------------
Name: W. Bradley Bennett
Title: Executive Vice President - Chief
Accounting Officer
Date: November 5, 1997
CHANGE OF CONTROL NOTICE AND OFFER TO PURCHASE
ROTECH MEDICAL CORPORATION
OFFER TO PURCHASE FOR CASH
ANY AND ALL OUTSTANDING
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
OF
ROTECH MEDICAL CORPORATION
($110 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE OFFER TO PURCHASE, THE
OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 4, 1997, UNLESS THE OFFER IS EXTENDED (SUCH TIME AND DATE OR THE LATEST
EXTENSION THEREOF, IF EXTENDED, THE "EXPIRATION DATE"). DEBENTURES TENDERED IN
THE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
RoTech Medical Corporation, a Florida corporation ("RoTech"), hereby offers
(the "Offer") to purchase for cash at the Repurchase Price (as defined below),
upon the terms and subject to the conditions set forth in this Change of Control
Notice and Offer to Purchase (as it may be supplemented and amended from time to
time, the "Offer to Purchase") and in the accompanying Letter of Transmittal (as
it may be supplemented and amended from time to time, the "Letter of
Transmittal") any and all of its outstanding 5 1/4% Convertible Subordinated
Debentures due 2003 (the "Debentures"). The "Repurchase Price" equals 100% of
the principal amount of the Debentures, plus accrued and unpaid interest up to
but excluding December 8, 1997 (the "Payment Date"), unless the Expiration Date
is extended as set forth under "The Offer--Expiration Date; Extension;
Amendment; Termination." Any Debentures not tendered in the Offer (or tendered
and withdrawn prior to the Expiration Date) will remain obligations of RoTech
and will continue to accrue interest and have all of the benefits of the
Indenture (as defined below).
The Offer is being made pursuant to the Indenture, dated as of June 1,
1996, as amended by a Supplemental Indenture, dated as of October 21, 1997 (as
amended, the "Indenture"), between RoTech and PNC Bank, Kentucky, Inc., as
trustee (the "Trustee"), which provides that following a Change of Control (as
defined below), each holder of Debentures (a "Holder") will have the right, at
such Holder's option, to require RoTech to repurchase in whole or in part such
Holder's Debentures at the Repurchase Price (a "Change of Control Right"). A
Change of Control occurred on October 21, 1997 as a result of the merger (the
"Merger") of IHS Acquisition XXIV, Inc. ("Merger Sub"), a Florida corporation
and a wholly-owned subsidiary of Integrated Health Services, Inc., a Delaware
corporation ("IHS"), with and into RoTech, pursuant to which RoTech became a
wholly-owned subsidiary of IHS. As a result of the Merger, each outstanding
share of common stock, $.0002 par value per share, of RoTech ("RoTech Common
Stock") became converted into the right to receive, and each right to acquire a
share of RoTech Common Stock became converted into the right to purchase, .5806
of a share of common stock, $.001 par value per share, of IHS (the "IHS Common
Stock"), with cash paid in lieu of any fractional shares.
As of November 4, 1997, there was $110,000,000 aggregate principal amount
of Debentures outstanding. Prior to the consummation of the Merger, the
Debentures were convertible into shares of RoTech Common Stock at a conversion
price of $26.25 per share of RoTech Common Stock. Upon consummation of the
Merger, pursuant to adjustment mechanisms contained in the Indenture, the
Debentures became, and are currently, convertible into shares of IHS Common
Stock at a conversion price of $45.21 per share of IHS Common Stock.
On November 4, 1997, the closing price per share of IHS Common Stock, as
reported on the New York Stock Exchange, Inc. (the "NYSE") Composite Tape, was
$32.3125. A Holder may convert Debentures into shares of IHS Common Stock until,
but not after, such Debenture is properly tendered to PNC Bank, Kentucky, Inc.,
as Depositary (the "Depositary"), unless the tender of such Debenture is
properly withdrawn, there is a default in payment of the Repurchase Price or the
Offer is terminated without the purchase of Debentures.
(cover page continues)
----------------
November 5, 1997
<PAGE>
Any Holder of Debentures desiring to tender all or any portion of such
Holder's Debentures must comply with the procedures for tendering Debentures set
forth under "The Offer -- Procedures for Tendering Debentures" and in the Letter
of Transmittal. Tenders of Debentures may be withdrawn at any time prior to the
Expiration Date. In the event of a withdrawal of Debentures, the Debentures so
withdrawn will be returned to the Holder promptly. Holders who do not tender
their Debentures for repurchase pursuant to the Offer or who withdraw their
Debentures prior to the Expiration Date will continue to hold the Debentures
pursuant to the terms of the Indenture, except that such Debentures will be
convertible into IHS Common Stock at a conversion price of $45.21 per share
(22.119 shares per $1,000 principal amount of Debentures). The Debentures will
continue to be obligations solely of RoTech, and will not be obligations of, or
guaranteed by, IHS. RoTech will continue its operations as a wholly-owned
subsidiary of IHS. Information regarding IHS is set forth in this Offer to
Purchase. See "Business of IHS." RoTech intends to apply under the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), to terminate the
registration of the Debentures under the Exchange Act on June 5, 1998, the date
RoTech is no longer required to keep effective under the Securities Act of 1933,
as amended (the "Securities Act"), a registration statement registering the
resale of the Debentures. Such termination will reduce the available information
about RoTech. Pursuant to the terms of the Indenture, the Debentures may be
redeemed in whole or in part at the option of RoTech at any time on or after
June 4, 1999, at a price, expressed as a percentage of the principal amount,
initially equal to 103.00% and declining to 100.75% on June 1, 2002. The
Indenture does not contain any limitations on the ability of RoTech to incur
additional indebtedness.
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment) and applicable law, RoTech will purchase by accepting for payment,
and will pay for all Debentures validly tendered (and not properly withdrawn)
pursuant to the Offer, promptly after the Expiration Date, such payment to be
made by the deposit of immediately available funds by RoTech with the
Depositary. Under no circumstances will any interest be payable because of any
delay in the transmission of funds to Holders. Subject to applicable securities
laws and the terms set forth in the Offer, RoTech reserves the right (i) to
waive any and all conditions to the Offer, (ii) to extend or to terminate the
Offer or (iii) otherwise to amend the Offer in any respect.
Notwithstanding any other provision of the Offer, RoTech's obligation to
accept for payment, and to pay for, Debentures validly tendered pursuant to the
Offer is conditioned upon the General Conditions (as defined herein). RoTech may
waive any of the conditions of the Offer, in whole or in part, at any time and
from time to time. See "The Offer -- Conditions of the Offer."
See "Risk Factors" commencing on page 22 and "Certain Federal Income Tax
Considerations" for discussions of certain factors that should be considered in
evaluating the Offer.
NEITHER ROTECH, IHS, THE INFORMATION AGENT NOR THE DEPOSITARY MAKES ANY
RECOMMENDATION AS TO WHETHER OR NOT HOLDERS SHOULD EXERCISE THEIR CHANGE OF
CONTROL RIGHT AND TENDER DEBENTURES PURSUANT TO THE OFFER.
Any questions or requests for assistance may be directed to the Information
Agent at the address and telephone numbers set forth below. Requests for
additional copies of this Offer to Purchase, the Letter of Transmittal, the
Notice of Guaranteed Delivery and other related documents may be directed to the
Information Agent. Beneficial owners may also contact their broker, dealer,
commercial bank or trust company for assistance concerning the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500
(800) 322-2885
The date of this Change of Control Notice and Offer to Purchase is
November 5, 1997.
(end of cover page)
<PAGE>
IMPORTANT
Any Holder desiring to tender Debentures should either (i) in the case of a
Holder who holds physical certificates evidencing such Debentures, complete and
sign the Letter of Transmittal (or a facsimile thereof) in accordance with the
instructions set forth therein, have his or her signature thereon guaranteed (if
required by Instruction 1 of the Letter of Transmittal) and send or deliver such
manually signed Letter of Transmittal (or a manually signed facsimile thereof),
together with certificates evidencing such Debentures and any other required
documents to PNC Bank, Kentucky, Inc., as Depositary, or (ii) in the case of a
Holder who holds Debentures in book-entry form, request such Holder's broker,
dealer, commercial bank, trust company or other nominee to effect the
transaction for such Holder pursuant to the procedures for book-entry delivery
set forth herein. See "The Offer -- Procedures for Tendering Debentures." A
beneficial owner who has Debentures registered in the name of a broker, dealer,
commercial bank, trust company or other nominee must contact such broker,
dealer, commercial bank, trust company or other nominee if such beneficial owner
desires to tender Debentures so registered.
The Depository Trust Company ("DTC") has authorized DTC participants that
hold Debentures on behalf of beneficial owners of Debentures through DTC to
tender their Debentures as if they were Holders. To effect a tender, DTC
participants should either (i) complete and sign the Letter of Transmittal or a
facsimile thereof, have the signature thereon guaranteed if required by
Instruction 1 of the Letter of Transmittal, and mail or deliver the Letter of
Transmittal or such facsimile pursuant to the procedure set forth in "The Offer
- -- Procedures for Tendering Debentures" or (ii) transmit their acceptance to DTC
through the DTC Automated Tender Offer Program ("ATOP"), for which the
transaction will be eligible, and follow the procedure for book-entry transfer
set forth in "The Offer -- Procedures for Tendering Debentures." A beneficial
owner of Debentures that are held of record by a custodian bank, depositary,
broker, trust company or other nominee must instruct such Holder to tender the
Debentures on the beneficial owner's behalf. A Letter of Instructions is
included in the solicitation materials provided along with this Offer to
Purchase which may be used by a beneficial owner in this process to give such
instructions. See "The Offer -- Procedures for Tendering Debentures."
Any Holder who desires to tender Debentures but who cannot comply with the
procedures set forth herein for tender on a timely basis or whose certificates
for Debentures are not immediately available may tender the Debentures by
following the procedures for guaranteed delivery set forth under "The Offer --
Procedures for Tendering Debentures -- Guaranteed Delivery."
Tendering Holders will not be obligated to pay brokerage fees or
commissions.
Questions and requests for assistance may be directed to the Information
Agent at its address and telephone numbers set forth on the back cover of this
Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of
Transmittal, the Notice of Guaranteed Delivery and other related materials may
be obtained from the Information Agent. Beneficial owners may also contact their
brokers, dealers, commercial banks or trust companies through which they hold
the Debentures with questions and requests for assistance.
The Offer to Purchase and the Letter of Transmittal do not constitute an
offer to purchase or the solicitation of an offer to sell securities in any
circumstances in which such offer or solicitation is unlawful. The delivery of
this Offer to Purchase shall not under any circumstances create any implication
that the information contained herein is correct as of any time subsequent to
the date hereof or that there has been no change in the information set forth or
incorporated by reference herein or in the affairs of IHS or its subsidiaries
(including RoTech) or affiliates since the date hereof.
----------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS OFFER TO
PURCHASE AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MAY NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY ROTECH, IHS OR THE INFORMATION AGENT.
i
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
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<S> <C>
AVAILABLE INFORMATION ...................................................... 2
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE .............................. 2
PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT ............... 3
THE OFFER .................................................................. 5
General ..................................................................... 5
Purpose and Effects of the Offer .......................................... 5
Expiration Date; Extension; Amendment; Termination ........................ 6
Conditions of the Offer ................................................... 7
Acceptance for Payment and Payment for Debentures ........................... 8
Procedures for Tendering Debentures ....................................... 8
Tender of Debentures ...................................................... 8
Tender of Debentures Held in Physical Form. .............................. 8
Tender of Debentures Held Through a Custodian ........................... 9
Tender of Debentures Held Through DTC. .................................... 9
Book-Entry Delivery Procedures. .......................................... 9
Signature Guarantees ...................................................... 10
Guaranteed Delivery. ...................................................... 10
Backup U.S. Federal Income Tax Withholding. .............................. 10
Determination of Validity. ................................................ 11
Withdrawal of Tenders ...................................................... 11
Source and Amount of Funds ................................................ 12
Market and Trading Information ............................................. 12
Depositary and Information Agent .......................................... 12
Fees and Expenses ......................................................... 13
Miscellaneous ............................................................... 13
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS .................................... 14
Sale of Debentures Pursuant to the Offer .................................... 14
Information Reporting ...................................................... 15
Backup Withholding and Substitute Form W-9 ................................. 15
CERTAIN INFORMATION CONCERNING ROTECH AND IHS .............................. 16
RoTech Medical Corporation ................................................ 16
Integrated Health Services, Inc. .......................................... 18
RISK FACTORS ............................................................... 22
Limited Trading Market ...................................................... 22
Subordination of the Debentures; Holding Company Structure .................. 22
Risks Related to Substantial Indebtedness of IHS ........................... 23
Risks Associated with Growth Through Acquisitions and Internal Development 24
Risks Related to Managed Care Strategy .................................... 25
Risks Related to Capital Requirements ....................................... 25
Risks Related to Recent Acquisitions ....................................... 26
Risks Related to Historical Financial Performance of First American ......... 27
Reliance on Reimbursement by Third Party Payors ........................... 27
Risk of Adverse Effect of Healthcare Reform ................................. 28
Uncertainty of Government Regulation ....................................... 28
Competition ............................................................... 30
Effects of Certain Anti-Takeover Provisions ................................. 31
Possible Volatility of Stock and Debenture Prices ........................... 31
</TABLE>
ii
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
- ------- -----
<S> <C>
Tax Matters ........................................................................ 31
IHS RECENT DEVELOPMENTS ............................................................ 32
Nine Month Results .................................................................. 32
Proposed Acquisition of Long-Term Care Facilities and Other Assets from HEALTHSOUTH
Corporation ..................................................................... 33
New Credit Facility ............................................................... 33
Recent Acquisitions ............................................................... 34
First American Acquisition ......................................................... 35
Other Acquisitions and Divestitures ................................................ 36
Repurchase of 9 5/8% Senior Subordinated Notes and 10 3/4% Senior Subordinated Notes 37
Sale of 9 1/2% Senior Subordinated Notes due 2007 ................................. 37
Sale of 9 1/4% Senior Subordinated Notes due 2008 ................................. 38
UNAUDITED PRO FORMA FINANCIAL INFORMATION .......................................... 39
BUSINESS OF IHS ..................................................................... 49
General Overview .................................................................. 49
Industry Background ............................................................... 50
Company Strategy .................................................................. 52
Patient Services .................................................................. 54
Management and Other Services ...................................................... 57
Quality Assurance .................................................................. 57
Operations ........................................................................ 58
Joint Ventures ..................................................................... 58
Sources of Revenue .................................................................. 58
Government Regulation ............................................................... 60
Federal and State Assistance Programs ............................................. 63
Competition ........................................................................ 64
Employees ........................................................................... 65
Insurance ........................................................................... 65
Legal Proceedings .................................................................. 65
DESCRIPTION OF IHS CAPITAL STOCK ................................................... 66
Authorized Capital Stock ............................................................ 66
IHS Common Stock .................................................................. 66
IHS Preferred Stock ............................................................... 66
Options, Warrants and Convertible Debentures ....................................... 66
Certain Provisions of IHS' By-Laws and the DGCL .................................... 67
IHS Stockholders' Rights Plan ...................................................... 67
Limitations on Liability of Officers and Directors ................................. 69
Transfer Agent and Registrar ...................................................... 70
DESCRIPTION OF CERTAIN IHS INDEBTEDNESS ............................................. 71
New Credit Facility ............................................................... 71
5 3/4% Convertible Senior Subordinated Debentures due 2001 ........................ 72
6% Convertible Subordinated Debentures due 2003 .................................... 72
9 1/4% Senior Subordinated Notes due 2008 .......................................... 72
9 1/2% Senior Subordinated Notes due 2007 .......................................... 73
10 1/4% Senior Subordinated Notes due 2006 .......................................... 73
10 3/4% Senior Subordinated Notes due 2004 .......................................... 73
9 5/8% Senior Subordinated Notes due 2002, Series A ................................. 74
Certain Other Obligations ......................................................... 74
</TABLE>
iii
<PAGE>
AVAILABLE INFORMATION
Each of IHS and RoTech is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Securities and Exchange Commission (the
"Commission"). The reports, proxy statements and other information filed by each
of IHS and RoTech with the Commission can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's Regional Offices
at 7 World Trade Center, 13th Floor, New York, New York 10048, and Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of
such material also may be obtained by mail from the Public Reference Section of
the Commission, Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. In addition, reports, proxy materials and other information
concerning IHS may be inspected at the offices of the NYSE, 20 Broad Street, New
York, New York 10005, and reports, proxy materials and other information
concerning RoTech may be inspected at the reading room of the National
Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, D.C.
20006. Additionally, the Commission maintains a Web site on the Internet that
contains reports, proxy and information statements and other information
regarding registrants, including IHS and RoTech, that file electronically with
the Commission and that is located at http://www.sec.gov.
RoTech intends to apply under the Exchange Act to terminate the
registration of the Debentures under the Exchange Act on June 5, 1998, the date
RoTech is no longer required to keep effective under the Securities Act a
registration statement registering the resale of the Debentures. Such
termination will reduce the available information about RoTech.
This Offer to Purchase constitutes a part of an Issuer Tender Offer
Statement on Schedule 13E-4 (the "Schedule 13E-4") filed with the Commission
pursuant to Section 13(e) of the Exchange Act and the rules and regulations
promulgated thereunder. The Schedule 13E-4 and all exhibits thereto are
incorporated by reference into this Offer to Purchase.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The information in the following documents filed by RoTech with the
Commission (File No. 0-14003) pursuant to the Exchange Act is incorporated by
reference in this Offer to Purchase:
1. Annual Report on Form 10-K for the fiscal year ended July 31, 1997;
2. Current Report on Form 8-K dated September 17, 1997 reporting earnings
for the fourth quarter and year ended July 31, 1997; and
3. Current Report on Form 8-K dated October 21, 1997 reporting IHS'
acquisition of RoTech.
The information in the following documents filed by IHS with the Commission
(File No. 1-12306) pursuant to the Exchange Act is incorporated by reference in
this Offer to Purchase:
1. Annual Report on Form 10-K for the year ended December 31, 1996;
2. Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
1997;
3. Quarterly Report on Form 10-Q for the fiscal quarter ended June 30,
1997;
4. Current Report on Form 8-K dated October 17, 1996 reporting the
acquisition of First American Health Care of Georgia, Inc. ("First
American"), as amended by Form 8-K/A filed November 26, 1996 and
Amendment No. 1 to Form 8-K/A filed July 11, 1997;
5. Current Report on Form 8-K dated October 19, 1996 reporting the
execution of the Agreement and Plan of Merger (the "Coram Merger
Agreement") among IHS, IHS Acquisition XIX, Inc. and Coram Healthcare
Corporation ("Coram"), as amended by Form 8-K/A filed April 11, 1997
reporting the termination of the Coram Merger Agreement;
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6. Current Report on Form 8-K dated May 23, 1997 reporting IHS' agreement
to issue privately an aggregate of $450 million principal amount of
its 9 1/2% Senior Subordinated Notes due 2007;
7. Current Report on Form 8-K dated May 30, 1997 reporting (i) IHS'
issuance of an aggregate of $450 million principal amount of its 9
1/2% Senior Subordinated Notes due 2007 and (ii) IHS' acceptance for
payment of an aggregate of $114,975,000 principal amount of its 9 5/8%
Senior Subordinated Notes due 2002, Series A and an aggregate of
$99,893,000 principal amount of its 10 3/4% Senior Subordinated Notes
due 2004 pursuant to cash tender offers;
8. Current Report on Form 8-K dated July 6, 1997 reporting the execution
of the Agreement and Plan of Merger, dated as July 6, 1997, among IHS,
Merger Sub and RoTech;
9. Current Report on Form 8-K dated September 9, 1997 reporting IHS'
agreement to issue privately an aggregate of $500 million principal
amount of its 9 1/4% Senior Subordinated Notes due 2008 (the "9 1/4%
Senior Notes");
10. Current Report on Form 8-K dated September 15, 1997, as amended,
reporting IHS' $1.75 billion revolving credit and term loan facility
(the "New Credit Facility");
11. Current Report on Form 8-K dated September 25, 1997 reporting IHS'
acquisition of Community Care of America, Inc. and the Lithotripsy
Division of Coram;
12. Current Report on Form 8-K dated October 21, 1997 reporting IHS'
acquisition of RoTech;
13. The description of the IHS Common Stock contained in Item 1 of IHS'
Registration Statement on Form 8-A dated September 1, 1993; and
14. The description of IHS' Preferred Stock Purchase Rights contained in
Item 1 of IHS' Registration Statement on Form 8-A dated September 28,
1995.
All documents filed by IHS and RoTech pursuant to Sections 13(a), 13(c), 14
or 15(d) of the Exchange Act after the date of this Offer to Purchase and prior
to the Expiration Date shall be deemed to be incorporated by reference in this
Offer to Purchase and to be a part hereof from the respective dates of filing of
such documents. Any statement contained herein or in a previously filed document
incorporated or deemed to be incorporated by reference herein shall be deemed to
be modified or superseded for purposes of this Offer to Purchase to the extent
that a statement contained herein or in any other subsequently filed document
which also is or was deemed to be incorporated by reference herein modifies or
supersedes such statement. Any such statement so modified or superseded shall
not be deemed, except as so modified or superseded, to constitute a part of this
Offer to Purchase.
The information relating to IHS and RoTech contained in this Offer to
Purchase should be read together with the information in the documents
incorporated by reference.
THIS OFFER TO PURCHASE INCORPORATES BY REFERENCE DOCUMENTS WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON, INCLUDING ANY BENEFICIAL OWNER, TO
WHOM THIS OFFER TO PURCHASE IS DELIVERED, UPON WRITTEN OR ORAL REQUEST. REQUESTS
FOR SUCH DOCUMENTS SHOULD BE DIRECTED, IN THE CASE OF IHS DOCUMENTS, TO
INTEGRATED HEALTH SERVICES, INC., 10065 RED RUN BOULEVARD, OWINGS MILLS,
MARYLAND 21117, ATTENTION: MARC B. LEVIN, TELEPHONE: (410) 998-8400, AND, IN THE
CASE OF ROTECH DOCUMENTS, TO ROTECH MEDICAL CORPORATION, 4506 L.B. MCLEOD ROAD,
SUITE F, ORLANDO, FLORIDA 32811, ATTENTION: SECRETARY, TELEPHONE: (407)
841-2115. IN ORDER TO ENSURE TIMELY DELIVERY OF THE DOCUMENTS PRIOR TO THE
EXPIRATION DATE, ANY SUCH REQUESTS SHOULD BE MADE BY NOVEMBER 26, 1997.
PRIVATE SECURITIES LITIGATION REFORM ACT
SAFE HARBOR STATEMENT
This Offer to Purchase (including the documents incorporated by reference
herein) contains certain forward-looking statements (as such term is defined in
the Private Securities Litigation Reform Act of 1995) and information relating
to IHS and RoTech that are based on the beliefs of the management of IHS
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and RoTech, as well as assumptions made by and information currently available
to the management of IHS and RoTech. When used in this Offer to Purchase, the
words "estimate," "project," "believe," "anticipate," "intend," "expect" and
similar expressions are intended to identify forward-looking statements. Such
statements reflect the current views of IHS and RoTech with respect to future
events and are subject to risks and uncertainties, including those discussed
under "Risk Factors," that could cause actual results to differ materially from
those contemplated in such forward-looking statements. Readers are cautioned not
to place undue reliance on these forward-looking statements, which speak only as
of the date hereof. Neither IHS nor RoTech undertakes any obligation to publicly
release any revisions to these forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
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THE OFFER
GENERAL
RoTech hereby offers, upon the terms and subject to the conditions set
forth in this Offer to Purchase, to purchase for cash at the Repurchase Price
any and all Debentures that are properly tendered (and not properly withdrawn),
pursuant to the terms and conditions set forth herein, prior to the Expiration
Date. RoTech will accept only tenders of Debentures or a portion thereof which
are in an amount equal to $1,000 principal amount of Debentures or integral
multiples thereof. Tenders of Debentures may be withdrawn at any time prior to
the Expiration Date. In the event of a withdrawal of Debentures, the Debentures
so withdrawn will be returned to the tendering Holders promptly.
Upon the terms and subject to the conditions of the Offer (including, if
the Offer is extended or amended, the terms and conditions of any such extension
or amendment) and applicable law, RoTech will purchase, by accepting for
payment, and will pay for, all Debentures validly tendered (and not properly
withdrawn) pursuant to the Offer, on the Payment Date, unless the Expiration
Date is extended as set forth herein under "The Offer -- Expiration Date;
Extension; Amendment; Termination." Such payment will be made by the deposit of
immediately available funds by RoTech with the Depositary, which will act as
agent for tendering Holders for the purpose of receiving payment from RoTech and
transmitting such payment to tendering Holders. Subject to the requirements of
Article Fourteen of the Indenture, RoTech expressly reserves the right, in its
sole discretion and subject to Rule 13e-4(f)(5) under the Exchange Act, to delay
acceptance for payment of or payment for Debentures in order to comply, in whole
or in part, with applicable law.
If less than all the principal amount of Debentures held by a Holder is
tendered and accepted pursuant to the Offer, RoTech shall issue, and the Trustee
shall authenticate and deliver to or on the order of the Holder thereof, at the
expense of RoTech, new Debentures of authorized denominations, in a principal
amount equal to the portion of the Debentures not tendered or not accepted, as
the case may be, as promptly as practicable after the Expiration Date.
A Debenture may be converted into shares of IHS Common Stock until, but not
after, such Debenture is properly tendered to the Depositary unless the tender
of such Debenture is properly withdrawn, there is a default in payment of the
Repurchase Price or the Offer is terminated without the purchase of the
Debentures.
After the Expiration Date, RoTech or its affiliates may seek to acquire any
Debentures which remain outstanding through open market purchases, privately
negotiated transactions, tender offers, exchange offers or otherwise, upon such
terms and at such prices as it may determine, which may be more or less than the
Repurchase Price and could be for cash or other consideration. There can be no
assurance as to which, if any, of these alternatives (or combinations thereof)
RoTech may pursue.
PURPOSE AND EFFECTS OF THE OFFER
The Offer is being made pursuant to the Indenture, which provides that,
following a Change of Control (as defined below), each Holder of Debentures will
have the right, at such Holder's option, to require RoTech to repurchase all or
a portion of such Holder's Debentures, in integral multiples of $1,000, at a
purchase price equal to 100% of the principal amount thereof plus accrued and
unpaid interest up to but excluding the Payment Date. A "Change of Control" is
defined in the Indenture to occur when: (i) all or substantially all of RoTech's
assets are sold as an entirety to any person or related group of persons; (ii)
there shall be consummated any consolidation or merger of RoTech (A) in which
RoTech is not the continuing or surviving corporation (other than a
consolidation or merger with a wholly-owned subsidiary of RoTech in which all
shares of RoTech Common Stock outstanding immediately prior to the effectiveness
thereof are changed into or exchanged for the same consideration) or (B)
pursuant to which the RoTech Common Stock would be converted into cash,
securities or other property, in each case, other than a consolidation or merger
of RoTech in which the holders of RoTech Common Stock immediately prior to the
consolidation or merger have, directly or indirectly, at least a majority of the
total voting power of all classes of capital stock entitled to vote generally in
the election
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of directors of the continuing or surviving corporation immediately after such
consolidation or merger in substantially the same proportion as their ownership
of RoTech Common Stock immediately before such transaction; (iii) any person, or
any persons acting together which would constitute a "group" for purposes of
Section 13(d) of the Exchange Act (a "Group"), together with any Affiliates (as
defined in the Indenture) thereof, shall beneficially own (as defined in Rule
13d-3 under the Exchange Act) at least 50% of the total voting power of all
classes of capital stock of RoTech entitled to vote generally in the election of
directors of RoTech; (iv) at any time during any consecutive two-year period,
individuals who at the beginning of such period constituted the Board of
Directors of RoTech (together with any new directors whose election by such
Board of Directors or whose nomination for election by the stockholders of
RoTech was approved by a vote of 66 2/3% of the directors then still in office
who were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of RoTech then in office; or (v)
RoTech is liquidated or dissolved or adopts a plan of liquidation or
dissolution.
A "Change of Control" occurred on October 21, 1997 as a result of the
consummation of the Merger, pursuant to which RoTech became a subsidiary of IHS
and all shares of RoTech Common Stock were converted into shares of IHS Common
Stock at the Exchange Ratio. This Offer to Purchase serves as the Change of
Control notice required by Section 14.02(a) of the Indenture.
The Debentures purchased in the Offer will cease to be outstanding and will
be delivered to the Trustee for cancellation immediately after such purchase.
Any Debentures which remain outstanding after consummation of the Offer will
continue to be obligations of RoTech and will continue to be convertible into
shares of IHS Common Stock at the option of the Holder at a price of $45.21 per
share (22.119 shares for each $1,000 principal amount of Debentures, which is
the consideration the Holder would have received in the Merger for each $1,000
principal amount of Debentures if such Debentures had been converted into RoTech
Common Stock immediately prior to the Merger). The Indenture does not contain
any limitations on the ability of RoTech to incur additional indebtedness.
Holders of Debentures that are not tendered pursuant to the Offer will not
have the right after the Expiration Date to exercise their Change of Control
Rights in respect of such Debentures in connection with the Merger. Depending
upon, among other things, the amount of Debentures outstanding after the
consummation of the Offer, the liquidity of untendered Debentures may be
adversely affected by the Offer. If there is a market for such Debentures
following the Offer, such Debentures may also trade at a discount compared to
current trading prices depending on prevailing interest rates, the market for
securities with similar credit features, the performance of IHS and RoTech and
the IHS Common Stock, as well as other factors. Accordingly, there is no
assurance that an active market in the Debentures following consummation of the
Offer will exist and no assurance as to the prices at which such Debentures may
trade. See "Risk Factors -- Limited Trading Market."
EXPIRATION DATE; EXTENSION; AMENDMENT; TERMINATION
The Offer will expire at 5:00 p.m., New York City time, on December 4,
1997, unless extended by RoTech. Subject to the requirements of Article Fourteen
of the Indenture, RoTech expressly reserves the right to extend the Offer on a
daily basis or for such period or periods as it may determine in its sole
discretion from time to time by giving written or oral notice to the Depositary
and by making a public announcement by press release (which shall include
disclosure of the approximate principal amount of Debentures deposited to date)
to the Dow Jones News Service prior to 9:00 a.m., New York City time, on the
next business day following the previously scheduled Expiration Date. During any
extension of the Offer, all Debentures previously tendered (and not properly
withdrawn) will remain subject to the Offer and, subject to the terms and
conditions of the Offer, may be accepted for payment by RoTech, subject to the
withdrawal rights of Holders.
Notwithstanding anything herein to the contrary, RoTech expressly reserves
the absolute right, in its sole discretion, to (a) waive any condition to the
Offer, (b) amend any term of the Offer and (c) modify the Repurchase Price. If
RoTech makes a material change in the terms of the Offer, RoTech will
disseminate additional Offer materials and will extend the Offer to the extent
required by applicable law. If RoTech changes the Repurchase Price for the
Debentures subject to the Offer, RoTech will, to
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the extent required by applicable law, cause the Offer to be extended, if
necessary, so that the Offer remains open at least until the expiration of ten
business days from the date that notice of such change is first published, sent
or given by RoTech to Holders. For purposes of the Offer, the term "business
day" means any day other than a Saturday, Sunday or federal holiday and consists
of the time period from 12:01 a.m. through 12:00 midnight, New York City time.
RoTech expressly reserves the right, in its sole discretion, to terminate
the Offer, including if any of the conditions applicable thereto set forth below
under "-- Conditions of the Offer" shall not have been satisfied or waived by
RoTech. Any such termination will be followed promptly by public announcement
thereof. In the event RoTech shall terminate the Offer, it shall as soon as
practicable give notice thereof to the Depositary, and all Debentures
theretofore tendered and not accepted for payment shall be returned promptly to
the tendering Holders thereof. See "-- Withdrawal of Tenders" and "-- Conditions
of the Offer" below.
CONDITIONS OF THE OFFER
Notwithstanding any other provision of the Offer, RoTech will not be
required to accept for payment, or to pay for, Debentures tendered pursuant to
the Offer, and may terminate, extend or amend the Offer and may, subject to Rule
13e-4(f)(5) under the Exchange Act, postpone the acceptance of Debentures so
tendered if any of the General Conditions shall not have been satisfied.
For purposes of the foregoing provisions, all the "General Conditions"
shall be deemed to have been satisfied unless any of the following conditions
shall occur prior to the Expiration Date:
(i) there shall have been instituted or threatened or be pending any
action or proceeding before or by any court or governmental, regulatory or
administrative agency or instrumentality, or by any other person, in
connection with the Offer that is, or is reasonably likely to be, in the
sole judgment of RoTech, materially adverse to the business, operations,
properties, condition (financial or otherwise), assets, liabilities or
prospects of RoTech or its subsidiaries;
(ii) any order, statute, rule, regulation, executive order, stay,
decree, judgment or injunction shall have been proposed, enacted, entered,
issued, promulgated, enforced or deemed applicable by any court or
governmental, regulatory or administrative agency or instrumentality that,
in the sole judgment of RoTech, would or might prohibit, prevent, restrict
or delay consummation of the Offer or that is, or is reasonably likely to
be, in the sole judgment of RoTech, materially adverse to the business,
operations, properties, condition (financial or otherwise), assets,
liabilities or prospects of RoTech or its subsidiaries;
(iii) there shall have occurred or be likely to occur any event that,
in the sole judgment of RoTech, would or might prohibit, prevent, restrict
or delay consummation of the Offer or that will, or is reasonably likely
to, result in the consummation of the Offer not being, or not being
reasonably likely to be, in the best interests of RoTech or its
subsidiaries;
(iv) the Trustee under the Indenture shall have objected in any
respect to, or taken any action that could, in the sole judgment of RoTech,
adversely affect the consummation of, the Offer, or shall have taken any
action that challenges the validity or effectiveness of the procedures used
by RoTech in (A) making the Offer or (B) the acceptance of, or payment for,
any of the Debentures; or
(v) there shall have occurred (a) any general suspension of, or
limitation on prices for, trading in securities in the United States
securities or financial markets, (b) any significant adverse change in the
trading prices for the Debentures or in any financial markets, (c) a
material impairment in the trading market for debt securities that could,
in the sole judgment of RoTech, affect the Offer, (d) a declaration of a
banking moratorium or any suspension of payments in respect of banks in the
United States, (e) any limitation (whether or not mandatory) by any
government or governmental, administrative or regulatory authority or
agency, domestic or foreign, on (or other event that, in the reasonable
judgment of RoTech, might affect) the extension of credit by banks or other
lending
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institutions, (f) a commencement of a war or armed hostilities or other
national or international calamity directly or indirectly involving the
United States, or (g) in the case of any of the foregoing existing on the
date hereof, a material acceleration or worsening thereof.
The conditions to the Offer are for the sole benefit of RoTech and may be
asserted by RoTech in its sole discretion regardless of the circumstances giving
rise to such conditions (including any action or inaction by RoTech) or may be
waived by RoTech, in whole or in part, at any time and from time to time, in its
sole discretion, whether or not any other condition of the Offer is also waived.
Any determination by RoTech concerning the events described in this section
shall be final and binding upon all persons.
ACCEPTANCE FOR PAYMENT AND PAYMENT FOR DEBENTURES
Upon the terms and subject to the conditions of the Offer (including if the
Offer is extended or amended, the terms and conditions of any such extension or
amendment) and applicable law, RoTech will purchase, by accepting for payment,
and will promptly pay for, after the Expiration Date, all Debentures validly
tendered pursuant to the Offer (and not withdrawn, or if withdrawn validly
retendered), such payment to be made by the deposit of the Repurchase Price in
immediately available funds by RoTech promptly after the Expiration Date with
the Depositary, which will act as agent for tendering Holders for the purpose of
receiving payment from RoTech and transmitting such payment to tendering
Holders. Under no circumstances will interest be paid by RoTech by reason of any
delay in making payment by the Depositary.
RoTech expressly reserves the right, in its sole discretion and subject to
the requirements of Article Fourteen of the Indenture and Rule 13e-4(f)(5) under
the Exchange Act, to delay acceptance for payment of, or payment for, Debentures
in order to comply, in whole or in part, with any applicable law. In all cases,
payment by the Depositary to Holders or beneficial owners of the consideration
for Debentures purchased pursuant to the Offer will be made only after timely
receipt by the Depositary of (i) certificates representing such Debentures or
timely confirmation of a book-entry transfer of such Debentures into the
Depositary's account at DTC pursuant to the procedures set forth herein, (ii) a
properly completed and duly executed Letter of Transmittal (or manually signed
facsimile thereof) or a properly transmitted Agent's Message (as defined below)
and (iii) any other documents required by the Letter of Transmittal.
Tendered Debentures will be deemed to have been accepted for payment if, as
and when RoTech gives oral or written notice thereof to the Depositary.
Tendering Holders will not be obligated to pay brokerage fees or
commissions or, except as set forth in the Instructions to the Letter of
Transmittal, transfer taxes on the purchase of Debentures pursuant to the Offer.
PROCEDURES FOR TENDERING DEBENTURES
Tender of Debentures. The tender by a Holder of Debentures (and subsequent
acceptance of such tender by RoTech) pursuant to one of the procedures set forth
below will constitute a binding agreement between such Holder and RoTech in
accordance with the terms and subject to the conditions set forth herein and in
the Letter of Transmittal.
Only Holders are authorized to exercise a Change of Control Right and to
tender their Debentures pursuant to the Offer. The procedures by which the
Change of Control Right may be exercised and the Debentures may be tendered by
beneficial owners that are not Holders will depend upon the manner in which the
Debentures are held.
Tender of Debentures Held in Physical Form. To effectively exercise a
Change of Control Right and tender Debentures held in physical form pursuant to
the Offer, a properly completed Letter of Transmittal (or a facsimile thereof
duly executed by the Holder thereof), and any other documents required by the
Letter of Transmittal, must be received by the Depositary at its address set
forth on the back cover of this Offer to Purchase (or delivery of Debentures may
be effected through the deposit of
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Debentures with DTC and making book-entry delivery as set forth below) on or
prior to the Expiration Date; provided, however, that the tendering Holder may
instead comply with the guaranteed delivery procedure set forth below. LETTERS
OF TRANSMITTAL AND DEBENTURES SHOULD BE SENT ONLY TO THE DEPOSITARY AND SHOULD
NOT BE SENT TO ROTECH OR IHS.
Tender of Debentures Held Through a Custodian. To effectively exercise a
Change of Control Right and tender Debentures that are held of record by a
custodian bank, depositary, broker, trust company or other nominee, the
beneficial owner thereof must instruct such Holder to tender the Debentures on
the beneficial owner's behalf. A Letter of Instructions is included in the
materials provided with this Offer to Purchase which may be used by a beneficial
owner in this process to give such instructions. Any beneficial owner of
Debentures held of record by DTC or its nominee, through authority granted by
DTC, may direct the DTC participant through which such beneficial owner's
Debentures are held in DTC to tender on such beneficial owner's behalf.
Tender of Debentures Held Through DTC. To effectively exercise a Change of
Control Right and tender Debentures that are held through DTC, DTC participants
should transmit their acceptance through ATOP, for which the transaction will be
eligible, and DTC will then edit and verify the acceptance and send an Agent's
Message to the Depositary for its acceptance. Delivery of tendered Debentures
must be made to the Depositary pursuant to the book-entry delivery procedures
set forth below or the tendering DTC participant must comply with the guaranteed
delivery procedures set forth below.
THE METHOD OF DELIVERY OF DEBENTURES AND LETTERS OF TRANSMITTAL, ANY
REQUIRED SIGNATURE GUARANTEES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING
DELIVERY THROUGH DTC AND ANY ACCEPTANCE OF AN AGENT'S MESSAGE TRANSMITTED
THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE PERSON TENDERING DEBENTURES AND
DELIVERING LETTERS OF TRANSMITTAL AND, EXCEPT AS OTHERWISE PROVIDED IN THE
LETTER OF TRANSMITTAL, DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED
BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, IT IS SUGGESTED THAT THE HOLDER USE
PROPERLY INSURED, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, AND THAT THE
MAILING BE MADE SUFFICIENTLY IN ADVANCE OF THE EXPIRATION DATE TO PERMIT
DELIVERY TO THE DEPOSITARY PRIOR TO SUCH DATE.
Except as provided below, unless the Debentures being tendered are
deposited with the Depositary on or prior to the Expiration Date (accompanied by
a properly completed and duly executed Letter of Transmittal or a properly
transmitted Agent's Message), RoTech may, at its option, treat such tender as
defective for purposes of the right to receive the Repurchase Price. Payment for
the Debentures will be made only against deposit of the tendered Debentures and
delivery of all other required documents.
Book-Entry Delivery Procedures. The Depositary will establish accounts with
respect to the Debentures at DTC for purposes of the Offer within two business
days after the date of this Offer to Purchase, and any financial institution
that is a participant in DTC may make book-entry delivery of the Debentures by
causing DTC to transfer such Debentures into the Depositary's account in
accordance with DTC's procedures for such transfer. However, although delivery
of Debentures may be effected through book-entry transfer into the Depositary's
account at DTC, the Letter of Transmittal (or facsimile thereof), with any
required signature guarantees or an Agent's Message in connection with a
book-entry transfer, and any other required documents, must, in any case, be
transmitted to and received by the Depositary at one or more of its addresses
set forth on the back cover of this Offer to Purchase on or prior to the
Expiration Date, or the guaranteed delivery procedure described below must be
complied with. Delivery of documents to DTC does not constitute delivery to the
Depositary. The confirmation of a book-entry transfer into the Depositary's
account at DTC as described above is referred to herein as a "Book-Entry
Confirmation."
The term "Agent's Message" means a message transmitted by DTC to, and
received by, the Depositary and forming a part of the Book-Entry Confirmation,
which states that DTC has received an express acknowledgment from the
participants in DTC described in such Agent's Message, stating the aggregate
principal amount of Debentures which have been tendered by such participants
pursuant to the Offer and that such participants have received this Offer to
Purchase and the Letter of Transmittal and agree to be bound by the terms of
this Offer to Purchase and the Letter of Transmittal, and RoTech may enforce
such agreement against such participants.
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Signature Guarantees. Signatures on all Letters of Transmittal must be
guaranteed by a recognized participant in the Securities Transfer Agents
Medallion Program, the New York Stock Exchange Medallion Signature Program or
the Stock Exchange Medallion Program (a "Medallion Signature Guarantor"), unless
the Debentures tendered thereby are tendered (i) by a registered Holder of
Debentures (or by a participant in DTC whose name appears on a security position
listing as the owner of such Debentures) who has not completed either the box
entitled "Special Delivery Instructions" or "Special Payment Instructions" on
the Letter of Transmittal, or (ii) for the account of a member firm of a
registered national securities exchange, a member of the National Association of
Securities Dealers, Inc. ("NASD") or a commercial bank or trust company having
an office or correspondent in the United States (each of the foregoing being
referred to as an "Eligible Institution"). See Instruction 1 of the Letter of
Transmittal. If the Debentures are registered in the name of a person other than
the signer of the Letter of Transmittal or if Debentures not accepted for
payment or not tendered are to be returned to a person other than the registered
Holder, then the signatures on the Letters of Transmittal accompanying the
tendered Debentures must be guaranteed by a Medallion Signature Guarantor as
described above. See Instructions 1 and 5 of the Letter of Transmittal.
Guaranteed Delivery. If a Holder desires to tender Debentures pursuant to
the Offer and time will not permit the Letter of Transmittal, certificates
representing such Debentures and all other required documents to reach the
Depositary, or the procedures for book-entry transfer cannot be completed, on or
prior to the Expiration Date, such Debentures may nevertheless be tendered, with
the effect that such tender will be deemed to have been received prior to the
Expiration Date, if all the following conditions are satisfied:
(i) the tender is made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed Delivery,
substantially in the form provided by RoTech herewith, or an Agent's
Message with respect to guaranteed delivery, is received by the
Depositary prior to 5:00 p.m., New York City time, on the Expiration
Date, as provided below; and
(iii)the certificates for the tendered Debentures, in proper form for
transfer (or a Book-Entry Confirmation of the transfer of such
Debentures into the Depositary's account at DTC as described above),
together with a Letter of Transmittal (or facsimile thereof) properly
completed and duly executed, with any required signature guarantees
and any other documents required by the Letter of Transmittal or a
properly transmitted Agent's Message, are received by the Depositary
within three business days after the date of execution of the Notice
of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be sent by hand delivery, facsimile
transmission or mail to the Depositary and must include a guarantee by an
Eligible Institution in the form set forth in the Notice of Guaranteed Delivery.
Notwithstanding any other provision hereof, payment of the Repurchase Price
for Debentures tendered and accepted for payment pursuant to the Offer will, in
all cases, be made only after timely receipt by the Depositary of the tendered
Debentures (or Book-Entry Confirmation of the transfer of such Debentures into
the Depositary's account at DTC as described above), and a Letter of Transmittal
(or facsimile thereof) with respect to such Debentures, properly completed and
duly executed, with any required signature guarantees and any other documents
required by the Letter of Transmittal, or a properly transmitted Agent's
Message.
UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY ROTECH BY REASON OF ANY
DELAY IN MAKING PAYMENT TO ANY PERSON USING THE GUARANTEED DELIVERY PROCEDURES.
THE REPURCHASE PRICE FOR DEBENTURES TENDERED PURSUANT TO THE GUARANTEED DELIVERY
PROCEDURES WILL BE THE SAME AS THAT FOR DEBENTURES DELIVERED TO THE DEPOSITARY
ON OR PRIOR TO THE EXPIRATION DATE, EVEN IF THE DEBENTURES TO BE DELIVERED
PURSUANT TO THE GUARANTEED DELIVERY PROCEDURES ARE NOT SO DELIVERED TO THE
DEPOSITARY, AND THEREFORE PAYMENT BY THE DEPOSITARY ON ACCOUNT OF SUCH
DEBENTURES IS NOT MADE, UNTIL AFTER THE PAYMENT DATE.
Backup U.S. Federal Income Tax Withholding. To prevent backup U.S. federal
income tax withholding, each tendering Holder of Debentures must provide the
Depositary with such Holder's correct taxpayer identification number and certify
that such Holder is not subject to backup U.S. federal income
10
<PAGE>
tax withholding by completing the Substitute Form W-9 included in the Letter of
Transmittal. For a discussion of federal income tax considerations relating to
backup withholding, see "Certain Federal Income Tax Considerations -- Backup
Withholding and Substitute Form W-9."
Determination of Validity. All questions as to the validity, form,
eligibility (including time of receipt) and acceptance of any tendered
Debentures pursuant to any of the procedures described above will be determined
by RoTech in RoTech's sole discretion (whose determination shall be final and
binding). RoTech reserves the absolute right to reject any or all tenders of any
Debentures determined by it not to be in proper form or if the acceptance for
payment, or payment for, such Debentures may, in the opinion of RoTech's
counsel, be unlawful. RoTech also reserves the absolute right, in its sole
discretion, to waive any of the conditions of the Offer or any defect or
irregularity in any tender with respect to Debentures of any particular Holder,
whether or not similar defects or irregularities are waived in the case of other
Holders. RoTech's interpretation of the terms and conditions of the Offer
(including the Letter of Transmittal and the Instructions thereto) will be final
and binding. No tender of Debentures will be deemed to have been validly made
until all defects or irregularities have been cured or expressly waived. None of
RoTech, IHS, the Depositary, the Information Agent, the Trustee or any other
person will be under any duty to give notification of any defects or
irregularities in tenders or consents or will incur any liability for failure to
give any such notification. If RoTech waives its right to reject a defective
tender of Debentures, the Holder will be entitled to the Repurchase Price.
WITHDRAWAL OF TENDERS
Tenders of Debentures may be withdrawn at any time prior to 5:00 p.m., New
York City time, on the Expiration Date.
For a withdrawal of a tender of Debentures to be effective, a written,
telegraphic or facsimile transmission notice of withdrawal must be received by
the Depositary prior to 5:00 p.m., New York City time, on the Expiration Date at
its address set forth on the back cover of this Offer to Purchase. Any such
notice of withdrawal must (i) specify the name of the person who tendered the
Debentures to be withdrawn, (ii) contain the description of the Debentures to be
withdrawn and identify the certificate number or numbers shown on the particular
certificates evidencing such Debentures (unless such Debentures were tendered by
book-entry transfer) and the aggregate principal amount represented by such
Debentures and (iii) be signed by the Holder of such Debentures in the same
manner as the original signature on the Letter of Transmittal by which such
Debentures were tendered (including any required signature guarantees), if any,
or be accompanied by (x) documents of transfer sufficient to have the Trustee
register the transfer of the Debentures into the name of the person withdrawing
such Debentures and (y) a properly completed irrevocable proxy that authorized
such person to effect such revocation on behalf of such Holder. If Debentures
have been delivered pursuant to the procedures for book-entry transfer, any
notice of withdrawal must specify the name and number of the account of the
appropriate book-entry transfer facility to be credited with such withdrawn
Debentures and must otherwise comply with such book-entry transfer facility's
procedures. If the Debentures to be withdrawn have been delivered or otherwise
identified to the Depositary, a signed notice of withdrawal is effective
immediately upon written or facsimile notice of withdrawal even if physical
release is not yet effected. Any Debentures properly withdrawn will be deemed to
be not validly tendered for purposes of the Offer.
Withdrawal of Debentures can only be accomplished in accordance with the
foregoing procedures.
ALL QUESTIONS AS TO THE VALIDITY (INCLUDING TIME OF RECEIPT) OF NOTICES OF
WITHDRAWAL WILL BE DETERMINED BY ROTECH, IN ROTECH'S SOLE DISCRETION (WHOSE
DETERMINATION SHALL BE FINAL AND BINDING). NO WITHDRAWAL OF DEBENTURES WILL BE
DEEMED TO HAVE BEEN PROPERLY MADE UNTIL ALL DEFECTS OR IRREGULARITIES HAVE BEEN
CURED OR EXPRESSLY WAIVED. NONE OF ROTECH, IHS, THE DEPOSITARY, THE INFORMATION
AGENT, THE TRUSTEE OR ANY OTHER PERSON WILL BE UNDER ANY DUTY TO GIVE
NOTIFICATION OF ANY DEFECTS OR IRREGULARITIES IN ANY NOTICE OF WITHDRAWAL, OR
INCUR ANY LIABILITY FOR FAILURE TO GIVE ANY SUCH NOTIFICATION.
ANY DEBENTURES PROPERLY WITHDRAWN WILL BE DEEMED NOT TO BE VALIDLY TENDERED
FOR PURPOSES OF THE OFFER. WITHDRAWN DEBENTURES MAY BE RETENDERED BY FOLLOWING
ONE OF THE PROCEDURES DESCRIBED ABOVE AT ANY TIME PRIOR TO THE EXPIRATION DATE.
11
<PAGE>
SOURCE AND AMOUNT OF FUNDS
The precise amount of funds required by RoTech to purchase Debentures
tendered pursuant to the Offer and to pay all related costs and expenses will
not be known until the Expiration Date. If all outstanding Debentures were
tendered and purchased, the aggregate amount of funds required to pay the
Repurchase Price would be $110,000,000. Such funds are expected to be provided
through a capital contribution by IHS to RoTech. IHS intends to provide such
capital contribution from term loan borrowings under its New Credit Facility and
the proceeds from the sale of the 9 1/4% Senior Notes. Assuming 100% of the
outstanding principal amount of the Debentures is tendered prior to the
Expiration Date, RoTech expects to record an extraordinary loss on
extinguishment of debt of approximately $1,722,000 (net of related income tax
effect of approximately $1,106,000) in the fourth quarter of 1997.
MARKET AND TRADING INFORMATION
The Debentures were issued in 1996, and there currently is a limited
trading market for the Debentures, which are not listed on any securities
exchange. To RoTech's knowledge, the Debentures are traded infrequently in
transactions arranged through market makers, and there is no publicly available
pricing information for the Debentures. Quotations for securities that are not
widely traded, such as the Debentures, may differ from actual trading prices and
should be viewed as approximations. Holders of Debentures are urged to contact
their brokers to obtain the best available information as to current market
prices. See "Risk Factors -- Limited Trading Market."
The IHS Common Stock is traded on the NYSE under the symbol "IHS." The
following table sets forth for the periods indicated the high and low reported
sale prices for the IHS Common Stock as reported on the NYSE Composite Tape.
HIGH LOW
---------- -----------
CALENDAR YEAR 1995
First Quarter .............................. $42 1/2 $34 1/2
Second Quarter ........................... 37 1/4 28 5/8
Third Quarter .............................. 32 7/8 27 5/8
Fourth Quarter ........................... 29 3/4 20 3/8
CALENDAR YEAR 1996
First Quarter .............................. 26 20 1/8
Second Quarter ........................... 27 7/8 23 3/8
Third Quarter .............................. 25 7/8 20 1/2
Fourth Quarter ........................... 27 3/8 22
CALENDAR YEAR 1997
First Quarter ........................... 32 3/8 23 3/4
Second Quarter ........................... 39 26 7/8
Third Quarter ........................... 39 1/8 32 11/16
Fourth Quarter (through November 4) ...... 33 7/8 30 9/16
On November 4, 1997, the closing sale price of the IHS Common Stock, as
reported on the NYSE Composite Tape, was $32 5/16 per share.
HOLDERS ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE DEBENTURES
AND THE IHS COMMON STOCK PRIOR TO MAKING ANY DECISION WITH RESPECT TO THE OFFER.
Depositary and Information Agent
PNC Bank, Kentucky, Inc., the Trustee under the Indenture, has been
appointed Depositary for the Offer. All deliveries and correspondence sent to
the Depositary should be directed to its address set forth on the back cover of
this Offer to Purchase. Requests for assistance or additional copies of this
Offer to Purchase and the Letter of Transmittal should be directed to the
Information Agent at its address set forth on the back cover of this Offer to
Purchase. Holders of the Debentures may also contact their broker, dealer,
commercial bank or trust company for assistance concerning the Offer.
12
<PAGE>
FEES AND EXPENSES
RoTech will pay the Depositary and the Information Agent reasonable and
customary fees for their services (and will reimburse them for their reasonable
out-of-pocket expenses in connection therewith), and will pay brokerage houses
and other custodians, nominees and fiduciaries the reasonable out-of-pocket
expenses incurred by them in forwarding copies of this Offer to Purchase and
related documents to the beneficial owners of the Debentures and in handling or
forwarding tenders for purchase. In addition, RoTech has agreed to indemnify the
Depositary and the Information Agent against certain liabilities in connection
with their services, including liabilities under the federal securities laws.
RoTech will pay all transfer taxes, if any, applicable to the purchase of
Debentures pursuant to the Offer. If, however, Debentures for principal amounts
not accepted for tender are to be delivered to, or are to be registered or
issued in the name of, any person other than the registered Holder of the
Debentures, or if tendered Debentures are registered in the name of any person
other than the person signing the Letter of Transmittal, or if a transfer tax is
imposed for any reason other than the purchase of Debentures pursuant to the
Offer, then the amount of any such transfer tax (whether imposed on the
registered Holder or any other person) will be payable by the tendering Holder.
If satisfactory evidence of payment of such tax or exemption therefrom is not
submitted, then the amount of such transfer tax will be deducted from the
Repurchase Price otherwise payable to such tendering Holder.
MISCELLANEOUS
In connection with the Offer, directors, officers and employees of IHS and
RoTech (who will not be specifically compensated for such services) may solicit
tenders of Debentures by use of the mails, personally or by telephone, telegram
or facsimile transmissions.
RoTech is not aware of any jurisdiction where the making of the Offer is
not in compliance with the laws of such jurisdiction. If RoTech becomes aware of
any jurisdiction where the making of the Offer would not be in compliance with
such laws, RoTech will make a good faith effort to comply with any such laws or
seek to have such laws declared inapplicable to the Offer. If, after such good
faith effort, RoTech cannot comply with any such applicable laws, the Offer will
not be made to (nor will tenders be accepted from or on behalf of) the Holders
of the Debentures residing in such jurisdiction.
13
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following discussion summarizes certain federal income tax consequences
resulting from the sale of the Debentures pursuant to the Offer. This summary is
general in nature, and does not address all of the federal income tax
consequences that may be relevant to a Holder in light of such Holder's
particular tax situation or to certain classes of Holders subject to special
treatment under the federal income tax laws (for example, dealers in securities,
banks, insurance companies, subchapter S corporations, nonresident aliens,
foreign corporations, tax exempt entities, employee stock ownership plans,
individual retirement and other tax-deferred accounts, and persons who hold the
Debentures as a hedge, who have otherwise hedged the risk of holding Debentures,
who hold the Debentures as part of a straddle with other investments, or who
hold the Debentures in connection with a conversion transaction). In addition,
the discussion does not consider the effect of any foreign, state, local or
other tax laws, or any U.S. tax considerations (e.g., estate or gift tax) other
than U.S. federal income tax considerations, that may be applicable to
particular Holders. This discussion is directed at Holders who are United States
persons and assumes that the Debentures are held as "capital assets" (generally,
property held for investment) within the meaning of section 1221 of the Internal
Revenue Code of 1986, as amended (the "Code").
This summary is based upon the Code, the Treasury Regulations promulgated
thereunder, Internal Revenue Service ("IRS") rulings, and judicial decisions,
all as in effect on the date hereof, and all of which are subject to change or
differing interpretations, possibly with retroactive effect. No assurance can be
given that the treatment described herein of the cash payments pursuant to the
Offer will be accepted by the IRS or, if challenged, by a court.
HOLDERS OF DEBENTURES ARE URGED TO CONSULT THEIR OWN TAX ADVISORS REGARDING
THE TAX CONSEQUENCES OF TENDERING OR FAILING TO TENDER DEBENTURES, INCLUDING THE
APPLICATION AND EFFECT OF ANY GIFT, ESTATE, STATE, LOCAL, FOREIGN OR OTHER TAX
LAWS.
SALE OF DEBENTURES PURSUANT TO THE OFFER
A sale of Debentures by a Holder pursuant to the Offer will be a taxable
transaction to such Holder for federal income tax purposes. A Holder will
generally recognize capital gain (subject to the market discount rules discussed
below) or loss on the sale of a Debenture in an amount equal to the difference
between (i) the amount of cash received for such Debenture, other than the
portion of such amount that is properly allocable to accrued interest, which
will be taxed as ordinary income, and (ii) the Holder's "adjusted tax basis" for
such Debenture at the time of the sale. Gain or loss will be separately computed
for each block of Debentures tendered by a Holder. Such capital gain or loss
will be eligible for taxation at a maximum federal income tax rate of 20% if the
Holder is an individual, estate or trust who held the Debenture for more than 18
months at the time of such sale and 28% if held for more than one year but 18
months or less, at the time of sale. Generally, a Holder's adjusted tax basis
for a Debenture will be equal to the cost of the Debenture to such Holder, less
payments (other than interest payments) received on the Debenture. If
applicable, a Holder's tax basis in a Debenture also would be increased by any
market discount previously included in income by such Holder pursuant to an
election to include market discount in gross income currently as it accrues, and
would be reduced by the accrual of amortizable bond premium which the Holder has
previously elected to deduct from gross income on an annual basis. Certain
limitations exist on the deduction of capital losses by both corporations and
individual taxpayers. Tendering Holders of Debentures should consult their own
tax advisors with respect to the tax consequences to them of the receipt of cash
in a sale pursuant to the Offer.
An exception to the capital gain treatment described above may apply to a
Holder who purchased a Debenture at a "market discount." Subject to a statutory
de minimis exception, market discount is the excess of the stated redemption
price at maturity of such Debenture over the Holder's tax basis in such
Debenture immediately after its acquisition by such Holder. In general, unless
the Holder has elected to include market discount in income currently as it
accrues, any gain realized by a Holder on the sale of a Debenture having market
discount will be treated as ordinary income to the extent of the market discount
that has accrued (on a straight line basis or, at the election of the Holder, on
a constant interest basis) while such Debenture was held by the Holder.
14
<PAGE>
INFORMATION REPORTING
Information statements will be provided to the IRS and to Holders whose
Debentures are sold pursuant to the Offer reporting the payment of the
consideration for the Debentures (except with respect to Holders that are exempt
from the information reporting rules, such as corporations).
BACKUP WITHHOLDING AND SUBSTITUTE FORM W-9
Under federal income tax law, certain Holders whose tendered Debentures are
accepted for payment are required to provide the Depositary (as payor) with such
Holder's current taxpayer identification number ("TIN") on the Substitute Form
W-9 (included as part of the Letter of Transmittal). If the Holder is an
individual, the TIN is his or her social security number. If the Depositary is
not provided with the correct TIN, the Holder or other payee may be subject to a
$50 penalty imposed by the IRS. In addition, any consideration paid to such
Holder or other payee with respect to Debentures purchased pursuant to the Offer
may be subject to backup withholding.
Certain Holders (including, among others, corporations and certain foreign
individuals) are not subject to these backup withholding and reporting
requirements. In order for a foreign individual to qualify as an exempt
recipient, that Holder must submit to the Depositary a properly completed IRS
Form W-8 signed under penalties of perjury, attesting to such individual's
exempt status. A Form W-8 can be obtained from the Information Agent. If backup
withholding applies, the Depositary is required to withhold 31% of any
consideration paid to the Holder or other payee. Backup withholding is not an
iadditional tax. Rather, the federal income tax liability of persons subject to
backup withholding will be reduced by the amount of tax withheld. If withholding
results in an overpayment of federal income taxes, a refund may be obtained from
the IRS provided the required information is furnished.
To prevent backup withholding on any consideration paid to a Holder or
other payee with respect to Debentures purchased pursuant to the Offer, the
Holder or other payee is required to complete the Substitute Form W-9 in the
Letter of Transmittal certifying that the TIN provided on such form is correct
and that such Holder or other payee is not subject to backup withholding.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES
NOT CONSIDER THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY HOLDER'S SITUATION OR
STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE CODE, REGULATIONS, RULINGS
AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH ARE SUBJECT TO CHANGE,
POSSIBLY ON A RETROACTIVE BASIS. HOLDERS OF DEBENTURES (INCLUDING HOLDERS OF
DEBENTURES WHO DO NOT TENDER THEIR DEBENTURES) SHOULD CONSULT THEIR OWN TAX
ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM, INCLUDING THE TAX
CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER LAWS, OF THE SALE OF THE
DEBENTURES.
15
<PAGE>
CERTAIN INFORMATION CONCERNING ROTECH AND IHS
ROTECH MEDICAL CORPORATION
RoTech Medical Corporation provides comprehensive home healthcare,
principally to patients in non-urban areas. RoTech currently operates 631
locations in 36 states. RoTech's home healthcare business provides a diversified
range of products and services, with an emphasis on home respiratory, home
medical equipment and infusion therapy. RoTech has pursued an aggressive
acquisition strategy since 1988, which included in the year ended July 31, 1997
acquisitions of 174 locations of smaller home healthcare companies and the
opening of 49 new locations. RoTech plans to continue to enter new home
healthcare markets through acquisitions or start-ups as competitive and pricing
pressures encourage consolidation and economies of scale.
Recent data suggests that there is a shortage of healthcare services in
non-urban markets. According to the United States Census Bureau, in 1990
non-urban areas of the United States accounted for roughly 25% of the national
population, or approximately 62 million people. However, according to the
American Medical Association, just 11% of physicians, or approximately 75,000
physicians, practice in non-metropolitan markets. This data indicates that
non-urban markets are underserved, and suggests that there may be opportunities
for improvement in access to primary care physicians, as well as specialty
services. RoTech believes that these needs result in significant opportunities
for companies such as RoTech, which can attract, retain and network physicians
in non-urban settings while offering ancillary services such as home healthcare,
to become a full-service non-institutional based primary healthcare provider.
RoTech was founded in 1981 to provide home respiratory and home medical
equipment products and services to patients in Florida. With its founders' roots
in pharmacy and pharmaceutical sales, RoTech's marketing directive has always
been to provide information to primary care physicians regarding the utilization
of home healthcare techniques, products and services for their patient base.
Providing information to these physicians as to disease management leads to
earlier identification and treatment of patients, enhancing the patient's
quality of life and longevity. RoTech has not targeted specialists, as their
patients are more acute and since specialists have historically been tied to
hospital systems, which results in higher hospitalization rates. RoTech's
marketing is directed at identifying patients of primary care physicians prior
to hospitalization and prior to an acuity level that would require utilizing a
specialist.
RoTech's strategy is to develop integrated healthcare delivery systems
through the acquisition of smaller local home healthcare companies in non-urban
areas. RoTech targets non-urban markets of smaller cities and rural areas, due
to the dominance of primary care physicians in these markets, reduced
competition and a tendency to care for patients in the home setting. RoTech
believes that acquisitions of home healthcare companies will continue to expand
the base of relationships with primary care physicians in these markets. Primary
care physicians in these markets typically have long-standing relationships with
loyal patient bases. These physicians are usually solo practitioners and are the
key decision makers in the treatment of their patients. RoTech believes that
making home healthcare products and services available to these physicians will
result in better, less expensive healthcare that provides an improved quality of
life for the patients and their caregivers in these communities.
RoTech was incorporated on September 1, 1981 as a Florida corporation.
RoTech's principal executive offices are located at 4506 L.B. McLeod Road, Suite
F, Orlando, Florida 32811 and its telephone number is (407) 841-2115. Unless the
context indicates otherwise, the term "RoTech" includes RoTech Medical
Corporation and its subsidiaries.
16
<PAGE>
The following table summarizes certain selected consolidated financial data
of RoTech for each of the years in the five-year period ended July 31, 1997. The
selected historical financial information of RoTech has been derived from, and
should be read in conjunction with, the historical consolidated financial
statements of RoTech, including the notes thereto, incorporated by reference
herein.
<TABLE>
<CAPTION>
AS OF AND FOR THE FISCAL YEAR ENDED JULY 31,
---------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------ ------------------ ---------- ---------- ---------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating revenue:
Home respiratory therapy & equipment ......... $ 23,857 (a) $ 41,579 (a) $ 56,533 $110,118 $ 211,346
Home medical equipment & supplies ............ (a) (a) 32,305 92,062 122,581
Home infusion therapy & other pharmacy related
services ................................. 21,715 25,492 33,554 41,498 59,177
Other products & services .................. 2,811 4,399 11,719 19,352 29,588
----------- ----------- --------- --------- ------------
Total .................................... 48,383 71,470 134,111 263,030 422,692
Cost and expenses:
Cost of revenue .............................. 12,359 17,409 36,288 71,013 105,564
Selling, general and administrative ......... 25,064 35,880 66,477 127,357 208,977
Depreciation and amortization ............... 2,801 5,338 9,565 26,520 44,017
Interest .................................... 76 67 835 5,228 13,561
----------- ----------- --------- --------- ------------
Total cost and expenses .................. 40,300 58,694 113,165 230,118 372,119
Income before income taxes .................. 8,083 12,776 20,946 32,912 50,573
Income tax expense ........................... 2,956 4,664 7,801 12,356 19,766
----------- ----------- --------- --------- ------------
Net income ................................. $ 5,127 $ 8,112 $ 13,145 $ 20,556 $ 30,807
=========== =========== ========= ========= ============
Net income per share(b):
Primary .................................... $ 0.38 $ 0.50 $ 0.64 $ 0.83 $ 1.17
Fully-diluted .............................. $ 0.38 $ 0.50 $ 0.63 $ 0.82 $ 1.12
=========== =========== ========= ========= ============
Other Data:
Weighted average shares outstanding(b):
Primary .................................... 13,384 16,294 20,684 24,657 26,352
Fully-diluted .............................. 13,384 16,294 20,984 25,206 30,940
=========== =========== ========= ========= ============
BALANCE SHEET DATA:
Working capital (deficit) ..................... $ 18,203 $ 27,783 $ 41,587 $ 36,007 $ (59,821)(c)
Total assets ................................. 40,019 94,433 175,425 374,614 560,732
Long-term debt (less current portion) ......... -- -- -- 110,000 110,000
Shareholders' equity(b) ..................... 36,197 83,320 149,659 174,675 213,960
</TABLE>
- ----------
RoTech has acquired various businesses in the five years shown above. Results of
these acquisitions' operations are included from the respective dates acquired.
(a) A breakout of home respiratory therapy and equipment revenues and home
medical equipment and supplies was not available for the years ended July
31, 1993 and 1994. All revenue related to these two product lines has been
presented as "home respiratory therapy and equipment" for the years
indicated.
(b) On May 21, 1996, RoTech distributed a 100% common stock dividend to
shareholders of record as of July 31, 1996 to effect a 2-for-1 stock split.
Shareholders' equity has been restated to give retroactive recognition to
the stock split for all periods. In addition, per share amounts and
weighted average shares outstanding have been restated to give retroactive
effect to the split.
(c) Notes payable to banks of $181 million are classified as short-term
liabilities, causing the working capital deficit at July 31, 1997.
17
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
Integrated Health Services, Inc. is one of the nation's leading providers
of post-acute healthcare services. Post-acute care is the provision of a
continuum of care to patients following discharge from an acute care hospital.
IHS' post-acute care services include subacute care, home care, skilled nursing
facility care and inpatient and outpatient rehabilitation, hospice and
diagnostic services. IHS' post-acute care network is designed to address the
fact that the cost containment measures implemented by private insurers and
managed care organizations and limitations on government reimbursement of
hospital costs have resulted in the discharge from hospitals of many patients
who continue to require medical and rehabilitative care. IHS' post-acute
healthcare system is intended to provide cost-effective continuity of care for
its patients in multiple settings and enable payors to contract with one
provider to provide all of a patient's needs following discharge from acute care
hospitals. IHS believes that its post-acute care network can be extended beyond
post-acute care to also provide "pre-acute" care, i.e., services to patients
which reduce the likelihood of a need for a hospital stay. IHS' post-acute care
network currently consists of approximately 1,900 service locations in 47 states
and the District of Columbia.
IHS' post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. To implement its post-acute
care network strategy, IHS has focused on (i) expanding the range of home
healthcare and related services it offers to patients directly in order to
provide patients with a continuum of care throughout their recovery, to better
control costs and to meet the growing desire by payors for one-stop shopping;
(ii) developing market concentration for its post-acute care services in
targeted states due to increasing payor consolidation and the increased
preference of payors, physicians and patients for dealing with only one service
provider; and (iii) developing subacute care units. Given the increasing
importance of managed care in the healthcare marketplace and the continued cost
containment pressures from Medicare, Medicaid and private payors, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, IHS has recently
focused on expanding its home healthcare services to take advantage of
healthcare payors' increasing focus on having healthcare provided in the lowest
cost setting possible, recent advances in medical technology which have
facilitated the delivery of medical services in alternative sites and patients'
desires to be treated at home. Consistent with IHS' strategy, IHS in October
1996 acquired First American Health Care of Georgia, Inc. ("First American"), a
provider of home health services, principally home nursing, in 21 states,
primarily Alabama, California, Florida, Georgia, Michigan, Pennsylvania and
Tennessee. IHS in October 1997 acquired RoTech, a provider of home healthcare
products and services, with an emphasis on home respiratory, home medical
equipment and infusion therapy, principally to patients in non-urban areas. In
addition, in September 1997, IHS acquired Community Care of America, Inc.
("CCA"), which develops and operates skilled nursing facilities in medically
underserved rural communities (the "CCA Acquisition"). IHS believes that CCA
will broaden its post-acute care network to include more rural markets and will
complement its existing home care locations in rural markets as well as RoTech's
business. In October 1997, IHS acquired (the "Coram Lithotripsy Acquisition")
the lithotripsy division (the "Coram Lithotripsy Division") of Coram, which
provides lithotripsy services and equipment maintenance in 180 locations in 18
states, in order to expand the mobile diagnostic treatment and services it
offers to patients, payors and other providers. Lithotripsy is a non-invasive
technique that utilizes shock waves to disintegrate kidney stones. See "IHS
Recent Developments." IHS intends to use the home healthcare setting and the
delivery franchise of its home healthcare branch and agency network to (i)
deliver sophisticated care, such as skilled nursing care, home infusion therapy
and rehabilitation, outside the hospital or nursing home; (ii) serve as an entry
point for patients into the IHS post-acute care network; and (iii) provide a
cost-effective site for case management and patient direction.
IHS provides subacute care through medical specialty units ("MSUs"), which
are typically 20 to 75 bed specialty units with physical identities, specialized
medical technology and staffs separate from the geriatric care facilities in
which they are located. MSUs are designed to provide comprehensive medical
18
<PAGE>
services to patients who have been discharged from acute care hospitals but who
still require subacute or complex medical treatment. The levels and quality of
care provided in IHS' MSUs are similar to those provided in the hospital but at
per diem treatment costs which IHS believes are generally 30% to 60% below the
cost of such care in acute care hospitals. Because of the high level of
specialized care provided, IHS' MSUs generate substantially higher net revenue
and operating profit per patient day than traditional geriatric care services.
IHS presently operates 215 geriatric care facilities (168 owned or leased
and 47 managed), including the facilities acquired in the CCA Acquisition (of
which 20 facilities are being held for sale), and 158 MSUs located within 84 of
these facilities. Specialty medical services revenues, which include all MSU
charges, all revenue from providing rehabilitative therapies, pharmaceuticals,
medical supplies and durable medical equipment to all its patients, all revenue
from its Alzheimer's programs and all revenue from its provision of pharmacy,
rehabilitation therapy, home healthcare, hospice care and similar services to
third-parties, constituted approximately 57%, 65% and 70% of net revenues during
the years ended December 31, 1994, 1995 and 1996, respectively. IHS also offers
a wide range of basic medical services as well as a comprehensive array of
respiratory, physical, speech, occupational and physiatric therapy in all its
geriatric care facilities. For the year ended December 31, 1996, approximately
17% of IHS' revenues were derived from home health and hospice care,
approximately 53% were derived from subacute and other ancillary services,
approximately 27% were derived from basic nursing home services and the
remaining approximately 3% were derived from management and other services. On a
pro forma basis after giving effect to the acquisition of First American and the
Merger, for the year ended December 31, 1996, approximately 44% of IHS' revenues
were derived from home health and hospice care, approximately 36% were derived
from subacute and other ancillary services, approximately 18% were derived from
traditional basic nursing home services and the remaining approximately 2% were
derived from management and other services.
Integrated Health Services, Inc. was incorporated in March 1986 as a
Pennsylvania corporation and reorganized as a Delaware corporation in November
1986. IHS' principal executive offices are located at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 and its telephone number is (410) 998-8400. Unless
the context indicates otherwise, the term "IHS" includes Integrated Health
Services, Inc. and its subsidiaries, including RoTech.
19
<PAGE>
The following table summarizes certain selected consolidated financial data
of IHS for each of the years in the five-year period ended December 31, 1996 and
the six months ended June 30, 1996 and 1997. The selected historical financial
information of IHS has been derived from, and should be read in conjunction
with, the historical consolidated financial statements of IHS, including the
notes thereto, incorporated by reference herein. The results of IHS as of and
for the six months ended June 30, 1997 are not necessarily indicative of the
results to be achieved by IHS for the full fiscal year. See "IHS Recent
Developments--Nine Month Results" for information with respect to IHS' results
of operations for the nine months ended September 30, 1997.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- -------------- -------------- -------------- --------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net Revenues:
Basic medical services .................. $ 100,799 $ 113,508 $ 269,817 $ 368,569 $ 389,773
Specialty medical services ............... 88,065 162,017 404,401 770,554 999,209
Management services and other ............ 13,232 20,779 37,884 39,765 45,713
----------- ------------- ------------- ------------ ------------
Total .................................... 202,096 296,304 712,102 1,178,888 1,434,695
Cost and Expenses:
Operating expenses ........................ 145,623 212,936 528,131 888,551 1,093,948
Corporate administrative and general ...... 11,927 16,832 37,041 56,016 60,976
Depreciation and amortization ............ 4,334 8,126 26,367 39,961 41,681
Rent .................................... 19,509 23,156 42,158 66,125 77,785
Interest, net ........................... 1,493 5,705 20,602 38,977 64,110
Loss on impairment of long-lived assets
(3) .................................... -- -- -- 83,321 --
Other non-recurring charges (income)(4) ... -- -- -- 49,639 (14,457)
----------- ------------- ------------- ------------ ------------
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes and
extraordinary items ..................... 19,210 29,549 57,803 (43,702) 110,652
Equity in earnings (loss) of affiliates ... (36) 1,241 1,176 1,443 828
----------- ------------- ------------- ------------ ------------
Earnings (loss) before income taxes and
extraordinary items ..................... 19,174 30,790 58,979 (42,259) 111,480
Income tax provision (benefit) ............ 7,286 12,008 22,117 (16,270) 63,715
----------- ------------- ------------- ------------ ------------
Earnings (loss) before extraordinary
items ................................. 11,888 18,782 36,862 (25,989) 47,765
Extraordinary items(5) ..................... 2,524 2,275 4,274 1,013 1,431
----------- ------------- ------------- ------------ ------------
Net earnings (loss) ..................... $ 9,364 $ 16,507 $ 32,588 $ (27,002) $ 46,334
=========== ============= ============= ============ ============
Per Common Share (fully-diluted)(6):
Earnings (loss) before extraordinary
items ................................. $ 1.01 $ 1.35 $ 1.73 $ (1.21) $ 1.82
Net earnings (loss) ..................... .80 1.22 1.57 (1.26) 1.78
=========== ============= ============= ============ ============
Weighted average number of common and
common equivalent shares outstanding(6) ... 1,996,815 17,261,079 27,154,153 21,463,464 31,652,620
=========== ============= ============= ============ ============
BALANCE SHEET DATA:
Cash and temporary investments ............ $ 103,858 $ 65,295 $ 63,347 $ 41,304 $ 41,072
Working capital ........................... 144,074 69,495 76,383 136,315 57,549
Total assets .............................. 313,671 776,324 1,255,989 1,433,730 1,993,107
Long-term debt, including current por-
tion(7) .................................. 142,620 402,536 551,452 770,661 1,054,747
Stockholders' equity ..................... 146,013 216,506 453,811 431,528 534,865
<CAPTION>
AS OF AND FOR THE
SIX MONTHS
ENDED JUNE 30,
----------------------------
1996 1997
-------------- -------------
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net Revenues:
Basic medical services .................. $ 195,279 $ 176,810
Specialty medical services ............... 446,393 722,802
Management services and other ............ 21,381 19,304
------------- -------------
Total .................................... 663,053 918,916
Cost and Expenses:
Operating expenses ........................ 504,169 691,148
Corporate administrative and general ...... 29,947 36,151
Depreciation and amortization ............ 16,779 30,844
Rent .................................... 35,535 49,795
Interest, net ........................... 30,102 44,645
Loss on impairment of long-lived assets
(3) .................................... -- --
Other non-recurring charges (income)(4) ... -- 20,047
------------- -------------
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes and
extraordinary items ..................... 46,521 46,286
Equity in earnings (loss) of affiliates ... 760 98
------------- -------------
Earnings (loss) before income taxes and
extraordinary items ..................... 47,281 46,384
Income tax provision (benefit) ............ 18,203 18,090
------------- -------------
Earnings (loss) before extraordinary
items ................................. 29,078 28,294
Extraordinary items(5) ..................... 1,431 18,168
------------- -------------
Net earnings (loss) ..................... $ 27,647 $ 10,126
============= =============
Per Common Share (fully-diluted)(6):
Earnings (loss) before extraordinary
items ................................. $ 1.10 $ 0.92
Net earnings (loss) ..................... 1.05 0.41
============= =============
Weighted average number of common and
common equivalent shares outstanding(6) ... 31,028,123 36,232,591
============= =============
BALANCE SHEET DATA:
Cash and temporary investments ............ $ 45,472
Working capital ........................... 159,042
Total assets .............................. 2,142,647
Long-term debt, including current por-
tion(7) .................................. 1,218,248
Stockholders' equity ..................... 581,319
</TABLE>
- ----------
(1) IHS has grown substantially through acquisitions and the opening of MSUs,
which acquisitions and MSU openings materially affect the comparability of
the financial data reflected herein. In addition, IHS sold its pharmacy
division in July 1996 (the "Pharmacy Sale"), a majority interest in its
assisted living services subsidiary ("ILC") in October 1996 (the "ILC
Offering") and the remaining interest in ILC in July 1997 (together with
the ILC Offering, the "ILC Sale"). See "Unaudited Pro Forma Financial
Information."
(2) In 1995, IHS merged with IntegraCare, Inc. ("IntegraCare") in a transaction
accounted for as a pooling of interests. Accordingly, IHS' historical
financial statements for all periods prior to the effective date of the
IntegraCare merger have been restated to include the results of
IntegraCare.
(3) In December 1995, IHS elected early implementation of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, resulting in a non-cash charge of $83,321,000.
20
<PAGE>
(4) In 1995, consists of (i) expenses of $1,939,000 related to the merger with
IntegraCare, (ii) a $21,915,000 loss on the write-off of accrued management
fees ($8,496,000), loans ($11,097,000) and contract acquisition costs
($2,322,000) related to IHS' termination of its agreement, entered into in
January 1994, to manage 23 long-term care and psychiatric facilities owned
by Crestwood Hospital and (iii) the write-off of $25,785,000 of deferred
pre-opening costs resulting from a change in accounting estimate regarding
the future benefit of deferred pre-opening costs. In 1996, consists
primarily of (i) a gain of $34,298,000 from the Pharmacy Sale, (ii) a loss
of $8,497,000 from its sale of shares in the ILC Offering, (iii) a
$7,825,000 loss on write-off of accrued management fees and loans resulting
from IHS' termination of its 10-year agreement, entered into in September
1994, to manage six geriatric care facilities owned by All Seasons and (iv)
a $3,519,000 exit cost resulting from the closure of redundant home
healthcare agencies. Because IHS' investment in the Capstone Pharmacy
Services, Inc. ("Capstone") common stock received in the Pharmacy Sale had
a very small tax basis, the taxable gain on the sale significantly exceeded
the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale. In
1997, consists primarily of (i) a gain of $7,578,000 realized on the shares
of Capstone common stock received in the Pharmacy Sale, (ii) the write-off
of $6,553,000 of accounting, legal and other costs resulting from the
proposed transaction to acquire Coram (the "Coram Merger Transaction") and
(iii) the payment to Coram of $21,000,000 in connection with the
termination of the proposed Coram Merger Transaction. See "Unaudited Pro
Forma Financial Information."
(5) In 1992, IHS recorded a loss on extinguishment of debt of $4,072,000
relating primarily to prepayment charges and the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of
$1,548,000, is presented for the year ended December 31, 1992 as an
extraordinary loss of $2,524,000. In 1993, IHS recorded a loss on
extinguishment of debt of $3,730,000 relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $1,455,000, is presented for the year ended December 31, 1993 as
an extraordinary loss of $2,275,000. In 1994, IHS recorded a loss on
extinguishment of debt of $6,839,000 relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $2,565,000, is presented for the year ended December 31, 1994 as
an extraordinary loss of $4,274,000. In 1995, IHS recorded a loss on
extinguishment of debt of $1,647,000 relating primarily to prepayment
charges and the write-off of deferred financing costs. Such loss, reduced
by the related income tax effect of $634,000, is presented for the year
ended December 31, 1995 as an extraordinary loss of $1,013,000. In 1996,
IHS recorded a loss on extinguishment of debt of $2,327,000, relating
primarily to the write-off of deferred financing costs. Such loss, reduced
by the related income tax effect of $896,000, is presented in the statement
of operations for the year ended December 31, 1996 and the six months ended
June 30, 1996 as an extraordinary loss of $1,431,000. During the six months
ended June 30, 1997, IHS recorded a loss on extinguishment of debt of
$29,784,000, representing approximately (i) $23,554,000 of cash payments
for premium and consent fees relating to the early extinguishment of
$214,868,000 aggregate principal amount of IHS' senior subordinated notes
and (ii) $6,230,000 of deferred financing costs written-off in connection
with the early extinguishment of such debt. Such loss, reduced by the
related income tax effect of $11,616,000, is presented in the statement of
operations for the six months ended June 30, 1997 as an extraordinary loss
of $18,168,000. See "IHS Recent Developments -- Repurchase of 9 5/8% Senior
Subordinated Notes and 10 3/4% Senior Subordinated Notes."
(6) The weighted average number of common and common equivalent shares
outstanding for the years ended December 31, 1992, 1993, 1994 and 1996 and
the six months ended June 30, 1996 and 1997 includes the assumed conversion
of IHS' convertible subordinated debentures into IHS Common Stock.
Additionally, interest expense and amortization of underwriting costs
related to such debentures are added, net of tax, to income for the purpose
of calculating fully-diluted earnings per share. Such amounts aggregated
$183,000, $4,516,000, $10,048,000, $9,888,000, $4,944,000 and $4,904,000
for the years ended December 31, 1992, 1993, 1994 and 1996 and the six
months ended June 30, 1996 and 1997, respectively. The weighted average
number of common and common equivalent shares outstanding for the year
ended December 31, 1995 does not include the assumed conversion of IHS'
convertible subordinated debentures or the related interest expense and
underwriting costs, as such conversion would be anti-dilutive.
(7) In September 1997, IHS issued $500 million aggregate principal amount of
its 9 1/4% Senior Subordinated Notes due 2008 and borrowed $750 million of
term loans under its new revolving credit and term loan facility. See "IHS
Recent Developments -- New Credit Facility" and "-- Sale of 9 1/4% Senior
Subordinated Notes due 2008."
21
<PAGE>
RISK FACTORS
The following considerations, in addition to the other information set
forth herein, should be considered carefully by Holders and beneficial owners of
Debentures.
LIMITED TRADING MARKET
The Debentures were issued in 1996, and there currently is a limited
trading market for the Debentures, which are not listed on any securities
exchange. To RoTech's knowledge, the Debentures are traded infrequently in
transactions arranged through market makers, and there is no publicly available
pricing information for the Debentures. Quotations for securities that are not
widely traded, such as the Debentures, may differ from actual trading prices and
should be viewed as approximations. Holders are urged to contact their brokers
with respect to current market prices for the Debentures.
To the extent that Debentures are tendered and accepted for payment in the
Offer, the trading market for Debentures that remain outstanding may be
significantly more limited, which might adversely affect the liquidity of the
Debentures. The extent of the public market and the availability of price
quotations would depend upon a number of factors, including the number of
holders of Debentures remaining at such time. An issue of securities with a
smaller outstanding market value available for trading (the "float") may command
a lower price than would a comparable issue of securities with a greater float.
Therefore, the market price for Debentures that are not tendered in the Offer
may be affected adversely to the extent that the amount of Debentures purchased
pursuant to the Offer reduces the float. The reduced float also may tend to make
the trading prices of the Debentures that are not so purchased more volatile. In
addition, RoTech may from time to time following the Expiration Date repurchase
Debentures through open market purchases, privately negotiated transactions,
tender offers, exchange offers or otherwise, upon such terms and at such prices
as it may determine, which may be more or less than the Repurchase Price and
could be for cash or other consideration. There can be no assurance as to which,
if any, of these alternatives (or combinations thereof) RoTech may pursue.
RoTech intends to apply under the Exchange Act to terminate the registration of
the Debentures under the Exchange Act on June 5, 1998, the date RoTech is no
longer required to keep effective under the Securities Act a registration
statement registering the resale of the Debentures. Following such termination,
RoTech will no longer file reports, proxy statements and other information with
the Commission. This lack of publicly available information regarding RoTech may
further limit the trading market for the Debentures. As a result, there can be
no assurance that any trading market for the Debentures will exist after
consummation of the Offer.
SUBORDINATION OF THE DEBENTURES; HOLDING COMPANY STRUCTURE
The Debentures are subordinated to all Senior Indebtedness (as defined in
the Indenture) of RoTech (including IHS' $1.75 billion revolving credit and term
loan facility by reason of RoTech's guaranty of such facility) now or at any
time later outstanding. In addition, the operations of RoTech are conducted
through its subsidiaries and, therefore, the Debentures are effectively
subordinated to all indebtedness and other liabilities and commitments of
RoTech's subsidiaries. As a result, RoTech's rights, and the rights of its
creditors, to participate in the distribution of assets of any subsidiary upon
such subsidiary's liquidation or reorganization will be subject to the prior
claims of such subsidiary's creditors, except to the extent that RoTech is
itself recognized as a creditor of such subsidiary, in which case the claims of
RoTech would still be subject to the claims of any secured creditor of such
subsidiary and of any holder of indebtedness of such subsidiary senior to that
held by RoTech. The Debentures are obligations exclusively of RoTech, and are
not guaranteed by any of RoTech's subsidiaries or by IHS. Since the operations
of RoTech are currently conducted primarily through subsidiaries, RoTech's cash
flow and its ability to service its debt, including the Debentures, is dependent
upon the earnings of its subsidiaries and distributions to RoTech. The
subsidiaries are separate and distinct legal entities and have no obligation,
contingent or otherwise, to pay amounts due pursuant to the Debentures or to
make any funds available therefor. Moreover, the payment of dividends and the
making of loans or advances to RoTech by its subsidiaries are contingent upon
the earnings of those subsidiaries and are subject to various business
considerations and, for certain subsidiaries, restrictive loan covenants
contained in the instru-
22
<PAGE>
ments governing the indebtedness of such subsidiaries, including covenants which
restrict in certain circumstances the payment of dividends and distributions and
the transfer of assets to RoTech. The Indenture does not limit the amount of
indebtedness RoTech and its subsidiaries may incur.
RISKS RELATED TO SUBSTANTIAL INDEBTEDNESS OF IHS
IHS' indebtedness is substantial in relation to its stockholders' equity.
At June 30, 1997, IHS' total debt, including current portion, accounted for
67.7% of its total capitalization. On a pro forma basis after giving effect to
the Merger, the CCA Acquisition and the Coram Lithotripsy Acquisition
(collectively, the "Recent Acquisitions"), the New Credit Facility and the
issuance of the 9 1/4% Senior Notes and the use of proceeds therefrom and from
the term loan portion of the New Credit Facility to repay amounts outstanding
under the prior credit facility, to pay the cash portion of the purchase price
of the Recent Acquisitions and to repay certain indebtedness assumed in the
Recent Acquisitions, IHS' total debt, including current portion, at June 30,
1997 accounted for approximately 68.1% of its total pro forma capitalization.
IHS also has significant lease obligations with respect to the facilities
operated pursuant to long-term leases, which aggregated approximately $212.1
million at June 30, 1997 ($239.1 million on a pro forma basis after giving
effect to the Merger). For the year ended December 31, 1996 and the six months
ended June 30, 1996 and 1997, IHS' rent expense was $77.8 million ($108.9
million on a pro forma basis after giving effect to the Merger, the acquisition
of First American (the "First American Acquisition"), the sale of a majority
interest in IHS' assisted living services subsidiary in October 1996 and the
sale of the remaining interest in July 1997 (the "ILC Sale"), the sale of IHS'
pharmacy division in July 1996 (the "Pharmacy Sale") and certain other
acquisitions consummated by IHS in 1996 and 1997), $35.5 million ($49.8 million
on a pro forma basis after giving effect to the Merger, the First American
Acquisition, the ILC Sale, the Pharmacy Sale and certain other acquisitions
consummated by IHS in 1996 and 1997) and $49.8 million ($58.4 million on a pro
forma basis after giving effect to the Merger and certain other acquisitions
consummated by IHS in 1997), respectively. See "Unaudited Pro Forma Financial
Information." In addition, IHS is obligated to pay up to an additional $155
million in respect of the acquisition of First American during 2000 to 2004
under certain circumstances, of which $35.3 million has been recorded at June
30, 1997. See "IHS Recent Developments -- First American Acquisition." IHS'
strategy of expanding its specialty medical services and growing through
acquisitions may require additional borrowings in order to finance working
capital, capital expenditures and the purchase price of any acquisitions. The
degree to which IHS is leveraged, as well as its rent expense, could have
important consequences to holders of IHS Common Stock, including: (i) IHS'
ability to obtain additional financing in the future for working capital,
capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) a substantial portion of IHS' cash flow from operations may be
dedicated to the payment of principal and interest on its indebtedness and rent
expense, thereby reducing the funds available to IHS for its operations; (iii)
certain of IHS' borrowings bear, and will continue to bear, variable rates of
interest, which expose IHS to increases in interest rates; and (iv) certain of
IHS' indebtedness contains financial and other restrictive covenants, including
those restricting the incurrence of additional indebtedness, the creation of
liens, the payment of dividends and sales of assets and imposing minimum net
worth requirements. In addition, IHS' leverage may also adversely affect IHS'
ability to respond to changing business and economic conditions or continue its
growth strategy. There can be no assurance that IHS' operating results will be
sufficient for the payment of IHS' indebtedness. If IHS were unable to meet
interest, principal or lease payments, or satisfy financial covenants, it could
be required to seek renegotiation of such payments and/or covenants or obtain
additional equity or debt financing. To the extent IHS finances its activities
with additional debt, IHS may become subject to certain additional financial and
other covenants that may restrict its ability to pursue its growth strategy.
There can be no assurance that any such efforts would be successful or timely or
that the terms of any such financing or refinancing would be acceptable to IHS.
See "-- Risks Related to Capital Requirements" and "Description of Certain IHS
Indebtedness."
In connection with the offering of the 9 1/4% Senior Notes, Standard &
Poors ("S&P") confirmed its B rating of IHS' other subordinated debt
obligations, but with a negative outlook, and assigned the same rating to the 9
1/4% Senior Notes. S&P stated that IHS' speculative-grade ratings reflect IHS'
aggressive transition toward becoming a full-service alternate-site healthcare
provider, and its limited cash flow
23
<PAGE>
relative to its heavy debt burden. S&P noted that IHS would be greatly
challenged to control, integrate and further expand operations that were only a
quarter of their current size just three years ago, and also noted the
continuing uncertainty with regard to the adequacy of reimbursement from
government sponsored programs for the indigent and elderly. S&P also noted that
there is the potential that a large debt-financed acquisition could lead to a
ratings downgrade. In connection with the offering of the 9 1/4% Senior Notes,
Moody's Investors Service ("Moody's") downgraded to B2 IHS' other senior
subordinated debt obligations, but noted that the outlook for the rating was
stable, and assigned the new rating to the 9 1/4% Senior Notes. Moody's stated
that the rating action reflects Moody's concern about IHS' continued rapid
growth through acquisitions, which has resulted in negative tangible equity of
$114 million, making no adjustment for the $259 million of convertible debt of
IHS outstanding. Moody's also stated that the availability provided by the New
Credit Facility and the 9 1/4% Senior Notes positioned IHS to complete sizable
acquisition transactions using solely debt. Moody's further noted that the
rating reflects that there are significant changes underway in the reimbursement
of services rendered by IHS, and that the exact impact of these changes is
uncertain.
RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS AND INTERNAL DEVELOPMENT
IHS' growth strategy involves growth through acquisitions and internal
development and, as a result, IHS is subject to various risks associated with
this growth strategy. IHS' planned expansion and growth require that IHS expand
its home healthcare services through the acquisition of additional home
healthcare providers (including the continuation by RoTech of its acquisition
program) and that IHS acquire, or establish relationships with, third parties
which provide post-acute care services not currently provided by IHS, that
additional MSUs be established in IHS' existing facilities and that IHS acquire,
lease or acquire the right to manage for others additional facilities in which
MSUs can be established. Such expansion and growth will depend on IHS' ability
to create demand for its post-acute care programs, the availability of suitable
acquisition, lease or management candidates and IHS' ability to finance such
acquisitions and growth. The successful implementation of IHS' post-acute
healthcare system, including the capitation of rates, will depend on IHS'
ability to expand the amount of post-acute care services it offers directly to
its patients rather than through third-party providers. There can be no
assurance that suitable acquisition candidates will be located, that
acquisitions can be consummated, that acquired facilities and companies can be
successfully integrated into IHS' operations, that MSUs can be successfully
established in acquired facilities or that IHS' post-acute healthcare system,
including the capitation of rates, can be successfully implemented. The
post-acute care market is highly competitive, and IHS faces substantial
competition from hospitals, subacute care providers, rehabilitation providers
and home healthcare providers, including competition for acquisitions. IHS
anticipates that competition for acquisition opportunities will intensify due to
the ongoing consolidation in the healthcare industry. See "-- Risks Related to
Managed Care Strategy" and "-- Competition."
The successful integration of acquired businesses, including RoTech, CCA,
the Coram Lithotripsy Division and First American, is important to IHS' future
financial performance. The anticipated benefits from any of these acquisitions
may not be achieved unless the operations of the acquired businesses are
successfully combined with those of IHS in a timely manner. The integration of
IHS' recent acquisitions will require substantial attention from management. The
diversion of the attention of management, and any difficulties encountered in
the transition process, could have a material adverse effect on IHS' operations
and financial results. In addition, the process of integrating the various
businesses could cause the interruption of, or a loss of momentum in, the
activities of some or all of these businesses, which could have a material
adverse effect on IHS' operations and financial results. There can be no
assurance that IHS will realize any of the anticipated benefits from its
acquisitions. The acquisition of service companies that are not profitable, or
the acquisition of new facilities that result in significant integration costs
and inefficiencies, could also adversely affect IHS' profitability.
IHS' current and anticipated future growth has placed, and will continue to
place, significant demands on the management, operational and financial
resources of IHS. IHS' ability to manage its growth effectively will require it
to continue to improve its operational, financial and management information
systems and to continue to attract, train, motivate, manage and retain key
employees. There can be no assurance that IHS will be able to manage its
expanded operations effectively. See "-- Risks Related to Capital Requirements."
24
<PAGE>
There can be no assurance that IHS will be successful in implementing its
strategy or in responding to ongoing changes in the healthcare industry which
may require adjustments to its strategy. If IHS fails to implement its strategy
successfully or does not respond timely and adequately to ongoing changes in the
healthcare industry, IHS' business, financial condition and results of
operations will be materially adversely affected.
RISKS RELATED TO MANAGED CARE STRATEGY
Managed care payors and traditional indemnity insurers have experienced
pressure from their policyholders to curb or reduce the growth in premiums paid
to such organizations for healthcare services. This pressure has resulted in
demands on healthcare service providers to reduce their prices or to share in
the financial risk of providing care through alternate fee structures such as
capitation or fixed case rates. Given the increasing importance of managed care
in the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has been restructuring its operations to enable IHS
to focus on obtaining contracts with managed care organizations and to provide
capitated services. IHS believes that its home healthcare capabilities will be
an important component of its ability to provide services under capitated and
other alternate fee arrangements. However, to date there has been limited demand
among managed care organizations for post-acute care network services, and there
can be no assurance that demand for such services will increase. Further, IHS
and RoTech have limited experience in providing services under capitated and
other alternate fee arrangements and setting the applicable rates. Accordingly,
there can be no assurance that the fees received by IHS and/or RoTech will cover
the cost of services provided. If revenue for capitated services is insufficient
to cover the treatment costs, IHS' and/or RoTech's operating results could be
adversely affected. As a result, the success of IHS' managed care strategy will
depend in large part on its ability to increase demand for post-acute care
services among managed care organizations, to obtain favorable agreements with
managed care organizations and to manage effectively its operating and
healthcare delivery costs through various methods, including utilization
management and competitive pricing for purchased services. Additionally, there
can be no assurance that pricing pressures faced by healthcare providers will
not have a material adverse effect on IHS' and/or RoTech's business, results of
operations and financial condition.
Further, pursuing a strategy focused on risk-sharing fee arrangements
entails certain regulatory risks. Many states impose restrictions on a service
provider's ability to provide capitated services unless it meets certain
financial criteria, and may view capitated fee arrangements as an insurance
activity, subjecting the entity accepting the capitated fee to regulation as an
insurance company rather than merely a licensed healthcare provider accepting a
business risk in connection with the manner in which it is charging for its
services. The laws governing risk-sharing fee arrangements for healthcare
service providers are evolving and are not certain at this time. If the
risk-sharing activities of IHS and/or RoTech require licensure as an insurance
company, there can be no assurance that IHS and/or RoTech could obtain or
maintain the necessary licensure, or that IHS and/or RoTech would be able to
meet any financial criteria imposed by a state. If IHS were precluded from
providing services under risk-sharing fee arrangements, its managed care
strategy would be adversely affected. See "-- Uncertainty of Government
Regulation."
RISKS RELATED TO CAPITAL REQUIREMENTS
IHS' growth strategy requires substantial capital for the acquisition of
additional home healthcare and related service providers and geriatric care
facilities and the establishment of new, and expansion of existing, MSUs. The
effective integration, operation and expansion of the existing businesses will
also require substantial capital. IHS expects to finance new acquisitions from a
combination of funds from operations, borrowings under its bank credit facility
and the issuance of debt and equity securities. IHS may raise additional capital
through the issuance of long-term or short-term indebtedness or the issuance of
additional equity securities in private or public transactions, at such times as
management deems appropriate and the market allows. Any of such financings could
result in dilution of existing equity positions, increased interest and
amortization expense or decreased income to fund future expansion. There can be
no assurance that acceptable financing for future acquisitions or for the
integration and expansion of existing businesses and operations can be obtained.
IHS' bank credit facility limits IHS' ability to make acquisitions, and certain
of the
25
<PAGE>
indentures under which IHS' outstanding senior subordinated debt securities were
issued limit IHS' ability to incur additional indebtedness unless certain
financial tests are met. See "-- Risks Related to Substantial Indebtedness of
IHS," "Business of IHS -- Company Strategy" and "Description of Certain IHS
Indebtedness."
RISKS RELATED TO RECENT ACQUISITIONS
IHS has recently completed several major acquisitions, including the
acquisitions of RoTech, CCA, the Coram Lithotripsy Division and First American,
and is still in the process of integrating those acquired businesses. The IHS
Board of Directors and senior management of IHS face a significant challenge in
their efforts to integrate the acquired businesses. The dedication of management
resources to such integration may detract attention from the day-to-day business
of IHS. The difficulties of integration may be increased by the necessity of
coordinating geographically separated organizations, integrating personnel with
disparate business backgrounds and combining different corporate cultures. There
can be no assurance that there will not be substantial costs associated with
such activities or that there will not be other material adverse effects of
these integration efforts. Further, there can be no assurance that management's
efforts to integrate the operations of IHS and newly acquired companies will be
successful or that the anticipated benefits of the recent acquisitions will be
fully realized.
IHS has recently expanded significantly its home healthcare operations.
During the year ended December 31, 1996 and the six months ended June 30, 1996
and 1997, home healthcare accounted for approximately 16.3%, 4.0% and 30.8%,
respectively, of IHS' total revenues. On a pro forma basis after giving effect
to the Merger and the First American Acquisition, home healthcare accounted for
approximately 43.9%, 38.3% and 43.4%, respectively, of IHS' total revenues, of
which approximately 64.2%, 68.8% and 53.4%, respectively, was derived from home
nursing services and approximately 28.7%, 26.1% and 36.3%, respectively, was
derived from home respiratory services. On a pro forma basis, after giving
effect to the Merger and the acquisition of First American (which derives
substantially all its revenues from Medicare), approximately 70.7%, 78.3% and
68.0% of IHS' home healthcare revenues were derived from Medicare in the year
ended December 31, 1996 and the six months ended June 30, 1996 and 1997,
respectively. Medicare has developed a national fee schedule for infusion
therapy, respiratory therapy and home medical equipment which provides
reimbursement at 80% of the amount of any fee on the schedule. The remaining 20%
is paid by other third party payors (including Medicaid in the case of
"medically indigent" patients) or patients; with respect to home nursing,
Medicare generally reimburses for the cost (including a rate of return) of
providing such services, up to a regionally adjusted allowable maximum per visit
and per discipline with no fixed limit on the number of visits. There generally
is no deductible or coinsurance. As a result, there is no reward for efficiency,
provided that costs are below the cap, and traditional home healthcare services
carry relatively low margins. However, IHS expects that Medicare will implement
a prospective payment system for home nursing services in the next several
years, and implementation of a prospective payment system will be a critical
element to the success of IHS' expansion into home nursing services. Based upon
prior legislative proposals, IHS believes that a prospective payment system
would most likely provide a healthcare provider a predetermined rate for a given
service, with providers that have costs below the predetermined rate being
entitled to keep some or all of this difference. There can be no assurance that
Medicare will implement a prospective payment system for home nursing services
in the next several years or at all. The implementation of a prospective payment
system will require IHS to make contingent payments related to the First
American Acquisition of $155 million over a period of five years. In addition,
the Balanced Budget Act of 1997, enacted in August 1997, reduces the Medicare
national payment limits for oxygen and oxygen equipment used in home respiratory
therapy by 25% in 1998 and 30% (from 1997 levels) in 1999 and each subsequent
year. Approximately 22% of RoTech's total revenues for the year ended July 31,
1997 were derived from the provision of oxygen services to Medicare patients.
The inability of IHS to realize operating efficiencies and provide home
healthcare services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home healthcare operations and its
post-acute care network. See "-- Risk of Adverse Effect of Healthcare Reform,"
"IHS Recent Developments -- First American Acquisition" and "Unaudited Pro Forma
Financial Information."
26
<PAGE>
RISKS RELATED TO HISTORICAL FINANCIAL PERFORMANCE OF FIRST AMERICAN
During the year ended December 31, 1995 and the nine months ended September
30, 1996, First American recorded a net loss of $110.4 million and $36.2
million, respectively. Numerous factors have affected First American's
performance and financial condition prior to its acquisition by IHS, including,
among others, high administrative costs and the settlement of claims for
reimbursement of certain overpayments and unallowable reimbursements under
Medicare (which settlement resulted in a reduction to patient service revenues
of $54.6 million for the year ended December 31, 1995 and $10.4 million for the
nine months ended September 30, 1996). In addition, in February 1996, in
response to the stoppage by the Health Care Financing Administration ("HCFA") of
its bi-weekly periodic interim payments ("PIP") to First American, First
American was forced to declare bankruptcy. In March 1996, the bankruptcy court
ordered HCFA to resume PIP payments to First American. However, the bankruptcy
filing and operation of First American in bankruptcy until its acquisition by
IHS adversely affected the business, results of operations and financial
condition of First American. There can be no assurance that these factors or the
First American bankruptcy will not continue to have an adverse effect on First
American's and IHS' business, financial condition and results of operations in
the future. There can be no assurance that the historical losses incurred by
First American will not continue. See "IHS Recent Developments -- First American
Acquisition."
RELIANCE ON REIMBURSEMENT BY THIRD PARTY PAYORS
IHS and RoTech receive payment for services rendered to patients from
private insurers and patients themselves, from the Federal government under
Medicare, and from the states in which they operate under Medicaid. The
healthcare industry is experiencing a trend toward cost containment, as
government and other third party payors seek to impose lower reimbursement and
utilization rates and negotiate reduced payment schedules with service
providers. These cost containment measures, combined with the increasing
influence of managed care payors and competition for patients, has resulted in
reduced rates of reimbursement for services provided by IHS and RoTech, which
has adversely affected, and may continue to adversely affect, IHS' margins,
particularly in its skilled nursing and subacute facilities. Aspects of certain
healthcare reform proposals, such as cutbacks in the Medicare and Medicaid
programs, reductions in Medicare reimbursement rates and/or limitations on
reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect IHS and RoTech. See "-- Risk
of Adverse Effect of Healthcare Reform." During the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997, IHS derived
approximately 56%, 55%, 60%, 57% and 67%, respectively, of its patient revenues
from Medicare and Medicaid. On a pro forma basis after giving effect to the
Merger, the acquisition of First American (which derives substantially all its
revenues from Medicare) and the ILC Sale, approximately 66.5%, 67.5% and 64.5%
of IHS' patient revenues have been derived from Medicare and Medicaid during the
year ended December 31, 1996 and the six months ended June 30, 1996 and 1997,
respectively.
The sources and amounts of IHS' patient revenues derived from the operation
of its geriatric care facilities and MSU programs are determined by a number of
factors, including licensed bed capacity of its facilities, occupancy rate, the
mix of patients and the rates of reimbursement among payor categories (private,
Medicare and Medicaid). Changes in the mix of IHS' patients among the private
pay, Medicare and Medicaid categories can significantly affect the profitability
of IHS' operations. IHS' cost of care for its MSU patients generally exceeds
regional reimbursement limits established under Medicare. The success of IHS'
MSU strategy will depend in part on its ability to obtain per diem rate
approvals for costs which exceed the Medicare established per diem rate limits
and by obtaining waivers of these limitations. There can be no assurance that
IHS will be able to obtain the waivers necessary to enable IHS to recover its
excess costs. See "Business of IHS -- Sources of Revenue."
Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. Consequently, the healthcare needs of a large percentage of the United
States population are provided by a small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a
27
<PAGE>
limited number of providers for needed services. To the extent such
organizations terminate IHS and/or RoTech as a preferred provider and/or engage
IHS' and/or RoTech's competitors as a preferred or exclusive provider, the
business of IHS and/or RoTech could be materially adversely affected.
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
In addition to extensive existing government healthcare regulation, there
are numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services,
including a number of proposals that would significantly limit reimbursement
under Medicare and Medicaid. It is not clear at this time what proposals, if
any, will be adopted or, if adopted, what effect such proposals would have on
IHS' or RoTech's business. Aspects of certain of these healthcare proposals,
such as cutbacks in the Medicare and Medicaid programs, containment of
healthcare costs on an interim basis by means that could include a short-term
freeze on prices charged by healthcare providers, and permitting greater state
flexibility in the administration of Medicaid, could adversely affect IHS and/or
RoTech. In addition, there have been proposals to convert the current cost
reimbursement system for home nursing services covered under Medicare to a
prospective payment system. The prospective payment system proposals generally
provide for prospectively established per visit payments to be made for all
covered services, which are then subject to an annual aggregate per episode
limit at the end of the year. Home health agencies that are able to keep their
total expenses per visit during the year below their per episode annual limits
will be able to retain a specified percentage of the difference, subject to
certain aggregate limitations. Such changes could have a material adverse effect
on IHS and its growth strategy and/or on RoTech. The implementation of a
prospective payment system will require IHS to make contingent payments related
to the First American Acquisition of $155 million over a period of five years.
The inability of IHS to provide home healthcare and/or skilled nursing services
at a cost below the established Medicare fee schedule could have a material
adverse effect on IHS' home healthcare operations, post-acute care network and
business generally. The Balanced Budget Act of 1997, enacted in August 1997,
provides, among other things, for a prospective payment system for home nursing
to be implemented for cost reporting periods beginning on or after October 1,
1999, a reduction in current cost reimbursement for home healthcare pending
implementation of a prospective payment system, reductions (effective January 1,
1998) in Medicare reimbursement for oxygen and oxygen equipment for home
respiratory therapy and a shift of the bulk of home health coverage from Part A
to Part B of Medicare. The failure to implement a prospective payment system for
home nursing services in the next several years could adversely affect IHS'
post-acute care network strategy. IHS expects that there will continue to be
numerous initiatives on the federal and state levels for comprehensive reforms
affecting the payment for and availability of healthcare services, including
proposals that will further limit reimbursement under Medicare and Medicaid. It
is not clear at this time what proposals, if any, will be adopted or, if
adopted, what effect such proposals will have on IHS' business. See "-- Risks
Related to Recent Acquisitions," "-- Reliance on Reimbursement by Third Party
Payors" and "IHS Recent Developments -- First American Acquisition." There can
be no assurance that currently proposed or future healthcare legislation or
other changes in the administration or interpretation of governmental healthcare
programs will not have an adverse effect on IHS and/or RoTech or that payments
under governmental programs will remain at levels comparable to present levels
or will be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. Concern about the potential effects of
the proposed reform measures has contributed to the volatility of prices of
securities of companies in healthcare and related industries, including IHS and
RoTech, and may similarly affect the price of the Debentures and the IHS Common
Stock in the future. See "-- Uncertainty of Government Regulation" and "Business
of IHS -- Government Regulation."
UNCERTAINTY OF GOVERNMENT REGULATION
IHS, RoTech and the healthcare industry generally are subject to extensive
federal, state and local regulation governing licensure and conduct of
operations at existing facilities, construction of new facilities, acquisition
of existing facilities, additions of new services, certain capital expenditures,
the quality of services provided and the manner in which such services are
provided and reimbursement for services rendered. Changes in applicable laws and
regulations or new interpretations of existing laws and regulations could have a
material adverse effect on licensure, eligibility for participation, permissible
activities, operating costs and
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<PAGE>
the levels of reimbursement from governmental and other sources. There can be no
assurance that regulatory authorities will not adopt changes or new
interpretations of existing regulations that could adversely affect IHS and/or
RoTech. The failure to maintain or renew any required regulatory approvals or
licenses could prevent IHS and/or RoTech from offering existing services or from
obtaining reimbursement. In certain circumstances, failure to comply at one
facility may affect the ability of IHS and/or RoTech to obtain or maintain
licenses or approvals under Medicare and Medicaid programs at other facilities.
In addition, in the conduct of their business IHS' and RoTech's operations are
subject to review by federal and state regulatory agencies. In the course of
these reviews, problems are from time to time identified by these agencies.
Although each of IHS and RoTech has to date been able to resolve these problems
in a manner satisfactory to the regulatory agencies without a material adverse
effect on its business, there can be no assurance that it will be able to do so
in the future.
Recently effective provisions of the regulations adopted under the Omnibus
Budget Reconciliation Act of 1987 ("OBRA") have implemented stricter guidelines
for annual state surveys of long-term care facilities and expanded remedies
available to HCFA to enforce compliance with the detailed regulations mandating
minimum healthcare standards and may significantly affect the consequences to
IHS if annual or other HCFA facility surveys identify noncompliance with these
regulations. Remedies include fines, new patient admission moratoriums, denial
of reimbursement, federal or state monitoring of operations, closure of
facilities and termination of provider reimbursement agreements. These
provisions eliminate the ability of operators to appeal the scope and severity
of any deficiencies and grant state regulators the authority to impose new
remedies, including monetary penalties, denial of payments and termination of
the right to participate in the Medicare and/or Medicaid programs. IHS believes
these new guidelines may result in an increase in the number of facilities that
will not be in "substantial compliance" with the regulations and, as a result,
subject to increased disciplinary actions and remedies, including admission
holds and termination of the right to participate in the Medicare and/or
Medicaid programs. In ranking facilities, survey results subsequent to October
1990 are considered. As a result, IHS' acquisition of poorly performing
facilities could adversely affect IHS' business to the extent remedies are
imposed at such facilities.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium is expected to last approximately six months, and
implemented rules requiring home healthcare providers to reapply for Medicare
certification every three years. In addition, HCFA will double the number of
detailed audits of home healthcare providers it completes each year and increase
by 25% the number of home healthcare claims it reviews each year. IHS cannot
predict what effect, if any, these new rules will have on IHS' business and the
expansion of its home healthcare operations.
IHS and RoTech are also subject to federal and state laws which govern
financial and other arrangements between healthcare providers. These laws often
prohibit certain direct and indirect payments or fee-splitting arrangements
between healthcare providers that are designed to induce or encourage the
referral of patients to, or the recommendation of, a particular provider for
medical products and services. These laws include the federal "Stark Bills",
which prohibit, with limited exceptions, financial relationships between
ancillary service providers and referring physicians, and the federal
"anti-kickback law", which prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. The Office of Inspector General of the
Department of Health and Human Services, the Department of Justice and other
federal agencies interpret these fraud and abuse provisions liberally and
enforce them aggressively. Members of Congress have proposed legislation that
would significantly expand the federal government's involvement in curtailing
fraud and abuse and increase the monetary penalties for violation of these
provisions. In addition, some states restrict certain business relationships
between physicians and other providers of healthcare services. Many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset
forfeitures and civil and criminal penalties. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. IHS and RoTech seek to structure their business
arrangements in compliance with these laws and, from time to time, IHS and
RoTech have sought guidance as to the interpretation of such laws;
29
<PAGE>
however, there can be no assurance that such laws ultimately will be interpreted
in a manner consistent with the practices of IHS and RoTech. See "Business of
IHS -- Government Regulation."
In 1994 RoTech began to acquire primary care physician practices as part of
its strategy to develop integrated healthcare delivery systems. RoTech's
acquisitions of primary care physician practices are structured to attempt to
comply with federal and state law restrictions on business relationships between
RoTech and persons who may be in a position to refer patients to RoTech for the
provision of healthcare related items or services. Accordingly, RoTech endeavors
to undertake such acquisitions in a manner where the consideration offered and
paid is consistent with fair market value in arms-length transactions and is not
determined in a manner that takes into account the volume or value of any
referrals or business that might otherwise be generated between RoTech and the
physician whose practice is to be acquired and for which payment may be made
under Medicare or Medicaid. While RoTech believes that its acquisitions do not
entail any form of unlawful remuneration, there can be no assurance that
enforcement authorities will not attempt to construe the consideration exchanged
in certain acquisition transactions as entailing unlawful remuneration and to
challenge such transactions on such basis. In many states, the "corporate
practice of medicine doctrine" prohibits business corporations from providing,
or holding themselves out as providers of, medical care through the employment
of physicians. Although the two states in which RoTech has acquired practices of
primary care physicians, Florida and Mississippi, have not adopted this
prohibition, there can be no assurance that either state will not adopt this
doctrine in the future. Enforcement of such doctrine could require divestiture
of acquired practices or restructuring of physician relationships.
Many states have adopted certificate of need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
or capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the extent certificates of need or other similar
approvals are required for expansion of IHS' operations, either through facility
acquisitions or expansion or provision of new services or other changes, such
expansion could be adversely affected by the failure or inability to obtain the
necessary approvals, changes in the standards applicable to such approvals and
possible delays in, and the expenses associated with, obtaining such approvals.
IHS and RoTech are unable to predict the future course of federal, state or
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on IHS' and/or RoTech's business, results of operations and
financial condition. See "-- Risk of Adverse Effect of Healthcare Reform."
COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. IHS and RoTech compete on a local and regional basis with other
providers on the basis of the breadth and quality of their services, the quality
of their facilities and, to a more limited extent, price. IHS also competes with
other providers in the acquisition and development of additional facilities and
service providers. IHS' current and potential competitors include national,
regional and local operators of geriatric care facilities, acute care hospitals
and rehabilitation hospitals, extended care centers, retirement centers and
community home health agencies, other home healthcare companies and similar
institutions, many of which have significantly greater financial and other
resources than IHS. In addition, IHS competes with a number of tax-exempt
nonprofit organizations which can finance acquisitions and capital expenditures
on a tax-exempt basis or receive charitable contributions unavailable to IHS.
New service introductions and enhancements, acquisitions, continued industry
consolidation and the development of strategic relationships by IHS' and
RoTech's competitors could cause a significant decline in sales or loss of
market acceptance of IHS' and RoTech's services or intense price competition or
make IHS' and/or RoTech's services noncompetitive. Further, technological
advances in drug delivery systems and the development of new medical treatments
that cure certain complex diseases or reduce the need for healthcare services
could adversely
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<PAGE>
impact the business of IHS and RoTech. There can be no assurance that IHS and
RoTech will be able to compete successfully against current or future
competitors or that competitive pressures will not have a material adverse
effect on IHS' or RoTech's business, financial condition and results of
operations. IHS and RoTech also compete with various healthcare providers with
respect to attracting and retaining qualified management and other personnel.
Any significant failure by IHS and RoTech to attract and retain qualified
employees could have a material adverse effect on their business, results of
operations and financial condition. See "Business of IHS -- Competition."
EFFECT OF CERTAIN ANTI-TAKEOVER PROVISIONS
IHS' Third Restated Certificate of Incorporation and By-laws, as well as
the General Corporation Law of the State of Delaware (the "DGCL"), contain
certain provisions that could have the effect of making it more difficult for a
third party to acquire, or discouraging a third party from attempting to
acquire, control of IHS. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of IHS Common Stock.
Certain of these provisions allow IHS to issue, without stockholder approval,
preferred stock having voting rights senior to those of the IHS Common Stock.
Other provisions impose various procedural and other requirements that could
make it more difficult for stockholders to effect certain corporate actions. In
addition, the IHS Stockholders' Rights Plan, which provides for discount
purchase rights to certain stockholders of IHS upon certain acquisitions of 20%
or more of the outstanding shares of IHS Common Stock, may also inhibit a change
in control of IHS. As a Delaware corporation, IHS is subject to Section 203 of
the DGCL which, in general, prevents an "interested stockholder" (defined
generally as a person owning 15% or more of the corporation's outstanding voting
stock) from engaging in a "business combination" (as defined) for three years
following the date such person became an interested stockholder unless certain
conditions are satisfied. See "Description of IHS Capital Stock -- Certain
Provisions of IHS' By-Laws and the DGCL" and "-- IHS Stockholders' Rights Plan."
POSSIBLE VOLATILITY OF STOCK AND DEBENTURE PRICES
There may be significant volatility in the market price for the Debentures
and the IHS Common Stock. Quarterly operating results of IHS, changes in general
conditions in the economy, the financial markets or the healthcare industry, or
other developments affecting IHS or its competitors, could cause the market
price of the Debentures and the IHS Common Stock to fluctuate substantially.
Fluctuations in the market price of the IHS Common Stock will likely cause
fluctuations in the market price of the Debentures. In addition, in recent years
the stock market and, in particular, the healthcare industry segment, has
experienced significant price and volume fluctuations. This volatility has
affected the market prices of securities issued by many companies for reasons
unrelated to their operating performance. In the past, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been initiated against such companies. Such
litigation could result in substantial costs and a diversion of management's
attention and resources, which could have a material adverse effect upon IHS'
business, operating results and financial condition.
TAX MATTERS
See "Certain Federal Income Tax Considerations" for a discussion of certain
tax matters that should be considered in evaluating the Offer.
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IHS RECENT DEVELOPMENTS
NINE MONTH RESULTS
Set forth below is certain unaudited summary financial information with
respect to IHS' results of operations for the nine months ended September 30,
1996 and 1997 and balance sheet data as of September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
1996 1997
----------- -----------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net Revenues:
Basic medical services ....................................... $296,468 $ 268,268
Specialty medical services .................................... 658,297 1,093,571
Management services and other ................................. 35,036 29,285
-------- ---------
Total revenues ............................................. 989,801 1,391,124
-------- ---------
Costs and Expenses:
Operating expenses .......................................... 745,346 1,039,618
Corporate administrative and general ........................ 44,890 56,068
Depreciation and amortization ................................. 25,909 47,818
Rent ......................................................... 53,980 75,322
Interest, net ................................................ 46,033 71,991
Non-recurring charges (income), net (1) ..................... (34,298) 20,047
-------- ---------
Total costs and expenses .................................... 881,860 1,310,864
-------- ---------
Earnings before income taxes and extraordinary items ............ 107,941 80,260
Federal and state income taxes ................................. 62,352 31,301
-------- ---------
Earnings before extraordinary items ........................ 45,589 48,959
Extraordinary items (2) .......................................... 1,431 20,552
-------- ---------
Net earnings ............................................. $ 44,158 $ 28,407
======== =========
Per Common Share (fully-diluted) (3):
Earnings before extraordinary items ........................... $ 1.68 $ 1.57
Net earnings .............................................. 1.64 1.00
======== =========
Weighted average number of common and common equiva-
lent shares outstanding (3) .................................. 31,477 35,803
======== =========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
---------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and temporary investments .................................. $ 880,880
Working capital ................................................. 975,712
Total assets .................................................... 3,232,080
Long-term debt, including current portion ...................... 2,198,765
Stockholders' equity ........................................... $ 627,424
</TABLE>
- ----------
(1) In 1996, consists of a gain of $34,298,000 from the Pharmacy Sale. Because
IHS' investment in the Capstone common stock received in the Pharmacy Sale
had a very small tax basis, the taxable gain on the sale significantly
exceeded the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale. In
1997, consists primarily of (i) a gain of $7,578,000 realized on the shares
of Capstone common stock received in the Pharmacy Sale, (ii) the write-off
of $6,553,000 of accounting, legal and other costs resulting from the
proposed Coram Merger Transaction, (iii) the payment to Coram of
$21,000,000 in connection with the termination of the proposed Coram Merger
Transaction, (iv)
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<PAGE>
a gain of $4,635,000 from the sale of its remaining 37.3% interest in
Integrated Living Communities, Inc. and (v) a $4,635,000 exit cost in the
third quarter resulting from the closure of certain redundant activities in
connection with the Merger. See "Unaudited Pro Forma Financial
Information."
(2) In the nine months ended September 30, 1996, IHS recorded a loss on
extinguishment of debt of $2,327,000, relating primarily to the write-off
of deferred financing costs. Such loss, reduced by the related income tax
effect of $896,000, is presented in the statement of operations for the
nine months ended September 30, 1996 as an extraordinary loss of
$1,431,000. During the nine months ended September 30, 1997, IHS recorded a
loss on extinguishment of debt of $33,692,000, representing approximately
(i) $23,554,000 of cash payments for premium and consent fees relating to
the early extinguishment of $214,868,000 aggregate principal amount of IHS'
senior subordinated notes and (ii) $10,138,000 of deferred financing costs
written-off in connection with the early extinguishment of such senior
subordinated notes and the Prior Credit Facility (as defined below). Such
loss, reduced by the related income tax effect of $13,140,000, is presented
in the statement of operations for the nine months ended September 30, 1997
as an extraordinary loss of $20,552,000. See "IHS Recent Developments --
New Credit Facility" and "-- Repurchase of 9 5/8% Senior Subordinated Notes
and 10 3/4% Senior Subordinated Notes."
(3) The weighted average number of common and common equivalent shares
outstanding for the nine months ended September 30, 1996 and 1997 includes
the assumed conversion of IHS' convertible subordinated debentures into IHS
Common Stock. Additionally, interest expense and amortization of
underwriting costs related to such debentures are added, net of tax, to
income for the purpose of calculating fully-diluted earnings per share.
Such amounts aggregated $7,416,000 and $7,356,000 for the nine months ended
September 30, 1996 and 1997, respectively.
PROPOSED ACQUISITION OF LONG-TERM CARE FACILITIES AND OTHER ASSETS FROM
HEALTHSOUTH CORPORATION
On November 3, 1997, IHS and HEALTHSOUTH Corporation ("HEALTHSOUTH")
entered into an agreement pursuant to which IHS agreed to acquire from
HEALTHSOUTH 139 owned, leased or managed long-term care facilities, 12 specialty
hospitals, a contract therapy business having over 1,000 contracts and an
institutional pharmacy business serving approximately 38,000 beds. The
businesses being acquired, which had annual revenues of approximately $925
million for the 12 months ended August 31, 1997, were acquired by HEALTHSOUTH in
its recent acquisition of Horizon/CMS Healthcare Corporation.
Under the terms of the agreement, IHS will pay $1.15 billion in cash and
assume approximately $100 million in debt. IHS will fund the purchase price with
available cash from term loan borrowings under the New Credit Facility and the
sale of the 9 1/4% Senior Notes and borrowings under the revolving credit
portion of the New Credit Facility. On a pro forma basis after giving effect to
the acquisition of these businesses from HEALTHSOUTH, the Merger, the CCA
Acquisition and the Coram Lithotripsy Acquisition, IHS' total debt, including
current portion, accounted for approximately 74% of its total pro forma
capitalization as of September 30, 1997. Consummation of the transaction, which
is expected to close by December 31, 1997, is subject to, among other things,
receipt of required regulatory approvals, consent of IHS' senior lenders and
other customary conditions.
There can be no assurance that this transaction will close on these terms,
on different terms or at all.
NEW CREDIT FACILITY
On September 15, 1997, IHS entered into a $1.75 billion revolving credit
and term loan facility with Citibank, N.A., as Administrative Agent, and certain
other lenders (the "New Credit Facility") to replace its existing $700 million
revolving credit facility. The New Credit Facility consists of a $750 million
term loan facility (the "Term Facility") and a $1 billion revolving credit
facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, matures on September 30, 2004
and will be amortized beginning December 31, 1998 as follows: 1998 -- $7.5
million; each of 1999, 2000, 2001 and 2002 -- $7.5 million (payable in equal
quarterly installments); 2003 -- $337.5 million (payable in equal quarterly
installments); and 2004 -- $375 million (payable in equal quarterly
installments). Any unpaid balance will be due on the maturity date. The Term
Facility bears interest at a rate equal to, at the option of IHS, either (i) in
the case of Eurodollar loans, the sum of (x) one and three-quarters percent or
two percent (depending on the ratio of IHS' Debt (as defined in the New Credit
Facility) to earnings before interest, taxes, depreciation, amortization and
rent, pro forma for any acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London
33
<PAGE>
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio). The Term
Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30, 2001
and $500 million on September 30, 2002, with a final maturity on September 15,
2004; however, the $100 million letter of credit subfacility and $10 million
swing line subfacility will remain at $100 million and $10 million,
respectively, until final maturity. The Revolving Facility bears interest at a
rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans,
the sum of (x) between three-quarters of one percent and one and three-quarters
percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the
London interbank market for loans in an amount substantially equal to the amount
of borrowing and for the period of borrowing selected by IHS or (ii) the sum of
(a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the
latest overnight federal funds rate plus (b) a margin of between zero percent
and one-half percent (depending on the Debt/EBITDAR Ratio). Amounts repaid under
the Revolving Facility may be reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group
managed by Dr. Elkins, owns more than 40% of IHS' stock. The New Credit Facility
is guaranteed by all of IHS' subsidiaries (other than inactive subsidiaries),
including RoTech, and secured by a pledge of all of the stock of substantially
all of IHS' subsidiaries, including RoTech.
The New Credit Facility replaced IHS' $700 million revolving credit
facility (the "Prior Credit Facility"). As a result, IHS recorded an
extraordinary loss on extinguishment of debt of approximately $2.4 million (net
of related tax benefit of approximately $1.6 million) in the third quarter of
1997 resulting from the write-off of deferred financing costs of $4.0 million
related to the Prior Credit Facility.
RECENT ACQUISITIONS
RoTech Acquisition. On October 21, 1997, IHS acquired RoTech through merger
of a wholly-owned subsidiary of IHS into RoTech (the "Merger"), with RoTech
becoming a wholly-owned subsidiary of IHS. RoTech provides home healthcare
products and services, with an emphasis on home respiratory, home medical
equipment and infusion therapy, primarily to patients in non-urban areas. RoTech
currently operates 631 home health locations in 36 states and approximately 26
primary care physicians practices.
Under the terms of the Merger, holders of RoTech Common Stock received for
each share of RoTech Common Stock 0.5806 of a share of IHS Common Stock (the
"Exchange Ratio"), having a market value of $19.16 based on the $33.00 closing
price of the IHS Common Stock on October 21, 1997, the effective date of the
Merger. Options to purchase RoTech Common Stock ("RoTech Options") were
converted at the closing into options to purchase IHS Common Stock based on the
Exchange Ratio. IHS issued approximately 15,350,670 shares of IHS Common Stock
in the Merger, and reserved for issuance approximately 1,841,700 shares of IHS
Common Stock issuable upon exercise of RoTech Options. In addition, the
Debentures became convertible into approximately 2,433,000 shares of IHS Common
Stock at a conversion price of $45.21 per share of IHS Common Stock. At October
20, 1997, IHS had outstanding 26,852,396 shares of IHS Common Stock. At
September 30, 1997, IHS had outstanding options and warrants to purchase
approximately 9,000,000 shares of IHS Common Stock, and had reserved for
issuance 7,989,275 shares upon conversion of $258,750,000 principal amount of
outstanding convertible debentures. The Merger consideration aggregated
approximately $514.8 million, substantially all of which will be recorded as
goodwill. The transaction will be treated as a purchase for
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<PAGE>
accounting and financial reporting purposes. IHS repaid the $199.7 million of
RoTech bank debt assumed in the transaction with the proceeds of the term loans
under its New Credit Facility. See "Unaudited Pro Forma Financial Information."
Coram Lithotripsy Acquisition. IHS acquired, effective September 30, 1997,
substantially all of the assets of Coram's Lithotripsy Division, which operates
20 mobile lithotripsy units and 13 fixed-site machines in 180 locations in 18
states. The Coram Lithotripsy Division also provides maintenance services to its
own and third-party equipment. Lithotripsy is a non-invasive technique that
utilizes shock waves to disintegrate kidney stones.
IHS paid approximately $130.0 million in cash for the Coram Lithotripsy
Division, and assumed $1.0 million of intercompany debt to Coram. The Coram
Lithotripsy Division had revenues of $49.0 million and earnings before interest,
taxes, depreciation and amortization ("EBITDA") of $28.8 million (before
minority interest) for the year ended December 31, 1996 and revenues of $23.9
million and EBITDA of $14.3 million (before minority interest) for the six
months ended June 30, 1997.
IHS has assumed Coram's agreements with its lithotripsy partners, which
contemplate that IHS will acquire the remaining interest in each partnership at
a defined price in the event that legislation is passed or regulations are
adopted or interpreted that would prevent the physician partners from owning an
interest in the partnership and using the partnership's lithotripsy equipment
for the treatment of his or her patients. Coram has represented to IHS that its
partnership arrangements with physicians in its lithotripsy business are in
compliance with current law.
Within the last three years, HCFA released a proposed rule defining the
rate at which ambulatory surgery centers and certain hospitals would be
reimbursed for the technical component of a lithotripsy procedure. This proposed
rule has not been finalized. IHS cannot predict what the final rate for such
reimbursement will be or what effect, if any, the adoption of this proposed rule
would have on lithotripsy revenue and whether this decreased reimbursement rate
will be applied to lithotripsy procedures performed at hospitals, where a
majority of IHS' lithotripsy machines are currently utilized.
CCA Acquisition. On September 25, 1997, IHS acquired, through a cash tender
offer and subsequent merger, CCA for a purchase price of approximately $34.3
million in cash. In addition, in connection with the CCA Acquisition IHS repaid
approximately $58.0 million of indebtedness assumed in the CCA Acquisition with
the proceeds of the term loans under its New Credit Facility and assumed
approximately $27.2 million of indebtedness. CCA develops and operates skilled
nursing facilities in medically underserved rural communities. CCA currently
operates 54 licensed long-term care facilities with 4,450 licensed beds (of
which 20 facilities are being held for sale), one rural healthcare clinic, two
outpatient rehabilitation centers, one child day care center and 124 assisted
living units within seven of the facilities which CCA operates. CCA currently
operates in Alabama, Colorado, Florida, Georgia, Iowa, Kansas, Louisiana, Maine,
Missouri, Nebraska, Texas and Wyoming. According to CCA's filings with the
Commission, CCA had revenues of $127.5 million and a net loss of $18.9 million
for the year ended December 31, 1996 and revenues of $65.5 million and a net
loss of $2.4 million for the six months ended June 30, 1997. Dr. Robert N.
Elkins, Chairman of the Board and Chief Executive Officer of IHS, beneficially
owned approximately 21.0% of CCA's outstanding common stock (excluding warrants
owned by IHS to purchase approximately 13.5% of CCA's common stock).
FIRST AMERICAN ACQUISITION
On October 17, 1996, IHS acquired through merger First American Health Care
of Georgia, Inc., a provider of home health services in 21 states, principally
Alabama, California, Florida, Georgia, Michigan, Pennsylvania and Tennessee. IHS
believes the acquisition of First American is an important component in the
implementation of its post-acute care network. See "Business of IHS -- Company
Strategy."
The purchase price for First American was $154.1 million in cash plus
contingent payments of up to $155 million. The contingent payments will be
payable if (i) legislation is enacted that changes the Medicare reimbursement
methodology for home health services to a prospectively determined rate
methodology, in whole or in part, or (ii) in respect of any year the percentage
increase in the seasonally
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<PAGE>
unadjusted Consumer Price Index for all Urban Consumers for the Medical Care
expenditure category (the "Medical CPI") is less than 8% or, even if the Medical
CPI is greater than 8% in such year, in any subsequent year prior to 2004 the
percentage increase in the Medical CPI is less than 8%. If payable, the
contingent payments will be paid as follows: $10 million for 1999, which must be
paid on or before February 14, 2000; $40 million for 2000, which must be paid on
or before February 14, 2001; $51 million for 2001, which must be paid on or
before February 14, 2002; $39 million for 2002, which must be paid on or before
February 14, 2003; and $15 million for 2003, which must be paid on or before
February 14, 2004. IHS has concluded, based on its current expectations with
respect to the Medical CPI, that the contingent payments due in 2000 and 2001
are probable of occurrence. Accordingly, IHS has accrued on its balance sheet a
long-term liability representing the present value of the $50 million aggregate
contingent payments due in 2000 and 2001, which at June 30, 1997 aggregated
$35.3 million. IHS borrowed the cash purchase price paid at the closing under
its revolving credit facility. $115 million of the $154.1 million paid at
closing was paid to HCFA, the Department of Justice and the United States
Attorney for the Southern District of Georgia in settlement of claims by the
United States government seeking repayment from First American of certain
overpayments and unallowable reimbursements under Medicare. The total settlement
with the United States government was $255 million; the remaining $140 million
will be paid from the contingent payments to the extent such payments become
due. In addition, HCFA and First American agreed to a specified bi-weekly PIP
payment from August 27, 1996 through December 31, 1996, without adjustment for
any liability, overpayment or underpayment.
Substantially all of First American's revenues are derived from Medicare.
The following table summarizes certain selected financial and operating data of
First American for the three years ended December 31, 1995 and the nine months
ended September 30, 1995 and 1996. The selected historical financial information
of First American has been derived from, and should be read in conjunction with,
the historical consolidated financial statements of First American, including
the notes thereto, incorporated by reference herein. The results for the nine
months ended September 30, 1996 are not necessarily indicative of the results
achieved for the full fiscal year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ------------ ----------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues(1) ............ $ 340,897 $ 452,163 $ 563,747 $ 439,873 $ 370,654
Total expenses ............... 356,387 496,647 673,658 515,332 402,106
Loss from operations ......... (15,490) (44,484) (109,911) (75,459) (31,452)
Net loss ..................... (15,557) (55,314) (110,376) (75,776) (36,189)
Visits to patient homes ...... 5,036,000 7,433,203 9,024,271 6,966,451 5,731,026
Number of States ............ 17 22 23 21 21
Number of service locations ... 288 379 456 426 410
Number of employees (est.) ... 9,000 12,000 16,000 15,000 13,700
</TABLE>
- ----------
(1) As a result of the settlement of the HCFA claims, First American recorded
reductions to patient service revenues of $8.7 million for the period
ending December 31, 1992, $11.4 million, $29.3 million and $54.6 million
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$41.0 million and $10.4 million for the nine months ended September 30,
1995 and 1996, respectively.
See "Risk Factors -- Risks Related to Historical Financial Performance of
First American" and "Unaudited Pro Forma Financial Information."
OTHER ACQUISITIONS AND DIVESTITURES
IHS continues to acquire and lease additional geriatric care facilities,
enter into new management agreements, acquire rehabilitation, home healthcare
and related service companies and implement its strategy of expanding the range
of related services it offers directly to its patients in order to serve the
full spectrum of patients' post-acute care needs. See "Risk Factors -- Risks
Associated with Growth Through Acquisitions and Internal Development" and
"Unaudited Pro Forma Financial Information."
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<PAGE>
From January 1 through October 31, 1997, IHS has, in addition to the
acquisitions described above, acquired nine home healthcare companies, five
mobile diagnostic companies and two rehabilitation companies. The total cost for
these acquisitions was approximately $99.5 million. In July 1997, IHS sold its
remaining 37% interest in its assisted living services subsidiary pursuant to a
cash tender offer. IHS recognized a gain of approximately $4.6 million during
the third quarter of 1997 as a result of this transaction. In addition to the
proposed transaction with HEALTHSOUTH described above, IHS has also reached a
definitive agreement to purchase a home infusion company for approximately $16.2
million. IHS has reached agreements-in-principle to purchase three mobile
diagnostic companies for approximately $8.2 million, four home health companies
for approximately $48.3 million, a rehabilitation company for approximately
$11.1 million and a lithotripsy company for approximately $11.2 million. IHS has
also agreed in principle to assume leases of three skilled nursing facilities
for $3.7 million. There can be no assurance that any of these pending
acquisitions will be consummated on the proposed terms, on different terms or at
all. See "Unaudited Pro Forma Financial Information."
In developing its post-acute healthcare system, IHS continuously evaluates
whether owning and operating businesses which provide certain ancillary
services, or contracting with third parties for such services, is more
cost-effective. As a result, IHS is continuously evaluating its existing
operations to determine whether to retain or divest operations. To date, IHS has
divested its pharmacy division and its assisted living services division, and
may divest additional divisions or assets in the future. See "Unaudited Pro
Forma Financial Information."
REPURCHASE OF 9 5/8% SENIOR SUBORDINATED NOTES AND 10 3/4% SENIOR SUBORDINATED
NOTES
On May 30, 1997 IHS completed cash tender offers to purchase its
outstanding 9 5/8% Senior Subordinated Notes due 2002, Series A (the "9 5/8%
Senior Notes") and its 10 3/4% Senior Subordinated Notes due 2004 (the "10 3/4%
Senior Notes") and related consent solicitations to eliminate certain
restrictive covenants and other provisions in the indentures pursuant to which
the 9 5/8% Senior Notes and 10 3/4% Senior Notes were issued in order to improve
the operating and financial flexibility of the Company. The consideration paid
pursuant to the tender offer and consent solicitation to holders of the 9 5/8%
Senior Notes who tendered their notes (and thereby delivered consents to the
proposed amendments to the indenture pursuant to which the 9 5/8% Senior Notes
were issued) prior to 12:00 midnight, New York City time, on May 14, 1997 (the
"Consent Date") was $1,094.00 plus accrued and unpaid interest to but not
including the payment date in respect of each $1,000 principal amount tendered,
consisting of $1,089.00 plus accrued and unpaid interest as tender offer
consideration and $5.00 as a consent payment. The total consideration paid
pursuant to the tender offer and consent solicitation to holders of the 10 3/4%
Senior Notes who tendered their notes (and thereby delivered consents to the
proposed amendments to the indenture pursuant to which the 10 3/4% Senior Notes
were issued) prior to 12:00 midnight, New York City time, on the Consent Date
was $1,119.50 plus accrued and unpaid interest to but not including the payment
date in respect of each $1,000 principal amount tendered, consisting of
$1,114.50 plus accrued and unpaid interest as tender offer consideration and
$5.00 as a consent payment. Of the $115,000,000 aggregate principal amount of
the 9 5/8% Senior Notes outstanding, an aggregate of $114,975,000 principal
amount of such notes was tendered. Of the $100,000,000 aggregate principal
amount of the 10 3/4% Senior Notes outstanding, an aggregate of $99,893,000
principal amount of such notes was tendered. IHS used approximately $247.2
million of the net proceeds from the sale of $450,000,000 aggregate principal
amount of its 9 1/2% Senior Subordinated Notes due 2007 to pay the tender offer
and consent solicitation payments and accrued interest.
SALE OF 9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
On May 30, 1997, IHS sold privately an aggregate of $450 million principal
amount of its 9 1/2% Senior Subordinated Notes due 2007 to Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.
Incorporated and Salomon Brothers Inc (the "9 1/2% Initial Purchasers"). The 9
1/2% Senior Subordinated Notes were subsequently resold by the 9 1/2% Initial
Purchasers pursuant to Rule 144A under the Securities Act. IHS used
approximately $247.2 million of the net proceeds to repurchase substantially all
its outstanding 9 5/8% Senior Notes and 10 3/4% Senior Notes and the remaining
$191.0 million of net proceeds to pay down borrowings under its Prior Credit
Facility. See "Description of Certain IHS Indebtedness -- 9 1/2% Senior
Subordinated Notes due 2007."
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<PAGE>
SALE OF 9 1/4% SENIOR SUBORDINATED NOTES DUE 2008
On September 11, 1997, IHS sold privately an aggregate of $500 million
principal amount of its 9 1/4% Senior Subordinated Notes due 2008 to Smith
Barney Inc., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Citicorp Securities, Inc. (the "9 1/4% Initial
Purchasers"). The 9 1/4% Senior Notes were subsequently resold by the 9 1/4%
Initial Purchasers pursuant to Rule 144A under the Securities Act. IHS used
approximately $319.5 million of the net proceeds to repay all amounts
outstanding under its Prior Credit Facility. IHS intends to use the remaining
approximately $166.9 million of net proceeds for general corporate purposes,
including working capital, and for potential acquisitions. See "Description of
Certain IHS Indebtedness -- 9 1/4% Senior Subordinated Notes due 2008."
38
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statements of operations of IHS give
effect to (i) the Merger, which will be accounted for as a purchase (including
the effect of the refinancing of certain RoTech indebtedness in connection with
the Merger), (ii) the sale by IHS of its pharmacy division in July 1996 (the
"Pharmacy Sale"), (iii) the sale by IHS of a majority interest in its assisted
living services subsidiary ("ILC") in October 1996 (the "ILC Offering"), (iv)
the acquisition by IHS of First American in October 1996 (the "First American
Acquisition"), and (v) the acquisition by IHS of (a) Vintage Health Care Center,
a skilled nursing and assisted living facility, in January 1996 (the "Vintage
Acquisition"), (b) Rehab Management Systems, Inc., an outpatient rehabilitation
company, in March 1996 (the "RMS Acquisition"), (c) Hospice of the Great Lakes,
Inc., a hospice company, in May 1996 (the "Hospice Acquisition"), (d) J.R. Rehab
Associates, Inc., an inpatient and outpatient rehabilitation center, in August
1996 (the "J.R. Rehab Acquisition"), (e) Extendicare of Tennessee, Inc., a home
health company, in August 1996 (the "Extendicare Acquisition"), (f) Edgewater
Home Infusion Services, Inc., a home infusion company, in August 1996 (the
"Edgewater Acquisition"), (g) Century Home Services, Inc., a home health
services company, in September 1996 (the "Century Acquisition"), (h) Signature
Home Care, Inc., a home health company, in September 1996 (the "Signature
Acquisition"), (i) Mediq Mobile X-Ray Services, Inc., a mobile diagnostics
company, in November 1996 (the "Mediq Acquisition"), (j) Total Rehab Services,
LLC and Total Rehab Services 02, LLC, providers of contract rehabilitation and
respiratory services, in November 1996 (the "Total Rehab Acquisition"), (k)
Lifeway Inc., a physician management and disease management company, in November
1996 (the "Lifeway Acquisition"), (l) In-Home Health Care, Inc., a home health
company, in January 1997 (the "In-Home Acquisition"), (m) Portable X-Ray Labs,
Inc., a mobile diagnostics company, in February 1997 (the "Portable X-Ray
Acquisition"), (n) Coastal Rehabilitation, Inc., an inpatient rehabilitation
company, in April 1997 (the "Coastal Acquisition"), (o) Health Care Industries,
Inc., a home health company, in June 1997 (the "Health Care Industries
Acquisition"), and (p) Rehab Dynamics, Inc. and Restorative Therapy, Ltd.,
related contract rehabilitation companies, in June 1997 (the "Rehab Dynamics
Acquisition"). The pro forma statements of operations for the year ended
December 31, 1996 and the six months ended June 30, 1997 were prepared as if all
of the foregoing transactions were consummated on January 1, 1996. The pro forma
combined balance sheet gives effect to the Merger (including the effect of the
refinancing of certain RoTech indebtedness in connection with the Merger) as if
the Merger had occurred on June 30, 1997.
The pro forma financial information does not give pro forma effect to (i)
IHS' acquisition of CCA and the Coram Lithotripsy Division, (ii) the New Credit
Facility, (iii) the sale of IHS' remaining 37.3% interest in Integrated Living
Communities, Inc., (iv) the acquisition by IHS of the assets of five small
ancillary service businesses during the six months ended June 30, 1997, (v) the
acquisition by IHS of four home healthcare companies and one mobile diagnostic
company during the three months ended September 30, 1997 or (vi) the sale by IHS
of the 9 1/4% Senior Notes in September 1997.
The pro forma adjustments are based upon available information and certain
assumptions that IHS management believes are reasonable. The unaudited pro forma
financial information set forth below is not necessarily indicative of IHS'
financial position or the results of operations that actually would have
occurred if the transactions had been consummated on the dates shown. In
addition, they are not intended to be a projection of results of operations that
may be obtained by IHS in the future. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto incorporated by reference in this Offer to
Purchase. See "Incorporation of Certain Documents by Reference."
39
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA COMBINED BALANCE SHEET AS OF JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
IHS ROTECH PRO FORMA PRO FORMA
HISTORICAL* HISTORICAL(1)** ADJUSTMENTS COMBINED
------------- ----------------- ---------------------- --------------
<S> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents ............... $ 43,105 $ 12,819 $ 55,924
Temporary investments ..................... 2,367 -- 2,367
Patient accounts and third-party payor
settlements receivable, net ............ 344,144 112,341 456,485
Inventories, prepaid expenses and
other current assets .................. 28,931 26,980 55,911
Income tax receivable .................. 30,617 -- $ 800 (2) 31,417
---------- -------- ---------------- ----------
Total current assets .................. 449,164 152,140 800 602,104
---------- -------- ---------------- ----------
Property, plant and equipment, net ......... 910,772 131,240 1,042,012
Intangible assets ........................ 633,206 272,795 306,967 (3) 1,212,968
Other assets .............................. 149,505 4,557 154,062
---------- -------- ---------------- ----------
Total assets ........................... $2,142,647 $560,732 $ 307,767 $3,011,146
========== ======== ================ ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt ...... $ 13,161 $180,991 $ (180,991)(4) $ 13,161
Accounts payable and accrued 4,750 (2)
expenses ................................. 276,961 30,970 10,250 (5) 322,931
---------- -------- ---------------- ----------
Total current liabilities ............... 290,122 211,961 (165,991) 336,092
---------- -------- ---------------- ----------
Long-term debt:
Convertible subordinated debentures ....... 258,750 110,000
368,750
Other long-term debt less current
maturities .............................. 946,337 -- 180,991 (4) 1,127,328
---------- -------- ---------------- ----------
Total long-term debt .................. 1,205,087 110,000 180,991 1,496,078
---------- -------- ---------------- ----------
Other long-term liabilities(6) ............ 35,315 -- 35,315
Deferred income taxes ..................... 25,073 20,735 45,808
Deferred gain on sale-leaseback
transactions .............................. 5,731 -- 5,731
Redeemable common stock .................. -- 4,076 (4,076)(7) --
Stockholders' equity:
Common stock .............................. 25 5 11 (8) 41
Additional paid-in capital ............... 492,892 131,269 383,468 (8) 1,007,629
(83,534)(8)
Retained earnings (deficit) ............... 89,940 83,534 (3,950)(2) 85,990
Treasury stock ........................... (1,538) (848) 848 (8) (1,538)
---------- -------- ---------------- ----------
Total stockholders' equity ............ 581,319 213,960 296,843 1,092,122
---------- -------- ---------------- ----------
Total liabilities and stockholders'
equity .............................. $2,142,647 $560,732 $ 307,767 $3,011,146
========== ======== ================ ==========
</TABLE>
- ----------
* As of June 30, 1997
** As of July 31, 1997
40
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
IHS PHARMACY ILC
HISTORICAL(9) ADJUSTMENTS(10) ADJUSTMENTS(11)
--------------- ----------------- -----------------
<S> <C> <C> <C>
Net revenues:
Basic medical services .................. $ 389,773 $ (16,101)(a)
Specialty medical services ............... 999,209 $ (52,331)(a)
Management services and other ............ 45,713 (1,020)(a)
----------- ------------
Total revenues ........................ 1,434,695 (52,331) (17,121)
Costs and expenses:
Operating, general and administra-
tive expenses 1,154,924 (43,279)(a) (12,453)(a)
Depreciation and amortization ............ 41,681 (1,785)(a) (833)(a)
Rent .................................... 77,785 (838)(a) (1,885)(a)
Interest, net ........................... 64,110 (3,817)(b) (963)(b)
Non-recurring charges (income) ............ (14,457) 34,298 (c) (8,497)(d)
----------- ------------ ------------
Total costs and expenses ............... 1,324,043 (15,421) (24,631)
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items ................................. 110,652 (36,910) 7,510
Equity in earnings (loss) of affiliates .... 828 722
----------- ------------
Earnings (loss) before income
taxes and extraordinary items ......... 111,480 $ (36,910) $ 8,232
============ ============
Federal and state income taxes ............ 63,715
-----------
Earnings before extraordinary
items .................................... $ 47,765
===========
Earnings before extraordinary items
per common share:
Primary ................................. $ 2.03
Fully-diluted ........................... 1.82
===========
Weighted average shares:
Primary ................................. 23,574
Fully-diluted ........................... 31,653
===========
<CAPTION>
FIRST OTHER OTHER PRO FORMA
FIRST AMERICAN AMERICAN ACQUISITIONS ACQUISITIONS BEFORE
HISTORICAL(12) ADJUSTMENTS HISTORICAL(13) ADJUSTMENTS ROTECH
---------------- ----------------- ---------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services .................. $ -- $ 292 $ 373,964
Specialty medical services ............... 387,547 173,463 1,507,888
Management services and other ............ 3,115 3 47,811
---------- --------- ------------
Total revenues ........................ 390,662 173,758 1,929,663
Costs and expenses:
Operating, general and administra-
tive expenses 406,800 168,766 1,674,758
Depreciation and amortization ............ 5,439 $ 4,501 (e) 2,087 $ 2,381 (e) 53,471
Rent .................................... -- 3,474 78,536
Interest, net ........................... 6,208 9,314 (b) 3,402 3,053 (b) 81,307
Non-recurring charges (income) ............ 3,468 -- 14,812
---------- --------- ------------
Total costs and expenses ............... 421,915 13,815 177,729 5,434 1,902,884
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items ................................. (31,253) (13,815) (3,971) (5,434) 26,779
Equity in earnings (loss) of affiliates .... (671) 1,032 1,911
---------- --------- ------------
Earnings (loss) before income
taxes and extraordinary items ......... $ (31,924) $ (13,815) $ (2,939) $ (5,434) 28,690
========== ========== ========= ==========
Federal and state income taxes ............ 17,449
------------
Earnings before extraordinary
items .................................... $ 11,241
============
Earnings before extraordinary items
per common share:
Primary ................................. $ 0.46
Fully-diluted ........................... 0.65
============
Weighted average shares:
Primary ................................. 922 24,496
Fully-diluted ........................... 922 32,575
========== ============
<CAPTION>
ROTECH* ROTECH PRO FORMA
HISTORICAL ADJUSTMENTS CONSOLIDATED
------------ ----------------- -------------
<S> <C> <C> <C>
Net revenues:
Basic medical services .................. $ -- $ 373,964
Specialty medical services ............... 344,590 1,852,478
Management services and other ............ -- 47,811
---------- ------------
Total revenues ........................ 344,590 2,274,253
Costs and expenses:
Operating, general and administra-
tive expenses 258,891 1,933,649
Depreciation and amortization ............ 36,074 $ 2,850 (e) 92,395
Rent .................................... -- 78,536
Interest, net ........................... 9,456 475 (f) 91,238
Non-recurring charges (income) ............ -- 14,812
---------- ------------
Total costs and expenses ............... 304,421 3,325 2,210,630
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items ................................. 40,169 (3,325) 63,623
Equity in earnings (loss) of affiliates .... -- 1,911
---------- ------------
Earnings (loss) before income
taxes and extraordinary items ......... $ 40,169 $ (3,325) 65,534
========== ==========
Federal and state income taxes ............ 34,250
------------
Earnings before extraordinary
items .................................... $ 31,284
============
Earnings before extraordinary items
per common share:
Primary ................................. $ 0.80
Fully-diluted ........................... 0.90
============
Weighted average shares:
Primary ................................. 25,513 (10,700) 39,309
Fully-diluted ........................... 30,063 (12,608) 50,030
========== ========== ============
</TABLE>
- ----------
* 12 months ended January 31, 1997
41
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
OTHER
IHS PHARMACY ACQUISITIONS
HISTORICAL(14) ADJUSTMENTS(10) HISTORICAL(15)
---------------- ----------------- ----------------
<S> <C> <C> <C>
Net revenues:
Basic medical services .............................. $176,810 $ --
Specialty medical services ........................... 722,802 18,379
Management services and other ........................ 19,304
--------- --------
Total revenues .................................... 918,916 18,379
Costs and expenses:
Operating, general and administrative expenses ...... 727,299 15,649
Depreciation and amortization ........................ 30,844 135
Rent ................................................ 49,795 547
Interest, net ....................................... 44,645 88
Non-recurring charges, net ........................... 20,047 $ 7,578 (c) --
--------- ---------- ---------
Total costs and expenses ........................ 872,630 7,578 16,419
Earnings (loss) before equity in earnings of affili-
ates, income taxes and extraordinary items 46,286 (7,578) 1,960
Equity in earnings of affiliates ..................... 98 --
--------- ---------- ---------
Earnings (loss) before income taxes and
extraordinary items .............................. 46,384 $ (7,578) $ 1,960
========== =========
Federal and state income taxes ........................ 18,090
---------
Earnings before extraordinary items ............... $ 28,294
=========
Earnings before extraordinary items per common share:
Primary ............................................. $ 1.05
Fully-diluted ....................................... 0.92
=========
Weighted average shares:
Primary ............................................. 26,963
Fully-diluted ....................................... 36,233
=========
<CAPTION>
OTHER PRO FORMA
ACQUISITIONS BEFORE ROTECH ROTECH PRO FORMA
ADJUSTMENTS ROTECH HISTORICAL* ADJUSTMENTS CONSOLIDATED
-------------- ---------- ------------- -------------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services .............................. $176,810 $ -- $ 176,810
Specialty medical services ........................... 741,181 234,549 975,730
Management services and other ........................ 19,304 -- 19,304
--------- ---------- ------------
Total revenues .................................... 937,295 234,549 1,171,844
Costs and expenses:
Operating, general and administrative expenses ...... 742,948 173,250 916,198
Depreciation and amortization ........................ $ 306 (e) 31,285 24,700 $ (2,139)(e) 53,846
Rent ................................................ 50,342 -- 50,342
Interest, net ....................................... 399 (b) 45,132 7,996 577 (f) 53,705
Non-recurring charges, net ........................... 27,625 -- 27,625
-------- --------- ---------- ------------ ------------
Total costs and expenses ........................ 705 897,332 205,946 (1,562) 1,101,716
Earnings (loss) before equity in earnings of affili-
ates, income taxes and extraordinary items (705) 39,963 28,603 1,562 70,128
Equity in earnings of affiliates ..................... 98 -- 98
-------- --------- ---------- -------------- ------------
Earnings (loss) before income taxes and
extraordinary items .............................. $ (705) 40,061 $ 28,603 $ 1,562 70,226
======== ========== ==============
Federal and state income taxes ........................ 18,844 32,106
--------- ------------
Earnings before extraordinary items ............... $ 21,217 $ 38,120
========= ============
Earnings before extraordinary items per common share:
Primary ............................................. $ 0.78 $ 0.89
Fully-diluted ....................................... 0.71 0.82
========= ============
Weighted average shares:
Primary ............................................. 305 27,268 26,715 (11,204) 42,779
Fully-diluted ....................................... 305 36,538 31,384 (13,162) 54,760
======== ========= ========== ============== ============
</TABLE>
- ----------
* Six Months ended July 31, 1997.
42
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) Certain amounts have been reclassified to conform the presentation of
RoTech and IHS.
(2) Represents nonrecurring charges directly attributable to the Merger, which
will be included in IHS' statement of operations within the 12 month period
following the transaction. Such charges represent the nonrecurring lump sum
payments to certain RoTech officers aggregating $4,750,000 less related
income tax benefit of $800,000.
(3) Represents the excess of the purchase price (based on a price per share of
IHS Common Stock of $33.00 (the closing price of IHS Common Stock on
October 21, 1997 (the date the Merger was consummated)) and using the
26,866,000 shares of RoTech Common Stock outstanding on October 21, 1997
(including 422,651 shares of redeemable common stock (see note 7 below))
adjusted for the Exchange Ratio of .5806) including estimated direct costs
of the Merger of $10,250,000 (see note 5 below), over the estimated fair
values of the net assets acquired as follows:
Merger consideration for RoTech .................. $514,753,000
Direct costs of acquisition ........................ 10,250,000
-------------
525,003,000
Stockholders' equity of RoTech (including redeemable
common stock of $4,076,000)........................ 218,036,000
-------------
$306,967,000
=============
(4) Represents the pay down of borrowings outstanding under RoTech's credit
facility. Does not reflect the repurchase of the Debentures pursuant to the
Offer.
(5) Represents the estimated expenses of the Merger of $10,250,000 as follows:
Non-compete payments to certain officers ($5,000,000); professional fees
($2,500,000); filing fees ($500,000); and other ($2,250,000). Other
primarily represents severance payments and related benefits anticipated to
be paid to identified employees whose employment will be terminated after
the Merger in accordance with a restructuring plan to be adopted.
(6) Represents the present value of contingent payments aggregating $50,000,000
due in 2000 and 2001 relating to the First American Acquisition, which
payments IHS deems probable. See "IHS Recent Developments -- First American
Acquisition."
(7) Represents 422,651 shares of RoTech Common Stock subject to put options at
the sole discretion of the RoTech stockholder at prices ranging from $9.75
to $17.50 per share. The put options expire at various dates between
October 1997 and December 1999. Because the put price is below the current
market price of the RoTech Common Stock, IHS has assumed for purposes of
these pro forma financial statements that the put options will not be
exercised and, therefore, the shares of IHS Common Stock issued in exchange
for such RoTech Common Stock have not been classified as redeemable common
stock, but have been included in stockholders' equity for purposes of the
pro forma financial statements.
(8) Represents the Merger consideration of $514,753,000 (see note 3 above),
less $16,000 allocated to Common stock and less RoTech's Additional paid-in
capital of $131,269,000. Other adjustments represent eliminations of
RoTech's equity account balances.
(9) Includes the results of operations of (i) IHS' pharmacy division through
July 30, 1996, the date of the Pharmacy Sale, (ii) IHS' assisted living
services subsidiary through October 9, 1996, the date of closing of the ILC
Offering, (iii) First American from October 17, 1996, the date of closing
of the First American Acquisition, (iv) Vintage Health Care Center from
January 29, 1996, the date of closing of the Vintage Acquisition, (v) Rehab
Management Systems, Inc. from March 19, 1996, the date of closing of the
RMS Acquisition, (vi) Hospice of the Great Lakes, Inc. from May 1, 1996,
the date of closing of the Hospice Acquisition, (vii) J.R. Rehab
Associates, Inc. from August 1, 1996, the date of closing of the J.R. Rehab
Acquisition, (viii) Extendicare of Tennessee, Inc. from August 12, 1996,
the date of closing of the Extendicare Acquisition, (ix) Edgewater Home
Infusion
43
<PAGE>
Services, Inc. from August 19, 1996, the date of closing of the Edgewater
Acquisition, (x) Century Home Services, Inc. from September 13, 1996, the
date of closing of the Century Acquisition, (xi) Signature Home Care, Inc.
from September 25, 1996, the date of closing of the Signature Acquisition,
(xii) Mediq Mobile X-Ray Services, Inc. from November 7, 1996, the date of
closing of the Mediq Acquisition, (xiii) Total Rehab Services, LLC and
Total Rehab Services 02, LLC from November 8, 1996, the date of closing of
the Total Rehab Acquisition and (xiv) Lifeway Inc. from November 8, 1996,
the date of closing of the Lifeway Acquisition. Also includes from October
9, 1996 IHS' equity in ILC's earnings. See notes 10, 11, 12 and 13 below.
(10) In July 1996, IHS sold its pharmacy division to Capstone Pharmacy Services,
Inc. ("Capstone") for a purchase price of $150 million, consisting of cash
of $125 million and shares of Capstone common stock having a value of $25
million. IHS used the net proceeds of the sale to repay borrowings under
its revolving credit facility. IHS had a pre-tax gain of $34.3 million.
Because IHS' investment in the pharmacy division had a very small tax
basis, the taxable gain on the sale significantly exceeded the gain for
financial reporting purposes, thereby resulting in a disproportionately
higher income tax provision related to the sale. IHS' investment in
Capstone common stock of $14.6 million was recorded at carryover cost and
classified as securities available for sale. In 1997, IHS recognized the
remaining gain of $7.6 million when restrictions on transferability of such
shares were removed.
(11) On October 9, 1996, Integrated Living Communities, Inc. ("ILC"), at the
time a wholly-owned subsidiary of IHS which provides assisted living and
related services to the private pay elderly market, completed an initial
public offering of ILC common stock. IHS sold 1,400,000 shares of ILC
common stock in the offering, for which it received aggregate net proceeds
of approximately $10.4 million. In addition, ILC used approximately $7.4
million of the net proceeds received by it to repay outstanding
indebtedness to IHS. IHS used the net proceeds from the sale to repay
borrowings under its credit facility. IHS recorded a pre-tax loss of
approximately $8.5 million in the fourth quarter of 1996 as a result of
this transaction. On July 2, 1997, IHS sold the remaining 2,497,900 shares
of ILC common stock it owned, representing 37.3% of the outstanding ILC
common stock, for $11.50 per share in a cash tender offer (the "ILC Sale").
IHS recorded a gain of approximately $4.6 million from the ILC Sale in the
third quarter of 1997. The pro forma effect of the ILC Sale is not
reflected in the pro forma statements of operations.
(12) In October 1996, IHS acquired through merger First American. The purchase
price was $154.1 million in cash, which IHS borrowed under its credit
facility, plus contingent payments of up to $155 million payable at various
times through 2004. See "IHS Recent Developments -- First American
Acquisition."
(13) Consists of the following acquisitions:
Vintage Acquisition. In January 1996, IHS purchased Vintage Health
Care Center, a 220 bed skilled nursing and assisted living facility in
Denton, Texas, for $6.9 million. A condominium interest in the assisted
living portion of this facility (valued at $3.5 million) was contributed to
ILC on June 1, 1996.
RMS Acquisition. In March 1996, IHS acquired all of the outstanding
capital stock of Rehab Management Systems, Inc. ("RMS"), which operates
outpatient rehabilitation therapy clinics in central Florida. RMS also
managed one therapy and one physician clinic. Total purchase price was
$10.0 million, including $8.0 million representing the issuance of 385,542
shares of IHS Common Stock. In addition, IHS incurred direct costs of
acquisition of $2.9 million. Total goodwill at the date of acquisition was
$12.8 million.
Hospice of the Great Lakes Acquisition. In May 1996, IHS acquired
substantially all the assets of Hospice of the Great Lakes, Inc., a hospice
company in Northbrook, Illinois. Total purchase price was $8.2 million
representing the issuance of 304,822 shares of IHS Common Stock. IHS
incurred direct costs of acquisition of $1.0 million. Total goodwill at the
date of acquisition aggregated $9.0 million.
44
<PAGE>
J.R. Rehab Acquisition. In August 1996, IHS acquired all of the
outstanding capital stock of J.R. Rehab Associates, Inc., an inpatient and
outpatient rehabilitation clinic in Mooresville, North Carolina. Total
purchase price was approximately $2.1 million. IHS incurred direct costs of
acquisition of $200,000. Total goodwill at the date of acquisition
aggregated $3.2 million.
Extendicare Acquisition. In August 1996, IHS acquired substantially
all of the assets of Extendicare of Tennessee, Inc., a home healthcare
company in Memphis, Tennessee. Total purchase price was approximately $3.4
million. IHS incurred direct costs of acquisition of $200,000. Total
goodwill at the date of acquisition aggregated $1.9 million.
Edgewater Acquisition. In August 1996, IHS acquired substantially all
the assets of Edgewater Home Infusion Services, Inc., a home infusion
company in Miami, Florida. Total purchase price was approximately $8.0
million. IHS incurred direct costs of acquisition of $300,000. Total
goodwill at the date of acquisition aggregated $7.7 million.
Century Acquisition. In August 1996, IHS acquired substantially all
the assets of Century Health Services, Inc., a home healthcare company in
Murfreesboro, Tennessee. Total purchase price was approximately $2.4
million. In addition, IHS used borrowings under its revolving credit
facility to repay approximately $1.6 million of debt of Century assumed in
the acquisition. IHS incurred direct costs of acquisition of $200,000.
Total goodwill at the date of acquisition aggregated $12.1 million.
Signature Acquisition. In September 1996, IHS acquired all of the
outstanding capital stock of Signature Home Care, Inc., a home care company
in Dallas, Texas. Total purchase price was approximately $9.2 million,
including $4.7 million representing the issuance of 196,374 shares of IHS
Common Stock. In addition, IHS used borrowings under its revolving credit
facility to repay approximately $1.9 million of Signature's debt. IHS
incurred direct costs of acquisition of $2.5 million. Total goodwill at the
date of acquisition aggregated $21.1 million.
Mediq Acquisition. In November 1996, IHS acquired the assets of Mediq
Mobile X-Ray Services, Inc., which provides mobile diagnostic services. The
total purchase price was $10.1 million, including $5.2 million representing
the issuance of 143,893 shares of IHS Common Stock (after giving effect to
the return of 59,828 shares of its Common Stock because of an increase in
the share price of IHS Common Stock between the date of issuance and the
date such shares were registered for resale). In addition, IHS incurred
direct costs of acquisition of $5.5 million. Total goodwill at the date of
acquisition was $15.6 million.
Total Rehab Acquisition. In November 1996, IHS acquired the assets of
Total Rehab Services, LLC and Total Rehab Services 02, LLC, which provide
contract rehabilitative and respiratory services. The total purchase price
was $8.0 million, including $2.7 million representing the issuance of
106,559 shares of IHS Common Stock. In addition, IHS repaid approximately
$3.9 million of Total Rehab's debt. In addition, IHS incurred direct costs
of acquisition of $1.3 million. Total goodwill at the date of acquisition
was $12.0 million.
Lifeway Acquisition. In November 1996, IHS acquired all of the
outstanding stock of Lifeway, Inc., which provides physician and disease
management services. The total purchase price was $900,000 representing the
issuance of 38,502 shares of IHS Common Stock. IHS also issued 48,129
shares of Common Stock to Robert Elkins, Chairman and Chief Executive
Officer of IHS, in payment of outstanding loans of $1.1 million from Mr.
Elkins to Lifeway. In addition, IHS incurred direct costs of acquisition of
$275,000.
In-Home Acquisition. In January 1997, IHS acquired all the outstanding
capital stock of In-Home Health Care, Inc. ("In-Home"), a home health
company in Salt Lake City, Utah. Total purchase price was $3.2 million. IHS
incurred direct costs of acquisition of $250,000. Total goodwill at the
date of acquisition aggregated $3.9 million.
Portable X-Ray Acquisition. In February 1997, IHS acquired
substantially all the assets of Portable X-Ray Labs, Inc. ("Portable
X-Ray"), a mobile diagnostics company in Anaheim, California. Total
purchase price was $4.9 million. IHS incurred direct costs of acquisition
of $1.3 million. Total goodwill at the date of acquisition aggregated $5.7
million.
45
<PAGE>
Coastal Acquisition. In April 1997, IHS acquired substantially all the
assets of Coastal Rehabilitation, Inc. ("Coastal"), an inpatient
rehabilitation company in Indian Harbour, Florida. Total purchase price was
$1.3 million. IHS incurred direct costs of acquisition of $200,000. Total
goodwill at the date of acquisition aggregated $1.8 million.
Health Care Industries Acquisition. In June 1997, IHS acquired all the
outstanding capital stock of Health Care Industries, Inc. ("Health Care
Industries"), a home health company in Florida. Total purchase price was
$1.8 million. IHS incurred direct costs of acquisition of $500,000. Total
goodwill at the date of acquisition aggregated $2.5 million.
Rehab Dynamics Acquisition. In June 1997, IHS acquired substantially
all the assets of Rehab Dynamics, Inc. and Restorative Therapy, Ltd.
(collectively "Rehab Dynamics"), a contract rehab company. Total purchase
price was $19.7 million, including $11.5 million representing the issuance
of 322,472 shares of IHS Common Stock. IHS incurred direct costs of
acquisition of $2.5 million. Total goodwill at the date of acquisition
aggregated $21.5 million.
(14) Includes the results of operations from the respective months of
acquisition as follows: (i) In-Home from January 10, 1997, (ii) Portable
X-Ray from February 5, 1997, (iii) Coastal from April 7, 1997, (iv) Health
Care Industries from June 10, 1997, and (iv) Rehab Dynamics from June 20,
1997.
(15) Consists of the In-Home Acquisition, the Portable X-Ray Acquisition, the
Coastal Acquisition, the Health Care Industries Acquisition and the Rehab
Dynamics Acquisition. See note 13 above.
----------------
For purposes of determining the effects of the acquisitions and divestitures
described in Notes 9 through 15 above, including those events which are (i)
directly attributable to the transaction, (ii) expected to have a continuing
impact on IHS, and (iii) factually supportable, the following estimates and
adjustments have been made:
(a) Represents actual revenues and expenses of divisions sold.
46
<PAGE>
(b) Represents (reduction in) additional interest expense resulting from
(repayment) borrowings under IHS' revolving credit facility to finance
acquisitions based on the interest rate under the revolving credit
facility on the date of (repayment) borrowings, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEBT MONTHS INTEREST INTEREST
(PROCEEDS) IN 1996 RATE ADJUSTMENT
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Pharmacy ............................................. $ (91,000) 7.0 7.19% $ (3,817)
ILC Offering ....................................... (17,851) 9.0 7.19% (963)
First American ....................................... 165,000 9.5 7.13% 9,314
--------- ----- -------- --------
Other Acquisitions
In-Home Health .................................... 3,200 12.0 7.38% 236
Portable X-Ray .................................... 4,900 12.0 7.25% 355
Coastal .......................................... 1,250 12.0 7.19% 90
Health Care Industries ........................... 1,825 12.0 7.19% 131
Rehab Dynamics .................................... 8,203 12.0 7.19% 590
Total Rehab ....................................... 5,300 10.0 7.13% 315
Mediq ............................................. 4,942 10.0 7.13% 294
Century .......................................... 2,390 8.5 7.25% 123
Signature ....................................... 4,519 9.0 7.19% 244
Edgewater ....................................... 7,974 7.5 7.25% 361
Extendicare ....................................... 3,410 7.5 7.25% 155
J.R. Rehab ....................................... 2,100 7.0 7.25% 89
RMS ............................................. 2,000 2.5 6.88% 29
Vintage .......................................... 6,932 1.0 7.06% 41
--------- --------
Total Other ....................................... 58,945 3,053
Total ............................................. $ 115,094 7.10%(1) $ 7,587
========= ========
Effect of 1/8% reduction in interest expense ... $ 115,094 6.98%(1) $ 7,433
Effect of 1/8% increase in interest expense ...... $ 115,094 7.23%(1) $ 7,699
</TABLE>
- ----------
(1) Percentage is weighted average based on amount (repaid) borrowed.
SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEBT MONTHS INTEREST INTEREST
(PROCEEDS) IN 1997 RATE ADJUSTMENT
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Other Acquisitions
In-Home Health ................................. $ 3,200 .5 7.38% $ 10
Portable X-Ray ................................. 4,900 1.3 7.25% 37
Coastal .......................................... 1,250 3.3 7.19% 24
Health Care Industries ........................... 1,825 5.3 7.19% 57
Rehab Dynamics ................................. 8,203 5.5 7.19% 271
-------- -----
$19,378 7.24%(1) $399
======== =====
Effect of 1/8% reduction in interest expense ...... $19,378 7.11%(1) $392
Effect of 1/8% increase in interest expense ...... $19,378 7.36%(1) $406
</TABLE>
- ----------
(1) Percentage is weighted average based on amount (repaid) borrowed.
(c) Represents gain on the sale of the pharmacy division of $34,298,000
and $7,578,000 recorded in 1996 and 1997, respectively.
(d) Represents loss on sale of shares in the ILC Offering.
(e) Represents additional amortization relating to goodwill and other
intangibles recorded as a result of the acquisition, amortized using
the straight line method over 15-40 years, as follows:
47
<PAGE>
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LESS: PREVIOUSLY ADJUSTED MONTHS
ANNUAL RECORDED ANNUAL IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1996 ADJUSTMENT
------- -------- ---- ------------ ---------------- -------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
First American ............ $ 227,406 40 $ 5,685 $ 0 $ 5,685 9.5 $4,501
---------- -------- ---------- -------- ----- -------
RoTech goodwill ............ 574,762 40 14,369 (11,853) 2,516 12.0 2,516
---------- -- -------- ---------- -------- ----- -------
RoTech non-compete
covenants .................. 5,000 15 334 0 334 12.0 334
---------- -- -------- ---------- -------- ----- -------
Other Acquisitions
Lifeway .................. 0 40 0 0 0 10.0 0
Total Rehab ............... 11,982 40 300 0 300 10.0 250
Mediq ..................... 15,600 40 390 0 390 10.0 325
Century .................. 12,140 40 304 (5) 299 8.5 211
Signature ............... 21,122 40 528 (24) 504 9.0 378
Edgewater ............... 7,685 40 192 (1) 191 7.5 119
Extendicare ............... 1,945 40 49 0 49 7.5 30
J.R. Rehab ............... 3,159 40 79 (2) 77 7.0 45
Hospice of Great Lakes . 9,031 40 226 (2) 224 4.0 75
RMS ..................... 12,832 40 321 0 321 2.5 67
Vintage .................. 0 40 0 0 0 1.0 0
In Home Health ............ 3,856 40 96 0 96 12.0 96
Portable X-Ray ............ 5,653 40 141 0 141 12.0 141
Coastal .................. 1,764 40 44 0 44 12.0 44
Health Care Industries ... 2,505 40 63 0 63 12.0 63
Rehab Dynamics ............ 21,478 40 537 0 537 12.0 537
---------- -- -------- ---------- -------- ----- -------
130,752 3,270 (34) 3,236 2,381
---------- -------- ---------- -------- -------
Total ..................... $ 937,920 $23,658 $ (11,887) $11,771 $9,732
========== ======== ========== ======== =======
</TABLE>
SIX MONTHS ENDED JUNE 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LESS: PREVIOUSLY SIX MONTHS MONTHS
SIX MONTHS RECORDED ADJUSTED IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1997 ADJUSTMENT
------- -------- ---- ------------ ---------------- -------------- ------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
RoTech goodwill ............ $574,762 40 $ 7,184 $ (9,490) $ (2,306) 6 $ (2,306)
--------- -- -------- -------- -------- ---- --------
RoTech non-compete
covenants .................. 5,000 15 167 0 167 6 167
--------- -- -------- -------- -------- ---- --------
Other Acquisitions
In Home Health ............ 3,856 40 48 0 48 .5 4
Portable X-Ray ............ 5,653 40 71 0 71 1.3 15
Coastal .................. 1,764 40 22 0 22 3.3 12
Health Care Industries ... 2,505 40 32 0 32 5.3 28
Rehab Dynamics ............ 21,478 40 269 0 269 5.5 247
--------- -- -------- -------- -------- ---- --------
35,256 442 0 442 306
--------- -------- -------- -------- --------
Total ..................... $615,018 $ 7,793 $ (9,490) $ (1,697) $ (1,833)
========= ======== ======== ======== ========
</TABLE>
(f) Represents additional interest on borrowings by IHS to repay RoTech's
credit facility as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED SIX MONTHS ENDED
JANUARY 31, 1997 JULY 31, 1997
--------------------- -----------------
<S> <C> <C>
Credit facility:
Average borrowings outstanding during the period . $ 85,290,000 $ 157,268,000
IHS average borrowing rate during the period ... 7.13% 7.23%
Pro forma interest .............................. $ 6,081,000 $ 5,685,000
Less actual interest .............................. 5,606,000 5,108,000
------------ -------------
Pro forma adjustment .............................. $ 475,000 $ 577,000
============ =============
</TABLE>
48
<PAGE>
BUSINESS OF IHS
GENERAL OVERVIEW
Integrated Health Services, Inc. is one of the nation's leading providers
of post-acute healthcare services. Post-acute care is the provision of a
continuum of care to patients following discharge from an acute care hospital.
IHS' post-acute care services include subacute care, home care, skilled nursing
facility care and inpatient and outpatient rehabilitation, hospice and
diagnostic services. IHS' post-acute care network is designed to address the
fact that the cost containment measures implemented by private insurers and
managed care organizations and limitations on government reimbursement of
hospital costs have resulted in the discharge from hospitals of many patients
who continue to require medical and rehabilitative care. IHS' post-acute
healthcare system is intended to provide cost-effective continuity of care for
its patients in multiple settings and enable payors to contract with one
provider to provide all of a patient's needs following discharge from acute care
hospitals. IHS believes that its post-acute care network can be extended beyond
post-acute care to also provide "pre-acute" care, i.e., services to patients
which reduce the likelihood of a need for a hospital stay. IHS' post-acute care
network currently consists of approximately 1,900 service locations in 47 states
and the District of Columbia.
IHS' post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. To implement its post-acute
care network strategy, IHS has focused on (i) expanding the range of home
healthcare and related services it offers to patients directly in order to
provide patients with a continuum of care throughout their recovery, to better
control costs and to meet the growing desire by payors for one-stop shopping;
(ii) developing market concentration for its post-acute care services in
targeted states due to increasing payor consolidation and the increased
preference of payors, physicians and patients for dealing with only one service
provider; and (iii) developing subacute care units. Given the increasing
importance of managed care in the healthcare marketplace and the continued cost
containment pressures from Medicare, Medicaid and private payors, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, IHS has recently
focused on expanding its home healthcare services to take advantage of
healthcare payors' increasing focus on having healthcare provided in the
lowest-cost setting possible, recent advances in medical technology which have
facilitated the delivery of medical services in alternative sites and patients'
desires to be treated at home. Consistent with IHS' strategy, IHS in October
1996 acquired First American, a provider of home health services, principally
home nursing, in 21 states, primarily Alabama, California, Florida, Georgia,
Michigan, Pennsylvania and Tennessee, and in October 1997 acquired RoTech, a
provider of home healthcare products and services, with an emphasis on home
respiratory, home medical equipment and infusion therapy, principally to
patients in non-urban areas. In addition, in September 1997, IHS acquired
Community Care of America, Inc., which develops and operates skilled nursing
facilities in medically underserved rural communities. IHS believes that CCA
will broaden its post-acute care network to include more rural markets and will
complement its existing home care locations in rural markets as well as RoTech's
business. In October 1997, IHS acquired the Coram Lithotripsy Division, which
provides lithotripsy services and equipment maintenance in 180 locations in 18
states, in order to expand the mobile diagnostic treatment and services it
offers to patients, payors and other providers. Lithotripsy is a non-invasive
technique that utilizes shock waves to disintegrate kidney stones. See "IHS
Recent Developments." IHS intends to use the home healthcare setting and the
delivery franchise of its home healthcare branch and agency network to (i)
deliver sophisticated care, such as skilled nursing care, home infusion therapy
and rehabilitation, outside the hospital or nursing home; (ii) serve as an entry
point for patients into the IHS post-acute care network; and (iii) provide a
cost-effective site for case management and patient direction.
49
<PAGE>
IHS provides subacute care through medical specialty units ("MSUs"), which
are typically 20 to 75 bed specialty units with physical identities, specialized
medical technology and staffs separate from the geriatric care facilities in
which they are located. MSUs are designed to provide comprehensive medical
services to patients who have been discharged from acute care hospitals but who
still require subacute or complex medical treatment. The levels and quality of
care provided in IHS' MSUs are similar to those provided in the hospital but at
per diem treatment costs which IHS believes are generally 30% to 60% below the
cost of such care in acute care hospitals. Because of the high level of
specialized care provided, IHS' MSUs generate substantially higher net revenue
and operating profit per patient day than traditional geriatric care services.
Total revenues generated from MSUs have increased from $104.3 million for the
year ended December 31, 1993 to $178.0 million for the year ended December 31,
1994, $290.2 million for the year ended December 31, 1995 and $324.0 million for
the year ended December 31, 1996 and from $157.1 million for the six months
ended June 30, 1996 to $172.9 million for the six months ended June 30, 1997.
MSU revenues as a percentage of total revenues were 35% in 1993, 25% in each of
1994 and 1995, 23% in 1996 and 24% and 19% in the six months ended June 30, 1996
and 1997, respectively. The percentage decrease in 1994 was primarily the result
of the acquisition of facilities which did not have MSUs at the time of
acquisition as well as the acquisition of rehabilitation, pharmacy, diagnostic,
respiratory therapy, home healthcare and related service companies in connection
with IHS' vertical integration strategy and the implementation of IHS'
post-acute care network. MSU revenue as a percentage of total revenues is
expected to continue to decrease as IHS implements its vertical integration
strategy and continues to expand its post-acute care network through the
acquisition of home healthcare, rehabilitation and similar service companies.
IHS presently operates 215 geriatric care facilities (168 owned or leased
and 47 managed), including the facilities acquired in the CCA Acquisition (of
which 20 facilities are being held for sale), and 158 MSUs located within 84 of
these facilities. Specialty medical services revenues, which include all MSU
charges, all revenue from providing rehabilitative therapies, pharmaceuticals,
medical supplies and durable medical equipment to all its patients, all revenue
from its Alzheimer's programs and all revenue from its provision of pharmacy,
rehabilitation therapy, home healthcare, hospice care and similiar services to
third-parties, constituted approximately 57%, 65% and 70% of net revenues during
the years ended December 31, 1994, 1995 and 1996, respectively. IHS also offers
a wide range of basic medical services as well as a comprehensive array of
respiratory, physical, speech, occupational and physiatric therapy in all its
geriatric care facilities. For the year ended December 31, 1996, approximately
17% of IHS' revenues were derived from home health and hospice care,
approximately 53% were derived from subacute and other ancillary services,
approximately 27% were derived from traditional basic nursing home services and
the remaining approximately 3% were derived from management and other services.
On a pro forma basis after giving effect to the acquisition of First American
and the Merger, for the year ended December 31, 1996, approximately 44% of IHS'
revenues were derived from home health and hospice care, approximately 36% were
derived from subacute and other aucillary services, approximately 18% were
derived from traditional basic nursing home services and the remaining
approximately 2% were derived from management and other services.
INDUSTRY BACKGROUND
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for inpatient hospital services
based on regional and national rates established under a system of diagnosis-
related groups ("DRGs"). As a result, hospitals bear the cost risk of providing
care inasmuch as they receive specified reimbursement for each treatment
regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs,
a "managed care" segment of the healthcare industry emerged based on the theme
of cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by
50
<PAGE>
negotiating discounted fixed rates for hospital services. In addition,
traditional third party indemnity insurers began to limit reimbursement to
pre-determined amounts of "reasonable charges," regardless of actual cost, and
to increase the amount of co-payment required to be paid by patients, thereby
requiring patients to assume more of the cost of hospital care. These changes
have resulted in the earlier discharge of patients from acute care hospitals.
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. The early discharge from hospitals of patients who are not fully
recovered and still require medical care and rehabilitative therapy has
contributed significantly to the rapid growth of the home healthcare industry,
as have recent advances in medical technology, which have facilitated the
delivery of services in alternate sites, demographic trends, such as an aging
population, and a preference for home healthcare among patients. As a result,
home healthcare is among the fastest growing areas in healthcare.
However, for some of these patients home healthcare is not a viable
alternative because of their continued need for a high degree of monitoring,
more intensive and specialized medical care, 24-hour per day nursing care and a
comprehensive array of rehabilitative therapy. As a result, IHS believes there
is an increasing need for non-acute care hospital facilities which can provide
the monitoring, specialized care and comprehensive rehabilitative therapy
required by the growing population of subacute and medically complex patients.
The traditional nursing home, despite its skilled care license and
eligibility for Medicare certification, has focused on providing custodial care
to Medicaid eligible persons until they die. The state Medicaid reimbursement
program reinforces this focus by typically setting "cost ceilings" on
reimbursement for each patient based on overall average state costs for all
patients. Since the "average" patient is a long-stay, non-medically complex
patient, nursing homes face an economic disincentive to treat medically complex
patients because Medicaid reimburses the nursing home as if it had provided only
custodial care to a non-medically complex patient regardless of the type of care
actually provided. In addition, state laws impose substantial restrictions on or
prohibitions against the ability of a facility to reduce the number of Medicaid
certified beds in a facility, thus making the process of converting to the
treatment of more medically complex non-Medicaid eligible persons a long and
financially risky process. As a result, most traditional nursing homes, with
high Medicaid census and earnings and cash flow under pressure, are reluctant to
spend the capital required to upgrade staff, implement medical procedures (such
as infection control) and equip a nursing home to treat subacute and medically
complex patients and provide the comprehensive rehabilitative therapy required
by many of these patients.
Moreover, recent healthcare reform proposals, which have focused on
containment of healthcare costs, together with the desire of third-party payors
to contract with one service provider for all post-acute care services, the
increasing complexity of medical services provided, growing regulatory and
compliance requirements and increasingly complicated reimbursement systems, have
resulted in a trend of consolidation of smaller, local operators who lack the
sophisticated management information systems, operating efficiencies and
financial resources to compete effectively into larger, more established
regional or national operators that offer a broad range of services, either
through its own network or through subcontracts with other third-party service
providers.
There are numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect such proposals would have on IHS' business. Aspects
of certain of these healthcare proposals, such as cutbacks in the Medicare and
Medicaid programs, reduc-
51
<PAGE>
tions in Medicare reimbursement rates and/or limitations on reimbursement rate
increases, containment of healthcare costs on an interim basis by means that
could include a short-term freeze on prices charged by healthcare providers, and
permitting greater state flexibility in the administration of Medicaid, could
adversely affect IHS. See "-- Sources of Revenue." There can be no assurance
that currently proposed or future healthcare legislation or other changes in the
administration or interpretation of governmental healthcare programs will not
have an adverse effect on IHS. Ongoing consolidation in the healthcare industry
could also impact IHS' business and results of operations. See "Risk Factors --
Risk of Adverse Effect of Healthcare Reform" and "-- Uncertainty of Government
Regulation."
COMPANY STRATEGY
IHS' post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. IHS believes that the success
of its post-acute care strategy will depend in large part on its ability to
control each component of the post-acute care delivery system in order to
provide low-cost, high quality outcomes. The central elements of IHS' business
strategy are:
Vertical Integration of Post-acute Care Services. IHS is expanding the
range of home healthcare and related services it offers to its patients directly
in order to serve the full spectrum of patient needs following acute
hospitalization. In addition to subacute care, IHS is now able to offer directly
to its patients, rather than through third-party providers, home healthcare,
rehabilitation (physical, occupational and speech), hospice care and mobile
x-ray and electrocardiogram services. As a full service provider, IHS believes
that it is better able to respond to the needs of its patients and referral
sources. In addition, IHS believes that by offering managed care organizations
and insurance companies a single source from which to obtain a full continuum of
care to patients following discharge from the acute care hospital, it will
attract healthcare payors seeking to improve the management of healthcare
quality as well as to reduce servicing and administrative expenses. IHS also
believes that offering a broad range of services will allow it to better control
certain costs, which will provide it with a competitive advantage in contracting
with managed care companies and offering capitated rates, whereby IHS assumes
the financial risk for the cost of care.
Expansion of Home-Based Services. IHS' strategy is to expand its home
healthcare services to take advantage of healthcare payors' increasing focus on
having healthcare provided in the lowest-cost setting possible and patients'
desires to be treated at home. IHS believes that the nation's aging population,
when combined with advanced technology which allows more healthcare procedures
to be performed at home, has resulted in an increasingly large number of
patients with long-term chronic conditions that can be treated effectively in
the home. In addition, a significant number of patients discharged from IHS'
MSUs require home healthcare. IHS also believes that it can expand its home
healthcare services to cover pre-acute, as well as post-acute, patients by
having home healthcare nurses provide preventive care services to home-bound
senior citizens. In addition, IHS believes that home healthcare will help IHS
contain costs, thereby providing it with a competitive advantage in contracting
with managed care companies and offering capitated rates. IHS believes that the
changing healthcare reimbursement environment, with the focus on cost
containment, will require healthcare providers to go "at risk" under capitated
service agreements, and that home healthcare will be a critical component of its
ability to do so.
IHS believes that the acquisition of First American and the Merger are
important components in the implementation of its post-acute healthcare system.
First American and RoTech, together with IHS' existing home healthcare
operations, gives IHS a significant home healthcare presence in 38 states,
including those states IHS has targeted for its post-acute healthcare system.
IHS believes that its expanded home healthcare network will assist it in meeting
the desire of payors for one stop shopping, as well as offering capitated rates
to managed care providers. Additionally, IHS expects that Medicare will
implement a prospective payment system for home nursing services in the next
several years. Currently, Medicare provides reimbursement for home nursing care
on a cost basis which includes a rate of return, subject to a cap. There is no
reward for efficiency, provided that costs are below the cap. Under current
52
<PAGE>
prospective payment proposals, a healthcare provider would receive a
predetermined rate for a given service. Providers with costs below the
predetermined rate will be entitled to keep some or all of this difference.
Under prospective pay, the efficient operator will be rewarded. Since the
largest component of home nursing care costs is labor, which is basically fixed,
IHS believes the differentiating factor in profitability will be administrative
costs. As a result of the First American Acquisition, IHS, as a large provider
of home nursing services, should be able to achieve administrative efficiencies
compared with the small providers which currently dominate the home healthcare
industry, although there can be no assurance it will be able to do so. There can
be no assurance that Medicare will implement a prospective payment system for
home nursing services in the next several years or at all. See "Risk Factors --
Risk of Adverse Effect of Healthcare Reform."
Focus on Managed Care. Given the increasing importance of managed care in
the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has, over the past year, begun to restructure its
operations to position IHS to focus on obtaining contracts with managed care
organizations and to provide capitated services. IHS' strategy is to become a
preferred or exclusive provider to managed care organizations. Although to date
there has been limited demand among managed care organizations for post-acute
care services, IHS believes demand will increase as HMOs continue to attempt to
control healthcare costs and to penetrate the Medicare market. As part of its
focus on managed care and capitated rates, IHS spent several years collecting
outcome data for more than 50,000 patients. To date, IHS has service agreements
with approximately 395 managed care organizations. In January 1996, IHS was
chosen as the exclusive capitated provider for five years of long-term care,
subacute care and therapy services to Sierra Health Plan's Health Plan of Nevada
("Sierra Health"), the largest HMO in Nevada with approximately 26,000 Medicare
enrollees and 125,000 commercial enrollees. As the exclusive provider, IHS
provides all contracted services to the HMO's members; as a capitated provider,
IHS accepts full risk of patient care in exchange for a flat fee per enrollee.
The agreement with Sierra Health provides for annual capitation adjustments and
the ability to increase revenue through other non-capitated services, although
there can be no assurance that these provisions will be effective to protect
IHS. In September 1997, this agreement was extended through December 2002. In
addition, in October 1996 IHS entered into a three-year agreement to provide, on
an exclusive basis, long-term and subacute care to patients of Foundation Health
Corporation ("Foundation Health"), an HMO located in Florida, on a capitated
basis. Foundation Health currently has 24,500 Medicare and 60,000 commercial
enrollees. The agreement provides for increased revenues to IHS for reduced
hospital utilization. Although IHS has attempted to minimize its risk under the
contract, there can be no assurance that safeguards it implemented will be
effective. See "Risk Factors -- Risks Related to Managed Care Strategy."
Subacute Care Through Medical Specialty Units. IHS' strategy is designed to
take advantage of the need for early discharge of many patients from acute care
hospitals by using MSUs as subacute specialty units within its geriatric care
facilities. MSUs provide the monitoring and specialized care still required by
these persons after discharge from acute care hospitals at per diem treatment
costs which IHS believes are generally 30% to 60% below the cost of care in
acute care hospitals. IHS also intends to continue to use its geriatric care
facilities to meet the increasing need for cost-efficient, comprehensive
rehabilitation treatment of these patients. The primary MSU programs currently
offered by IHS are complex care programs, ventilator programs, wound management
programs and cardiac care programs; other programs offered include subacute
rehabilitation, oncology and HIV. IHS opened its first MSU program in April 1988
and currently operates 158 MSU programs in 84 facilities. IHS also emphasizes
the care of medically complex patients through the provision of a comprehensive
array of respiratory, physical, speech, occupational and physiatric therapy. IHS
intends that its MSUs be a lower cost alternative to acute care or
rehabilitation hospitalization of subacute or medically complex patients. IHS
intends to expand its specialty medical services at its existing and newly
acquired facilities. IHS believes that its subacute care programs will also
serve as an important referral base for its home healthcare and ancillary
services. In expanding its post-acute care network, IHS expects to place less
emphasis on subacute care through MSUs and more emphasis on home healthcare.
While IHS added 1,098 MSU beds in 1994 and 868 MSU beds in 1995, it only added
an additional 383 MSU beds in 1996 and 105 MSU beds in the first half of 1997,
and it anticipates that it will only add an additional 200 to 300 MSU beds in
each of 1997 and 1998.
53
<PAGE>
Concentration on Targeted Markets. IHS has implemented a strategy focused
on the development of market concentration for its post-acute care services in
targeted states due to increasing payor consolidation. IHS also believes that by
offering its services on a concentrated basis in targeted markets, together with
the vertical integration of its services, it will be better positioned to meet
the needs of managed care payors. IHS now has approximately 1,900 service
locations in 47 states and the District of Columbia, including 215 geriatric
care facilities in 31 states (47 of which IHS manages), with: 58 service
locations, including 12 geriatric care facilities (10 of which IHS manages), in
California; 293 service locations, including 32 geriatric care facilities (five
of which IHS manages), in Florida; 111 service locations, including 14 geriatric
care facilities (two of which IHS manages), in Pennsylvania; and 201 service
locations, including 21 geriatric care facilities (seven of which IHS manages),
in Texas.
Expansion Through Acquisitions. IHS has grown substantially through
acquisitions and the opening of MSUs and the acquisition of home healthcare and
related service providers, and expects to continue to expand its business by
expanding the amount of home healthcare and related services it offers directly
to its patients rather than through third-party providers, by establishing
additional MSUs and rehabilitation programs in its existing geriatric care
facilities, by acquiring additional geriatric care facilities in which to
establish MSUs and rehabilitation programs and by expanding the number of MSU
programs offered. From January 1, 1991 to date, IHS has increased the number of
geriatric care facilities it owns or leases from 25 to 168 (including 20
facilities held for sale), has increased the number of facilities it manages
from 18 to 47 and has increased the number of MSU programs it operates from 13
to 158. In addition, IHS now offers certain related services, such as home
healthcare, rehabilitation, x-ray and electrocardiogram, directly to its
patients rather than relying on third-party providers. IHS' planned expansion
and growth require that IHS expand its home healthcare services through the
acquisition of additional home healthcare providers, that IHS acquire, or
establish relationships with, third-parties which provide other post-acute care
services not currently provided by IHS, that additional MSUs be established in
IHS' existing facilities and that IHS acquire, lease or acquire the right to
manage for others additional facilities in which MSUs can be established. See
"Risk Factors -- Risks Associated with Growth Through Acquisitions and Internal
Development."
PATIENT SERVICES
BASIC MEDICAL SERVICES
IHS provides a wide range of basic medical services at its geriatric care
facilities which are licensed as skilled care nursing homes. Services provided
to all patients include required nursing care, room and board, special diets,
and other services which may be specified by a patient's physician who directs
the admission, treatment and discharge of the patient.
SPECIALTY MEDICAL SERVICES
Medical Specialty Units
IHS' MSUs are typically 20 to 75 bed subacute specialty care units located
within discrete areas of IHS' facilities, with physical identities, specialized
medical technology and medical staffs separate from the geriatric care
facilities in which they are located. An intensive care unit nurse, or a nurse
with specialty qualifications, serves as clinical coordinator of each unit,
which generally is staffed with nurses having experience in the acute care
setting. The operations of each MSU are generally overseen by a Board certified
specialist in that unit's area of treatment. The patients in each MSU are
provided with a high degree of monitoring and specialized care similar to that
provided by acute care hospitals. The physiological monitoring equipment
required by the MSU is equivalent to that found in the acute care hospital. IHS
opened its first MSU program during April 1988 and currently operates 158 MSUs
at 84 facilities. Approximately one-third of all of IHS' MSU patients are under
the age of 70.
Although each MSU has most of the treatment capabilities of an acute care
hospital in the MSU's area of specialization, IHS believes the per diem
treatment costs are generally 30% to 60% less than in acute care hospitals.
Additionally, the MSU is less "institutional" in nature than the acute care
hospital,
54
<PAGE>
families may visit MSU patients whenever they wish and family counseling is
provided. In marketing its MSU programs to insurers and healthcare providers,
IHS emphasizes the cost advantage of its treatment as compared to acute care
hospitals. IHS also emphasizes the improved "quality of life" compared to acute
care and long-term care hospitals in marketing its MSU programs to hospital
patients and their families. The primary MSU programs currently offered by IHS
are complex care programs, ventilator programs, wound management programs and
cardiac care programs; other programs offered include subacute rehabilitation,
oncology and HIV.
Complex Care Program. This program is designed to treat persons who are
generally subacute or chronically ill and sick enough to be treated in an acute
care hospital. Persons requiring this care include post-surgical patients,
cancer patients and patients with other diseases requiring long recovery
periods. This program is designed to provide the monitoring and specialized care
these patients require but in a less institutional and more cost efficient
setting than provided by hospitals. Some of the monitoring and specialized care
provided to these patients are apnea monitoring, continuous peripheral
intravenous therapy with or without medication, continuous subcutaneous
infusion, chest percussion and postural drainage, gastrostomy or naso-gastric
tube feeding, ileostomy or fistula care (including patient teaching),
post-operative care, tracheostomy care, and oral, pharyngeal or tracheal
suctioning. Patients in this program also typically undergo intensive
rehabilitative services to allow them to return home.
Ventilator Program. This program is designed for persons who require
ventilator assistance for breathing because of respiratory disease or
impairment. Persons requiring ventilation include sufferers of chronic
obstructive pulmonary disease, muscular atrophy and respiratory failure,
pneumonia, cancer, spinal cord or traumatic brain injury and other diseases or
injuries which impair respiration. Ventilators assist or effect respiration in
patients unable to breathe adequately for themselves by injecting heated,
humidified, oxygen-enriched air into the lungs at a pre-determined volume per
breath and number of breaths per minute and by controlling the relationship of
inhalation time to exhalation time. Patients in this program undergo respiratory
rehabilitation to wean them from ventilators by teaching them to breathe on
their own once they are medically stable. Patients are also trained to use the
ventilators on their own.
Wound Management Programs. These programs are designed to treat persons
suffering from post operative complications and persons infected by certain
forms of penicillin and other antibiotic resistant bacteria, such as methicillin
resistant staphylococcus aureus ("MRSA"). Patients infected with these types of
bacteria must be isolated under strict infection control procedures to prevent
the spread of the resistant bacteria, which makes MSUs an ideal treatment site
for these patients. Because of the need for strict infection control, including
isolation, treatment of this condition in the home is not practical.
Cardiac Care Program. This program is designed to treat persons suffering
from congestive heart failure, severe cardiac arrhythmia, pre/post transplants
and other cardiac diagnoses. The monitoring and specialized care provided to
these patients includes electrocardiographic monitoring/telemetry, continuous
hemodynamic monitoring, infusion therapy, cardiac rehabilitation, stress
management and dietary counseling, planning and education.
IHS believes that MSU programs can be developed to address a wide variety
of medical conditions which require specialized care. In addition, IHS has
developed MSU programs for subacute rehabilitation, oncology and HIV. IHS
intends to establish additional MSUs in its existing facilities and in
facilities which it acquires or manages for others to address the various market
needs for MSU programs in the markets in which it operates.
Rehabilitation
IHS provides a comprehensive array of rehabilitative services for patients
at all of its geriatric care facilities, including those in its MSU programs, in
order to enable those persons to return home. These services include respiratory
therapy with licensed respiratory therapists, physical therapy with a particular
emphasis on programs for the elderly, speech therapy, particularly for the
elderly recovering from cerebral vascular disorders, occupational therapy and
physiatric care. A portion of the rehabilitative
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service hours are provided by independent contractors. In order to reduce the
number of rehabilitative service hours provided by independent contractors, IHS
began in late 1993 to acquire companies which provide physical, occupational and
speech therapy to healthcare facilities.
IHS also offers a rehabilitation program to stroke victims and persons who
have undergone hip replacement.
Home Healthcare Services
IHS provides a broad spectrum of home healthcare services to the
recovering, disabled, chronically ill or terminally ill person. Home healthcare
services may be as basic as assisting with activities of daily living or as
complex as cancer chemotherapy. Care involves either or both a service component
(provided by registered nurses, home health aides, therapists and technicians
through periodic visits) and a product component (drugs, equipment and related
supplies). Time spent with a patient may range from one or two visits to
around-the-clock care. Patients may be treated for several weeks, several months
or the remainder of their lives.
The home healthcare market is generally divided into four segments: nursing
services; infusion therapy; respiratory therapy; and home medical equipment. On
a pro forma basis after giving effect to the Merger, the acquisition of First
American and the ILC Sale, IHS had home healthcare revenues of approximately
$549.1 million, $812.3 million, $944.1 million, $398.9 million and $475.8
million during the years ended December 31, 1994, 1995 and 1996 and the six
months ended June 30, 1996 and 1997, respectively, representing approximately
45.4%, 43.6%, 44.9%, 39.3% and 43.0%, respectively, of total pro forma patient
revenues. On a pro forma basis after giving effect to the acquisition of First
American, home nursing services accounted for approximately 80.7%, 77.4%, 64.2%,
68.8% and 56.3% of IHS' home healthcare revenues in 1994, 1995 and 1996 and the
six months ended June 30, 1996 and 1997, respectively.
Home Nursing. Home nursing is the largest component of home healthcare, the
most labor-intensive and generally the least profitable. Home nursing services
range from skilled care provided by registered and other nurses, typically for
those recently discharged from hospitals, to unskilled services delivered by
home health aides for those needing help with the activities of daily living.
Home nursing also includes physical, occupational and speech therapy, as well as
social worker services. IHS substantially expanded its home nursing services
through the acquisition of First American, and currently provides home nursing
services at approximately 500 locations in 30 states.
Infusion Therapy. Infusion therapy, the second largest home healthcare
market, involves the intravenous administration of anti-infective, biotherapy,
chemotherapy, pain management, nutrition and other therapies. Infusion therapy
generally requires patient training, specialized equipment and periodic
monitoring by skilled nurses. Technological advances such as programmable pumps
that control frequency and intensity of delivery are increasing the percentage
of infections and diseases that are treatable in the home; previously these
infections and diseases generally required patients to be hospitalized. Home
infusion therapy is more skilled-labor-intensive than other home healthcare
segments. The Merger will significantly expand IHS' home infusion therapy
services. See "IHS Recent Developments."
Respiratory Therapy. Respiratory therapy is provided primarily to older
patients with chronic lung diseases (such as chronic obstructive pulmonary
disease, asthma and cystic fibrosis) or reduced respiratory function. The most
common therapy is home oxygen, delivered through oxygen gas systems, oxygen
concentration or liquid oxygen systems. Respiratory therapy is monitored by
licensed respiratory therapists and other clinical staff under the direction of
physicians. The Merger will significantly expand IHS' respiratory therapy
services. See "IHS Recent Developments."
Home Medical Equipment. Home medical equipment consists of the sale or
rental of medical equipment such as specialized beds, wheelchairs, walkers,
rehabilitation equipment and other patient aids. The Merger will significantly
expand IHS' provision of home medical equipment. See "IHS Recent Developments."
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Alzheimer's Program
IHS also offers a specialized treatment program for persons with
Alzheimer's disease. This program, called "The Renaissance Program," is located
in a specially designed wing separated from the remainder of the facility. The
physical environment is designed to address the problems of disorientation and
perceptual confusion experienced by Alzheimer's sufferers. The Renaissance
Program is designed to help reduce the stress and agitation of Alzheimer's
disease by addressing the problems of short attention spans and hyperactivity.
The staff for this program is specially recruited and staff training is highly
specialized. This program is designed not only to provide care to persons
suffering from Alzheimer's disease, but also to work with the patient's family.
IHS currently offers The Renaissance Program at 12 of its geriatric care
facilities with a total of 395 beds. Patients pay a small premium to IHS' per
diem rate for basic medical care to participate in this program.
Hospice Services
IHS provides hospice services, including medical care, counseling and
social services, to the terminally ill in the greater Chicago metropolitan area,
Michigan and Pennsylvania. Hospice care is a coordinated program of support
services providing physical, psychological, social and spiritual care for dying
persons and their families. Services are provided in the home and/or inpatient
settings. The goal of hospice care is typically to improve a terminal patient's
quality of life rather than trying to extend life. IHS also provides hospice
care to the terminally ill at its facility in Miami, Florida.
MANAGEMENT AND OTHER SERVICES
IHS manages geriatric care facilities under contract for others to
capitalize on its specialized care programs without making the capital outlay
generally required to acquire and renovate a facility. IHS currently manages 47
geriatric care facilities with 5,177 licensed beds. IHS is responsible for
providing all personnel, marketing, nursing, resident care, dietary and social
services, accounting and data processing reports and services for these
facilities, although such services are provided at the facility owner's expense.
The facility owner is also obligated to pay for all required capital
expenditures. IHS manages these facilities in the same manner as the facilities
it owns or leases, and provides the same geriatric care services as are provided
in its owned or leased facilities. Contract acquisition costs for legal and
other direct costs incurred to acquire long-term management contracts are
capitalized and amortized over the term of the related contract.
IHS receives a management fee for its services which generally is equal to
4% to 8% of gross revenues of the geriatric care facility. Certain management
agreements also provide IHS with an incentive fee based on the amount of the
facility's operating income which exceeds stipulated amounts. Management fee
revenues are recognized when earned and billed, generally on a monthly basis.
Incentive fees are recognized when operating results of managed facilities
exceed amounts required for incentive fees in accordance with the terms of the
management agreements. The management agreements generally have an initial term
of ten years, with IHS having a right to renew in most cases. The management
agreements expire at various times between August 1999 and May 2005, although
all can be terminated earlier under certain circumstances. IHS generally has a
right of first refusal in respect of the sale of each managed facility. IHS
believes that by implementing its specialized care programs and services in
these facilities, it will be able to increase significantly the operating income
of these facilities and thereby increase the management fees IHS will receive
for managing these facilities.
IHS also manages private duty and Medicare certified home health agencies
in the Dallas/Fort Worth, Texas market.
QUALITY ASSURANCE
IHS has developed a comprehensive Quality Assurance Program to verify that
high standards of care are maintained at each facility operated or managed by
IHS. IHS requires that its facilities meet standards of care more rigorous than
those required by Federal and state law. Under IHS' Quality Assurance Program,
standards for delivery of care are set and the care and services provided by
each
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facility are evaluated to insure they meet IHS' standards. A quality assurance
team evaluates each facility bi-annually, reporting directly to IHS' Chief
Executive Officer and to the Chief Operating Officer, as well as to the
administrator of each facility. Facility administrator bonuses are dependent in
part upon their facility's evaluation. IHS also maintains an 800 number, called
the "In-Touch Line," which is prominently displayed above telephones in each
facility and placed in patients' bills. Patients and staff are encouraged to
call this number if they have any problem with nursing or administrative
personnel which cannot be resolved quickly at the facility level. This program
provides IHS with an early warning of problems which may be developing at the
facility. IHS has also developed a specialized Quality Assurance Program for its
MSU programs.
IHS has begun a program to obtain accreditation by the Joint Commission on
Accreditation of Healthcare Organizations ("JCAHO") for each of its facilities.
At September 30, 1997, 72 of IHS' facilities had been fully accredited by the
JCAHO.
OPERATIONS
The day-to-day operations of each facility are managed by an on-site state
licensed administrator, and an on-site business office manager monitors the
financial operations of each facility. The administrator of each facility is
supported by other professional personnel, including the facility's medical
director, social workers, dietician and recreation staff. Nursing departments in
each facility are under the supervision of a director of nursing who is
state-registered. The nursing staffs are composed of registered nurses and
licensed practical nurses as well as nursing assistants.
IHS' home healthcare businesses are conducted through approximately 500
branches which are managed through three geographic area offices. The area
office provides each of its branches with key management direction and support
services. IHS' organizational structure is designed to create operating
efficiencies associated with certain centralized services and purchasing while
also promoting local decision making.
IHS' corporate staff provides services such as marketing assistance,
training, quality assurance oversight, human resource management, reimbursement
expertise, accounting, cash management and treasury functions, internal auditing
and management support. Financial control is maintained through fiscal and
accounting policies that are established at the corporate level for use at each
facility and branch location. IHS has standardized operating procedures and
monitors its facilities and branch locations to assure consistency of
operations. IHS emphasizes frequent communications, the setting of operational
goals and the monitoring of actual results. IHS uses a financial reporting
system which enables it to monitor, on a daily basis, certain key financial data
at each facility such as payor mix, admissions and discharges, cash collections,
net revenue and staffing.
Each facility and branch location has all necessary state and local
licenses. Most facilities are certified as providers under the Medicare program
and under the Medicaid program of the state in which they are located.
JOINT VENTURES
IHS has a 49% interest in a partnership formed in 1993 to manage and
operate approximately 8,000 geriatric care and assisted retirement beds
("Tutera"), and a 40% interest in HPC America, Inc., a Delaware corporation
("HPC") that operates home infusion and home healthcare companies in addition to
owning and managing physician practices. IHS does not participate in the
day-to-day operations of Tutera or HPC, although its consent is required for
certain material transactions. Under certain circumstances, IHS has the right to
purchase the remaining interest in Tutera based upon a multiple of Tutera's
earnings. IHS' right to purchase the remaining interest in HPC expired in
September 1997.
SOURCES OF REVENUE
IHS receives payments for services rendered to patients from private
insurers and patients themselves, from the Federal government under Medicare,
and from the states in which certain of its facilities are located under
Medicaid. The sources and amounts of IHS' patient revenues are determined by a
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number of factors, including licensed bed capacity of its facilities, occupancy
rate, the mix of patients and the rates of reimbursement among payor categories
(private, Medicare and Medicaid). Changes in the mix of IHS' patients among the
private pay, Medicare and Medicaid categories can significantly affect the
profitability of IHS' operations. Generally, private pay patients are the most
profitable and Medicaid patients are the least profitable.
During the years ended December 31, 1994, 1995 and 1996, IHS derived
approximately $297.8 million, $509.3 million and $562.5 million, respectively,
or 44.2%, 44.7% and 40.5%, respectively, of its patient revenues from private
pay sources and approximately $376.4 million, $629.8 million and $826.4 million,
respectively, or 55.8%, 55.3% and 59.5%, respectively, of its patient revenues
from government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $225.6
million, $387.2 million and $516.7 million, or 33.5%, 34.0% and 37.2% of total
patient revenues, respectively, from Medicare and approximately $150.8 million,
$242.6 million and $309.7 million, respectively, or 22.3%, 21.3% and 22.3% of
total patient revenues, respectively, from Medicaid. During the six months ended
June 30, 1996 and 1997, IHS derived approximately $275.9 million and $301.4
million, respectively, or 43.0% and 33.5%, respectively, of its patient revenues
from private pay sources and approximately $365.8 million and $598.2 million,
respectively, or 57.0% and 66.5%, respectively, of its patient revenues from
government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $211.8
million and $442.1 million, respectively, or 33.0% and 49.1% of total patient
revenues, respectively, from Medicare and approximately $154.0 million and
$156.1 million, respectively, or 24.0% and 17.4% of total patient revenues,
respectively, from Medicaid. The increase in the percentage of revenue from
government reimbursement programs is due to the higher level of Medicare and
Medicaid patients serviced by the respiratory therapy, rehabilitative therapy,
home healthcare and mobile diagnostic companies acquired in 1994, 1995 and 1996.
On a pro forma basis after giving effect to the Merger, the acquisition of
First American (which derives substantially all its revenues from Medicare) and
the ILC Sale, during the years ended December 31, 1995 and 1996, IHS derived
approximately $585.3 million and $704.5 million, respectively, or 31.4% and
33.5%, respectively, of its patient revenues from private pay sources and
approximately $1.3 billion and $1.4 billion, respectively, or 68.6% and 66.5%,
respectively, of its patient revenues from government reimbursement programs.
Pro forma patient revenues from government reimbursement programs during these
periods consisted of approximately $1.0 billion and $1.0 billion, or 54.0% and
49.7%, respectively, from Medicare and approximately $271.4 million and $353.2
million, respectively, or 14.6% and 16.8%, respectively, from Medicaid. On a pro
forma basis after giving effect to the Merger, the acquisition of First American
and the ILC Sale, during the six months ended June 30, 1996 and 1997, IHS
derived approximately $329.3 million and $402.2 million, respectively, or 32.5%
and 35.5%, respectively, of its patient revenues from private pay sources and
approximately $684.6 million and $731.9 million, respectively, or 67.5% and
64.5%, respectively, of its patient revenues from government reimbursement
programs. Pro forma patient revenues from government reimbursement programs
during these periods consisted of approximately $512.9 million and $550.0
million, or 50.6% and 48.5%, respectively, from Medicare and approximately
$171.7 million and $182.0 million, respectively, or 16.9% and 16.0%,
respectively, from Medicaid.
IHS' experience has been that Medicare patients constitute a higher
percentage of an MSU program's initial occupancy than they do once the program
matures. However, as IHS' marketing program to private pay patients is
implemented in the new MSUs, the number of private pay patients in those
programs has traditionally increased. In addition, IHS received payments from
third parties for its management services, which constituted approximately 5.3%,
3.4%, 3.2%, 3.2% and 2.1% of total net revenues for the years ended December 31,
1994, 1995 and 1996 and the six months ended June 30, 1996 and 1997,
respectively.
Gross third party payor settlements receivable, primarily from federal and
state governments (i.e., Medicare and Medicaid cost reports), were $36.2 million
at June 30, 1997, as compared to $42.6 million at December 31, 1996, $33.0
million at December 31, 1995 and $22.6 million at December 31, 1994.
Approximately $10.8 million, or 30%, of the third party payor settlements
receivable, primarily from
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Federal and state governments, at June 30, 1997 represent the costs for its MSU
patients which exceed regional reimbursement limits established under Medicare,
as compared to approximately $15.6 million, or 37%, at December 31, 1996,
approximately $7.6 million, or 23%, at December 31, 1995 and approximately $6.2
million, or 27%, at December 31, 1994.
IHS' cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of IHS' MSU
strategy depends in part on its ability to obtain per diem rate approvals for
costs which exceed the Medicare established per diem rate limits and by
obtaining waivers of these limitations. IHS has submitted waiver requests for
225 cost reports, covering all cost report periods through December 31, 1996. To
date, final action has been taken by HCFA on 221 waiver requests covering cost
report periods through December 31, 1995. IHS' final rates as approved by HCFA
represent approximately 95% of the requested rates as submitted in the waiver
requests. There can be no assurance, however, that IHS will be able to recover
its excess costs under any waiver requests which may be submitted in the future.
IHS' failure to recover substantially all these excess costs would adversely
affect its results of operations and could adversely affect its MSU strategy.
Both private third party and governmental payors have undertaken cost
containment measures designed to limit payments made to healthcare providers
such as IHS. Furthermore, government programs are subject to statutory and
regulatory changes, retroactive rate adjustments, administrative rulings and
government funding restrictions, all of which may materially increase or
decrease the rate of program payments to facilities managed and operated by IHS.
There can be no assurance that payments under governmental programs will remain
at levels comparable to present levels or will, in the future, be sufficient to
cover the costs allocable to patients participating in such programs. In
addition, there can be no assurance that facilities owned, leased or managed by
IHS now or in the future will initially meet or continue to meet the
requirements for participation in such programs. IHS could be adversely affected
by the continuing efforts of governmental and private third party payors to
contain the amount of reimbursement for healthcare services. The May 1997
balanced budget agreement between the President and Congress contemplated
changing Medicare payments for skilled nursing facilities and home nursing
services from a cost-reimbursement system to a prospective payment system. The
Balanced Budget Act of 1997, enacted in August 1997, provides, among other
things, for a prospective payment system for home nursing to be implemented for
cost reporting periods beginning on or after October 1, 1999, a reduction in
current cost reimbursement for home healthcare pending implementation of a
prospective payment system, reductions (effective January 1, 1998) in Medicare
reimbursement for oxygen and oxygen equipment for home respiratory therapy and a
shift of the bulk of home health coverage from Part A to Part B of Medicare. The
failure to implement a prospective payment system for home nursing services in
the next several years could adversely affect IHS' post-acute care network
strategy. In an attempt to limit the federal and state budget deficits, there
have been, and IHS expects that there will continue to be, a number of proposals
to limit Medicare and Medicaid reimbursement for healthcare services. IHS cannot
at this time predict whether this legislation or any other legislation will be
adopted or, if adopted and implemented, what effect, if any, such legislation
will have on IHS. See "Risk Factors -- Risk of Adverse Effect of Healthcare
Reform."
GOVERNMENT REGULATION
The healthcare industry is subject to extensive federal, state and local
statutes and regulations. The regulations include licensure requirements,
reimbursement rules and standards and levels of services and care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of IHS facilities,
eligibility for participation in federal and state programs, permissible
activities, costs of doing business, or the levels of reimbursement from
governmental, private and other sources. Political, economic and regulatory
influences are subjecting the healthcare industry in the United States to
fundamental change. It is not possible to predict the content or impact of
future legislation and regulations affecting the healthcare industry. In
addition, in the conduct of its business IHS' operations are subject to review
by federal and state regulatory agencies. In the course of these reviews,
problems are from time to time identified by these agencies. Although IHS has to
date been able to resolve these problems in a manner satisfactory to the
regulatory agencies without a material adverse effect on IHS, there can be no
assurance that IHS will be able to do so in the future. See "Risk Factors --
Uncertainty of Government Regulation."
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Most states in which IHS operates or is studying expansion possibilities
have statutes which require that prior to the addition or construction of new
beds, the addition of new services or certain capital expenditures in excess of
defined levels, IHS must obtain a certificate of need ("CON") which certifies
that the state has made a determination that a need exists for such new or
additional beds, new services or capital expenditures. These state
determinations of need or CON programs are designed to comply with certain
minimum federal standards and to enable states to participate in certain federal
and state health related programs. Elimination or relaxation of CON requirements
may result in increased competition in such states and may also result in
increased expansion possibilities in such states. Of the states in which IHS
operates, the following require CONs for the facilities that are owned, operated
or managed by IHS: Alabama, Colorado, Delaware, Florida, Georgia, Illinois,
Indiana, Iowa, Kentucky, Louisiana, Maryland, Massachusetts, Michigan,
Mississippi, Missouri, Nevada, New Hampshire, New Jersey, North Carolina, Ohio,
South Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and
Wisconsin. To date the conversion of geriatric care beds to MSU beds has not
required a CON.
IHS' facilities are also subject to licensure regulations. Each of IHS'
geriatric care facilities is licensed as a skilled care facility and is
certified as a provider under the Medicare program and most are also certified
by the state in which they are located as a provider under the Medicaid program
of that state. IHS believes it is in substantial compliance with all material
statutes and regulations applicable to its business. In addition, all healthcare
facilities are subject to various local building codes and other ordinances.
State and local agencies survey all geriatric care centers on a regular
basis to determine whether such centers are in compliance with governmental
operating and health standards and conditions for participation in government
medical assistance programs. Such surveys include reviews of patient utilization
of healthcare facilities and standards for patient care. IHS endeavors to
maintain and operate its facilities in compliance with all such standards and
conditions. However, in the ordinary course of its business IHS' facilities
receive notices of deficiencies for failure to comply with various regulatory
requirements. Generally, the facility and the reviewing agency will agree upon
the measures to be taken to bring the facility into compliance with regulatory
requirements. In some cases or upon repeat violations, the reviewing agency may
take adverse actions against a facility, including the imposition of fines,
temporary suspension of admission of new patients to the facility, suspension or
decertification from participation in the Medicare or Medicaid programs, and, in
extreme circumstances, revocation of a facility's license. These adverse actions
may adversely affect the ability of the facility to operate or to provide
certain services and its eligibility to participate in the Medicare or Medicaid
programs. In addition, such adverse actions may adversely affect other
facilities operated by IHS. See "-- Federal and State Assistance Programs."
Effective July 1, 1995, HCFA implemented stricter guidelines for annual
state surveys of long-term care facilities. These guidelines eliminate the
ability of operators to appeal the scope and severity of any deficiencies and
grant state regulators the authority to impose new remedies, including monetary
penalties, denial of payments and termination of the right to participate in the
Medicare and/or Medicaid programs. IHS believes these new guidelines may result
in an increase in the number of facilities that will not be in "substantial
compliance" with the regulations and, as a result, subject to increased
disciplinary actions and remedies, including admission holds and termination of
the right to participate in the Medicare and/or Medicaid programs. In ranking
facilities, survey results subsequent to October 1990 are considered. As a
result, IHS' acquisition of poorly performing facilities could adversely affect
IHS' business to the extent remedies are imposed at such facilities.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium is expected to last approximately six months, and
implemented rules requiring home healthcare providers to reapply for Medicare
certification every three years. In addition, HCFA will double the number of
detailed audits of home healthcare providers it completes each year and increase
by 25% the number of home healthcare claims it reviews each year. IHS cannot
predict what effect, if any, these new rules will have on IHS' business and the
expansion of its home healthcare operations.
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The operations of IHS' home healthcare branches are subject to numerous
federal and state laws governing pharmacies, nursing services, therapy services
and certain types of home health agency activities. Certain of IHS' employees
are subject to state laws and regulations governing the professional practice of
respiratory therapy, physical, occupational and speech therapies, pharmacy and
nursing. The failure to obtain, to renew or to maintain any of the required
regulatory approvals or licenses could adversely affect IHS' home healthcare
business and could prevent the branch involved from offering products and
services to patients. Generally, IHS is required to be licensed as a home health
agency in those states in which it provides traditional home health or home
nursing services. IHS' ability to expand its home healthcare services will
depend upon its ability to obtain licensure as a home health agency, which may
be restricted by state CON laws.
Various Federal and state laws regulate the relationship between providers
of healthcare services and physicians or others able to refer medical services,
including employment or service contracts, leases and investment relationships.
These laws include the fraud and abuse provisions of Medicare and Medicaid and
similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment,
receipt, solicitation or offering of any direct or indirect remuneration
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil and criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs and from state programs containing similar provisions relating to
referrals of privately insured patients. The Department of Health and Human
Services ("HHS") and other federal agencies have interpreted these provisions
broadly to include the payment of anything of value to influence the referral of
Medicare or Medicaid business. HHS has issued regulations which set forth
certain "safe harbors," representing business relationships and payments that
can safely be undertaken without violation of the Fraud and Abuse Laws. In
addition, certain Federal and state requirements generally prohibit certain
providers from referring patients to certain types of entities in which such
provider has an ownership or investment interest or with which such provider has
a compensation arrangement, unless an exception is available. IHS considers all
applicable laws in planning marketing activities and exercises care in an effort
to structure its arrangements with healthcare providers to comply with these
laws. However, there can be no assurance that all of IHS' existing or future
arrangements will withstand scrutiny under the Fraud and Abuse Laws, safe harbor
regulations or other state or federal legislation or regulations, nor can it
predict the effect of such rules and regulations on these arrangements in
particular or on IHS' operations in general.
IHS' healthcare operations generate medical waste that must be disposed of
in compliance with Federal, state and local environmental laws, rules and
regulations. IHS' operations are also subject to compliance with various other
environmental laws, rules and regulations. Such compliance has not materially
affected, and IHS anticipates that such compliance will not materially affect,
IHS' capital expenditures, earnings or competitive position, although there can
be no assurance to that effect.
In addition to extensive existing governmental healthcare regulation, there
are numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services. It is
not clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals would have on IHS' business. Aspects of certain of
these healthcare proposals, such as cutbacks in the Medicare and Medicaid
programs, reductions in Medicare reimbursement rates and/or limitations on
reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect IHS. See "Risk Factors --
Uncertainty of Government Regulation" and "-- Sources of Revenue." There can be
no assurance that currently proposed or future healthcare legislation or other
changes in the administration or interpretation of governmental healthcare
programs will not have an adverse effect on IHS. Concern about the potential
effects of the proposed reform measures has contributed to the volatility of
prices of securities of companies in healthcare and related industries,
including IHS, and may similarly affect the price of the Debentures and the IHS
Common Stock in the future. IHS cannot predict the ultimate timing or effect of
such legislative efforts and no assurance can be given that any such efforts
will not have a material adverse effect on IHS' and/or RoTech's business,
results of operations and financial condition.
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FEDERAL AND STATE ASSISTANCE PROGRAMS
Substantially all of IHS' geriatric care facilities are currently certified
to receive benefits as a skilled nursing facility provided under the Health
Insurance for the Aged and Disabled Act (commonly referred to as "Medicare"),
and substantially all are also certified under programs administered by the
various states using federal and state funds to provide medical assistance to
qualifying needy individuals ("Medicaid"). Both initial and continuing
qualification of a skilled nursing care facility to participate in such programs
depend upon many factors including, among other things, accommodations,
equipment, services, patient care, safety, personnel, physical environment, and
adequate policies, procedures and controls.
Services under Medicare consist of nursing care, room and board, social
services, physical and occupational therapies, drugs, biologicals, supplies,
surgical, ancillary diagnostic and other necessary services of the type provided
by extended care or acute care facilities. Under the Medicare program, the
federal government pays the reasonable direct and indirect allowable costs
(including depreciation and interest) of the services furnished and, through
September 30, 1993, provided a rate of return on equity capital (as defined
under Medicare). However, IHS' cost of care for its MSU patients generally
exceeds regional reimbursement limits established under Medicare. IHS has
submitted waiver requests to recover these excess costs. See "-- Sources of
Revenue." There can be no assurance, however, that IHS will be able to recover
its excess costs under the pending waiver requests or under any waiver requests
which may be submitted in the future. IHS' failure to recover substantially all
these excess costs would adversely affect its results of operations and could
adversely affect its MSU strategy. Even though IHS' cost of care for its MSU
patients generally exceeds regional reimbursement limits established under
Medicare for nursing homes, IHS' cost of care is still lower than the cost of
such care in an acute care hospital.
The Medicare program reimburses for home healthcare services under two
basic systems: cost-based and charge-based. Under the cost-based system, IHS is
reimbursed at the lowest of IHS' reimbursable costs (based on Medicare
regulations), cost limits established by HCFA or IHS' charges. While a small
amount of corporate level overhead is permitted as part of reimbursable costs
under Medicare regulations, such costs consist predominantly of expenses and
charges directly incurred in providing the related services, and cannot include
any element of profit or net income to IHS. Under the charge-based system,
Medicare reimburses IHS on a "prospective payment" basis, which consists in
general of either a fixed fee for a specific service or a fixed per diem amount
for providing certain services. As a result, IHS can generate profit or net
income from Medicare charge-based revenues by providing covered services in an
efficient, cost-effective manner. All nursing services (including related
products) are Medicare cost-based reimbursed, except for nursing services
provided to hospice patients. Hospice care and all other home healthcare
services (including non-nursing related products) are Medicare charge-based
reimbursed.
The Balanced Budget Act of 1997 provides, among other things, for
implementation of a prospective payment system for home nursing services for
cost reporting periods beginning on or after October 1, 1999. Implementation of
a prospective payment system will be a critical element to the success of IHS'
expansion into home nursing services. Based upon prior legislative proposals,
IHS believes that a prospective payment system would most likely provide a
healthcare provider a predetermined rate for a given service, and that providers
with costs below the predetermined rate will be entitled to keep some or all of
this difference. Under such a prospective payment system, the efficient operator
will be rewarded. Since the largest component of home healthcare costs is labor,
which is basically fixed, IHS believes the differentiating factor in
profitability will be administrative costs. As a result of the First American
Acquisition, IHS, as a large provider of home nursing services, believes it
should be able to achieve administrative efficiencies compared with the small
providers which currently dominate the home healthcare industry, although there
can be no assurance it will be able to do so. There can be no assurance that
Medicare will implement a prospective payment system for home nursing services
in the next several years or at all. The inability of IHS to provide home
healthcare services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home healthcare operations and its
post-acute care network. See "Risk Factors -- Risk of Adverse Effect of
Healthcare Reform."
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to qualifying
needy individuals. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
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typically they provide for the payment of certain expenses, up to established
limits. The majority of the MSU programs are not required to participate in the
various state Medicaid programs. However, should IHS' MSU programs be required
to admit Medicaid patients as a condition to continued participation in such
programs by the facility in which the MSU program is located, IHS' results of
operations could be adversely affected since IHS' cost of care in its MSU
programs is substantially in excess of state Medicaid reimbursement rates.
Funds received by IHS under Medicare and Medicaid are subject to audit with
respect to the proper preparation of annual cost reports upon which
reimbursement is based. Such audits can result in retroactive adjustments of
revenue from these programs, resulting in either amounts due to the government
agency from IHS or amounts due IHS from the government agency.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy
determinations by insurance companies acting as Medicare fiscal intermediaries
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to healthcare facilities. Since 1985,
Congress has consistently attempted to limit the growth of federal spending
under the Medicare and Medicaid programs. IHS can give no assurance that
payments under such programs will in the future remain at a level comparable to
the present level or be sufficient to cover the operating and fixed costs
allocable to such patients. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could significantly
affect IHS' results of operations. It is uncertain at this time whether
additional legislation on healthcare reform will be implemented or whether other
changes in the administration or interpretation of governmental healthcare
programs will occur. There can be no assurance that future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on the results
of operations of IHS. IHS cannot at this time predict whether any healthcare
reform legislation will be adopted or, if adopted and implemented, what effect,
if any, such legislation will have on IHS. See "Risk Factors -- Risk of Adverse
Effect of Healthcare Reform."
COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. IHS competes on a local and regional basis with other providers on
the basis of the breadth and quality of its services, the quality of its
facilities and, to a limited extent, price. IHS also competes with other
providers in the acquisition and development of additional facilities and
service providers. IHS' current and potential competitors include national,
regional and local operators of geriatric care facilities, acute care hospitals
and rehabilitation hospitals, extended care centers, retirement centers and
community home health agencies and similar institutions, many of which have
significantly greater financial and other resources than IHS. In addition, IHS
competes with a number of tax-exempt nonprofit organizations which can finance
acquisitions and capital expenditures on a tax-exempt basis or receive
charitable contributions unavailable to IHS. There can be no assurance that IHS
will not encounter increased competition which could adversely affect its
business, results of operations or financial condition. See "Risk Factors --
Competition."
The geriatric care facilities operated and managed by IHS primarily compete
on a local and regional basis with other skilled care providers. IHS' MSUs
primarily compete on a local basis with acute care and long-term care hospitals.
In addition, some skilled nursing facilities have developed units which provide
a greater level of care than the care traditionally provided by nursing homes.
The degree of success with which IHS' facilities compete varies from location to
location and depends on a number of factors. IHS believes that the specialized
services and care provided, the quality of care provided, the reputation and
physical appearance of facilities and, in the case of private pay patients,
charges for services, are significant competitive factors. In light of these
factors, IHS seeks to meet competition in each locality by improving the
appearances of, and the quality and types of services provided at, its
facilities, establishing a reputation within the local medical communities for
providing competent care services, and by responding appropriately to regional
variations in demographics and tastes. There is limited, if any, competition in
price with respect to Medicaid and Medicare patients, since revenues for
services to such patients are strictly controlled
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and based on fixed rates and cost reimbursement principles. Because IHS'
facilities compete primarily on a local and regional basis rather than a
national basis, the competitive position of IHS varies from facility to facility
depending upon the types of services and quality of care provided by facilities
with which each of IHS' facilities compete, the reputation of the facilities
with which each of IHS' facilities compete, and, with respect to private pay
patients, the cost of care at facilities with which each of IHS' facilities
compete.
The home healthcare market is highly competitive and is divided among a
large number of providers, some of which are national providers but most of
which are either regional or local providers. IHS believes that the primary
competitive factors are availability of personnel, the price of the services and
quality considerations such as responsiveness, the technical ability of the
professional staff and the ability to provide comprehensive services.
IHS also competes with other healthcare companies for acquisitions and
management contracts. There can be no assurance that additional acquisitions can
be made and additional management contracts can be obtained on favorable terms.
EMPLOYEES
As of September 30, 1997, IHS had approximately 56,000 full-time and
regular part-time employees. Full-time and regular part-time service and
maintenance employees at 17 facilities, totaling approximately 1,300 employees,
are covered by collective bargaining agreements. IHS' corporate staff consisted
of approximately 1,900 people at such date. IHS believes its relations with its
employees are good.
IHS seeks the highest quality of professional staff within each market.
Competition in the recruitment of personnel in the healthcare industry is
intense, particularly with respect to nurses. Many areas are already facing
nursing shortages, and it is expected that the shortages will increase in the
future. Although IHS has, to date, been successful in hiring and retaining
nurses and rehabilitation professionals, IHS in the future may experience
difficulty in hiring and retaining nurses and rehabilitation professionals. IHS
believes that its future success and the success of its MSU programs will depend
in large part upon its continued ability to hire and retain qualified personnel.
INSURANCE
Healthcare companies are subject to medical malpractice, personal injury
and other liability claims which are generally covered by insurance. IHS
maintains liability insurance coverage in amounts deemed appropriate by
management based upon historical claims and the nature and risks of its
business. There can be no assurance that a future claim will not exceed
insurance coverage or that such coverage will continue to be available. In
addition, any substantial increase in the cost of such insurance could have an
adverse effect on IHS' business, results of operations and financial condition.
LEGAL PROCEEDINGS
IHS is from time to time involved in various legal proceedings. Although
IHS does not believe that any currently pending proceeding will materially and
adversely affect IHS, there can be no assurance that any current or future
proceeding will not have a material adverse effect on IHS' financial position or
results of operations.
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DESCRIPTION OF IHS CAPITAL STOCK
The following summary does not purport to be complete and is subject in all
respects to the applicable provisions of the DGCL, IHS' Third Restated
Certificate of Incorporation, as amended (the "IHS Certificate"), and the terms
of IHS' Stockholders' Rights Plan.
THE FOLLOWING DESCRIPTION OF THE IHS CAPITAL STOCK SHOULD BE READ CAREFULLY
BY HOLDERS SINCE THE DEBENTURES ARE NOW CONVERTIBLE ONLY INTO FULLY PAID AND
NONASSESSABLE SHARES OF IHS COMMON STOCK.
AUTHORIZED CAPITAL STOCK
IHS is authorized to issue up to 150,000,000 shares of IHS Common Stock,
par value $.001 per share, 26,852,396 shares of which were issued and
outstanding at October 20, 1997, and 15,000,000 shares of IHS Preferred Stock,
none of which is outstanding as of the date hereof.
IHS COMMON STOCK
Holders of IHS Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders and do not
have preemptive rights. Subject to preferences that may be applicable to any
outstanding shares of IHS Preferred Stock, holders of IHS Common Stock are
entitled to receive ratably such dividends, if any, as may be declared from time
to time by the IHS Board of Directors out of funds legally available therefor.
All outstanding shares of IHS Common Stock are, and the shares to be issued upon
conversion of the Debentures will be, fully paid and nonassessable. In the event
of any liquidation, dissolution or winding-up of the affairs of IHS, holders of
IHS Common Stock will be entitled to share ratably in the assets of IHS
remaining after payment or provision for payment of all of IHS' debts and
obligations and liquidation payments to holders of any outstanding shares of IHS
Preferred Stock.
IHS PREFERRED STOCK
The IHS Board, without further stockholder authorization, is authorized to
issue shares of IHS Preferred Stock in one or more series and to determine and
fix the rights, preferences and privileges of each series, including dividend
rights and preferences over dividends on the IHS Common Stock and one or more
other series of IHS Preferred Stock, conversion rights, voting rights (in
addition to those provided by law), redemption rights and the terms of any
sinking fund therefor, and rights upon liquidation, dissolution or winding up,
including preferences over the IHS Common Stock and one or more series of IHS
Preferred Stock. Although IHS has no present plans to issue any shares of IHS
Preferred Stock, the issuance of shares of IHS Preferred Stock, or the issuance
of rights to purchase such shares, may have the effect of delaying, deferring or
preventing a change in control of IHS or an unsolicited acquisition proposal.
IHS has designated 750,000 shares of Preferred Stock as Series A Junior
Participating Cumulative Preferred Stock, $.01 par value per share (the "Series
A Preferred Stock"). The rights, preferences and privileges of the Series A
Preferred Stock are set forth under "-- IHS Stockholders' Rights Plan."
OPTIONS, WARRANTS AND CONVERTIBLE DEBENTURES
AT September 30, 1997, options covering an aggregated of approximately
8,475,000 shares of IHS Common Stock and warrants covering an aggregate of
525,000 shares of IHS Common Stock were outstanding. In addition, at September
30, 1997, IHS had reserved for issuance approximately 2,283,000 additional
shares of IHS Common Stock for issuance under its stock option plans pursuant to
options which have not yet been granted and under its stock purchase plan. IHS
also has reserved for issuance 7,989,275 shares of IHS Common Stock for issuance
upon conversion of its 5 3/4% Convertible Senior Subordinated Debentures due
2001 and 6% Convertible Subordinated Debentures due 2003. In addition, as a
result of the Merger IHS has reserved for issuance approximately 1,841,700
shares of IHS Common Stock for issuance upon exercise of RoTech Options and
2,433,000 shares of IHS Common Stock for issuance upon conversion of the
Debentures. See "IHS Recent Developments -- Recent Acquisitions -- RoTech
Acquisition," "Description of Certain IHS Indebtedness -- 5 3/4% Convertible
Senior Subordinated Debentures due 2001" and "-- 6% Convertible Subordinated
Debentures due 2003."
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CERTAIN PROVISIONS OF IHS' BY-LAWS AND THE DGCL
Advance Notice Provisions for Stockholder Proposals and Stockholder
Nominations of Directors. The IHS By-laws establish an advance notice procedure
with regard to the nomination, other than by or at the direction of the IHS
Board or a committee thereof, of candidates for election as directors (the
"Nomination Procedure") and with regard to other matters to be brought by
stockholders before an annual meeting of stockholders of IHS (the "Business
Procedure").
The Nomination Procedure requires that a stockholder give prior written
notice, in proper form, of a planned nomination for the IHS Board to the
Secretary of IHS. The requirements as to the form and timing of that notice are
specified in the IHS By-laws. If the Chairman of the IHS Board determines that a
person was not nominated in accordance with the Nomination Procedure, such
person will not be eligible for election as a director.
Under the Business Procedure, a stockholder seeking to have any business
conducted at an annual meeting must give prior written notice, in proper form,
to the Secretary of IHS. The requirements as to the form and timing of that
notice are specified in the IHS By-laws. If the Chairman of the IHS Board
determines that the other business was not properly brought before such meeting
in accordance with the Business Procedure, such business will not be conducted
at such meeting.
Although the IHS By-laws do not give the IHS Board any power to approve or
disapprove stockholder nominations for the election of directors or of any other
business desired by stockholders to be conducted at an annual or any other
meeting, the IHS By-laws (i) may have the effect of precluding a nomination for
the election of directors or precluding the conduct of business at a particular
annual meeting if the proper procedures are not followed or (ii) may discourage
or deter a third party from conducting a solicitation of proxies to elect its
own slate of directors or otherwise attempting to obtain control of IHS, even if
the conduct of such solicitation or such attempt might be beneficial to IHS and
its stockholders.
Delaware Takeover Statute. IHS is subject to Section 203 of the DGCL which,
subject to certain exceptions, prohibits a Delaware corporation from engaging in
any of a broad range of business combinations with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless (i) prior to such date, the board of directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; (ii) upon
consummation of the transaction which resulted in the stockholder becoming an
interested stockholder, the interested stockholder owned at least 85% of the
voting stock of the corporation outstanding at the time the transaction
commenced, excluding for purposes of determining the number of shares
outstanding those shares owned (a) by persons who are directors and also
officers and (b) by employee stock plans in which employee participants do not
have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer; or (iii) on or after such
date, the business combination is approved by the board of directors and
authorized at an annual or special meeting of stockholders, and not by written
consent, by the affirmative vote of at least 66 2/3% of the outstanding voting
stock which is not owned by the interested stockholder. An "interested
stockholder" is defined as any person that is (a) the owner of 15% or more of
the outstanding voting stock of the corporation or (b) an affiliate or associate
of the corporation and was the owner of 15% or more of the outstanding voting
stock of the corporation at any time within the three-year period immediately
prior to the date on which it is sought to be determined whether such person is
an interested stockholder.
IHS STOCKHOLDERS' RIGHTS PLAN
The following is a description of the IHS Stockholders' Rights Plan (the
"IHS Rights Plan"). The description thereof set forth below is qualified in its
entirety by reference to the IHS Rights Plan, a copy of which has been filed
with the Commission. See "Available Information" and "Incorporation of Certain
Documents by Reference."
The IHS Rights Plan provides that one preferred stock purchase right (a
"Right") will be issued with each share of IHS Common Stock (whether originally
issued or from IHS' treasury) prior to the Rights Distribution Date (as defined
herein). When exercisable, each Right entitles the registered holder to purchase
from IHS one one-hundredth of a share of Series A Preferred Stock at a price of
$135.00 per one one-hundredth of a share of Series A Preferred Stock (the
"Purchase Price"), subject to adjustment.
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Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding IHS
Common Stock or (ii) 10 business days (or such later date as may be determined
by action of the IHS Board prior to such time as any person or group of
affiliated persons becomes an Acquiring Person) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the outstanding IHS Common Stock (the earlier of such
dates being called the "Distribution Date"), the Rights will be evidenced by all
the IHS Common Stock share certificates and will be transferred with the IHS
Common Stock certificates, and no separate Rights certificates will be
distributed. As soon as practicable following the Distribution Date, separate
certificates evidencing the Rights ("Right Certificates") will be mailed to
holders of record of the IHS Common Stock as of the close of business on the
Distribution Date and such separate Right Certificates alone will evidence the
Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on September 26, 2005 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by IHS, in each case, as described below.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Right are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for or purchase
shares of Series A Preferred Stock with a conversion price less than the
then-current market price of the Series A Preferred Stock or (iii) upon the
distribution to holders of the Series A Preferred Stock of evidences of
indebtedness or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings or dividends payable in Series A Preferred Stock)
or of subscription rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
share of Series A Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a stock split of the IHS Common Stock or a
stock dividend on the IHS Common Stock payable in IHS Common Stock or
subdivisions, consolidations or combinations of the IHS Common Stock occurring,
in any such case, prior to the Distribution Date.
Series A Preferred Stock purchasable upon exercise of the Rights will not
be redeemable. Each share of Series A Preferred Stock will be entitled to a
minimum preferential quarterly dividend payment of $1 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of IHS Common Stock. In the event of liquidation, the holders of the Series A
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $100 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of IHS Common Stock. Each share of Series A Preferred
Stock will have 100 votes, voting together with the shares of IHS Common Stock.
Finally, in the event of any merger, consolidation or other transaction in which
IHS Common Stock is exchanged, each share of Series A Preferred Stock will be
entitled to receive 100 times the amount received per share of IHS Common Stock.
These rights are protected by customary antidilution provisions. The Series A
Preferred Stock will, if issued, be junior to any other series of Preferred
Stock which may be authorized and issued by IHS, unless the terms of any such
other series provide otherwise. Once the shares of Series A Preferred Stock are
issued, the IHS Certificate may not be amended in a manner which would
materially alter or change the powers, preferences or special rights of the
Series A Preferred Stock so as to affect them adversely without the affirmative
vote of the holders of two-thirds or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class.
Because of the nature of the Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Series A Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of IHS Common Stock.
In the event that IHS is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
after a person or group has become an Acquiring Person, proper provision will be
made so that each holder of a Right will thereafter have the
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right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times the
exercise price of the Right. In the event that any person or group of affiliated
or associated persons becomes an Acquiring Person, proper provision shall be
made so that each holder of a Right, other than Rights beneficially owned by the
Acquiring Person (which will thereafter be void), will thereafter have the right
to receive upon exercise such number of one one-hundredths of a share of Series
A Preferred Stock as shall equal the result obtained by (x) multiplying the then
current Purchase Price by the number of one one-hundredths of a share of Series
A Preferred Stock for which a Right is then exercisable and dividing that
product by (y) 50% of the then current per share market price of the IHS Common
Stock.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding IHS
Common Stock, the IHS Board may exchange the Rights (other than Rights owned by
such person or group which will have become void), in whole or in part, for
consideration consisting of one-half the securities of IHS that would be
issuable at such time upon exercise of one Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A Preferred Stock will be
issued (other than fractions which are integral multiples of one one-hundredth
of a share of Series A Preferred Stock, which may, at the election of IHS, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Series A Preferred Stock on the
last trading day prior to the date of exercise.
At any time prior to the tenth day following the acquisition by a person or
group of affiliated or associated persons of beneficial ownership of 20% or more
of the outstanding IHS Common Stock, the IHS Board may redeem the Rights in
whole, but not in part, at a price of $.01 per Right (the "Redemption Price");
provided, however, that, for the 120-day period after any date of a change
(resulting from a proxy or consent solicitation) in a majority of the IHS Board
in office at the commencement of such solicitation, the Rights may only be
redeemed if (A) there are directors then in office who were in office at the
commencement of such solicitation and (B) the IHS Board, with the concurrence of
a majority of such directors then in office, determines that such redemption is,
in their judgment, in the best interests of IHS and its stockholders. The
redemption of the Rights may be made effective at such time on such basis with
such conditions as the IHS Board in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the IHS Board without the consent
of the holders of the Rights, except that from and after a Distribution Date no
such amendment may adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of IHS, including, without limitation, the right to vote
or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire IHS without
conditioning the offer on the Rights being redeemed or a substantial number of
Rights being acquired. The effect of the Rights may be to inhibit a change in
control of IHS (including through a third party tender offer at a price which
reflects a premium to the then prevailing trading price) that may be beneficial
to IHS stockholders. See "Risk Factors -- Effect of Certain Anti-Takeover
Provisions."
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
IHS' Certificate contains a provision eliminating or limiting director
liability to IHS and its stockholders for monetary damages arising from acts or
omissions in the director's capacity as a director. The provision does not,
however, eliminate or limit the personal liability of a director (i) for any
breach of such director's duty of loyalty to IHS or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under the DGCL for unlawful
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dividends or unlawful stock purchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. This
provision offers persons who serve on the IHS Board protection against awards of
monetary damages resulting from breaches of their duty of care (except as
indicated above). As a result of this provision, the ability of IHS or a
stockholder thereof to successfully prosecute an action against a director for a
breach of his duty of care is limited. However, the provision does not affect
the availability of equitable remedies such as an injunction or rescission based
upon a director's breach of his duty of care. The Commission has taken the
position that the provision will have no effect on claims arising under the
federal securities laws.
In addition, the IHS Certificate and the IHS By-laws provide for mandatory
indemnification rights, subject to limited exceptions, to any director, officer,
employee, or agent of IHS who, by reason of the fact that he or she is a
director, officer, employee, or agent of IHS, is involved in a legal proceeding
of any nature. Such indemnification rights include reimbursement for expenses
incurred by such director, officer, employee, or agent in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
the DGCL. In addition, IHS has entered into indemnification agreements with its
officers and directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the IHS Common Stock is American Stock
Transfer & Trust Company, New York, New York.
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DESCRIPTION OF CERTAIN IHS INDEBTEDNESS
The following summarizes the material long-term indebtedness of IHS and its
subsidiaries. IHS' indebtedness is substantial in relation to its stockholders'
equity. At June 30, 1997, IHS' total long-term debt, including current portion,
accounted for 67.7% of its total capitalization. In connection with the offering
of the 9 1/4% Senior Notes, S&P confirmed its B rating of IHS' other
subordinated debt obligations, but with a negative outlook, and assigned the
same rating to the 9 1/4% Senior Notes, and Moody's downgraded IHS' debt
obligations to B2, but noted that the outlook for the rating was stable, and
assigned the new rating to the 9 1/4% Senior Notes. See "Unaudited Pro Forma
Financial Information" and "Risk Factors -- Risks Related to Substantial
Indebtedness of IHS." The summary is not a complete description of such
indebtedness. Copies of the material agreements relating to such indebtedness
have been filed with the Commission and the description set forth below is
qualified in its entirety by reference to such agreements. See "Available
Information."
NEW CREDIT FACILITY
On September 15, 1997, IHS entered into a $1.75 billion revolving credit
and term loan facility with Citibank, N.A., as Administrative Agent, and certain
other lenders (the "New Credit Facility") to replace its existing $700 million
revolving credit facility. The New Credit Facility consists of a $750 million
term loan facility (the "Term Facility") and a $1 billion revolving credit
facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, matures on September 30, 2004
and will be amortized beginning September 30, 1998 as follows: 1998 -- $7.5
million; each of 1999, 2000, 2001 and 2002 -- $7.5 million (payable in equal
quarterly installments); 2003 -- $337.5 million (payable in equal quarterly
installments); and 2004 -- $375 million (payable in equal quarterly
installments). Any unpaid balance will be due on the maturity date. The Term
Facility bears interest at a rate equal to, at the option of IHS, either (i) in
the case of Eurodollar loans, the sum of (x) one and three-quarters percent or
two percent (depending on the ratio of IHS' Debt (as defined in the New Credit
Facility) to earnings before interest, taxes, depreciation, amortization and
rent, pro forma for any acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio). The Term
Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30, 2001
and $500 million on September 30, 2002, with a final maturity on September 15,
2004; however, the $100 million letter of credit subfacility and $10 million
swing line subfacility will remain at $100 million and $10 million,
respectively, until final maturity. The Revolving Facility bears interest at a
rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans,
the sum of (x) between three-quarters of one percent and one and three-quarters
percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the
London interbank market for loans in an amount substantially equal to the amount
of borrowing and for the period of borrowing selected by IHS or (ii) the sum of
(a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the
latest overnight federal funds rate plus (b) a margin of between zero percent
and one-half percent (depending on the Debt/EBITDAR Ratio). Amounts repaid under
the Revolving Facility may be reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group
managed by Dr. Elkins, owns more than 40% of
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IHS' stock. The New Credit Facility is guaranteed by all of IHS' subsidiaries
(other than inactive subsidiaries), including RoTech, and secured by a pledge of
all of the stock of substantially all of IHS' subsidiaries, including RoTech.
The New Credit Facility replaced IHS' $700 million credit facility (the
"Prior Credit Facility"). As a result, IHS recorded an extraordinary loss on
extinguishment of debt of approximately $2.4 million (net of related tax benefit
of approximately $1.6 million) in the third quarter of 1997 resulting from the
write-off of deferred financing costs of $4.0 million related to the Prior
Credit Facility.
IHS will use proceeds of term loans under the New Credit Facility to make a
capital contribution to RoTech in an amount necessary to allow RoTech to pay the
aggregate consideration due in connection with the Offer.
5 3/4% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2001
IHS has outstanding $143,750,000 principal amount of IHS' 5 3/4%
Convertible Senior Subordinated Debentures due 2001 (the "5 3/4% Debentures").
Interest on the 5 3/4% Debentures is payable semi-annually on January 1 and July
1. The 5 3/4% Debentures are redeemable in whole or in part at the option of IHS
at a price, expressed as a percentage of the principal amount, ranging from
103.29% in 1997 to 100.82% in 2000, plus accrued interest. The 5 3/4% Debentures
are convertible into IHS Common Stock at any time prior to redemption or final
maturity, initially at the conversion price of $32.60 per share (the equivalent
of 30.675 shares per $1,000 principal amount of 5 3/4% Debentures), subject to
adjustment upon the occurrence of certain events. In the event of a change in
control of IHS (as defined in the indenture under which the 5 3/4% Debentures
were issued), each holder of 5 3/4% Debentures may require IHS to repurchase
such holder's 5 3/4% Debentures, in whole or in part, at 100% of the principal
amount thereof, plus accrued interest to the repurchase date.
6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
IHS has outstanding $115,000,000 aggregate principal amount of its 6%
Convertible Subordinated Debentures due 2003 (the "6% Debentures"). Interest on
the 6% Debentures is payable semi-annually on January 1 and July 1. The 6%
Debentures are redeemable in whole or in part at the option of IHS at any time
at a price, expressed as a percentage of the principal amount, ranging from
103.6% in 1997 to 100.6% in 2002, plus accrued interest. Prior to redemption,
the 6% Debentures are convertible into IHS Common Stock at the option of the
holder at any time at or before maturity at $32.125 per share (the equivalent of
31.128 shares per $1,000 principal amount of 6% Debentures), subject to
adjustment upon the occurrence of certain events. In the event of a change in
control of IHS (as defined in the indenture under which the 6% Debentures were
issued), each holder of 6% Debentures may require IHS to repurchase such
holder's 6% Debentures, in whole or in part, at 100% of the principal amount
thereof, plus accrued interest to the repurchase date.
9 1/4% SENIOR SUBORDINATED NOTES DUE 2008
IHS has outstanding $500,000,000 aggregate principal amount of its 9 1/4%
Senior Subordinated Notes due 2008 (the "9 1/4% Senior Notes"). Interest on the
9 1/4% Senior Notes is payable semi-annually on January 15 and July 15. The 9
1/4% Senior Notes are redeemable in whole or in part at the option of IHS at any
time on or after January 15, 2003, at a price, expressed as a percentage of the
principal amount, initially equal to 104.625% and declining to 100% on January
15, 2006, plus accrued interest thereon. In addition, IHS may redeem up to
$166,667,000 aggregate principal amount of 9 1/4% Senior Notes at any time and
from time to time prior to January 15, 2001 at a redemption price equal to
109.25% of the aggregate principal amount thereof, plus accrued interest
thereon, out of the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9 1/4% Senior Notes were issued (the "9
1/4% Senior Notes Indenture")). In the event of a change in control of IHS (as
defined in the 9 1/4% Senior Notes Indenture), each holder of 9 1/4% Senior
Notes may require IHS to repurchase such holder's 9 1/4% Senior Notes, in whole
or in part, at 101% of the principal amount thereof, plus accrued interest to
the repurchase date. The 9 1/4% Senior Notes Indenture con-
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tains certain covenants, including, but not limited to, covenants with respect
to the following matters: (i) limitations on additional indebtedness unless
certain coverage ratios are met; (ii) limitations on other subordinated
indebtedness; (iii) limitations on liens; (iv) limitations on the issuance of
preferred stock by IHS' subsidiaries; (v) limitations on transactions with
affiliates; (vi) limitations on restricted payments and investments; (vii)
application of the proceeds of certain asset sales; (viii) limitations on
restrictions on subsidiary dividends; and (ix) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of IHS
to another person.
9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
IHS has outstanding $450,000,000 aggregate principal amount of its 9 1/2%
Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"). Interest on the
9 1/2% Senior Notes is payable semi-annually on March 15 and September 15. The 9
1/2% Senior Notes are redeemable in whole or in part at the option of IHS at any
time on or after September 15, 2002, at a price, expressed as a percentage of
the principal amount, initially equal to 104.75% and declining to 100% on
September 15, 2005, plus accrued interest thereon. In addition, IHS may redeem
up to $150,000,000 aggregate principal amount of 9 1/2% Senior Notes at any time
and from time to time prior to September 15, 2000 at a redemption price equal to
108.50% of the aggregate principal amount thereof, plus accrued interest
thereon, out of the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9 1/2% Senior Notes were issued (the "9
1/2% Senior Notes Indenture")). In the event of a change in control of IHS (as
defined in the 9 1/2% Senior Notes Indenture), each holder of 9 1/2% Senior
Notes may require IHS to repurchase such holder's 9 1/2% Senior Notes, in whole
or in part, at 101% of the principal amount thereof, plus accrued interest to
the repurchase date. The 9 1/2% Senior Notes Indenture contains certain
covenants, including, but not limited to, covenants with respect to the
following matters: (i) limitations on additional indebtedness unless certain
coverage ratios are met; (ii) limitations on other subordinated indebtedness;
(iii) limitations on liens; (iv) limitations on the issuance of preferred stock
by IHS' subsidiaries; (v) limitations on transactions with affiliates; (vi)
limitations on restricted payments and investments; (vii) application of the
proceeds of certain asset sales; (viii) limitations on restrictions on
subsidiary dividends; and (ix) restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets of IHS to another person.
10 1/4% SENIOR SUBORDINATED NOTES DUE 2006
IHS has outstanding $150,000,000 aggregate principal amount of its 10 1/4%
senior subordinated notes due 2006 (the "10 1/4% Senior Notes"). Interest on the
10 1/4% Senior Notes is payable semi-annually on April 30 and October 30. The 10
1/4% Senior Notes are redeemable for cash at any time after April 30, 2001, at
IHS' option, in whole or in part, initially at a redemption price equal to
105.125% of the principal amount, declining to 100% of the principal amount on
April 30, 2004, plus accrued interest thereon to the date fixed for redemption.
In the event of a change in control of IHS (as defined in the indenture under
which the 10 1/4% Senior Notes were issued), each holder of 10 1/4% Senior Notes
may require IHS to repurchase such holder's 10 1/4% Senior Notes, in whole or in
part, at 101% of the principal amount thereof, plus accrued interest to the
repurchase date. The indenture under which the 10 1/4% Senior Notes were issued
contains certain covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitations on additional indebtedness
unless certain ratios are met; (ii) limitations on other subordinated debt;
(iii) limitations on liens; (iv) limitations on the issuance of preferred stock
by IHS' subsidiaries; (v) limitations on transactions with affiliates; (vi)
limitations on certain payments, including dividends; (vii) application of the
proceeds of certain asset sales; (viii) restrictions on mergers, consolidations
and the transfer of all or substantially all of the assets of IHS to another
person; and (ix) limitations on investments and loans.
10 3/4% Senior Subordinated Notes due 2004
IHS has outstanding $107,000 aggregate principal amount of its 10 3/4%
Senior Subordinated Notes due 2004 (the "10 3/4% Senior Notes"). Interest on the
10 3/4% Senior Notes is payable semi-annually on January 15 and July 15. The 10
3/4% Senior Notes are redeemable in whole or in part at the option of IHS at any
time on or after July 15, 1999, at a price, expressed as a percentage of the
principal amount,
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initially equal to 105.375% and declining to 100% on July 15, 2002, plus accrued
interest thereon. In the event of a change in control of IHS (as defined in the
indenture under which the 10 3/4% Senior Notes were issued (the "10 3/4% Senior
Notes Indenture")), each holder of 10 3/4% Senior Notes may require IHS to
repurchase such holder's 10 3/4% Senior Notes, in whole or in part, at 101% of
the principal amount thereof, plus accrued interest to the repurchase date. The
10 3/4% Senior Notes Indenture contains certain limited covenants, including a
covenant with respect to the application of the proceeds of certain asset sales.
On May 30, 1997, IHS repurchased $99,893,000 aggregate principal amount of
the 10 3/4% Senior Notes pursuant to a cash tender offer. As a condition of IHS'
obligation to repurchase tendered 10 3/4% Senior Notes, tendering holders
consented to amendments to the 10 3/4% Senior Notes Indenture which eliminated
or modified most of the restrictive covenants previously contained in such
indenture.
9 5/8% SENIOR SUBORDINATED NOTES DUE 2002, SERIES A
IHS has outstanding $25,000 aggregate principal amount of its 9 5/8% Senior
Subordinated Notes due 2002, Series A (the "9 5/8% Senior Notes"). Interest on
the 9 5/8% Senior Notes is payable semi-annually on May 31 and November 30. The
9 5/8% Senior Notes are not redeemable prior to maturity. In the event of a
change in control of IHS (as defined in the indenture under which the 9 5/8%
Senior Notes were issued (the "9 5/8% Senior Notes Indenture")), each holder of
9 5/8% Senior Notes may require IHS to repurchase such holder's 9 5/8% Senior
Notes, in whole or in part, at 101% of the principal amount thereof, plus
accrued interest to the repurchase date. The 9 5/8% Senior Notes Indenture
contains certain limited covenants, including a covenant with respect to the
application of the proceeds of certain asset sales.
On May 30, 1997, IHS repurchased $114,975,000 aggregate principal amount of
the 9 5/8% Senior Notes pursuant to a cash tender offer. As a condition of IHS'
obligation to repurchase tendered 9 5/8% Senior Notes, tendering holders
consented to amendments to the 9 5/8% Senior Notes Indenture which eliminated or
modified most of the restrictive covenants previously contained in such
indenture.
CERTAIN OTHER OBLIGATIONS
IHS' contingent liabilities (other than liabilities in respect of
litigation and the contingent payments in respect of the First American
Acquisition) aggregated approximately $77.3 million as of June 30, 1997. IHS is
obligated to purchase its Greenbriar facility upon a change in control of IHS.
The net purchase price of the facility is approximately $4.0 million. IHS has
guaranteed approximately $6.6 million of the lessor's indebtedness. IHS is
required, upon certain defaults under the lease, to purchase its Orange Hills
facility at a purchase price equal to the greater of $7.1 million or the
facility's fair market value. IHS has guaranteed approximately $4.0 million owed
by Tutera Group, Inc. and Sunset Plaza Limited Partnership, a partnership
affiliated with a partnership in which IHS has a 49% interest, to Finova Capital
Corporation. IHS has established several irrevocable standby letters of credit
with the Bank of Nova Scotia to secure certain of IHS' self-insured workers'
compensation obligations, health benefits and other obligations. The maximum
obligation was $15.7 million at June 30, 1997. IHS has also established three
irrevocable standby letters of credit in the total amount of $10.7 million. IHS
has guaranteed approximately $539,000 owed by a managed facility to National
Health Investors Inc. and approximately $8.9 million owed by Litchfield Asset
Management Corporation to National Health Investors Inc. At June 30, 1997, IHS
had guaranteed approximately $4.8 million owed by CCA, a related party company
to which IHS provided certain management services, to Daiwa Healthco-2 LLC and
had also guaranteed approximately $10.0 million owed by CCA to Health and
Retirement Properties Trust under a loan and lease financing agreement. In
addition, IHS had established an irrevocable standby line of credit with CCA
with a maximum amount of $5.0 million available to CCA at June 30, 1997.
Subsequent to June 30, 1997, IHS established an additional $5.0 million credit
facility. On September 25, 1997, IHS acquired CCA. See "IHS Recent Developments
- -- Recent Acquisitions." IHS owned warrants to purchase approximately 13.5% of
CCA's Common Stock, and IHS' Chairman and Chief Executive Officer beneficially
owned approximately 21.0% of CCA's outstanding common stock (excluding the
warrants owned by IHS). In addition, IHS has obligations under operating leases
aggregating approxi-
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mately $212.1 million at June 30, 1997. In addition, with respect to certain
acquired businesses IHS is obligated to make certain contingent payments if
earnings of the acquired businesses increase or earnings targets are met. IHS is
also obligated under certain circumstances to make contingent payments of up to
$155 million in respect of the First American Acquisition. See "IHS Recent
Developments -- First American Acquisition."
IHS leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, IHS
is obligated to pay additional rent in an amount equal to a specified percentage
(generally five percent) of the amount by which the facility's gross revenues
exceed a specified amount (generally based on the facility's gross revenues
during its first year of operation). If an event of default occurs under any
Meditrust lease or any other agreement IHS has with Meditrust, Meditrust has the
right to require IHS to purchase the facility leased from the partnership at a
price equal to the higher of the then current fair market value of the facility
or the original purchase price of the facility paid by Meditrust plus the cost
of certain capital expenditures paid for by Meditrust, an adjustment for the
increase in the cost of living index since the commencement of the lease and all
rent then due and payable, all such amounts to be determined pursuant to the
prescribed formula contained in the lease. In addition, each Meditrust lease
provides that a default under any other Meditrust lease or any other agreement
IHS has with Meditrust constitutes a default under such lease. Upon such
default, Meditrust has the right to terminate the leases and to seek damages
based upon lost rent.
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Facsimile copies of the Letter of Transmittal, properly completed and validly
executed, will be accepted. Letters of Transmittal, certificates for Debentures
and any other required documents should be sent or delivered by each Holder of
Debentures or such Holder's broker, dealer, commercial bank or trust company to
the Depositary at one of its addresses set forth below.
THE DEPOSITARY FOR THE OFFER IS:
PNC Bank, Kentucky, Inc.
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
Corporate Trust Department, 7th Floor Corporate Trust Department, 7th Floor Corporate Trust Department, 7th Floor
500 W. Jefferson Street 500 W. Jefferson Street 500 W. Jefferson Street
Louisville, Kentucky 40202 Louisville, Kentucky 40202 Louisville, Kentucky 40202
By Facsimile:
(502) 581-2705
Facsimile Confirmation Only:
(502) 581-3214
</TABLE>
Requests for assistance or additional copies of this Offer to Purchase, the
Letter of Transmittal, the Notice of Guaranteed Delivery and other related
documents should be directed to the Information Agent. You may also contact your
broker, dealer, commercial bank, trust company or nominee for assistance
concerning the Offer.
THE INFORMATION AGENT FOR THE OFFER IS:
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500
or
Call Toll Free (800) 322-2885
The date of this Change of Control Notice and Offer to Purchase is November 5,
1997
Letter of Transmittal
TO TENDER
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
OF
ROTECH MEDICAL CORPORATION
PURSUANT TO THE CHANGE OF CONTROL NOTICE AND OFFER TO PURCHASE
DATED NOVEMBER 5, 1997
SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE OFFER TO PURCHASE, THE
OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 4, 1997, UNLESS THE OFFER IS EXTENDED (SUCH TIME AND DATE OR THE LATEST
EXTENSION THEREOF, IF EXTENDED, THE "EXPIRATION DATE"). DEBENTURES TENDERED IN
THE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
THE DEPOSITARY FOR THE OFFER IS:
PNC BANK, KENTUCKY, INC.
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
Corporate Trust Department, 7th Floor Corporate Trust Department, 7th Floor Corporate Trust Department, 7th Floor
500 W. Jefferson Street 500 W. Jefferson Street 500 W. Jefferson Street
Louisville, Kentucky 40202 Louisville, Kentucky 40202 Louisville, Kentucky 40202
By Facsimile:
(502) 581-2705
Facsimile Confirmation Only:
(502) 581-3214
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE, OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A
VALID DELIVERY. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD
BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED.
HOLDERS WHO WISH TO BE ELIGIBLE TO RECEIVE THE REPURCHASE PRICE PURSUANT TO
THE OFFER MUST VALIDLY TENDER (OR RETENDER IF SUCH HOLDERS HAVE PREVIOUSLY
WITHDRAWN) THEIR DEBENTURES TO THE DEPOSITARY PRIOR TO 5:00 P.M., NEW YORK CITY
TIME, ON THE EXPIRATION DATE.
This Letter of Transmittal should be used only to tender the Debentures as
described in the Change of Control Notice and Offer to Purchase of RoTech
Medical Corporation, dated November 5, 1997 (as the same may be amended or
supplemented from time to time, the "Offer to Purchase").
This Letter of Transmittal is to be used (i) if Debentures are to be
physically delivered to the Depositary, (ii) if delivery of Debentures is to be
made by book-entry transfer to the account maintained by the Depositary at the
Depository Trust Company ("DTC") pursuant to the procedures set forth in the
Offer to Purchase under the caption "The Offer -- Procedures for Tendering
Debentures -- Book-Entry Delivery Procedures" or (iii) if Debentures are being
tendered in accordance with the guaranteed delivery procedures set forth in the
Offer to Purchase under the caption "The Offer -- Procedures for Tendering
Debentures -- Guaranteed Delivery."
Holders of Debentures that are tendering by book-entry transfer to the
Depositary's account at DTC can execute the tender through the DTC Automated
Tender Offer Program ("ATOP"), for which the transaction will be eligible. DTC
participants that are accepting the Offer should transmit their acceptance to
DTC, which will edit and verify the acceptance and execute a book-entry delivery
to the Depositary's account at DTC. DTC will then send an Agent's Message to the
Depositary for its acceptance. Delivery of the Agent's Message by DTC will
satisfy the terms of the Offer as to execution and delivery of a Letter of
Transmittal by the participant identified in the Agent's Message. DTC
participants may also accept the Offer by submitting a notice of guaranteed
delivery through ATOP.
Holders whose Debentures are not available or who cannot deliver their
Debentures and all other documents required hereby to the Depositary prior to,
or on, the Expiration Date may nevertheless tender their Debentures in
accordance with the guaranteed delivery procedures set forth in the Offer to
Purchase under the caption "The Offer -- Procedures for Tendering Debentures --
Guaranteed Delivery." See Instruction 2 herein.
<PAGE>
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE
DEPOSITARY.
THE OFFER IS NOT BEING MADE TO (NOR WILL TENDERS OF DEBENTURES BE ACCEPTED
FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH THE MAKING OR
ACCEPTANCE OF THE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS OF SUCH
JURISDICTION.
Holders who wish to tender their Debentures must complete the box below
entitled "Method of Delivery" and complete columns (1) through (3) in the box
herein entitled "Description of Debentures Tendered" and sign in the appropriate
box below. Holders who complete this Letter of Transmittal will be deemed to
have tendered all Debentures listed in the box.
Only registered Holders of Debentures may validly tender their Debentures
pursuant to the Offer. Only registered Holders of Debentures are entitled to
receive the Repurchase Price with respect to the Debentures.
All capitalized terms used herein and not defined herein shall have the
meanings ascribed to them in the Offer to Purchase.
2
<PAGE>
- --------------------------------------------------------------------------------
METHOD OF DELIVERY
[ ] CHECK HERE IF CERTIFICATES FOR TENDERED DEBENTURES ARE ENCLOSED
HEREWITH.
[ ] CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE DEPOSITARY WITH A
BOOK-ENTRY TRANSFER FACILITY SPECIFIED BELOW AND COMPLETE THE
FOLLOWING:
Name of Tendering Institution: ---------------------------
Name of Book-Entry Transfer Facility:
[ ] The Depository Trust Company
[ ] Philadelphia Depository Trust Company
Account Number: ---------- VOI Number: ------------------
[ ] CHECK HERE IF TENDERED DEBENTURES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Owner(s): --------------------------------------
Window Ticket Number (if any): ---------------------------------------
Date of Execution of Notice of Guaranteed Delivery: ------------------
Name of Eligible Institution which Guaranteed Delivery: --------------
If delivered by a Book-Entry Transfer Facility, check box of
Book-Entry Transfer Facility:
[ ] The Depository Trust Company
[ ] Philadelphia Depository Trust Company
Account Number: ---------- VOI Number: ----------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
DESCRIPTION OF DEBENTURES TENDERED*
<S> <C>
NAME(S) AND ADDRESS(ES) OF HOLDER(S)
(PLEASE FILL IN, IF BLANK, DEBENTURES TENDERED
EXACTLY AS NAME(S) APPEAR(S) ON DEBENTURES) (ATTACH ADDITIONAL SCHEDULE, IF NECESSARY)
- ----------------------------------------------------------------------------------------------------------
(1) (2) (3)
SECURITY NUMBER(S)** PRINCIPAL AMOUNT OF DEBENTURES
TENDERED***
- ----------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* Completion of this Letter of Transmittal will constitute the tender of all
Debentures delivered.
** Need not be completed by Holders tendering by book-entry transfer.
*** Unless otherwise specified, the entire aggregate principal amount
represented by the Debentures described above will be deemed to be
tendered.
3
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
By execution hereof, the undersigned hereby acknowledges receipt of the
Change of Control Notice and Offer to Purchase dated November 5, 1997 (as the
same may be amended or supplemented from time to time, the "Offer to Purchase")
of RoTech Medical Corporation (the "Company"), and this Letter of Transmittal
and instructions hereto (the "Letter of Transmittal"), relating to the Company's
offer to purchase (the "Offer") all of its outstanding 5 1/4% Convertible
Subordinated Debentures due 2003 (the "Debentures") upon the terms and subject
to the conditions set forth in the Offer to Purchase.
Upon the terms and subject to the conditions of the Offer as set forth in
the Offer to Purchase and this Letter of Transmittal, the undersigned hereby
tenders to the Company the principal amount of Debentures indicated above.
Subject to, and effective upon, the acceptance for payment of the principal
amount of Debentures tendered hereby, the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to, and any and all claims in respect of or arising or having arisen as a
result of the undersigned's status as a Holder of, all Debentures tendered
hereby. The undersigned hereby irrevocably constitutes and appoints the
Depositary as the true and lawful agent and attorney-in-fact of the undersigned
(with full knowledge that the Depositary also acts as the agent of the Company)
with respect to such Debentures, with full power of substitution (such power of
attorney being deemed to be an irrevocable power coupled with an interest) to
(a) deliver such Debentures, or transfer ownership of such Debentures on the
account books maintained by DTC, together with all accompanying evidences of
transfer and authenticity, to or upon the order of the Company, (b) present such
Debentures for transfer on the register, and (c) receive all benefits and
otherwise all rights of beneficial ownership of such Debentures, all in
accordance with the terms of the Offer as described in the Offer to Purchase.
The undersigned understands that tenders of Debentures may be withdrawn by
written notice of withdrawal received by the Depositary at any time on or prior
to 5:00 p.m., New York City time, on the Expiration Date. In the event of a
termination of the Offer, the Debentures tendered pursuant to the Offer will be
returned to the tendering Holders promptly (or, in the case of Debentures
tendered by book-entry transfer, such Debentures will be credited to the account
maintained at DTC from which such Debentures were delivered). If the Company
makes a material change in the terms of the Offer or the information concerning
the Offer, the Company will disseminate additional Offer materials and extend
such Offer, to the extent required by law.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Debentures
tendered hereby, and that when such Debentures are accepted for payment by the
Company, the Company will acquire good, marketable and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances,
and that none of such Debentures will be subject to any adverse claim or right.
The undersigned, upon request, will execute and deliver all additional documents
deemed by the Depositary or the Company to be necessary or desirable to complete
the sale, assignment and transfer of the Debentures tendered hereby.
The undersigned understands that tenders of Debentures pursuant to any of
the procedures described in the Offer to Purchase under the caption "The Offer
- -- Procedures for Tendering Debentures" and in the instructions hereto will
constitute the undersigned's acceptance of the terms and conditions of the
Offer. The Company's acceptance of such Debentures for payment will constitute a
binding agreement between the undersigned and the Company upon the terms and
subject to the conditions of the Offer. For purposes of the Offer, the
undersigned understands that validly tendered Debentures (or defectively
tendered Debentures with respect to which the Company has, or has caused to be,
waived such defect) will be deemed to have been accepted by the Company if, as
and when the Company gives oral or written notice thereof to the Depositary.
All authority conferred or agreed to be conferred by this Letter of
Transmittal shall survive the death or incapacity of the undersigned and every
obligation of the undersigned under this Letter of Transmittal shall be binding
upon the undersigned's heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives.
The undersigned understands that the delivery and surrender of any
Debentures is not effective, and the risk of loss of the Debentures does not
pass to the Depositary, until receipt by the Depositary of this Letter of
Transmittal (or a manually signed facsimile hereof), properly completed and duly
executed, together with all accompanying evidences of authority and any other
required documents in form satisfactory to the Company. All questions as to the
form of all documents and the validity (including the time of receipt) and
acceptance of tenders and withdrawals of Debentures will be determined by the
Company, in its sole discretion, which determination shall be final and binding.
4
<PAGE>
Unless otherwise indicated herein in the box entitled "Special Payment
Instructions," please issue the check for the Repurchase Price with respect to
Debentures accepted for payment, and return any certificates for Debentures not
tendered or not accepted for payment, in the name(s) of the registered holder(s)
appearing above under "Description of Debentures Tendered." Similarly, unless
otherwise indicated herein in the box entitled "Special Delivery Instructions,"
please mail the check for the Repurchase Price with respect to Debentures
accepted for payment, together with any certificates for Debentures not tendered
or not accepted for payment (and any accompanying documents, as appropriate) to
the address(es) of the registered holder(s) appearing above under "Description
of Debentures Tendered." If both the "Special Payment Instructions" box and the
"Special Delivery Instructions" box are completed, please issue the check for
the Repurchase Price with respect to any Debentures accepted for payment, and
return any certificates for Debentures not tendered or not accepted for payment,
in the name(s) of, and mail the check and any such certificates to, the
person(s) at the address(es) so indicated. The undersigned recognizes that the
Company has no obligation pursuant to the "Special Payment Instructions" box or
"Special Delivery Instructions" box provisions of this Letter of Transmittal to
transfer any Debenture from the name of the registered holder(s) thereof if the
Company does not accept for payment any of the principal amount of such
Debenture.
5
<PAGE>
- --------------------------------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed only if certificates for debentures in a principal amount not
tendered or not accepted for payment and/or the check for the Repurchase Price
are to be issued in the name of someone other than the undersigned, or if
Debentures are to be returned by credit to an account maintained by DTC.
Issue Check and/or Debentures to:
Name: ------------------------------------------------------------------------
(Please print)
Address: ----------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Zip Code
- -------------------------------------------------------------------------------
Taxpayer Identification Number
(You must also complete Substitute Form W-9 below)
Requires Signature Guarantee
Credit unaccepted Debentures tendered by book-entry transfer to:
[ ] The Depository Trust Company
[ ] Philadelphia Depository Trust Company
account set forth below:
-----------------------------------------------------------------------------
(account number)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 1, 5, 6 AND 7)
To be completed ONLY if certificates for Debentures in a principal amount not
tendered or not accepted for payment and/or the check for the Repurchase Price
are to be sent to someone other than the undersigned at an address other than
that shown above.
Deliver Check and/or Debentures to:
Name: ------------------------------------------------------------------------
(Please print)
Address: ----------------------------------------------------------------------
-----------------------------------------------------------------------------
-----------------------------------------------------------------------------
Zip Code
-----------------------------------------------------------------------------
Taxpayer Identification Number
(You must also complete Substitute Form W-9 below)
Requires Signature Guarantee
- --------------------------------------------------------------------------------
6
<PAGE>
- --------------------------------------------------------------------------------
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING
HOLDERS OF DEBENTURES REGARDLESS OF WHETHER
DEBENTURES ARE BEING PHYSICALLY DELIVERED HEREWITH)
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
(Signature(s) of Holder(s) or Authorized Signatory)
Dated:______________________________, 1997
Must be signed by the registered holder(s) of Debentures exactly as their
name(s) appear(s) on certificate(s) for the Debentures or by person(s)
authorized to become registered holder(s) by endorsements and documents
transmitted with this Letter of Transmittal. If signature is by a trustee,
executor, administrator, guardian, attorney-in-fact, officer of a corporation,
agent or other person acting in a fiduciary or representative capacity, please
provide the following information and see Instruction 5 herein.
Name(s): -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Please Print)
Capacity (full title): ---------------------------------------------------------
Address: -----------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Including Zip Code)
Area Code and Telephone No.: ---------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SIGNATURE GUARANTEE (SEE INSTRUCTIONS 1 AND 5 BELOW)
- --------------------------------------------------------------------------------
(Name of Medallion Signature Guarantor Guaranteeing Signature(s) )
- --------------------------------------------------------------------------------
(Address (including zip code) and Telephone No. (including area code) of Firm)
- --------------------------------------------------------------------------------
(Authorized Signature)
- --------------------------------------------------------------------------------
(Printed Name)
- --------------------------------------------------------------------------------
(Title)
Dated:______________________________, 1997
- --------------------------------------------------------------------------------
7
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER
1. GUARANTEE OF SIGNATURES. All signatures on this Letter of Transmittal or
a notice of withdrawal must be guaranteed by a Medallion Signature Guarantor (as
defined in the Offer to Purchase) unless (i) this Letter of Transmittal is
signed by the registered holder(s) (which term, for purposes of this Letter of
Transmittal, shall include DTC) of the Debentures tendered herewith and neither
the "Special Payment Instructions" box nor the "Special Delivery Instructions"
box of this Letter of Transmittal has been completed or (ii) such Debentures are
tendered for the account of an Eligible Institution (as defined in the Offer to
Purchase). See Instruction 5 herein.
2. DELIVERY OF LETTER OF TRANSMITTAL AND DEBENTURES; GUARANTEED DELIVERY
PROCEDURES. This Letter of Transmittal is to be completed by Holders if (i)
certificates representing Debentures are to be physically delivered to the
Depositary herewith by such Holders; (ii) tender of Debentures is to be made by
book-entry transfer to the Depositary's account at DTC pursuant to the
procedures set forth under the caption "The Offer -- Procedures for Tendering
Debentures -- Book-Entry Delivery Procedures" in the Offer to Purchase; or (iii)
tender of Debentures is to be made according to the guaranteed delivery
procedures set forth under the caption "The Offer -- Procedures for Tendering
Debentures -- Guaranteed Delivery" in the Offer to Purchase; and, in each case,
instructions are not being transmitted through ATOP. All physically delivered
Debentures, or a confirmation of a book-entry transfer into the Depositary's
account at DTC of all Debentures delivered electronically, as well as a properly
completed and duly executed Letter of Transmittal (or manually signed facsimile
thereof) and any other documents required by this Letter of Transmittal, must be
received by the Depositary at its address set forth herein prior to 5:00 p.m.,
New York City time, on the Expiration Date, or the tendering Holder must comply
with the guaranteed delivery procedures set forth below. Delivery of documents
to DTC does not constitute delivery to the Depositary.
If a Holder desires to tender Debentures pursuant to the Offer and time
will not permit this Letter of Transmittal, certificates representing such
Debentures and all other required documents to reach the Depositary, or the
procedures for book-entry transfer cannot be completed, on or prior to the
Expiration Date, then such Holder must tender such Debentures pursuant to the
guaranteed delivery procedures set forth under the caption "The Offer --
Procedures for Tendering Debentures -- Guaranteed Delivery" in the Offer to
Purchase. Pursuant to such procedures, (i) such tender must be made by or
through an Eligible Institution, (ii) a properly completed and duly executed
Notice of Guaranteed Delivery, substantially in the form provided by the
Company, or an Agent's Message with respect to guaranteed delivery that is
accepted by the Company, must be received by the Depositary, either by hand
delivery, mail, telegram or facsimile transmission prior to 5:00 p.m., New York
City time, on the Expiration Date, and (iii) the certificates for all tendered
Debentures, in proper form for transfer (or confirmation of a book-entry
transfer of all Debentures delivered electronically into the Depositary's
account at DTC pursuant to the procedures for such transfer set forth in the
Offer to Purchase), together with a properly completed and duly executed Letter
of Transmittal (or manually signed facsimile thereof) and any required signature
guarantees and any other documents required by this Letter of Transmittal or a
properly transmitted Agent's Message, must be received by the Depositary within
three business days after the date of the execution of such Notice of Guaranteed
Delivery.
THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, THE DEBENTURES AND
ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH DTC AND ANY ACCEPTANCE
OR AGENT'S MESSAGE DELIVERED THROUGH ATOP, IS AT THE OPTION AND RISK OF THE
TENDERING HOLDER. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. In all cases, sufficient time
should be allowed for such documents to reach the Depositary. Except as
otherwise provided in this Instruction 2, delivery will be deemed made only when
actually received by the Depositary.
No alternative, conditional or contingent tenders will be accepted. All
tendering Holders, by execution of this Letter of Transmittal (or a facsimile
thereof), waive any right to receive any notice of the acceptance of their
Debentures for payment.
If Holders wish to tender less than the entire principal amount evidenced
by any Debenture submitted, such Holders must fill in the principal amount that
is to be tendered in the column entitled "Principal Amount of Debentures
Tendered," but only in integral multiples of $1,000. In the case of a partial
tender of Debentures, as soon as practicable after the Expiration Date, new
certificates for the remainder of the Debentures that were evidenced by such
Holder's old certificates will be sent to such Holder, unless otherwise provided
in the appropriate box on this Letter of Transmittal. The entire amount that is
represented by Debentures delivered to the Depositary will be deemed to have
been tendered, unless otherwise indicated. (This paragraph does not apply to
tender by book-entry transfer.)
All questions as to the validity, form, eligibility (including time of
receipt), acceptance, withdrawal and revocation of tendered Debentures will be
resolved by the Company, whose determination will be final and binding. The
Company reserves the absolute right to reject any or all tenders and withdrawals
of Debentures that are not in proper form or the acceptance of which would, in
the opinion of the Company or counsel for the Company, be unlawful. The Company
also reserves the right to waive any irregularities or conditions of a tender as
to particular
8
<PAGE>
Debentures. The Company's interpretation of the terms and conditions of the
Offer (including the instructions in this Letter of Transmittal) will be final
and binding. Unless waived, any irregularities in connection with tenders and
withdrawals of Debentures must be cured within such time as the Company shall
determine. Tenders and withdrawals of Debentures will not be deemed to have been
made until such irregularities have been cured or waived. Any Debentures
received by the Depositary that are not properly tendered or delivered and to
which the irregularities have not been cured or waived will be returned by the
Depositary to the tendering Holder unless otherwise provided in this Letter of
Transmittal as soon as practicable following the Expiration Date.
None of the Company, IHS, the Depositary, the Information Agent, the
Trustee or any other person shall be obligated to give notification of defects
or irregularities in any tender or withdrawal or shall incur any liability for
failure to give any such notification.
3. INADEQUATE SPACE. If the space provided herein under "Description of
Debentures Tendered" is inadequate, the certificate numbers of the Debentures
and the principal amount of Debentures tendered should be listed on a separate
schedule and attached hereto.
4. WITHDRAWAL OF TENDERS. Tenders of Debentures may be withdrawn at any
time prior to 5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal of a tender of Debentures to be effective, a written
telegraphic or facsimile transmission notice of withdrawal must be received by
the Depositary prior to 5:00 p.m., New York City time, on the Expiration Date at
its address set forth on the back cover of the Offer to Purchase. Any such
notice of withdrawal must (i) specify the name of the person who tendered the
Debentures to be withdrawn, (ii) contain the description of the Debentures to be
withdrawn and identify the certificate number or numbers shown on the particular
certificates evidencing such Debentures (unless such Debentures were tendered by
book-entry transfer) and the aggregate principal amount represented by such
Debentures and (iii) be signed by the Holder of such Debentures in the same
manner as the original signature on the Letter of Transmittal by which such
Debentures were tendered (including any required signature guarantees), or be
accompanied by (x) documents of transfer sufficient to have the Trustee register
the transfer of the Debentures into the name of the person withdrawing such
Debentures and (y) a properly completed irrevocable proxy that authorizes such
person to effect such revocation on behalf of such Holder. If the Debentures to
be withdrawn have been delivered or otherwise identified to the Depositary, a
signed notice of withdrawal is effective immediately upon written or facsimile
notice of withdrawal even if physical release is not yet effected. Any
Debentures properly withdrawn will be deemed to be not validly tendered for
purposes of the Offer.
Withdrawal of Debentures can only be accomplished in accordance with the
foregoing procedures.
All questions as to the validity (including time of receipt) of notices of
withdrawal will be determined by the Company, in the Company's sole discretion
(whose determination shall be final and binding). None of the Company, IHS, the
Depositary, the Information Agent, the Trustee or any other person will be under
any duty to give notification of any defects or irregularities in any notice of
withdrawal, or incur any liability for failure to give any such notification.
5. SIGNATURES ON LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS. If
this Letter of Transmittal is signed by the registered Holder(s) of the
Debentures tendered hereby, the signature(s) must correspond to the name(s) as
written on the face of the Debentures without alteration, enlargement or any
other change whatsoever. If this Letter of Transmittal is signed by a
participant in DTC whose name is shown as the owner of the Debentures tendered
hereby, the signature must correspond with the name shown on the security
position listing as the owner of the Debentures.
If any Debentures tendered hereby are owned of record by two or more
persons, all such persons must sign this Letter of Transmittal.
If any Debentures tendered hereby are registered in the names of different
Holders, it will be necessary to complete, sign and submit as many separate
Letters of Transmittal, and any necessary accompanying documents, as there are
different registrations of such Debentures.
If this Letter of Transmittal is signed by the registered Holder of
Debentures tendered hereby, no endorsements of such Debentures or separate bond
powers are required, unless payment is to be made to, or Debentures not tendered
or not accepted for payment are to be issued in the name of, a person other than
the registered Holder(s), in which case the Debentures tendered hereby must be
endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name(s) of the registered Holder(s) appear(s) on such Debentures.
Signatures on such Debentures and bond powers must be guaranteed by a Medallion
Signature Guarantor. See Instruction 1 herein.
If this Letter of Transmittal or any Debentures or bond powers are signed
by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a
corporation or other person acting in a fiduciary or representative capacity,
such person should so indicate when signing, and proper evidence satisfactory to
the Company of such person's authority so to act must be submitted with this
Letter of Transmittal.
9
<PAGE>
6. TRANSFER TAXES. Except as set forth in this Instruction 6, the Company
will pay all transfer taxes, if any, applicable to the purchase of Debentures
pursuant to the Offer. If, however, Debentures for principal amounts not
accepted for tender are to be delivered to, or are to be registered or issued in
the name of, any person other than the registered Holder of the Debentures, or
if tendered Debentures are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the purchase of Debentures pursuant to the Offer, then the
amount of any such transfer tax (whether imposed on the registered Holder or any
other person) will be payable by the tendering Holder. If satisfactory evidence
of payment of such tax or exemption therefrom is not submitted, then the amount
of such transfer tax will be deducted from the Repurchase Price otherwise
payable to such tendering Holder.
7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If a check for the payment of
the Repurchase Price with respect to any Debentures tendered hereby is to be
issued, or if Debentures not tendered or not accepted for payment are to be
issued, in the name of a person other than the person(s) signing this Letter of
Transmittal or if such check or any such Debenture is to be sent to someone
other than the person(s) signing this Letter of Transmittal or to the person(s)
signing this Letter of Transmittal but at an address other than that shown in
the box entitled "Description of Debentures Tendered," the appropriate boxes in
this Letter of Transmittal must be completed. If no such instruction is given,
the Repurchase Price and/or Debentures not accepted for payment or not tendered,
as the case may be, will be sent to the person signing this Letter of
Transmittal. All Debentures tendered by book-entry transfer and not accepted for
payment will be returned by crediting the account at DTC designated above as the
account for which such Debentures were delivered.
8. TAXPAYER IDENTIFICATION NUMBER. Each tendering Holder is required to
provide the Depositary with the Holder's correct taxpayer identification number
("TIN"), generally, the Holder's Social Security or Federal Employer
Identification number, on Substitute Form W-9, which is provided under
"Important Tax Information" below, and to certify whether such person is subject
to backup withholding of federal income tax.
9. CONFLICTS. In the event of any conflict between the terms of the Offer
to Purchase and the terms of this Letter of Transmittal, the terms of the Offer
to Purchase will control.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right, subject
to applicable law, to amend in any respect or waive any of the specified
conditions in the Offer in the case of any particular Debenture tendered.
11. MUTILATED, LOST, STOLEN OR DESTROYED DEBENTURES. If a Holder desires to
tender Debentures pursuant to the Offer, but any such Debenture has been
mutilated, lost, stolen or destroyed, such Holder should write to or telephone
the Trustee concerning the procedures for obtaining replacement certificates for
such Debenture, arranging for indemnification or any other matter that requires
handling by the Trustee.
12. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions relating to the
procedure for tendering, as well as requests for additional copies of the Offer
to Purchase and the related Letter of Transmittal, may be directed to the
Information Agent, MacKenzie Partners, Inc., 156 Fifth Avenue, New York, New
York 10010, (800) 322-2885, or collect (212) 929-5500. A Holder may also contact
such Holder's broker, dealer, commercial bank or trust company or nominee for
assistance concerning the Offer.
IMPORTANT TAX INFORMATION
Under federal income tax law, an owner of Debentures whose tendered
Debentures are accepted for payment is required to provide the Depositary (as
payor) with such owner's current TIN on Substitute Form W-9 below. If such owner
is an individual, the TIN is his or her social security number. If the
Depositary is not provided with the correct TIN, the owner or other payee may be
subject to a $50 penalty imposed by the Internal Revenue Service. In addition,
any consideration paid to such owner or other payee with respect to Debentures
purchased pursuant to the Offer may be subject to 31% backup withholding tax.
Certain owners of Debentures (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that owner must submit to the Depositary a properly completed
Internal Revenue Service Form W-8 (a "Form W-8"), signed under penalties of
perjury, attesting to that individual's exempt status. A Form W-8 can be
obtained from the Information Agent. See the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional instructions.
If backup withholding applies, the Depositary is required to withhold 31%
of any consideration paid to the owner or other payee. Backup withholding is not
an additional tax. Rather, the federal income tax liability of persons subject
to backup withholding will be reduced by the amount of tax withheld. If
withholding results in an overpayment of taxes, a refund may be obtained from
the Internal Revenue Service provided the required information is furnished.
10
<PAGE>
PURPOSE OF SUBSTITUTE FORM W-9
To prevent backup withholding on any consideration paid to an owner or
other payee with respect to Debentures purchased pursuant to the Offer, the
owner is required to notify the Depositary of the owner's current TIN (or the
TIN of any other payee) by completing the form below, certifying that the TIN
provided on Substitute Form W-9 is correct (or that such owner is awaiting a
TIN), and that (i) the owner has not been notified by the Internal Revenue
Service that the owner is subject to backup withholding as a result of failure
to report all interest or dividends or (ii) the Internal Revenue Service has
notified the owner that the owner is no longer subject to backup withholding.
WHAT NUMBER TO GIVE THE DEPOSITARY
The Holder is required to give the Depositary the TIN (e.g., social
security number or employer identification number) of the owner of the
Debentures. If the Debentures are registered in more than one name or are not
registered in the name of the actual owner, consult the enclosed "Guidelines for
Certification of Taxpayer Identification Number on Substitute Form W-9" for
additional guidance on which number to report.
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES
NOT CONSIDER THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY HOLDER'S SITUATION OR
STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE CODE, REGULATIONS,
PROPOSED REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH
ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. HOLDERS OF DEBENTURES
(INCLUDING HOLDERS OF DEBENTURES WHO DO NOT TENDER THEIR DEBENTURES) SHOULD
CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX CONSEQUENCES TO THEM,
INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN AND OTHER LAWS, OF
THE SALE OF THE DEBENTURES. FOR ADDITIONAL INFORMATION, SEE "CERTAIN FEDERAL
INCOME TAX CONSIDERATIONS" IN THE OFFER TO PURCHASE.
11
<PAGE>
<TABLE>
<CAPTION>
PAYER'S NAME: PNC BANK, KENTUCKY, INC.
- --------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE Part 1 -- PLEASE PROVIDE YOUR TIN IN Social Security Number or
THE BOX AT RIGHT AND CERTIFY BY Employer Identification Number
SIGNING AND DATING BELOW.
------------------------------
FORM W-9
DEPARTMENT OF THE TREASURY Part 2 -- Certification-Under penalties of perjury, I certify that:
INTERNAL REVENUE SERVICE (1) The number shown on this form is my correct taxpayer identification number (or
I am waiting for a number to be issued to me) and
PAYER'S REQUEST FOR (2) I am not subject to backup withholding because: (a) I am exempt from backup withholding,
TAXPAYER IDENTIFICATION or (b) I have not been notified by the Internal Revenue Service IRS that I am subject to
NUMBER "TIN" backup withholding as a result of a failure to report all interest or dividends, or (c) the
IRS has notified me that I am no longer subject to (IRS) backup withholding.
CERTIFICATION INSTRUCTIONS -- You must cross out Item (2) above if you have been notified
by the IRS that you are currently subject to backup withholding because of under reporting
interest or dividends on your tax return.
SIGNATURE: Part 3
-------------------------
------------------------------------
Awaiting TIN [ ]
DATE:
------------------------------
</TABLE>
NOTE: FAILURE TO COMPLETE THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31
PERCENT OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW
THE ENCLOSED "GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION
NUMBER ON SUBSTITUTE FORM W-9" FOR ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED
THE BOX IN PART 3 OF SUBSTITUTE FORM W-9
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me, and either (1) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office or (2) I intend to mail
or deliver an application in the near future. I understand that if I do not
provide a taxpayer identification number by the time of payment, 31% of all
reportable cash payments made to me thereafter will be withheld until I provide
a taxpayer identification number.
Signature
----------------------------------
Date
---------------------------------------
12
<PAGE>
THE INFORMATION AGENT FOR THE OFFER IS:
MACKENZIE PARTNERS, INC.
156 Fifth Avenue
New York, New York 10010
(212) 929-5500
or
(800) 322-2885
NOTICE OF GUARANTEED DELIVERY
FOR
TENDER OF 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
OF
ROTECH MEDICAL CORPORATION
PURSUANT TO THE CHANGE OF CONTROL NOTICE AND OFFER TO PURCHASE
DATED NOVEMBER 5, 1997
THIS NOTICE OF GUARANTEED DELIVERY OR A FORM SUBSTANTIALLY EQUIVALENT HERETO
MUST BE USED TO ACCEPT THE OFFER IF TIME WILL NOT PERMIT THE LETTER OF
TRANSMITTAL, CERTIFICATES REPRESENTING THE DEBENTURES OR ANY OTHER REQUIRED
DOCUMENTS TO REACH THE DEPOSITARY, OR THE PROCEDURES FOR BOOK-ENTRY TRANSFER
CANNOT BE COMPLETED, ON OR PRIOR TO THE EXPIRATION DATE (AS DEFINED BELOW). THIS
FORM MAY BE DELIVERED BY AN ELIGIBLE INSTITUTION (AS DEFINED IN THE OFFER TO
PURCHASE) BY HAND DELIVERY, TELEGRAM, FACSIMILE TRANSMISSION OR MAIL TO THE
DEPOSITARY AS SET FORTH BELOW. ALL CAPITALIZED TERMS USED HEREIN BUT NOT DEFINED
HEREIN SHALL HAVE THE MEANINGS ASCRIBED TO THEM IN THE CHANGE OF CONTROL NOTICE
AND OFFER TO PURCHASE DATED NOVEMBER 5, 1997 (AS THE SAME MAY BE AMENDED OR
SUPPLEMENTED FROM TIME TO TIME, THE "OFFER TO PURCHASE").
THE OFFER IS NOT BEING MADE TO (NOR WILL THE SURRENDER OF DEBENTURES FOR
PURCHASE BE ACCEPTED FROM OR ON BEHALF OF) HOLDERS IN ANY JURISDICTION IN WHICH
THE MAKING OR ACCEPTANCE OF THE OFFER WOULD NOT BE IN COMPLIANCE WITH THE LAWS
OF SUCH JURISDICTION.
THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON DECEMBER 4, 1997 (THE
"EXPIRATION DATE"). TENDERS OF DEBENTURES MAY BE WITHDRAWN AT ANY TIME ON OR
PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE.
THE DEPOSITARY FOR THE OFFER IS:
PNC BANK, KENTUCKY, INC.
<TABLE>
<S> <C> <C>
By Mail: By Overnight Courier: By Hand:
Corporate Trust Department, 7th Floor Corporate Trust Department, 7th Floor Corporate Trust Department, 7th Floor
500 W. Jefferson Street 500 W. Jefferson Street 500 W. Jefferson Street
Louisville, Kentucky 40202 Louisville, Kentucky 40202 Louisville, Kentucky 40202
By Facsimile:
(502) 581-2705
Facsimile Confirmation Only:
(502) 581-3214
For information, call the Information Agent:
MacKenzie Partners, Inc.
156 Fifth Avenue
New York, NY 10010
(800) 322-2885
(212) 929-5500
</TABLE>
<PAGE>
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS, OR
TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION, OTHER THAN AS SET FORTH
ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on the
Letter of Transmittal is required to be guaranteed by a Medallion Signature
Guarantor under the instructions thereto, such signature guarantee must appear
in the applicable space provided in the signature box on the Letter of
Transmittal.
2
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tenders to the Company, upon the terms and subject
to the conditions set forth in the Offer to Purchase and Letter of Transmittal,
receipt of which is hereby acknowledged, the principal amount of Debentures set
forth below, pursuant to the guaranteed delivery procedures set forth in the
Offer to Purchase under the heading "The Offer -- Procedures for Tendering
Debentures -- Guaranteed Delivery."
The undersigned understands that tenders of Debentures may be withdrawn by
written notice of withdrawal received by the Depositary at any time on or prior
to 5:00 p.m., New York City time, on the Expiration Date. In the event of
termination of the Offer, the Debentures tendered pursuant to the Offer will be
returned to the tendering Holders promptly (or, in the case of Debentures
tendered by book-entry transfer, such Debentures will be credited to the account
maintained at DTC from which such Debentures were delivered). If the Company
makes a material change in the terms of the Offer or the information concerning
the Offer, the Company will disseminate additional Offer materials and extend
such Offer, to the extent required by law.
The undersigned understands that payment by the Depositary for Debentures
tendered and accepted for payment pursuant to the Offer will be made only after
timely receipt by the Depositary of such Debentures (or Book-Entry Confirmation
of the transfer of such Debentures into the Depositary's account at DTC) and a
Letter of Transmittal (or facsimile thereof) with respect to such Debentures
properly completed and duly executed with any required signature guarantees and
any other documents required by the Letter of Transmittal or a properly
transmitted Agent's Message.
All authority herein conferred or agreed to be conferred by this Notice of
Guaranteed Delivery shall survive the death or incapacity of the undersigned and
every obligation of the undersigned under this Notice of Guaranteed Delivery
shall be binding upon the heirs, personal representatives, executors,
administrators, successors, assigns, trustees in bankruptcy and other legal
representatives of the undersigned.
Capitalized terms used herein, but not defined herein, shall have the
meanings ascribed to them in the Offer to Purchase.
3
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
- ------------------------------------------------------------------------------------------------
PLEASE SIGN AND COMPLETE
Signature(s) of Registered Holders or Authorized Address(es): ---------------------------
Signatory:
-----------------------------------------
- ------------------------------------ -----------------------------------------
- ------------------------------------ Area Code and Telephone No.:
Name(s) of Registered Holder(s):
------------------------------------
- ------------------------------------
- ------------------------------------ If Debentures will be delivered by a
book-entry transfer, check trust company:
- ------------------------------------ [ ] The Depository Trust Company
[ ] Philadelphia Depository Trust Company
- ------------------------------------
Principal Amount of Debentures Tendered:
- ------------------------------------ Depository Account No.:________________
Certificate No(s). of Debentures (if available)
- ------------------------------------
- ------------------------------------
- ------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------------------------------------------------
This Notice of Guaranteed Delivery must be signed by the registered holder(s) of
Debentures exactly as their name(s) appear(s) on the Debentures or by person(s)
authorized to become registered holder(s) by endorsements and documents
transmitted with this Notice of Guaranteed Delivery. If signature is by a
trustee, guardian, attorney-in-fact, officer of a corporation, executor,
administrator, agent or other representative, such person must provide the
following information:
Please print name(s) and address(es)
Name(s):
----------------------------------------------------------------
----------------------------------------------------------------
Capacity: ----------------------------------------------------------------
----------------------------------------------------------------
DO NOT SEND DEBENTURES WITH THIS FORM. DEBENTURES SHOULD BE SENT TO THE
DEPOSITARY, TOGETHER WITH A PROPERLY COMPLETED AND VALIDLY EXECUTED LETTER OF
TRANSMITTAL.
- --------------------------------------------------------------------------------
4
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member of the Securities Transfer Agents Medallion
Program, the Stock Exchange Medallion Program or the New York Stock Exchange
Medallion Signature Program, hereby guarantees that, within three business days
from the date of this Notice of Guaranteed Delivery, a properly completed and
validly executed Letter of Transmittal (or a facsimile thereof), together with
Debentures tendered hereby in proper form for transfer (or confirmation of the
book-entry transfer of such Debentures into the Depositary's account at DTC
pursuant to the procedures for book-entry transfer set forth in the Offer to
Purchase under the caption "The Offer -- Procedures for Tendering Debentures --
Book-Entry Delivery Procedures") and all other required documents will be
deposited by the undersigned with the Depositary at its address set forth above.
The Institution that completes this form must communicate the guarantee to
the Depositary and must deliver the Letter of Transmittal or Agent's Message and
Debentures to the Depositary within the time period shown herein. Failure to do
so could result in a financial loss to the undersigned.
Name of Firm: -------------------------- ------------------------------------
Authorized Signature
Address: ------------------------------ Name:
------------------------------
- --------------------------------------- Title:
------------------------------
Area Code and
Telephone No.: ------------------------ Date:
------------------------------
DO NOT SEND DEBENTURES WITH THIS FORM. ACTUAL SURRENDER OF DEBENTURES MUST BE
MADE PURSUANT TO, AND BE ACCOMPANIED BY, A PROPERLY COMPLETED AND VALIDLY
EXECUTED LETTER OF TRANSMITTAL AND ANY OTHER REQUIRED DOCUMENTS.
5
ROTECH MEDICAL CORPORATION
OFFER TO PURCHASE FOR CASH
ALL OUTSTANDING 5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
OF
ROTECH MEDICAL CORPORATION
PURSUANT TO THE CHANGE OF CONTROL NOTICE AND OFFER TO PURCHASE DATED NOVEMBER
5, 1997
- --------------------------------------------------------------------------------
SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE OFFER TO PURCHASE, THE
OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 4, 1997, UNLESS THE OFFER IS EXTENDED (SUCH TIME AND DATE OR THE LATEST
EXTENSION THEREOF, IF EXTENDED, THE "EXPIRATION DATE"). DEBENTURES TENDERED IN
THE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees:
Enclosed for your consideration is a Change of Control Notice and Offer to
Purchase (the "Offer to Purchase") and a form of Letter of Transmittal (the
"Letter of Transmittal") relating to the offer (the "Offer") by RoTech Medical
Corporation (the "Company") to purchase for cash all of its outstanding 5 1/4%
Convertible Subordinated Debentures due 2003 (the "Debentures"). Capitalized
terms used herein but not defined herein shall have the meanings ascribed to
such terms in the Offer to Purchase.
The total consideration payable pursuant to the Offer to a Holder who
validly tenders Debentures prior to 5:00 p.m., New York City time, on the
Expiration Date (and does not validly withdraw such Debentures) shall be an
amount equal to 100% of the principal amount of such Debentures, plus accrued
interest to, but not including, the Payment Date (the "Repurchase Price").
Pursuant to the terms of the Indenture, the Debentures may be redeemed in whole
or in part at the option of RoTech at any time on or after June 4, 1999 at a
price, expressed as a percentage of the principal amount, initially equal to
103.00% and declining to 100.75% on June 1, 2002.
We are asking you to contact your clients for whom you hold Debentures
registered in your name or in the name of your nominee. In addition, we ask you
to contact your clients who, to your knowledge, hold Debentures registered in
their own names. The Company will pay all transfer taxes, if any, applicable to
the tender of Debentures to it or to its order, except as otherwise provided in
the Offer to Purchase and the Letter of Transmittal.
Enclosed herewith are copies of the following documents:
1. A Change of Control Notice and Offer to Purchase dated November 5,
1997;
2. A Letter of Transmittal for your use and for the information of your
clients, together with guidelines of the Internal Revenue Service for
Certification of Taxpayer Identification Number on Substitute Form W-9 providing
information relating to backup federal income tax withholding;
3. A Notice of Guaranteed Delivery to be used to accept the Offer if (i)
the Debentures and all other required documents cannot be delivered to the
Depositary or (ii) the required procedures for book-entry transfer cannot be
completed on or prior to the Expiration Date; and
4. A form of a letter which may be sent to your clients for whose account
you hold the Debentures in your name or in the name of a nominee, with space
provided for obtaining such clients' instructions with regard to the Offer.
DTC participants will be able to tender through the DTC Automated Tender
Offer Program ("ATOP").
<PAGE>
PLEASE NOTE THAT THE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 4, 1997 UNLESS EXTENDED (THE "EXPIRATION DATE"). WE URGE YOU TO CONTACT
YOUR CLIENTS AS PROMPTLY AS POSSIBLE IN ORDER TO OBTAIN THEIR INSTRUCTIONS.
The Company will not pay any fees or commissions to any broker or dealer or
other person for soliciting tenders of the Debentures pursuant to the Offer. You
will be reimbursed for customary mailing and handling expenses incurred by you
in forwarding the enclosed materials to your clients as described in the Offer
to Purchase under the caption "The Offer -- Fees and Expenses."
Your prompt action is requested. The Offer will expire at 5:00 p.m., New
York City time, on December 4, 1997, unless extended. Debentures tendered
pursuant to the Offer may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the Expiration Date.
Additional copies of the enclosed materials may be obtained from the
Information Agent at its address and telephone numbers set forth on the back
cover of the enclosed Offer to Purchase.
Very truly yours,
ROTECH MEDICAL CORPORATION
NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR
ANY OTHER PERSON AS THE AGENT OF THE COMPANY, IHS, THE DEPOSITARY, THE
INFORMATION AGENT OR THE TRUSTEE OR AUTHORIZE YOU OR ANY OTHER PERSON TO GIVE
ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF ANY OF THEM WITH RESPECT
TO THE OFFER WHICH IS NOT CONTAINED IN THE OFFER TO PURCHASE OR THE LETTER OF
TRANSMITTAL.
2
ROTECH MEDICAL CORPORATION
OFFER TO PURCHASE FOR CASH
ALL OUTSTANDING
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
OF
ROTECH MEDICAL CORPORATION
($110 MILLION AGGREGATE PRINCIPAL AMOUNT OUTSTANDING)
- --------------------------------------------------------------------------------
SUBJECT TO THE TERMS AND CONDITIONS SET FORTH IN THE OFFER TO PURCHASE, THE
OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
DECEMBER 4, 1997, UNLESS THE OFFER IS EXTENDED (SUCH TIME AND DATE OR THE LATEST
EXTENSION THEREOF, IF EXTENDED, THE "EXPIRATION DATE"). DEBENTURES TENDERED IN
THE OFFER MAY BE WITHDRAWN AT ANY TIME PRIOR TO THE EXPIRATION DATE.
- --------------------------------------------------------------------------------
To Our Clients:
Enclosed for your consideration is the Change of Control Notice and Offer
to Purchase dated November 5, 1997 (as the same may be amended or supplemented
from time to time, the "Offer to Purchase") and related Letter of Transmittal
and instructions thereto (the "Letter of Transmittal") relating to the offer
(the "Offer") by RoTech Medical Corporation (the "Company") to purchase all of
its outstanding 5 1/4% Convertible Subordinated Debentures due 2003 (the
"Debentures").
The total consideration payable pursuant to the Offer to a Holder who
validly tenders Debentures prior to 5:00 p.m., New York City time, on the
Expiration Date (and does not validly withdraw such Debentures) shall be an
amount equal to 100% of the principal amount of such Debentures, plus accrued
interest to, but not including, the date of repurchase (the "Repurchase Price").
Pursuant to the terms of the Indenture, the Debentures may be redeemed in whole
or in part at the option of RoTech at any time on or after June 4, 1999, at a
price, expressed as a percentage of the principal amount, initially equal to
103.00% and declining to 100.75% on June 1, 2002.
Consummation of the Offer is subject to certain conditions described in the
Offer to Purchase. Capitalized terms used herein and not defined herein shall
have the meanings ascribed to them in the Offer to Purchase.
THIS MATERIAL RELATING TO THE OFFER IS BEING FORWARDED TO YOU AS THE
BENEFICIAL OWNER OF DEBENTURES CARRIED BY US FOR YOUR ACCOUNT OR BENEFIT BUT NOT
REGISTERED IN YOUR NAME. A TENDER OF ANY SUCH DEBENTURES CAN BE MADE ONLY BY US
AS THE REGISTERED HOLDER AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF
TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY
YOU TO TENDER DEBENTURES HELD BY US FOR YOUR ACCOUNT.
Accordingly, we request instructions as to whether you wish us to tender
any or all such Debentures held by us for your account, pursuant to the terms
and conditions set forth in the Offer to Purchase and the Letter of Transmittal.
We urge you to read the Offer to Purchase and the Letter of Transmittal
carefully before instructing us to tender your Debentures.
Your instructions to us should be forwarded as promptly as possible in
order to permit us to tender Debentures with respect thereto on your behalf in
accordance with the provisions of the Offer. The Offer will expire at 5:00 p.m.,
New York City time, on December 4, 1997, unless extended (the "Expiration
Date"). Debentures tendered pursuant to the Offer may be withdrawn at any time
on or prior to 5:00 p.m., New York City time, on the Expiration Date.
Your attention is directed to the following:
<PAGE>
1. The Offer is for all outstanding Debentures.
2. Consummation of the Offer is conditioned upon, among other things,
satisfaction of the General Conditions (as defined in the Offer to Purchase).
3. Tendering holders may withdraw their tendered Debentures at any time
prior to 5:00 p.m., New York City time, on the Expiration Date.
4. Any transfer taxes incident to the transfer of Debentures from the
tendering holder to the Company will be paid by the Company, except as provided
in the Offer to Purchase and the instructions to the Letter of Transmittal.
5. The Offer is not being made to (nor will the surrender of Debentures
for purchase be accepted from or on behalf of) holders in any jurisdiction in
which the making or acceptance of the Offer would not be in compliance with the
laws of such jurisdiction.
6. The acceptance for payment of Debentures validly tendered and not
validly withdrawn and the payment of the Repurchase Price will be made as
promptly as practicable after the Expiration Date. Subject to rules promulgated
pursuant to the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), the Company, however, expressly reserves the right to delay acceptance of
any of the Debentures or to terminate the Offer and not accept for payment any
Debentures not theretofore accepted if any of the conditions set forth in the
Offer to Purchase under the caption "The Offer -- Conditions of the Offer" shall
not have been satisfied or waived by the Company. The Company will pay the
Repurchase Price promptly following acceptance of the Debentures.
7. The Company expressly reserves the right, subject to applicable law
and the terms of the Offer, (i) to delay acceptance for purchase of any
Debentures or, regardless of whether such Debentures were theretofore accepted
for payment, to delay the purchase of any Debentures pursuant to the Offer and
to terminate the Offer and not accept for payment any Debentures not theretofore
accepted for purchase, upon the failure of any of the conditions to the Offer
specified herein to be satisfied, by giving oral or written notice of such delay
or termination to the Depositary and (ii) at any time, or from time to time, to
amend the Offer in any respect. The reservation by the Company of the right to
delay acceptance for payment of Debentures is subject to the provisions of Rule
13e-4(f)(5) under the Exchange Act, which requires that the Company pay the
consideration offered or return the Debentures deposited by or on behalf of
holders thereof promptly after the termination or withdrawal of the Offer.
8. Consummation of the Offer may have adverse consequences to
non-tendering holders, including that the reduced amount of outstanding
Debentures as a result of the Offer may adversely affect the trading market,
liquidity and market price of the Debentures.
If you wish to have us tender any or all of the Debentures held by us for
your account, please so instruct us by completing, executing and returning to us
the instruction form that follows.
2
<PAGE>
INSTRUCTIONS REGARDING THE OFFER TO PURCHASE
WITH RESPECT TO THE
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
OF
ROTECH MEDICAL CORPORATION
The undersigned acknowledge(s) receipt of your letter and the enclosed
documents referred to therein relating to the Offer of RoTech Medical
Corporation.
This will instruct you whether to tender the principal amount of Debentures
indicated below held by you for the account of the undersigned, pursuant to the
terms of and conditions set forth in the Offer to Purchase and the Letter of
Transmittal.
Box 1 [ ] Please tender the indicated Debentures held by you for my account.
Box 2 [ ] Please do not tender any Debentures held by you for my account.
Date:______________, 1997
--------------------------------
--------------------------------
Signature(s)
--------------------------------
---------------------------------
Please print name(s) here
Principal amount of Debentures to Be Tendered: ---------------------------------
--------------------------------
$______________________*
(must be in principal amounts equal to $1,000 ---------------------------------
or integral multiples thereof) Please type or print address
---------------------------------
Area Code and Telephone Number
---------------------------------
Taxpayer Identification or Social
Security Number
---------------------------------
My Account Number with You
- ------------
* UNLESS OTHERWISE INDICATED, SIGNATURE(S) HEREON BY BENEFICIAL OWNER(S)
SHALL CONSTITUTE AN INSTRUCTION TO THE NOMINEE TO TENDER ALL DEBENTURES OF
SUCH BENEFICIAL OWNER(S).
3
EXHIBIT (c)2
- --------------------------------------------------------------------------------
ROTECH MEDICAL CORPORATION
AND
PNC BANK, KENTUCKY, INC.,
AS TRUSTEE
-----------------
SUPPLEMENTAL INDENTURE
DATED AS OF OCTOBER 21, 1997
-----------------
$110,000,000
5 1/4% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
- --------------------------------------------------------------------------------
<PAGE>
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this "SUPPLEMENTAL INDENTURE"), dated as of
October 21, 1997 between ROTECH MEDICAL CORPORATION, a corporation duly
organized and existing under the laws of the State of Florida (herein called the
"COMPANY"), and PNC BANK, KENTUCKY, INC., a Kentucky banking corporation, as
Trustee (herein called the "TRUSTEE").
RECITALS OF THE COMPANY
The Company has issued $110,000,000 in principal amount of its 5 1/4%
Convertible Subordinated Debentures due 2003 (herein called the "SECURITIES") on
June 1, 1996 as contemplated by the Indenture (the "INDENTURE"), dated as of
June 1, 1996, between the Company and the Trustee.
On July 6, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement") with Integrated Health Services, Inc., a
Delaware corporation ("IHS"), and IHS Acquisition XXIV, Inc., a Florida
corporation that is wholly owned by IHS ("Merger Sub"), pursuant to which Merger
Sub will be merged with and into the Company (the "Merger") and the Company will
be the surviving corporation and a wholly owned subsidiary of IHS.
As a result of the Merger each issued and outstanding share of Common
Stock, par value $.0002 per share, of RoTech (the "RoTech Common Stock" and the
issued and outstanding shares thereof, the "RoTech Shares"), without any further
action by the holder thereof, shall be converted into the right to receive, and
become exchangeable for a merger consideration (the "Merger Consideration")
consisting of .5806 (the "Exchange Ratio") validly issued, fully paid and
nonassessable shares of Common Stock, $.001 par value, of IHS (the "IHS Common
Stock," shares thereof, "IHS Shares" and the IHS Shares to be issued pursuant
hereto, the "IHS Merger Shares"); provided however, that in lieu of issuing
certificates or scrip representing fractional shares of IHS Common Stock upon
the surrender for exchange of stock certificates representing shares of IHS
Common Stock, each holder of RoTech Shares exchanged pursuant to the Merger who
would otherwise have been entitled to receive a fraction of a share of IHS
Common Stock (after taking into account all stock certificates representing
RoTech Shares delivered by such holder) shall receive, in lieu thereof, cash
(without interest) in an amount equal to such fractional part of a share of IHS
Common Stock multiplied by the average closing New York Stock Exchange price of
such stock for the thirty (30) trading day period ending on the date which is
two (2) trading days prior to the Effective Time.
Pursuant to Section 1311 of the Indenture, as a result of the Merger,
the Holder (such term and each other capitalized term used herein and not
otherwise defined herein shall have the meaning ascribed to such term in the
Indenture) of each Security then Outstanding shall have the right after the
effective time of the Merger (the "Effective Time"), during the period such
Security shall be convertible as specified in Section 1301 of the Indenture (the
"Conversion Period"), to convert such Security only into the kind and amount of
securities, cash and other property, if any, receivable upon
-2-
<PAGE>
the occurrence of the Merger by a holder of the number of shares of RoTech
Common Stock into which such Security might have been converted immediately
prior to the Merger, assuming that such holder of RoTech Common Stock (i) is not
a Constituent Person, or an Affiliate of a Constituent Person, and (ii) failed
to exercise his rights of election, if any, as to the kind or amount of
securities, cash and other property receivable upon the Merger (an "Unaffected
Person").
Pursuant to Section 1311 of the Indenture, as a result of the Merger,
the Company as the surviving entity of the Merger is required to execute and
deliver this Supplemental Indenture to the Trustee.
NOW, THEREFORE, THIS SUPPLEMENTAL INDENTURE WITNESSETH:
For and in consideration of the premises, it is mutually agreed, for
the equal and proportionate benefit of all Holders of the Securities, as
follows:
ARTICLE ONE
EFFECT OF MERGER
SECTION 101. CONVERSION RIGHTS. Commencing at the Effective Time, during the
Conversion Period, if and to the extent that any Holder of any Security then
Outstanding (other than Unaffected Persons) would otherwise have been entitled
to convert such Security into RoTech Shares, such Security shall be convertible
into IHS Shares, and accordingly, Article Thirteen of the Indenture
automatically shall be deemed amended, effective as of the Effective Time, so
that all references therein to "Common Stock" shall thereafter be deemed to
refer to shares of IHS Common Stock, references therein to the "Company" in
Sections 1303 through and including 1312 shall be deemed to refer to IHS (unless
the context shall require otherwise), and the conversion price referred to
therein shall be $45.21 until further adjusted in accordance with Article
Thirteen of the Indenture as amended by this Supplemental Indenture.
SECTION 102 COMPLIANCE WITH SECTION 801 AND 903. Concurrently herewith, the
Company is delivering to the Trustee, an Officers' Certificate and Opinion of
Counsel from the Company's General Counsel, each stating that the Merger and
this Supplemental Indenture comply with Articles Eight and Nine of the Indenture
and all conditions precedent set forth in Section 801 and 903 of the Indenture
have been complied with.
ARTICLE TWO
MISCELLANEOUS
SECTION 201 NO OTHER AMENDMENTS. Except for the amendments expressly set forth
herein, the Indenture shall not be deemed to have been modified or amended and
shall remain in full force and effect.
-3-
<PAGE>
SECTION 202 COUNTERPARTS. This instrument may be executed in any number of
counterparts, each of which when so executed shall be deemed to be an original,
but all such counterparts shall together constitute but one and the same
instrument.
IN WITNESS WHEREOF, the parties hereto have caused this Indenture to be
duly executed, and their respective corporate seals to be hereunto affixed and
attested, all as of the day and year first above written.
ROTECH MEDICAL
CORPORATION
By: /s/ Stephen P. Griggs
----------------------------------
Name: Stephen P. Griggs
Title: President, Chief Operating Officer
Attest:
/s/ William A. Walker II
- -----------------------------
William A. Walker II
Corporate Secretary
PNC BANK, KENTUCKY, INC.,
AS TRUSTEE
By: /s/
----------------------------------
Name:
----------------------------------
Title: Assistant Vice President
Attest:
/s/
- -----------------------------
Name:________________________
Title:_______________________
-4-
<PAGE>
STATE OF FLORIDA )
) ss.
COUNTY OF ORANGE )
On the 20th day of October, 1997, before me personally came Stephen P.
Griggs, to me known who, being by me duly sworn, did depose and say that he is
President, Chief Operating Officer of RoTech Medical Corporation, one of the
corporations described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
/s/ M. Deborah Fricke
-----------------------------------------
M. Deborah Fricke
)
) ss.
)
On the day of , 1997, before me personally came Jack R.
Cornwall, to me known who, being by me duly sworn, did depose and say that he is
Assistant Vice President of PNC BANK, KENTUCKY, INC., a Kentucky banking
corporation described in and which executed the foregoing instrument; that he
knows the seal of said corporation; that the seal affixed to said instrument is
such corporate seal; that it was so affixed by authority of the Board of
Directors of said corporation; and that he signed his name thereto by like
authority.
-----------------------------------------
-5-
