AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 25, 1996
Registration Number 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
INTEGRATED HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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<S> <C> <C>
Delaware 8051 23-2428312
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
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10065 Red Run Boulevard
Owings Mills, Maryland 21117
(410) 998-8400
(Address, including ZIP Code, and telephone number, including area code,
of registrant's principal executive offices)
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
(Name, address, including ZIP Code, and telephone number,
including area code, of agent for service)
Copies to:
Carl E. Kaplan, Esq. Leslie A. Glew, Esq.
Fulbright & Jaworski L.L.P. Vice President and
666 Fifth Avenue` Associate General Counsel
New York, New York 10103 Integrated Health Services, Inc.
(212) 318-3000 10065 Red Run Boulevard Owings
Mills, Maryland 21117
(410) 998-8400
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
Proposed maximum Amount of
Title of each class of aggregate registration
securities to be registered offering price fee
10 1/4 % Senior Subordinated Notes
due 2006, Series A ................... $150,000,000 $51,724.14
- --------------------------------------------------------------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933, as amended, or until this Registration Statement
shall become effective on such date as the Commission, acting pursuant to said
Section 8(a), may determine.
================================================================================
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
CROSS-REFERENCE SHEET
(PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K)
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FORM S-4 ITEM AND CAPTION LOCATION OR PROSPECTUS CAPTION
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<S> <C> <C>
1 Forepart of Registration Statement and Out-
side Front Cover Page of Prospectus Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus Inside Front Cover Page
3 Risk Factors, Ratio of Earnings to Fixed Charges
and Other Information Prospectus Summary; Risk Factors
4 Terms of the Transaction Prospectus Summary; The Exchange Offer; Certain
Federal Income Tax Consequences; Description of
New Notes
5 Pro Forma Financial Information Pro Forma Financial Information
6 Material Contacts with the Company Being Acquired Not Applicable
7 Additional Information Required for Reoffering by
Persons and Parties Deemed to be Underwriters Not Applicable
8 Interests of Named Experts and Counsel Legal Matters; Experts
9 Disclosure of Commission Position on
Indemnification for Securities Act Liabilities Not Applicable
10 Information with Respect to S-3 Registrants Incorporation of Certain Information by
Reference
11 Incorporation of Certain Information by Reference Incorporation of Certain Information by
Reference
12 Information with Respect to S-2 or S-3
Registrants Not Applicable
13 Incorporation of Certain Information by Reference Not Applicable
14 Information with Respect to Registrants Other
Than S-3 or S-2 Registrants Not Applicable
15 Information with Respect to S-3 Companies Not Applicable
16 Information with Respect to S-2 or S-3 Companies Not Applicable
17 Information with Respect to Companies Other Than
S-3 or S-2 Companies Not Applicable
18 Information if Proxies, Consents or
Authorizations are to be Solicited Not Applicable
19 Information if Proxies, Consents or
Authorizations are not to be Solicited or in
an Exchange Offer The Exchange Offer
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<PAGE>
SUBJECT TO COMPLETION, DATED SEPTEMBER 25, 1996
PROSPECTUS
INTEGRATED HEALTH SERVICES, INC.
OFFER TO EXCHANGE
ALL OUTSTANDING
10 1/4 % SENIOR SUBORDINATED NOTES DUE 2006
($150,000,000 PRINCIPAL AMOUNT OUTSTANDING)
FOR
10 1/4 % SENIOR SUBORDINATED NOTES DUE 2006, SERIES A
($150,000,000 PRINCIPAL AMOUNT)
----------------------------
The Exchange Offer will expire at 5:00 p.m., New York City time, on ______,
1996, unless extended.
----------------------------
Integrated Health Services, Inc., a Delaware corporation ("IHS" or the
"Company"), hereby offers (the "Exchange Offer"), upon the terms and subject to
the conditions set forth in this Prospectus (the "Prospectus") and the
accompanying Letter of Transmittal (the "Letter of Transmittal"), to exchange up
to an aggregate principal amount of $150,000,000 of its 10 1/4 % Senior
Subordinated Notes due 2006, Series A (the "New Notes"), which have been
registered under the Securities Act of 1933, as amended (the "Securities Act"),
for an equal principal amount of its outstanding 10 1/4 % Senior Subordinated
Notes due 2006 (the "Old Notes"), in integral multiples of $1,000. The New Notes
will be substantially identical (including principal amount, interest rate and
maturity) to the Old Notes for which they may be exchanged pursuant to this
offer, except that (i) the New Notes will have been registered under the
Securities Act and, therefore, will not bear legends restricting the transfer
thereof, and (ii) holders of New Notes will not be entitled to certain rights of
holders of the Old Notes under a Registration Rights Agreement dated as of May
23, 1996 (the "Registration Rights Agreement"), between the Company and Smith
Barney Inc., Donaldson, Lufkin & Jenrette Securities Corporation and Citicorp
Securities, Inc. (the "Initial Purchasers"). The Old Notes have been, and the
New Notes will be, issued under an Indenture dated as of May 15, 1996 (the
"Indenture") between the Company and Signet Trust Company, as Trustee. The New
Notes and the Old Notes are together referred to herein as the "10 1/4 Notes."
See "The Exchange Offer" and "Description of New Notes." There will be no
proceeds to the Company from this offering; however, pursuant to the
Registration Rights Agreement, the Company will bear certain offering expenses.
The New Notes will be unsecured obligations of the Company, will be
subordinated to all present and future Senior Indebtedness and will be
effectively subordinated to all indebtedness and liabilities of subsidiaries of
the Company. The New Notes will rank pari passu with the Old Notes and the
Company's 9 5/8 % Senior Subordinated Notes due 2002, Series A and the Company's
10 3/4 % Senior Subordinated Notes due 2004, and will be senior to the Company's
6% Convertible Subordinated Debentures due 2003 and the Company's 5 3/4 %
Convertible Senior Subordinated Debentures due 2001. The Indenture under which
the New Notes are to be issued will not restrict the incurrence of any other
indebtedness by the Company or its subsidiaries under certain circumstances. At
June 30, 1996, the aggregate amount of Senior Indebtedness outstanding and the
aggregate amount of indebtedness and other liabilities of the Company and its
subsidiaries (excluding intercompany indebtedness) to which the 10 1/4 % Notes
are effectively subordinated was approximately $435.0 million. At June 30, 1996,
$215.0 million of indebtedness ranks pari passu with the New Notes. See
"Description of the New Notes."
The Company will accept for exchange any and all validly tendered Old Notes
on or prior to 5:00 p.m., New York City time, on ________, 1996, unless extended
(the "Expiration Date"). Tenders of Old Notes may be withdrawn at any time prior
to 5:00 p.m., New York City time, on the Expiration Date; otherwise such tenders
are irrevocable. Signet Trust Company is acting as Exchange Agent in connection
with the Exchange Offer. The Exchange Offer is not conditioned upon any minimum
principal amount of Old Notes being tendered for exchange, but is otherwise
subject to certain customary conditions. Since the Registration Statement of
which this Prospectus is a part became effective prior to 60 days after the
Filing Date (as defined herein), if the Exchange Offer is consummated holders of
the Old Notes, whether or not tendered, will not be entitled to the contingent
increases in the interest rates provided for in the Old Notes.
See "Risk Factors", which begins on page 14 of this Prospectus, for a
discussion of certain factors to be considered by holders who tender Old Notes
in the Exchange Offer.
-------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
(cover page text continued on next page)
The date of this Prospectus is ______, 1996
<PAGE>
(cover page continued)
The Old Notes were sold by the Company on May 29, 1996 to the Initial
Purchasers in a transaction not registered under the Securities Act in reliance
upon the exemption provided in Section 4(2) of the Securities Act. The Initial
Purchasers subsequently resold the Old Notes to qualified institutional buyers
in reliance upon Rule 144A under the Securities Act and institutional accredited
investors in reliance upon Section 4(2) of the Securities Act. Accordingly, the
Old Notes may not be otherwise transferred in the United States unless so
registered or unless an applicable exemption from the registration requirements
of the Securities Act is available. The New Notes are being offered hereunder in
order to satisfy the obligations of the Company under the Registration Rights
Agreement. See "The Exchange Offer."
The New Notes will bear interest at a rate equal to 10 1/4 % per annum and on
the same terms as the Old Notes from their date of issuance. Holders of Old
Notes that are accepted for exchange will receive, in cash, accrued interest
thereon from May 29, 1996, the date of issuance of the Old Notes that are
tendered in exchange for the New Notes to, but not including, the date of
issuance of the New Notes. Such interest will be paid with the first interest
payment on the New Notes on October 30, 1996. Accordingly, holders of Old Notes
that are accepted for exchange will not receive interest that is accrued but
unpaid on such Old Notes at the time of tender. Interest on the Old Notes
accepted for exchange will cease to accrue upon issuance of the New Notes.
Interest on the New Notes will be payable semiannually on April 30 and October
30 of each year commencing on the first such date following the Expiration Date.
Based on an interpretation by the staff of the Securities and Exchange
Commission (the "Commission") set forth in no-action letters issued to third
parties, the Company believes that New Notes issued pursuant to this Exchange
Offer may be offered for resale, resold and otherwise transferred by a holder
(other than broker-dealers, as set forth below) who is not an affiliate of the
Company without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that the holder is acquiring the New
Notes in its ordinary course of business and has no arrangement or understanding
with any person to participate in the distribution (within the meaning of the
Securities Act) of the New Notes. Persons wishing to exchange Old Notes in the
Exchange Offer must represent to the Company that such conditions have been met.
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of New Notes. The Letter of Transmittal states that
by so acknowledging and by delivering a prospectus, a broker-dealer will not be
deemed to admit that it is an "underwriter" within the meaning of the Securities
Act. This Prospectus, as it may be amended or supplemented from time to time,
may be used by a broker-dealer in connection with resales of New Notes received
in exchange for Old Notes where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. The Company has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus available to any broker-dealer for
use in connection with any such resale. See "Plan of Distribution."
Prior to the Exchange Offer, there has been only a limited secondary market
and no public market for the Old Notes. The New Notes constitute a new issue of
securities with no established trading market. The Company intends to apply to
list the New Notes on the New York Stock Exchange. The Initial Purchasers have
advised the Company that they intend to make a market in the New Notes; however,
the Initial Purchasers are not obligated to do so and any market-making may be
discontinued at any time. As a result, the Company cannot determine whether an
active public market will develop for the New Notes. See "Risk Factors --
Absence of Public Market for the New Notes."
Any Old Notes not tendered and accepted in the Exchange Offer will remain
outstanding. To the extent that any Old Notes are tendered and accepted in the
Exchange Offer, a holder's ability to sell untendered Old Notes could be
adversely affected. Following consummation of the Exchange Offer, the holders of
Old Notes will continue to be subject to the existing restrictions upon transfer
thereof and the Company will have no further obligation to such holders to
provide for the registration under the Securities Act of the Old Notes held by
them. See "Risk Factors -- Consequences of the Exchange Offer on Non-Tendering
Holders of Old Notes."
<PAGE>
The Company expects that the New Notes issued pursuant to this Exchange Offer
will be issued in the form of Global Securities (as defined herein), which will
be deposited with, or on behalf of, The Depository Trust Company (the
"Depositary") and registered in its name or in the name of Cede & Co., its
nominee, except with respect to institutional "accredited investors" (within the
meaning of Rule 501(a)(1), (2), (3) or (7) under the Securities Act) who will
receive New Notes in certificated form. Beneficial interests in the Global
Securities representing the New Notes will be shown on, and transfers thereof to
qualified institutional buyers will be effected through, records maintained by
the Depositary and its participants. After the initial issuance of the Global
Securities, New Notes in certificated form will be issued in exchange for the
Global Securities on the terms set forth in the Indenture. See "Description of
New Notes--Book-Entry, Delivery and Form."
-------------------------
No dealer, salesperson or other person has been authorized to give
information or to make any representations not contained in this Prospectus,
and, if given or made, such information or representations must not be relied
upon as having been authorized by the Company. This Prospectus does not
constitute an offer to sell or the solicitation of an offer to buy any security
other than the New Notes offered hereby, nor does it constitute an offer to sell
or the solicitation of an offer to buy any of the New Notes to any person in any
jurisdiction in which it is unlawful to make such an offer or solicitation to
such person. Neither the delivery of this Prospectus nor any sale made hereunder
shall under any circumstances create any implication that the information
contained herein is correct as of any date subsequent to the date hereof.
-------------------------
TABLE OF CONTENTS
PAGE
------
Available Information .......................... 4
Incorporation of Certain Documents by Reference 4
Prospectus Summary ............................. 6
The Company .................................... 14
Risk Factors ................................... 14
Recent Developments............................. 20
The Exchange Offer ............................. 25
Certain Federal Income Tax Consequences ....... 35
Use of Proceeds ................................ 35
Capitalization ................................. 36
Selected Historical Consolidated Financial Data 37
Pro Forma Financial Information................. 41
Business ....................................... 46
Description of the New Notes ................... 60
Description of Certain Indebtedness ............ 80
Plan of Distribution ........................... 82
Legal Matters .................................. 83
Experts ........................................ 83
Index to Consolidated Financial Statements ..... F-1
3
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 under the Securities Act for the registration of the New Notes offered
hereby (the "Registration Statement"). This Prospectus, which constitutes a part
of the Registration Statement, does not contain all of the information set forth
in the Registration Statement, certain items of which are contained in exhibits
and schedules to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company or the New Notes offered hereby, reference is made to the Registration
Statement, including the exhibits thereto, which may be inspected without charge
at the public reference facility maintained by the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of which may be obtained from
the Commission at prescribed rates. Statements made in this Prospectus
concerning the contents of any document referred to herein are not necessarily
complete. With respect to each such document filed as an exhibit to the
Registration Statement or otherwise filed with the Commission, reference is made
to the exhibit for a more complete description of the matter involved, and each
such statement shall be deemed qualified in its entirety by such reference.
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports and other information with the Commission. Such reports
and other information filed by the Company can be inspected and copied at the
public reference facilities of the Commission at 450 Fifth Street, N.W.,
Washington, D.C. 20549 and the regional offices of the Commission located at 7
World Trade Center, New York, New York 10048 and 500 West Madison Street, 14th
Floor, Chicago, Illinois 60661. Copies of such materials may be obtained from
the Public Reference Section of the Commission, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at its public reference facilities in
New York, New York and Chicago, Illinois at prescribed rates. In addition,
reports, proxy materials and other information concerning the Company may be
inspected at the offices of the New York Stock Exchange, 20 Broad Street, New
York, New York 10005. The Commission maintains a World Wide Web site on the
Internet at http://www.sec.gov that contains reports, proxy and information
statements and other information of the Company and other registrants that file
electronically with the Commission.
The Company is obligated under the Indenture to remain subject to the
reporting requirements of Section 13 or Section 15(d) of the Exchange Act and to
continue to file with the Commission such information, documents and other
reports which are specified in such sections of the Exchange Act. The Company is
obligated to file with the Trustee and cause to be provided to the holders of
the 10 1/4 % Notes copies of such annual reports and of the information,
documents and other reports which the Company is required to file with the
Commission.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents are hereby incorporated by reference herein:
(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1995, as amended by Form 10-K/A filed April 3, 1996;
(ii) The Company's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996;
(iii) The Company's Quarterly Report on Form 10-Q, as amended, for the
quarter ended June 30, 1996;
(iv) The Company's Current Report on Form 8-K dated May 24, 1996 reporting
the Company's agreement to sell to the Initial Purchasers $150,000,000
principal amount of the Old Notes; and
(v) The Company's Current Report on Form 8-K dated July 30, 1996, reporting
the sale of the Company's Pharmacy Division.
All documents filed by the Company with the Commission pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this Prospectus
and prior to the 91st day following the Expiration Date shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of the filing of such documents. Any statement contained in this Prospectus
or in a
4
<PAGE>
document incorporated or deemed to be incorporated by reference in this
Prospectus shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained in this Prospectus or in any
other subsequently filed document that also is or is 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 Prospectus.
This Prospectus incorporates documents by reference which are not presented
herein or delivered herewith. These documents are available upon request from
Integrated Health Services, Inc., 10065 Red Run Boulevard, Owings Mills,
Maryland 21117, Attention: Marc B. Levin, Executive Vice President-Investor
Relations (telephone number: (410) 998-8400). In order to ensure timely delivery
of the documents, any requests should be made by ________, 1996. The Company
undertakes to provide without charge to each person to whom a copy of this
Prospectus has been delivered, upon the written or oral request of any such
person, a copy of any or all of the documents incorporated by reference herein,
other than the exhibits to such documents, unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates. Written or oral requests for such copies should be directed to the
address set forth above.
5
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information appearing elsewhere in this Prospectus or incorporated by reference
herein.
THE COMPANY
Integrated Health Services, Inc. ("IHS" or the "Company") 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. Post-acute care services include subacute care, outpatient
and home care, inpatient and outpatient rehabilitation and hospice services. The
Company's 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. The Company's 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'
post-acute care network currently consists of over 600 service locations in 40
states.
The Company's post-acute care strategy is to provide cost-effective
continuity of care for its patients in multiple settings, including 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 strategy, the Company has focused on (i) 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; (ii)
developing subacute care units; (iii) 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; and (iv) forming
strategic alliances with health maintenance organizations, hospital groups and
physicians.
In implementing its post-acute healthcare strategy, the Company 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 the Company's strategy, the
Company in February 1996 entered into an agreement to acquire First American
Health Care of Georgia, Inc. ("First American"), a provider of home health
services in 21 states, principally Alabama, California, Florida, Georgia,
Michigan, Pennsylvania and Tennessee. First American had over nine million
visits to the home in 1995. See "Recent Developments."
The Company 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 the Company's MSUs are similar to those provided in
the hospital but at per diem treatment costs which the Company 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, the Company's MSUs
generate substantially higher net revenue and operating profit per patient day
than traditional geriatric care services.
The Company presently operates 195 geriatric care facilities (125 owned or
leased and 70 managed) and 145 MSUs located within 79 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 and similar services to third-parties, constituted approximately
57%, 65%, 65% and 67% of net revenues during the years ended December 31, 1994
and 1995 and the six months ended June 30, 1995 and 1996, respectively. The
Company 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. During the years ended
December 31, 1994 and 1995 and the six months ended June 30, 1995 and 1996, the
Company derived approximately 44%, 45%, 42% and 43%, respectively, of its
patient revenues from private pay sources.
6
<PAGE>
THE NOTE OFFERING
The Old Notes The Old Notes were sold by the Company on May 29,
1996, to Smith Barney Inc., Donaldson, Lufkin &
Jenrette Securities Corporation and Citicorp
Securities, Inc. (the "Initial Purchasers") pursuant
to a Purchase Agreement dated May 23, 1996 (the
"Purchase Agreement"). The Initial Purchasers
subsequently resold the Old Notes to qualified
institutional buyers pursuant to Rule 144A under the
Securities Act and to institutional accredited
investors in reliance upon Section 4(2) of the
Securities Act.
Registration Rights
Agreement Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into a Registration
Rights Agreement dated May 23, 1996, which grants
the holders of the Old Notes certain exchange and
registration rights. The Exchange Offer is intended
to satisfy such exchange and registration rights,
which will terminate upon the consummation of the
Exchange Offer.
THE EXCHANGE OFFER
Securities Offered $150,000,000 aggregate principal amount of 10 1/4 %
Senior Subordinated Notes due 2006, Series A.
The Exchange Offer $1,000 principal amount of the New Notes in exchange
for each $1,000 principal amount of Old Notes. As of
the date hereof, $150,000,000 aggregate principal
amount of Old Notes are outstanding. The Company
will issue the New Notes to holders (who have
properly tendered and not withdrawn their Old Notes)
as promptly as practicable after the Expiration
Date.
Based on an interpretation by the staff of the
Commission set forth in no-action letters issued to
third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in
exchange for Old Notes may be offered for resale,
resold and otherwise transferred by any holder
thereof (other than broker-dealers, as set forth
below, and any such holder that is an "affiliate" of
the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the
registration and prospectus delivery provisions of
the Securities Act, provided that such New Notes are
acquired in the ordinary course of such holder's
business and that such holder does not intend to
participate and has no arrangement or understanding
with any person to participate in the distribution
of such New Notes.
Each broker-dealer that receives New Notes for its
own account pursuant to the Exchange Offer must
acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. The
Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the
Securities Act. This Prospectus, as it may be
amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales
of New Notes received in exchange for Old Notes
where such Old Notes were acquired by such
broker-dealer as a result of market-making
activities or other trading activities. The Company
has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus
available to any broker-dealer for use in connection
with any such resale. See "Plan of Distribution."
Any holder who tenders in the Exchange Offer with
the intention to participate, or for the purpose of
participating, in a distribution of the New Notes
could not rely on the position of the staff of the
Commis-
7
<PAGE>
sion enunciated in Exxon Capital Holdings
Corporation (available May 13, 1988), Morgan Stanley
& Co., Incorporated (available June 5, 1991) or
similar no-action letters and, in the absence of an
exemption therefrom, must comply with the
registration and prospectus delivery requirements of
the Securities Act in connection with the resale
transaction. Failure to comply with such
requirements in such instance may result in such
holder incurring liability under the Securities Act
for which the holder is not indemnified by the
Company.
Expiration Date 5:00 p.m., New York City time, on ___________, 1996,
unless the Exchange Offer is extended, in which case
the term "Expiration Date" means the latest date and
time to which the Exchange Offer is extended.
Interest on the New
Notes and Old Notes The New Notes will bear interest from their date of
issuance. Holders of Old Notes that are accepted for
exchange will receive, in cash, accrued interest
thereon from May 29, 1996, the date of issuance of
the Old Notes to, but not including, the date of
issuance of the New Notes. Such interest will be
paid with the first interest payment on the New
Notes on October 30, 1996. Accordingly, holders of
Old Notes that are accepted for exchange will not
receive interest on the Old Notes that is accrued
but unpaid at the time of tender. Interest on the
Old Notes accepted for exchange will cease to accrue
upon issuance of the New Notes.
Conditions to the
Exchange Offer The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company in
its sole discretion. See "The Exchange
Offer--Conditions." The Exchange Offer is not
conditioned upon any minimum principal amount of Old
Notes being tendered.
Procedures for Tendering
Old Notes Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and any other
required documentation, to the Exchange Agent at the
address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. By executing
the Letter of Transmittal, each holder will
represent to the Company that, among other things,
the holder or the person receiving such New Notes,
whether or not such person is the holder, is
acquiring the New Notes in the ordinary course of
business and that neither the holder nor any such
other person has any arrangement or understanding
with any person to participate in the distribution
of such New Notes and that neither the holder nor
any such other person is an "affiliate" of the
Company within the meaning of Rule 405. In lieu of
physical delivery of the certificates representing
Old Notes, tendering holders may transfer Old Notes
pursuant to the procedure for book-entry transfer as
set forth under "The Exchange Offer--Procedures for
Tendering Old Notes" and "--Guaranteed Delivery
Procedures."
Special Procedures for
Beneficial Owners Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to
8
<PAGE>
completing and executing the Letter of Transmittal
and delivering its Old Notes, either make
appropriate arrangements to register ownership of
the Old Notes in such owner's name or obtain a
properly completed bond power from the registered
holder. The transfer of registered ownership may
take considerable time and may not be able to be
completed prior to the Expiration Date. See "The
Exchange Offer--Procedures for Tendering Old Notes."
Guaranteed Delivery
Procedures Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes, the
Letter of Transmittal or any other documents
required by the Letter of Transmittal to the
Exchange Agent (or comply with the procedures for
book-entry transfer) prior to the Expiration Date
must tender their Old Notes according to the
guaranteed delivery procedures set forth in "The
Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date
pursuant to the procedures described under "The
Exchange Offer--Withdrawal of Tenders."
Acceptance of Old Notes
and Delivery of New Notes Subject to the terms and conditions of the Exchange
Offer, including the reservation of certain rights
by the Company, the Company will accept for exchange
any and all Old Notes that are properly tendered in
the Exchange Offer, and not withdrawn, prior to 5:00
p.m., New York City time, on the Expiration Date.
Subject to such terms and conditions, the New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer--Terms of the Exchange
Offer" and "--Conditions."
Federal Income Tax
Consequences The exchange pursuant to the Exchange Offer should
not be a taxable event for Federal income tax
purposes. See "Certain Federal Income Tax
Consequences."
Effect on Holders of
Old Notes As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its
obligations under the Registration Rights Agreement
and holders of Old Notes who do not tender their Old
Notes will not have any further registration rights
under the Registration Rights Agreement or
otherwise. Such holders will continue to hold the
untendered Old Notes and will be entitled to all the
rights and subject to all the limitations applicable
thereto under the Indenture, except to the extent
such rights or limitations, by their terms,
terminate or cease to have further effectiveness as
a result of the Exchange Offer. All untendered Old
Notes will continue to be subject to certain
restrictions on transfer. Accordingly, if any Old
Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered Old
Notes could be adversely affected.
Exchange Agent Signet Trust Company, the trustee under the
Indenture, is serving as Exchange Agent (the
"Exchange Agent") in connection with the Exchange
Offer.
SUMMARY OF TERMS OF THE NEW NOTES
The form and terms of the New Notes are the same as the form and terms of the
Old Notes (which they replace) except that (i) the New Notes have been
registered under the Securities Act and, therefore, will not bear legends
restricting the transfer thereof, and (ii) the holders of New Notes will
9
<PAGE>
not be entitled to certain rights under the Registration Rights Agreement, which
rights will terminate when the Exchange Offer is consummated. The New Notes will
evidence the same debt as the Old Notes and will be entitled to the benefits of
the Indenture. See "Description of the New Notes."
Securities Offered $150,000,000 principal amount of 10 1/4 % Senior
Subordinated Notes due 2006, Series A.
Maturity Date April 30, 2006.
Interest Payment Dates April 30 and October 30, commencing October 30,
1996.
Subordination The New Notes are senior subordinated obligations of
the Company, and, as such, are subordinated to all
existing and future Senior Indebtedness of the
Company, which will include indebtedness pursuant to
the Company's bank credit facility, rank pari passu
with the Old Notes, the Company's 9 5/8 % Senior
Subordinated Notes due 2002, Series A and the
Company's 10 3/4 % Senior Subordinated Notes due
2004, and are senior to the Company's 6% Convertible
Subordinated Debentures due 2003 and the Company's 5
3/4 % Convertible Senior Subordinated Debentures due
2001. The New Notes will also be effectively
subordinated to all existing and future liabilities
of the Company's subsidiaries. As of June 30, 1996,
the aggregate amount of Senior Indebtedness and
Indebtedness of the Company's subsidiaries
(excluding intercompany indebtedness) that would
have effectively ranked senior to the New Notes was
approximately $435.0 million.
Optional Redemption The New Notes are redeemable for cash at any time
after April 30, 2001, at the Company's option, in
whole or in part, initially at a redemption price
equal to 105.125% of principal amount, declining to
100% of principal amount on April 30, 2004, plus
accrued interest thereon to the date fixed for
redemption.
Change in Control In the event of a Change in Control, each holder of
New Notes may require the Company to repurchase such
holder's New Notes, in whole or in part, at 101% of
the principal amount thereof, plus accrued interest
to the repurchase date. There is no assurance that
the Company will be able to repurchase the New Notes
upon the occurrence of a Change in Control. The
Company's ability to repurchase the New Notes
following a Change in Control will be dependent upon
the Company having sufficient cash, and may be
limited by the terms of the Company's Senior
Indebtedness or the subordination provisions of the
Indenture. The term Change in Control is limited to
certain specified transactions and, depending upon
the circumstances, may not include other events,
such as highly leveraged transactions,
reorganizations, restructurings, mergers or similar
transactions, that might adversely affect the
financial condition of the Company or result in a
downgrade in the credit rating of the New Notes.
Restrictive Covenants The Indenture under which the Old Notes have been
issued and the New Notes will be issued 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 debt; (iii) limitations on liens;
(iv) limitations on the issuance of preferred stock
by the Company's subsidiaries; (v) limitations on
transactions with affiliates; (vi) limitations on
restricted payments; (vii) application of the
proceeds of certain asset sales; (viii) limitations
on restrictions on subsidiary dividends; (ix)
restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets
of the Company to another person; and (x)
limitations on investments and loans.
Use of Proceeds There will be no cash proceeds to the Company from
the Exchange Offer. See "Use of Proceeds."
Listing The Company intends to apply for listing of the New
Notes on the New York Stock Exchange.
10
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1991 1992 1993 1994 1995 1995 (1) 1995 (2)
---- ---- ---- ---- ---- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations Data(3)(4):
Net revenues...................... $143,715 $202,096 $296,304 $712,102 $1,178,888 $1,089,053 $1,089,053
Operating income before fixed
charges(5)....................... 31,996 44,546 66,536 146,930 234,321 219,853 219,853
Depreciation and amortization(6).. 3,307 4,334 8,126 26,367 39,961 36,866 37,329
Interest, net(7)(8)............... 4,126 1,493 5,705 20,602 38,977 29,558 43,757
Loss from impairment of long-lived
assets(9)........................ -- -- -- -- 109,106 103,980 103,980
Other non-recurring charges(10)... -- -- -- -- 23,854 23,854 23,854
Earnings (loss)(11):
Before income taxes and
extraordinary items............. 7,985 19,174 30,790 58,979 (42,259) (35,430) (50,092)
Before extraordinary items ...... $ 5,925 $ 11,888 $ 18,782 $ 36,862 $ (25,989) $ (21,789) $ (30,806)
========== ========== ========== ========== ============ ============ ============
Other Financial Data:
EBITDA(12)........................ $ 15,418 $ 25,001 $ 44,621 $105,948 $ 169,639 $ 158,828 $ 158,828
Ratio of EBITDA to interest,
net(12).......................... 3.7x 16.7x 7.8x 5.1x 4.4x 5.4x 3.6x
Ratio of earnings to fixed charges
(13) ............................ 1.6x 2.8x 2.6x 2.4x 0.3x 0.3x 0.2x
Capital expenditures:
Acquisitions(14)................. $ 589 $ 13,898 $209,214 $152,791 $ 96,671
Other(15) ....................... 7,668 27,124 59,959 91,354 131,080
Other Operating Data:
MSU Beds(16)...................... 313 624 1,206 2,304 3,172
MSU Occupancy..................... 52.4% 60.1% 69.4% 71.4% 72.0%
Speciality Medical Services
Revenues(17)..................... 34.7% 43.6% 54.7% 56.8% 65.4%
</TABLE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
------------------------------------------------
PRO FORMA
PRO FORMA AS ADJUSTED
1995 1996 1996 (1) 1996 (2)
---- ---- -------- --------
<S> <C> <C> <C> <C>
Statement of Operations Data(3)(4):
Net revenues.......................... $561,016 $663,053 $607,256 $607,256
Operating income before fixed
charges(5)........................... 112,732 130,762 119,644 119,644
Depreciation and amortization(6)...... 18,642 18,604 16,569 16,762
Interest, net(7)(8)................... 15,915 30,102 25,701 27,879
Earnings(11):
Before income taxes and extraordinary
items............................... 46,285 47,281 44,610 42,239
Before extraordinary items .......... $ 28,465 $ 29,078 $ 27,435 $ 25,977
========== ========== =========== =============
Other Financial Data:
EBITDA(12)............................ $ 80,842 $ 95,987 $ 86,880 $ 86,880
Ratio of EBITDA to interest, net(12).. 5.1x 3.2x 3.4x 3.1x
Ratio of earnings to fixed charges
(13) ................................ 2.5x 2.0x 2.1x 1.9x
Capital expenditures:
Acquisitions(14)..................... $ 39,455 $ 18,159
Other(15) ........................... 47,943 66,643
Other Operating Data:
MSU Beds(16).......................... 2,917 3,374
MSU Occupancy......................... 71.8% 76.8%
Speciality Medical Services
Revenues(17)......................... 65.0% 67.3%
</TABLE>
11
<PAGE>
JUNE 30, 1996
-------------------------
ACTUAL PRO FORMA(18)
----------- -------------
Balance Sheet Data:
Cash and temporary investments........... $ 46,689 $ 45,811
Working capital.......................... 187,619 168,958
Total assets............................. 1,620,381 1,509,114
Long-term debt, including current
portions ............................... 908,746 782,658
Stockholders' equity..................... 491,424 513,697
- --------------
(1) The pro forma statement of operations data is presented as if the
Company's sale of its Pharmacy Division and an interest in its assisted
living operations had occurred on the first day of the period. On July 30,
1996 the Company sold its Pharmacy Division to Capstone Pharmacy Services,
Inc. ("Capstone") for $125 million in cash and shares of Capstone common
stock having a value of $25 million pursuant to a definitive agreement
dated June 20, 1996 (the "Pharmacy Sale"). On June 13, 1996, Integrated
Living Communities, Inc. ("ILC"), a wholly-owned subsidiary of IHS which
provides assisted living and related services to the private pay elderly
market, filed a registration statement relating to a proposed intial
public offering of ILC common stock. It is currently anticipated that IHS
will sell 2,694,900 shares of ILC common stock in the offering, for which
it will receive aggregate net proceeds of approximately $35.1 million
(assuming an initial public offering price of $14.00 per share (the
midpoint of the estimated offering price range) and after deducting
estimated underwriting discounts) (the "Proposed ILC Offering"). Following
the offering, it is anticipated that IHS will continue to own 1,203,000
shares of ILC common stock representing 19.0% of the outstanding ILC
common stock (16.9% if the underwriters' over-allotment option, which is
being provided by ILC, is exercised in full). There can be no assurance
that the Proposed ILC Offering will be consummated on these terms, on
different terms or at all. See "Recent Developments."
(2) Adjusted to reflect (i) the transactions reflected in note 1 above and
(ii) the sale of the Old Notes and the application of the net proceeds
therefrom as described under "Use of Proceeds" as if the sale of Old Notes
and application of net proceeds therefrom had occurred on January 1, 1995.
Does not reflect the pro forma effect of the proposed acquisition of First
American. See "Recent Developments."
(3) The Company 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.
(4) In 1995, the Company merged with IntegraCare, Inc. ("IntegraCare") in a
transaction accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements for all periods prior to the
effective date of the merger have been restated to include the results of
IntegraCare. See Note 1(n) of Notes to Consoldiated Financial Statements.
(5) Represents income from operations (excluding equity in earnings of
affiliates) before deducting depreciation and amortization, rent,
interest, non-recurring charges and income taxes.
(6) Includes amortization of deferred financing costs of $546,000, $178,000,
$306,000, $621,000, $645,000, $645,000, $1,108,000, $210,000, $640,000,
$640,000, and $833,000 for the years ended December 31, 1991, 1992, 1993,
1994 and 1995, pro forma for the year ended December 31, 1995, pro forma
as adjusted for the year ended December 31, 1995, for the six months ended
June 30, 1995 and 1996, pro forma for the six months ended June 30, 1996
and pro forma as adjusted for the six months ended June 30, 1996,
respectively.
(7) Net of interest income of $1,438,000, $1,300,000, $2,669,000, $1,121,000,
$1,876,000, $1,876,000, $1,876,000, $835,000, $1,045,000, $1,045,000, and
$1,045,000 for the years ended December 31, 1991, 1992, 1993, 1994 and
1995, pro forma for the year ended December 31, 1995, pro forma as
adjusted for the year ended December 31, 1995, for the six months ended
June 30, 1995 and 1996, pro forma for the six months ended June 30, 1996
and pro forma as adjusted for the six months ended June 30, 1996,
respectively. The Company's average outstanding balance under its bank
credit facility during 1995 was $141,833,000; as a result, interest, net
as adjusted for the year ended December 31, 1995 does not reflect interest
income on the $129,630,000 of net proceeds from the sale of the Old Notes,
the Pharmacy Sale and the Proposed ILC Offering remaining after payment of
the amounts outstanding under the bank credit facility. See "Use of
Proceeds."
(8) Interest, net does not include capitalized interest of $535,000, $860,000,
$1,402,000, $3,030,000, $5,155,000, $5,155,000, $5,155,000, $2,193,000,
$1,902,000, $1,902,000, and $1,902,000 for the years ended December 31,
1991, 1992, 1993, 1994 and 1995, pro forma for the year ended December 31,
1995, pro forma as adjusted for the year ended December 31, 1995, for the
six months ended June 30, 1995 and 1996, pro forma for the six months
ended June 30, 1996 and pro forma as adjusted for the six months ended
June 30, 1996, respectively.
(9) In December 1995, the Company 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 $109,106,000.
See "Selected Historical Consolidated Financial Data" and Notes 1(j) and
17 of Notes to Consolidated Financial Statements.
12
<PAGE>
(10) In the fourth quarter of 1995, the Company terminated a contract to manage
23 facilities and, as a result, incurred a loss of $21,915,000 on the
termination of this contract. Such loss consists of the write-off of its
investment in the management contract and management fees receivable. In
connection with the merger with IntegraCare, the Company incurred
$1,939,000 of accounting, legal and other costs. See "Selected Historical
Consolidated Financial Data" and Note 17 of Notes to Consolidated
Financial Statements.
(11) In 1992, the Company 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
effects of $1,548,000, is presented in the statement of operations for the
year ended December 31, 1992 as an extraordinary loss of $2,524,000. In
1993, the Company recorded an extraordinary loss of $3,730,000 on
extinguishment of debt relating primarily to the write-off of deferred
financing costs. Such loss, reduced by the related income tax effects of
$1,455,000 is presented in the statement of operations for the year ended
December 31, 1993 as an extraordinary loss of $2,275,000. In 1994, the
Company 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 effects of $2,565,000, is presented in the
statement of operations for the year ended December 31, 1994 as an
extraordinary loss of $4,274,000. In 1995, the Company 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 in the
statement of operations for the year ended December 31, 1995 as an
extraordinary loss of $1,013,000. During the six months ended June 30,
1995 and 1996, the Company recorded a loss on extinguishment of debt of
$826,000 and $2,327,000, respectively, relating primarily to the write-off
of deferred financing costs. Such losses, reduced by the related income
tax effect of $318,000 and $896,000, respectively, are presented in the
statement of operations for the six months ended June 30, 1995 and 1996 as
an extraordinary loss of $508,000 and $1,431,000, respectively. See
"Selected Historical Consolidated Financial Data."
(12) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges and extraordinary
items. EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator
of the Company's operating performance or cash flow as a measure of
liquidity. Management also believes that the ratio of EBITDA to interest,
net is an accepted measure of debt service ability; however, such ratio
should not be considered a substitute for the ratio of earnings to fixed
charges as a measure of debt service ability.
(13) The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest,
expensed or capitalized, amortization of debt issuance costs and the
estimated interest component of rent expense. As a result of the loss from
impairment of long-lived assets and other non-recurring charges, fixed
charges exceeded earnings by $47.8 million in the year ended December 31,
1995. The ratio of earnings to fixed charges before giving effect to the
loss from impairment of long-lived assets and other non-recurring charges
would have been 2.2x, 2.5x and 2.0x for the year ended December 31, 1995,
pro forma for the year ended December 31, 1995 and pro forma as adjusted
for the year ended December 31, 1995, respectively.
(14) Does not include assumed indebtedness and other liabilities of acquired
companies.
(15) Includes renovation costs and equipment purchases, primarily for MSUs.
(16) At the end of the period.
(17) As a percentage of net revenues.
(18) The pro forma balance sheet data as of June 30, 1996 was prepared as if
the Pharmacy Sale and Proposed ILC Offering had been consummated as of
June 30, 1996.
------------------------
13
<PAGE>
THE COMPANY
Integrated Health Services, Inc. was incorporated in March 1986 as a
Pennsylvania corporation and reorganized as a Delaware corporation in November
1986. The Company's 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, Integrated Health Services,
Inc. and its subsidiaries are referred to herein collectively as "IHS" or the
"Company."
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before deciding whether to accept the Exchange Offer. This Prospectus
contains, in addition to historical information, forward-looking statements that
involve risks and uncertainties. The Company's actual results could differ
materially. Factors that could cause or contribute to such differences include,
but are not limited to, those discussed below, as well as those discussed
elsewhere in this Prospectus.
Substantial Indebtedness. The Company's indebtedness is substantial in
relation to its stockholders' equity. At June 30, 1996, Company's total
long-term debt, net of current portion, accounted for 64.8% of its total
capitalization. See "Capitalization." The Company also has significant lease
obligations with respect to the facilities operated pursuant to long-term
leases, which aggregated approximately $245.5 million at June 30, 1996. For the
year ended December 31, 1995 and the six months ended June 30, 1996, the
Company's rent expense was $66.1 million and $35.5 million, respectively. The
Company's strategy of expanding its specialty medical services and growing
through acquisitions may require additional borrowing in order to finance
working capital, capital expenditures and the purchase price of any
acquisitions. The degree to which the Company is leveraged, as well as its rent
expense, could have important consequences to holders of the 10 1/4 % Notes,
including: (i) the Company's 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 the Company's
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 the Company for its operations, (iii) approximately 99% of the
Company's indebtedness at June 30, 1996, including the Company's 5 3/4 %
Convertible Senior Subordinated Debentures due 2001, the Company's 9 5/8 %
Senior Subordinated Notes due 2002, Series A, the Company's 6% Convertible
Subordinated Debentures due 2003, the Company's 10 3/4 % Senior Subordinated
Notes due 2004 and the amount outstanding under the Company's existing bank
credit agreement, is scheduled to become due prior to the time any principal
payments are required to be made on the 10 1/4 % Notes, (iv) certain of the
Company's borrowings bear, and will continue to bear, variable rates of
interest, which expose the Company to increases in interest rates, and (v)
certain of the Company's 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. There can be no assurance
that the Company's operating results will be sufficient for the payment of the
Company's indebtedness.
Subordination of the 10 1/4 % Notes; Holding Company Structure. The Old Notes
are, and the New Notes will be, subordinated to all Senior Indebtedness of the
Company now or at any time later outstanding. In addition, the operations of the
Company are conducted through its subsidiaries and, therefore, the Old Notes are
and the New Notes will also be, effectively subordinated to all Indebtedness and
other liabilities and commitments of the Company's subsidiaries. As a result,
the Company'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 the Company is itself recognized as a
creditor of such subsidiary, in which case the claims of the Company 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 the Company.
All of the Company's subsidiaries have guaranteed the obligations of the Company
under its bank credit facility. The Old Notes are, and the New Notes will be,
obligations exclusively of the Company, and are not guaranteed by any of the
Company's subsidiaries. Since the operations of the Company are currently
conducted primarily through subsidiaries, the Company's cash flow and its
ability to service its debt,
14
<PAGE>
including the 10 1/4 % Notes, is dependent upon the earnings of its subsidiaries
and distributions to the Company. The subsidiaries are separate and distinct
legal entities and have no obligation, contingent or otherwise, to pay amounts
due pursuant to the Notes or to make any funds available therefor. Moreover, the
payment of dividends and the making of loans or advances to the Company 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 instruments 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 the Company. See "Description of Other Indebtedness." At June 30,
1996, the aggregate amount of Senior Indebtedness and Indebtedness of the
Company's subsidiaries (excluding intercompany indebtedness) that effectively
ranked senior to the 10 1/4 % Notes was approximately $435.0 million. In
addition, the Old Notes are, and the New Notes will be, effectively subordinated
to the lease obligations of the Company's Subsidiaries, which aggregated $245.5
million at June 30, 1996, and other liabilities, including trade payables, the
amount of which could be material. The Indenture does not limit the amount of
Indebtedness the Company and its Subsidiaries may incur provided the Company
meets certain financial tests at the time such indebtedness is incurred. See
"Description of the New Notes."
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 the Company'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 the Company. Congress has proposed converting the current cost
reimbursement system for home health services covered under Medicare to a
prospective payment system beginning in October 1996. The prospective payment
system contained in the bill provides 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 per visit expenses 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 the Company and its growth strategy. See "-- Reliance
on Reimbursement by Third Party Payors." 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 the Company 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 the Company, and may
similarly affect the price of the 10 1/4 % Notes in the future. See "--
Uncertainty of Government Regulation" and "Business -- Government Regulation."
Risks Related to Growth Strategy. The Company's planned expansion and growth
require that additional MSUs be established in the Company's existing
facilities, that the Company acquire, lease or acquire the right to manage for
others additional facilities in which MSUs can be established, that the Company
expand its home healthcare services through the acquisition of additional home
healthcare providers, and that the Company acquire, or establish relationships
with, third parties which provide post-acute care services not currently
provided by the Company. Such expansion and growth will depend on the Company's
ability to create demand for its post-acute care programs, the availability of
suitable acquisition, lease or management candidates and the Company's ability
to finance such acquisitions and growth. The successful implementation of the
Company's post-acute healthcare system, including the capitation of rates, will
depend on the Company's 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 the Company's operations or that MSUs can be
successfully established in ac-
15
<PAGE>
quired facilities or that the Company's post-acute healthcare system, including
the capitation of rates, can be successfully implemented. The post-acute care
market is highly competitive, and the Company faces substantial competition from
hospitals, subacute care providers, rehabilitation providers and home healthcare
providers, including competition for acquisitions. The successful integration of
acquired businesses is important to the Company's 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 the Company in a timely manner. 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 the Company's operations and financial results. There can be
no assurance that the Company 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 the Company's
profitability. The Company 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. Depending on the number, size
and timing of such transactions, the Company may in the future require
additional financing in order to continue to make acquisitions. There is no
assurance that such additional financing, if any, will be available to the
Company on acceptable terms or at all. The Company's bank credit facility limits
the Company's ability to make acquisitions. See "-- Risks Related to Proposed
Acquisition of First American," "Recent Developments -- New Revolving Credit
Facility" and "Business -- Company Strategy."
Reliance on Reimbursement by Third Party Payors. The Company receives payment
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 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. Aspects of certain
healthcare reform 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 the Company. See "-- Risk of Adverse Effect of Healthcare
Reform." During the years ended December 31, 1994 and 1995 and the six months
ended June 30, 1995 and 1996, the Company derived approximately 56%, 55%, 58%
and 57%, respectively, of its patient revenues from Medicare and Medicaid. The
increase in Medicare and Medicaid patient revenues was primarily the result of
the higher level of Medicare and Medicaid patients serviced by the
rehabilitation, home healthcare, pharmacy, mobile x-ray and other related
service companies acquired in 1993, 1994 and 1995 and certain acquisitions of
facilities which had large concentrations of Medicaid patients during 1993 and
1994. Substantially all of First American's revenues are derived from Medicare.
As a result, the consummation of the First American acquisition would
substantially increase the percentage of the Company's revenues derived from
Medicare. The sources and amounts of the Company's 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 the Company's
patients among the private pay, Medicare and Medicaid categories can
significantly affect the profitability of the Company's operations. The
Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of the Company's
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
the Company will be able to obtain the waivers necessary to enable the Company
to recover its excess costs. See "Business -- Sources of Revenue."
Uncertainty of Government Regulation. The Company 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 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 the levels of
reimbursement from governmental and other sources. There can be no assurance
that regulatory author-
16
<PAGE>
ities will not adopt changes or new interpretations of existing regulations that
could adversely affect the Company. The failure to maintain or renew any
required regulatory approvals or licenses could prevent the Company from
offering existing services or from obtaining reimbursement. In certain
circumstances, failure to comply at one facility may affect the ability of the
Company to obtain or maintain licenses or approvals under Medicare and Medicaid
programs at other facilities.
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 the Health Care Financing Administration ("HCFA") to enforce
compliance with the detailed regulations mandating minimum healthcare standards
and may significantly affect the consequences to the Company 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. The Company 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, the Company's strategy of acquiring poorly performing facilities could
adversely affect the Company's business to the extent remedies are imposed at
such facilities.
The Company is 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 legislations" which
prohibit, with limited exceptions, physician ownership of ancillary service
providers 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 the
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. The Company seeks to structure its business arrangements in
compliance with these laws and, from time to time, the Company has sought
guidance as to the interpretation of such laws; however, there can be no
assurance that such laws ultimately will be interpreted in a manner consistent
with the practices of the Company. See "Business -- Government Regulation."
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 Company 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.
17
<PAGE>
The Company is 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 the financial results of the Company's operations.
Risks Related to Proposed Acquisition of First American. The Company has
entered into an agreement to acquire First American Health Care of Georgia, Inc.
("First American"), a provider of home health services in 21 states. The
proposed purchase price is $150 million plus an earn-out of up to $162.5 million
based on the home healthcare operations of the Company in the years 1999 through
2003. First American has filed for protection under the federal bankruptcy laws.
Consummation of the acquisition is subject to a number of conditions, some of
which are beyond the Company's control, including approval of the acquisition by
the bankruptcy court, resolution of claims by HCFA seeking repayment of certain
disallowed reimbursements under Medicare (the "HCFA Claims"), which claims IHS
believes relate to personal or corporate expenses, rather than care-related
expenses, regulatory approvals and approval from the Company's lenders and other
third parties. There can be no assurance that these conditions will be
satisfied. There can be no assurance that the First American acquisition will be
consummated on the proposed terms, on different terms or at all. Failure to
complete this transaction may have an adverse impact on the near-term expansion
of the Company's post-acute healthcare system. There can be no assurance that
the Company will ultimately realize any benefit from the acquisition of First
American. IHS, First American and HCFA have reached a tentative settlement of
the HCFA Claims, which requires the payment of up to $255 million to HCFA and
the Department of Justice, which amounts will be paid from the proceeds of the
purchase price for First American. The tentative settlement of the HCFA Claims
is subject to completion of definitive documentation and approval of the
bankruptcy court and First American's stockholders. There can be no assurance a
settlement of the HCFA Claims will be reached on these terms, on different terms
or at all. The resolution of the HCFA Claims will require a restatement of First
American's financial statements. The restatement of First American's financial
statements to give effect to the settlement of the HCFA Claims is likely to have
a material adverse effect on First American's historical financial statements,
including negative earnings before interest, taxes, depreciation and
amortization ("EBITDA"). As a result, the Company's pro forma results of
operations reflecting the First American acquisition, including pro forma
EBITDA, will be adversely affected, and such adverse effect could be material.
See "Recent Developments -- Proposed Acquisition of First American." The
preparation and audit of such restated financial statements (the "Restated
Financial Statements") will be required before the Company will be able to file
any registration statements under the Securities Act if, at the time of filing,
the acquisition of First American is deemed to be "probable" within the meaning
of the accounting regulations under the Securities Act. At the time the First
American acquisition is deemed "probable," the Company will not be able to raise
additional funds through the public issuance of debt or equity securities until
the Restated Financial Statements are completed, the First American acquisition
agreement is terminated or the acquisition is no longer "probable." The
Company's inability to raise additional funds in the public markets could have a
material adverse effect on the Company's business.
Competition. The healthcare industry is highly competitive. The Company
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. The Company also competes with other providers in the
acquisition and development of additional facilities. The Company's 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 the Company. In addition, the Company 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 the Company. There can be no assurance that the Company will not
encounter increased competition which could adversely affect its business,
results of operations or financial condition. See "Business -- Competition."
Absence of Public Market for the New Notes. The Old Notes were issued to, and
the Company believes are currently owned by, a relatively small number of
beneficial owners. The Old Notes have not been registered under the Securities
Act and will be subject to restrictions on transferability to the extent that
they are not exchanged for the New Notes. Although the New Notes will generally
be
18
<PAGE>
permitted to be resold or otherwise transferred by the holders (who are not
affiliates of the Company) without compliance with the registration requirements
under the Securities Act, they will constitute a new issue of securities with no
established trading market. The Company has been advised by the Initial
Purchasers that the Initial Purchasers presently intend to make a market in the
New Notes. However, the Initial Purchasers are not obligated to do so and any
market-making activity with respect to the New Notes may be discontinued at any
time without notice. In addition, such market-making activity will be subject to
the limits imposed by the Securities Act and the Exchange Act and may be limited
during the Exchange Offer. Accordingly, no assurance can be given that an active
public or other market will develop for the New Notes or the Old Notes or as to
the liquidity of or the trading market for the New Notes or the Old Notes. If an
active public market does not develop, the market price and liquidity of the New
Notes may be adversely affected.
If a public trading market develops for the New Notes, future trading prices
of such securities will depend on many factors, including, among other things,
prevailing interest rates, the Company's results of operations and the market
for similar securities. Depending on prevailing interest rates, the market for
similar securities and other factors, including the financial condition of the
Company, the New Notes may trade at a discount.
Notwithstanding the registration of the New Notes in the Exchange Offer,
holders who are "affiliates" (as defined under Rule 405 of the Securities Act)
of the Company may publicly offer for sale or resell the New Notes only in
compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives New Notes for its own account in exchange
for Old Notes, where such Old Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities, must acknowledge
that it will deliver a prospectus in connection with any resale of such New
Notes. See "Plan of Distribution."
Exchange Offer Procedures. Issuance of the New Notes in exchange for Old
Notes pursuant to the Exchange Offer will be made only after a timely receipt by
the Company of such Old Notes, a properly completed and duly executed Letter of
Transmittal and all other required documents. Therefore, holders of the Old
Notes desiring to tender such Old Notes in exchange for New Notes should allow
sufficient time to ensure timely delivery. The Company is under no duty to give
notification of defects or irregularities with respect to the tenders of Old
Notes for exchange. Old Notes that are not tendered or are tendered but not
accepted will, following the consummation of the Exchange Offer, continue to be
subject to the existing restrictions upon transfer thereof and, upon
consummation of the Exchange Offer, the registration rights under the
Registration Rights Agreement will terminate. In addition, any holder of Old
Notes who tenders in the Exchange Offer for the purpose of participating in a
distribution of the New Notes may be deemed to have received restricted
securities and, if so, will be required to comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes. See "Plan of Distribution." To the extent
that Old Notes are tendered and accepted in the Exchange Offer, the trading
market for untendered and tendered but unaccepted Old Notes could be adversely
affected. See "The Exchange Offer."
Consequences of the Exchange Offer on Non-Tendering Holders of the Old Notes.
The Company intends for the Exchange Offer to satisfy its registration
obligations under the Registration Rights Agreement. If the Exchange Offer is
consummated, the Company does not intend to file further registration statements
for the sale or other disposition of Old Notes. Consequently, following
completion of the Exchange Offer, holders of Old Notes seeking liquidity in
their investment would have to rely on an exemption to the registration
requirements under applicable securities laws, including the Securities Act,
with respect to any sale or other disposition of the Old Notes.
19
<PAGE>
RECENT DEVELOPMENTS
NEW REVOLVING CREDIT FACILITY
On May 15, 1996, the Company entered into a $700 million revolving credit
facility, including a $100 million letter of credit subfacility, with Citibank,
N.A., as Administrative Agent, and certain other lenders (the "New Credit
Facility"). The New Credit Facility consists of a $700 million revolving loan
which reduces to $560 million on June 30, 2000 and $315 million on June 30,
2001, with a final maturity on June 30, 2002. The $100 million subcommitment for
letters of credit will remain at $100 million until final maturity. The New
Credit Facility is guaranteed by the Company's subsidiaries and secured by a
pledge of all of the stock of substantially all of the Company's subsidiaries.
At the option of the Company, loans under the New Credit Facility bear interest
at a rate equal to either (i) the sum of (a) the higher of (1) the bank's base
rate or (2) one percent plus the latest overnight federal funds rate plus (b) a
margin of between zero percent and one and one-quarter percent (depending on
certain financial ratios); or (ii) in the case of Eurodollar loans, the sum of
between three quarters of one percent and two and one-half percent (depending on
certain financial ratios) and 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 the borrowing selected by the Company.
The New Credit Facility limits the Company's ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to create or incur
liens on assets, to pay dividends and to purchase or redeem the Company's stock.
In addition, the New Credit Facility requires that the Company meet certain
financial tests, and provides the banks with the right to require the payment of
all of the amounts outstanding under the New Credit Facility if there is a
change in control of the Company or if any person other than Dr. Robert N.
Elkins or a group managed by Dr. Elkins owns more than 40% of the Company's
capital stock. Amounts repaid under the New Credit Facility may be reborrowed
until June 30, 2002. The new $700 million credit facility replaced the Company's
$500 million revolving credit facility (the "Prior Credit Facility"). As a
result, the Company recorded a loss on extinguishment of debt, net of related
tax benefits, of approximately $1.4 million in the second quarter of 1996. On
May 15, 1996, the Company borrowed $328.2 million under the New Credit Facility
to repay amounts outstanding under the Prior Credit Facility.
The Company used the proceeds of the sale of the Old Notes to repay $145.0
million outstanding under the New Credit Facility. At September 20, 1996, $142.2
million was outstanding under the New Credit Facility, bearing interest at 7.2%.
See "Use of Proceeds." Amounts repaid under the New Credit Facility from the
proceeds of the sale of the Old Notes may be reborrowed by the Company for
acquisitions and for other general corporate purposes, including working capital
and to finance its stock repurchase program.
PROPOSED ACQUISITION OF FIRST AMERICAN
In February 1996, the Company entered into an agreement to acquire First
American Health Care of Georgia, Inc., a provider of home health services in 23
states, principally Alabama, California, Florida, Georgia, Michigan,
Pennsylvania and Tennessee. The Company believes First American is the fourth
largest (and largest privately-held) provider of home healthcare services in the
United States.
The proposed purchase price for First American is $150 million plus an
earn-out of up to $162.5 million based on the home healthcare operations of the
Company in the years 1999 through 2003. The Company intends to finance the
acquisition through borrowings under the New Credit Facility. During the first
quarter of 1996, the Company loaned $18.1 million to First American to fund
certain of First American's pension and tax liabilities. The loan, which bears
interest at a rate per annum equal to the prime rate plus 4% and is due December
31, 1996, is secured by a pledge of certain shares of First American stock owned
by First American's principal stockholder. Subsequent to the execution of the
acquisition agreement, First American filed for protection under the federal
bankruptcy laws. Consummation of the acquisition is subject to a number of
conditions, some of which are beyond the Company's control, including approval
of the acquisition by the bankruptcy court, resolution of the HCFA Claims
seeking repayment from First American of certain disallowed reimbursements under
Medicare, which claims IHS believes
20
<PAGE>
relate to personal or corporate, rather than care-related, expenses, regulatory
approvals and approval from the Company's lenders and other third parties. There
can be no assurance that these conditions will be satisfied. Under the
acquisition agreement, the HCFA Claims will be satisfied with proceeds of the
sale, and will result in a restatement of the financial statements of First
American. There can be no assurance that the First American acquisition will be
consummated on the proposed terms, on different terms or at all. See "Risk
Factors -- Risks Related to Proposed Acquisition of First American."
In August 1995, a federal grand jury handed down an 82 count indictment
against First American and four of its senior executive officers, two of whom
are its principal stockholders, alleging that First American improperly claimed
Medicare reimbursement for costs related to personal flights, political
contributions, "ghost employees" and lobbying. In February 1996, First American,
First American's chief executive officer and principal stockholder, and the
chief executive officer's wife, the other principal stockholder, were convicted.
In addition, HCFA has claimed significant disallowances of costs for cost
report filings made by First American for 1989 through 1995. These claims are
similar to those in the criminal proceeding discussed above and are not
considered by the Company to be operational or clinical in nature. In February
1996 the substantial nature and amount of these claims and HCFA's inability to
resolve these claims with First American led HCFA to stop its bi-weekly periodic
interim payments ("PIP") to First American. Because First American relies almost
entirely on Medicare reimbursement, First American was forced to declare
bankruptcy in February 1996. In March 1996, the bankruptcy court ordered HCFA to
resume PIP payments to First American. In April 1996, First American submitted a
plan of reorganization based on its being acquired by the Company. The plan is
currently being reviewed and considered by the bankruptcy court and First
American's creditors (primarily HCFA). The Company and First American's court
approved interim chief executive officer are currently negotiating the
resolution of the HCFA Claims with HCFA.
IHS, First American and HCFA have reached a tentative settlement of the HCFA
Claims, which requires the payment of up to $255 million to HCFA and the
Department of Justice, of which $115 million would be paid at the time of
closing from the proceeds of the sale and the remainder from the earn-out
payments to the extent such payments become due. The tentative settlement of the
HCFA Claims is subject to completion of definitive documentation and approval of
the bankruptcy court and First American's stockholders. There can be no
assurance a settlement of the HCFA Claims will be reached on these terms, on
different terms or at all. The resolution of the HCFA Claims will require a
restatement of First American's financial statements. The restatement of First
American's financial statements to give effect to the settlement of the HCFA
Claims is likely to have a material adverse effect on First American's
historical financial statements, including negative EBITDA. As a result, the
Company's pro forma results of operations reflecting the First American
acquisition, including pro forma EBITDA, will be adversely affected, and such
adverse effect could be material. See "Risk Factors -- Risks Related to Proposed
Acquisition of First American."
Substantially all of First American's revenues are derived from Medicare. The
following table sets forth certain operating data regarding First American:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
--------------------------------- --------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Visits to patient homes ... 5,036,000 7,433,203 9,024,271 4,655,870 3,881,744
Number of States........... 17 22 23 21 21
Number of service
locations.................. 288 379 456 404 422
Number of employees
(est.)..................... 9,000 12,000 16,000 16,000 14,000
</TABLE>
The Company believes that the acquisition of First American will be an
important component in the implementation of its post-acute healthcare system.
First American, when combined with the Company's existing home healthcare
operations, will give the Company a significant home healthcare presence in 24
states, many of which are the states the Company has targeted for its post-acute
healthcare system. The Company believes that its expanded home healthcare
network will assist it in meeting the desire of payors
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<PAGE>
for one stop shopping, as well as offering capitated rates to managed care
providers. Additionally, the Company expects that Medicare will implement a
prospective payment system forhome healthcare services in the next several
years. Currently, Medicare provides reimbursement for home healthcare 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 prospective pay as
currently proposed, 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
healthcare costs is labor, which is basically fixed, the Company believes the
differentiating factor in profitability will be administrative costs. A large
provider, which the Company would be upon the completion of the First American
acquisition, 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
healthcare services in the next several years or at all. See "Risk Factors --
Risk of Adverse Effect of Healthcare Reform."
DIVESTITURES
In developing its post-acute healthcare system, the Company 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, the Company is continuously evaluating its existing
operations to determine whether to retain or divest operations. To date, the
Company has divested its pharmacy division and determined to divest its assisted
living division, and may divest additional divisions or assets in the future.
Sale of Pharmacy Division. In July 1996 the Company 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. The Company's pharmacy division
operated institutional pharmacies in eight states providing service to over
40,000 beds within 379 facilities. Approximately 17% of the beds are currently
owned, leased or managed by IHS. The pharmacy division generated revenue and
EBITDA of approximately $91.0 million (of which $17.5 million was revenue from
services to IHS facilities) and $9.3 million, respectively, for the year ended
December 31, 1995 and approximately $54.2 million (of which $9.7 million was
revenue from services to IHS facilities) and $6.9 million, respectively, for the
six months ended June 30, 1996. The Company has determined that its ownership of
pharmacy operations is not critical to the development and implementation of its
post-acute strategy. See "Pro Forma Financial Information."
Proposed Sale of Assisted Living Services Division. On June 13, 1996,
Integrated Living Communities, Inc. ("ILC"), a wholly-owned subsidiary of the
Company which provides assisted living and related services to the private pay
elderly market, filed a registration statement relating to a proposed public
offering of ILC common stock. It is currently anticipated that the Company will
sell 2,694,900 shares of ILC common stock in the offering, for which it will
receive aggregate net proceeds of approximately $35.1 million (assuming an
initial public offering price of $14.00 per share (the midpoint of the estimated
offering price range) and after deducting estimated underwriting discounts).
Following the offering, it is anticipated that IHS will continue to own
1,203,000 shares of ILC common stock, representing 19.0% of the outstanding ILC
common stock (16.9% if the underwriters' over-allotment option, which is being
provided by ILC, is exercised in full). There can be no assurance that the
offering will be consummated on these terms, on different terms or at all. ILC
currently operates 19 residential-style assisted-living communities, which
comprise a combination of housing, personalized support services and healthcare
in a non-institutional setting designed to respond to the individual needs of
the elderly who need assistance with certain activities of daily living but who
do not require the level of healthcare provided in a skilled nursing facility.
ILC's facilities (seven owned, four leased and eight managed) have approximately
1,812 units in seven states. ILC had revenue and EBITDA of approximately $16.3
million and $1.6 million, respectively, for the year ended December 31, 1995,
and approximately $11.3 million and $2.2 million, respectively, for the six
months ended June 30, 1996. The Company has determined that the operation of
assisted-living communities does not fit directly within its post-acute
healthcare network strategy. See "Pro Forma Financial Information."
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ACQUISITIONS
The Company 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.
During 1995, the Company purchased five geriatric care facilities (two of
which were previously leased), and leased three facilities, all of which were
previously managed. The total cost of these acquisitions was approximately $42.9
million, which includes legal fees and other costs incurred to secure the
facilities or leasehold interests in the facilities. In addition, the Company in
January 1996 purchased one geriatric care facility for approximately $7.0
million. The Company also leased two facilities in April 1996 and one facility
in July 1996. During 1995, the Company also continued to expand its MSU focus by
opening 31 MSU programs totalling 691 beds (including two MSU programs totalling
63 beds at its managed facilities) and expanding existing programs by 177 beds
(including 17 beds at managed facilities). During the six months ended June 30,
1996, the Company opened two MSU programs totaling 20 beds and expanded
existing programs by 182 beds.
In 1995, the Company acquired 25 ancillary services businesses which provide
home health services, physical, occupational and speech therapy services,
rehabilitation services, hospice services and mobile x-ray and electrocardiogram
services. The total purchase price for these businesses was $30.7 million,
including $9.8 million representing the issuance of 385,216 shares of the
Company's common stock. Total goodwill at the dates of acquisition aggregated
$32.6 million. In February 1995, the Company entered into a management agreement
to manage Total Home Health Care, Inc. and Total Health Service, Inc.
(collectively "Total Home Health"), which are private-duty and Medicare
certified home health agencies in the Dallas/Ft. Worth, Texas market, pursuant
to which a subsidiary of the Company receives a management fee of $10 per home
visit by Total Home Health personnel. The Company was also granted a five-year
option to purchase Total Home Health for a purchase price of $5.0 million.
In March 1996, the Company acquired Rehab Management Systems, Inc., an
outpatient rehabilitation company in central Florida, for approximately $10
million (including $8.0 million in shares of the Company's common stock). In the
three months ended March 31, 1996, the Company acquired two mobile x-ray
companies for approximately $1.3 million. In May 1996, the Company acquired a
hospice company in Chicago, Illinois for approximately $8.2 million (which was
paid through the issuance of shares of the Company's common stock). In August
1996, the Company acquired an inpatient and outpatient rehabilitation clinic in
Mooresville, North Carolina for approximately $2.1 million, a mobile x-ray
company in Denver, Colorado for approximately $422,000, a home infusion company
in Miami, Florida for approximately $8.0 million, a home health company in
Memphis, Tennessee for approximately $2.0 million and a home health company in
Murfreesboro, Tennessee for approximately $2.3 million. In addition, the Company
has reached agreements in principle to lease a 150-bed skilled nursing facility
in Kansas City, Missouri and to purchase a 191-bed skilled nursing facility in
West Palm Beach, Florida for approximately $6.4 million, a home health company
for approximately $16.5 million, a contract therapy and respiratory
rehabilitation company for approximately $8.0 million, and four mobile x-ray
companies for approximately $17.6 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.
INDENTURE AMENDMENTS
In June 1996, the Company obtained consent from the holders of its 9 5/8 %
Senior Subordinated Notes due 2002, Series A (the "9 5/8 % Notes) and its 10 3/4
% Senior Subordinated Notes due 2004 (the "10 3/4 % Notes") to the amendment of
the calculation of the consolidated coverage ratio to permit the Company to
exclude from the calculation the results of operations of First American for the
period prior to the acquisition. The Company paid a consent fee of $2.50 per
$1,000 aggregate principal amount upon approval of the amendment, and will pay
an additional $2.50 per $1,000 aggregate principal
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amount if the acquisition of First American is consummated and an additional
$2.50 per $1,000 aggregate principal amount if the Company elects to exclude
from the calculation of the consolidated coverage ratio under the indentures
under which the 9 5/8 % Notes and 10 3/4 % Notes were issued the results of
operations of First American for the period prior to the acquisition. See "Risk
Factors -- Risks Related to Growth Strategy," "-- Risks Related to Proposed
Acquisition of First American" and "-- Proposed Acquisition of First American."
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on May 29, 1996, to the Initial
Purchasers pursuant to the Purchase Agreement. The Initial Purchasers
subsequently resold the Old Notes to qualified institutional buyers in reliance
on Rule 144A under the Securities Act and to institutional "accredited
investors" in reliance upon Section 4(2) of the Securities Act. As a condition
to the purchase of the Old Notes by the Initial Purchasers, the Company entered
into the Registration Rights Agreement with the Initial Purchasers, which
requires, among other things, that promptly following the sale of the Old Notes
to the Initial Purchasers, the Company would (i) file with the Commission a
registration statement under the Securities Act with respect to an issue of new
notes of the Company identical in all material respects to the Old Notes, (ii)
use its best efforts to cause such registration statement to become effective
under the Securities Act and (iii) upon the effectiveness of that registration
statement, offer to the holders of the Old Notes the opportunity to exchange
their Old Notes for a like principal amount of New Notes, which would be issued
without a restrictive legend and may be reoffered and resold by the holder
without restrictions or limitations under the Securities Act (other than any
such holder that is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act), subject, in the case of certain broker-dealers, to
any requirement that they comply with the prospectus delivery requirements
referred to below. A copy of the Registration Rights Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus is a part. The
Exchange Offer is being made to satisfy the contractual obligations of the
Company under the Registration Rights Agreement. Unless the context requires
otherwise, the term "Holder" with respect to the Exchange Offer means any person
in whose name the Old Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder, or any person whose Old Notes are held of record by The
Depository Trust Company who desires to deliver such Old Notes by book-entry
transfer at The Depository Trust Company.
The Company has not requested, and does not intend to request, an
interpretation by the staff of the Commission with respect to whether the New
Notes issued pursuant to the Exchange Offer in exchange for the Old Notes may be
offered for sale, resold or otherwise transferred by any Holder without
compliance with the registration and prospectus delivery provisions of the
Securities Act. Based on an interpretation by the staff of the Commission set
forth in no-action letters issued to third parties, the Company believes that
New Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any Holder of such New
Notes (other than any such Holder that is an "affiliate" of the Company within
the meaning of Rule 405 under the Securities Act and except in the case of
broker-dealers, as set forth below) without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such New
Notes are acquired in the ordinary course of such Holder's business and such
Holder has no arrangement or understanding with any person to participate in the
distribution of such New Notes. Any Holder who tenders in the Exchange Offer for
the purpose of participating in a distribution of the New Notes could not rely
on such interpretation by the staff of the Commission and must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Notes for its own account in exchange for Old Notes, where such Old Notes were
acquired by such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder of Old Notes will represent
to the Company that, among other things, (i) the New Notes acquired pursuant to
the Exchange Offer are being obtained in the ordinary course of business of the
person receiving such New Notes, whether or not such person is such Holder, (ii)
neither the Holder of Old Notes nor any such other person has an arrangement or
understanding with any person to participate in the distribution of such New
Notes, (iii) if the Holder is not a broker-dealer, or is a broker-dealer but
will not receive New Notes for its own account in exchange for Old Notes,
neither the Holder nor any such other person is engaged in or intends to
participate in the distribution of such New Notes and (iv) neither the Holder
nor any such other person is an "affili-
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ate" of the Company within the meaning of Rule 405 under the Securities Act. If
the tendering Holder is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, it will be required to
acknowledge that it will deliver a prospectus in connection with any resale of
such New Notes.
Following the consummation of the Exchange Offer, Holders of the Old Notes
who did not tender their Old Notes will not have any further registration rights
under the Registration Rights Agreement, and such Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Old Notes could be adversely affected. See "Risk Factors --
Exchange Offer Procedures" and "-- Consequences of the Exchange Offer on
Non-Tendering Holders of the Old Notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus and
in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for $1,000 principal amount of outstanding Old Notes accepted in the
Exchange Offer. Holders may tender some or all of their Old Notes pursuant to
the Exchange Offer. However, Old Notes may be tendered only in integral
multiples of $1,000.
The form and terms of the New Notes are the same as the form and terms of the
Old Notes except that (i) the New Notes bear a Series A designation and a
different CUSIP Number from the Old Notes, (ii) the New Notes have been
registered under the Securities Act and therefore will not bear legends
restricting the transfer thereof and (iii) the holders of the New Notes will not
be entitled to certain rights under the Registration Rights Agreement, including
the provisions providing for an increase in the interest rate on the Old Notes
in certain circumstances relating to the timing of the Exchange Offer, all of
which rights will terminate upon consummation of the Exchange Offer. The New
Notes will evidence the same debt as the Old Notes and will be entitled to the
benefits of the Indenture.
As of the date of this Prospectus, $150,000,000 aggregate principal amount of
the Old Notes was outstanding. Solely for reasons of administration (and for no
other purpose), the Company has fixed the close of business on _______________
___, 1996, as the record date for the Exchange Offer for purposes of determining
the persons to whom this Prospectus and the Letter of Transmittal will be mailed
initially. Only a registered holder of the Old Notes may participate in the
Exchange Offer. There will be no fixed record date for determining registered
holders of the Old Notes entitled to participate in the Exchange Offer.
Holders of Old Notes do not have any appraisal or dissenters' rights under
the General Corporation Law of Delaware or the Indenture in connection with the
Exchange Offer. The Company intends to conduct the Exchange Offer in accordance
with the applicable requirements of the Exchange Act and the rules and
regulations of the Commission thereunder, including Rule 14e-1 thereunder.
The Company shall be deemed to have accepted validly tendered Old Notes when,
as and if the Company has given oral or written notice thereof to the Exchange
Agent. The Exchange Agent will act as agent for the tendering Holders for the
purpose of receiving the New Notes from the Company.
If any tendered Old Notes are not accepted for exchange because of an invalid
tender, the occurrence of certain other events set forth herein or otherwise,
the certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering Holder thereof as promptly as practicable after the
Expiration Date.
Holders who tender Old Notes in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than transfer taxes in certain circumstances, in connection with the
Exchange Offer. See "-- Fees and Expenses."
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on
____________, 1996, unless the Company, in its sole discretion, extends the
Exchange Offer, in which case the term "Expiration Date" shall mean the latest
date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice and will mail to the registered Holders
an announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled expiration date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by written
notice thereof to the registered holders. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, the Company
will promptly disclose such amendment by means of a prospectus supplement that
will be distributed to the registered Holders, and, depending upon the
significance of the amendment and the manner of disclosure to the registered
Holders, the Company will extend the Exchange Offer for a period of five to ten
business days if the Exchange Offer would otherwise expire during such five to
ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders of Old
Notes that are accepted for exchange will receive, in cash, accrued interest
thereon from May 29, 1996, the date of issuance of the Old Notes, to, but not
including, the date of issuance of the New Notes. Such interest will be paid
with the first interest payment on the New Notes on October 30, 1996.
Accordingly, holders of Old Notes that are accepted for exchange will not
receive interest that is accrued but unpaid on such Old Notes at the time of
tender. Interest on the Old Notes accepted for exchange will cease to accrue
upon issuance of the New Notes.
Interest on the New Notes will be payable semi-annually on each April 30 and
October 30, commencing October 30, 1996.
PROCEDURES FOR TENDERING OLD NOTES
Only a Holder of Old Notes may tender such Old Notes in the Exchange Offer.
To tender in the Exchange Offer, a Holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal and mail or otherwise
deliver such Letter of Transmittal or such facsimile, together with the Old
Notes and any other required documents, to the Exchange Agent prior to 5:00
p.m., New York City time, on the Expiration Date. To be tendered effectively,
the Old Notes, Letter of Transmittal and other required documents must be
received by the Exchange Agent at the address set forth below under "Exchange
Agent" prior to 5:00 p.m., New York City time, on the Expiration Date. Delivery
of the Old Notes may be made by book-entry transfer in accordance with the
procedures described below. Confirmation of such book-entry transfer must be
received by the Exchange Agent prior to the Expiration Date.
By executing the Letter of Transmittal, each Holder will make to the Company
the representation set forth below in the second paragraph under the heading
"Resale of New Notes".
The tender by a Holder and the acceptance thereof by the Company will
constitute agreement between such Holder and the Company in accordance with the
terms and subject to the conditions set forth herein and in the Letter of
Transmittal.
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THE METHOD OF DELIVERY OF THE OLD NOTES AND THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK OF
THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS
MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES
OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a broker,
dealer, commercial bank, trust company or other nominee and who wishes to tender
should contact the registered Holder promptly and instruct such registered
Holder to tender on such beneficial owner's behalf. See "Instructions to
Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the registered
Holder of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by a properly completed bond power, signed by such registered Holder
as such registered Holder's name appears on such Old Notes with the signature
thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request promptly
after the date of this Prospectus to establish accounts with respect to the Old
Notes at the book-entry transfer facility, The Depository Trust Company (the
"Book-Entry Transfer Facility"), for the purpose of facilitating the Exchange
Offer, and subject to the establishment thereof, any financial institution that
is a participant in the Book-Entry Transfer Facility's system may make
book-entry delivery of the Old Notes by causing such Book-Entry Transfer
Facility to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with the Book-Entry Transfer Facility's
procedures for such transfer. Although delivery of the Old Notes may be effected
through book-entry transfer into the Exchange Agent's account at the Book-Entry
Transfer Facility, an appropriate Letter of Transmittal properly completed and
duly executed with any required signature guarantee and all other required
documents must in each case be transmitted to and received or confirmed by the
Exchange Agent at its address set forth below on or prior to the Expiration
Date, or, if the guaranteed delivery procedures described below are complied
with, within the time period provided under such procedures. Delivery of
documents to the Book-Entry Transfer Facility does not constitute delivery to
the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject
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any and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify Holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders, unless otherwise provided in the Letter of
Transmittal, as soon as practicable following the Expiration Date.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are not
immediately available, (ii) who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent or (iii) who
cannot complete the procedures for book-entry transfer, prior to the Expiration
Date, may effect a tender if:
(a) the tender is made through an Eligible Institution;
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of
Guaranteed Delivery (by facsimile transmission, mail or hand delivery)
setting forth the name and address of the Holder, the certificate
number(s) of such Old Notes and the principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing
that, within three New York Stock Exchange trading days after the
Expiration Date, the Letter of Transmittal (or facsimile thereof),
together with the certificate(s) representing the Old Notes (or a
confirmation of book-entry transfer of such Old Notes into the Exchange
Agent's account at the Book-Entry Transfer Facility) and any other
documents required by the Letter of Transmittal, will be deposited by
the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or facsimile
thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer (or a confirmation of book-entry
transfer of such Old Notes into the Exchange Agent's account at the
Book-Entry Transfer Facility) and all other documents required by the
Letter of Transmittal, are received by the Exchange Agent within three
New York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above.
WITHDRAWALS OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn at
any time prior to 5:00 p.m., New York City time, on the Expiration Date.
Withdrawal of tendered Old Notes will be deemed a rejection of the Exchange
Offer.
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time, on
the Expiration Date. Any such notice of withdrawal must (i) specify the name of
the person having deposited the Old Notes to be withdrawn (the "Depositor"),
(ii) identify the Old Notes to be withdrawn (including the certificate number(s)
and principal amount of such Old Notes, or, in the case of Old Notes transferred
by book-entry transfer, the name and number of the account at the Book-Entry
Transfer Facility to be credited), (iii) be signed by the Holder in the same
manner as the original signature on the Letter of Transmittal by which such Old
Notes were tendered (including any
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<PAGE>
required signature guarantees) or be accompanied by documents of transfer
sufficient to have the Trustee with respect to the Old Notes register the
transfer of such Old Notes into the name of the person withdrawing the tender
and (iv) specify the name in which any such Old Notes are to be registered, if
different from that of the Depositor. A purported notice of withdrawal which
lacks any of the required information will not be an effective withdrawal of a
tender previously made. All questions as to the validity, form and eligibility
(including time of receipt) of such notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no New Notes will be issued with respect thereto unless the
Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the Holder
thereof without cost to such Holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"--Procedures for Tendering" at any time prior to the Expiration Date.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company shall not
be required to accept for exchange, or to exchange New Notes for, any Old Notes,
and may terminate or amend the Exchange Offer as provided herein before the
acceptance of such Old Notes, if:
(a) any action or proceeding is instituted or threatened in any court or by
or before any governmental agency with respect to the Exchange Offer
which, in the sole judgment of the Company, might materially impair the
ability of the Company to proceed with the Exchange Offer or any
material adverse development has occurred in any existing action or
proceeding with respect to the Company or any of its subsidiaries; or
(b) any change, or any development involving a prospective change, in the
business or financial affairs of the Company or any of its subsidiaries
has occurred which, in the sole judgment of the Company, might
materially impair the ability of the Company to proceed with the
Exchange Offer; or
(c) any law, statute, rule, regulation or interpretation by the staff of the
Commission is proposed, adopted or enacted which, in the sole judgment
of the Company, might materially impair the ability of the Company to
proceed with the Exchange Offer or materially impair the contemplated
benefits of the Exchange Offer to the Company; or
(d) there shall occur a change in the current interpretation by the staff of
the Commission which permits the New Notes issued pursuant to the
Exchange Offer in exchange for Old Notes to be offered for resale,
resold and otherwise transferred by Holders thereof (other than
broker-dealers and any such Holder which is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of
the Securities Act provided that such New Notes are acquired in the
ordinary course of such Holders' business and such Holders have no
arrangement or understanding with any person to participate in the
distribution of such New Notes; or
(e) any governmental approval has not been obtained, which approval the
Company shall, in its sole discretion, deem necessary for the
consummation of the Exchange Offer as contemplated hereby.
If the Company determines in its sole discretion that any of the conditions
are not satisfied, the Company may (i) refuse to accept any Old Notes and return
all tendered Old Notes to the tendering Holders, (ii) extend the Exchange Offer
and retain all Old Notes tendered prior to the expiration of the Exchange Offer,
subject, however, to the rights of Holders to withdraw such Old Notes (see "--
Withdrawal of Tenders") or (iii) waive such unsatisfied conditions with respect
to the Exchange Offer and accept all properly tendered Old Notes which have not
been withdrawn. If any waiver by the Company constitutes a material change to
the Exchange Offer, the Company will promptly disclose such waiver by means of a
prospectus supplement that will be distributed to the registered Holders, and,
depending
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upon the significance of the waiver and the manner of disclosure to the
registered Holders, the Company will extend the Exchange Offer for a period of
five to ten business days if the Exchange Offer would otherwise expire during
such five to ten business day period.
The foregoing conditions are for the sole benefit of the Company and may be
waived by the Company, in whole or in part, in its sole discretion, although the
Company has no current intention of doing so. Any determination made by the
Company concerning an event, development or circumstance described or referred
to above will be final and binding on all parties.
EXCHANGE AGENT
Signet Trust Company has been appointed as Exchange Agent for the Exchange
Offer. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notice of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
By Registered or Certified Mail:
Signet Trust Company
7 St. Paul Street
6th Floor, Corporate Trust Department
Baltimore, MD 21202
Attention: Dianne TenHoopen
By Overnight Mail or Hand:
Signet Trust Company
7 St. Paul Street
6th Floor, Corporate Trust Department
Baltimore, MD 21202
Attention: Dianne TenHoopen
By Facsimile:
Signet Trust Company
(410) 752-8642
Confirm: (410) 332-5857
Attention: Dianne TenHoopen
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, telephone or in person by officers and regular
employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers or others soliciting
acceptances of the Exchange Offer. The Company, however, will pay the Exchange
Agent reasonable and customary fees for its services and will reimburse it for
its reasonable out-of-pocket expenses in connection therewith and pay other
registration expenses, including fees and expenses of the Trustee, filing fees,
blue sky fees and printing and distribution expenses.
The Company will pay all transfer taxes, if any, applicable to the exchange
of the Old Notes pursuant to the Exchange Offer. If, however, certificates
representing the New Notes or the Old Notes for principal amounts not tendered
or accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered Holder of the Old Notes tendered, or if
tendered Old Notes 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 exchange of the Old Notes pursuant to the Exchange
Offer, then the amount of any such transfer taxes (whether imposed on the
registered
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Holder or any other person) will be payable by the tendering Holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering Holder.
ACCOUNTING TREATMENT
The New Notes will be recorded at the same carrying value as the Old Notes,
which is face value, as reflected in the Company's accounting records on the
date of exchange. Accordingly, no gain or loss for accounting purposes will be
recognized. The expenses of the Exchange Offer and the approximately $4.6
million of unamortized expenses related to the issuance of the Old Notes will be
amortized over the term of the New Notes.
RESALE OF NEW NOTES
Based on an interpretation by the staff of the Commission set forth in
no-action letters issued to third parties, the Company believes that the New
Notes issued pursuant to the Exchange Offer in exchange for Old Notes may be
offered for resale, resold and otherwise transferred by any holder of such New
Notes (other than broker-dealers, as set forth below, and any such holder which
is an "affiliate" of the Company within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
provisions of the Securities Act, provided that such New Notes are acquired in
the ordinary course of such holder's business and such holder does not intend to
participate and has no arrangement or understanding with any person to
participate in the distribution of such New Notes. Any holder who tenders in the
Exchange Offer with the intention to participate, or for the purpose of
participating, in a distribution of the New Notes may not rely on the position
of the staff of the Commission enunciated in Exxon Capital Holdings Corporation
(available May 13, 1988) and Morgan Stanley & Co., Incorporated (available June
5, 1991), or similar no-action letters, but rather must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. In addition, any such resale transaction
should be covered by an effective registration statement containing the selling
security holders information required by Item 507 of Regulation S-K of the
Securities Act. Each broker-dealer that receives New Notes for its own account
in exchange for Old Notes, where such Old Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it (i) acquired the Old Notes for its own
account as a result of market-making activities or other trading activities,
(ii) has not entered into any arrangement or understanding with the Company or
any "affiliate" of the Company (within the meaning of Rule 405 under the
Securities Act) and (iii) will deliver a prospectus in connection with any
resale of such New Notes. See "Plan of Distribution."
By tendering in the Exchange Offer, each Holder will represent to the Company
that, among other things, (i) the New Notes acquired pursuant to the Exchange
Offer are being obtained in the ordinary course of business of the person
receiving such New Notes, whether or not such person is a Holder, (ii) neither
the Holder nor any such other person has an arrangement or understanding with
any person to participate in the distribution of such New Notes and (iii) the
Holder and such other person acknowledge that if they participate in the
Exchange Offer for the purpose of distributing the New Notes (a) they must, in
the absence of an exemption therefrom, comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale of the New Notes and cannot rely on the no-action letters referenced
above and (b) failure to comply with such requirements in such instance could
result in such Holder incurring liability under the Securities Act for which
such Holder is not indemnified by the Company. Further, by tendering in the
Exchange Offer, each Holder that may be deemed an "affiliate" (as defined under
Rule 405 of the Securities Act) of the Company will represent to the Company
that such Holder understands and acknowledges that the New Notes may not be
offered for resale, resold or otherwise transferred by that Holder without
registration under the Securities Act or an exemption therefrom.
32
<PAGE>
As set forth above, affiliates of the Company are not entitled to rely on the
foregoing interpretations of the staff of the Commission with respect to resales
of the New Notes without compliance with the registration and prospectus
delivery requirements of the Securities Act.
CONSEQUENCES OF FAILURE TO EXCHANGE
As a result of the making of this Exchange Offer, the Company will have
fulfilled one of its obligations under the Registration Rights Agreement and
Holders of Old Notes who do not tender their Old Notes will not have any further
registration rights under the Registration Rights Agreement or otherwise.
Accordingly, any Holder of Old Notes that does not exchange that Holder's Old
Notes for New Notes will continue to hold the untendered Old Notes and will be
entitled to all the rights and limitations applicable thereto under the
Indenture, except to the extent such rights or limitations, by their terms,
terminate or cease to have further effectiveness as a result of the Exchange
Offer.
The Old Notes that are not exchanged for New Notes pursuant to the Exchange
Offer will remain restricted securities. Accordingly, such Old Notes may be
resold only (i) to the Company (upon redemption thereof or otherwise), (ii)
pursuant to an effective registration statement under the Securities Act, (iii)
so long as the Old Notes are eligible for resale pursuant to Rule 144A, to a
qualified institutional buyer within the meaning of Rule 144A under the
Securities Act in a transaction meeting the requirements of Rule 144A, (iv)
outside the United States to a foreign person pursuant to the exemption from the
registration requirements of the Securities Act provided by Regulation S
thereunder, (v) to an institutional accredited investor that, prior to such
transfer, furnishes to Signet Trust Company, as trustee, a signed letter
containing certain representations and agreements relating to the restrictions
on transfer of the Old Notes evidenced thereby (the form of which letter can be
obtained from such trustee) or (vi) pursuant to another available exemption from
the registration requirements of the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United States.
Accordingly, if any Old Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered Old Notes could be adversely
affected. See "Risk Factors -- Consequences of the Exchange Offer on
Non-Tendering Holders of the Old Notes" and "-- Termination of Certain Rights."
TERMINATION OF CERTAIN RIGHTS
Holders of the Senior Notes will not be entitled to certain rights under the
Registration Rights Agreement following the consummation of the Exchange Offer.
The rights that will terminate are the right (i) to have the Company file with
the Commission and use its best efforts to have declared effective a shelf
registration statement to cover resales of the Old Notes by the holders thereof
and (ii) to receive additional interest if the registration statement of which
this Prospectus is a part or the shelf registration statement are not filed
with, or declared effective by, the Commission within certain specified time
periods or the Exchange Offer is not consummated within a specified time period.
OTHER
Participation in the Exchange Offer is voluntary and holders should carefully
consider whether to accept. Holders of the Old Notes are urged to consult their
financial and tax advisors in making their own decision on what action to take.
No person has been authorized to give any information or to make any
representations in connection with the Exchange Offer other than those contained
in this Prospectus. If given or made, such information or representations should
not be relied upon as having been authorized by the Company. Neither the
delivery of this Prospectus nor any exchange made hereunder shall, under any
circumstances, create any implication that there has been no change in the
affairs of the Company since the respective dates as of which information is
given herein. The Exchange Offer is not being made to (nor will tender be
accepted from or on behalf of) holders of Old Notes in any jurisdiction in which
the making of the Exchange Offer or the acceptance thereof would not be in
compliance with the laws of such jurisdiction. However, the Company may, at its
discretion, take such action as it may deem necessary to make the Exchange Offer
in any such jurisdiction and extend the Exchange Offer to holders of
33
<PAGE>
Old Notes in such jurisdiction. In any jurisdiction the securities laws or blue
sky laws of which require the Exchange Offer to be made by a licensed broker or
dealer, the Exchange Offer is being made on behalf of the Company by one or more
registered brokers or dealers which are licensed under the laws of such
jurisdiction.
The Company may in the future seek to acquire untendered Old Notes in open
market or privately negotiated transactions, through subsequent exchange offers
or otherwise. The Company has no present plans to acquire any Old Notes that are
not tendered in the Exchange Offer or to file a registration statement to permit
resales of any untendered Old Notes.
34
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following discussion is based upon current provisions of the Internal
Revenue Code of 1986, as amended, applicable Treasury regulations, judicial
authority and administrative rulings and practice. There can be no assurance
that the Internal Revenue Service (the "Service") will not take a contrary view,
and no ruling from the Service has been or will be sought. Legislative, judicial
or administrative changes or interpretations may be forthcoming that could alter
or modify the statements and conditions set forth herein. Any such changes or
interpretations may or may not be retroactive and could affect the tax
consequences to Holders. Certain Holders of the Old Notes (including insurance
companies, tax exempt organizations, financial institutions, broker-dealers,
foreign corporations and persons who are not citizens or residents of the United
States) may be subject to special rules not discussed below. EACH HOLDER OF AN
OLD NOTE SHOULD CONSULT HIS, HER OR ITS OWN TAX ADVISOR AS TO THE PARTICULAR TAX
CONSEQUENCES OF EXCHANGING SUCH HOLDER'S OLD NOTES FOR NEW NOTES, INCLUDING THE
APPLICABILITY AND EFFECT OF ANY STATE, LOCAL OR FOREIGN TAX LAWS.
The issuance of the New Notes to Holders of the Old Notes pursuant to the
terms set forth in this Prospectus should not constitute a recognition event for
Federal income tax purposes. Consequently, no gain or loss should be recognized
by Holders of the Old Notes upon receipt of the New Notes. For purposes of
determining gain or loss upon the subsequent sale or exchange of the New Notes,
a Holder's basis in the New Notes should be the same as such Holder's basis in
the Old Notes exchanged therefor. Holders should be considered to have held the
New Notes from the time of their original acquisition of the Old Notes.
USE OF PROCEEDS
This Exchange Offer is intended to satisfy certain of the Company's
obligations under the Purchase Agreement and the Registration Rights Agreement.
The Company will not receive any cash proceeds from the issuance of the New
Notes offered hereby. In consideration for issuing the New Notes contemplated in
this Prospectus, the Company will receive the Old Notes in like principal
amount, the form and terms of which are the same as the form and terms of the
New Notes (which replace the Old Notes), except as otherwise described herein.
The Old Notes surrendered in exchange for the New Notes will be retired and
canceled and cannot be reissued. Accordingly, issuance of the New Notes will not
result in any increase or decrease in the indebtedness of the Company.
In accordance with the terms of its New Credit Facility, the Company used all
of the net proceeds from the sale of the Old Notes to repay $145.0 million of
the $337.7 million outstanding under this facility on May 29, 1996. The
indebtedness repaid was incurred to pay amounts outstanding under the Company's
prior credit facility, for acquisitions and for general corporate purposes,
including working capital. Loans under the New Credit Facility bear interest at
a rate equal to, at the option of the Company, either (i) the sum of (a) the
higher of (1) the bank's base rate or (2) one percent plus the latest overnight
federal funds rate plus (b) a margin of between zero percent and one and
one-quarter percent (depending on financial ratios); or (ii) in the case of
Eurodollar loans, the sum of between three-quarters of one percent and two and
one-half percent (depending on certain financial ratios) and the interest rate
in the London interbank market for loans in an amount substantially equal to the
amount of borrowing and the period of borrowing selected by the Company. The New
Credit Facility consists of a $700 million revolving loan which reduces to $560
million on June 30, 2000 and $315 million on June 30, 2001, with a final
maturity on June 30, 2002. See "Recent Developments -- New Revolving Credit
Facility," "Capitalization" and "Description of Certain Indebtedness."
35
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at June
30, 1996 and (ii) on a pro forma basis as of such date to give effect to the
Pharmacy Sale and the Proposed ILC Offering, as if such transactions had
occurred on June 30, 1996. The issuance of the New Notes in exchange for the Old
Notes pursuant to the exchange offer will have no effect on the capitalization
of the Company. See "Recent Developments -- Proposed Divesitures and "Pro Forma
Financial Information."
<TABLE>
<CAPTION>
JUNE 30, 1996
-----------------------
(DOLLARS IN THOUSANDS)
ACTUAL PRO FORMA
------ ---------
<S> <C> <C>
Cash and temporary investments............................... $ 46,689 $ 45,811
============ ============
Short-term debt:
Current portion of long-term debt........................... $ 4,907 $ 4,907
============ ============
Long-term debt, less current portion:
Credit facility(1).......................................... $ 210,650 84,562
Other debt.................................................. 69,439 69,439
10 1/4 % Senior Subordinated Notes due 2006 ................ 150,000 150,000
9 5/8 % Senior Subordinated Notes due 2002, Series A........ 115,000 115,000
10 3/4 % Senior Subordinated Notes due 2004................. 100,000 100,000
5 3/4 % Convertible Senior Subordinated Debentures due 2001. 143,750 143,750
6% Convertible Subordinated Debentures due 2003............. 115,000 115,000
------------ ------------
Total long-term debt....................................... 903,839 777,751
------------ ------------
Stockholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares
authorized................................................. -- --
Common Stock, $.001 par value, 150,000,000 shares
authorized; 23,164,993 shares issued(2).................... 23 23
Additional paid-in capital.................................. 429,803 429,803
Retained earnings .......................................... 61,598 72,935
Unrealized gain on available for sale securities............ -- 10,936
------------ ------------
Total stockholders' equity ................................ 491,424 513,697
------------ ------------
Total capitalization ..................................... $1,395,263 $1,291,448
============ ============
</TABLE>
- ----------
(1) Subsequent to June 30, 1996 and as of September 20, 1996, the Company had
net pay downs under its revolving credit facility of $68.5 million.
(2) The Company's Board of Directors in 1995 authorized the repurchase, in the
open market, of up to $50 million of the Company's common stock. The
repurchases will be made at such times and in such amounts as the Company's
management deems appropriate. The purpose of the repurchase program is to
have available in treasury shares of common stock to satisfy contingent
earn-out payments under prior business combinations accounted for by the
purchase method. The repurchases will be funded from cash from operations
and drawings under the Company's revolving credit facility.
36
<PAGE>
SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The following tables summarize certain selected consolidated financial data,
which should be read in conjunction with the Company's Consolidated Financial
Statements and related Notes and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included or incorporated by
reference herein. The selected consolidated financial data set forth below for
each of the years in the five-year period ended December 31, 1995 and as of the
end of each of such periods have been derived from the Consolidated Financial
Statements of the Company which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants. The consolidated financial statements
as of December 31, 1994 and 1995 and for each of the years in the three-year
period ended December 31, 1995 and the report thereon, are included elsewhere
herein. The selected consolidated financial data presented below as of June 30,
1996 and for the six months ended June 30, 1995 and 1996 have been prepared on
the same basis as the audited financial statements included herein and, in the
opinion of the Company, include all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the information set forth
therein. The results for the six months ended June 30, 1996 are not necessarily
indicative of the results to be achieved for the full fiscal year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------------------------- -------------------------
1991 1992 1993 1994 1995 1995 1996
---------- ----------- ---------- ----------- ----------- ---------- ----------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data(1)(2):
Net revenues:
Basic medical services ........... $ 82,411 $100,799 $113,508 $269,817 $ 368,569 $176,701 $195,279
Specialty medical services ....... 49,901 88,065 162,017 404,401 770,554 364,489 446,393
Management services and other .... 11,403 13,232 20,779 37,884 39,765 19,826 21,381
---------- ----------- ---------- ----------- ----------- ---------- ----------
Total .......................... 143,715 202,096 296,304 712,102 1,178,888 561,016 663,053
Cost and expenses:
Operating expenses ............... 103,754 145,623 212,936 528,131 888,551 421,708 502,344
Corporate administrative and
general ......................... 7,965 11,927 16,832 37,041 56,016 26,576 29,947
Depreciation and amortization(3).. 3,307 4,334 8,126 26,367 39,961 18,642 18,604
Rent ............................. 16,515 19,509 23,156 42,158 66,125 32,520 35,535
Interest, net(4)(5)............... 4,126 1,493 5,705 20,602 38,977 15,915 30,102
Loss from impairment of long-lived
assets(6)........................ -- -- -- -- 109,106 -- --
Other non-recurring charges(7).... -- -- -- -- 23,854 -- --
---------- ----------- ---------- ----------- ----------- ---------- ----------
Earnings (loss) before equity in
earnings (loss) of affiliates,
income taxes and extraordinary
items .......................... 8,048 19,210 29,549 57,803 (43,702) 45,655 46,521
Equity in earnings (loss) of
affiliates ....................... (63) (36) 1,241 1,176 1,443 630 760
---------- ----------- ---------- ----------- ----------- ---------- ----------
Earnings (loss) before income
taxes and extraordinary items .. 7,985 19,174 30,790 58,979 (42,259) 46,285 47,281
Income tax provision (benefit) .... 2,060 7,286 12,008 22,117 (16,270) 17,820 18,203
---------- ----------- ---------- ----------- ----------- ---------- ----------
Earnings (loss) before
extraordinary items ............ 5,925 11,888 18,782 36,862 (25,989) 28,465 29,078
Extraordinary items(8) ............ -- 2,524 2,275 4,274 1,013 508 1,431
---------- ----------- ---------- ----------- ----------- ---------- ----------
Net earnings (loss) ............ $ 5,925 $ 9,364 $ 16,507 $ 32,588 $ (27,002) $ 27,957 $ 27,647
========== =========== ========== =========== =========== ========== ==========
Other Financial Data:
EBITDA(9).......................... $ 15,418 $ 25,001 $ 44,621 $105,948 $ 169,639 $ 80,842 $ 95,987
Ratio of EBITDA to interest,
net(9) ........................... 3.7x 16.7x 7.8x 5.1x 4.4x 5.1x 3.2x
Ratio of earnings to fixed
charges(10)....................... 1.6x 2.8x 2.6x 2.4x 0.3x 2.5x 2.0x
Capital expenditures:
Acquisitions(11).................. $ 589 $ 13,898 $209,214 $152,791 $ 96,671 $ 39,455 $ 18,159
Other(12)......................... 7,668 27,124 59,959 91,354 131,080 47,943 66,643
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------- JUNE 30,
1991 1992 1993 1994 1995 1996
---------- ----------- --------- ----------- ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and temporary investments .. $ 16,083 $103,858 $ 65,295 $ 63,347 $ 41,304 $ 46,689
Working capital .................. 41,004 144,074 69,495 76,383 136,315 187,619
Total assets ..................... 156,191 313,671 776,324 1,255,989 1,433,730 1,620,381
Long-term debt, including current
portion .......................... 49,877 142,620 402,536 551,452 770,661 908,746
Stockholders' equity ............. 87,354 146,013 216,506 453,811 431,528 491,424
</TABLE>
- --------------
(1) The Company 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, the
Company sold its pharmacy division in July 1995 and is pursuing the sale of
its assisted living division. See "Pro Forma Financial Information."
(2) In 1995, the Company merged with IntegraCare, Inc. ("IntegraCare") in a
transaction accounted for as a pooling of interests. Accordingly the
Company's historical financial statements for all periods prior to the
effective date of the merger have been restated to include the results of
IntegraCare. See Note 1(n) of Notes to Consolidated Financial Statements.
(3) Includes amortization of deferred financing costs of $546,000, $178,000,
$306,000, $621,000, $645,000, $210,000 and $640,000 for the years ended
December 31, 1991, 1992, 1993, 1994 and 1995 and for the six months ended
June 30, 1995 and 1996, respectively.
(4) Net of interest income of $1,438,000, $1,300,000, $2,669,000, $1,121,000,
$1,876,000, $835,000 and $1,045,000 for the years ended December 31, 1991,
1992, 1993, 1994 and 1995 and for the six months ended June 30, 1995 and
1996, respectively.
(5) Interest, net does not include capitalized interest of $535,000, $860,000,
$1,402,000, $3,030,000, $5,155,000, $2,193,000 and $1,902,000 for the years
ended December 31, 1991, 1992, 1993, 1994 and 1995 and for the six months
ended June 30, 1995 and 1996, respectively.
(6) In December 1995, the Company 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 $109,106,000. See Notes
1(j) and 17 of Notes to Consolidated Financial Statements.
(7) In the fourth quarter of 1995, the Company terminated a contract to manage
23 facilities and, as a result, incurred a loss of $21,915,000 on the
termination of this contract. Such loss consists of the write-off of its
investment in the management contract and management fees receivable. In
connection with the merger with IntegraCare, the Company incurred $1,939,000
of accounting, legal and other costs. See Note 17 of Notes to Consolidated
Financial Statements.
(8) In 1992 the Company 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 effects of
$1,548,000, is presented for the year ended December 31, 1992 as an
extraordinary loss of $2,524,000. In 1993 the Company 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
effects of $1,455,000, is presented for the year ended December 31, 1993 as
an extraordinary loss of $2,275,000. In 1994 the Company 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
effects of $2,565,000, is presented for the year ended December 31, 1994 as
an extraordinary loss of $4,274,000. In 1995, the Company 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. During the six
months ended June 30, 1995 and 1996, the Company recorded a loss on
extinguishment of debt of $826,000 and $2,327,000, respectively, relating
primarily to the write-off of deferred financing costs. Such losses, reduced
by the related income tax effects of $318,000 and $896,000, respectively,
are presented in the statement of operations for the six months ended June
30, 1995 and 1996 as an extraordinary item loss of $508,000 and $1,431,000,
respectively.
(9) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges and extraordinary
items. EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator of
the Company's operating performance or cash flow as a measure of liquidity.
Management also believes that the ratio of EBITDA to interest, net is an
accepted measure of debt service ability; however, such ratio should not be
considered a substitute for the ratio of earnings to fixed charges as a
measure of debt service ability.
(10)The ratio of earnings to fixed charges is computed by dividing fixed
charges into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest,
expensed or capitalized, amortization of debt issuance costs and the
estimated interest component of rent expense. As a result of the loss from
impariment of long-lived assets and other non-recurring charges, fixed
charges exceeded earnings by $47.8 million in the year ended December 31,
1995. The ratio of earnings to fixed charges before giving effect to the
loss from impairment of long-lived assets and other non-recurring charges
would have been 2.2x for the year ended December 31, 1995.
(11)Does not include assumed indebtedness and other liabilities of acquired
companies.
(12)Includes renovation costs and equipment purchases, primarily for MSUs.
38
<PAGE>
In December 1995, the Company adopted the provisions of SFAS No. 121
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of." The Company's decision to adopt SFAS No. 121 prior to its
required date of effectiveness was influenced by its conclusion that the
healthcare regulatory and reimbursement environments in many of its markets
eroded its ability to fully recover certain of its investments in those markets.
Through evaluations of the recent financial performance and projected cash flows
of its facilities and using standard industry appraisal techniques, the Company
estimated the fair value of each of its facilities and determined that the value
of certain deferred pre-opening costs, leasehold improvements and buildings and
equipment exceeded their carrying value. See Note 1(j) of Notes to Consolidated
Financial Statements.
RESULTS OF OPERATIONS
The following table sets forth for the fiscal periods indicated the
percentage of net revenues represented by certain items reflected in the
Company's statement of operations.
<TABLE>
<CAPTION>
PERCENTAGE OF NET REVENUES(1)
----------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
---------------------------------------- -----------------
1991 1992 1993 1994 1995 1995 1996
------- ------- ------- ------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services................. 57.4% 49.9% 38.3% 37.9% 31.3% 31.5% 29.5%
Specialty medical service.............. 34.7 43.6 54.7 56.8 65.4 65.0 67.3
Management services and other.......... 7.9 6.5 7.0 5.3 3.3 3.5 3.2
------- ------- ------- ------- -------- -------- --------
Total................................ 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Facility operating expenses............. 72.2 72.1 71.9 74.2 75.4 75.2 75.8
Corporate administrative and general ... 5.5 5.9 5.7 5.2 4.8 4.7 4.5
------- ------- ------- ------- -------- -------- --------
Operating income before certain fixed
expenses............................... 22.3 22.0 22.4 20.6 19.8 20.1 19.7
------- ------- ------- ------- -------- -------- --------
Depreciation and amortization........... 2.3 2.1 2.7 3.7 3.4 3.3 2.8
Rent.................................... 11.5 9.7 7.8 5.9 5.6 5.8 5.4
Interest, net........................... 2.9 0.7 1.9 2.9 3.3 2.8 4.5
Loss from impairment of long-lived
assets ................................ -- -- -- -- 9.2 -- --
Other non-recurring charges............. -- -- -- -- 2.0 -- --
------- ------- ------- ------- -------- -------- --------
Earnings (loss) before equity in
earnings (loss) of affiliates, income
taxes and extraordinary items.......... 5.6 9.5 10.0 8.1 (3.7) 8.2 7.0
Equity in earnings (loss) of
affiliates............................. (0.1) -- 0.4 0.2 0.1 0.1 0.1
------- ------- ------- ------- -------- -------- --------
Earnings (loss) before income taxes and
extraordinary items.................... 5.5 9.5 10.4 8.3 (3.6) 8.3 7.1
Income tax provision (benefit).......... 1.4 3.6 4.1 3.1 (1.4) 3.2 2.7
------- ------- ------- ------- -------- -------- --------
Earnings (loss) before extraordinary
items.................................. 4.1 5.9 6.3 5.2 (2.2) 5.1 4.4
Extraordinary items..................... -- (1.3) (0.8) (0.6) (0.1) (0.1) (0.2)
------- ------- ------- ------- -------- -------- --------
Net earnings (loss)..................... 4.1 4.6 5.5 4.6 (2.3) 5.0 4.2
======= ======= ======= ======= ======== ======== ========
</TABLE>
- ------------
(1) In 1995, the Company merged with IntegraCare in a transaction accounted for
as a pooling of interests. Accordingly, the Company's historical financial
statements for all periods prior to the effective date of the merger have
been restated to include the results of IntegraCare. See Note 1(n) of Notes
to Consolidated Financial Statements.
39
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the Company's
operations for the last ten fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
---------------------
1994 1995 1996
-------------------------------------- ---------------------------------------- ------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30
-------- ------- -------- ------- -------- ------- -------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services $ 54,371 $ 54,735 $ 69,042 $ 91,669 $ 89,336 $ 87,365 $ 95,482 $ 96,386 $ 97,216 $ 98,063
Specialty medical
services ............. 73,634 81,524 106,806 142,437 176,158 188,331 193,604 212,461 219,525 226,868
Management services and
other ................ 9,833 9,332 9,001 9,718 9,141 10,583 10,039 10,002 10,532 10,849
---------- -------- --------- --------- ---------- ---------- ---------- ----------- ---------- ----------
Total ............... 137,838 145,591 184,849 243,824 274,635 286,279 299,125 318,849 327,273 335,780
Cost and Expenses:
Operating expenses .... 102,049 107,275 136,469 182,338 207,304 214,404 224,457 242,386 248,973 253,371
Corporate
administrative and
general .............. 7,686 8,566 9,675 11,114 12,402 14,174 14,262 15,178 15,093 14,854
Depreciation and
amortization ......... 5,117 5,357 6,832 9,061 8,960 9,682 9,867 11,452 9,196 9,408
Rent .................. 8,022 8,210 10,859 15,067 16,066 16,454 16,726 16,879 17,656 17,879
Interest, net ......... 4,405 5,127 4,796 6,274 7,330 8,585 10,955 12,107 14,214 15,888
Loss from impairment of
long-lived assets..... -- -- -- -- -- -- -- 109,106 -- --
Other non-recurring
charges............... -- -- -- -- -- -- 1,939 21,915 -- --
---------- -------- --------- --------- ---------- ---------- ---------- ----------- ---------- ----------
Earnings (loss) before
equity in earnings of
affiliates, income
taxes and
extraordinary items... 10,559 11,056 16,218 19,970 22,573 22,980 20,919 (110,174) 22,141 24,380
Equity in earnings of
affiliates............. 283 271 281 341 315 417 401 310 300 460
---------- -------- --------- --------- ---------- ---------- ---------- ----------- ---------- ----------
Earnings (loss) before
income taxes and
extraordinary items .. 10,842 11,327 16,499 20,311 22,888 23,397 21,320 (109,864) 22,441 24,840
Income tax provision
(benefit).............. 4,066 4,248 6,187 7,616 8,812 9,008 8,208 (42,298) 8,640 9,563
---------- -------- --------- --------- ---------- ---------- ---------- ----------- ---------- ----------
Earnings (loss) before
extraordinary
items(2).............. 6,776 7,079 10,312 12,695 14,076 14,389 13,112 (67,566) 13,801 15,277
Extraordinary items .... - - 4,274 - -- 508 - 505 -- 1,431
---------- -------- --------- --------- ---------- ---------- ---------- ----------- ---------- ----------
Net earnings (loss).... $ 6,776 $ 7,079 $ 6,038 $ 12,695 $ 14,076 $ 13,881 $ 13,112 $ (68,071) $ 13,801 $ 13,846
========== ======== ========= ========= ========== ========== ========== =========== ========== ==========
</TABLE>
- ---------
(1) In 1995, the Company merged with IntegraCare in a transaction accounted for
as a pooling of interests. Accordingly, the Company's historical financial
statements for all periods prior to the effective date of the merger have
been restated to include the results of IntegraCare. See Note 1(n) of Notes
to Consolidated Financial Statements.
(2) Extraordinary items relate to extinguishments of debt. See note 14 to
Consolidated Financial Statements.
From January 1, 1994 through June 30, 1996, the Company acquired ten
geriatric care facilities (including three facilities which it had previously
leased and five of which had been managed by IHS), leased 57 geriatric care
facilities (three of which had previously been owned and three of which had
previously been managed) and entered into management agreements to manage 57
geriatric care facilities (23 of which were subsequently terminated) and four
assisted living facilities. During this period, the Company sold its interest in
five geriatric care facilities and seven retirement facilities (ten owned and
two leased) and agreements to manage 25 facilities were terminated. In addition,
during this period the Company opened 82 MSUs totalling 1,836 beds and expanded
existing MSUs (including MSUs opened during this period) by 332 beds.
40
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The accompanying unaudited pro forma financial information are based upon the
consolidated historical statements of the Company adjusted to give effect to:(i)
the Pharmacy Sale and (ii) the Proposed ILC Offering. In the Pharmacy Sale, the
Company received $125 million in cash and Capstone Common Stock having a value
of $25 million. In the Proposed ILC Offering, the Company is expected to receive
net proceeds of approximately $35.1 million (assuming the sale of 2,694,900
shares of ILC common stock at an initial public offering price of $14.00 per
share (the midpoint of the estimated offering price range) and after deducting
estimated underwriting discounts). There can be no assurance the Proposed ILC
Offering will be consummated on the proposed terms, on different terms or at
all. See "Recent Developments -- Divestitures."
The pro forma balance sheet at June 30, 1996 was prepared as if the Pharmacy
Sale and Proposed ILC Offering were consummated as of June 30, 1996. The pro
forma statement of operations for the year ended December 31, 1995 and the six
months ended June 30, 1996 were prepared as if the Pharmacy Sale and Proposed
ILC Offering were consummated on January 1, 1995.
The pro forma adjustments are based upon available information and certain
assumptions that management believes are reasonable. The unaudited pro forma
financial information set forth below is not necessarily indicative of the
Company's 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 in the Company's future. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto included elsewhere in this Prospectus.
41
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
UNAUDITED PRO FORMA BALANCE SHEET
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PROPOSED
PHARMACY SALE ILC OFFERING
ADJUSTMENTS ADJUSTMENTS
IHS INCREASE INCREASE PRO FORMA
ACTUAL (DECREASE) (DECREASE) CONSOLIDATED
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ..................... $ 44,399 $ (878)(a) $ -- $ 43,521
Temporary investments ......................... 2,290 -- -- 2,290
Patient accounts and third-party payor
settlements receivable, net .................. 263,203 (17,867)(a) (70)(a) 245,266
Supplies, inventories, prepaid expenses and
other current assets ......................... 26,665 (6,457)(a) (841)(a) 19,367
Income tax receivable.......................... 14,717 -- -- 14,717
---------- --------------- -------------- ---------------
Total current assets ........................ 351,274 (25,202) (911) 325,161
Property, plant and equipment, net ............. 816,530 (9,529)(a) (60,588)(a) 746,413
Intangible assets .............................. 338,051 (54,965)(a) -- 283,086
Investments in and advances to affiliates ..... 30,193 25,000 (b) 15,664 (g) 70,857
Other assets ................................... 84,333 -- (736)(a) 83,597
---------- --------------- -------------- ---------------
Total assets ................................ $1,620,381 $ (64,696) $ (46,571) $1,509,114
========== =============== ============== ===============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt .......... $ 4,907 $ -- $ -- $ 4,907
Accounts payable and accrued expenses ......... 158,748 4,031 (a)(c) (11,483)(a) 151,296
---------- --------------- -------------- ---------------
Total current liabilities ................... 163,655 4,031 (11,483) 156,203
Long-term debt:
Convertible subordinated debentures ........... 258,750 -- -- 258,750
Other long-term debt less current maturities .. 645,089 (91,000)(d) (35,088)(h) 519,001
---------- --------------- -------------- ---------------
Total long-term debt ........................ 903,839 (91,000) (35,088) 777,751
Deferred income taxes .......................... 54,730 -- -- 54,730
Deferred gain on sale-leaseback transactions .. 6,733 -- -- 6,733
Commitments and contingencies
Stockholders' equity:
Common stock .................................. 23 -- -- 23
Additional paid-in capital .................... 429,803 -- -- 429,803
Retained earnings ............................. 61,598 11,337 (e) -- 72,935
Unrealized gain on available for sale
securities.................................... -- 10,936 (f) -- 10,936
---------- --------------- -------------- ---------------
Total stockholders' equity ................. 491,424 22,273 -- 513,697
---------- --------------- -------------- ---------------
Total liabilities and stockholders' equity .. $1,620,381 $ (64,696) $ (46,571) $1,509,114
========== =============== ============== ===============
</TABLE>
42
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PROPOSED
ILC
PHARMACY SALE OFFERING
ADJUSTMENTS ADJUSTMENTS
IHS INCREASE INCREASE PRO FORMA
ACTUAL (DECREASE) (DECREASE) CONSOLIDATED
------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services ................... $ 368,569 $ -- $ -- $ 368,569
Specialty medical services ............... 770,554 (73,566)(i) (15,123)(i) 681,865
Management services and other ............ 39,765 -- (1,146)(i) 38,619
---------- -------------- ------------- ---------------
Total .................................. 1,178,888 (73,566) (16,269) 1,089,053
Cost and expenses:
Operating expenses ....................... 888,551 (63,082)(i) (12,285)(i) 813,184
Corporate administrative and
general ................................. 56,016 -- -- 56,016
Depreciation and amortization............. 39,961 (2,681)(i) (414)(i) 36,866
Rent ..................................... 66,125 (1,227)(i) (2,430)(i) 62,468
Interest, net............................. 38,977 (6,798)(j) (2,621)(j) 29,558
Loss from impairment of long-lived
assets(1)................................ 109,106 -- (5,126)(i) 103,980
Other non-recurring charges(2)............ 23,854 -- -- 23,854
---------- -------------- ------------- ---------------
Total costs and expenses................ 1,222,590 (73,788) (22,876) 1,125,926
Earnings (loss) before equity in earnings
of affiliates, income taxes and
extraordinary items .................... (43,702) 222 6,607 (36,873)
Equity in earnings of affiliates .......... 1,443 -- -- 1,443
---------- --------------- ------------- ---------------
Earnings (loss) before income taxes and
extraordinary items .................... (42,259) $ 222 $ 6,570 (35,430)
=============== =============
Income tax benefit......................... (16,270) (13,641)
---------- ---------------
Loss before extraordinary items ........... (25,989) (21,789)
Extraordinary items(3) .................... 1,013 1,013
---------- ---------------
Net loss ............................... $ (27,002) $ (22,802)
========== ===============
</TABLE>
43
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PROPOSED
PHARMACY SALE ILC OFFERING
ADJUSTMENTS ADJUSTMENTS
IHS INCREASE INCREASE PRO FORMA
ACTUAL (DECREASE) (DECREASE) CONSOLIDATED
Net revenues: ------ ----------- ----------- ------------
<S> <C> <C> <C> <C>
Basic medical services .................. $195,279 $ -- $ -- $195,279
Specialty medical services .............. 446,393 (44,502)(i) (10,568)(i) 391,323
Management services and other ........... 21,381 -- (727) 20,654
------ -------- ---- ------
Total ................................. 663,053 (44,502) (11,295) 607,256
Cost and expenses:
Operating expenses ...................... 502,344 (36,863)(i) (7,816)(i) 457,665
Corporate administrative and
general ................................ 29,947 -- -- 29,947
Depreciation and amortization............ 18,604 (1,555)(i) (480)(i) 16,569
Rent .................................... 35,535 (702)(i) (1,309)(i) 33,524
Interest, net............................ 30,102 (3,176)(j) (1,225)(j) 25,701
------ ------ ------ ------
Total costs and expenses............... 616,532 (42,296) (10,830) 563,406
Earnings (loss) before equity in
earnings of affiliates, income
taxes and extraordinary items ......... 46,521 (2,206) (465) 43,850
Equity in earnings of affiliates ......... 760 -- -- 760
--- ------- ------ ---
Earnings (loss) before income taxes and
extraordinary items ................... 47,281 $ (2,206) $ (465) 44,610
======== ========
Income tax provision ..................... 18,203 17,175
-------- ------
Earnings before extraordinary
items ................................. 29,078 27,435
Extraordinary items(6).................. 1,431 1,431
--------- ---------
Net earnings ...... ................... $ 27,647 $ 26,004
========== =========
</TABLE>
44
<PAGE>
NOTES TO UNAUDITED PRO FORMA FINANCIAL INFORMATION
(1) In December 1995, the Company 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 $109,106,000. See Notes
1(j) and 17 of Notes to Consolidated Financial Statements.
(2) In the fourth quarter of 1995, the Company terminated a contract to manage
23 facilities and, as a result, incurred a loss of $21,915,000 on the
termination of this contract. Such loss consists of the write-off of its
investment in the management contract and management fees receivable. In
connection with the merger with IntegraCare, the Company incurred $1,939,000
of accounting, legal and other costs. See Note 17 of Notes to Consolidated
Financial Statements.
(3) In 1995, the Company 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 item of $1,013,000.
(4) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges and extraordinary
items. EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator of
the Company's operating performance or cash flow as a measure of liquidity.
Management also believes that the ratio of EBITDA to interest, net is an
accepted measure of debt service ability; however, such ratio should not be
considered a substitute for the ratio of earnings to fixed charges as a
measure of debt service ability.
(5) The ratio of earnings to fixed charges is computed by dividing fixed charges
into earnings from continuing operations before income taxes and
extraordinary items plus fixed charges. Fixed charges include interest,
expensed or capitalized, amortization of debt issuance costs and the
estimated interest component of rent expense. As a result of the loss from
impariment of long-lived assets and other non-recurring charges, fixed
charges exceeded earnings by $47.8 million in the year ended December 31,
1995. The ratio of earnings to fixed charges before giving effect to the
loss from impairment of long-lived assets and other non-recurring charges
would have been 2.2x for the year ended December 31, 1995.
(6) During the six months ended June 30, 1996, the Company 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 for the six months ended June 30, 1996 as
an extraordinary item of $1,431,000.
NOTES TO PRO FORMA ADJUSTMENTS
For purposes of determining the effect of the sale of the Pharmacy Sale and
the Proposed ILC Offering, the following estimates and adjustments have been
made:
(a) Represents the carrying values of assets and liabilities sold.
(b) Represents the value of the Capstone Pharmacy Services, Inc. common stock
received as partial consideration for the pharmacy division.
(c) Represents liabilities not assumed by the purchaser associated with the
disposition of the pharmacy division.
(d) Represents net proceeds from the Pharmacy Sale applied to reduce long-term
debt.
(e) Represents the net gain on the Pharmacy Sale.
(f) Represents unrealized gain on the shares of common stock of Capstone
received as partial consideration of the pharmacy division.
(g) Represents carryover basis in shares of ILC retained by the Company.
(h) Represents net proceeds from the Proposed ILC Offering applied to reduce
long-term debt.
(i) Represents actual revenues and expenses of division sold.
(j) Represents reduction of interest resulting from pay-down of debt based on
the average interest rate of outstanding balances.
45
<PAGE>
BUSINESS
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. Post-acute
care services include subacute care, outpatient and home care, inpatient and
outpatient rehabilitation and hospice services. The Company's 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. The Company's 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' post-acute care
network currently consists of over 600 service locations in 40 states.
The Company's post-acute care strategy is to provide cost-effective
continuity of care for its patients in multiple settings, including 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 strategy, the Company has focused on (i) developing market
concentration for its post-acute care services in targeted states due to
increasing payor consolidation and the preference of payors, physicians and
patients for dealing with only one service provider; (ii) developing subacute
care units; (iii) 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; and (iv) forming strategic alliances
with health maintenance organizations, hospital groups and physicians.
In implementing its post-acute healthcare strategy, the Company 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 the Company's strategy, the
Company in February 1996 entered into an agreement to acquire 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. First American had over nine million visits to the home in 1995. See
"Recent Developments" and "-- Company Strategy."
The Company provides subacute care through medical specialty units, 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 the Company's MSUs are similar to those provided in the
hospital but at per diem treatment costs which the Company 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, the Company's 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 and to $290.2 million for
the year ended December 31, 1995, and from $130.0 million in the six months
ended June 30, 1995 to $157.1 million in the six months ended June 30, 1996. MSU
revenues as a percentage of total revenues were 35% in 1993, 25% in each of 1994
and 1995 and 23% and 24% in the six months ended June 30, 1995 and 1996,
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 the
Company's vertical integration strategy and the implementation of the Company's
post-acute care
46
<PAGE>
network. MSU revenue as a percentage of total revenues is expected to continue
to decrease as the Company implements its vertical integration strategy and
continues to expand its post-acute care network through the acquisition of
rehabilitation and home healthcare and similar service companies.
The Company presently operates 195 geriatric care facilities (125 owned or
leased and 70 managed) and 145 MSUs located within 79 of these facilities.
During the years ended December 31, 1994 and 1995 and the six months ended June
30, 1995 and 1996, the Company derived approximately 44%, 45%, 42% and 43%,
respectively, of its patient revenues from private pay sources. 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 and similiar services to third-parties, constituted
approximately 57%, 65%, 65% and 67% of net revenues during the years ended
December 31, 1994 and 1995 and the six months ended June 30, 1995 and 1996,
respectively. The Company 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. In addition, the
Company offers a wide range of hospice 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 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
significantly contributed 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. 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, the Company 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.
47
<PAGE>
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 have focused on regional health
alliances, which would negotiate rates with providers on behalf of consumers,
and a reliance on managed care as a way to contain healthcare costs. These
proposals, together with 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.
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 the Company'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 the Company. 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 the
Company. Ongoing consolidation in the healthcare industry could also impact the
Company's business and results of operations. See "Risk Factors -- Risk of
Adverse Effect of Healthcare Reform" and "-- Uncertainty of Government
Regulation."
COMPANY STRATEGY
The Company's post-acute care strategy is to provide cost-effective
continuity of care for its patients in multiple settings, including 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. The central
elements of IHS' business strategy are:
Vertical Integration of Post-acute Care Services. The Company 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. The Company is now able to offer directly to its patients,
rather than through third-party providers, home healthcare, rehabilitation
(physical, occupational and speech) 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, the
Company 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. The Company 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 permit the development of capitated rates.
48
<PAGE>
Subacute Care Through Medical Specialty Units. The Company's 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 the Company 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 the Company are complex care programs, ventilator
programs and wound management programs; other programs offered include subacute
rehabilitation, cardiology, oncology and HIV. IHS opened its first MSU program
in April 1988 and currently operates 145 MSU programs in 79 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. The Company 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.
Expansion of Home-Based Services. The Company's 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. The Company 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. A significant number of patients discharged from the
Company's MSUs require home healthcare. The Company also believes that it can
expand its home healthcare services to cover preacute, as well as postacute,
patients by having home healthcare nurses provide preventive care services to
home bound senior citizens. In addition, the Company believes that home
healthcare will help the Company contain costs, thereby providing it with a
competitive advantage in contracting with managed care companies and assisting
in the development of capitated rates. The Company currently provides home
healthcare services, which range from light housekeeping to skilled professional
care by trained nurses and therapists, in 14 states. In addition, the Company
has entered into an agreement to acquire First American Health Care of Georgia,
Inc., which provides home health services in 21 states (including 18 states in
which IHS is already operating), although there can be no assurance the
acquisition will be consummated. See "Risk Factors -- Risks Related to Proposed
Acquisition of First American" and "Recent Developments -- Proposed Acquisition
of First American."
Concentration on Targeted Markets. The Company has implemented a strategy
focused on the development of market concentration for its post-acute services
in targeted states due to increasing payor consolidation. The Company 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. The Company now
operates 195 geriatric care facilities (70 of which the Company manages), with
31 geriatric care facilities (28 of which the Company manages) in California, 35
geriatric care facilities in Florida (five of which the Company manages), 14
geriatric care facilities in Pennsylvania (two of which the Company manages) and
23 geriatric care facilities in Texas (six of which the Company manages).
Expansion Through Acquisition. The Company has grown substantially through
acquisitions and the opening of MSUs, and expects to continue to expand its
business 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, by expanding
the number of MSU programs offered and by expanding the amount of home
healthcare and related services it offers directly to its patients rather than
through third-party providers. From January 1, 1991 to date, the Company has
increased the number of geriatric care facilities it owns or leases from 25 to
125, has increased the number of facilities it manages from 18 to 70 and has
increased the number of MSU programs it operates from 13 to 145. In addition,
the Company now offers certain related services, such as home healthcare,
rehabilitation, x-ray and electrocardiogram and pharmacy, directly to its
patients rather than relying on third-party providers. The Company's planned
expansion and growth require that additional MSUs be established in the
Company's existing facilities, that the Company acquire, lease or acquire the
right to manage for others additional facilities in which
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MSUs can be established, that the Company expand its home healthcare services
through the acquisition of additional home healthcare providers, and that the
Company acquire, or establish relationships with, third-parties which provide
other post-acute care services not currently provided by the Company. See "Risk
Factors -- Risks Related to Growth Strategy."
PATIENT SERVICES
BASIC MEDICAL SERVICES
The Company 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.
The Company also operates assisted living facilities for elderly persons who
do not require the medical care provided in a geriatric care facility but need
assistance with the "activities of daily living," such as cooking, bathing,
driving, or administering their own medication. The Company is currently
pursuing the sale of a majority of the Company's assisted living services
division. See "Recent Developments -- Divestitures -- Proposed Sale of Assisted
Living Division."
SPECIALTY MEDICAL SERVICES
MEDICAL SPECIALTY UNITS
The Company's 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. The
Company opened its first MSU program during April 1988 and currently operates
145 MSUs at 79 facilities. Approximately one-third of all of the Company's 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, the Company 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, 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. The Company 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 the Company are complex care programs, ventilator programs,
wound management programs and cardiac care programs; other programs offered
include subacute rehabilitation, cardiology, 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.
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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.
The Company believes that MSU programs can be developed to address a wide
variety of medical conditions which require specialized care. In addition, the
Company has developed MSU programs for subacute rehabilitation, oncology and
HIV. The Company 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
The Company 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
service hours are provided by independent contractors. In order to reduce the
number of rehabilitative services hours provided by independent contractors, the
Company began in late 1993 to acquire companies which provide physical,
occupational and speech therapy to healthcare facilities.
The Company has also begun to offer a rehabilitation program to stroke
victims and persons who have undergone hip replacement.
HOME HEALTHCARE SERVICES
The Company provides home healthcare assistance to the elderly in Arizona,
Colorado, Florida, Illinois, Indiana, Kansas, Kentucky, Missouri, New Mexico,
North Carolina, Ohio, Pennsylvania, Tennessee and Texas. Services offered range
from light housekeeping to skilled professional care by trained nurses and
therapists. The Company intends to expand substantially its home healthcare
services. See "Recent Developments -- Proposed Acquisition of First American"
and "-- Company Strategy-Expansion of Home-Based Services."
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
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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.
The Company currently offers The Renaissance Program at 12 of its geriatric care
facilities with a total of 394 beds. Patients pay a small premium to the
Company's per diem rate for basic medical care to participate in this program.
HOSPICE SERVICES
The Company also provides hospice care to the terminally ill at its facility
in Miami, Florida. In addition, the Company provides hospice services, including
medical care, counseling and social services, to the terminally ill in the
greater Chicago metropolitan area and the State of Michigan.
MANAGEMENT AND OTHER SERVICES
The Company 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. The Company currently
manages 70 geriatric care facilities with 7,954 licensed beds, including eight
assisted living facilities with 621 living units. The Company 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. The Company 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.
The Company 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 the Company 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 the Company having a right to renew in most
cases. The management agreements expire at various times between October 1996
and November 2005 although all can be terminated earlier under certain
circumstances. The Company generally has a right of first refusal in respect of
the sale of each managed facility. The Company 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 the Company will receive for managing these
facilities.
The Company also manages private duty and Medicare certified home health
agencies in the Dallas/Fort Worth, Texas market.
In addition to the foregoing management services, the Company provided
consulting services for the development of subacute programs at the 25 Canadian
facilities operated by Central Park Lodges Ltd., a wholly-owned Canadian
subsidiary of Trizec Corporation, Ltd. ("Trizec"), a publicly held Canadian real
estate company which owned Central Park Lodges, Inc. ("CPL"), for a period of
two years through December 1995. The Company received a fee of $4 million for
these services in 1994 and a fee of $3 million for these services in 1995. In
December 1993, the Company acquired substantially all the United States
operations of CPL, consisting of 30 geriatric care facilities located in
Florida, Pennsylvania and Texas, nine retirement facilities located in Florida,
an institutional pharmacy division servicing geriatric care facilities in
Florida, Pennsylvania and Texas and a division which provides healthcare
personnel and support services to home healthcare and institutional markets in
Florida and Pennsylvania. The Company subsequently disposed of seven retirement
facilities, five geriatric care facilities and, pursuant to the Pharmacy Sale,
an institutional pharmacy division acquired from CPL which the Company did not
consider to fit within its post-acute care strategy.
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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
the Company. The Company requires that its facilities meet standards of care
more rigorous than those required by Federal and state law. Under the Company's
Quality Assurance Program standards for delivery of care are set and the care
and services provided by each facility are evaluated to insure they meet the
Company's standards. A quality assurance team evaluates each facility
bi-annually, reporting directly to the Company's Chief Executive Officer and to
the Chief Operating Officer, as well as to the administrator of each facility.
The Company has also developed a specialized Quality Assurance Program for its
MSU programs. The Company has begun a program to obtain accreditation by the
Joint Commission on Accreditation of Healthcare Organizations ("JCAHO") for each
of its facilities. At July 31, 1996, 36 of the Company's facilities had been
fully accredited by the JCAHO.
In connection with its Quality Assurance Program, the Company conducts
quarterly evaluations of its services through written questionnaires of its
patients and their families. Facility administrator bonuses are dependent in
part upon their facility's ranking in such surveys. The Company 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 the Company with an early-warning of problems which may be
developing at the facility.
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.
The Company's 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. The Company has standardized operating procedures and monitors its
facilities to assure consistency of operations. IHS emphasizes frequent
communications, the setting of operational goals and the monitoring of actual
results. The Company 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 has all necessary state and local licenses. Most facilities are
certified as providers under the Medicare and Medicaid programs of the state in
which they are located.
JOINT VENTURES
In January 1993, a wholly-owned subsidiary of IHS, Integrated Health Services
of Missouri, Inc. ("IHSM"), invested $4,650,000 for a 49% interest in a
partnership newly formed to manage and operate approximately 8,000 geriatric
care and assisted retirement beds. In connection with this transaction, the
Company guaranteed a $4.2 million first mortgage loan on one of these geriatric
care facilities. Cenill, Inc., a wholly owned subsidiary of Tutera Group, Inc.,
the former manager of the facilities, is the sole general partner of the
partnership and owns a 51% interest therein. Subject to certain material
transactions requiring the approval of IHSM, the business of the partnership is
conducted by its general partner. Under certain circumstances, IHSM has the
right to become a 51% owner and sole general partner of the partnership, or to
purchase the general partner's entire interest in the partnership, in each case
for a price based upon a multiple of the partnership's earnings.
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In April 1993, a wholly-owned subsidiary of IHS, Southwood Holdings, Inc.
("Southwood"), acquired a 21.28% interest in the common stock and a 47.64%
interest in the 6% cumulative convertible preferred stock of Speciality Care
PLC, an owner and operator of geriatric care facilities in the United Kingdom.
The total cost of the investment was $748,000 for the common stock and
$2,245,000 for the preferred stock. The preferred stock contains certain
preferences as to liquidation. In 1994, Southwood loaned $1,000,000 to
Speciality Care bearing interest at 9%. In January 1995 Southwood applied
$627,000 of the loan to pay for additional shares of common and preferred stock
of Speciality Care PLC subscribed for in November 1994. In June 1995, Southwood
loaned an additional $8,575,000 to Speciality Care bearing interest at 12%; this
loan was subsequently repaid in August 1995. In addition, Southwood invested an
additional $4,384,000 in Speciality Care. Southwood currently owns 21.3% of
Speciality Care's common stock and 63.65% of Speciality Care's 6% cumulative
convertible preferred stock.
In 1994, the Company sold its 49% interest in two joint ventures formed to
develop and operate assisted living facilities and acquired the 51% interest in
a joint venture which owned a facility which IHS managed.
In 1995, Southwood invested $8.2 million for a 40% interest in HPC America,
Inc. ("HPC"), a Delaware corporation that operates home infusion and home
healthcare companies, in addition to owning physician practices. Subject to
certain material transactions requiring the approval of Southwood, the business
is conducted under the direction of the Chief Executive Officer and President of
HPC. Under certain circumstances, IHS has the right to purchase the remaining
60% interest in HPC, based upon a multiple of HPC's earnings.
SOURCES OF REVENUE
The Company 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 the Company's patient revenues derived from
the operations 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 the Company's
patients among the private pay, Medicare and Medicaid categories can
significantly affect the profitability of the Company's operations. Generally,
private pay patients are the most profitable and Medicaid patients are the least
profitable.
During the years ended December 31, 1993, 1994 and 1995, the Company derived
approximately $151.6 million, $297.8 million and $509.3 million, respectively,
or 55.0%, 44.2% and 44.7%, respectively, of its patient revenues from private
pay sources and approximately $123.9 million, $376.4 million and $629.8 million,
respectively, or 45.0%, 55.8% and 55.3%, respectively, of its patient revenues
from government reimbursement programs. Patient revenues from government
reimbursement programs during these periods consisted of approximately $79.4
million, $225.6 million and $387.2 million, or 64.1%, 59.9% and 61.5%,
respectively, from Medicare and approximately $44.5 million, $150.8 million and
$242.6 million, respectively, or 35.9%, 40.1% and 38.5%, respectively, from
Medicaid. During the six months ended June 30, 1995 and 1996, the Company
derived approximately $226.8 million and $277.6 million, respectively, or 41.9%
and 43.2%, respectively, of its patient revenues from private pay sources and
approximately $314.6 million and $364.9 million, respectively, or 58.1% and
56.8%, respectively, of its patient revenues from government reimbursement
programs. Patient revenues from government reimbursement programs during these
periods consisted of approximately $192.5 million and $226.2 million, or 61.2%
and 62.0%, respectively, from Medicare and approximately $122.1 million and
$138.7 million, respectively, or 38.8% and 38.0%, 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
related service companies and the larger concentration of Medicaid patients in
the 30 Central Park Lodges facilities acquired on December 1, 1993 and the 41
facilities leased on August 31, 1994, as well as the increase in MSU beds.
The Company's 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 the Company's marketing program to private pay patients is
implemented in the new MSUs, the number of private pay
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patients in those programs has traditionally increased. In addition, the Company
received payments from third parties for its management services, which
constituted approximately 7.0%, 5.3% and 3.3%, of total net revenues for the
years ended December 31, 1993, 1994 and 1995, respectively, and 3.5% and 3.2% of
total net revenue for the six months ended June 30, 1995 and 1996, respectively.
Gross third party payor settlements receivable, primarily from federal and
state governments (i.e., Medicare and Medicaid cost reports), were $44.3 million
at June 30, 1996, as compared to $33.0 million at December 31, 1995 and $22.6
million at December 31, 1994. Approximately $16.0 million, or 36%, of the third
party payor settlements receivable, primarily from Federal and state
governments, at June 30, 1996 represent the costs for its MSU patients which
exceed regional reimbursement limits established under Medicare, as compared to
approximately $7.6 million, or 23%, at December 31, 1995 and approximately $6.2
million, or 27%, at December 31, 1994.
The Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of the Company's
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. The Company has submitted waiver
requests for 205 cost reports, covering all cost report periods through December
31, 1995. To date, final action has been taken by the Health Care Financing
Administration ("HCFA") on all 205 waiver requests covering cost report periods
through December 31, 1995. The Company's 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 the Company will be able to
recover its excess costs under any waiver requests which may be submitted in the
future. The Company's 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 the Company. 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 the
Company. 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 the Company now or in the future will initially meet or continue
to meet the requirements for participation in such programs. The Company could
be adversely affected by the continuing efforts of governmental and private
third party payors to contain the amount of reimbursement for healthcare
services. In an attempt to limit the federal and state budget deficits, there
have been, and the Company expects that there will continue to be, a number of
proposals to limit Medicare and Medicaid reimbursement for healthcare services.
The Company 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 the Company. 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 of care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of Company
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. See "Risk
Factors -- Uncertainty of Government Regulations."
Most states in which the Company 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, the Company 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
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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. Certain states have recently permitted their certificate of need
programs to lapse or have relaxed their CON requirements. 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 the Company operates, the following require CONs for the
facilities that are owned, operated or managed by the Company: Alabama,
Colorado, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Maryland,
Michigan, Mississippi, Missouri, Nevada, New Hampshire, New Jersey, North
Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, Washington
and Wisconsin. The conversion of geriatric care beds to MSU beds does not
require a CON.
The Company's facilities are also subject to licensure regulations. Each of
the Company's 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. The Company 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. The Company endeavors to
maintain and operate its facilities in compliance with all such standards and
conditions. However, in the ordinary course of its business the Company's
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 the Company. 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. The Company 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, the Company's strategy of acquiring poorly performing facilities could
adversely affect the Company's business to the extent remedies are imposed at
such facilities.
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 the 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
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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. The Company 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, because there is no
procedure for obtaining advisory opinions from government officials, IHS is
unable to provide assurance that all of its existing or future arrangements will
withstand scrutiny under the anti-fraud and abuse statutes, 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.
The Company's healthcare operations generate medical waste that must be
disposed of in compliance with Federal, state and local environmental laws,
rules and regulations. The Company's operations are also subject to compliance
with various other environmental laws, rules and regulations. Such compliance
has not materially affected, and the Company anticipates that such compliance
will not materially affect, the Company's capital expenditures, earnings or
competitive position, although there can be no assurance to that effect.
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. It is not
clear at this time what proposals, if any, will be adopted or, if adopted, what
effect such proposals would have on the Company'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 the Company. 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 the Company. 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 the Company, and may similarly affect the price of the 10
1/4 % Notes and the Company's Common Stock in the future. The Company 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 the Company's business and results of operations.
FEDERAL AND STATE ASSISTANCE PROGRAMS
Substantially all of the Company's 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, the Company's cost of care for its MSU patients
generally exceeds regional reimbursement limits established under Medicare. The
Company has submitted waiver requests to recover these excess costs. See "--
Sources of Revenue." There can be no assurance, however, that the Company will
be able to recover its excess costs under the pending waiver request or under
any waiver requests which may be submitted in the future. The Company's failure
to recover substantially all these excess costs would adversely affect its
results of operations and could adversely
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affect its MSU strategy. Even though the Company's cost of care for its MSU
patients generally exceeds regional reimbursement limits established under
Medicare for nursing homes, the Company's cost of care is still lower than the
cost of such care in an acute care hospital.
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,
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 the Company's 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, the Company's
results of operations could be adversely affected since the Company's 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. The Company 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 the Company's results of operations. It is uncertain at this time whether
legislation on healthcare reform will ultimately 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 the Company. The Company 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 the Company. See
"Risk Factors -- Risk of Adverse Effect of Healthcare Reform."
COMPETITION
The healthcare industry is highly competitive. The Company 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. The Company also competes with other providers in the acquisition and
development of additional facilities. The Company's 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 the Company. In addition, the Company 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 the Company. There can be no assurance that the Company 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 the Company primarily
compete on a local and regional basis with other skilled care providers. The
Company's 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 the Company's facilities
compete varies from location to location and depends on a number of factors. The
Company 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
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for services, are significant competitive factors. In light of these factors,
the Company 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 and based on fixed rates and
cost reimbursement principles. Because the Company's facilities compete
primarily on a local and regional basis rather than a national basis, the
competitive position of the Company varies from facility to facility depending
upon the types of services and quality of care provided by facilities with which
each of the Company's facilities compete, the reputation of the facilities with
which each of the Company's facilities compete, and, with respect to private pay
patients, the cost of care at facilities with which each of the Company's
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. The Company 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.
The Company 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 June 30, 1996, the Company had approximately 34,000 full-time and
regular part-time employees. Full-time and regular part-time service and
maintenance employees at 15 facilities, totaling approximately 1,400 employees,
are covered by collective bargaining agreements. The Company's corporate staff
consisted of approximately 1,000 people at such date. The Company believes its
relations with its employees are good.
The Company seeks the highest quality of professional staff within each
market. Competition in the recruitment of personnel in the health care 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 the Company has, to date, been successful in hiring and
retaining nurses and rehabilitation professionals, the Company in the future may
experience difficulty in hiring and retaining nurses and rehabilitation
professionals. The Company 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. The Company
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 the Company's business.
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DESCRIPTION OF THE NEW NOTES
The Old Notes were issued, and the New Notes will be issued, under an
indenture dated as of May 15, 1996 (the "Indenture") between the Company and
Signet Trust Company, as trustee (the "Trustee"). The terms of the New Notes and
the Old Notes will be substantially identical to each other, except for
transferability. Under the terms of the Indenture, the covenants and events of
default will apply equally to the New Notes and the Old Notes and the New Notes
and the Old Notes will be treated as one class for all actions to be taken by
the holders thereof and for determining their respective rights under the
Indenture. The terms of the New Notes include those set forth in the Indenture
and those made a part of the Indenture by reference to the Trust Identure Act of
1939, as amended and as in effect on the date of the Indenture (the "Trust
Indenture Act." ) The following summaries of certain provisions of the New Notes
and the Indenture do not purport to be complete and are subject to, and are
qualified in their entirety by reference to, all of the provisions of the
Indenture, including the definition therein of certain terms. Capitalized terms
that are used but not otherwise defined below under the caption "Certain
Definitions" have the meaning assigned to them in the Indenture and such
definitions are incorporated herein by reference. A copy of the Indenture has
been filed as an exhibit to the Registration Statement of which this Prospectus
is a part. The Old Notes and the New Notes are sometimes referred to herein,
collectively, as the "10 1/4 Notes."
GENERAL
The 10 1/4 % Notes are unsecured obligations of the Company, are limited to
$150,000,000 in aggregate principal amount and will mature on April 30, 2006.
The 10 1/4 % Notes bear interest at the rate of 10 1/4 % per annum from May
29, 1996 or from the most recent payment date to which interest has been paid or
provided for, payable on April 30 and October 30, of each year, commencing on
October 30, 1996, to holders of record (the "Holders") at the close of business
on April 15 or October 15, as the case may be, immediately preceding the
relevant interest payment date.
Principal, premium, if any, and interest on the 10 1/4 % Notes will be
payable (i) in respect of 10 1/4 % Notes in book-entry form held of record by
the Depository Trust Company ("DTC") or its nominee, in same day funds on or
prior to the payment dates with respect to such amounts and (ii) in respect of
10 1/4 % Notes issued in certificated form, at the office of the Trustee, and
the 10 1/4 % Notes may be presented for registration of transfer or exchange, at
the offices of the Trustee. Payments in respect of the 10 1/4 % Notes issued in
certificated form may be made by check mailed to the registered addresses of the
Holders. Initially, the Trustee will act as the Paying Agent and the Registrar
under the Indenture. The Company or any of its Subsidiaries may subsequently act
as the Paying Agent and the Registrar, and the Company may change any Paying
Agent and any Registrar without prior notice to the Holders.
The 10 1/4 % Notes will be issued only in denominations of $1,000 or any
integral multiple thereof. No service charge will be made for any transfer or
exchange of the 10 1/4 % Notes, but the Company may require payment of a sum
sufficient to cover any tax or other governmental charge and any other expenses
(including the fees and expenses of the Trustee) payable in connection
therewith.
All monies paid by the Company to the Trustee or any Paying Agent for the
payment of principal of and premium and interest on any 10 1/4 % Note which
remain unclaimed for two years after such principal, premium or interest become
due and payable may be repaid to the Company. Thereafter, each Holder may, as an
unsecured general creditor, look only to the Company for payment thereof.
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OPTIONAL REDEMPTION OF THE 10 1/4 % NOTES
The 10 1/4 % Notes may not be redeemed by the Company prior to April 30,
2001. Thereafter, the 10 1/4 % Notes may be redeemed at the option of the
Company, in whole or in part, at the following redemption prices (expressed as
percentages of principal amount), plus accrued interest, if any, to the date of
redemption:
IF REDEEMED DURING THE REDEMPTION
12-MONTH PERIOD COMMENCING PRICE
- ----------------------------- ------------
April 30, 2001.................. 105.125%
April 30, 2002.................. 103.417%
April 30, 2003.................. 101.708%
April 30, 2004 and thereafter... 100%
If less than all of the 10 1/4 % Notes are to be redeemed at any time,
selection of the 10 1/4 % Notes to be redeemed will be made by the Trustee from
among the outstanding 10 1/4 % Notes by lot. Notice of redemption will be mailed
at least 30 days but not more than 60 days before the redemption date to each
Holder whose 10 1/4 % Notes are to be redeemed at the registered address of such
Holder. On and after the redemption date, interest shall cease to accrue on the
10 1/4 % Notes or the portions thereof called for redemption.
PURCHASE OF 10 1/4 % NOTES UPON CHANGE IN CONTROL
The Indenture provides that if a Change in Control occurs, each Holder will
have the right to require that the Company repurchase such Holder's 10 1/4 %
Notes, in whole or in part, at a purchase price equal to 101% of the principal
amount thereof, plus accrued and unpaid interest, if any, to the repurchase
date, in accordance with the procedures set forth in the Indenture. See "Certain
Covenants -- Change in Control."
SUBORDINATION
The payment of the principal of and premium, if any, and interest on the 10
1/4 % Notes will, to the extent set forth in the Indenture, be subordinated in
right of payment to the prior payment in full of all Senior Indebtedness. If
there is a payment or distribution of assets to creditors upon any liquidation,
dissolution, winding up, reorganization, assignment for the benefit of
creditors, marshalling of assets or any bankruptcy, insolvency or similar
proceeding of the Company, the holders of all Senior Indebtedness will be
entitled to receive payment in full of all amounts due or to become due thereon
or provision for such payment in cash before the Holders will be entitled to
receive any payment in respect of the principal of or premium, if any, or
interest on the 10 1/4 % Notes (other than payment of amounts already deposited
in accordance with the defeasance provisions of the Indenture). In the event of
the acceleration of the maturity of the 10 1/4 % Notes, the holders of all
Senior Indebtedness will first be entitled to receive payment in full in cash of
all amounts due thereon before the Holders of the 10 1/4 % Notes will be
entitled to receive any payment for the principal of or premium, if any, or
interest on the 10 1/4 % Notes or on account of the purchase or other
acquisition of the 10 1/4 % Notes (other than payment of amounts already
deposited in accordance with the defeasance provisions of the Indenture).
The New Notes will rank pari passu with the Old Notes, the Company's 9 5/8 %
Senior Subordinated Notes due 2002, Series A and the Company's 10 3/4 % Senior
Subordinated Notes due 2004 and will rank senior to the Company's 5 3/4 %
Convertible Senior Subordinated Debentures due 2001 and the Company's 6%
Convertible Subordinated Debentures due 2003 and all other Indebtedness of the
Company which expressly provides that such Indebtedness shall not be senior in
right of payment to the 10 1/4 % Notes.
No payment or distribution of any assets of the Company of any kind or
character will be made on account of principal of or premium, if any, or
interest on the 10 1/4 % Notes (other than payment of amounts already deposited
in accordance with the defeasance provisions of the Indenture) or on account of
the purchase or acquisition of the 10 1/4 % Notes upon the occurrence of any
default in the payment of
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any Bank Debt or any Senior Indebtedness (other than Bank Debt) in excess of $20
million beyond any applicable grace period, unless and until such default is
cured or waived or ceases to exist or such Senior Indebtedness is discharged.
No payment or distribution of any assets of the Company of any kind or
character (other than payment of amounts already deposited in accordance with
the defeasance provisions of the Indenture) may be made by the Company on
account of principal of or premium, if any, or interest on the 10 1/4 % Notes or
on account of the purchase or acquisition of the 10 1/4 % Notes for the period
specified below (the "Payment Blockage Period") if there has occurred a default,
or if such payment would result in a default, with respect to the financial
covenants under the Credit Agreement. These financial covenants may be changed
from time to time by the banks and the Company without the consent of the
Holders of the 10 1/4 % Notes, and such changes may be adverse to the Holders of
the 10 1/4 % Notes and may result in the Company being prohibited from making
payments on account of principal of or premium, if any, or interest on the 10
1/4 % Notes or upon a Change in Control Repurchase or an Asset Sale Offer. The
Payment Blockage Period shall commence upon the receipt of notice by the Company
or the Trustee from the Bank Agent and shall end on the earlier of (i) 179 days
thereafter, (ii) the date on which such default with respect to the financial
covenants under the Credit Agreement is cured, waived or ceased to exist, or on
which the Bank Debt is discharged, (iii) the date on which the maturity of any
Indebtedness (other than Senior Indebtedness) shall have been accelerated by
virtue of such event, or (iv) the date on which such Payment Blockage Period
shall have been terminated by notice to the Company or the Trustee from the Bank
Agent, after which the Company shall resume making any and all required payments
in respect of the 10 1/4 % Notes, including any missed payments. Only one
Payment Blockage Period may be commenced during any period of 365 consecutive
days. No default with respect to the financial covenants under the Credit
Agreement that existed or was continuing on the date of the commencement of any
Payment Blockage Period will be, or can be, made the basis for the commencement
of a second Payment Blockage Period whether or not within a period of 365
consecutive days, unless such default has been cured or waived for a period of
not less than 90 consecutive days. In no event will a Payment Blockage Period
extend beyond 179 days.
The 10 1/4 % Notes are obligations exclusively of the Company, which is a
holding company. Since the operations of the Company are currently conducted
principally through Subsidiaries, the cash flow of the Company and the
consequent ability to service its debt, including the 10 1/4 % Notes, are
dependent upon the earnings of such Subsidiaries and the distribution of those
earnings to the Company, or upon loans or other payments of funds by such
Subsidiaries to the Company. The Subsidiaries are separate and distinct legal
entities and have no obligation, contingent or otherwise, to pay any amounts due
pursuant to the 10 1/4 % Notes or to make any funds available therefor, whether
by dividends, loans or other payments. In addition, the payment of dividends and
certain loans and advances to the Company by such Subsidiaries may be subject to
certain statutory or contractual restrictions, are contingent upon the earnings
of such Subsidiaries and are subject to various business considerations. See
"Risk Factors -- Subordination of the 10 1/4 % Notes; Holding Company
Structure."
The 10 1/4 % Notes will be effectively subordinated to all Indebtedness and
other liabilities and commitments (including trade payables and lease
obligations) of the Company's Subsidiaries. Any right of the Company to receive
assets of any such Subsidiary upon the liquidation or reorganization of any such
Subsidiary (and the consequent right of the Holders of the 10 1/4 % Notes to
participate in those assets) will be effectively subordinated to the claims of
that Subsidiary's creditors, except to the extent that the Company is itself
recognized as a creditor of such Subsidiary, in which case the claims of the
Company would still be subordinate to any security in the assets of such
Subsidiary and any Indebtedness of such Subsidiary senior to that held by the
Company.
The Indenture does not limit or prohibit the incurrence of Senior
Indebtedness if certain coverage tests are met and, in any case, whether or not
such coverage tests are met, will not restrict the incurrence of certain Senior
Indebtedness, and the Company expects to incur Senior Indebtedness from time to
time in the future. At June 30, 1996, the aggregate amount of Senior
Indebtedness outstanding and the aggregate amount of Indebtedness of the Company
and its Subsidiaries (excluding intercompany indebtedness) to which the 10 1/4 %
Notes are effectively subordinated was approximately $435.0 million. In
addition, the 10 1/4 % Notes
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are effectively subordinated to the lease obligations of the Company's
Subsidiaries, which aggregated $245.5 million at June 30, 1996, and other
liabilities, including trade payables, the amount of which could be material. At
June 30, 1996, $215.0 million of indebtedness ranks pari passu with the 10 1/4 %
Notes.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitations on Additional Indebtedness. The Indenture provides that, after
the date of the Indenture, (i) the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee, extend the maturity of, or otherwise become liable with respect to
(collectively, "incur"), any Indebtedness (including without limitation,
Acquired Indebtedness) and (ii) the Company will not permit any of its
Subsidiaries to issue (except to the Company or any of its Wholly Owned
Subsidiaries) any Capital Stock having a preference in liquidation or with
respect to the payment of dividends, unless after giving effect thereto, the
Company's Consolidated Coverage Ratio on the date thereof would be at least:
(i) 2.00 to 1, if such date is on or prior to March 31, 1997,
(ii) 2.25 to 1, if such date is after March 31, 1997 and on or prior to
March 31, 1998, and
(iii) 2.50 to 1, if such date is after March 31, 1998,
in each case determined on a pro forma basis as if the incurrence of such
additional Indebtedness or the issuance of such Capital Stock, as the case may
be, and the application of the net proceeds therefrom, had occurred at the
beginning of the four-quarter period used to calculate the Company's
Consolidated Coverage Ratio.
Notwithstanding the foregoing: (a) the Company and its Subsidiaries may (i)
incur Indebtedness under the Credit Agreement in an aggregate principal amount
at any time not to exceed $700.0 million; (ii) incur Refinancing Indebtedness;
(iii) incur any Indebtedness of the Company to any Wholly Owned Subsidiary or of
any Subsidiary to the Company or to any Wholly Owned Subsidiary; (iv) incur any
Indebtedness evidenced by letters of credit which are used in the ordinary
course of business of the Company and its Subsidiaries to secure workers'
compensation and other insurance coverages; and (v) incur Capitalized Lease
Obligations of the Company and its Subsidiaries such that the aggregate
principal amount of Capitalized Lease Obligations of the Company then
outstanding, when added to the Capitalized Lease Obligations to be incurred,
does not exceed 5% of Consolidated Tangible Assets; and (b) the Company and its
Subsidiaries may incur additional Indebtedness (including additional
Indebtedness under the Credit Agreement that is designated in the Credit
Agreement as incurred under this clause (b)), provided that the aggregate
principal amount of any such additional Indebtedness outstanding under this
clause (b) at any time, together with the liquidation value of any outstanding
Subsidiary Preferred Stock, does not exceed $75.0 million.
No Subsidiary of the Company shall Guarantee any Indebtedness of the Company
that is subordinate in right of payment to any Senior Indebtedness unless such
Subsidiary also Guarantees the 10 1/4 % Notes and waives, and will not claim or
take advantage of, any rights of reimbursement, indemnity or subrogation against
the Company as a result of any payment by such Subsidiary under its Guarantee of
the 10 1/4 % Notes. If such other Indebtedness of the Company is (1) pari passu
with the 10 1/4 % Notes, such Guarantee of such pari passu Indebtedness shall be
pari passu with or expressly subordinated to such Guarantee of the 10 1/4 %
Notes, or (2) subordinated in right of payment to the 10 1/4 % Notes, such
Guarantee of such subordinated Indebtedness shall be expressly subordinated to
such Guarantee of the 10 1/4 % Notes, at least to the extent that such
subordinated Indebtedness is subordinated or junior to the 10 1/4 % Notes.
Notwithstanding the foregoing, any Guarantee of the 10 1/4 % Notes by a
Subsidiary of the Company may provide by its terms that it shall be
automatically and unconditionally released and discharged upon the release or
discharge of the Guarantee which resulted in the creation of such Guarantee of
the 10 1/4 % Notes, except a discharge or release by or as a result of payment
under such Guarantee of such other Indebtedness or if any other Guarantee of
other Indebtedness is outstanding.
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Limitations on Subsidiary Preferred Stock. The Indenture provides that, after
the date of the Indenture, the Company will not permit any of its Subsidiaries
to issue any Preferred Stock (other than to the Company or a Wholly Owned
Subsidiary) or permit any Person (other than the Company or a Wholly Owned
Subsidiary) to own or hold any interest in any Preferred Stock of any such
Subsidiary, unless the Subsidiary would be permitted to incur Indebtedness
pursuant to the provisions of the "Limitations on Additional Indebtedness"
covenant in the aggregate principal amount equal to the aggregate liquidation
value of such Preferred Stock.
Limitations on Restricted Payments. The Indenture provides that the Company
will not, and will not permit any of its Subsidiaries, directly or indirectly,
to make any Restricted Payment if at the time of such Restricted Payment:
(i) a Default or Event of Default shall have occurred and be continuing
or shall occur as a consequence thereof;
(ii) after giving effect to the proposed Restricted Payment, the amount
of such Restricted Payment, when added to the aggregate amount of all
Restricted Payments made after the date of the Indenture plus Investments
made after such date pursuant to clause (v)(b) of the "Limitations on
Investments and Loans" covenant, exceeds the sum of: (1) 50% of the
Company's Consolidated Net Income accrued during the period (taken as a
single period) commencing with the date of the Indenture to and including
the fiscal quarter ended immediately prior to the date of such Restricted
Payment (or, if such aggregate Consolidated Net Income shall be a deficit,
minus 100% of such aggregate deficit); (2) the net cash proceeds from the
issuance and sale of the Company's Capital Stock that is not Disqualified
Stock (other than to a Subsidiary of the Company) during such period; and
(3) $20 million; or
(iii) the Company would not be able to incur an additional $1.00 of
Indebtedness under the Consolidated Coverage Ratio in the "Limitations on
Additional Indebtedness" covenant.
Notwithstanding the foregoing, the provisions of the Indenture do not prevent:
(x) the payment of any dividend within 60 days after the date of
declaration thereof if the payment thereof would have complied with the
limitations of this covenant on the date of declaration;
(y) the retirement of shares of the Company's Capital Stock or the
Company's or a Subsidiary of the Company's Indebtedness out of the
proceeds of a substantially concurrent sale (other than to a Subsidiary of
the Company) of shares of the Company's Capital Stock (other than
Disqualified Stock); and
(z) the purchase of stock held by officers, directors or employees of
the Company whose employment or term with the Company has been terminated
or who have died or become disabled in an aggregate amount not to exceed
$5 million in any fiscal year.
Limitations on Investments and Loans. The Company will not, and will not
permit any of its Subsidiaries to, make any Investments in any other Person,
except (i) capital contributions, advances or loans to the Company by any
Subsidiary, by the Company to a Wholly Owned Subsidiary or by a Subsidiary to a
Wholly Owned Subsidiary; (ii) the Company and each of its Subsidiaries may
acquire and hold receivables owing to it, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; (iii) the Company and its Subsidiaries may acquire and hold cash
and Eligible Investments; (iv) the Company and its Subsidiaries may make
Investments in Persons at least a majority of whose revenues result from
healthcare related businesses or facilities; and (v) Investments not otherwise
permitted by clauses (i) through (iv) above in an aggregate amount not exceeding
at any time the sum of (a) $10 million and (b) that amount equal to the amount
of Restricted Payments that could be made by the Company and its Subsidiaries
without violating the Indenture.
Limitations on Restrictions on Distributions from Subsidiaries. The Indenture
provides that the Company will not, and will not permit any of its Subsidiaries
to, create or otherwise cause or suffer to exist or become effective any
consensual encumbrance or restriction (other than encumbrances or restrictions
imposed by law or by judicial or regulatory action or by provisions in leases or
other agree-
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ments that restrict the assignability thereof) on the ability of any Subsidiary
of the Company to (i) pay dividends or make any other distributions on its
Capital Stock or any other interest or participation in, or measured by, its
profits, owned by the Company or any of its other Subsidiaries, or pay interest
on or principal of any Indebtedness owed to the Company or any of its other
Subsidiaries, (ii) make loans or advances to the Company or any of its other
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its other Subsidiaries, except for encumbrances or restrictions existing
under or by reason of (a) applicable law, (b) Existing Indebtedness, (c) any
restrictions under any agreement evidencing any Acquired Indebtedness that was
permitted to be incurred pursuant to the Indenture, provided that such
restrictions and encumbrances only apply to assets that were subject to such
restrictions or encumbrances prior to the acquisition of such assets by the
Company or its Subsidiaries, (d) restrictions or encumbrances replacing those
permitted by clause (b) or (c) which, taken as a whole, are not more
restrictive, (e) the Indenture, (f) any restrictions and encumbrances arising in
connection with Refinancing Indebtedness, provided that any restrictions and
encumbrances of the type described in this paragraph that arise under such
Refinancing Indebtedness are not, taken as a whole, more restrictive than those
under the agreement creating or evidencing the Indebtedness being refunded or
refinanced, (g) any restrictions with respect to a Subsidiary of the Company
imposed pursuant to an agreement that has been entered into for the sale or
other disposition of all or substantially all of the Capital Stock or assets of
such Subsidiary, (h) any agreement restricting the sale or other disposition of
property securing Indebtedness if such agreement does not expressly restrict the
ability of a Subsidiary of the Company to pay dividends or make loans or
advances, (i) customary restrictions in purchase money debt or leases relating
to the property covered thereby and (j) the Credit Agreement.
Limitations on Certain Other Subordinated Indebtedness. The Indenture
provides that the Company shall not create, incur, assume or suffer to exist any
Indebtedness that is subordinate in right of payment to any Senior Indebtedness
unless such Indebtedness by its terms or the terms of the instrument creating or
evidencing such Indebtedness is subordinate in right of payment to, or ranks
pari passu with, the 10 1/4 % Notes.
Limitations on Transactions with Affiliates. The Indenture provides that
neither the Company nor any of its Subsidiaries will make any loan, advance,
guarantee or capital contribution to, or for the benefit of, or sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or for the
benefit of, or purchase or lease any property or assets from, or enter into or
amend any contract, agreement or understanding with, or for the benefit of, any
Affiliate of the Company or any of its Subsidiaries or any Person (or any
Affiliate of such Person) holding 10% or more of the Common Equity of the
Company or any of its Subsidiaries (each an "Affiliate Transaction"), unless (i)
such Affiliate Transactions are between or among the Company and its
Subsidiaries, (ii) such Affiliate Transactions are in the ordinary course of
business and consistent with past practice or (iii) the terms of such Affiliate
Transactions are fair and reasonable to the Company or such Subsidiary, as the
case may be, and are at least as favorable as the terms which could be obtained
by the Company or such Subsidiary, as the case may be, in a comparable
transaction made on an arm's-length basis between unaffiliated parties. In the
event of any transaction or series of transactions occurring subsequent to the
date of the Indenture with an Affiliate of the Company which is not permitted
under clauses (i) or (ii) above and involves in excess of $5,000,000, the terms
of such transaction shall be in writing and a majority of the disinterested
members of the Board of Directors shall by resolution determine that such
business or transaction meets the criterion set forth in clause (iii) above.
Limitations on Liens. The Indenture provides that the Company will not create
or suffer to exist any Lien, other than Permitted Liens, on any of its assets
unless all payments due under the Indenture and the 10 1/4 % Notes are secured
on an equal and ratable basis with the obligation so secured until such time as
such obligation is no longer secured by a Lien.
Limitations on Asset Sales. The Indenture provides that the Company will not,
and will not permit any of its Subsidiaries to, consummate any Asset Sale unless
(i) the Company or its Subsidiaries receive consideration at the time of such
Asset Sale at least equal to the fair market value of the assets or Capital
Stock included in such Asset Sale (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a board
resolution) and (ii) not less than 50% of
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such consideration is in the form of cash. The Indenture will further provide
that the Net Proceeds of Asset Sales shall, within 360 days, (i) be reinvested
in the lines of business of the Company or any of its Subsidiaries immediately
prior to such investment; (ii) be applied to the payment of the principal of,
and interest on, Senior Indebtedness; (iii) be utilized to make any Investment
in any other Person permitted under the Indenture; or (iv) be applied to an
offer (an "Asset Sale Offer") to purchase outstanding 10 1/4 % Notes. In any
such Asset Sale Offer, the Company shall offer to purchase 10 1/4 % Notes as
selected by lot at a purchase price equal to 100% of the aggregate principal
amount of the 10 1/4 % Notes, plus accrued and unpaid interest to the date of
purchase, in the manner set forth in the Indenture. Any Asset Sale Offer will be
conducted in compliance with applicable tender offer rules, including Section
14(e) of the Exchange Act and Rule 14e-1 thereunder. Any Net Proceeds remaining
immediately after the completion of any Asset Sale Offer may be used by the
Company or its Subsidiaries for any purpose not inconsistent with the other
provisions of the Indenture. The Company's ability to make an Asset Sale Offer
may be limited by the terms of the Company's Senior Indebtedness and the
subordination provisions of the Indenture.
Notwithstanding the provisions of the immediately preceding paragraph, the
Company and its Subsidiaries may, in the ordinary course of business (or, if
otherwise than in the ordinary course of business, upon receipt of a favorable
written opinion from an independent financial advisor of national reputation as
to the fairness from a financial point of view to the Company or such Subsidiary
of the proposed transaction), exchange all or a portion of its property,
businesses or assets for property, businesses or assets that, or Capital Stock
of a Person all or substantially all of whose assets, are of a type used in a
healthcare related business, or a combination of any such property, businesses
or assets, or Capital Stock of such a Person and cash or cash equivalents;
provided that (i) there shall not exist immediately prior or subsequent thereto
a Default or an Event of Default, (ii) a majority of the disinterested members
of the Board of Directors of the Company shall have approved a resolution of the
Board of Directors that such exchange is fair to the Company or such Subsidiary,
as the case may be, and (iii) any cash or cash equivalents received pursuant to
any such exchange shall be applied in the manner applicable to Net Proceeds of
Asset Sales as set forth pursuant to the provisions of the immediately preceding
paragraph; and provided, further, that any Capital Stock of a Person received in
such an exchange pursuant to this paragraph shall be owned directly by the
Company or a Subsidiary of the Company and, when combined with the Capital Stock
of such Person already owned by the Company and its Subsidiaries, shall result
in such Person becoming a Wholly Owned Subsidiary of the Company.
Change in Control. If a Change in Control occurs, each Holder will have the
right to require that the Company repurchase (a "Change in Control Repurchase")
such Holder's 10 1/4 % Notes at a purchase price payable in cash in an amount
equal to 101% of the principal amount thereof, plus accrued and unpaid interest
thereon, if any, to the repurchase date, in accordance with the procedures set
forth in the Indenture.
Within 30 days after any Change in Control, the Company shall mail a notice
to each Holder stating (i) that a Change in Control has occurred and that such
Holder has the right to require the Company to repurchase such Holder's 10 1/4 %
Notes in cash, (ii) the date of repurchase (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed), (iii) the
purchase price for the repurchase, and (iv) the instructions determined by the
Company, consistent with this covenant, that a Holder must follow in order to
have its 10 1/4 % Notes repurchased. Any Change in Control Repurchase will be
conducted in compliance with applicable tender offer rules, including Section
14(e) of the Exchange Act and Rule 14e-1 thereunder.
The Indenture provides that, without the consent of each Holder affected, the
Indenture may not be amended to adversely affect the right of Holders to require
the Company to repurchase 10 1/4 % Notes upon a Change in Control. A Default
resulting from a failure to comply with the Change in Control provisions may be
waived only with the consent of each Holder affected thereby. The Change in
Control Repurchase may not be modified or conditioned in any manner.
A Change in Control or a Change in Control Repurchase may cause the
acceleration of other indebtedness of the Company. In the event of a Change in
Control Repurchase and a simultaneous acceleration of other indebtedness, the
Company may not be able to meet all of its debt payment
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obligations. Failure by the Company to repurchase the 10 1/4 % Notes when
required will result in an Event of Default with respect to the 10 1/4 % Notes
whether or not such repurchase is permitted by the subordination provisions and
may constitute an event of default under the Company's other debt instruments.
The Company's ability to make a Change in Control Repurchase may be limited by
the terms of the Company's Senior Indebtedness and the subordination provisions
of the Indenture.
The Change in Control provisions described above may deter certain mergers,
tender offers and other takeover attempts involving the Company. In determining
whether a sale, lease, conveyance or other disposition of all or substantially
all of the Company's assets as an entirety or substantially as an entirety
involves a Change in Control of the Company within the meaning of the Indenture,
several considerations may be relevant, including the percentage of the
Company's assets being disposed of, the percentage of the Company's revenues and
income generated by such assets and the effect of such disposition on the
Company's remaining operations. Accordingly, in certain circumstances it may be
unclear as to whether a Change in Control has occurred and whether the Holders
are therefore entitled to require a Change in Control Repurchase. Further, the
term Change in Control is limited to certain specified transactions and,
depending on the circumstances, may not include other events, such as highly
leveraged transactions, reorganizations, restructurings, mergers or similar
transactions, that might adversely affect the financial condition of the Company
or result in a downgrade in the credit rating of the 10 1/4 % Notes.
Additionally, a change in control of the Board of Directors through a proxy
contest would not, in and of itself, constitute a Change in Control. The Company
does not have any current intention to enter into a transaction which would
constitute a Change in Control.
Limitations on Mergers and Consolidations. The Indenture provides that the
Company will not consolidate or merge with or into, or sell, lease, convey or
otherwise dispose of all or substantially all of its assets, or assign any of
its obligations under the 10 1/4 % Notes or the Indenture, to any Person unless:
(i) the Person formed by or surviving such consolidation or merger (if other
than the Company), or to which such sale, lease, conveyance or other disposition
or assignment shall be made (collectively, the "Successor"), is a corporation
organized and existing under the laws of the United States or any State thereof
or the District of Columbia, and the Successor assumes by supplemental indenture
in a form satisfactory to the Trustee all of the obligations of the Company
under the 10 1/4 % Notes and the Indenture; (ii) immediately after giving effect
to such transaction, no Default or Event of Default shall have occurred and be
continuing; (iii) immediately after giving effect to such transaction and the
use of any net proceeds therefrom on a pro forma basis, the Consolidated Net
Worth of the Company or the Successor, as the case may be, would be at least
equal to the Consolidated Net Worth of the Company immediately prior to such
transaction; and (iv) the Consolidated Coverage Ratio of the Company or the
Successor, as the case may be, immediately after giving effect to such
transaction, would, on a pro forma basis, be such that the Company or the
Successor, as the case may be, would be entitled to incur at least $1 of
additional Indebtedness under the Consolidated Coverage Ratio test in the
"Limitations on Additional Indebtedness" covenant.
Reports. The Indenture provides that, whether or not required by the rules
and regulations of the Commission, so long as any 10 1/4 % Notes are
outstanding, the Company will furnish to the Holders of 10 1/4 % Notes all
quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-K and 10-Q if the Company
were required to file such Forms, including a "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and, with respect to
the annual information only, a report thereon by the Company's certified public
accountants.
EVENTS OF DEFAULT
The following are Events of Default under the Indenture with respect to the
10 1/4 % Notes: (a) default in the payment of principal of or any premium on any
10 1/4 % Notes when due (even if such payment is prohibited by the subordination
provisions of the Indenture), whether at Stated Maturity, upon redemption, upon
acceleration or otherwise; (b) default in the payment of any interest on any 10
1/4 % Note when due, which default continues for 30 days (even if such payment
is prohibited by the subordination provisions of the Indenture); (c) default in
the performance of any other covenant of the
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Company in the Indenture continued for 45 days after written notice to the
Company by the Trustee or to the Company and the Trustee by the Holders of at
least 25% of the aggregate principal amount of the 10 1/4 % Notes then
outstanding; (d) any acceleration of the maturity of Indebtedness of the Company
or its Subsidiaries having an outstanding principal amount of at least $10
million or a failure to pay such Indebtedness at its Stated Maturity, provided
that such acceleration or failure to pay is not cured within 10 days after such
acceleration or failure to pay; and (e) certain events in bankruptcy, insolvency
or reorganization of the Company or any Significant Subsidiary.
If an Event of Default (other than an Event of Default resulting from
bankruptcy, insolvency or reorganization involving the Company) with respect to
the 10 1/4 % Notes shall occur and be continuing, the Trustee or the Holders of
not less than 25% in aggregate principal amount of the 10 1/4 % Notes then
outstanding may declare the principal of all such 10 1/4 % Notes to be due and
payable. The Company is required to furnish to the Trustee annually a statement
as to the performance by the Company of certain of its obligations under the
Indenture and as to any default in such performance. If an Event of Default
results from bankruptcy, insolvency or reorganization involving the Company, all
outstanding 10 1/4 % Notes shall become due and payable without any further
action or notice. Under certain circumstances, any declaration of acceleration
with respect to the 10 1/4 % Notes may be rescinded and past defaults may be
waived by the Holders of a majority of the aggregate principal amount of the 10
1/4 % Notes then outstanding. The Indenture provides that the Trustee may
withhold notice to the holders of any continuing default (except a default in
the payment of the principal of or premium, if any, or interest on any 10 1/4 %
Notes or in respect of the Company's obligation to make a Change in Control
Repurchase) if the Trustee considers it in the interest of Holders to do so.
MODIFICATION, AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Company and
the Trustee without the consent of the Holders to: (a) cause the Indenture to be
qualified under the Trust Indenture Act; (b) evidence the succession of another
Person to the Company and the assumption by any such successor of the covenants
contained in the Indenture and in the 10 1/4 % Notes; (c) add to the covenants
of the Company for the benefit of the Holders or an additional Event of Default,
or surrender any right or power conferred upon the Company; (d) secure the 10
1/4 % Notes or provide for any Guarantee by a Subsidiary in accordance with the
covenant described under the caption "-- Certain Covenants -- Limitations on
Additional Indebtedness"; (e) provide for the issuance of the New Notes
identical in all material respects to the Old Notes pursuant to the Exchange
Offer as contemplated by the Registration Rights Agreement; (f) evidence and
provide for the acceptance of appointment by a successor Trustee with respect to
the 10 1/4 % Notes; and (g) cure any ambiguity, correct or supplement any
provision which may be defective or inconsistent with any other provision, or
make any other provisions with respect to matters or questions arising under the
Indenture which shall not be inconsistent with the provisions of the Indenture,
provided, however, that no such modification or amendment may adversely affect
the interests of the Holders.
Modifications and amendments of the Indenture may be made by the Company and
the Trustee with the consent of the Holders of a majority in aggregate principal
amount of the 10 1/4 % Notes then outstanding; provided, however, that no such
modification or amendment may, without the consent of the Holder of each such 10
1/4 % Note, (a) change the Stated Maturity of the principal of, or any
installment of interest on, such 10 1/4 % Note, (b) reduce the principal amount
of, or premium, if any, or interest on, such 10 1/4 % Note, (c) modify the
subordination provisions in the Indenture in a manner adverse to the Holder, (d)
change the place or currency of payment of principal of, or premium, if any, or
interest on, such 10 1/4 % Note, (e) adversely affect the right to require the
Company to repurchase 10 1/4 % Notes under certain circumstances, (f) impair the
right to institute suit for the enforcement of any such payment on or with
respect to such 10 1/4 % Note, or (g) reduce the percentage in principal amount
of 10 1/4 % Notes then outstanding, the consent of whose Holders is required for
modification or amendment of the Indenture or for waiver of compliance with
certain provisions of the Indenture or for waiver of certain defaults.
The Holders of a majority in aggregate principal amount of the 10 1/4 % Notes
then outstanding may, on behalf of all Holders, waive compliance by the Company
with certain restrictive provisions of the
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Indenture. The Holders of a majority in aggregate principal amount of the 10 1/4
% Notes then outstanding may, on behalf of all Holders, waive any Default or
Event of Default under the Indenture with respect to the 10 1/4 % Notes, except
a Default or Event of Default in the payment of principal of, or premium, if
any, or interest on the 10 1/4 % Notes or in respect of a provision which under
the Indenture cannot be modified or amended without consent of the Holder of
each Note then outstanding.
SATISFACTION AND DISCHARGE
The Indenture permits the Company to terminate all of its obligations under
the Indenture, other than the obligation to pay interest on and the principal of
the 10 1/4 % Notes and certain other obligations ("covenant defeasance"), at any
time by (i) depositing in trust with the Trustee (or a third party satisfactory
to the Trustee), under an irrevocable trust agreement, money or U.S. government
obligations in an amount sufficient to pay principal of, premium, if any, and
interest on the 10 1/4 % Notes to their maturity or redemption, as the case may
be (provided that (x) the Company delivers to the Trustee an officer's
certificate stating that all conditions precedent to covenant defeasance have
been complied with, and, if any other Indebtedness of the Company shall then be
outstanding or committed, that such covenant defeasance will not violate the
provisions of the agreements or instruments evidencing such Indebtedness and (y)
such deposit does not result in a breach or violation of, or constitute a
default or event of default under, the Indenture or any other material agreement
or instrument to which the Company is a party or by which it is bound), and (ii)
complying with certain other conditions, including delivery to the Trustee of an
opinion of counsel to the effect that Holders will not recognize income, gain or
loss for federal income tax purposes as a result of the Company's exercise of
such right, and will be subject to federal income tax on the same amount and in
the same manner and at the same time as would have been the case otherwise or
that the Company has received from, or there has been published by, the Internal
Revenue Service a ruling to the foregoing effect.
In addition, the Indenture will permit the Company to terminate all of its
obligations under the Indenture (including its obligations to pay interest on
and the principal of the 10 1/4 % Notes and certain other obligations) ("legal
defeasance"), at any time by (i) depositing in trust with the Trustee (or a
third party satisfactory to the Trustee), under an irrevocable trust agreement,
money or U.S. government obligations in an amount sufficient to pay principal
of, premium, if any, and interest on the 10 1/4 % Notes to their maturity or
redemption, as the case may be (provided that (x) the Company delivers to the
Trustee an officer's certificate stating that all conditions precedent to legal
defeasance have been complied with and, if any other Indebtedness of the Company
shall then be outstanding or committed, that such legal defeasance will not
violate the provisions of the agreements or instruments evidencing such
Indebtedness and (y) such deposit does not result in a breach or violation of,
or constitute a default or event of default under, the Indenture or any other
material agreement or instrument to which the Company is a party or by which it
is bound), and (ii) complying with certain other conditions, including delivery
to the Trustee of an opinion of counsel to the effect that Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
the Company's exercise of such right and will be subject to federal income tax
on the same amount and in the same manner and at the same time as would have
been the case otherwise, which opinion of counsel is based upon either a ruling
by the Internal Revenue Service, controlling precedent or a change in the
applicable federal tax law since the date of the Indenture.
GOVERNING LAW
The Indenture and the 10 1/4 % Notes are governed by, and will be construed
in accordance with, the laws of the State of New York, without giving effect to
such State's conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Company and its Subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of business.
The Trustee serves as trustee with respect to the Company's 9 5/8 % Senior
Subordinated Notes due 2002, Series A, the Company's 10 3/4 % Senior
Subordinated Notes due 2004 and the Company's 6% Convertible Subordinated
Debentures due 2003.
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CERTAIN DEFINITIONS
Set forth below is a summary of certain of the defined terms used in the
Indenture. Reference is made to the Indenture for the full definition of all
such terms used in the Indenture.
"Accounts Receivable" means all of the accounts receivable of the Company and
each of its Subsidiaries which, in accordance with GAAP, would be set opposite
the caption "accounts receivable" or any like caption on a balance sheet of the
Company.
"Acquired Indebtedness" means (a) with respect to any Person that becomes a
Subsidiary of the Company after the date of the Indenture, Indebtedness of such
Person and its Subsidiaries existing at the time such person becomes a
Subsidiary of the Company that was not incurred in connection with, or in
contemplation of, such Person becoming a Subsidiary of the Company and (b) with
respect to the Company or any of its Subsidiaries, any Indebtedness assumed by
the Company or any of its Subsidiaries in connection with the acquisition of an
asset from another Person that was not incurred by such other person in
connection with, or in contemplation of, such acquisition.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling, controlled by or under direct or indirect common control
with such specified Person. For the purposes of this definition, "control" when
used with respect to any specified Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise, and the terms
"controlling" and "controlled" have meanings correlative to the foregoing.
"Asset Sale" for any Person means the sale, lease, conveyance or other
disposition (including, without limitation, by merger or consolidation, and
whether by operation of law or otherwise) of any of that Person's assets
(including, without limitation, the sale or other disposition of Capital Stock
of any Subsidiary of such Person, whether by such Person or by such Subsidiary),
whether owned on the date of the Indenture or subsequently acquired, in one
transaction or a series of related transactions, in which such Person and/or its
Subsidiaries sell, lease, convey or otherwise dispose of (i) all or
substantially all of the Capital Stock of any of such Person's Subsidiaries,
(ii) assets which constitute substantially all of an operating unit or business
of such Person or any of its Subsidiaries, or (iii) any healthcare facility;
provided, however, that the following shall not constitute Asset Sales: (i) a
transaction or series of related transactions that results in a Change in
Control, (ii) transactions between the Company and any of its Wholly Owned
Subsidiaries or among such Wholly Owned Subsidiaries, or (iii) transactions in
which either (x) the fair market value of the asset disposed of does not exceed
2.5% of the Consolidated Tangible Assets of the Company or (y) the Consolidated
EBITDA of the Company associated with the asset disposed of does not exceed 2.5%
of the Consolidated EBITDA of the Company.
"Attributable Indebtedness" when used with respect to any Sale and Leaseback
Transaction or an operating lease with respect to a healthcare facility means,
as at the time of determination, the present value (discounted at a rate
equivalent to the interest rate implicit in the lease, compounded on a
semi-annual basis) of the total obligations of the lessee for rental payments,
after excluding all amounts required to be paid on account of maintenance and
repairs, insurance, taxes, utilities and other similar expenses payable by the
lessee pursuant to the terms of the lease, during the remaining term of the
lease included in any such Sale and Leaseback Transaction or such operating
lease or until the earliest date on which the lessee may terminate such lease
without penalty or upon payment of a penalty (in which case the rental payments
shall include such penalty); provided that the Attributable Indebtedness with
respect to a Sale and Leaseback Transaction shall be no less than the fair
market value of the property subject to such Sale and Leaseback Transaction.
"Bank Debt" means all obligations of the Company and its Subsidiaries, now or
hereafter existing under the Credit Agreement, whether for principal, interest,
reimbursement of amounts drawn under letters of credit issued pursuant thereto,
guarantees in respect thereof, fees, expenses, premiums, indemnities or
otherwise, including such obligations incurred by the Company or its
Subsidiaries in connection with any extension, refunding or refinancing of the
Credit Agreement.
"Capital Stock" of any Person means any and all shares, rights to purchase,
warrants or options (whether or not currently exercisable), participation or
other equivalents of or interests in (however
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designated) the equity (including, without limitation, common stock, preferred
stock and partnership and joint venture interests) of such Person (excluding any
debt securities that are convertible into, or exchangeable for, such equity).
"Capitalized Lease Obligation" of any Person means the obligation of such
Person to pay rent or other amounts under a lease that is required to be
capitalized for financial reporting purposes in accordance with GAAP, and the
amount of such obligation shall be the capitalized amount thereof determined in
accordance with GAAP.
"Change in Control" means any of the following: (1) all or substantially all
of the Company's assets are sold, leased, conveyed or disposed of, as an
entirety or substantially as an entirety, to any Person or related group of
Persons (other than a Permitted Holder); (ii) stockholders of the Company shall
approve any plan or proposal for the liquidation or dissolution of the Company;
(iii) there shall be consummated any consolidation or merger of the Company (A)
in which the Company is not the continuing or surviving corporation (other than
a consolidation or merger with a Wholly Owned Subsidiary of the Company in which
all shares of Common Stock outstanding immediately prior to the effectiveness
thereof are changed into or exchanged for the same consideration) or (B)
pursuant to which the Common Stock would be converted into cash, securities or
other property, in each case other than a consolidation or merger of the Company
in which the holders of the Common Stock immediately prior to the consolidation
or merger have, directly or indirectly, at least a majority of the common stock
of the continuing or surviving corporation immediately after such consolidation
or merger; or (iv) any Person, or any Persons acting together which would
constitute a "group" for purposes of Section 13(d) of the Exchange Act (other
than a Permitted Holder), together with any affiliates 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 the Company
entitled to vote generally in the election of directors of the Company.
"Common Equity" of any Person means all Capital Stock of such Person that is
generally entitled to (i) vote in the election of directors of such Person or
(ii) if such Person is not a corporation, vote or otherwise participate in the
selection of the governing body, partners, managers or others that will control
the management and policies of such Person.
"Consolidated Amortization Expense" of any Person for any period means the
amortization expense of such Person and its Subsidiaries for such period (to the
extent included in the computation of Consolidated Net Income of such Person),
determined on a consolidated basis in accordance with GAAP.
"Consolidated Coverage Ratio" with respect to any period means the ratio of
(i) Consolidated EBITDA of the Company to (ii) the aggregate amount of
Consolidated Interest Expense of the Company for such period; provided, however,
that if any calculation of the Company's Consolidated Coverage Ratio requires
the use of any quarter prior to the date of the Indenture, such calculation
shall be made on a pro forma basis, giving effect to the issuance of the 10 1/4
% Notes and the use of the net proceeds therefrom as if the same had occurred at
the beginning of the four-quarter period used to make such calculation; and
provided further that if any such calculation requires the use of any quarter
prior to the date that any Asset Sale was consummated, or that any Indebtedness
was incurred, or that any acquisition of a hospital or other healthcare facility
or any assets purchased outside the ordinary course of business was effected, by
the Company or any of its Subsidiaries, such calculation shall be made on a pro
forma basis, giving effect to each such Asset Sale, incurrence of Indebtedness
or acquisition (including the Consolidated EBITDA relating to the hospital,
healthcare facility or other assets acquired), as the case may be, and the use
of any proceeds therefrom, as if the same had occurred at the beginning of the
four-quarter period used to make such calculation; provided, however, that if
the Company consummates an acquisition of First American Health Care of Georgia,
Inc. ("First American"), the results of operations for First American shall be
reflected in the computation of the Consolidated Coverage Ratio from the date of
consummation of the acquisition of First American (on an annualized basis for
the four quarter period following the acquisition) and pro forma effect shall
not be given to such results of operations (but shall be given effect to any
financing, including the incurrence of Indebtedness, in connection with such
transaction) as if it had occurred at the beginning of the four-quarter period
used to make such calculation.
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"Consolidated Depreciation Expense" of any Person for any period means the
depreciation expense of such Person and its Subsidiaries for such period (to the
extent included in the computation of Consolidated Net Income of such Person),
determined on a consolidated basis in accordance with GAAP.
"Consolidated EBITDA" of any Person means, with respect to any determination
date, Consolidated Net Income, plus (i) Consolidated Income Tax Expense, plus
(ii) Consolidated Depreciation Expense, plus (iii) Consolidated Amortization
Expense, plus (iv) Consolidated Interest Expense, plus (v) all other non-cash
items reducing Consolidated Net Income of such Person and its Subsidiaries,
determined on a consolidated basis in accordance with GAAP, and less all
non-cash items increasing Consolidated Net Income of such Person and its
Subsidiaries, determined on a consolidated basis in accordance with GAAP, in
each case, for such Person's prior four full fiscal quarters for which financial
results have been reported immediately preceding the determination date.
"Consolidated Income Tax Expense" means, for any Person for any period, the
provision for taxes based on income and profits of such Person and its
Subsidiaries to the extent such income or profits were included in computing
Consolidated Net Income of such Person for such period.
"Consolidated Interest Expense" of any Person for any period means the
Interest Expense of such Person and its Subsidiaries for such period, determined
on a consolidated basis in accordance with GAAP, plus any dividends accrued for
such period on any Preferred Stock of any Subsidiary not held by the Company or
any Wholly Owned Subsidiary.
"Consolidated Net Income" of any Person for any period means the net income
(or loss) of such Person and its Subsidiaries for such period determined on a
consolidated basis in accordance with GAAP, without giving effect to dividends
on any series of preferred stock of any Subsidiary of such Person, whether or
not in cash, to the extent such consolidated net income was reduced thereby;
provided that there shall be excluded from such net income (to the extent
otherwise included therein), without duplication: (i) the net income (or loss)
of any Person (other than a Subsidiary of the referent Person) in which any
Person other than the referent Person has an ownership interest, except to the
extent that any such income has actually been received by the referent Person or
any of its Wholly Owned Subsidiaries in the form of dividends or similar
distributions during such period; (ii) except to the extent includible in the
consolidated net income of the referent Person pursuant to the foregoing clause
(i), the net income (or loss) of any Person that accrued prior to the date that
(a) such Person becomes a Subsidiary of the referent Person or is merged into or
consolidated with the referent Person or any of its Subsidiaries or (b) the
assets of such Person are acquired by the referent Person or any of its
Subsidiaries; (iii) the net income of any Subsidiary of the referent Person
(other than a Wholly Owned Subsidiary) to the extent that the declaration or
payment of dividends or similar distributions by such Subsidiary of that income
is not permitted by operation of the terms of its charter or any agreement,
instrument, judgment, decree, order, statute, rule or governmental regulation
applicable to that Subsidiary during such period; (iv) any gain (but not loss),
together with any related provisions for taxes on any such gain, realized during
such period by the referent Person or any of its Subsidiaries upon (a) the
acquisition of any securities, or the extinguishment of any Indebtedness, of the
referent Person or any of its Subsidiaries or (b) any Asset Sale by the referent
Person or any of its Subsidiaries; (v) any extraordinary gain or loss, together
with any related provision for taxes on any such extraordinary gain or loss,
realized by the referent Person or any of its Subsidiaries during such period;
(vi) any unusual or nonrecurring non-cash charge which is not, under generally
accepted accounting principles, an extraordinary item; and (vii) in the case of
a successor to such Person by consolidation, merger or transfer of its assets,
any earnings of the successor prior to such merger, consolidation or transfer of
assets.
"Consolidated Net Worth" of any Person as of any date means the stockholders'
equity (including any preferred stock that is classified as equity under GAAP,
other than Disqualified Stock) of such Person and its Subsidiaries (excluding
any equity adjustment for foreign currency translation for any period subsequent
to the date of the Indenture) on a consolidated basis at such date, as
determined in accordance with GAAP, less all write-ups (other than write-ups in
connection with acquisitions) subsequent to the date of the Indenture in the
book value of any asset owned by such Person or any of its Subsidiaries.
"Consolidated Tangible Assets" of any Person as of any date means the total
assets of such Person and its Subsidiaries (excluding any assets that would be
classified as "intangible assets" under GAAP)
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on a consolidated basis at such date, as determined in accordance with GAAP,
less all write-ups (other than write-ups in connection with acquisitions)
subsequent to the date of the Indenture in the book value of any asset (except
any such intangible assets) owned by such Person or any of its Subsidiaries.
"Credit Agreement" means the Revolving Credit Agreement, dated May 15, 1996,
among the Company, the Bank Agent, and the other financial institutions
signatory thereto, together with the related documents thereto, including,
without limitation, any security documents and all exhibits and schedules
thereto and any agreement or agreements relating to any extension, refunding,
refinancing, successor or replacement facility, whether or not with the same
lenders, and whether or not the principal amount or amount of letters of credit
outstanding thereunder of the interest rate payable in respect thereof shall be
thereby increased, in each case as amended and in effect from time to time.
"Default" means any event, act or condition that is, or after notice or the
passage of time or both would be, an Event of Default.
"Disqualified Stock" means any Capital Stock that by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or is redeemable
at the option of the holder thereof, in whole or in part, on or prior to the
final maturity date of the 10 1/4 % Notes.
"Eligible Investments" of any Person means Investments of such Person in (i)
securities issued or fully guaranteed or insured by the United States Government
or any agency thereof and backed by the full faith and credit of the United
States maturing not more than one year from the date of acquisition; (ii)
certificates of deposit, time deposits, Eurodollar time deposits, bankers'
acceptances or deposit accounts having in each case a remaining term to maturity
of not more than one year, which are either (A) fully insured by the Federal
Deposit Insurance Corporation or (B) issued by any lender or by any commercial
bank under the laws of any State or any national banking association that has
combined capital and surplus of not less than $500,000,000 and whose short-term
securities are rated at least A-1 by S&P or P-1 by Moody's; (iii) commercial
paper that is rated at least A-1 by S&P or P-1 by Moody's, issued by a company
that is incorporated under the laws of the United States or of any State and
directly issues its own commercial paper, and has a remaining term to maturity
of not more than one year; (iv) a repurchase agreement with (A) any commercial
bank that is organized under the laws of any State or any national banking
association and that has total assets of at least $500,000,000, or (B) any
investment bank that is organized under the laws of any State and that has total
assets of at least $500,000,000, which agreement is secured by any one or more
of the securities and obligations described in clauses (i), (ii) or (iii) of
this definition of Eligible Investments, which shall have a market value
(exclusive of accrued interest and valued at least monthly) at least equal to
the principal amount of such investment; (v) any money market or other
investment fund the investments of which are limited to investments described in
clauses (i), (ii), (iii) and (iv) of this definition of Eligible Investments and
which is managed by (A) a commercial bank that is organized under the laws of
any State or any national banking association and that has total assets of at
least $500,000,000, or (B) any investment bank that is organized under the laws
of any State and that has total assets of at least $500,000,000; (vi)
obligations, debentures, notes, bonds or other evidences of indebtedness rated
at least A- by Moody's or A3 by S&P; provided that the aggregate amount of
investments by any Person permitted under this clause (vi) shall not exceed 25%
of the total amount invested by such Person in Eligible Investments; (vii)
investments in investment grade auction rate and adjustable rate preferred
equities for issuers whose actual or implied senior long-term debt is rated at
least A- by Moody's or A3 by S&P; (viii) investments in investment grade fixed
rate preferred equities for issuers whose actual or implied senior long-term
debt is rated at least A- by Moody's or A3 by S&P; provided that the aggregate
amount of investments by any Person permitted under this clause (viii) shall not
exceed 10% of the total amount invested by such Person in Eligible Investments;
(ix) adjustable rate mortgage-backed securities rated at least AA by S&P or Aa
by Moody's; and (x) fixed rate mortgage-backed securities rated at least AA by
S&P or Aa by Moody's; provided that the aggregate amount of investments by any
Person permitted under this clause (x) shall not exceed 25% of the total amount
invested by such Person in Eligible Investments.
"Existing Indebtedness" means all of the Indebtedness of the Company and its
Subsidiaries that is outstanding on the date of the Indenture.
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"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as may be approved by a significant segment of the accounting
profession of the United States, as in effect from time to time.
"Guarantee" by any Person means any obligation, contingent or otherwise, of
such Person directly or indirectly guaranteeing any Indebtedness or other
obligation of any other Person and, without limiting the generality of the
foregoing, any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other purchase or other obligation of such
other Person (whether arising by virtue of partnership arrangements, by
agreement to keepwell, to purchase assets, goods, securities or services, to
take-or-pay, or to maintain financial statement conditions or otherwise) or (ii)
entered into for the purpose of assuring in any other manner the obligee of such
Indebtedness or other obligation of the payment thereof or to protect such
obligee against loss in respect thereof (in whole or in part); provided that the
term Guarantee shall not include endorsements for collection or deposit in the
ordinary course of business. The term "Guarantee" used as a verb has a
corresponding meaning.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any interest rate swap agreement, foreign currency exchange
agreement, interest rate collar agreement, option or futures contract or other
similar agreement or arrangement relating to interest rates or foreign exchange
rates.
"Indebtedness" of any Person at any date means, without duplication: (i) all
Bank Debt; (ii) all other indebtedness of such Person for borrowed money
(whether or not recourse of the lender is to the whole of the assets of such
Person or only to a portion thereof); (iii) all obligations of such Person
evidenced by bonds, debentures, notes or other similar instruments; (iv) all
obligations of such Person in respect of letters of credit or other similar
instruments (or reimbursement obligations with respect thereto); (v) all
obligations of such Person with respect to Hedging Obligations (other than those
that fix the interest rate on variable rate indebtedness otherwise permitted by
the Indenture or that protect the Company and/or its Subsidiaries against
changes in foreign exchange rates); (vi) all obligations of such Person to pay
the deferred and unpaid purchase price of property or services, except trade
payables and accrued expenses incurred in the ordinary course of business; (vii)
all Capitalized Lease Obligations of such Person; (viii) all Indebtedness of
others secured by a Lien on any asset of such Person, whether or not such
Indebtedness is assumed by such Person; (ix) all Indebtedness of others
guaranteed by such Person to the extent of such guarantee; and (x) all
Attributable Indebtedness. The amount of Indebtedness of any Person at any date
shall be the outstanding balance at such date of all unconditional obligations
as described above; and in the case of clauses (iv) and (ix), the maximum
liability of such Person for any such contingent obligations at such date, and
in the case of clause (viii), the amount of the Indebtedness secured.
"Interest Expense" of any Person for any period means the aggregate amount of
interest which, in accordance with GAAP, would be set opposite the caption
"interest expense" or any like caption on an income statement for such Person
(including, without limitation or duplication, imputed interest included in
Capitalized Lease Obligations, all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing, the net costs associated with Hedging Obligations, amortization of
financing fees and expenses, the interest portion of any deferred payment
obligation, amortization of discount and all other non-cash interest expense).
"Inventory" means all of the inventory of the Company and each of its
Subsidiaries which, in accordance with GAAP, would be set opposite the caption
"inventory" or any like caption on a balance sheet of the Company.
"Investments" of any Person means (i) all investments by such Person in any
other Person in the form of loans, advances or capital contributions (excluding
commission, travel and similar advances to officers and employees made in the
ordinary course of business), (ii) all guarantees of Indebtedness or other
obligations of any other Person by such Person, (iii) all purchases (or other
acquisitions for consideration)
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by such Person of Indebtedness, Capital Stock or other securities of any other
Person and (iv) all other items that would be classified as investments
(including, without limitation, purchases of assets outside the ordinary course
of business) on a balance sheet of such Person prepared in accordance with GAAP.
"Lien" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or other similar encumbrance of any kind in respect of such
asset, whether or not filed, recorded or otherwise perfected under applicable
law (including, without limitation, any conditional sale or other title
retention agreement, any financing lease in the nature thereof, any agreement to
sell, and any filing of, or agreement to give, any financing statement (other
than notice filings not perfecting a security interest) under the Uniform
Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Proceeds" with respect to any Asset Sale means (i) cash (in U.S. dollars
or freely convertible into U.S. dollars) received by the Company or any of its
Subsidiaries from such Asset Sale (including, without limitation, cash received
as consideration for the assumption or incurrence of liabilities incurred in
connection with or in anticipation of such Asset Sale), after (a) provision for
all income or other taxes measured by or resulting from such Asset Sale or the
transfer of the proceeds of such Asset Sale to the Company or any of its
Subsidiaries, (b) payment of all brokerage commissions and the underwriting and
other fees and expenses related to such Asset Sale and (c) deduction of an
appropriate amount to be provided by the Company or any of its Subsidiaries as a
reserve, in accordance with GAAP, against any liabilities associated with the
assets sold or otherwise disposed of in such Asset Sale and retained by the
Company or any of its Subsidiaries after such Asset Sale (including, without
limitation, pension and other post-employment benefit liabilities and
liabilities related to environmental matters) or against any indemnification
obligations associated with the sale or other disposition of the assets sold or
otherwise disposed of in such Asset Sale and (ii) all non-cash consideration
received by the Company or any of its Subsidiaries from such Asset Sale upon the
liquidation or conversion of such consideration into cash.
"Permitted Holder" means Robert N. Elkins and any group (within the meaning
of Section 13(d)(3) of the Exchange Act) of which Mr. Elkins is a member; so
long as, with respect to any group, Mr. Elkins owns more than 20% of the total
voting power of all classes of capital stock of the acquiring entity entitled to
vote generally in the election of directors of the acquiring entity.
"Permitted Liens" means (i) Liens for taxes, assessments or governmental
charges or claims that either (a) are not yet delinquent or (b) are being
contested in good faith by appropriate proceedings and as to which appropriate
reserves or other provisions have been made in accordance with GAAP; (ii)
statutory Liens of landlords and carriers', warehousemen's, mechanics',
suppliers', materialmen's, repairmen's or other like Liens arising in the
ordinary course of business and with respect to amounts that either (a) are not
yet delinquent or (b) are being contested in good faith by appropriate
proceedings and as to which appropriate reserves or other provisions have been
made in accordance with GAAP; (iii) Liens (other than any Lien imposed by the
Employee Retirement Income Security Act of 1974, as amended) incurred or
deposits due in the ordinary course of business in connection with workers'
compensation, unemployment insurance and other types of social security; (iv)
Liens incurred or deposits made to secure the performance of tenders, bids,
leases, statutory obligations, surety and appeal bonds, progress payments,
government contracts and other obligations of like nature (exclusive of
obligations for the payment of borrowed money), in each case incurred in the
ordinary course of business; (v) attachment or judgment Liens not giving rise to
a Default or an Event of Default; (vi) easements, rights-of-way, restrictions
and other similar charges or encumbrances not interfering with the ordinary
conduct of the business of the Company or any of its Subsidiaries; (vii) leases
or subleases granted to others not interfering with the ordinary conduct of the
business of the Company or any of its Subsidiaries; (viii) Liens with respect to
any Acquired Indebtedness; provided that such Liens only extend to assets that
were subject to such Liens prior to the acquisition of such assets by the
Company or its Subsidiaries; (ix) Liens securing Senior Indebtedness; (x) Liens
securing Refinancing Indebtedness that is not Senior Indebtedness; provided that
such Liens only extend to the assets securing the Indebtedness being refinanced
and such refinanced Indebtedness was previously secured by such assets; (xi)
Liens on Accounts Receivable (and guarantees by third parties of such Accounts
Receivable or collateral pledged by account obligors or other unrelated third
parties securing such Accounts Receivable) or Inventory; (xii) purchase money
mortgages (including Capitalized Lease Obligations); (xiii) Liens existing on
the
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date of the Indenture; (xiv) Liens on assets of any Subsidiary of the Company
securing Indebtedness of such Subsidiary; provided that such Indebtedness is
permitted to be incurred by the terms of the Indenture; (xv) bankers' liens with
respect to the right of set-off arising in the ordinary course of business
against amounts maintained in bank accounts or certificates of deposit in the
name of the Company or any Subsidiary; (xvi) the interest of any issuer of a
letter of credit in any cash or Eligible Investment deposited with or for the
benefit of such issuer as collateral for such letter of credit, provided that
the Indebtedness so collateralized is permitted to be incurred by the terms of
the Indenture; (xvii) any Lien not materially adverse to the interests of the
Holders consisting of a right of first refusal or an option to purchase the
Company's interest in any Subsidiary, or the assets of any Subsidiary; and
(xviii) the Lien granted to the Trustee pursuant to Section 7.6 of the Indenture
and any substantially equivalent Lien granted to the respective trustees under
the indentures for other debt securities of the Company.
"Person" means any individual, corporation, partnership, joint venture,
incorporated or unincorporated association, joint-stock company, trust,
unincorporated organization or government or other agency or political
subdivision thereof or other entity of any kind.
"Preferred Stock" means with respect to any Person all Capital Stock of such
Person which has a preference in liquidation or a preference with respect to the
payment of dividends.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Existing Indebtedness (other than Existing Indebtedness under the
Credit Agreement); provided that: (i) the Refinancing Indebtedness is the
obligation of the same Person and is subordinated to the 10 1/4 % Notes, if at
all, to the same extent as the Indebtedness being refunded, refinanced or
extended; (ii) the Refinancing Indebtedness is scheduled to mature no earlier
than the Indebtedness being refunded, refinanced or extended; (iii) the
Refinancing Indebtedness has a Weighted Average Life to Maturity at the time
such Refinancing Indebtedness is incurred that is equal to or greater than the
Weighted Average Life to Maturity of the portion of the Indebtedness being
refunded, refinanced or extended; (iv) the Refinancing Indebtedness is secured
only to the extent, if at all, and by the assets that the Indebtedness being
refunded, refinanced or extended is secured; and (v) such Refinancing
Indebtedness is in an aggregate principal amount that is equal to or less than
the aggregate principal amount then outstanding under the Indebtedness being
refunded, refinanced or extended (except for issuance costs and increases in
Attributable Indebtedness due solely to increases in the present value
calculations resulting from renewals or extensions of the terms of the
underlying leases in effect on the date of the Indenture).
"Restricted Payment" means with respect to any Person: (i) the declaration of
any dividend or the making of any other payment or distribution of cash,
securities or other property or assets in respect of such Person's Capital Stock
(except that a dividend payable solely in Capital Stock (other than Disqualified
Stock) of such Person shall not constitute a Restricted Payment); (ii) any
payment on account of the purchase, redemption, retirement or other acquisition
for value of such Person's Capital Stock or any other payment or distribution
made in respect thereof, either directly or indirectly; or (iii) any payment on
account of the purchase, redemption, retirement, defeasance or other acquisition
for value of Indebtedness of the Company or its Subsidiaries which is pari passu
with or subordinated in right of payment to the 10 1/4 % Notes and has a
scheduled maturity date subsequent to the maturity of the 10 1/4 % Notes;
provided, however, that with respect to the Company and its Subsidiaries,
Restricted Payments shall not include (I) any payment described (a) in clause
(i), (ii) or (iii) above made (1) to the Company or any of its Wholly Owned
Subsidiaries by any of the Company's Subsidiaries or (2) by the Company to any
of its Wholly Owned Subsidiaries or (b) in clause (iii) above made with the Net
Proceeds from any Asset Sale remaining after completion of the Asset Sale Offer
made in connection with such Asset Sale, all as contemplated under "Limitations
on Asset Sales" or (II) the purchase by the Company of up to an aggregate of $50
million of the Company's Capital Stock pursuant to one or more stock repurchase
programs.
"Sale and Leaseback Transaction" means, with respect to any Person, an
arrangement with any bank, insurance company or other lender or investor or to
which such lender or investor is a party, providing for the leasing by such
Person or any of its Subsidiaries of any property or asset of such Person or any
of its Subsidiaries which has been or is being sold or transferred by such
Person or such Subsidiary to such lender or investor or to any Person to whom
funds have been or are to be advanced by such lender or investor on the security
of such property or asset.
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"Senior Indebtedness" means the principal of and premium, if any, and
interest on and other amounts due on or in connection with any Indebtedness of
the Company permitted under the "Limitations on Additional Indebtedness"
covenant described above (including without limitation all Allowed and
Disallowed Post-Commencement Interest and Expenses in respect of such
Indebtedness) and any amounts with respect to Hedging Obligations that fix the
interest rate on variable rate indebtedness otherwise permitted by this
Indenture, other than the 10 1/4 % Notes, the Company's 9 5/8 % Senior
Subordinated Notes due 2002, Series A, the Company's 10 3/4 % Senior
Subordinated Notes due 2004, the Company's 5 3/4 % Convertible Senior
Subordinated Debentures due 2001 and the Company's 6% Convertible Subordinated
Debentures due 2003, whether outstanding on the date of the Indenture or
thereafter created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness shall
not be senior in right of payment to the 10 1/4 % Notes; provided that Senior
Indebtedness will not include (i) any Indebtedness, liability or obligation of
the Company to (A) any of its Subsidiaries, (B) trade creditors or (C) any
person arising out of any lawsuit against the Company or any of its Subsidiaries
or any settlement thereof (other than any lawsuit or settlement thereof
respecting amounts payable with regard to Senior Indebtedness), (ii) any
redemption or other payments on Preferred Stock, (iii) any Indebtedness incurred
in violation of the provisions of the Indenture or (iv) amounts owing under
leases (other than Capitalized Lease Obligations).
"Significant Subsidiary" has the meaning ascribed to it under Regulation C
promulgated under the Securities Act of 1933, as amended.
"Stated Maturity" means, when used with respect to any security or any
installment of interest thereon, that date specified in such security as the
fixed date on which the principal of such security or such installment of
interest is due and payable.
"Subsidiary" of any Person means (i) any corporation of which Common Equity
having ordinary voting power to elect a majority of the directors of such
corporation is owned by such Person directly or through one or more other
Subsidiaries of such Person and (ii) any entity other than a corporation in
which such Person, directly or indirectly, owns at least a majority of the
Common Equity of such entity.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
or portion thereof at any date, the number of years obtained by dividing (i) the
then outstanding principal amount of such Indebtedness or portion thereof (if
applicable) into (ii) the sum of the products obtained by multiplying (a) the
amount of each then remaining installment, sinking fund, serial maturity or
other required payment of principal, including payment at final maturity, in
respect thereof, by (b) the number of years (calculated to the nearest
one-twelfth) that will elapse between such date and the making of such date and
the making of such payment.
"Wholly Owned Subsidiary" of any person means (i) a Subsidiary of which 100%
of the Common Equity (except for director's qualifying shares or certain
minority interests owned by other Persons solely due to local law requirements
that there be more than one stockholder, but which interest is not in excess of
what is required for such purpose) is owned directly by such Person or through
one or more other Wholly Owned Subsidiaries of such Person and (ii) any entity
other than a corporation in which such Person, directly or indirectly, owns all
of the Common Equity of such entity.
BOOK-ENTRY, DELIVERY AND FORM
The certificates representing the New Notes will be issued in fully
registered form without coupons. Except as set forth in the next paragraph, the
New Notes initially will be represented by a single permanent global certificate
in definitive fully registered form (the "Global Note") and will be deposited
with, or on behalf of, The Depository Trust Company, New York, New York (the
"Depositary") and registered in the name of Cede & Co., as nominee of the
Depositary.
Old Notes that were issued as described below under "-- Certificated
Securities" will be issued in the form of registered definitive certificates
(the "Certificated Securities"). Such Certificated Securities may, unless the
Global Note has previously been exchanged for Certificated Securities, be
exchanged for an interest in the Global Note representing the principal amount
of Senior Notes being transferred.
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The Depositary is a limited purpose trust company created to hold securities
for its participating organizations (collectively, the "Participants" or the
"Depositary's Participants") and to facilitate the clearance and settlement of
transactions in such securities between Participants through electronic
book-entry changes in the accounts of its Participants. The Depositary's
Participants include securities brokers and dealers, banks and trust companies,
clearing corporations and certain other organizations. Access to the
Depositary's system is also available to other entities such as banks, brokers,
dealers and trust companies (collectively, the "Indirect Participants" or the
"Depositary's Indirect Participants") that clear through or maintain a custodial
relationship with a Participant, either directly or indirectly. Persons who are
not Participants may beneficially own securities held by or on behalf of the
Depositary only through the Depositary's Participants or the Depositary's
Indirect Participants.
The Company expects that pursuant to procedures established by the Depositary
ownership of the 10 1/4 % Notes evidenced by the Global Note will be shown on,
and the transfer of ownership thereof will be effected only through, records
maintained by the Depositary (with respect to the interests of the Depositary's
Participants), the Depositary's Participants and the Depositary's Indirect
Participants. Neither the Company nor the Trustee will have any responsibility
or liability for any aspect of the records of the Depositary or for maintaining,
supervising or reviewing any records of the Depositary relating to the 10 1/4 %
Notes. Holders are advised that the laws of some states require that certain
persons take physical delivery in definitive form of securities that they own.
Consequently, the ability to transfer 10 1/4 % Notes evidenced by the Global
Note will be limited to such extent.
So long as the Global Note Holder is the registered owner of any 10 1/4 %
Notes, the Global Note Holder will be considered the sole holder under the
Indenture of any 10 1/4 % Notes evidenced by the Global Note. Beneficial owners
of 10 1/4 % Notes evidenced by the Global Note will not be considered the owners
or holders thereof under the Indenture for any purpose, including with respect
to the giving of any directions, instructions or approvals to the Trustee
thereunder. Accordingly, each person owning a beneficial interest in a Global
Note must rely on the procedures of the Depositary and, if such person is not a
Participant, on the procedures of the Participant through which such person owns
its interest, to exercise any rights of a holder under the Indenture. The
Company understands that under existing industry practices, if it requests any
action of holders or if an owner of a beneficial interest in a Global Note
desires to give or take any action which a holder is entitled to give or take
under the Indenture, the Depositary would authorize the Participants holding the
relevant beneficial interests to give or take such action, and such Participants
would authorize beneficial owners through such Participants to give or take such
actions or would otherwise act upon the instructions of beneficial owners
holding through them.
Payments in respect of the principal of, premium, if any, and interest on,
any 10 1/4 % Notes registered in the name of the Global Note Holder on the
applicable record date will be payable by the Trustee to or at the direction of
the Global Note Holder in its capacity as the registered holder under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names 10 1/4 % Notes, including the Global Note, are
registered as the owners thereof for the purpose of receiving such payments.
Consequently, neither the Company nor the Trustee has or will have any
responsibility or liability for the payment of such amounts to beneficial owners
of 10 1/4 % Notes (including principal, premium, if any, and interest). The
Company believes, however, that it is currently the policy of the Depositary to
immediately credit the accounts of the relevant Participants with such payments,
in amounts proportionate to their respective holdings of beneficial interests in
the relevant security as shown on the records of the Depositary. Payments by the
Depositary's Participants and the Depositary's Indirect Participants to the
beneficial owners of 10 1/4 % Notes will be governed by standing instructions
and customary practice and will be the responsibility of the Depositary's
Participants for the Depositary's Indirect Participants.
Neither the Company nor the Trustee will be liable for any delay by the
Global Note Holder or the Depositary in identifying the beneficial owners of 10
1/4 % Notes and the Company and the Trustee may conclusively rely on, and will
be protected in relying on, instructions from the Global Note Holder or the
Depositary for all purposes.
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CERTIFICATED SECURITIES
Institutional "accredited investors" (within the meaning of Rule 501(a)(1),
(2), (3) or (7) of the Securities Act received Old Notes in the form of
certificated securities. Subject to certain conditions, any person having a
beneficial interest in the Global Note may, upon request to the Trustee,
exchange such beneficial interest for 10 1/4 % Notes in the form of certificated
securities. Upon any such issuance, the Trustee is required to register such
certificated securities in the name of, and cause the same to be delivered to,
such person or persons (or the nominee of any thereof). If (i) the Company
notifies the Trustee in writing that the Depositary is no longer willing or able
to act as a depositary and the Company is unable to locate a qualified successor
within 90 days or (ii) the Company, at its option, notifies the Trustee in
writing that it elects to cause the issuance of 10 1/4 % Notes in the form of
certificated securities under the Indenture, then, upon surrender by the Global
Note Holder of its Global Note, 10 1/4 % Notes in such form will be issued to
each person that the Global Note Holder and the Depositary identify as being the
beneficial owner of the related 10 1/4 % Notes.
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<PAGE>
DESCRIPTION OF CERTAIN INDEBTEDNESS
The following summarizes the material long-term indebtedness of the Company
and its subsidiaries. The Company's indebtedness is substantial in relation to
its stockholders' equity. At June 30, 1996, the Company's total consolidated
long-term debt (excluding current maturities) accounted for 64.8% of its total
capitalization. See "Capitalization." 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.
NEW REVOLVING CREDIT FACILITY
On May 15, 1996, the Company entered into a $700 million revolving credit
facility, including a $100 million letter of credit subfacility, with Citibank,
N.A., as Administrative Agent, and certain other lenders (the "New Credit
Facility"). The New Credit Facility consists of a $700 million revolving loan
which reduces to $560 million on June 30, 2000 and $315 million on June 30,
2001, with a final maturity on June 30, 2002. The $100 million subcommitment for
letters of credit will remain at $100 million until final maturity. The New
Credit Facility is guaranteed by the Company's subsidiaries and secured by a
pledge of all of the stock of substantially all of the Company's subsidiaries.
At the option of the Company, loans under the New Credit Facility bear interest
at a rate equal to either (i) the sum of (a) the higher of (1) the bank's base
rate or (2) one percent plus the latest overnight federal funds rate plus (b) a
margin of between zero percent and one and one-quarter percent (depending on
certain financial ratios); or (ii) in the case of Eurodollar loans, the sum of
between three quarters of one percent and two and one-half percent (depending on
certain financial ratios) and 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 the borrowing selected by the Company.
The New Credit Facility limits the Company's ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to create or incur
liens on assets, to pay dividends and to purchase or redeem the Company's stock.
In addition, the New Credit Facility requires that the Company meet certain
financial tests, and provides the banks with the right to require the payment of
all of the amounts outstanding under the New Credit Facility if there is a
change in control of the Company or if any person other than Dr. Robert N.
Elkins or a group managed by Dr. Elkins owns more than 40% of the Company's
capital stock. Amounts repaid under the New Credit Facility may be reborrowed
until June 30, 2002. The new $700 million credit facility replaced the Company's
$500 million revolving credit facility (the "Prior Credit Facility"). As a
result, the Company recorded a loss on extinguishment of debt, net of related
tax benefits, of approximately $1.4 million in the second quarter of 1996. On
May 15, 1996, the Company borrowed $328.2 million under the New Credit Facility
to repay amounts outstanding under the Prior Credit Facility.
The Company used all of the net proceeds of the sale of the Old Notes to
repay $145.0 million outstanding under the New Credit Facility. At September 20,
1996, $142.2 million was outstanding under the New Credit Facility, bearing
interest at 7.2%. Amounts repaid under the New Credit Facility from the proceeds
of the sale of the Old Notes may be reborrowed by the Company for acquisitions
and for other general corporate purposes, including working capital and to
finance its stock repurchase program.
5 3/4 % CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2001
The Company has outstanding $143,750,000 principal amount of the Company's 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 the Company at any time on or after January 2, 1997 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 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
the Company (as defined in the indenture under which the
80
<PAGE>
5 3/4 % Debentures were issued), each holder of 5 3/4 % Debentures may require
the Company 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
The Company 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 the Company at
any time at a price, expressed as a percentage of the principal amount, ranging
from 104.2% in 1996 to 100.6% in 2002, plus accrued interest. Prior to
redemption, the 6% Debentures are convertible into 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 the Company (as defined in the indenture under which the 6%
Debentures were issued), each holder of 6% Debentures may require the Company 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.
10 3/4 % SENIOR SUBORDINATED NOTES DUE 2004
The Company has outstanding $100,000,000 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
the Company at any time on or after July 15, 1999, at a price, expressed as a
percentage of the principal amount, 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 the Company (as defined in the indenture under which the 10 3/4 %
Senior Notes were issued), each holder of 10 3/4 % Senior Notes may require the
Company 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 indenture under which the 10 3/4 % 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
coverage ratios are met; (ii) limitations on liens; (iii) limitations on the
issuance of preferred stock by the Company's subsidiaries; (iv) limitations on
transactions with affiliates; (v) limitations on certain payments, including
dividends; (vi) application of the proceeds of certain asset sales; (vii)
restrictions on mergers, consolidations and the transfer of all or substantially
all of the assets of the Company to another person; and (viii) limitations on
investments and loans.
9 5/8 % SENIOR SUBORDINATED NOTES DUE 2002, SERIES A
The Company has outstanding $115,000,000 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), 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 indenture under which the 9 5/8 % 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.
CERTAIN OTHER OBLIGATIONS
The Company's contingent liabilities (other than liabilities in respect of
litigation) aggregated approximately $54.7 million as of June 30, 1996. The
Company is obligated to purchase its Greenbriar facility upon a change in
control of the Company. The net purchase price of the facility is approximately
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$4.0 million. The lessor of this facility has the right to require Messrs.
Robert Elkins and Timothy Nicholson to purchase all or any part of 13,944 shares
of Common Stock owned by it at a per share purchase price equal to the sum of
$12.25 per share plus 9% simple interest per annum from May 8, 1988 until the
date of such purchase. The Company has agreed to purchase such shares if Messrs.
Elkins and Nicholson fail to do so. This amount aggregated approximately
$345,000 at June 30, 1996. The Company has guaranteed approximately $6.6 million
of the lessor's indebtedness. The Company 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. The Company
has jointly and severally guaranteed a $1.2 million construction loan made to
River City Limited Partnership in which the Company has a 30% general
partnership interest. The Company has guaranteed approximately $4.2 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. The Company has guaranteed approximately $3.9 million of a
construction loan for Trizec, the entity from which the Company purchased the
Central Park Lodges facilities. The Company has established several irrevocable
standby letters of credit with the Bank of Nova Scotia to secure certain of the
Company's self-insured workers' compensation obligations, health benefits and
other obligations. The maximum obligation was $15.7 million at June 30, 1996.
The Company has established a $3.0 million irrevocable standby letter of credit
with the Bank of Nova Scotia to secure its performance under two management
contracts. The Company has guaranteed approximately $8.7 million owed by
Litchfield Asset Management Corporation to National Health Investors Inc. In
addition, with respect to certain acquired businesses the Company is obligated
to make certain contingent payments if earnings of the acquired business
increase or earnings targets are met. In addition, the Company has obligations
under operating leases aggregating approximately $245.5 million at June 30,
1996.
The Company leases ten facilities from Meditrust, a publicly-traded real
estate investment trust. With respect to all the facilities leased from
Meditrust, the Company 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 the Company has
with Meditrust, Meditrust has the right to require the Company 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 the Company 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.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant to
the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that for a period of 90 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
The Company will not receive any proceeds from any sales of the New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions on the New York Stock Exchange, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or at negotiated prices. Any such resale may be
made directly to purchasers or to or through brokers or
82
<PAGE>
dealers who may receive compensation in the form of commissions or concessions
from any such broker-dealer and/or the purchasers of any such New Notes. Any
broker-dealer that resells the New Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such New Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of the New Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, the Company will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. The Company has agreed to pay certain expenses incident to the
Exchange Offer, other than commissions or concessions of any brokers or dealers,
and will indemnify the holders of the New Notes (including any broker-dealers)
against certain liabilities, including liabilities under the Securities Act.
By acceptance of this Exchange Offer, each broker-dealer that receives New
Notes for its own account pursuant to the Exchange Offer agrees that, upon
receipt of notice from the Company of the happening of any event which makes any
statement in this Prospectus untrue in any material respect or which requires
the making of any changes in this Prospectus in order to make the statements
herein not misleading (which notice the Company agrees to deliver promptly to
such broker-dealer), such broker-dealer will suspend use of this Prospectus
until the Company has amended or supplemented this Prospectus to correct such
misstatement or omission and has furnished copies of the amended or supplemented
Prospectus to such broker-dealer. If the Company shall give any such notice to
suspend the use of the Prospectus, it shall extend the 90-day period referred to
above by the number of days during the period from and including the date of the
giving of such notice to and including the date when broker-dealers shall have
received copies of the supplemented or amended Prospectus necessary to permit
resales of the New Notes.
LEGAL MATTERS
The validity of the New Notes being offered hereby will be passed upon for
the Company by Fulbright & Jaworski L.L.P, New York, New York. At August 12,
1996, attorneys at Fulbright & Jaworski L.L.P. owned an aggregate of 300 shares
of the Company's Common Stock.
EXPERTS
The consolidated financial statements of Integrated Health Services, Inc. and
subsidiaries as of December 31, 1995 and 1994 and for each of the years in the
three-year period ended December 31, 1995, included or incorporated by reference
into this Prospectus and elsewhere in the Registration Statement have been
audited by KPMG Peat Marwick LLP, independent certified public accountants, as
indicated in their report with respect thereto, and are included or incorporated
by reference herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
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<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report .............................................. F-2
Consolidated Balance Sheets at December 31, 1994 and 1995 and June 30,
1996 (unaudited) .......................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30,
1995 (unaudited) and 1996 (unaudited) ..................................... F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996
(unaudited) ............................................................... F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1993, 1994 and 1995 and for the six months ended June 30,
1995 (unaudited) and 1996 (unaudited) ..................................... F-6
Notes to Consolidated Financial Statements ................................ F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Integrated Health Services, Inc.:
We have audited the accompanying consolidated financial statements of
Integrated Health Services, Inc. and subsidiaries (the Company) as listed in the
accompanying index. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Integrated
Health Services, Inc. and subsidiaries at December 31, 1994 and 1995 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1995, in conformity with generally accepted
accounting principles.
As discussed in notes 1 and 17 to the consolidated financial statements, the
Company adopted the provisions of the Financial Accounting Standards Board's
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," in
1995.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
March 22, 1996
F-2
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
------------ JUNE 30,
1994 1995 1996
---- ---- ----
(UNAUDITED)
<S> <C> <C> <C>
Assets
Current Assets:
Cash and cash equivalents ..................................... $ 60,689 $ 38,917 $ 44,399
Temporary investments ......................................... 2,658 2,387 2,290
Patient accounts and third-party payor settlements
receivable, net (note 3) ..................................... 163,341 230,282 263,203
Supplies, inventories, prepaid expenses and other current
assets ....................................................... 25,470 25,629 26,665
Income tax receivable.......................................... -- 16,517 14,717
------------ ------------- ------------
Total current assets ........................................ 252,158 313,732 351,274
Property, plant and equipment, net (note 5) .................... 628,182 747,870 816,530
Assets held for sale (note 2) .................................. 66,106 -- --
Intangible assets (notes 2 and 6) .............................. 260,688 298,290 338,051
Investments in and advances to affiliates (note 4) ............ 15,593 29,362 30,193
Other assets ................................................... 33,262 44,476 84,333
------------ ------------- ------------
Total assets ................................................ $1,255,989 $1,433,730 $1,620,381
============ ============= ============
Liabilities and Stockholders' Equity
Current Liabilities:
Current maturities of long-term debt (note 8) ................. $ 8,972 $ 5,404 $ 4,907
Accounts payable and accrued expenses (note 7) ................ 161,117 172,013 158,748
Income taxes .................................................. 5,686 -- --
------------ ------------- ------------
Total current liabilities ................................... 175,775 177,417 163,655
------------ ------------- ------------
Long-term debt (note 8):
Convertible subordinated debentures ........................... 258,750 258,750 258,750
Other long-term debt less current maturities .................. 283,730 506,507 645,089
------------ ------------- ------------
Total long-term debt ........................................ 542,480 765,257 903,839
------------ ------------- ------------
Deferred income taxes (note 11) ................................ 75,656 52,279 54,730
Deferred gain on sale-leaseback transactions (note 2) ......... 8,267 7,249 6,733
Commitments and contingencies (notes 4, 9, 10 and 12)
Stockholders' equity (note 10):
Preferred stock, authorized 15,000,000 shares; no shares issued
and outstanding in 1994 and 1995 ............................. -- -- --
Common stock, $0.001 par value. Authorized 150,000,000 shares;
issued 20,917,623 shares at December 31, 1994, 21,785,334 at
December 31, 1995 and 23,164,993 at June 30, 1996 (including
400,600 treasury shares at December 31, 1995) ................ 21 22 23
Additional paid-in capital .................................... 392,402 410,345 429,803
Retained earnings ............................................. 61,388 33,951 61,598
Treasury stock, at cost (400,600 shares at December 31, 1995)
(note 10)..................................................... -- (12,790) --
------------ ------------- ------------
Total stockholders' equity .................................. 453,811 431,528 491,424
------------ ------------- ------------
Total liabilities and stockholders' equity .................. $1,255,989 $1,433,730 $1,620,381
============ ============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ..................... $113,508 $269,817 $ 368,569 $176,701 $195,279
Specialty medical services ................. 162,017 404,401 770,554 364,489 446,393
Management services and other .............. 20,779 37,884 39,765 19,826 21,381
---------- ---------- ------------ ---------- ----------
Total revenues ........................... 296,304 712,102 1,178,888 561,016 663,053
---------- ---------- ------------ ---------- ----------
Costs and expenses:
Operating expenses:
Salaries, wages, and benefits ............. 131,705 332,812 549,766 258,039 313,814
Other operating expenses .................. 81,231 195,319 338,785 163,669 188,530
Corporate administrative and general ....... 16,832 37,041 56,016 26,576 29,947
Depreciation and amortization .............. 8,126 26,367 39,961 18,642 18,604
Rent (note 9) .............................. 23,156 42,158 66,125 32,520 35,535
Interest (net of investment income of
$2,669, $1,121, $1,876, $835 and $1,045 for
the years ended December 31, 1993, 1994 and
1995 and for the six months ended June 30,
1995 and 1996, respectively)(note 8) ...... 5,705 20,602 38,977 15,915 30,102
Loss from impairment of long-lived assets
(note 17).................................. -- -- 109,106 -- --
Other non-recurring charges (note 17)....... -- -- 23,854 -- --
---------- ---------- ------------ ---------- ----------
Total costs and expenses ................. 266,755 654,299 1,222,590 515,361 616,532
---------- ---------- ------------ ---------- ----------
Earnings (loss) before equity in earnings
of affiliates, income taxes and
extraordinary items .................... 29,549 57,803 (43,702) 45,655 46,521
Equity in earnings of affiliates (note 4) ... 1,241 1,176 1,443 630 760
---------- ---------- ------------ ---------- ----------
Earnings (loss) before income taxes and
extraordinary items .................... 30,790 58,979 (42,259) 46,285 47,281
Federal and state income taxes (note 11) ... 12,008 22,117 (16,270) 17,820 18,203
---------- ---------- ------------ ---------- ----------
Earnings (loss) before extraordinary
items .................................. 18,782 36,862 (25,989) 28,465 29,078
Extraordinary items (note 14) ............... 2,275 4,274 1,013 508 1,431
---------- ---------- ------------ ---------- ----------
Net earnings (loss)...................... $ 16,507 $ 32,588 $ (27,002) $ 27,957 $ 27,647
========== ========== ============ ========== ==========
Per Common Share--primary:
Earnings (loss) before extraordinary item .. $ 1.39 $ 1.99 $ (1.21) $ 1.23 $ 1.26
Net earnings (loss) ........................ 1.22 1.75 (1.26) 1.21 1.20
========== ========== ============ ========== ==========
Per Common Share--fully diluted:
Earnings (loss) before extraordinary item .. $ 1.35 $ 1.73 $ (1.21) $ 1.07 $ 1.10
Net earnings (loss) ........................ 1.22 1.57 (1.26) 1.05 1.05
========== ========== ============ ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONAL
PREFERRED COMMON PAID-IN RETAINED TREASURY
STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
------------ --------- ------------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 .......................... $ -- $12 $133,310 $ 12,691 $ -- $146,013
Issuance of 1,265,539 shares of common stock in
connection with acquisitions .......................... -- 1 32,339 -- -- 32,340
Issuance of warrants in connection with acquisitions . -- -- 2,100 -- -- 2,100
Exercise of warrants for 72,259 shares of common stock -- -- 677 -- -- 677
Issuance of 13,447 shares of common stock in
connection with the employee stock purchase plan ..... -- -- 285 -- -- 285
Exercise of employee stock options for 795,008 shares
of common stock ....................................... -- 1 12,128 -- -- 12,129
Tax benefit arising from exercise of employee stock
options ............................................... -- -- 740 -- -- 740
Issuance of shares in connection with IntegraCare,
Inc.'s initial public offering......................... 5,715 -- 5,715
Net earnings .......................................... -- -- -- 16,507 -- 16,507
------------ --------- ------------- ----------- ---------- -----------
Balance at December 31, 1993 .......................... -- 14 $187,294 29,198 -- 216,506
Issuance of 2,620,309 shares of common stock in
connection with acquisitions .......................... -- 2 92,429 -- -- 92,431
Issuance of warrants in connection with acquisitions .. -- 3,000 -- -- 3,000
Exercise of warrants for 113,848 shares of common
stock.................................................. -- -- 2,508 -- -- 2,508
Issuance of 21,670 shares of common stock in
connection with employee stock purchase plan .......... -- -- 551 -- -- 551
Issuance of 3,477,384 shares of common stock in
connection with a public offering, less issuance
costs.................................................. -- 4 98,634 -- -- 98,638
Exercise of employee stock options for 521,992 shares
of common stock........................................ 1 7,986 -- -- 7,987
Declaration of cash dividend, $0.02 per share of
common stock........................................... -- -- -- (398) -- (398)
Net earnings........................................... -- -- -- 32,588 -- 32,588
------------ --------- ------------- ----------- ---------- -----------
Balance at December 31, 1994........................... -- 21 392,402 61,388 -- 453,811
Issuance of 385,216 shares of common stock in
connection with acquisitions .......................... -- 1 9,794 -- -- 9,795
Issuance of warrants in connection with acquisitions .. 339 339
Issuance of 49,377 shares in connection with employee
stock purchase plan.................................... 1,339 1,339
Acquisition of 400,600 shares of treasury stock ....... (12,790) (12,790)
Exercise of employee stock options for 340,244 shares
of common stock ....................................... -- -- 5,676 -- -- 5,676
Exercise of warrants for 44,181 shares of common stock -- -- 795 -- -- 795
Declaration of cash dividend, $0.02 per share of
common stock........................................... -- -- -- (435) -- (435)
Net loss .............................................. -- -- -- (27,002) -- (27,002)
------------ --------- ------------- ----------- ---------- -----------
Balance at December 31, 1995........................... -- 22 410,345 33,951 (12,790) 431,528
Issuance of 865,860 shares of common stock in
connection with acquisitions........................... -- 1 21,251 -- -- 21,252
Re-issuance of 400,600 shares of treasury stock in
connection with acquisitions........................... -- -- (3,592) -- 12,790 9,198
Issuance of 34,287 shares of common stock in
connection with employee stock purchase plan .......... -- -- 771 -- -- 771
Exercise of employee stock options for 78,912 shares
of common stock........................................ -- -- 1,028 -- -- 1,028
Net earnings........................................... -- -- -- 27,647 -- 27,647
----------- --------- ------------- ----------- ---------- -----------
Balance at June 30, 1996 (unaudited)................... $ $23 $429,803 $ 61,598 $ -- $491,424
============ ========= ============= =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------ --------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss).................................... $ 16,507 $ 32,588 $ (27,002) $ 27,957 $ 27,647
Adjustments to reconcile net earnings (loss) to net
cash provided (used) by operating activities:
Extraordinary items ................................. 3,730 6,839 1,647 826 2,327
Loss from impairment of long-lived assets............ -- -- 109,106 -- --
Loss from termination of management contract......... -- -- 21,915 -- --
Undistributed results of joint ventures ............. (83) (142) (431) (287) (390)
Depreciation and amortization ....................... 8,126 26,367 39,961 18,642 18,604
Deferred income taxes and other non-cash items ...... 3,289 2,628 (22,920) 1,869 2,095
Amortization of deferred gain on sale-leaseback ..... (308) (680) (1,018) (499) (516)
Increase in patient accounts and third-party payor
settlements receivable ............................. (20,443) (42,998) (62,512) (28,093) (31,399)
Decrease (increase) in supplies, inventories, prepaid
expenses and other current assets .................. (69) (349) (6,121) 2,022 (986)
Increase (decrease) in accounts payable and accrued
expenses ........................................... (3,098) 1,205 1,177 (15,932) (17,151)
Decrease in income taxes receivable.................. -- -- -- -- 1,800
Increase (decrease) in income taxes payable ......... 2,657 1,681 (22,203) 4,165 --
------------ ------------ ------------ ----------- -----------
Net cash provided by operating activities .......... 10,308 27,139 31,599 10,670 2,031
------------ ------------ ------------ ----------- -----------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net .......... 18,745 109,683 8,399 5,730 1,799
Proceeds from long-term borrowings .................... 383,389 308,467 510,659 385,979 627,675
Repayment of long-term borrowings...................... (151,239) (191,338) (307,440) (282,536) (490,761)
Proceeds from sale-leaseback transactions, net ........ -- 28,210 -- -- --
Deferred financing costs .............................. (8,142) (11,156) (5,512) (5,216) (8,090)
Purchase of treasury stock............................. -- -- (12,790) (12,517) --
Proceeds from sale of facilities....................... -- -- -- 29,303 --
Dividends paid......................................... -- -- (398) -- --
------------ ------------ ------------ ----------- -----------
Net cash provided by financing activities ........... 242,753 243,866 192,918 120,743 130,623
------------ ------------ ------------ ----------- -----------
Cash flows from investing activities:
Purchases of temporary investments .................... (241,758) (48,909) (401) (3,208) --
Sales of temporary investments ........................ 251,904 102,498 672 2,057 97
Business acquisitions ................................. (209,214) (152,791) (96,671) (39,455) (18,159)
Purchases of property, plant, and equipment ........... (59,959) (91,354) (131,080) (47,943) (66,643)
Disposition of assets held for sale.................... -- -- 33,153 -- --
Intangible assets ..................................... (6,435) (7,201) (14,183) (6,047) (2,537)
Investment in affiliates and other assets ............. (16,016) (21,401) (37,779) (36,957) (39,930)
------------ ------------ ------------ ----------- -----------
Net cash used by investing activities .............. (281,478) (219,158) (246,289) (131,553) (127,172)
Increase (decrease) in cash and equivalents ........ (28,417) 51,847 (21,772) (140) 5,482
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents, beginning of
period ................................................ 37,259 8,842 60,689 60,689 38,917
------------ ------------ ------------ ----------- -----------
Cash and cash equivalents, end of period ............... $ 8,842 $ 60,689 $ 38,917 $ 60,549 $ 44,399
============ ============ ============ =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Organization and Basis of Presentation
Integrated Health Services, Inc. (IHS), a Delaware corporation, was formed on
March 25, 1986. The consolidated financial statements include the accounts of
IHS and its majority-owned and controlled subsidiaries (the Company). In
consolidation, all significant intercompany balances and transactions have been
eliminated. Investments in affiliates in which the Company has less than
majority ownership and control are accounted for by the equity method (see note
4).
(b) Medical Services Revenues
Medical services revenues are recorded at established rates and adjusted for
differences between such rates and estimated amounts reimbursable by third-party
payors when applicable. Estimated settlements under third-party payor
retrospective rate setting programs (primarily Medicare and Medicaid) are
accrued in the period the related services are rendered. Settlements receivable
and related revenues under such programs are based on annual cost reports
prepared in accordance with Federal and state regulations, which reports are
subject to audit and retroactive adjustment in future periods. In the opinion of
management, adequate provision has been made therefor, and such adjustments in
determining final settlements will not have a material effect on financial
position or results of operations. Basic medical services revenues represent
routine service (room and board) charges of geriatric and assisted living
facilities, exclusive of medical specialty units. Specialty medical services
revenues represent ancillary service charges of geriatric and assisted living
facilities, revenues generated by medical specialty units and revenues of
pharmacy, rehabilitation, diagnostic, respiratory therapy, home health, hospice
and similar service operations.
(c) Cash Equivalents and Temporary Investments
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less at the date of investment by the Company.
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," which superseded SFAS No.
12. The Company's temporary investments, consisting primarily of preferred
stocks and municipal bonds, are classified as a trading security portfolio and
is recorded at their fair value of $2,658 and $2,387, at December 31, 1994 and
1995 respectively, with net unrealized gains or losses included in earnings.
Unrealized holding gains (losses) aggregated ($400) and $245 at December 31,
1994 and 1995, respectively. Realized gains and losses are recorded using the
specific identification basis to determine cost.
(d) Property, Plant and Equipment
The Company capitalizes costs associated with acquiring health care
facilities and related interests therein. Pre-acquisition costs represent direct
costs of the investigation and negotiation of the acquisition of operating
facilities; indirect and general expenses related to such activities are
expensed as incurred. Pre-construction costs represent direct costs incurred to
secure control of the development site, including the requisite certificate of
need and other approvals, and to perform other initial tasks which are essential
to the development and construction of a facility. Pre-acquisition and
pre-construction costs are transferred to construction in progress and
depreciable asset categories when the related tasks are completed. Interest cost
incurred during construction is capitalized. Non-refundable purchase option fees
related to operating leases are generally accounted for as leasehold interests
and treated as deposits until (1) the option is exercised, whereupon the deposit
is applied as a credit against the purchase price, or (2) the option period
expires, whereupon the deposit is written off as lease termination expense.
F-7
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(d) Property, Plant and Equipment--(Continued)
Total costs of facilities acquired are allocated to land, land improvements,
equipment and buildings (or leasehold interests therein) based on their
respective fair values determined generally by independent appraisal. Cost in
excess of such identified fair values is classified as intangible assets of
businesses acquired.
(e) Depreciation
Depreciation is provided on the straight-line basis over the estimated useful
lives of the assets, generally 25 years for land improvements, 10 years for
equipment, 40 years for buildings and the term of the lease for costs of
leasehold interests and improvements.
(f) Deferred Financing Costs
The Company defers financing costs incurred to obtain long-term debt and
amortizes such costs over the term of the related obligation. Debt discount is
amortized using the debt outstanding (interest) method over the term of the
related debt.
(g) Deferred Pre-opening Costs
Direct costs incurred to initiate and implement new medical specialty service
units at nursing facilities (e.g., respiratory therapy, rehabilitation and
Alzheimer units) are deferred during the pre-opening period and amortized on a
straight-line basis over five years, which corresponds to the period over which
the Company receives reimbursement from Medicare.
(h) Intangible Assets Acquired
Goodwill and other intangible assets of businesses acquired are amortized by
the straight-line method over periods ranging from 10 to 40 years.
(i) Deferred Gains on Sale-Leaseback Transactions
Gains on the sales of nursing facilities which are leased back under
operating leases are initially deferred and amortized over the terms of the
leases in proportion to and as a reduction of related rental expense.
(j) Impairment of Long-Lived Assets
Management regularly evaluates whether events or changes in circumstances
have occurred that could indicate an impairment in the value of long-lived
assets. In December 1995, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." In
accordance with the provisions of SFAS No. 121, if there is an indication that
the carrying value of an asset is not recoverable, the Company determines the
amount of impairment loss by comparing the carrying amount of the assets to
their estimated fair value. If an asset tested for recoverability was acquired
in a business combination accounted for using the purchase method, the related
goodwill is included as part of the carrying value in determining recoverability
of that asset. Goodwill also is evaluated for recoverability by estimating the
projected undiscounted cash flows, excluding interest, of the related business
activities, and any excess of carrying value over such estimates is written off.
In addition to consideration of impairment upon the events or changes in
circumstances described above, management regularly evaluates the remaining
lives of its long-lived assets. If estimates are changed, the carrying value of
affected assets is allocated over the remaining lives. Estimation of value and
future benefits of intangible assets is made based upon the related projected
undiscounted future cash flows, excluding interest payments.
F-8
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(j) Impairment of Long-Lived Assets--(Continued)
Prior to adoption of SFAS No. 121 in 1995, the Company performed its analyses
of impairment of long-lived assets by consideration of the projected
undiscounted cash flows on an entity-wide basis, except for goodwill for which
the policy is unchanged.
(k) Income Taxes
Deferred income taxes are recognized for the tax consequences of temporary
differences between financial statement carrying amounts and the related tax
bases of assets and liabilities. Such tax effects are measured by applying
enacted statutory tax rates applicable to future years in which the differences
are expected to reverse, and the effect of a change in tax rates is recognized
in the period that includes the date of enactment.
(l) Earnings Per Share
Primary earnings per share is computed based on the weighted average number
of common and common equivalent shares outstanding during the periods. Common
stock equivalents include options and warrants to purchase common stock, assumed
to be exercised using the treasury stock method. Fully diluted earnings per
share is computed as described above, except that the weighted average number of
common equivalent shares is determined assuming the dilution resulting from the
issuance of the aforementioned options and warrants at the end-of-period price
per share, rather than the weighted average price for the period, and the
issuance of common shares upon the assumed conversion of the convertible
subordinated debentures. An adjustment for interest expense and amortization of
underwriting costs related to such debentures is added, net of tax, to earnings
for the purpose of calculating fully diluted earnings per share. Such adjustment
and the weighted average number of common and common equivalent shares used in
the computations of earnings per share were as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------
1993 1994 1995
----------- ------------ -------------
<S> <C> <C> <C>
Weighted Average Shares:
Primary ................................ 13,478,683 18,568,599 21,463,464
Fully diluted .......................... 17,261,079 27,154,153 21,463,464
Adjustment for interest on convertible
debentures ............................. $ 4,516 $ 10,048 $ --
============ ============ ===========
</TABLE>
(m) Business and Credit Concentrations
The Company's medical services revenues are provided through 122 owned and
leased facilities located in 30 states throughout the United States. The Company
generally does not require collateral or other security in extending credit to
patients; however, the Company routinely obtains assignments of (or is otherwise
entitled to receive) benefits receivable under the health insurance programs,
plans or policies of patients (e.g., Medicare, Medicaid, commercial insurance
and managed care organizations) (see note 3).
(n) Merger with IntegraCare, Inc.
In August 1995, the Company merged with IntegraCare, Inc. (Integra) which
provides physical, occupational and speech services to skilled nursing
facilities, hospitals, outpatient clinics, home health agencies and schools in
Florida. The Company exchanged 681,723 shares of its Common Stock for all of the
outstanding stock of Integra. The merger was accounted for using the pooling of
interests method
F-9
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(n) Merger with IntegraCare, Inc.--(Continued)
and the accompanying financial statements have been presented as though the
merger had occurred effective December 31, 1992. Accordingly, the consolidated
financial statements and financial information included in these notes to the
consolidated financial statements for 1993 and 1994 have been restated to
combine the financial data of the Company and Integra for those periods. The
accounting practices of the Company and Integra were comparable; therefore no
adjustments to net assets of either enterprise were required to effect the
combination.
The accompanying consolidated statements of operations for 1993 and 1994 have
been restated to include revenues of $15,385 and $29,650, respectively, and net
earnings of $1,036 and $1,648, respectively, related to Integra's operations.
The consolidated statement of operations for 1995 includes $17,886 and $891 of
revenues and net income, respectively, related to the operations of Integra
prior to the date of the merger.
(o) Reclassifications
Certain amounts presented in 1993 and 1994 have been reclassified to conform
with the presentation for 1995.
(p) Interim Financial Information
The unaudited consolidated financial information as of June 30, 1996 and for
the six months ended June 30, 1996 and 1995 has been prepared in conformity with
the accounting principles and practices reflected in the audited financial
statements included herein. In the opinion of the Company, the unaudited
consolidated financial information contain all adjustments (consisting of only
normal recurring adjustements) necessary to present fairly the Company's
financial position, results of operations and cash flows for the periods
indicated.
(2) BUSINESS ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1995
During the year ended December 31, 1995, the Company acquired the following
geriatric care facilities:
<TABLE>
<CAPTION>
MONTH TRANSACTION TYPE FACILITY NAME LOCATION BEDS
- ----------- ----------------- ----------------- ---------------- -------
<S> <C> <C> <C> <C>
August..... Purchase Avenel Plantation, FL 120
August..... Operating Lease Cherry Creek Aurora, CO 190
September . Operating Lease Mill Hill Worcester, MA 101
September . Operating Lease Winthrop Medford, MA 142
November .. Purchase Governor's Park Barrington, IL 150
December .. Purchase Carrington Pointe Fresno, CA 172
</TABLE>
The total cost of these acquisitions was approximately $28,200 which includes
legal fees and other costs incurred to secure the facilities or leasehold
interests in the facilities. In addition, the Company purchased Hershey at
Woodlands and Clara Burke facilities, which had previously been leased, at a
total cost of approximately $14,700.
In January 1995, the Company acquired four ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities. The total purchase price was $3,600, including $300
representing the issuance of 7,935 shares of the Company's Common Stock. Total
goodwill at the date of acquisition was $3,200.
F-10
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS--(CONTINUED)
In February 1995, the Company acquired all of the assets of ProCare Group,
Inc. ("ProCare") and its affiliated entities, which provide home health services
in Broward, Dade and Palm Beach counties, Florida. The total purchase price was
$3,900, including $3,600 representing the issuance of 95,062 of the Company's
Common Stock. In addition, the Company incurred direct costs of acquisition of
$675. Total goodwill at the date of acquisition was $4,400.
In February 1995, the Company purchased the assets of Epsilon Medical
Equipment Corporation ("Epsilon"), which provides mobile video fluoroscopy
procedures to skilled nursing facilities for the diagnosis of dysphasia for the
aspiration of foods and liquids causing pneumonia. The total purchase price was
$200 plus an earn-out based on the future earnings of the business, payable in
shares of the Company's Common Stock. In addition, the Company incurred direct
costs of acquisition of $500 and repaid debt of Epsilon of $961. Total goodwill
at the date of acquisition was $1,900.
In February 1995, the Company entered into a management agreement to manage
Total Home Health Care, Inc. and Total Health Services, Inc. (collectively
"Total Home Health"), which are private-duty and Medicare certified home health
agencies in the Dallas/Ft. Worth, Texas market, pursuant to which a subsidiary
of the Company receives a management fee of ten dollars per home visit by Total
Home Health personnel. The Company was also granted a five-year option to
purchase Total Home Health for a purchase price of $5,000.
In March l995, the Company entered into a management agreement to manage 34
geriatric care facilities in Texas, California, Florida, Nevada and Mississippi
(the "Preferred Care Facilities"). The management agreement has a term of ten
years and provides for payments to the Company based upon a percentage of
adjusted gross revenues and adjusted EBITDA of the Preferred Care Facilities.
The Company has also been granted a purchase option whereby the Company has the
right to purchase the Preferred Care Facilities, between March 29, 1996 and the
date of the termination of the management agreement, for $80,000 plus
adjustments for inflation. The Company paid a non-refundable purchase option
deposit of $10,200 which will be applied against the purchase price if the
Company elects to acquire the facilities.
In March 1995, the Company purchased Samaritan Management, Inc., which
provides hospice services in Michigan. Total purchase price was $5,500. In
addition, the Company incurred direct costs of acquisition of $1,000. Total
goodwill at the date of acquisition was $6,800.
In March 1995, the Company acquired substantially all the assets of Fidelity
Health Care, Inc., a company which provides home healthcare services, temporary
staffing services and infusion services in Ohio. Total purchase price was
$2,100. In addition, the Company incurred direct costs of acquisition of $350.
Total goodwill at the date of acquisition was $2,300.
From January through April 1995, the Company acquired five physician
practices for $545 and $589 of the Company's Common Stock. Total goodwill at the
date of acquisition was $873.
In April 1995, the Company purchased the assets of Hometown Nurses Registry,
which provides home healthcare in Tennessee. The total purchase price was $500.
In addition, the Company incurred direct costs of acquisition of $150. Total
goodwill at the date of acquisition was $646.
In April 1995, the Company purchased the assets of Bernard's X-Ray Mobile
Service which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $100. Total goodwill at the date of
acquisition was $90.
In May 1995, the Company purchased the assets of Stewart's Portable X-Ray,
Inc. which provides x-ray services to long-term care and subacute care
facilities. The total purchase price was $1,900. In addition, the Company
incurred direct costs of $100. Total goodwill at the date of acquisition was
$1,800.
F-11
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS--(CONTINUED)
In May 1995, the Company purchased Immediate Care Clinic, an emergency clinic
in Amarillo, Texas for approximately $225.
In June 1995, the Company acquired three ancillary services companies which
provide mobile x-ray and electrocardiogram services to long-term and subacute
care facilities. The total purchase price was $2,200. Total goodwill at the date
of acquisition was $2,500.
In August 1995, the Company acquired all of the outstanding stock of Senior
Life Care Enterprises, Inc. ("SLC") which provides home health, supplemental
staffing, and management services. The total purchase price was $6,000
representing the issuance of 189,785 shares (the "SLC shares") of the Company's
Common Stock. The acquisition agreement provides for the issuance of additional
shares of Common Stock, if at the time a registration statement covering the
resale of the SLC shares is declared effective the fair market value of the SLC
shares is less than $6,000. In addition, the Company incurred direct costs of
acquisition of $700. The total goodwill at the date of acquisition was $5,600.
In September 1995, the Company purchased Mobile X-Ray Limited Partnership, a
provider of electrocardiogram services in Maryland, Virginia, West Virginia, and
the District of Columbia. The total purchase price was $1,400, The total
goodwill at the date of acquisition was $1,200.
In September 1995, the Company purchased Southern Nevada Physical Therapy
Associates, which provides outpatient physical therapy for $500.
In November 1995, the Company purchased Chesapeake Health, which provides
electrocardiogram services. The total purchase price was $1,100. In addition,
the Company incurred direct costs of acquisition of $75. The total goodwill at
the date of acquisition was $1,015.
In December 1995, the Company purchased Miller Portable X-Ray. The total
purchase price was $295. The total goodwill at the date of purchase was $275.
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1994
During the year ended December 31, 1994, the Company acquired the following
geriatric care facilities:
<TABLE>
<CAPTION>
MONTH TRANSACTION TYPE FACILITY NAME LOCATION BEDS
- ----------- ----------------- ---------------------- ---------------- --------
<S> <C> <C> <C> <C>
April ..... Purchase Homestead Denton, MD 52
Pennsylvania &
July ...... Operating Lease IFIDA Delaware 711
August .... Operating Lease Litchfield Facilities * 5,212
September . Purchase Amarillo Amarillo, TX 160
December . Purchase Houston Hospital Houston, TX 60
</TABLE>
- --------
* Alabama, Colorado, Florida, Georgia, Idaho, Kansas, Kentucky, Louisiana,
North Carolina, Tennessee, Texas and West Virginia.
The total cost of these acquisitions was approximately $36,186 which includes
purchase option deposits on the operating leases, legal fees and other costs
incurred to secure the facilities or leasehold interest in the facilities. In
addition to the acquisitions above, in June 1994 the Company acquired the real
property of the Dallas at Treemont facility, which had previously been leased by
the Company since February 1989, at a total cost of approximately $22,625. Also,
in June 1994, the Company sold and leased back two of its geriatric care
facilities (Mountain View and St. Louis at Gravois) in a transaction with
affiliates of Capstone Capital Corporation, a newly formed real estate
investment trust ("Capstone"). The net proceeds received by the Company were
approximately $18,230. In Decem-
F-12
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS--(CONTINUED)
ber 1994, the Company sold and leased back its Northern Virginia facility from
Capstone with net proceeds of approximately $9,980 (see note 16). In connection
with these three transactions with Capstone, the Company had deferred gains of
$7,900 and will recognize such gains over the lives of the leases (10 to 15
years) on a straight-line basis.
On April 27, 1994 the Company sold its approximate 92% interest in
Professional Community Management ("PCM") to PCM at its book value of $4,300.
In June 1994, the Company acquired USMM, a company engaged in the management
of physician practices for $30 and $1,093 in stock. Total goodwill at the date
of acquisition was $1,940.
On July 7, 1994, the Company acquired all of the outstanding capital stock of
Cooper Holding Corporation ("Cooper"), a Delaware corporation in the business of
providing mobile x-ray and electrocardiogram services to long-term care and
subacute care facilities in California, Florida, Georgia, Indiana, Nebraska,
Ohio, Oklahoma, Texas and Virginia. The total purchase price was approximately
$44,500, including $19,890 through the issuance of 593,953 shares of the
Company's Common Stock and options to acquire 51,613 shares of the Company's
Common Stock. In addition, the Company incurred direct costs of acquisition of
$7,400 and repaid debt of Cooper of $27,158. Total goodwill from this
transaction was $73,945.
In August 1994, the Company acquired five outpatient clinics, four physician
practices, and a home healthcare agency for $2,454 and $1,165 of stock. Total
goodwill at the date of acquisition was $3,014.
On August 1, 1994, the Company acquired certain assets of Fort Wayne
Radiology, a mobile x-ray company servicing Texas. The total purchase price was
fifteen thousand dollars.
On August 8, 1994 the Company acquired substantially all the assets of Pikes
Peak Pharmacy, Inc., a company which provides pharmacy services to patients at
nine facilities in Colorado Springs, Colorado which have an aggregate of 625
beds. The total purchase price was $600. Total goodwill at the date of
acquisition was $417.
On September 23, 1994 the Company acquired substantially all of the assets of
Pace Therapy, Inc., ("Pace"), a company which provides physical, occupational,
speech and audiology therapy services to approximately 60 facilities in Southern
California and Nevada. The total purchase price was $5,800, representing the
issuance of 181,569 shares of the Company's Common Stock. In addition, the
Company incurred direct costs of acquisition of $1,300 and repaid debt of Pace
of $1,568. Total goodwill at the date of acquisition was $6,672.
On October 4, 1994, the Company acquired certain assets of Home X-Ray of
Philadelphia ("Home X-Ray"), a mobile x-ray company. The total purchase price
was $150. Total goodwill at the date of acquisition was $111.
On October 7, 1994 the Company acquired all of the outstanding stock of
Amcare, Inc. ("Amcare"), an institutional pharmacy serving approximately 135
skilled nursing facilities in California, Minnesota, New Jersey and
Pennsylvania. The total purchase price was $21,000, including $10,500
representing the issuance of 291,101 shares of the Company's Common Stock. In
addition, the Company incurred direct costs of acquisition of $3,700. Total
goodwill at the date of acquisition was $20,300.
On October 11, 1994 the Company acquired substantially all of the assets of
Pharmaceutical Dose Service of La., Inc. ("PDS"), an institutional pharmacy
serving 14 facilities. The total purchase price was $4,190, including $3,900
representing the issuance of 122,117 shares of the Company's Common Stock. In
addition, the Company incurred direct costs of acquisition of $1,375. Total
goodwill at the date of acquisition was $5,696.
F-13
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS--(CONTINUED)
On November 2, 1994 the Company acquired all of the outstanding stock of
CareTeam Management Services, Inc. ("CareTeam"), a home healthcare company
serving Arizona, Kansas, Missouri, New Mexico, North Carolina and Texas. The
total purchase price was $5,900, including $5,200 representing the issuance of
147,068 shares of the Company's Common Stock. In addition, the Company incurred
direct costs of acquisition of $675. Total goodwill at the date of acquisition
was $7,651.
On November 3, 1994 the Company acquired all of the outstanding stock of
Therapy Resources, Inc., a company which provides physical, occupational, speech
and audiology services to approximately 22 geriatric care facilities and
operates seven outpatient rehabilitation facilities. The total purchase price
was $1,600. In addition, the Company incurred direct costs of acquisition of
$300. Total goodwill at the date of acquisition was $3,776.
On November 3, 1994 the Company acquired all of the outstanding stock of The
Rehab People, Inc. ("Rehab People"), a company which provides physical,
occupational and speech therapy services to approximately 38 geriatric care
facilities in Delaware, New York, North Carolina and Pennsylvania. The total
purchase price was $10,000, representing the issuance of 318,471 shares of the
Company's Common Stock. In addition, the Company incurred direct costs of
acquisition of $1,875. Total goodwill at the date of acquisition was $13,693.
On November 3, 1994, the Company acquired certain assets of Portable X-Ray
Service of Rhode Island, Inc. ("PXSRI"), a mobile x-ray company. The total
purchase price was $2,000, including $700 representing the issuance of 19,739
shares of the Company's Common Stock. Total goodwill at the date of acquisition
was $1,892.
On November 18, 1994 the Company acquired substantially all of the assets of
Medserv Corporation's Hospital Service Division ("Primedica"), which provides
respiratory therapy services. The total purchase price was $21,000. In addition,
the Company incurred direct costs of acquisition of $4,600. Total goodwill at
the date of acquisition was $21,348.
On December 9, 1994, the Company acquired all rights of Jule Institutional
Supply, Inc. under a management agreement with Samaritan Care, Inc. ("Samaritan
Care"), an entity which provides hospice services. The total purchase price was
$14,000. In addition, the Company incurred direct costs of acquisition of $720.
The Company also acquired the membership interests in Samaritan Care for no
additional consideration. Total goodwill at the date of acquisition was $18,632.
On December 23, 1994, the Company acquired all of the outstanding stock of
Partners Home Health, Inc. ("Partners"), a home health infusion company
operating in seven states. The total purchase price was $12,400, representing
the issuance of 332,810 shares of the Company's Common Stock. In addition, the
Company incurred direct costs of acquisition of $1,025. Total goodwill at the
date of acquisition was $17,146.
F-14
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS--(CONTINUED)
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1993
During the year ended December 31, 1993, the Company acquired the following
geriatric care facilities:
<TABLE>
<CAPTION>
MONTH TRANSACTION TYPE FACILITY NAME LOCATION BEDS
- ----------- ----------------- --------------------- ------------------------ --------
<S> <C> <C> <C> <C>
March ..... Purchase Grandview Des Moines, IA 93
April ..... Operating Lease Hawthorne Charlotte, NC 142
June ...... Purchase Oakwood Alexandria, VA 114
December . Purchase Central Park Florida, Pennsylvania 5,210
Lodges Facilities and Texas
December . Purchase Southmark Facilities Vero Beach, Fort Pierce 337
and Orlando, FL
December . Purchase Colorado Springs Colorado Springs, CO 155
</TABLE>
The total cost of these acquisitions was approximately $245,900 which
includes a purchase option deposit on the operating lease, legal fees and other
costs incurred to secure the facilities or leasehold interest in the facility.
The total purchase price of the Central Park Lodges, Inc. ("CPL") acquisition
was $185,300, and was financed by the Company's term loan and revolving credit
line facility (see note 8). In addition to the acquisitions above, in March
1993, the Company acquired the real property of the Alpine Claremont and Alpine
Derry facilities, which had previously been leased by the Company since June
1989, at a total cost of approximately $13,000.
In December 1993, the Company acquired the capital stock of CPL, a
wholly-owned subsidiary of Trizec Corporation, Ltd. ("Trizec"), a publicly-held
Canadian real estate company. The Company acquired substantially all of the
United States operations of CPL, consisting of 30 geriatric care facilities (24
owned and six leased) located in Florida, Pennsylvania and Texas and nine
retirement facilities (all owned) located in Florida, which facilities have an
aggregate of 5,210 beds; a division which provides pharmacy consulting services
and supplies prescription drugs and intravenous medications to geriatric care
facilities through five pharmacies in Florida, Pennsylvania and Texas; and a
division which provides healthcare personnel and support services to home
healthcare and institutional markets through five branch locations in Florida
and Pennsylvania. The total purchase price was $185,300, which was allocated
primarily to property, plant and equipment, based on the appraised value of the
properties, with the remaining purchase price allocated to current assets and
liabilities.
In connection with the purchase of the Southmark facilities, the Company
obtained a loan of $9,750, which bears interest at 8.094%, matures on December
20, 2001, and is secured by a lien on all assets (excluding receivables) of such
facilities. Also, the Company issued a five year warrant to purchase 50,000
shares of common stock at a price of $26.65 per share (valued at $700).
In connection with the purchase of the Colorado Springs facility, the Company
obtained a loan of $8,500, which bears interest at prime plus 125 basis points
floating, matures on December 31, 2000 and is secured by a lien on the facility.
In June 1993, the Company acquired all of the outstanding capital stock of
Patient Care Pharmacy, Inc. ("PCP"), a business providing pharmacy services to
geriatric care facilities and other healthcare providers in Southern California.
The total cost for PCP was $10,400, including $9,840 paid through the exchange
of 425,674 shares of the Company's Common Stock. In addition, the Company had
agreed to make contingent payments in shares of common stock following each of
the next three years based upon the earnings of PCP. In March 1995, the Company
and the PCP stockholders terminated all rights to contingent payments in
consideration for a payment of $3,500 in the form of 92,434 shares of the
Company's Common Stock.
F-15
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) BUSINESS ACQUISITIONS--(CONTINUED)
In July 1993, Comprehensive Post Acute Services, Inc. ("CPAS"), a newly
formed subsidiary, 80% owned by the Company and 20% owned by Chi Systems, Inc.,
formerly Chi Group, Inc. ("Chi"), acquired joint ventures and contracts to
develop and manage subacute programs from Chi. Chi is a healthcare consulting
company in which John Silverman, a director of the Company, is President and
Chief Financial Officer and an approximate 16% stockholder. The purchase price
was $200, and the Company made available a loan commitment of $300 for working
capital purposes, which bore interest at a rate equal to Citicorp's base rate
plus 4%. In July 1994, the Company purchased the remaining 20% of CPAS from Chi
for $160, paid through the issuance of 5,200 shares of the Company's Common
Stock.
In September 1993, the Company acquired all of the capital stock of Health
Care Systems, Inc., which owns Health Care Consulting, Inc. ("HCC") and RMI Inc.
("RMI"), for $1,850 in cash and a five-year earn-out, based upon achievement of
pre-tax earnings targets, not to exceed $3,750. HCC is a reimbursement and
consulting company specializing in subacute rehabilitation programs. RMI
provides direct therapy services, including physical therapy, occupational
therapy and speech pathology, to healthcare facilities. The Company has agreed
to issue warrants to purchase 20,000 shares of Common Stock at a purchase price
per share of $37.85 in exchange for cancellation of the earn-out.
In December 1993, the Company purchased all of the capital stock of
Associated Therapists Corporation, d/b/a Achievement Rehab ("Achievement"), a
provider of rehabilitation therapy services on a contract basis to various
geriatric facilities in Minnesota, Indiana and Florida. The purchase price of
$22,500 consists of 839,865 shares of the Company's Common Stock plus a
contingent earn-out payment, also payable in shares of the Company's Common
Stock, based upon increases in Achievement's earnings in 1994, 1995 and 1996
over a base amount.
All business acquisitions described above have been accounted for by the
purchase method.
Unaudited pro forma combined results of operations of the Company for the
years ended December 31, 1994 and 1995 are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions had been made as
of January 1, 1994.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
------------------------
1994 1995
----------- ------------
<S> <C> <C>
Revenues .................................. 1,069,695 $1,237,777
Earnings (loss) before extraordinary items 17,555 (32,852)
Net earnings (loss)........................ 13,281 $ (33,865)
Per common share--primary:
Earnings (loss) before extraordinary items .86 (1.52)
Net earnings (loss)....................... $ .65 $ (1.57)
</TABLE>
The unaudited pro forma results include the historical accounts of the
Company and the historical accounts for the acquired businesses adjusted to
reflect (1) depreciation and amortization of the acquired identifiable tangible
and intangible assets based on the new cost basis of the acquisitions, (2) the
interest expense resulting from the financing of the acquisitions, (3) the new
cost basis for the allocation of corporate overhead expenses and (4) the related
income tax effects. The pro forma results are not necessarily indicative of
actual results which might have occurred had the operations and management teams
of the Company and the acquired companies been combined in prior years.
F-16
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(3) PATIENT ACCOUNTS AND THIRD-PARTY PAYOR SETTLEMENTS RECEIVABLE
Patient accounts and third-party payor settlements receivable consist of the
following as of December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- -----------
<S> <C> <C>
Patient accounts ............................... $165,880 $226,821
Third-party payor settlements .................. 22,626 33,031
---------- -----------
188,506 259,852
Allowance for doubtful accounts and contractual
adjustments .................................... 25,165 29,570
---------- -----------
$163,341 $230,282
========== ===========
</TABLE>
Gross patient accounts receivable and third-party payor settlements
receivable from the Federal government (Medicare) were $49,551 and $73,726 at
December 31, 1994 and 1995, respectively. Medicare receivables include pending
requests for exceptions to the Medicare established routine cost limitations for
the reimbursement of costs exceeding these limitations (before related
allowances for contractual adjustments) of $6,161 and $7,611 at December 31,
1994 and 1995, respectively. Amounts receivable from various states (Medicaid)
were $38,212 and $57,723 respectively, at such dates, which relate primarily to
the states of Ohio, Florida, Pennsylvania, Louisiana and Texas.
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES
The Company's investments in and advances to affiliates at December 31, 1994
and 1995 are summarized as follows:
<TABLE>
<CAPTION>
1994 1995
--------- ----------
<S> <C> <C>
Investments accounted for by the equity method:
HPC............................................ $ -- $ 7,967
Tutera ........................................ 5,961 7,788
Speciality .................................... 4,377 9,250
Other ......................................... 1,018 898
--------- ----------
11,356 25,903
Other investments, accounted for at cost ...... 4,237 3,459
--------- ----------
$15,593 $29,362
========= ==========
</TABLE>
Investments in significant unconsolidated affiliates accounted for by the
equity method are summarized below.
HPC AMERICA, INC.
In September 1995, a wholly owned subsidiary of IHS, Southwood invested
$8,200 for a 40% interest in HPC America, Inc. ("HPC"), a Delaware corporation
that operates home infusion and home health care companies, in addition to
owning physician practices. Subject to certain material transactions requiring
the approval of Southwood, the business is conducted under the direction of the
Chief Executive Officer and President of HPC. Under certain circumstances,
Southwood has the right to purchase the remaining 60% interest in HPC, based
upon a multiple of HPC's earnings.
F-17
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES--(CONTINUED)
TUTERA HEALTH CARE MANAGEMENT, L.P. (TUTERA)
In January, 1993, a wholly-owned subsidiary of IHS, Integrated Health
Services of Missouri, Inc. ("IHSM"), invested $4,650 for a 49% interest in
Tutera Health Care Management, L.P. (the "Partnership" or "Tutera"), a
partnership newly formed to manage and operate approximately 8,000 geriatric
care and assisted retirement beds. Cenill, Inc., a wholly owned subsidiary of
Tutera Group, Inc., is the sole general partner of the Partnership and owns a
51% interest therein. Subject to certain material transactions requiring the
approval of IHSM, the business of the Partnership is conducted by its general
partner. Under certain circumstances, IHSM has the right to become a 51% owner
and sole general partner of the Partnership, or to purchase the general
partner's entire interest in the Partnership, in each case for a price based
upon a multiple of the Partnership's earnings. Also, the Company has guaranteed
the debt of the Partnership up to $4,200, which bears interest at prime plus 1
3/4 % and matures in October 1998.
SPECIALITY CARE PLC (SPECIALITY)
In April 1993, a wholly owned subsidiary of IHS, Southwood, acquired a 21.28%
interest in the common stock and a 47.64% interest in the 6% cumulative
convertible preferred stock of Speciality Care PLC, an owner and operator of
geriatric care facilities in the United Kingdom. The total cost of the
investment was $748 for the common stock and $2,245 for the preferred stock. The
preferred stock contains certain preferences as to liquidation. In 1994,
Southwood loaned an additional $1,000 to Speciality Care bearing interest at 9%.
In January 1995 Southwood applied $627 of the loan to pay for additional shares
of common and preferred stock of Speciality Care PLC subscribed for in November
1994.
In June 1995 the Company loaned an additional $8,575 to Speciality Care
bearing interest at 12%, this loan was subsequently repaid in August 1995. In
addition the Company invested an additional $4,384 in Speciality Care. As a
result of the Company's additional investment, the Company's interest in the
Common Stock is 21.30% and 63.65% for the 6% cumulative convertible preferred
stock.
ASSISTED LIVING GROUP VENTURE (ALG)
IHS Assisted Living Group--Fairfax, Inc. (IFI), a wholly-owned subsidiary of
IHS and Sunrise Partners, L.P. (Sunrise) had 49% and 51% joint venture
interests, respectively, in Assisted Living Group-Fairfax Associates, a Delaware
general partnership operating an assisted living center in Fairfax, Virginia.
Each venturer shared in the venture's capital, earnings and losses in accordance
with their respective joint venture interests. Sunrise manages the operations of
the venture and had the option to purchase IFI's interest at any time. In May
1994, the Company sold its 49% interest in both joint ventures at its book value
of approximately $1,600 to Assisted Living Group--Fairfax Associates.
WESTCLIFF MANOR VENTURE (WESTCLIFF)
Integrated of Amarillo, Inc. (IAI), a wholly-owned subsidiary of IHS, and
Integrated of Westcliff Park, Inc. (IWP) had 49% and 51% joint venture
interests, respectively, in a Delaware general partnership operating Westcliff
Manor Nursing Home, a 160 bed facility in Amarillo, Texas. The Company managed
the operations of the venture for a management fee of 6% of gross revenues. The
venturers shared in the venture's capital, earnings and losses in accordance
with their respective interests in the venture, except that net taxable
operating losses were allocated 100% to IWP. In September 1994, the Company
purchased the remaining 51% interest in this joint venture at a cost of $586.
F-18
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(4) INVESTMENTS IN AND ADVANCES TO AFFILIATES--(CONTINUED)
The Company's equity in earnings (loss) of affiliates for the years ended
December 31, 1993, 1994 and 1995 is classified as other revenue and is
summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
HPC.......... $ -- $ -- $ (185)
ALG ......... 72 54 --
Westcliff .. (289) (226) --
Tutera ...... 1,310 1,181 960
Speciality . 148 167 668
-------- -------- --------
$1,241 $1,176 1,443
======== ======== ========
</TABLE>
At December 31, 1995 the Company's investment in Tutera and HPC exceeded its
equity in the underlying net assets by $3,750 and $5,261 respectively, which are
being amortized over 15 years. The Company received cash disbursements from its
affiliates of $1,034 and $1,012 during the years ended December 31, 1994 and
1995, respectively.
Selected financial information for the combined affiliates is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31,
1994 1995
-------------- --------------
<S> <C> <C>
Working capital $ 251 $ 5,904
Total assets .. 51,867 74,065
Long-term debt 30,766 34,000
Equity ......... 17,269 28,555
============== ==============
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
Revenues ..... $19,895 $25,906 $64,294
Net earnings . 3,461 3,381 1,316
========= ========= =========
</TABLE>
The 1995 net earnings included in the selected financial information above
include the full year results of operations for HPC, whereas the Company's
equity in the loss of this affiliate only reflects its share of HPC's losses
since the formation of the joint venture in September 1995.
F-19
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1994 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Land .......................................... $ 31,757 $ 39,158
Buildings and improvements .................... 327,591 402,709
Leasehold improvements and leasehold interests 144,726 176,790
Equipment ..................................... 98,871 117,634
Construction in progress ...................... 52,136 57,809
Pre-construction and pre-acquisition costs ... 2,165 10,120
---------- ----------
657,246 804,220
Less accumulated depreciation and amortization 29,064 56,350
---------- ----------
Net property, plant and equipment ........... $628,182 $747,870
========== ==========
</TABLE>
Included in leasehold improvements and leasehold interests are purchase
option deposits on 89 facilities of $57,147 of which $25,357 is refundable at
December 31, 1995.
(6) INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31, 1994 and 1995:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Intangible assets of businesses acquired $235,848 $287,439
Deferred pre-opening costs............... 24,049 10,617
Deferred financing costs................. 12,925 17,461
---------- ----------
272,822 315,517
Less accumulated amortization............ 12,134 17,227
---------- ----------
Net intangible assets.................. $260,688 $298,290
========== ==========
</TABLE>
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1994 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ---------
<S> <C> <C>
Accounts payable .............................. $ 95,536 $102,999
Accrued salaries and wages .................... 28,807 32,093
Accrued workers' compensation and other claims 12,544 10,715
Accrued interest .............................. 13,910 15,921
Other accrued expenses ........................ 10,320 10,285
---------- ---------
$161,117 $172,013
========== ==========
</TABLE>
F-20
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) LONG-TERM DEBT
Long-term debt at December 31, 1994 and 1995 is summarized as follows:
<TABLE>
<CAPTION>
1994 1995
---------- ----------
<S> <C> <C>
Revolving credit facility notes due March 31, 2001 ..................... -- $220,500
Revolving credit facility notes due September 30, 2001 ................. $121,600 --
7.65% note payable in monthly installments of $42, including interest,
with final payment in July 2002 ........................................ -- 2,625
10.125% mortgage note payable in monthly installments of $64, including
interest due August 1997 ............................................... -- 5,723
6% note payable in monthly installments of $52, including interest,
with final payment of $639 in October 1998 ............................. 2,612 2,129
8.094% note payable, due December 2001 ................................. 9,638 9,508
Prime plus 1.25% note payable (9.75% at December 31, 1995), due
December 2000 .......................................................... 8,386 8,252
Mortgages payable in monthly installments of $62, interest rates
ranging from 9% to 14%.................................................. 14,699 10,512
9.75% mortgage note payable in monthly installments of $144, including
interest with final payment of $13,976 in October 1998.................. 15,108 14,845
Prime plus 1% (9.50% at December 31, 1995) note payable in monthly
installments of $89 including interest with final payment in January
2020.................................................................... 10,000 9,905
Seller notes, interest rates ranging from 10% to 14%, with final
payment of $2,971 in July 2000.......................................... 4,151 3,585
LIBOR plus 1.75%, (7.19% at December 31, 1995) mortgage note payable in
monthly installments of $51, including interest with final payment due
December 2000........................................................... -- 6,500
4% note payable, principal due annually with final payment due October
1998.................................................................... 1,609 1,317
Other .................................................................. 4,899 1,510
Subordinated debt:
5 3/4 % convertible senior subordinated debentures due January 1, 2001,
with interest payable semi-annually on January 1 and July 1. ......... 143,750 143,750
6% convertible subordinated debentures due December 31, 2003, with
interest payable semi-annually on January 1 and July 1 ............... 115,000 115,000
10 3/4 % Senior Subordinated Notes due July 15, 2004, with interest
payable semi-annually on January 15 and July 15....................... 100,000 100,000
9 5/8 % Senior Subordinated Notes due May 31, 2002, Series A, with
interest payable semi-annually on May 31 and November 30 ............. -- 115,000
---------- ----------
551,452 770,661
Less current portion .................................................. 8,972 5,404
---------- ----------
$542,480 $765,257
========== ==========
</TABLE>
In May 1995, the Company entered into a $500,000 revolving credit and term
loan agreement with Citicorp USA, Inc., the agent and certain other lenders
which replaced the $250,000 revolving credit and term loan facility, described
below, which the Company entered into during September 1994. Amounts outstanding
under the revolving loan on April 30, 1997 are to be converted to a term loan
with a final maturity date of March 31, 2001. The revolving credit and term loan
agreement is secured by a pledge of all of the stock of substantially all of the
Company's subsidiaries and bears interest based upon the bank's base rate, the
Federal fund rate or LIBOR. At December 31, 1995 the interest rate was 6.94%.
The $500,000 revolving credit and term loan facility will be used to finance the
Company's working capital requirements, to make acquisitions and for general
corporate purposes.
F-21
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) LONG-TERM DEBT--(CONTINUED)
On May 18, 1995, the Company issued $115,000 aggregate principal amount of
its 9 5/8 % Senior Subordinated Notes due 2002 (the "Senior Notes"). Interest on
the Senior Notes is payable semi-annually on May 31 and November 30, commencing
November 30, 1995. The Senior Notes are not redeemable prior to maturity. In the
event of a change in control of IHS, each holder of Senior Notes may require IHS
to repurchase such holder's 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 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's 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. The Company used $78,000 of the net
proceeds from the sale of the Senior Notes to repay a portion of the $188,000
then outstanding under its credit facility, and used the remaining approximately
$33,300 for general corporate purposes, including working capital.
In October 1995, the Company exchanged $115,000 aggregate principal amount of
its 9 5/8 % Senior Notes due 2002, Series A (the "Series A Senior Notes") for
the Senior Notes which were issued in May 1995. The Series A Senior Notes are
identical to the Senior Notes, except that the Series A Senior Notes have been
registered under the Securities Act of 1933, as amended, and are listed on the
New York Stock Exchange.
On July 7, 1994, the Company issued 10 3/4 % Senior Subordinated Notes due
2004 (the "1994 Senior Notes"). The net proceeds from this offering were
approximately $96,750, of which $52,700 was used to repay the then remaining
outstanding balance under the term loan facility and $44,050 outstanding under
the revolving credit facility notes.
The 1994 Senior Notes are redeemable in whole or in part at the option of the
Company at any time on or after July 15, 1999, at a price, expressed as a
percentage of the principal amount, 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 the Company, each holder of 1994 Senior Notes may require the
Company to repurchase such holder's 1994 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 1994 Senior Notes were issued contains
certain covenants, including, but not limited to, the following matters: (i)
limitations on additional indebtedness unless certain coverage ratios are met;
(ii) limitations on liens; (iii) limitations on the issuance of preferred stock
by the Company's subsidiaries; (iv) limitations on transactions with affiliates;
(v) limitations on certain payments, including dividends; (vi) application of
the proceeds of certain asset sales; (vii) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of the
Company to another person; and (viii) limitations on investments and loans.
F-22
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) LONG-TERM DEBT--(CONTINUED)
On September 20, 1994 the Company entered into a $250,000 revolving credit
and term loan agreement (the "Facility") with Citicorp USA, Inc., as agent and
certain other lenders. The Facility, which included a $50,000 letter of credit
subfacility, initially consisted of a $250,000 three year revolving loan.
Amounts outstanding under the revolving loan on September 30, 1997 were to
convert to a term loan with a final maturity date of September 30, 2001. The
$50,000 letter of credit subfacility was to remain in place, although the total
amount available was to be reduced by 25% each year from September 30, 1997
through September 30, 2001. The Facility was secured by a pledge of all of the
stock of substantially all of the Company's subsidiaries and bore interest based
upon various market indices. At December 31, 1994, the interest rate on the
facility was 7.97%.
On December 27, 1993 and January 10, 1994, the Company issued 5 3/4 %
convertible senior subordinated debentures due 2001 (the "5 3/4 % Debentures")
in the aggregate principal amount of $125,000 and $18,750, respectively.
Interest on the 5 3/4 % Debentures is payable semi-annually commencing July 1,
1994. The 5 3/4 % Debentures are redeemable in whole or in part at the option of
the Company at any time on or after January 2, 1997 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. In the event of a change in control of the Company,
each holder of the 5 3/4 % Debentures may require the Company to repurchase the
5 3/4 % Debentures, in whole or in part, at 100% of the principal amount
thereof, plus accrued interest to the repurchase date. At any time prior to
redemption or final maturity, the 5 3/4 % Debentures are convertible into Common
Stock of the Company, at $32.60 per share.
On December 16, 1992, the Company issued $115,000 principal amount of 6%
convertible subordinated debentures (the "6% Debentures") due December 31, 2003.
Interest on the 6% Debentures is payable semi-annually on January 1 and July 1,
commencing July 1, 1993. The 6% Debentures are redeemable in whole or in part at
the option of the Company at any time on or after January 1, 1996 at a price,
expressed as a percentage of the principal amount, ranging from 104.2% in 1996
to 100.6% in 2002, plus accrued interest. In the event of a change in control of
the Company, each holder of the 6% debentures may require the Company to
repurchase the Debentures, in whole or in part at 100% of the principal amount
thereof, plus accrued interest to the repurchase date. Prior to redemption, the
6% Debentures are convertible into Common Stock of the Company, at the option of
the holder, at any time at or before maturity at $32.125 per share, subject to
adjustment upon the occurrence of certain events.
At December 31, 1995, the aggregate maturities of long-term debt for the five
years ending December 31, 2000 and thereafter are as follows:
<TABLE>
<CAPTION>
<S> <C>
1996......... $ 5,404
1997 ........ 45,092
1998 ........ 74,571
1999 ........ 57,601
2000......... 66,973
Thereafter . 521,020
----------
$770,661
==========
</TABLE>
F-23
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(8) LONG-TERM DEBT--(CONTINUED)
Interest capitalized to construction in progress was $1,402, $3,030 and
$5,155 for the years ended December 31, 1993, 1994 and 1995, respectively.
(9) LEASES
The Company has entered into operating leases as lessee of 76 health care
facilities and certain office facilities expiring at various dates through June
2010. Minimum rent payments due under operating leases in effect at December 31,
1995 are summarized as follows:
<TABLE>
<CAPTION>
<S> <C>
1996 ............. $ 43,763
1997 ............. 42,555
1998 ............. 39,661
1999 ............. 39,176
2000.............. 35,916
Subsequent to
2000.............. 65,890
----------
Total .......... $266,961
==========
</TABLE>
The Company also leases equipment under short-term operating leases having
rentals of approximately $13,702 per year.
The leases of health care facilities provide renewal options for various
terms at fair market rentals at the expiration of the initial term, except for
leases of five facilities which have no renewal options. The Company generally
has the option or right of first refusal to purchase the facilities at fair
market value determined by independent appraisal (or by formula based upon the
cash flow of the facility, as defined) or, with respect to certain leases, at a
fixed price representing the fair market value at the inception of the lease.
Under certain conditions, the Company may be required to exercise the options to
buy the facilities. In connection with 55 leases the Company has paid purchase
option deposits aggregating $46,947, of which $25,357 is refundable. In
connection with one lease expiring September 30, 2002, the lessor has the right
to require two officers of the Company to repurchase up to 13,944 shares of the
Company's Common Stock owned by the lessor at the original issue price increased
at the annual rate of 9%. The Company has guaranteed this obligation of the
officers and has also guaranteed approximately $6,600 of the lessor's
indebtedness.
Minimum rentals are generally subject to adjustment based on the consumer
price index or the annual rate of five year U.S. Treasury securities. Also, the
leases generally provide for contingent rentals, based on gross revenues of the
facilities in excess of base year amounts, and additional rental obligations for
real estate taxes, utilities, insurance and repairs. Contingent rentals were
$426, $2,596 and $2,777 for the years ended December 31, 1993, 1994 and 1995,
respectively.
F-24
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) CAPITAL STOCK
The Company is authorized to issue up to 150,000,000 shares of Common Stock
and 15,000,000 shares of Preferred Stock. The issuance of such preferred stock
may have the effect of delaying, deferring or preventing a change in control of
the Company without further action by the stockholders and may adversely affect
the voting and other rights of the holders of Common Stock, including the loss
of voting control to others. As of December 31, 1994 and 1995, there were no
shares of Preferred Stock outstanding.
The Company declared a $0.02 per share cash dividend in 1994 and 1995.
At December 31, 1994 and 1995 the Company had outstanding stock options as
follows:
<TABLE>
<CAPTION>
1994 1995
----------- -----------
<S> <C> <C>
Stock options outstanding pursuant to:
Equity Incentive Plan ...................... 16,068 14,969
1990 Employee Stock Option Plan ............ 923,746 889,956
1992 Employee Stock Option Plan ............ 1,034,895 905,120
Stock Option Plan for Non-Employee Directors 300,000 300,000
1994 Stock Incentive Plan .................. 1,469,770 1,439,080
Senior Executives' Stock Option Plan ....... 1,800,000 2,100,000
Stock Option Compensation Plan for
Non-Employee Directors .................... 275,000 250,000
1995 Board of Director's Plan .............. -- 300,000
Other options .............................. 60,353 178,429
----------- -----------
Total stock options outstanding............ 5,879,832 6,377,554
=========== ===========
</TABLE>
The Equity Incentive Plan provides that options may be granted to certain
employees at a price per share not less than the fair market value at the date
of grant. The 1990 Employee Stock Option Plan and the 1992 Employee Stock Option
Plan provide for issuance of options with similar terms as well as non-qualified
options. In 1993, the Company adopted the Senior Executives' Stock Option Plan
and the 1994 Stock Incentive Plan which provide for the issuance of options with
terms similar to the 1992 plan. In addition, the Company adopted two Stock
Option Plans for Non-Employee Directors and a Stock Option Compensation Plan for
Non-Employee Directors. The Board of Directors has authorized the issuance of
7,974,015 shares of common stock under the plans. Such options have been granted
with exercise prices equal to or greater than the estimated fair market value of
the common stock on the date of grant; accordingly, the Company has recorded no
compensation expense related to such grants. In addition, the Company provides
an Employee Stock Purchase Plan whereby employees have the right to purchase the
Company's Common Stock at 90% of the quoted market price, subject to certain
limitations.
F-25
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(10) CAPITAL STOCK--(CONTINUED)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
1993 1994 1995
-------------- -------------- --------------
<S> <C> <C> <C>
Options outstanding--beginning of period 2,870,131 5,658,789 5,879,832
Granted ................................. 3,833,500 873,300 1,059,146
Exercised ............................... (795,008) (474,661) (267,402)
Cancelled ............................... (249,834) (177,596) (294,022)
-------------- -------------- --------------
Options outstanding--end of period ..... 5,658,789 5,879,832 6,377,554
============== ============== ==============
Options price range during period:
Options granted ......................... $20.50-29.88 $28.63-38.00 $20.88-37.50
Options exercised ....................... $ 7.00-25.25 $10.50-28.88 $10.80-28.88
Options exercisable at end of period ... 760,696 1,839,015 2,731,876
</TABLE>
650,000 options granted in 1995 are subject to approval by the Company's
shareholders.
Warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------------------
1993 1994 1995
-------------- -------------- ---------------
<S> <C> <C> <C>
Warrants outstanding--beginning of period 156,187 311,029 497,181
Granted to lenders and sellers ........... 253,000 300,000 65,000
Exercised ................................ (72,259) (113,848) (44,181)
Cancelled ................................ (25,899) -- --
-------------- -------------- ---------------
Warrants outstanding--end of period ..... 311,029 497,181 518,000
============== ============== ===============
Warrants price range during period:
Warrants granted ........................ $20.00-28.92 $ 31.33 $37.88-38.75
Warrants exercised ...................... $ 12.25 $12.25-26.00 $12.25-23.50
</TABLE>
Each outstanding warrant entitles the holder to purchase one share of Common
Stock at a price ranging from $12.25 to $38.75.
As discussed in note 9, the Company is contingently obligated to repurchase
up to 13,944 shares of its Common Stock, aggregating approximately $331 at
December 31, 1995.
The Company's Board of Directors has authorized the repurchase in the open
market, of up to $50,000 of the Company's Common Stock. The purpose of the
repurchase program is to have available treasury shares of Common Stock to
satisfy contingent earn-out payments under prior business combinations accounted
for by the purchase method. The repurchases will be funded from cash from
operations and drawings under the Company's revolving credit facility. During
the twelve months ended December 31, 1995, the Company repurchased 400,600
shares of Common Stock for an aggregate purchase price of approximately $12,800.
<PAGE>
(11) INCOME TAXES
The provision for income taxes on earnings before income taxes and
extraordinary items is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------------
1993 1994 1995
---------- --------- ------------
<S> <C> <C> <C>
Federal .. $10,090 $18,388 $(13,341)
State ..... 1,918 3,729 (2,929)
---------- --------- ------------
$12,008 $22,117 $(16,270)
========== ========= ============
Current .. $ 9,623 $19,905 $ 7,732
Deferred . 2,385 2,212 (24,002)
---------- --------- ------------
$12,008 $22,117 $(16,270)
========== ========= ============
</TABLE>
F-26
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(11) INCOME TAXES--(CONTINUED)
The amount computed by applying the Federal corporate tax rate of 35% in
1993, 1994 and 1995 to earnings before income taxes and extraordinary items is
summarized as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- --------- ------------
<S> <C> <C> <C>
Income tax computed at statutory rates ....... $10,777 $20,643 $(14,791)
State income taxes, net of Federal tax benefit 1,247 2,424 (1,904)
Amortization of intangibles.................... 132 993 1,975
Valuation allowance adjustment ................ -- (1,675) (2,111)
Other ......................................... (148) (268) 561
---------- --------- ------------
$12,008 $22,117 $(16,270)
========== ========= ============
</TABLE>
Deferred income tax (assets) liabilities at December 31, 1994 and 1995 are as
follows:
<TABLE>
<CAPTION>
1994 1995
--------- -----------
<S> <C> <C>
Excess of book over tax basis of assets .......................... $90,573 $ 76,097
Deferred pre-opening costs ....................................... 314 199
Accrued workers compensation...................................... (2,091) (3,769)
Deferred gain on sale-leaseback .................................. (3,192) (2,775)
Allowance for doubtful accounts .................................. (9,125) (11,384)
Prepaid expenses ................................................. 908 --
Pre-acquisition separate company net operating loss carryforwards. (5,220) (7,612)
Other ............................................................ 25 170
--------- -----------
$72,192 $ 50,926
Valuation allowance .............................................. 3,464 1,353
--------- -----------
$75,656 $ 52,279
========= ===========
</TABLE>
The decrease in the valuation allowance for deferred tax assets of $2,111 is
attributable to the utilization of pre-acquisition separate company net
operating loss carryforwards in the year ended December 31, 1995.
At December 31, 1995, certain subsidiaries of the Company had pre-acquisition
net operating loss carryforwards available for Federal and state income tax
purposes of approximately $19,770 which expire in the years 1996 through 2008.
The annual utilization of these net operating loss carryforwards is subject to
certain limitations under the Internal Revenue Code.
(12) OTHER COMMITMENTS AND CONTINGENCIES
The Company is obligated to purchase its Green Briar facility upon a change
in control of the Company. The net purchase price of the facility is
approximately $4,014. The Company has guaranteed approximately $6,600 of the
lessor's indebtedness. The lessor of this facility has the right to require
Messrs. Robert Elkins and Timothy Nicholson to purchase all or any part of
13,944 shares of Common Stock owned by it at a per share purchase price equal to
the sum of $12.25 per share plus 9% simple interest per annum from May 8, 1988
until the date of such purchase. The Company has agreed to repurchase such
shares if Messrs. Elkins and Nicholson fail to do so. The amount aggregated
approximately $331 at December 31, 1995.
The Company has guaranteed repayment of a construction loan of a partnership
in which the Company has a 30% general partnership interest and which owns and
operates a geriatric care facility. At December 31, 1995 the loan had a balance
of $1,231.
The lessor of one facility has the right, if the Company defaults under the
lease, to require the Company to purchase the facility at a price equal to the
greater of $7,130 or the facility's fair market value.
The Company has guaranteed approximately $3,944 of a construction loan for
Trizec, the entity from which the Company purchased the Central Park Lodges
facilities.
F-27
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) OTHER COMMITMENTS AND CONTINGENCIES--(CONTINUED)
The Company entered into a guaranty agreement whereby the Company guaranteed
up to $4,200 owed by Tutera Group Inc. and Sunset Plaza Limited Partnership, a
partnership interest of Cenill, Inc., to Bell Atlantic Tricon Leasing
Corporation. The amount guaranteed at December 31, 1995 was $4,070.
The Company has established several irrevocable letter of credit obligations
with the Bank of Nova Scotia totalling $23,833 at December 31, 1995.
The Company and its subsidiaries are from time to time subject to claims and
suits arising in the ordinary course of business. In the opinion of management,
the ultimate resolution of pending legal proceedings will not have a material
effect on the Company's financial statements.
(13) SUPPLEMENTAL CASH FLOW INFORMATION
Significant non-cash investing and financing activities for the year ended
December 31, 1993, 1994 and 1995, were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- -----------
<S> <C> <C> <C>
Current assets................ 20,521 30,247 (1,213)
Property, plant, and
equipment..................... 71,200 54,042 (74,858)
Assets held for sale.......... 60,180 -- --
Other assets.................. 980 2,182 (13,919)
Intangible assets............. 38,047 98,142 (2,100)
Current liabilities........... (66,006) (58,542) 10,117
Deferred income taxes......... (65,000) (3,756) 455
Long-term debt................ (24,742) (29,540) 15,169
Equity........................ (35,180) (92,775) (117,831)
</TABLE>
o An increase in additional paid-in capital of $740 in 1993 resulted from
the exercise of stock options granted under the Company's 1990 and 1992
Stock Option Plan and the Company's Equity Incentive Plan, which reduced
the Company's current taxes payable by $740 at December 31, 1993.
o The PCP acquisition in 1993 resulted in increases in net current assets of
$2,225; property, plant and equipment of $1,001; other assets of $443 and
goodwill of $12,225; offset by accounts payable and accrued expenses of
$3,621; long-term debt of $2,433 and the increase in common stock and
additional paid-in capital of $9,840.
o The Health Care Systems, Inc. acquisition in 1993 resulted in increases in
net current assets of $347; property, plant and equipment of $189; other
assets of $498 and goodwill of $4,747; offset by accounts payable and
accrued expenses of $4,872 and long-term debt of $909.
o The CPL acquisition in 1993 resulted in increases in current assets of
$10,290; property, plant and equipment of $67,612 and assets held for sale
of $60,180; offset by increases in accounts payable and accrued expenses
of $51,582; long-term debt of $20,100; deferred income taxes of $65,000;
and common stock and additional paid-in capital of $1,400.
o The Achievement acquisition in 1993 resulted in increases in net current
assets of $7,659; property, plant and equipment of $548; other assets of
$39; and goodwill of $21,075; offset by increases in accounts payable and
accrued expenses of $5,521; long-term debt of $1,300; and common stock and
additional paid-in capital of $22,500.
o The Southmark acquisition in 1993 resulted in increases in property, plant
and equipment of $1,850; offset by increases in accounts payable and
accrued expenses of $1,150; and common stock and additional paid-in
capital of $700.
F-28
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)
o The sale of Professional Community Management, Inc., which manages
residential retirement community living units in Southern California, in
1994 resulted in decreases in net current assets of $716; property, plant
and equipment of $200; other assets of $746 and intangible assets of
$3,899; net current liabilities of $1,226 and debt of $31; offset by the
$4,304 purchase price paid in the form of a note receivable.
o The Cooper acquisition in 1994 resulted in increases in net current assets
of $8,962; property, plant and equipment of $826; other assets of $922 and
goodwill of $22,177; offset by current liabilities of $5,156; long-term
debt of $4,233; deferred income taxes of $3,608 and common stock and
additional paid-in capital of $19,890.
o The Pace acquisition in 1994 resulted in increases in net current assets
of $1,869; other assets of $148 and goodwill of $5,104; offset by current
liabilities of $723; deferred income taxes of $600; and common stock and
additional paid-in capital of $5,798.
o The PDS acquisition in 1994 resulted in increases in net current assets of
$549; property, plant and equipment of $90; deferred tax receivable $533;
and goodwill of $5,402; offset by current liabilities of $2,678 and common
stock and additional paid-in capital of $3,896.
o The Therapy Resources acquisition in 1994 resulted in increases in net
current assets of $576; property, plant and equipment of $506; other
assets of $39 and goodwill of $2,176; offset by current liabilities of
$3,297.
o The CareTeam acquisition in 1994 resulted in increases in net current
assets of $2,094; property, plant and equipment of $472; other assets of
$628; deferred tax receivable of $806 and goodwill of $6,971; offset by
current liabilities of $5,001; debt of $749 and common stock and
additional paid-in capital of $5,221.
o The Rehab People acquisition in 1994 resulted in increases in net current
assets of $1,542; property, plant and equipment of $380; other assets of
$734 and goodwill of $13,693; offset by current liabilities of $4,477;
debt of $496; deferred taxes of $1,376 and common stock and additional
paid-in capital of $10,000.
o The Primedica acquisition in 1994 resulted in increases in net current
assets of $3,797; property, plant and equipment of $8,530; other assets of
$84; deferred tax receivable of $863 and goodwill of $348; offset by
current liabilities of $13,622.
o The Samaritan Care acquisition in 1994 resulted in increases in net
current assets of $1,106; property, plant and equipment of $1,028;
deferred tax receivable of $1,001 and goodwill of $18,632; offset by
current liabilities of $7,767 and common stock and additional paid-in
capital of $14,000.
o The Partners acquisition in 1994 resulted in increases in net current
assets of $836; property, plant and equipment of $1,788; other assets of
$1,256; deferred tax receivable of $625 and goodwill of $17,146; offset by
current liabilities of $7,072; debt of $2,176 and common stock and
additional paid-in capital of $12,403.
o The Houston Hospital acquisition in 1994 resulted in increases in net
current assets of $662 and other assets of $12; offset by current
liabilities of $674.
o The Amcare acquisition in 1994 resulted in increases in net current assets
of $7,295; property, plant and equipment of $3,819; and goodwill of
$9,800; offset by current liabilities of $7,356; debt of $797; deferred
income taxes of $2,000; other assets of $261 and common stock and
additional paid-in capital of $10,500.
F-29
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)
o The Treemont of Dallas acquisition in 1994 resulted in increases in
property, plant and equipment of $15,230; offset by debt of $15,230.
o The Amarillo acquisition in 1994 resulted in increases in net current
assets of $1,675; other assets of $108 and property, plant and equipment
of $10,300; offset by current liabilities of $1,547; debt of $5,490 and
the Company's 49% interest in the joint venture at the date of acquisition
of $5,046.
o The Company consummated certain other acquisitions in 1994, which resulted
in increases to property, plant and equipment of $518 and goodwill of
$592; offset by debt of $400 and common stock and additional paid-in
capital of $710.
o In 1994, the Company made purchase option deposits through the issuance of
its Common Stock and warrants of $10,755, resulting in an increase in
property, plant and equipment of $10,755; offset by common stock and
additional paid-in capital of $10,755.
o In 1994, the Company declared a cash dividend, which resulted in increases
to current liabilities of $398; offset by retained earnings of $398.
o The January 1995 acquisitions of four diagnostic service companies
resulted in increases in property of $501, increases in goodwill of
$1,381; offset by increases in current liabilities of $1,550, increases in
long term debt of $32, and increases in additional paid-in capital of
$300.
o The acquisiton of Epsilon in 1995 resulted in an increase in current
assets of $109, increase in property of $78, increase in goodwill of $704,
decrease in other assets of $140; offset by increase in current
liabilities of $651, and an increase in deferred income taxes of $100.
o The acquisition of ProCare in 1995 resulted in an increase in current
assets of $57, an increase in property of $154, an increase in goodwill of
$4,134; increases in other assets of $47; offset by increase in current
liabilities of $600, increase in deferred taxes of $75, an increase in
long term debt of $117, and an increase in additional paid-in capital of
$3,600.
o The acquisition of Samaritan of Michigan in 1995 resulted in an increase
in current assets of $265, an increase in goodwill of $1,275; offset by an
increase in current liabilities of $1,340, and an increase of deferred
income taxes of $200.
o The acquisition of Fidelity in 1995 resulted in an increase in current
assets of $8, increase in property of $183, increase in goodwill of $159;
offset by increase in current liabilities of $300, and an increase in
deferred taxes of $50.
o The acquisition of Hometown Nursing in 1995 resulted in an increase in
current assets of $3, increase in property of $1, increase in goodwill of
$146; offset by increase in current liabilities of $120, and an increase
in deferred taxes of $30.
o The acquisition of Bernard's in 1995 resulted in an increase in property
of $10, increase in goodwill of $30; offset by increase in current
liabilities of $40.
o The acquisition of Stewart's in 1995 resulted in an increase in property
of $190, increase in goodwill of $810; offset by increase in current
liabilities of $1,000.
o The June 1995 acquisition of three diagnostic service companies resulted
in an increase in property of $176, increase in goodwill of $774; offset
by an increase in current liabilities of $950.
o The acquisition of Mobile X of Maryland in 1995 resulted in an increase in
property of $230, increase in goodwill of $370; offset by an increase in
current liabilities of $600.
F-30
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) SUPPLEMENTAL CASH FLOW INFORMATION--(CONTINUED)
o The acquisition of SLC in 1995 resulted in an increase in current assets
of $4,314, increase in property of $103, increase in goodwill of $4,177,
decrease in other assets of $202; offset by an increase in current
liabilities of $2,531, and an increase in additional paid in capital of
$5,861.
o The acquisition of Hershey in 1995 resulted in increases in property of
$5,770 and long term debt of $5,770.
o The write off of the Crestwood management agreement in 1995 resulted in a
decrease in current assets of $5,969, a decrease in property of $2,322, a
decrease in other assets of $13,624, and a non-cash charge to income of
$21,915. (See Note 17)
o In 1995, the write off of long lived assets in connection with SFAS No.
121 resulted in a decrease in property of $89,182, a decrease in
intangible assets of $19,924, and a non-cash charge to income of $109,106.
(See Note 17)
o The acquisition of Clara Burke in 1995 resulted in an increase in property
of $6,500 and long-term debt of $6,500.
o Other asset acquisitions in 1995 resulted in an increase in property of
$2,750 and long-term debt of $2,750.
o Payment of previous acquisitions' earnout agreements in 1995 resulted in
an increase in intangible assets and equity of $3,864.
o The declaration of a dividend in 1995 resulted in an increase in current
liabilities and a decrease in retained earnings of $435.
Cash payments for interest were $6,786, $20,728 and $49,863 for the years
ended December 31, 1993, 1994 and 1995, respectively. Cash payments for income
taxes were $5,867, $13,761 and $27,549 for such periods.
(14) EXTRAORDINARY ITEMS
In the second quarter of 1995, the Company replaced its $250,000 revolving
credit and term loan facility with a $500,000 revolving credit and term loan
facility. This event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $826 representing the
write-off of deferred financing costs. In the fourth quarter of 1995, the
Company incurred prepayment penalties on debt in the amount of $821. Such
losses, reduced by the related income tax effect of $634, is presented in the
statement of earnings as an extraordinary item of $1,013.
In September 1994, the Company replaced its $260,000 revolving credit and
term loan facility (see note 8) with a $250,000 revolving credit and term loan
facility. Such event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $6,839, representing
the write-off of deferred financing costs. Such loss, reduced by the related
income tax effect of $2,565, is presented in the statement of earnings as an
extraordinary item of $4,274.
In December 1993, the Company replaced its $100,000 revolving credit facility
with a $260,000 revolving credit and term loan facility. Such event has been
accounted for as an extinguishment of debt and the Company has recorded a loss
on extinguishment of debt of $3,730, representing the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of $1,455,
is presented in the statement of earnings as an extraordinary item of $2,275.
F-31
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash and cash equivalents, patient accounts
receivable, other current assets, accounts payable, and accrued expenses
approximates fair value because of the short-term maturity of these instruments.
The fair value of temporary investments is estimated based on quoted market
prices for these or similar investments. The fair value of third-party payor
settlements receivable is estimated by discounting anticipated cash flows using
estimated market discount rates to reflect the time value of money. The fair
value of the Company's long-term debt is estimated based on current rates
offered to the Company for similar instruments with the same remaining
maturities. Management of the Company believes the carrying amount of the above
financial instruments approximates the estimated fair value. The Company has
investments in unconsolidated affiliates described in note 4, which are untraded
companies and joint ventures, including an investment in a combination of common
and preferred stock of Hearing Health Services, Inc. (HHS), which is carried at
its original cost basis less writedowns of $4,000 and $2,608 at December 31,
1994 and 1995 respectively. The Company has notes receivable from unaffiliated
individuals and untraded companies totaling $24,667 and $26,115 at December 31,
1994 and 1995 respectively. Also, the Company has guaranteed the indebtedness of
two of its leased facilities and has purchase option deposits of $54,402 and
$57,147 on 86 and 89 leased facilities of which $21,000 and $25,357 is
refundable at December 31, 1994 and 1995 respectively. It is not practicable to
estimate the fair value of these investments, notes and guarantees since they
are not traded, no quoted values are readily available for similar financial
instruments and the Company believes it is not cost-effective to have valuations
performed. However, management believes that there has been no permanent
impairment in the value of such investments and no indication of probable loss
on such guarantees.
(16) RELATED PARTY TRANSACTIONS
In 1994, the Company sold and leased back three of its geriatric care
facilities in a transation with affiliates of Capstone, a newly formed real
estate investment trust. Robert N. Elkins, Chairman of the Board and Chief
Executive Officer of the Company, is a Director of Capstone and Richard M.
Scrushy, at the time a director of the Company, is Chairman of the Board of
Capstone. The proceeds received by the Company were $28,210.
In April 1993, a wholly-owned subsidiary of the Company acquired a 21.28%
interest in the common stock and a 47.64% interest in the 6% cumulative
preferred stock of Speciality Care PLC, an owner and operator of geriatric care
facilities in the United Kingdom. Robert N. Elkins, Chairman of the Board and
Chief Executive Officer of the Company, is a director of Speciality Care PLC,
and Timothy Nicholson, a director of the Company, is Chairman and Managing
Director of Speciality Care. Mr. Nicholson was formerly Executive Vice President
of the Company. In 1995 the Company invested an additional $4,384 in Speciality
Care PLC. As a result of the Company's additional investment, the Company's
interest in the Common Stock is 21.30% and 63.65% for the 6% cumulative
convertible preferred stock. The Company's equity in Speciality Care PLC was
$9,250 at December 31, 1995.
F-32
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(17) LOSS FROM IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
The Company determined in 1995 that the health care regulatory and
reimbursement environments in certain of its markets had eroded its ability to
fully recover certain of its investments in those markets. Through evaluation of
the recent financial performance and projected cash flows of its facilities and
using standard industry valuation techniques, the Company estimated the fair
value of each of its facilities and determined that the carrying value of
certain long-lived assets, including buildings and improvements, leasehold
improvements, equipment and deferred pre-opening costs, exceeded their fair
values. The excess carrying value of $109,106 was written off and is included in
the statement of operations for 1995 as a loss from impairment of long-lived
assets.
During the fourth quarter of 1995, the Company terminated the Crestwood
management contract. As a result, the Company incurred a $21,915 loss on the
termination of this contract. Such loss consists of the write-off of its
investment in the managment contract and management fees receivable.
During the third quarter of 1995, the Company merged with IntegraCare, Inc.
in a transaction accounted for as a pooling of interests. In connection with
this transaction, the Company incurred merger costs of $1,939 for accounting,
legal, and other costs. These costs are included as an other non-recurring
charge on the statement of operations.
(18) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The following infomation is provided in accordance with the AICPA Statement
of Position No. 94-6, "Disclosure of Certain Significant Risks and Uncertanties"
which is effective for the year ended December 31, 1995.
The Company's strategy is to use geriatric care-facilities as a platform to
provide a wide variety of post-acute medical and rehabilitative services more
typically delivered in the acute care hospital setting and to use home
healthcare to provide those medical and rehabilitative services which do not
require 24-hour monitoring. Post-acute care includes subacute care, outpatient
and home care, inpatient and outpatient rehabilitation, diagnostic, respiratory
therapy and pharmacy services. The Company's post-acute health care system is
intended to provide continuity of care for its patients following discharge from
acute care hospitals. The Company also manages such operations for other owners
for a fee, which is generally based on a percentage of the gross revenue. The
Company and others in the health care business are subject to certain inherent
risks, including the following:
o Substantial dependence on revenues derived from reimbursement by the
Federal Medicare and state Medicaid programs and;
o Ability to obtain per diem rates approvals for costs which exceed the
Federal Medicare established per diem rates and;
o Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
F-33
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(18) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES--(CONTINUED)
Such inherent risks require the use of certain management estimates in the
preparation of the Company's financial statements and it is reasonably possible
that a change in such estimates may occur.
The Company receives payment for a significant portion of services rendered
to patients from the Federal government under Medicare and from the states in
which its facilities are located under Medicaid. Revenue derived from Medicare
and various state Medicaid reimbursement programs represented 32.8% and 20.6%,
respectively, of the Company's revenue for the year ended December 31, 1995, and
the Company's operations are subject to a variety of other Federal, state and
local regulatory requirements. Failure to maintain required regulatory approvals
and licenses and/or changes in such regulatory requirements could have a
significant adverse effect on the Company. Changes in Federal and state
reimbursement funding mechanism, related government budgetary constraints and
differences between final settlements and estimate settlements receivable under
Medicare and Medicaid retrospective reimbursement programs, which are subject to
audit and retroactive adjustment, could have a significant adverse effect on the
Company. The Company's cost of care for its MSU patients generally exceeds
regional reimbursement limits established under Medicare. The success of the
Company's 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. Also, the Company is from
time to time subject to malpractice and related claims and lawsuits, which arise
in the normal course of business and which could have a significant effect on
the Company. The Company believes that adequate provision for these items has
been made in the accompanying consolidated financial statements and that their
ultimate resolution will not have a material effect on the consolidated
financial statements.
Since its inception, the Company has grown through acquisitions, and
realization of acquisition costs, including intangible assets of businesses
acquired, is dependent initially upon the consummation of the acquisitions and
subsequently upon the Company's ability to successfully integrate and manage
acquired operations. Also, the Company's development of post-acute network
health care networks is dependent upon successfully effecting economics of
scale, the recruitment of skilled personnel and the expansion of services and
related revenues.
(19) SUBSEQUENT EVENTS
In February, 1996, the Company entered into an agreement to acquire First
American Health Care of Georgia, Inc., ("First American") which provides home
health services in twenty-three states. The agreement provides for a purchase
price of $150,000 plus an additional earn-out based on operational experience in
the years 1999 through 2002. First American has filed for protection from
creditors under Chapter 11 of the Federal Bankruptcy Code. The acquisition is
subject to the successful completion of a reorganization plan in bankruptcy
court, various regulatory approvals, bank approval, and Board of Directors
approval. There can be no assurance that the transaction will be consummated
under the described terms or at all.
In February 1996, the Company acquired Vintage Health Care Center in Denton,
Texas. The purchase price was approximately $7 million.
In March 1996, the Company acquired Rehab Management Services, Inc., an
outpatient rehabilitation company in central Florida for approximately $10
million.
The Company has reached agreements in principle to purchase a hospice company
in Chicago, Illinois, for approximately $8 million, and a home health agency in
Memphis, Tenessee, for approximately $2 million. There can be no assurance that
the transaction will be consummated on these terms or at all.
F-34
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the Delaware General Corporation Law (the "DGCL"), a corporation may
include provisions in its certificate of incorporation that will relieve its
directors of monetary liability for breaches of their fiduciary duty to the
corporation, except under certain circumstances, including a breach of the
director's duty of loyalty, acts or omissions of the director not in good faith
or which involve intentional misconduct or a knowing violation of law, the
approval of an improper payment of a dividend or an improper purchase by the
corporation of stock or any transaction from which the director derived an
improper personal benefit. The Company's Third Restated Certificate of
Incorporation, as amended, provides that the Company's directors are not liable
to the Company or its stockholders for monetary damages for breach of their
fiduciary duty, subject to the described exceptions specified by the DGCL.
Section 145 of the DGCL grants to the Company the power to indemnify each
officer and director of the Company against liabilities and expenses incurred by
reason of the fact that he is or was an officer or director of the Company if he
acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the Company and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The Company's Third Restated Certificate of Incorporation, as amended,
and By-laws, as amended, provide for indemnification of each officer and
director of the Company to the fullest extent permitted by the DGCL. In
addition, IHS has entered into indemnity agreements with its directors and
executive officers, a form of which is included as Exhibit 10.72 to IHS's
Registration Statement on Form S-1, No. 33-39339, effective March 31, 1992.
Section 145 of the DGCL also empowers the Company to purchase and maintain
insurance on behalf of any person who is or was an officer or director of the
Company against liability asserted against or incurred by him in any such
capacity, whether or not the Company would have the power to indemnify such
officer or director against such liability under the provisions of Section 145.
The Company has purchased and maintains a directors' and officers' liability
policy for such purposes.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) List of Exhibits.
<TABLE>
<CAPTION>
<S> <C>
1.01 Purchase Agreement, dated May 23, 1996, among Integrated Health
Services Inc., Smith Barney Inc., Donaldson, Lufkin and Jenrette
Securities Corporation and Citicorp Securities, Inc.(1)
2.01 Asset Purchase Agreement, dated as of June 20, 1996, among Integrated
Health Services, Inc., Symphony Pharmacy Services, Inc., various
subsidiaries of Symphony Pharmacy Services, Inc. and Capstone
Pharmacy Services, Inc., as amended.(2)
3.01 Third Restated Certificate of Incorporation, as amended.(3)
3.02 Amendment to Third Restated Certificate of Incorporation, dated May 26, 1995.(4)
3.03 Bylaws, as amended.(5)
4.01 Indenture, dated as of May 15, 1996, between Integrated Health Services Inc. and Signet
Trust Company, as Trustee.(1)
4.02 Form of 10 1/4 % Senior Subordinated Notes due 2006 and 10 1/4 % Senior Subordinated Notes
due 2006, Series A (included as exhibits to 4.01).(1)
5.01 Opinion of Fulbright & Jaworski L.L.P.
10.01 Registration Rights Agreement, dated as of May 23, 1996, among Integrated Health Services
Inc., Smith Barney Inc., Donaldson, Lufkin and Jenrette Securities Corporation and Citicorp
Securities, Inc.(1)
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges.
II-1
<PAGE>
23.01 Consent of KPMG Peat Marwick LLP.
23.02 Consent of Fulbright & Jaworski L.L.P. (included in their opinion filed as Exhibit 5.01).
24.01 Powers of Attorney of certain officers and directors of Integrated Health Services Inc.
(included on the signature page).
25.01 Form T-1, Statement of Eligibility under the Trust Indenture Act of 1939 of Signet Trust
Company.
99.01 Form of Letter of Transmittal and Consent.
99.02 Form of Notice of Guaranteed Delivery.
99.03 Form of Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant
from Beneficial Owner.
</TABLE>
- -----------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 30, 1996.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-77754, effective June 29, 1994.
(4) Incorporated by reference to Company's Registration Statement on Form S-4,
No. 33-94130, effective September 20, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be the initial bona
fide offering thereof.
II-2
<PAGE>
(5) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(6) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(7) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first-class mail or equally prompt means. This
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(9) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Owings
Mills, State of Maryland, on September 24, 1996.
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Robert N. Elkins
-----------------------
Robert N. Elkins
Chairman of the Board and
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS that each individual whose signature appears
below constitutes and appoints each of Lawrence P. Cirka, Robert N. Elkins,
Eleanor C. Harding and W. Bradley Bennett his true and lawful attorney-in-fact
and agent with full power of substitution and resubstitution, for him and in his
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and all documents in connection
therewith, with the Securities and Exchange Commission, granting unto each said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that any said attorney-in-fact and
agent, or any substitute or substitutes of any of them, may lawfully do or cause
to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Robert N. Elkins
- -------------------------- Chairman of the Board and Chief Executive
(Robert N. Elkins) Officer (Principal Executive Officer) September 24, 1996
/s/ Lawrence P. Cirka
- -------------------------- President, Chief Operating Officer and
(Lawrence P. Cirka) Director September 24, 1996
/s/ E. McCall Crawford
- --------------------------
(E. McCall Crawford) Director September 24, 1996
/s/ Kenneth M. Mazik
- --------------------------
(Kenneth M. Mazik) Director September 24, 1996
/s/ Robert A. Mitchell
- --------------------------
(Robert A. Mitchell) Director September 24, 1996
/s/ Charles W. Newhall, III
- --------------------------
(Charles W. Newhall, III) Director September 24, 1996
/s/ Timothy F. Nicholson
- --------------------------
(Timothy F. Nicholson) Director September 24, 1996
/s/ John L. Silverman
- --------------------------
(John L. Silverman) Director September 24, 1996
II-4
<PAGE>
/s/ George H. Strong
- -------------------------
(George H. Strong) Director September 24, 1996
/s/ W. Bradley Bennett
- -------------------------- Senior Vice President- Chief Accounting
(W. Bradley Bennett) Officer (Principal Accounting Officer) September 24, 1996
/s/ Eleanor C. Harding
- -------------------------- Senior Vice President-Finance (Principal
(Eleanor C. Harding) Financial Officer) September 24, 1996
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
------ ----------- ----
<S> <C>
1.01 Purchase Agreement, dated May 23, 1996, among Integrated Health
Services Inc., Smith Barney Inc., Donaldson, Lufkin and Jenrette
Securities Corporation and Citicorp Securities, Inc.(1)
2.01 Asset Purchase Agreement, dated as of June 20, 1996, among Integrated
Health Services, Inc., Symphony Pharmacy Services, Inc., various
subsidiaries of Symphony Pharmacy Services, Inc. and Capstone
Pharmacy Services, Inc., as amended.(2)
3.01 Third Restated Certificate of Incorporation, as amended.(3)
3.02 Amendment to Third Restated Certificate of Incorporation, dated May 26, 1995.(4)
3.03 Bylaws, as amended.(5)
4.01 Indenture, dated as of May 15, 1996, between Integrated Health Services Inc. and Signet
Trust Company, as Trustee.(1)
4.02 Form of 10 1/4 % Senior Subordinated Notes due 2006 and 10 1/4 % Senior Subordinated Notes
due 2006, Series A (included as exhibits to 4.01).(1)
5.01 Opinion of Fulbright & Jaworski L.L.P.
10.01 Registration Rights Agreement, dated as of May 23, 1996, among Integrated Health Services
Inc., Smith Barney Inc., Donaldson, Lufkin and Jenrette Securities Corporation and Citicorp
Securities, Inc.(1)
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges.
<PAGE>
23.01 Consent of KPMG Peat Marwick LLP.
23.02 Consent of Fulbright & Jaworski L.L.P. (included in their opinion filed as Exhibit 5.01).
24.01 Powers of Attorney of certain officers and directors of Integrated Health Services Inc.
(included on the signature page).
25.01 Form T-1, Statement of Eligibility under the Trust Indenture Act of 1939 of Signet Trust
Company.
99.01 Form of Letter of Transmittal and Consent.
99.02 Form of Notice of Guaranteed Delivery.
99.03 Form of Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant
from Beneficial Owner.
</TABLE>
- -----------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended June 30, 1996.
(2) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 30, 1996.
(3) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-77754, effective June 29, 1994.
(4) Incorporated by reference to Company's Registration Statement on Form S-4,
No. 33-94130, effective September 20, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
FULBRIGHT & JAWORSKI
L.L.P.
A REGISTERED LIMITED LIABILITY PARTNERSHIP
666 FIFTH AVENUE
NEW YORK, NEW YORK 10103-3198
HOUSTON
WASHINGTON, D.C.
AUSTIN
SAN ANTONIO
DALLAS
TELEPHONE: 212/318-3000 NEW YORK
FACSIMILE: 212/752-5958 LOS ANGELES
LONDON
HONG KONG
WRITER'S DIRECT DIAL NUMBER:
September 24, 1996
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Dear Sirs:
We refer to the Registration Statement on Form S-4 (the "Registration
Statement") to be filed by Integrated Health Services, Inc. (the "Company") with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, relating to $150,000,000 aggregate principal amount of the Company's 10
1/4% Senior Subordinated Notes due 2006, Series A (the "New Notes") proposed to
be issued under and pursuant to the Indenture, dated as of May 15, 1996, between
the Company and Signet Trust Company, as Trustee (the "Indenture"), in exchange
for the Company's 10 1/4% Senior Subordinated Notes due 2006.
We assume that appropriate action will be taken, prior to the offer and
sale of the New Notes, to register and qualify such New Notes for sale under all
applicable state securities or "blue sky" laws.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the originals
of such latter documents.
Based on the foregoing, we advise you that in our opinion the New Notes
being issued by the Company have been duly and validly authorized for issuance
by the Company, and, when duly executed and authenticated in accordance with the
terms of the Indenture and delivered as contemplated in the Prospectus forming
part of the Registration Statement, the New Notes will be legal, valid and
binding obligations of the Company (subject to bankruptcy, insolvency and other
laws which affect the rights of creditors generally, including the laws of the
State of Delaware relating to compromises, arrangements and reorganizations).
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the
<PAGE>
September 24, 1996
Page 2
Prospectus contained therein. This consent is not to be construed as an
admission that we are a person whose consent is required to be filed with the
Registration Statement under the provisions of the Securities Act of 1933.
Very truly yours,
/s/ Fulbright & Jaworski L.L.P.
<TABLE>
<CAPTION>
INTEGRATED HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, June 30,
1991 1992 1993 1994 1995 Pro forma As Adjusted 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations
before income taxes and extraordinary
item 7,985 19,174 30,790 58,979 (42,259) (35,430) (50,092) 46,285
Fixed charges:
Interest expense (1) 6,645 3,831 10,082 25,374 46,653 37,234 51,896 19,153
Portion of rental expense representative
of interest factor (2) 5,505 6,503 7,719 14,053 22,042 20,823 20,823 10,840
Capitalized interest (535) (860) (1,402) (3,030) (5,155) (5,155) (5,155) (2,193)
Equity earnings of less than fifty percent
owned joint ventures 63 36 (83) (142) (431) (431) (431) (287)
----------- -------- ---------- ----------- --------- ---------- ---------- ---------
Earnings available for fixed charges 19,663 28,684 47,106 95,234 20,850 17,041 17,041 73,798
=========== ======== ========== =========== ========= ========== ========== =========
Fixed charges:
Interest expense (1) 6,645 3,831 10,082 25,374 46,653 37,234 51,896 19,153
Portion of rental expense representative
of interest factor (2) 5,505 6,503 7,719 14,053 22,042 20,823 20,823 10,840
----------- -------- ---------- ----------- --------- ---------- ---------- ---------
Total fixed charges 12,150 10,334 17,801 39,427 68,695 58,057 72,719 29,993
=========== ======== ========== =========== ========= ========== ========== =========
Ratio of earnings to fixed charges 1.62 2.78 2.65 2.42 0.30 0.29 0.23 2.46
=========== ======== ========== =========== ========= ========== ========== =========
</TABLE>
INTEGRATED HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES -(CONTINUED)
June 30,
1996 Pro forma As Adjusted
--------- ---------- -----------
Earnings from continuing operations
before income taxes and extraordinary
item 47,281 44,610 42,239
Fixed charges:
Interest expense (1) 33,689 29,288 31,659
Portion of rental expense representative
of interest factor (2) 11,845 11,175 11,175
Capitalized interest (1,902) (1,902) (1,902)
Equity earnings of less than fifty percent
owned joint ventures (390) (390) (390)
---------- --------- -------------
Earnings available for fixed charges 90,523 82,781 82,781
========== ========= =============
Fixed charges:
Interest expense (1) 33,689 29,288 31,659
Portion of rental expense representative
of interest factor (2) 11,845 11,175 11,175
---------- --------- -------------
Total fixed charges 45,534 40,463 42,834
========== ========= =============
Ratio of earnings to fixed charges 1.99 2.05 1.93
========== ========= =============
(1) Interest expense includes expensed and capitalized interest and
amortization of debt issuance costs
(2) Represents one third of rental expense, the portion deemed to be a
reasonable approximation of the interest factor in rental expense
<PAGE>
<TABLE>
<CAPTION>
INTEGRATED HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
Year Ended December 31, June 30,
1991 1992 1993 1994 1995 Pro forma As Adjusted 1995
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense calculation:
Interest, net 4,126 1,493 5,705 20,602 38,977 29,558 43,757 15,915
Capitalized interest 535 860 1,402 3,030 5,155 5,155 5,155 2,193
Interest income 1,438 1,300 2,669 1,121 1,876 1,876 1,876 835
--------- -------- --------- -------- ------- --------- --------- --------
Interest exp 6,099 3,653 9,776 24,753 46,008 36,589 50,788 18,943
Def. financing amort (a) 546 178 306 621 645 645 1,108 210
--------- -------- --------- -------- ------- --------- --------- --------
Interest exp per above 6,645 3,831 10,082 25,374 46,653 37,234 51,896 19,153
========= ======== ========= ======== ======= ========= ========= ========
</TABLE>
INTEGRATED HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES - (CONTINUED)
June 30,
1996 Pro forma As Adjusted
------- ---------- ------------
Interest expense calculation:
Interest, net 30,102 25,701 27,880
Capitalized interest 1,902 1,902 1,902
Interest income 1,045 1,045 1,045
------- -------- ---------
Interest exp 33,049 28,648 30,827
Def. financing amort (a) 640 640 833
------- -------- ---------
Interest exp per above 33,689 29,288 31,660
======= ======== =========
Note: amortization expense on the fees related to the convertible debentures is
included in the interest, net number
(a) Amortization of line of credit and senior notes fees.
EXHIBIT 23.01
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors and Stockholders
Integrated Health Services, Inc.
We consent to the use of our reports included herein and to the reference to our
firm under the heading "Experts" in the prospectus.
Our report dated March 22, 1996 refers to the adoption of Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed Of".
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
September 24, 1996
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------
FORM T-1
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF A
CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an Application to Determine Eligibility of
a Trustee Pursuant to Section 305(b)(2): |_|
------------
SIGNET TRUST COMPANY
(Exact name of trustee as specified in its charter)
VIRGINIA
(Jurisdiction of incorporation or organization
if not a U.S. national bank)
54-0974225
(I.R.S. employer identification no.)
7 NORTH 8TH STREET,
RICHMOND, VIRGINIA 23219
(Address of trustee's
principal executive offices) (Zip code)
SIGNET TRUST COMPANY
7 NORTH 8TH STREET
RICHMOND, VIRGINIA 23219
(Name, address and telephone number of agent for service)
------------
INTEGRATED HEALTH SERVICES, INC.
(Exact name of obligor as specified in its charter)
DELAWARE 23-2428312
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10065 RED RUN BOULEVARD
OWINGS MILLS, MARYLAND 21117
(Address of principal executive offices) (Zip code)
10 1/4% SENIOR SUBORDINATED NOTES DUE 2006, SERIES A
(Title of the indenture securities)
<PAGE>
ITEM 1. GENERAL INFORMATION.
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to
which it is subject.
Commissioner of Financial Institutions, State
Corporation Commission of Virginia, 1300 East Main
Street, Richmond, Virginia 23219.
Board of Governors of the Federal Reserve System,
Twentieth Street and Constitution Avenue, N.W.,
Washington, D.C. 20551.
(b) Whether it is authorized to exercise corporate trust powers.
Yes.
ITEM 2. AFFILIATIONS WITH OBLIGOR.
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None.
ITEMS 3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 AND 15 HAVE BEEN OMITTED PURSUANT
TO GENERAL INSTRUCTION B.
ITEM 16. LIST OF EXHIBITS.
List below all exhibits filed as part of this statement of eligibility.
1. A copy of the articles of association of the trustee as now in
effect.*
2. A copy of the certificate of authority of the trustee to
commence business.*
3. A copy of the authorization of the trustee to exercise
corporate trust powers.*
4. A copy of the existing bylaws of the trustee.*
5. Not applicable.
6. Consent of the trustee required by Section 321(b) of the Trust
Indenture Act of 1939.
7. A copy of the latest report of condition of the trustee
published pursuant to law or the requirements of its
supervising or examining authority.
* Incorporated by reference to the Form T-1 filed in connection with
Registration Statement No. 33-76322.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, the
trustee, Signet Trust Company, a banking association incorporated and existing
under the laws of the Commonwealth of Virginia, has duly caused this statement
of eligibility and qualification to be signed on its behalf by the undersigned,
thereunto duly authorized all in the City of Baltimore, and State of Maryland on
the 21st day of August, 1996.
SIGNET TRUST COMPANY
By: /s/ Diane E. TenHoopen
------------------------
Name: Diane E. TenHoopen
Title: Vice President
<PAGE>
EXHIBIT 6
CONSENT OF TRUSTEE
Pursuant to the requirements of Section 321(b) of the Trust Indenture Act of
1939 in connection with the 10 1/4% SENIOR SUBORDINATED NOTES DUE 2006, SERIES A
of INTEGRATED HEALTH SERVICES, INC., we hereby consent that reports of
examinations of federal, state, territorial or district authorities may be
furnished by such authorities to the Securities and Exchange Commission upon
request therefor.
SIGNET TRUST COMPANY
By: /s/ Diane E. TenHoopen
--------------------------
Name: Diane E. TenHoopen
Title: Vice President
Dated: August 21, 1996
<PAGE>
EXHIBIT 7
Board of Governors of the Federal Reserve System
OMB Number: 7100-0036
Federal Deposit Insurance Corporation
OMB Number: 3064-0052
Office of the Comptroller of the Currency
OMB Number: 1557-0081
Expires March 31, 1999
Federal Financial Institutions Examination Council
- --------------------------------------------------------------------------------
[1]
Please refer to page i,
Table of Contents, for
the required disclosure
of estimated burden.
- --------------------------------------------------------------------------------
Consolidated Reports of Condition and Income for
A Bank With Domestic Offices Only and
Total Assets of Less Than $100 Million - FFIEC 034
(960630)
--------
Report at the close of business (RCRI9999)
June 30, 1996
This report is required by law: 12 This report form is to be filed by banks
U.S.C. Section 324 (State member with domestic offices only. Banks with
banks); and 12 U.S.C. Section branches and consolidated subsidiaries
Section 1817 (State nonmember in U.S. territories and possessions,
banks); and 12 U.S.C. Section 161 Edge or Agreement subsidiaries, foreign
(National banks). branches, consolidated foreign
subsidiaries, or International Banking
Facilities must file FFIEC 031.
- --------------------------------------------------------------------------------
Note: The Reports of Condition and The Reports of Condition and Income are
Income must be signed by an to be prepared in accordance with Federal
authorized officer and the Report regulatory authority instructions. NOTE:
of Condition must be attested to These instructions may in some cases
by not less than two directors differ from generally accepted accounting
(trustees) for State nonmember principles.
banks and three directors for
State member and National Banks. We, the undersigned directors (trustees,
attest to the correctness of this Report
I, Raymond E. Williams, S.V.P. of Condition (including the supporting
- ---------------------------------- schedules) and declare that it has been
Name and Title of Officer Authorized examined by us and to the best of our
to Sign Report knowledge and belief has been prepared in
conformance with the instructions issued
by the appropriate Federal regulatory
authority and is true and correct.
of the named bank do hereby declare -----------------------------------------
that these Reports of Condition and /s/Christopher Oddleifson
Income (including the supporting -----------------------------------------
schedules) have been prepared in Director (Trustee) Christopher Oddleifson
conformance with the instructions
issued by the appropriate Federal /s/T. Gaylon Layfield, III
regulatory authority and are true to -------------------------------------------
the best of my knowledge and belief. Director (Trustee) T. Gaylon Layfield, III
/s/Raymond E. Williams /s/John F. Vogel
- ----------------------------------- -------------------------------------------
Signature of Officer Authorized Director (Trustee) John F. Vogel
to Sign Report
- -----------------------------------
Date of Signature
- --------------------------------------------------------------------------------
For Banks Submitting Hard Copy Report
Forms:
State Member Banks: Return the National Banks: Return the original only
original and one copy to the in the special return address envelope
appropriate Federal Reserve provided. If express mail is used in lieu
District Bank. of the special return address envelope,
return the original only to the FDIC, c/o
State Nonmember Banks: Return the Quality Data Systems, 2127 Espey Court,
original only in the special return Suite 204, Crofton, MD 21114.
address envelope provided. If
express mail is used in lieu of the
special return address envelope,
return the original only to the
FDIC, c/o Quality Data Systems,
2127 Espey Court, Suite 204,
Crofton, MD 21114.
- --------------------------------------------------------------------------------
<PAGE>
[ ]
FDIC Certificate Number [][][][][] Banks should affix the address label in
(RCRI 9050) this space.
Signet Trust Company
-----------------------------------------
Legal Title of Bank (Text 9010)
Richmond
-----------------------------------------
City (Text 9130)
Virginia 23219
-----------------------------------------
State Abbrev.(Text 9200)Zip Code(Text 9220)
Board of Governors of the Federal Reserve System, Federal Deposit Insurance
Corporation, Office of the Comptroller of the Currency
<PAGE>
FFIEC 034
Page i
[2]
<TABLE>
<CAPTION>
Consolidated Reports of Condition and Income for
A Bank With Domestic Offices Only and Total Assets Less Than $100 Million
- --------------------------------------------------------------------------------
Table of Contents
<S> <C> <C> <C>
Signature Page Cover Report of Condition
Report of Income Schedule RC--Balance Sheet.......................RC-1,2
Schedule RI--Income Statement....RI-1,2,3 Schedule RC-B--Securities........................RC-3,4
Schedule RI-A--Changes in Equity Schedule RC-C--Loans and Lease Financing
Capital...........................RI-3 Receivables:
Part I. Loans and Leases.......................RC-5,6
Schedule RI-B--Charge-offs and Recoveries Part II. Loans to Small Businesses and
and Changes in Allowance for Loan and Small Farms (included in the forms for
Lease Losses....................RI-4,5 June 30 only).............................RC-6a,6b
Schedule RI-C--Applicable Income Taxes Schedule RC-E--Deposit Liabilities...............RC-7,8
by Taxing Authority...............RI-5
Schedule RC-F--Other Assets........................RC-9
Schedule RI-E--Explanations........RI-5,6
Schedule RC-G--Other Liabilities...................RC-9
Schedule RC-K--Quarterly Averages.................RC-10
Disclosure of Estimated Burden
Schedule RC-L--Off-Balance Sheet Items.........RC-11,12
The estimated average burden associated
with this information collection is 32.2 Schedule RC-M--Memoranda.......................RC-13,14
hours per respondent and is estimated to
vary from 15 to 230 hours per response, Schedule RC-N--Past Due and Nonaccrual
depending on individual circumstances. Loans, Leases, and Other Assets.................RC-15
Burden estimates include the time for
reviewing instructions, gathering and
maintaining data in the required form, and Schedule RC-O--Other Data for Deposit
completing the information collection, but Insurance Assessments........................RC-16,17
exclude the time for compiling and
maintaining business records
in the normal course of a respondent's Scheduled RC-R--Regulatory Capital.............RC-18,19
activities. Comments concerning the accu-
racy of this burden estimate and suggestions Optional Narrative Statement Concerning
for reducing this burden should be directed the Amounts Reported in the Reports
to the Office of Information and Regulatory of Condition and Income.........................RC-20
Affairs, Office of Management and Budget,
Washington, D.C. 20503, and to one of the Special Report (to be completed by all banks)
following:
Schedule RC-J--Repricing Opportunities (sent only to
Secretary and to be completed only by savings banks)
Board of Governors of the Federal Reserve System
Washington, D.C. 20551
Legislative and Regulatory Analysis Division
Office of the Comptroller of the Currency
Washington, D.C. 20219
Assistant Executive Secretary
Federal Deposit Insurance Corporation
Washington, D.C. 20429
</TABLE>
For information or assistance, national and state nonmember banks should contact
the FDIC's Call Reports Analysis Unit, 550 17th Street, NW, Washington, D.C.
20429, toll free on (800)688-FDIC (3342), Monday through Friday between 8:00
a.m. and 5:00 p.m., Eastern time. State member banks should contact their
Federal Reserve District Bank.
<PAGE>
FFIEC 034
Page RI-1
[3]
[ Affix the address label in this space ]
Signet Trust Company
- ----------------------------------------------------
Legal Title of Bank
Richmond
- ----------------------------------------------------
City
Virginia 23219
- ----------------------------------------------------
State Zip Code
[ ]
FDIC Certificate Number [][][][][]
Consolidated Report of Income
for the period January 1, 1996-June 30, 1996
All Report of Income schedules are to be reported on a calendar year-to-date
basis in thousands of dollars.
Schedule RI--Income Statement
<TABLE>
<CAPTION>
[ I180 ]
Dollar Amounts in Thousands [Mil] [Thou]
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Interest income:
a. Interest and fee income on loans(1,2):
(1) Total loans (to be completed only by those banks with less than $25 million in RIAD
total assets)....................................................................4010 NO NE 1.a.(1)
The following four items are to be completed only by those banks with $25 million
or more in total assets(1,2): RIAD
(2) Real estate loans................................................................4246 NO NE 1.a.(2)
RIAD
(3) Installment loans................................................................4247 NO NE 1.a.(3)
RIAD
(4) Credit cards and related plans...................................................4248 NO NE 1.a.(4)
RIAD
(5) Commercial (time and demand) and all other loans.................................4249 NO NE 1.a.(5)
RIAD
b. Income from lease financing receivables...............................................4065 NO NE 1.b.
RIAD
c. Interest income on balances due from depository institutions(3).......................4115 NO NE 1.c.
d. Interest and dividend income on securities:
(1) Securities issued by states and political subdivisions in the U.S.: RIAD
(a) Taxable securities............................................................4506 NO NE 1.d.(1)(a)
RIAD
(b) Tax-exempt securities.........................................................4507 NO NE 1.d.(1)(b)
RIAD
(2) U.S. Government and other debt securities.........................................3660 NO NE 1.d.(2)
RIAD
(3) Equity securities (including investments in mutual funds).........................3659 1 1.d.(3)
RIAD
e. Interest income from trading assets...................................................4069 NO NE 1.e
f. Interest income on federal funds sold(4) and securities purchased under agreements RIAD
to resell.............................................................................4020 NO NE 1.f.
RIAD
g. Total interest income (sum of items 1.a through 1.f)..................................4107 1 1.g.
- ----------
<FN>
1. See instructions for loan classifications used in this schedule.
2. The $25 million asset size test is generally based on the total assets reported on the June 30, 1995 Report of
Condition.
3. Includes interest income on time certificates of deposit not held for trading.
4. Report interest income on "term federal funds sold" in Schedule RI, item 1.a, "Interest and fee income on loans."
</FN>
</TABLE>
<PAGE>
FFIEC 034
Page RI-2
[4]
Schedule RI--Continued
<TABLE>
<CAPTION>
[ Year-to-date]
Dollar Amounts in Thousands [Mil] [Thou]
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
2. Interest expense:
(a) Interest on deposits:
(1) Transaction accounts (NOW accounts, ATS accounts, and telephone RIAD
and preauthorized transfer accounts)........................................ 4508 NO NE 2.a.(1)
(2) Nontransaction accounts: RIAD
(a) Money market deposit accounts (MMDAs)................................... 4509 NO NE 2.a.(2)(a)
RIAD
(b) Other savings deposits.................................................. 4511 NO NE 2.a.(2)(b)
RIAD
(c) Time certificates of deposit of $100,000 or more........................ 4174 NO NE 2.a.(2)(c)
RIAD
(d) All other time deposits(1).............................................. 4512 NO NE 2.a.(2)(d)
b. Expense of federal funds purchased(2) and securities sold under agreements RIAD
to repurchase.................................................................. 4180 NO NE 2.b.
c. Interest on demand notes issued to the U.S. Treasury, trading liabilities, RIAD
and other borrowed money....................................................... 4185 NO NE 2.c.
RIAD
d. Interest on mortgage indebtedness and obligations under capitalized leases..... 4072 NO NE 2.d.
RIAD
e. Interest on subordinated notes and debentures.................................. 4200 NO NE 2.e.
RIAD
f. Total interest expense (sum of items 2.a through 2.e).......................... 4073 NO NE 2.f.
3. Net interest income (item 1.g minus 2.f)............................................ RIAD
4074 1 3.
4. Provisions: RIAD
a. Provision for loan and lease losses.............................................. 4230 NO NE 4.a.
b. Provision for allocated transfer risk............................................ RIAD
4243 NO NE 4.b.
5. Noninterest income:
RIAD
a. Service charges on deposit accounts............................................ 4080 NO NE 5.a.
b. Other noninterest income: RIAD
(1) Other fee income............................................................ 5407 8 816 5.b.(1)
RIAD
(2) All other noninterest income*............................................... 5408 286 5.b.(2)
RIAD
c. Total noninterest income (sum of items 5.a and 5.b).............................. 4079 9 102 5.c.
RIAD
6. a. Realized gains (losses) on held-to-maturity securities........................... 3521 NO NE 6.a.
RIAD
b. Realized gains (losses) on available-for-sale securities......................... 3196 NO NE 6.b.
7. Noninterest expense: RIAD
a. Salaries and employee benefits................................................... 4135 4 518 7.a.
b. Expenses of premises and fixed assets (net of rental income) RIAD
(excluding salaries and employee benefits and mortgage interest)................. 4217 1 179 7.b.
RIAD
c. Other noninterest expense*....................................................... 4092 1 738 7.c.
RIAD
d. Total noninterest expense (sum of items 7.a through 7.c)......................... 4093 7 435 7.d.
8. Income (loss) before income taxes and extraordinary items and other adjustments RIAD
(item 3 plus or minus items 4.a, 4.b, 5.c, 6.a, 6.b, and 7.d)....................... 4301 1 668 8.
RIAD
9. Applicable income taxes (on item 8)................................................. 4302 608 9.
RIAD
10. Income (loss) before extraordinary items and other adjustments (item 8 minus 9)..... 4300 1 060 10.
11. Extraordinary items and other adjustments: RIAD
a. Extraordinary items and other adjustments, gross of income taxes*................ 4310 NO NE 11.a
RIAD
b. Applicable income taxes (on item 11.a)*.......................................... 4315 NO NE 11.b.
c. Extraordinary items and other adjustments, net of income taxes RIAD
(item 11.a minus 11.b)........................................................... 4320 NO NE 11.a
RIAD
12. Net income (loss) (sum of items 10 and 11.c)........................................ 4340 1 060 12
- ----------
<FN>
1. Includes interest expense on open-account time deposits of $100,000 or more.
2. Report the expense of "term federal funds purchased" in schedule RI, item 2.c,
"Interest on demand notes issued to the U.S. Treasury, trading liabilities, and other borrowed money."
* Describe on Schedule RI-E-- Explanations.
</FN>
</TABLE>
<PAGE>
FFIEC 034
Page RI-3
[5]
[ Affix the address label in this space. ]
Signet Trust Company
- ---------------------------------------------------
Legal Title of Bank
[ ]
FDIC Certificate Number [][][][][]
Schedule RI--Continued
Memoranda
<TABLE>
<CAPTION>
[ 1181 ]
[ Year-to-date ]
Dollar amounts in Thousands [Mil Thou]
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Interest expense incurred to carry tax-exempt securities, loans, and leases
acquired after August 7, 1986, that is not deductible for federal income tax RIAD
purposes.................................................................... 4513 NO NE M.1.
2. Income from the sale and servicing of mutual funds and annuities (included RIAD
in Schedule RI, item 8)..................................................... 8431 NO NE M.2.
3. Estimated income on tax-exempt loans and leases to states and political
subdivisions in the U.S. (reportable in Schedule RC-C, part I, items 7 and
9) included in Schedule RI, items 1.a and 1.b, above (excludes income on RIAD
tax-exempt securities)...................................................... 4313 NO NE M.3.
4. Number of full-time equivalent employees on payroll at end of current period RIAD Number
(round to nearest whole number)............................................. 4150 164 M.4.
5. Cash dividends declared during the calendar year to date RIAD [Mil Thou]
(to be reported only with March, June, and September Reports of Income)..... 4475 NO NE M.5.
6. To be completed by banks with $25 million or more in total assets and with
loans to finance agricultural production and other loans to farmers
(Schedule RC-C, part I, item 3) exceeding five percent of total loans(2) RIAD
Interest and fee income on agricultural loans(1) (included in item 1.a above) 4251 NO NE M.6.
7. If the reporting bank has restated its balance sheet as a result of MM DD YY
applying push down accounting this calendar year, report the date RIAD
of the bank's acquisition...............................................9106 N/A M.7.
- ----------
<FN>
1. See instructions for loan classifications used in this schedule.
2. The $25 million asset size test and the five percent of total loans test are generally based on the total
assets reported on the June 30, 1995 Report of Condition.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Schedule RI-A--Changes in Equity Capital
Schedule RI-A is to be reported with the December Report of Income.
Indicate decreases and losses in parentheses.
[ 1183 ]
[ Year-to-date ]
Dollar Amounts in Thousands [Mil Thou]
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1. Total equity capital originally reported in the December 31, 1995, Reports RIAD
of Condition and Income..................................................... 3215 10 727 1.
RIAD
2. Equity capital adjustments from amended Reports of Income, net*............. 3216 NO NE 2.
RIAD
3. Amended balance end of previous calendar year (sum of items 1 and 2)........ 3217 10 727 3.
RIAD
4. Net income (loss) (must equal Schedule RI, item 12)......................... 4340 1 060 4.
RIAD
5. Sale, conversion, acquisition, or retirement of capital stock, net.......... 4346 NO NE 5.
RIAD
6. Changes incident to business combinations, net.............................. 4356 NO NE 6.
RIAD
7. LESS: Cash dividends declared on preferred stock............................ 4470 NO NE 7.
RIAD
8. LESS: Cash dividends declared on common stock............................... 4460 NO NE 8.
<PAGE>
9. Cumulative effect of changes in accounting principles from prior years* RIAD
(see instructions for this schedule)........................................ 4411 NO NE 9.
10. Corrections of material accounting errors from prior years* (see RIAD
instructions for this schedule)............................................. 4412 NO NE 10.
11. Change in net unrealized holding gains (losses) on available-for-sale RIAD
securities.................................................................. 8433 NO NE 11.
12. Other transactions with parent holding company* (not included in items 5, RIAD
7, or 8 above).............................................................. 4415 NO NE 12.
13. Total equity capital end of current period (sum of items 3 through 12) (must RIAD
equal Schedule RC, item 28.a)............................................... 3210 11 787 13.
- ----------
*Describe on Schedule RI-E--Explanations.
</TABLE>
<PAGE>
FFIEC 034
Page RI-4
[6]
Schedule RI-B--Charge-offs and Recoveries and Changes in Allowance
for Loan and Lease Losses
Part I. Charge-offs and Recoveries on Loans and Leases (1)
<TABLE>
<CAPTION>
[ I186 ]
(Column A) (Column B)
Charge-offs Recoveries
----------- ----------
Calendar year-to-date
---------------------
<S> <C> <C> <C> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
1. Real estate loans........................................................... RIAD NO NE RIAD NO NE 1.
4256 4257
2. Installment loans........................................................... RIAD NO NE RIAD NO NE 2.
4258 4259
3. Credit cards and related plans ............................................. RIAD NO NE RIAD NO NE 3.
4262 4263
4. Commercial (time and demand) and all other loans ........................... RIAD NO NE RIAD NO NE 4.
4264 4265
5. Lease financing receivables ................................................ RIAD NO NE RIAD NO NE 5.
4266 4267
6. Total (sum of items 1 through 5) ........................................... RIAD NO NE RIAD NO NE 6.
4635 4605
</TABLE>
<TABLE>
<CAPTION>
Memoranda
Dollar Amounts in Thousands Mil Thou Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. To be completed by banks with loans to finance agricultural production and
other loans to farmers (Schedule RC-C, part I, item 3) exceeding five percent
of total loans.
Agricultural loans included in part I, items 1 through 4, above ............ RIAD N/A RIAD N/A M.1.
4268 4269
2.-3. Not applicable
4. Loans to finance commercial real estate, construction, and land development
activities (not secured by real estate) included in Schedule RI-B, part I,
items 2 through 4, above ................................................... RIAD N/A RIAD N/A M.4.
5. Real estate loans (sum of Memorandum items 5.a through 5.e must equal 5443 5444
Schedule RI-B, part I, item 1, above):
a. Construction and land development ....................................... RIAD N/A RIAD N/A M.5.a.
5445 5446
b. Secured by farmland ..................................................... RIAD N/A RIAD N/A M.5.b.
c. Secured by 1-4 family residential properties: 5447 5448
(1) Revolving, open-end loans secured by 1-4 family residential
properties and extended under lines of credit .................... RIAD N/A RIAD N/A M.5.c.(1)
5449 5450
(2) All other loans secured by 1-4 family residential properties ..... RIAD N/A RIAD N/A M.5.c.(2)
5451 5452
d. Secured by multifamily (5 or more) residential properties ............... RIAD N/A RIAD N/A M.5.d.
5453 5454
e. Secured by nonfarm nonresidential properties ............................ RIAD N/A RIAD N/A M.5.e.
5455 5456
- ----------
(1) See instructions for loan classifications used in this schedule.
</TABLE>
<PAGE>
FFIEC 034
Page RI-5
[7]
Signet Trust Company
- --------------------------------------------
Legal Title of Bank
FDIC Certificate Number [][][][][]
Schedule RI-B--Continued
Part II. Changes in Allowance for Loan and Lease Losses
Part II is to be reported with the December Report of Income.
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Mil Thou
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Balance originally reported in the December 31, 1995, Reports of Condition
and Income ................................................................. RIAD NO NE 1.
3124
2. Recoveries (must equal part I, item 6, Column B above) ..................... RIAD NO NE 2.
4605
3. LESS: Charge-offs (must equal part I, item 6, Column A above) .............. RIAD NO NE 3.
4635
4. Provision for loan and lease losses (must equal Schedule RI, item 4.a) ..... RIAD NO NE 4.
4230
5. Adjustments* (see instructions for this schedule) .......................... RIAD NO NE 5.
6. Balance end of current period (sum of items 1 through 5) (must equal 4815
Schedule RC, item 4.b) ..................................................... RIAD NO NE 6.
3123
- ----------
* Describe on Schedule RI-E--Explanations
Schedule RI-C--Applicable Income Taxes by Taxing Authority
</TABLE>
Schedule RI-C is to be reported with the December Report of Income.
<TABLE>
<CAPTION>
[1189]
Dollar Amounts in Thousands Mil Thou
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Federal .................................................................... RIAD N/A 1.
4780
2. State and local ............................................................ RIAD N/A 2.
4790
3. Total (sum of items 1 and 2)(must equal sum of Schedule RI, items 9 and
11.b) ...................................................................... RIAD N/A 3.
4770
4. Deferred portion of item 3 ............................. RIAD N/A 4.
4772
</TABLE>
Schedule RI-E--Explanations
Schedule RI-E is to be completed each quarter on a calendar year-to-date basis.
Detail all adjustments in Schedule RI-A and RI-B, all extraordinary items and
other adjustments in Schedule RI, and all significant items of other noninterest
income and other noninterest expense in Schedule RI. (See instructions for
details.)
<PAGE>
<TABLE>
<CAPTION>
[I195]
Year-to-date
Dollar Amounts in Thousands Mil Thou
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. All other noninterest income (from Schedule RI, item 5.b.(2))
Report amounts that exceed 10% if Schedule RI, item 5.b.(2):
a. Net gains on other real estate owned .................................... RIAD NO NE 1.a.
5415
b. Net gains on sales of loans ............................................. RIAD NO NE 1.b.
5416
c. Net gains on sales of premises and fixed assets ......................... RIAD NO NE 1.c.
5417
Itemize and describe the three largest other amounts that exceed 10%
of Schedule RI, item 5.b.(2):
d. [Text] Mutual Fund 12B-1 Fees RIAD 89 1.d.
4461 4531
e. [Text.................................................................... RIAD 1.e.
4462 4462
f. [Text]................................................................... RIAD 1.f.
4463 4463
2. Other noninterest expense (from Schedule RI, item 7.c):
a. Amortization expense of intangible assets ............................... RIAD NO NE 2.a.
4531
Report amounts that exceed 10% of Schedule RI, item 7.c:
b. Net losses on other real estate owned ................................... RIAD NO NE 2.b.
5418
c. Net losses on sales of loans ............................................ RIAD NO NE 2.c.
5419
d. Net losses on sales of premises and fixed assets ........................ RIAD NO NE 2.d.
5420
Itemize and describe the three largest other amounts that exceed 10% of
Schedule RI, item 7.c:
e. [Text]................................................................... RIAD NO NE 2.e.
4464 4464
f. [Text]................................................................... RIAD NO NE 2.f.
4467 4467
g. [Text]................................................................... RIAD NO NE 2.g.
4468 4468
</TABLE>
<PAGE>
FFIEC 034
Page RI-6
[8]
Schedule RI-E--Continued
<TABLE>
<CAPTION>
Tear-to-date
Dollar Amounts in Thousands Mil Thou
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3. Extraordinary items and other adjustments (from Schedule RI, item 11.a) and
applicable income tax effect (from Schedule RI, item 11.b) (itemize and
describe all extraordinary items and other adjustments):
a.(1) [Text]_________________________________________________________________RIAD NO NE 3.a.(1)
4469 4469
(2) Applicable income tax effect RIAD [___] [__] 3.a.(2)
4486
b.(1) [Text]_________________________________________________________________RIAD NO NE 3.b.(1)
4487 4487
(2) Applicable income tax effect RIAD [___] [__] 3.b.(2)
4488
c.(1) [Text]_________________________________________________________________RIAD NO NE 3.c.(1)
4489 4489
(2) Applicable income tax effect RIAD [___] [__] 3.c.(2)
4491
4. Equity capital adjustments from amended Reports of Income (from Schedule
RI-A, item 2) (itemize and describe all adjustments):
a. [Text]___________________________________________________________________ RIAD NO NE 4.a.
4492 4492
b. [Text]___________________________________________________________________ RIAD NO NE 4.b.
4493 4493
5. Cummulative effect of changes in accounting principles from prior years
(from Schedule RI-A, item 9)(itemize and describe all changes in accounting
principles):
a. [Text]___________________________________________________________________ RIAD NO NE 5.a.
4494 4494
b. [Text]___________________________________________________________________ RIAD NO NE 5.b.
4495 4495
6. Corrections of material accounting errors from prior years (from Schedule
RI-A, item 10)(itemize and describe all corrections):
a. [Text]___________________________________________________________________ RIAD NO NE 6.a.
4496 4496
b. [Text]___________________________________________________________________ RIAD NO NE 6.b.
4496 4497
7. Other transactions with parent holding company (from Schedule RI-A, item 12)
(itemize and describe all such transactions):
a. [Text]___________________________________________________________________ RIAD NO NE 7.a.
4497 4498
b. [Text]___________________________________________________________________ RIAD NO NE 7.b.
4498 4499
8. Adjustments to allowance for loan and lease losses (from Schedule RI-B, part
II, item 5) (itemize and describe all adjustments):
a. [Text]___________________________________________________________________ RIAD NO NE 8.a.
4499 4521
b. [Text]___________________________________________________________________ RIAD NO NE 8.b.
4521 4522
9. Other explanations (the space below is provided for the bank to briefly [I198] [I199]
describe, at its option, any other significant items affecting the Report
of Income):
No comment [ ] RIAD 4769
4522
Other explanations (please type or print clearly):
(Text 4769)
</TABLE>
<PAGE>
[ Affix the address label in this space. ] FFIEC 034
Page RC-1
[9]
Signet Trust Company
- -----------------------------------------------------
Legal Title of Bank
Richmond
- -----------------------------------------------------
City
Virginia 23219
- -----------------------------------------------------
State Zip Code
[ ]
FDIC Certificate Number [][][][][]
Consolidated Report of Condition for Insured Commercial
and State-Chartered Savings Banks for June 30, 1996
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of
the quarter.
Schedule RC--Balance Sheet
<TABLE>
<CAPTION>
C100
----
Dollar Amounts in Thousands Mil Thou
- --------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C> <C> <C>
1. Cash and balances due from depository institutions:
a. Noninterest-bearing balances and currency and coin(1,2)..................RCON 6 905 1.a.
0081
b. Interest-bearing balances(2).............................................RCON NO NE 1.b.
0071
2. Securities:
a. Held-to-maturity securities (from Schedule RC-B, column A)...............RCON NO NE 2.a.
1754
b. Available-for-sale securities (from Schedule RC-B, column D).............RCON 45 2.b.
1773
3. Federal funds sold and securities purchased under agreements to resell:
a. Federal funds sold(4)....................................................RCON NO NE 3.a.
0276
b. Securities purchased under agreements to resell(5).......................RCON NO NE 3.b.
0277
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from
Schedule RC-C)............................................RCON NO NE 4.a.
2122
b. LESS: Allowance for loan and lease losses.................RCON NO NE 4.b.
3123
c. LESS: Allocated transfer risk reserve.....................RCON NO NE 4.c.
3128
d. Loans and leases, net of unearned income, allowance, and
reserve (item 4.a minus 4.b and 4.c).....................................RCON NO NE 4.d.
2125
5. Trading assets..............................................................RCON NO NE 5.
3545
6. Premises and fixed assets (including capitalized leases)....................RCON 2 542 6.
2145
7. Other real estate owned (from Schedule RC-M)................................RCON NO NE 7.
2150
8. Investments in unconsolidated subsidiaries and associated companies
(from Schedule RC-M)........................................................RCON NO NE 8.
2130
9. Customers' liability to this bank on acceptances outstanding................RCON NO NE 9.
2155
10. Intangible assets (from Schedule RC-M)......................................RCON NO NE 10.
2143
11. Other assets (from Schedule RC-F)...........................................RCON 3 639 11.
2160
12. a. Total assets (sum of items 1 through 11).................................RCON 13 131 12.a.
2170
b. Losses deferred pursuant to 12 U.S.C. 1823(j)............................RCON NO NE 12.b.
0306
c. Total assets and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 12.a and 12.b).............................................RCON 13 131 12.c.
0307
<PAGE>
- ----------
<FN>
1. Includes cash items in process of collection and unposted debits.
2. The amount reported in this item must be greater than or equal to the sum of Schedule RC-M, items 3.a and 3.b.
3. Includes time certificates of deposit not held for trading.
4. Report "term federal funds sold" in Schedule RC, item 4.a, "Loans and leases, net of unearned income," and in Schedule RC-C,
part I.
5. Report securities purchased under agreements to resell that involve the receipt of immediately available funds and mature in one
business day or roll over under a continuing contract in Schedule RC, item 3.a. "Federal funds sold."
</FN>
</TABLE>
<PAGE>
FFIEC 034
Page RC-2
[10]
<TABLE>
<CAPTION>
Schedule RC--Continued
Dollar Amounts in Thousands Mil Thou
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
LIABILITIES
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E) RCON NO NE 13.a.
` 2200
(1) Noninterest-bearing(1)............................RCON NO NE 13.a.(1)
6631
(2) Interest-bearing..................................RCON NO NE 13.a.(2)
6636
b. In foreign offices, Edge and Agreement subsidiaries, and IBFs............
(1) Noninterest-bearing..................................................
(2) Interest-bearing.....................................................
14. Federal funds purchased and securities sold under agreements to repurchase:
a. Federal funds purchased(2)............................................... RCON NO NE 14.a.
0278
b. Securities sold under agreements to repurchase(3)........................ RCON NO NE 14.b.
0279
15. a. Demand notes issued to the U.S. Treasury................................. RCON NO NE 15.a.
2840
b. Trading liabilities...................................................... RCON NO NE 15.b.
3548
16. Other borrowed money:
a. With a remaining maturity of one year or less............................ RCON NO NE 16.a.
2332
b. With a remaining maturity of more than on year........................... RCON NO NE 16.b.
2333
17. Mortgage indebtedness and obligations under capitalized leases.............. RCON NO NE 17.
2910
18. Bank's liability on acceptances executed and outstanding.................... RCON NO NE 18.
2920
19. Subordinated notes and debentures........................................... RCON NO NE 19.
3200
20. Other liabilities (from Schedule RC-G)...................................... RCON 1 344 20.
2930
21. Total liabilities (sum of items 13 through 20).............................. RCON 1 344 21.
2948
22. Limited-life preferred stock and related surplus............................ RCON NO NE 22.
3282
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus............................... RCON NO NE 23.
3838
24. Common stock................................................................ RCON 1 200 24.
3230
25. Surplus (exclude all surplus related to preferred stock).................... RCON 300 25.
3839
26. a. Undivided profits and capital reserves................................... RCON 10 287 26.a.
3632
b. Net unrealized holding gains (losses) on available-for-sale securites.... RCON NO NE 26.b.
8434
27. Cumulative foreign currency translation adjustments.........................
28. a. Total equity capital (sum of items 23 through 27)........................ RCON 11 787 28.a.
3210
b. Losses deferred pursuant to 12 U.S.C. 1823(j)............................ RCON NO 287 28.b.
0306
c. Total equity capital and losses deferred pursuant to 12 U.S.C. 1823(j)
(sum of items 28.a and 28.b)............................................. RCON 11 787 28.c.
3559
29. Total liabilities, limited-life preferred stock, equity capital, and losses
deferred pursuant to 12 U.S.C. 1823(j) (sum of items 21, 22, and 28.c)..... RCON 13 131 29.
Memorandum 2257
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best
describes the most comprehensive level of auditing work performed for the Number
bank by independent external auditors as of any data during 1995............ RCON M.1.
<PAGE>
6724
1. = Independent audit of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm which
submits a report on the bank
2. = Independent audit of the bank's parent holding company conducted in
accordance with generally accepted auditing standards by a certified public
accounting firm which submits a report on the consolidated holding company
(but not on the bank separately)
3. = Directors' examination of the bank conducted in accordance with generally
accepted auditing standards by a certified public accounting firm (may be
required by state chartering authority)
4. = Directors' examination of the bank performed by other external auditors
(may be required by state chartering authority)
5. = Review of the bank's financial statements by external auditors
6. = Compilation of the bank's financial statements by external auditors
7. = Other audit procedures (excluding tax preparation work)
8. = No external audit work
- --------------
<FN>
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Report "term federal funds purchased" in Schedule RC, item 16, "Other
borrowed money."
(3) Report securities sold under agreements to repurchase that involve the
receipt of immediately available funds and mature in one business day or
roll over under a continuing contract in Schedule RC, item 14.a, "Federal
funds purchased."
</FN>
</TABLE>
<PAGE>
FFIEC 034
Page RC-3
[11]
Schedule RC-B--Securities
Exclude assets held for trading.
<TABLE>
<CAPTION>
C110
--------------------------------------------------------------------
Held-to-maturity Available-for-sale
--------------------------------------------------------------------
(Column A) (Column B) (Column C) (Column D)
Amortized Cost Fair Value Amortized Cost Fair Value(1)
--------------------------------------------------------------------
Dollar Amounts in Thousands Mil Thou Mil Thou Mil Thou Mil Thou
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
obligations (exclude mortgage-backed securities):
a. Issued by U.S. Government agencies(2)...........RCON NO NE RCON NO NE RCON NO NE RCON NO NE 2.a.
b. Issued by U.S. Government-sponsored 1289 1290 1291 1293
agencies(3).....................................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 2.b.
3. Securities issued by states and political 1294 1295 1297 1298
subdivisions in the U.S.:
a. General obligations.............................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 3.a.
1676 1677 1678 1679
b. Revenue obligations.............................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 3.b.
1681 1686 1690 1691
c. Industrial development and similar obligations..RCON NO NE RCON NO NE RCON NO NE RCON NO NE
1694 1695 1696 1697
4. Mortgage-backed securities (MBS): 3.c.
a. Pass-through securities:
(1) Guaranteed by GNMA..........................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 4.a.(1)
1698 1699 1701 1702
(2) Issued by FNMA and FHLMC....................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 4.a.(2)
1703 1705 1706 1707
(3) Other pass-through securities...............RCON NO NE RCON NO NE RCON NO NE RCON NO NE 4.a.(3)
1709 1710 1711 1713
b. Other mortgage-backed securities (include
CMOs, REMICs, and stripped MBS):
(1) Issued or guaranteed by FNMA,
FHLMC, or GNMA..............................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 4.b.(1)
(2) Collateralized by MBS issued or guaranteed 1714 1715 1716 1717
by FNMA, FHLMC, or GNMA.....................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 4.b.(2)
1718 1719 1731 1732
(3) All other mortgage-backed securities........RCON NO NE RCON NO NE RCON NO NE RCON NO NE 4.b.(3)
1733 1734 1735 1736
5. Other debt securities..............................RCON NO NE RCON NO NE RCON NO NE RCON NO NE 5.
1774 1775 1776 1779
6. Equity securities:
a. Investments in mututal funds.................... RCON NO NE RCON NO NE 6.a.
b. Other equity securities with readily 1747 1748
determinable fair values........................ RCON NO NE RCON NO NE 6.b.
c. All other equity securities(1) (includes Federal 1749 1751
Reserve stock).................................. RCON NO 45 RCON NO NE 6.c.
7. Total (sum of items 1 through 6) (total of 1752 1753
column A must equal Schedule RC, item 2.a)
(total of column D must equal Schedule RC,
item 2.b)..........................................RCON NO NE RCON NO NE RCON 45 RCON NO NE 7.
1754 1771 1772 1753
- ---------------
<FN>
(1) Includes equity securities without readily determinable fair values at
historical cost in Item 6.c, column D.
(2) Includes Small Business Administration "Guaranteed Loan Pool Certificates,"
U.S. Maritime Administration obligations, and Export-Import Bank
participation certificates.
(3) Includes obligations (other than mortgage-backed securities) issued by the
Farm Credit System, the Federal Home Loan Bank System, the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association, the
Financing Corporation, Resolution Funding Corporation, the Student Loan
Marketing Association, and the Tennessee Valley Authority.
</FN>
</TABLE>
<PAGE>
FFIEC 034
Page RC--4
[12]
Signet Trust Company
__________________________________________
Legal Title of Bank
FDIC CERTIFICATE NUMBER [][][][][]
Schedule RC-B--Continue
<TABLE>
<CAPTION>
Memoranda C112
Dollar Amounts in Thousands Mil Thou
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
RCON
1. Pledged securities............................................................ 0416 NO NE M.1.
2. Maturity and repricing data for debt securities (1,2,3,) (excluding those in
nonaccrual status):
a. Fixed rate debt securities with a remaining maturity of: RCON
(1) Three months or less....................................................... 0343 NO NE M.2.a.(1)
RCON
(2) Over three months through 12 months........................................ 0344 NO NE M.2.a.(3)
RCON
(3) Over one year through five years .......................................... 0345
RCON
(4) Over five years............................................................ 0346 NO NE M.2.a.(4)
(5) Total fixed rate debt securities (sum of Memorandum items 2.a.(1) through RCON
2.a.(4))................................................................... 0347 NO NE M.2.a.(5)
b. Floating rate debt securities with a repricing frequency of: RCON
(1) Quarterly or more frequently............................................... 4544 NO NE M.2.b.(1)
RCON
(2) Annually or more frequently, but less frequently than quarterly............ 4545 NO NE M.2.b.(2)
RCON
(3) Every five years or more frequently, but less frequently than annually..... 4551 NO NE M.2.b.(3)
RCON
(4) Less frequently than every five years...................................... 4552 NO NE M.2.B.(4)
(5) Total floating rate debt securities (sum of Memorandum items 2.b.(1) RCON
through 2.b.(4))........................................................... 4553 NO NE M.2.B.(5)
c. Total debt securities (sum of Memorandum items 2.a.(5) and 2.b.(5)) (must
equal total debt securities from Schedule RC-B, sum of items 1 through 5,
columns A and D, minus nonaccrual debt securities included in Schedule RC-N, RCON
item 6, column C)........................................................... 0393 NO NE M.2.c.
3. Not applicable
4. Held-to-maturity debt securities restructured and in compliance with modified RCON
terms (included in Schedule RC-B, items 3 through 5, column A, above)......... 5365 NO NE M.4.
5. Not applicable
6. Floating rate debt securities with a remaining maturity of one year or RCON
less (1,3) (included in Memorandum items 2.b.(1) through 2.b.(4) above)....... 5519 NO NE M.6.
7. Amortized cost of held-to-maturity securities sold or transferred to
available-for-sale or trading securities during the calendar year-to-date RCON
(report the amortized cost at date of sale or transfer)....................... 1778 NO NE M.7.
8. High-risk mortgage securities (included in the held-to-maturity and
available-for sale accounts in Schedule RC-B, item 4.b): RCON
a. Amortized cost............................................................. 8780 NO NE M.8.a.
RCON
b. Fair value................................................................. 8781 NO NE M.8.b.
9. Structured notes (included in the held-to-maturity and available-for-sale
accounts in Schedule RC-B, items 2, 3, and 5): RCON
a. Amortized cost............................................................. 8782 NO NE M.9.a.
RCON
b. Fair value................................................................... 8781 NO NE M.9.b.
</TABLE>
(1) Includes held-to-maturity securities at amortized cost and
available-for-sale securities at fair value.
(2) Exclude equity securites, e.g., investments in mutual funds, Federal
Reserve stock, common stock, and preferred stock.
(3) Memorandum items 2 and 6 are not applicable to savings banks that must
complete supplemental Schedule RC-J.
<PAGE>
FFIEC 034
Page RI-5
[13]
Schedule RC-C--Loans and Lease Financing Receivables
Part 1. Loans and Leases
Do not deduct the allowance for loan and lease losses from amounts reported in
this schedule. Report total loans and leases, net of unearned income. Exclude
assets held for trading.
<TABLE>
<CAPTION>
C115
Dollar Amounts in Thousands Mil Thou
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Loans secured by real estate: RCON
a. Construction and land development....................... 1415 NO NE 1.a.
b. Secured by farmland (including farm residential RCON
and other improvements.................................. 1420 NO NE 1.b.
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4
family residential properties and extended RCON
under lines of credit............................... 1797 NO NE 1.c.(1)
(2) All other loans secured by 1-4 family residential
properties: RCON
(a) Secured by first liens.......................... 5367 NO NE 1.c.(2)(a)
RCON
(b) Secured by junior liens......................... 5368 NO NE 1.c.(2)(b)
d. Secured by multifamily (5 or more) residential RCON NO NE 1.d.
properties.............................................. 1460
e. Secured by nonfarm nonresidential properties............ RCON NO NE 1.e.
1480
2. Loans to depository institutions........................... RCON NO NE 2.
1489
3. Loans to finance agricultural production and other loans
to farmers................................................. RCON NO NE 3.
1590
4. Commercial and industrial loans............................ RCON NO NE 4.
1766
5. Acceptances of other banks................................. RCON NO NE 5.
1755
6. Loans to individuals for household, family, and other
personal expenditures (i.e., consumer loans) (includes
purchased paper):
a. Credit cards and related plans (includes check credit
and other revolving credit plans........................ RCON NO NE 6.a.
2008
b. Other (includes single payment, installment, and all
student loans).......................................... RCON NO NE 6.b.
2011
7. Obligations (other than securities and leases) of states
and political subdivisions in the U.S. (includes nonrated
industrial development obligations)........................ RCON NO NE 7.
2107
8. All other loans (exclude consumer loans)................... RCON NO NE 8.
2080
9. Lease financing receivables (net of unearned income)....... RCON NO NE 9.
2165
10. LESS: Any unearned income on loans reflected in items
1-8 above.................................................. RCON NO NE 10.
2123
11. Total loans and leases, net of unearned income (sum of items
1 through 9 minus item 10) (must equal Schedule RC, item
4.a)....................................................... RCON NO NE 11.
2122
</TABLE>
<PAGE>
FFIEC 034
Page RC-6
[14]
Affix the address label in this space.
Signet Trust Company
- ----------------------------------------
Legal Title of Bank
Richmond
- ----------------------------------------
City
Virginia 23219
- ----------------------------------------
State Zip Code
FDIC Certificate Number [][][][][]
Schedule RC-C--Continued
Part 1. Continued
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Mil Thou
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1. Loans(1) and leases restructured and in compliance with modified
terms (included in Schedule RC-C, part 1, above and not reported
as past due or nonaccrual in Schedule RC-N, Memorandum item 1):
a. Real estate loans.............................................. RCON NO NE M.1.a.
b. All other loans and all leases financing receivables (exclude 1617
loans to individuals for household, family, and other personal
expenditures).................................................. RCON NO NE M.1.b.
2. Maturity and repricing data for loans and leases(2) (excluding 8691
those in nonaccrual status):
a. Fixed rate loans and leases with a remaining maturity of:
(1) Three months or less....................................... RCON NO NE M.2.a.(1)
0348
(2) Over three months through 12 months........................ RCON NO NE M.2.a.(2)
0349
(3) Over one year through five years........................... RCON NO NE M.2.a.(3)
0356
(4) Over five years............................................ RCON NO NE M.2.a.(4)
0357
(5) Total fixed rate loans and leases (sum of Memorandum items
2.a.(1) through 2.a.(4)).................................... RCON NO NE M.2.a.(5)
b. Floating rate loans with a repricing frequency of: 0358
(1) Quarterly or more frequently............................... RCON NO NE M.2.b.(1)
(2) Annually or more frequently, but less frequently than 4554
quarterly.................................................. RCON NO NE M.2.b.(2)
(3) Every five years or more frequently, but less frequently 4555
than annually.............................................. RCON NO NE M.2.b.(3)
4561
(4) Less frequently than every five years...................... RCON NO NE M.2.b.(4)
4564
(5) Total floating rate loans (sum of Memorandum items 2.b.(1)
through 2.b.(4))........................................... RCON NO NE M.2.b.(5)
4567
c. Total loans and leases (sum of Memorandum items 2.a.(5) and
2.b.(5)) (must equal the sum of total loans and leases, net,
from Schedule RC-C, part 1, item 11, plus unearned income
from Schedule RC-C, part 1, item 10, minus total nonaccrual
loans and leases from Schedule RC-N, sum of items 1 through 5,
column C)...................................................... RCON NO NE M.2.c.
d. Floating rate loans with a remaining maturity of one year or 1479
less (included in Memorandum items 2.b.(1) through 2.b.(4) RCON NO NE M.2.d.
above)......................................................... A246
3. Reserved
4. Loans to finance commercial real estate, construction, and land
development activities (not secured by real estate) included in RCON NO NE M.4.
Schedule RC-C, part 1, items 4 and 8, page RC-5(3)................ 2746
5. Loans and leased held for sale (included in Schedule RC-C, part 1, RCON NO NE M.5.
above)............................................................ 5369
6. Adjustable rate closed-end loans secured by first liens on 1-4
family residential properties (included in Schedule RC-C, part 1, RCON NO NE M.6.
item 1.c.(2)(a), page RC-5)....................................... 5370
- ---------
<FN>
1 See instructions for loan classifications used in Memorandum item 1.
2 Memorandum item 2 is not applicable to savings banks that must complete supplemental Schedule RC-J.
3 Exclude loans secured by real estate that are included in Schedule RC-C, part 1, items 1.a through 1.e.
</FN>
</TABLE>
<PAGE>
FFIEC 034
Page RC-6a
[14a]
Schedule RC-C--Continued
Part II. Loans to Small Businesses and Small Farms
Schedule RC-C, Part II is to be reported only with the June Report of Condition.
Report the number and amount currently outstanding as of June 30 of business
loans with "original amounts" of $1,000,000 or less and farm loans with
"original amounts" of $500,000 or less. The following guidelines should be used
to determine the "original amount" of a loan: (1) For loans drawn down under
lines of credit or loan commitment when the line of credit or loan commitment
was most recently approved, extended, or renewed prior to the report date.
However, if the amount currently outstanding as of the report date exceeds this
size, the "original amount" is the amount currently outstanding on the report
date. (2) For loan participations and syndications, the "original amount" of the
loan participation or syndication is the entire amount of the credit originated
by the lead lender. (3) For all other loans, the "original amount" is the total
amount of the loan at origination or the amount currently outstanding as of the
report date, whichever is larger.
Loans to Small Businesses
<TABLE>
<CAPTION>
<S> <C> <C>
1. Indicate in the appropriate box at the right whether all or substantially all
of the dollar volume of your bank's "Loans secured by nonfarm nonresidential
properties" reported in Schedule RC-C, part 1, item 1.e, and all or
substantially all of the dollar volume of your bank's "Commercial and
industrial loans" reported in Schedule RC-C, part 1, item 4, have original
amounts of $100,000 or less (If your bank has no loans outstanding in both of C118
these two loan catagories, place an "X" in the box marked "NO" and go to item YES NO
5; otherwise, see instructions for further information.)......................... RCON X 1.
6999
If YES, complete items 2.a and 2.b below, skip items 3 and 4, and go to item 5.
If NO and your bank has loans outstanding in either category, skip items 2.a and
2.b, complete items 3 and 4 below, and go to item 5.
Number of
Loans
2. Report the total number of loans currently outstanding for each of the
following schedule RC-C, part 1, loan categories:
a. "Loans secured by nonfarm nonresidential properties" reported in Schedule
RC-C, part 1, item 1.e......................................................... RCON 2.a.
5562
b. "Commercial and industrial loans" reported in Schedule RC-C, part 1, item 4.... RCON 2.b.
5563
</TABLE>
<TABLE>
<CAPTION>
(Column A) (Column B)
Amount
Number of Currently
Loans Outstanding
-----------------------------
Dollar Amounts in Thousands Mil Thou
- ----------------------------------------------------------------------------- -----------
<S> <C> <C> <C> <C>
3. Number and amount currently outstanding of "Loans secured by nonfarm
nonresidential properties" reported in Schedule RC-C, part 1, item 1.e (sum
of items 3.a through 3.c must be less than or equal to Schedule RC-C, part 1,
item 1.a):
a. With original amounts of $100,000 or less................................. RCON N/A RCON N/A
5564 5565
b. With original amounts of more than $100,000 through $250,000.............. RCON N/A RCON
5566 5567
c. With original amounts of more than $250,000 through $1,000,000............ RCON N/A RCON
5568 5569
4. Number and amount currently outstanding of "Commercial and industrial
loans" reported in Schedule RC-C, part 1, item 4 (sum of items 4.a
through 4.c must be less than or equal to Schedule RC-C, part 1, item 4):
a. With original amounts of $100,000 or less................................. RCON N/A RCON N/A
5570 5571
b. With original amounts of more than $100,000 through $250,000.............. RCON N/A RCON
5572 5573
c. With original amounts of more than $250,000 through $1,000,000............ RCON N/A RCON
5574 5575
</TABLE>
<PAGE>
FFIEC 034
Page RC-6b
[14b]
Signet Trust Company
- ------------------------------------
Legal Title of Bank
FDIC Certificates Number [][][][][]
Schedule RC-C--Continued
Part II. Continued
Agricultural Loans to Small Farms
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
5. Indicate in the appropriate box at the right whether all or substantially all
of the dollar volume of your bank's "Loans secured by farmland (including
farm residential and other improvements)" reported in Schedule RC-C, part 1,
item 1.b, and all or substantially all of the dollar volume of your bank's
"Loans to finance agricultural production and other loans to farmers"
reported in Schedule RC-C, part 1, item 3, have original amounts of $100,000
or less (If your bank has no loans outstanding in both these two loan
categories, place and "X" in the box marked "NO" and do not complete items 7
8; otherwise, see instructions for further information.)...................... RCON YES NO
6860 X 5.
If YES, complete items 6.a and 6.b below and do not complete 7 and 8. If NO and
your bank has loans outstanding in either loan category, skip items 6.a and 6.b
and complete items 7 and 8 below.
Number of
Loans
6. Report the total number of loans currently outstanding for each of the
following schedule RC-C, part 1, loan catogories:
a. "Loans secured by farmland (including farm residential and other
improvements)" reported in Schedule RC-C, part 1, item 1.b.............. RCON 6.a.
5576
b. "Loans to finance agricultural production and other to farmers" reported
in Schedule RC-C, part 1, item 3...................................... RCON 6.b.
5577
</TABLE>
<TABLE>
<CAPTION>
Column (A) Column (B)
Amount
Number of Currently
Loans Outstanding
Dollar Amounts in Thousands
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
7. Number and amount currently outstanding of "Loans secured farmland (including
farm residential and other improvments)" reported in Schedule RC-C, part 1,
item 1.b (sum of items 7.a through 7.c must be less than or equal to Schedule
RC-C, part 1, item 1.b): Mil Thou
a. With original amounts of $100,000 or less.................................RCON N/A RCON N/A 7.a.
5578 5579
b. With original amounts of more than $100,000 through $250,000..............RCON N/A RCON N/A 7.b.
5580 5581
c. With original amounts of more than $250,000 through $500,000..............RCON N/A RCON N/A 7.c.
5582 5583
8. Number and amount currently outstanding of "Loans to finance agricultural
production and other loans to farmers" reported in Schedule RC-C, part 1,
item 3 (sum of items 8.a through 8.c must be less than or equal to Schedule
RC-C, part 1, Item 3):
a. With original amounts of $100,000 or less.................................RCON N/A RCON N/A 8.a.
5584 5585
b. With original amounts of more than $100,000 through $250,000..............RCON N/A RCON N/A 8.b.
5586 5587
c. With original amounts of more than $250,000 through $500,000..............RCON N/A RCON N/A 8.c.
5588 5589
</TABLE>
<PAGE>
FFIEC 034
Page RC-7
[15]
Schedule RC-E--Deposit Liabilities
<TABLE>
<CAPTION>
C125
Nontransaction
Transaction Accounts Accounts
(Column A) (Column B) (Column C)
Total Memo: Total Total
transaction demand nontransaction
accounts deposits accounts
(including (included in (including
total demand column A) MMDAs)
deposits)
Dollar Amounts in Thousands Mil Thou Mil Thou Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C>
Deposits of:
1. Individuals, partnerships, and corporations RCON NO NE RCON NO NE RCON NO NE 1.
2201 2240 2346
2. U.S. Government............................. RCON NO NE RCON NO NE RCON NO NE 2.
2202 2280 2520
3. States and political subdivisions in the U.S. RCON NO NE RCON NO NE RCON NO NE 3.
2203 2290 2530
4. Commercial banks in the U.S. (including
U.S. branches and agencies of foreign RCON NO NE RCON NO NE RCON NO NE 4.
banks)...................................... 2206 2310 2550
5. Other depository institutions in the U.S. RCON NO NE RCON NO NE RCON NO NE 5.
2207 2312 2349
6. Certified and official checks............... RCON NO NE RCON NO NE NO NE 6.
2330 2330
7. Banks in foreign countries, foreign
governments, and foreign official RCON NO NE RCON NO NE RCON NO NE 7.
institutions ............................... 2384 2385 2186
8. Total (sum of items 1 through 7) (sum
of columns A and C must equal Schedule RCON NO NE RCON NO NE RCON NO NE 8.
RC, item 13.a .............................. 2215 2210 2385
</TABLE>
Memoranda
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Mil Thou
<S> <C> <C> <C> <C>
1. Selected components of total deposits (i.e., sum
8, columns A and C):
a. Total Individual Retirement Accounts (IRAs)
and Keogh Plan accounts..................... RCON NO NE M.1.a.
6835
b. Total brokered deposits..................... RCON NO NE M.1.b.
c. Fully insured brokered deposit (included 2365
in Memorandum item 1.b above):
(1) Issued in denominations of less than
$100,000................................ RCON NO NE M.1.c.(1)
(2) Issued either in denominations of $100,000 2343
or in denominations greater than $100,000
and participated out by the broker
in shares of $100,000 or less........... RCON NO NE M.1.c.(2)
d. Maturity data for brokered deposits: 2344
(1) Brokered deposits issued in denominations
of less than $100,000 with a remaining
maturity of one year or less (included
in Memorandum item 1.c.(1) above)........ RCON NO NE M.1.d.(1)
(2) Brokered deposits issued in denominations A243
of $100,000 or more with a remaining maturity
of one year or less (included in Memorandum
item 1.b. above).......................... RCON NO NE M.1.d.(2)
e. Preferred deposits (uninsured deposits of states A244
and political subdivisions in the U.S. reported in
item 3 above which are secured or collateralized RCON
as required under state law)................. 5590
2. Components of total nontransaction accounts (sum of
Memorandum items 2.a through 2.d must equal item 8,
column c, above):
a. Savings deposits:
(1) Money market deposit accounts (MMDAs)......... RCON NO NE M.2.a.(1)
(2) Other savings deposits (excludes 6810
<PAGE>
MMDAs)........................................ RCON NO NE M.2.a.(2)
0362
b. Total time deposits less that $100,000............ RCON NO NE M.2.b.
c. Time certificates of deposit of $100,000 6648
more.............................................. RCON NO NE M.2.c.
d. Open-account time deposits of $100,000 6645
or more........................................... RCON NO NE M.2.d.
3. All NOW accounts (included in column A 6646
above)............................................... RCON NO NE M.3.
4. Not Applicable....................................... 2398
</TABLE>
<PAGE>
FFIEC 034
Page RC-8
[16]
Signet Trust Company
- ------------------------------
Legal Title of Bank
FDIC Certificates Number [][][][][]
Schedule RC-E--Continued
Memoranda (Continued)
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Mil Thou
<S> <C> <C> <C> <C>
5. Maturity and repricing data for time deposits of less than $100,000 (sum of
Memorandum items 5.a.(1) through 5.b.(3) must equal Memorandum item 2.b
above):
a. Fixed rate time deposits of less than $100,000 with a remaining
maturity of:
(1) Three months or less............................................... RCON NO NE M.5.a.(1)
A225
(2) Over three months through 12 months................................ RCON NO NE M.5.a.(2)
A226
(3) Over one year...................................................... RCON NO NE M.5.a.(3)
b. Floating rate time deposits of less than $100,000 with a repricing A227
frequency of:
(1) Quarterly or more frequently........................................ RCON NO NE M.5.b.(1)
A228
(2) Annually or more frequently, but less frequently than quarterly..... RCON NO NE M.5.b.(2)
A229
(3) Less frequently than annually....................................... RCON NO NE M.5.b.(3)
A230
c. Floating rate time deposits of less than $100,000 with a remaining
maturity of one year or less (included in Memorandum items 5.b.(1)
through 5.b.(3) above)................................................... RCON NO NE M.5.c.
A231
6. Maturity and repricing data for time deposits of $100,000 or more
(i.e., time certificates of deposit of $100,000 or more and
open-account time deposits of $100,000 or more) (sum of memorandum
items 6.a.(1) through 6.b.(4) must equal the sum of Memorandum
items 2.c and 2.d above):(1)
a. Fixed rate rime deposits of $100,000 or more with a remaining
maturity of:
(1) Three months or less................................................ RCON NO NE M.6.a.(1)
A232
(2) Over three months through 12 months................................. RCON NO NE M.6.a.(2)
A233
(3) Over one year through five years.................................... RCON NO NE M.6.a.(3)
A234
(4) Over five years..................................................... RCON NO NE M.6.a.(4)
A235
b. Floating rate time deposits of $100,000 or more with a
repricing frequency of:
(1) Quarterly or more frequently......................................... RCON NO NE M.6.b.(1)
A236
(2) Annually or more frequently, but less frequently
than quarterly....................................................... RCON NO NE M.6.b.(2)
A237
(3) Every five years or more frequently, but less
frequently than annually............................................. RCON NO NE M.6.b.(3)
A238
(4) Less frequently than every five years............................... RCON NO NE M.6.b.(4)
c. Floating rate time deposits of $100,000 or more with a A239
remaining maturity of one year or less (included
in Memorandum items 6.b.(1) through 6.b.(4) above)....................... RCON NO NE M.6.c.
A240
- -------------
<FN>
(1) Memorandum items 5 and 6 are not applicable to savings banks that must
complete supplemental Schedule RC-J.
</FN>
</TABLE>
<PAGE>
FFIEC 034
Page RC-9
[17]
SCHEDULE RC-F--OTHER ASSETS
<TABLE>
<CAPTION>
C130
<S> <C> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
1. Income earned, not collected on loans(1)............................ RCON NO NE 1.
2164
2. Net deferred tax assets(2).......................................... RCON NO NE 2.
2148
3. Excess residential morgage servicing fees receivable ............... RCON NO NE 3.
5371
4. Other (itemize and describe amounts greater than $25,000
that exceed 25% of the item)........................................ RCON 3 639 4.
2168
a. TEXT Trust Income Receivable ...............RCON 2 687 4.a.
3549 3549
b. TEXT........................................RCON 4.b.
3550 3550
c. TEXT........................................RCON 4.c.
3551 3551
5. Total (sum of items 1 through 4) must equal Schedule RC, item 11)... RCON
2160 3 639 5.
</TABLE>
MEMORANDUM
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
RCON
1. Deferred tax assets disallowed for regulatory capital purposes .. 5610 NO NE M.1.
</TABLE>
SCHEDULE RC-G--OTHER LIABILITIES
<TABLE>
<CAPTION>
[C135]
<S> <C> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
1. a. Interest accrued and unpaid on deposits(3)................................ RCON NO NE 1.a.
b. Other expenses accrued and unpaid (includes accrued income taxes 3645
payable) ................................................................. RCON 582 1.b.
3646
2. Net deferred tax liabilities2) .............................................. RCON 141 2.
3049
3. Minority interest in consolidated subsidiaries............................... RCON NO NE 3.
4. Other (itemize and describe amounts greater than $25,000 that 3000
exceed 25% of this item) .................................................... RCON 621 4.
2938
a. TEXT Non-Qualified Savings Reserve ................... RCON 340 4.a.
3552 3552
b. TEXT ................................................. RCON 4.b.
3553 3553
c. TEXT ................................................. RCON 4.c.
3554 3554
5. Total (sum of items 1 through 4)(must equal Schedule RC, item 20)............ RCON 1 344 5.
2930
</TABLE>
- ------------------
(1) Report income earned, not collected on securities (and on other assets) in
item 4 of Schedule RC-F.
(2) See discussion of deferred income taxes in Glossary entry on "income
taxes."
(3) For savings banks, include "dividents" accrued and unpaid on deposits.
<PAGE>
FFIEC 034
Page RI-10
[18]
Signet trust Company
- ------------------------------
Legal Title of Bank
FDIC Certificate Number [][][][][]
SCHEDULE RC-K QUARTERLY AVERAGES(1)
<TABLE>
<CAPTION>
[C155]
<S> <C> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
Assets
1. Interest-bearing balances due from depository institutions ................. RCON NO NE 1.
2. a. U.S. Treasury securities, and U.S. Government agency and 3381
corporation obligations, and othr debt securities (4 )(excluding RCON NO NE 2.a.
securities issued by states and political subdivisions in the U.S.)...... 3649
b. Equity securities (4)(excluding investments in mutual funds and RCON 45 2.b.
Federal Reserve stock)................................................... 3648
3. Securities issued by states and political subdivisions in the RCON NO NE 3.
U.S.(4)..................................................................... 3383
4. Federal funds sold and securities purchased under agreements to RCON NO NE 4.
resell...................................................................... 3365
5. Loans(2,3):
a. Total loans, net of unearned income to be completed only by those
banks with less than $25 million in total assets)........................ RCON NO NE 5a.
3360
The following four items are to be completed only by those banks with
$25 million or more in total assets.
b. Real estate loans........................................................ RCON NO NE 5.b.
3286
c. Installment loans........................................................ RCON NO NE 5.c.
3287
d. Credit cards and related plans........................................... RCON NO NE 5.d.
3288
e. Commercial (time and demand) and all other loans......................... RCON NO NE 5.e.
3289
6. Lease financing receivables (net of unearned income)........................ RCON NO NE 6.
3484
7. Total assets(6)............................................................. RCON 12 334 7.
3368
LIABILITIES
8. Interest-bearing transaction accounts (NOW accounts, ATS accounts,
and telephone and preauthorized transfer accounts)(exclude demand
deposits)................................................................... RCON NO NE 8.
3485
9. Nontransaction accounts:
a. Money market deposit accounts (MMDAs).................................... RCON NO NE 9.a.
3486
b. Other savings deposits................................................... RCON NO NE 9.b.
3487
c. Time certificates of deposit of $100,000 or more......................... RCON NO NE 9.c.
3345
d. All other time deposits (include all time deposits of less than
$100,000 and open-account time deposits of $100,000 or more)............. RCON NO NE 9.d.
10. Federal funds purchased and securities sold under agreements to 3469
repurchase.................................................................. RCON NO NE 10.
3353
MEMORANDUM
[C135]
Dollar Amounts in Thousands Mil Thou
- ---------------------------------------------------------------------------------------------------------------------
11.To be completed by banks with $25 million or more in total assets and with
loans to finance agricultural production and other loans to farmers (Schedule
RC-C, part 1, item 3) exceeding five percent of total loans. (3) Agricultural
loans included in items 5.b through 5.e above ............................... RCON N/A M.1.
3379
</TABLE>
(1)For all items, banks have the option of reporting either (1) an average of
daily figures for the quarter, (2) an average of weekly figures (i.e., the
Wednesday of each week of the quarter). In addition, averages of four
month-end figures (the last day of the preceeding quarter and of each month
of the currently-reported quarter) are allowed for items 2, 3, 5.a through
5.a, 6, 7, and Memorandum item 1.
(2)See instructions for loan classifications used in this schedule.
(3)The $25 million asset size test and the five percent of total loans test are
generally based on the total assets and total loans reported on the June 30,
1995 Report of Condition.
(4)Quarterly averages for all debt securities should be based on amortized cost.
(5)Quarterly averages for all equity securities should be based on historical
costs.
(6)The quarterly average for total assets should reflect all debt
securities (not held for trading) at amortized costs, equity securities with
readily determinable fair values at the lower of cost or fair value, and
equity securities without readily determinble fair values at historical cost.
<PAGE>
FFIEC 034
Page RC-11
[19]
SCHEDULE RC-L OFF-BALANCE SHEET ITEMS
Please read carefully the instructions for the preparation of Schedule RC-L.
Some of the amounts reported in Schedule RC-L are regarded as volume indicators
and not necessarily as measures of risk.
<TABLE>
<CAPTION>
[C160]
<S> <C> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
1. Unused commitments:
a.Revolving, open-end lines secured by 1-4 family residential
properties, e.g., home equity lines........................................ RCON NO NE 1.a.
3814
b. Credit card lines......................................................... RCON NO NE 1.b.
3815
c. Commercial real estate, construction, and land development:
(1) Commitments to fund loans secured by real estate....................... RCON NO NE 1.c.(1)
3816
(2) Commitments to fund loans not secured by real estate .................. RCON NO NE 1.c.(2)
6550
d. Securites underwriting.................................................... RCON NO NE 1.d.
3817
e. Other unused commitments.................................................. RCON NO NE 1.e.
3818
2. Financial standby letters of credit(1) ...................................... RCON NO NE 2.
3819
a. Amount of financial standby letters of credit conveyed to others ......... RCON NO NE 2.a.
3820
3. Performance standby letters of credit(1)..................................... RCON NO NE 3.
3821
a. Amount of performance standby letters of credit conveyed to others ....... RCON NO NE 3.a.
3822
4. Commercial and similar letters of credit(1).................................. RCON NO NE 4.
3411
5. Not applicable
6. Participations in acceptances (as described in the instructions) RCON NO NE 6.
acquired by the reporting (nonaccepting) bank................................ 3429
7. Securities borrowed.......................................................... RCON NO NE 7.
3432
8. Securities lent (including customers' securities lent where the RCON NO NE 8.
customer is indemnified against loss by the reporting bank) ................. 3433
9. Loans transferred (i.e., sold or swapped) with recourse that have
been treated as sold for Call Report purposes:
a. FNMA and FHLMC residential mortgage loan pools:
(1) Outstanding principal balances of mortgages tranferred as of the RCON NO NE 9.a.(1)
report date............................................................ 3650
(2) Amount of recourse exposure on these mortgages as of the report RCON NO NE 9.a.(2)
date................................................................... 3651
b. Private (nongovernment-issued or -guaranteed) residential mortgage
loans pools:
(1) Outstanding principal balance of mortgages transferred as of the RCON NO NE 9.b.(1)
report date............................................................ 3652
(2) Amount of recourse exposure on these mortgages as of the report RCON `NO NE 9.b.(2)
date................................................................... 3653
c. Farmer Mac agricultural mortgage loan pools:
(1) Outstanding principal balance of mortgages as of the report date ...... RCON NO NE 9.c.(1)
3654
(2) Amount of recourse exposure on these mortgages as of the report3 RCON NO NE 9.c.(2)
date................................................................... 3655
d. Small business obligations transferred with recourse under Section
208 of the Riegle Community Development and Regulatory Improvement Act
of 1994:
(1) Outstanding principal balance of small business obligations RCON NO NE 9.d.(1)
transferred as of the report date...................................... A249
(2) Amount of retained recourse on these obligations as of the report RCON NO NE 9.d.(2)
date................................................................... A250
10. When-issued securities:
a. Gross commitments to purchase............................................. RCON NO NE 10.a
3434
b. Gross commitments to sell................................................. RCON NO NE 10.b.
3435
11. Spot foreign echange contracts.............................................. RCON NO NE 11.
8765
12. All other off-balance sheet liabilities (exclude off-balances
sheet derivatives)(itemize and describe each component of this item
over 25% of Schedule RC, item 28.a, "Total equity capital")
a. TEXT ................................................................. RCON NO NE 12.a.
3555 3555
b. TEXT.................................................................. RCON NO NE 12.b.
3556 3556
c. TEXT.................................................................. RCON NO NE 12.c.
3557 3557
d. TEXT.................................................................. RCON NO NE 12.d.
3558 3558
</TABLE>
<PAGE>
FFIEC 034
Page RC-12
[20]
Signet Trust Company
- ------------------------------
Legal Title of Bank
FDIC Certificates Number | | | | | | |
-------------
Schedule RC-L--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Mil Thou
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13. All other off-balance sheet assets (exclude off-balance sheet derivatives)(itemize
and describe each component of this item over 25% of Schedule RC, item 28.a, "Total
equity capital")....................................................................... RCON NO NE 13.
5591
a. TEXT...................................................................RCON
5592 5592 13.a.
b. TEXT...................................................................RCON
5593 5593 13.b.
c. TEXT...................................................................RCON
5594 5594 13.c.
d. TEXT...................................................................RCON
5595 5595 13.d.
</TABLE>
<TABLE>
<CAPTION>
(Column A) (Column B) (Column C) (Column D)
Interest Foreign Equity Commodity
Rate Exchange Derivative and Other
Contracts Contracts Contracts Contracts
Dollar Amounts in Thousands Mil Thou Mil Thou Mil Thou Mill Thou
Off-balance Sheet Derivatives
Position Indicators
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
14. Gross amounts (e.g., notional amounts)(for
each column, sum of items 14.a through 14.a
must equal sum of items 15, 16.a, and 16.b)
a. Futures contracts....................... RCON NO NE RCON NO NE RCON NO NE RCON NO NE 14.a.
8693 8694 8695 8696
b. Forward contracts....................... RCON NO NE RCON NO NE RCON NO NE RCON NO NE 14.b.
8697 8698 8699 8700
c. Exchange-traded option contracts:
(1) Written options................... RCON NO NE RCON NO NE RCON NO NE RCON NO NE 14.c.(1)
8701 8702 8703 8704
(2) Purchased options................. RCON NO NE RCON NO NE RCON NO NE RCON NO NE 14.c.(2)
8705 8706 8707 8708
d. Over-the-counter option contracts:
(1)Written options.................... RCON NO NE RCON NO NE RCON NO NE RCON NO NE 14.d.(1).
8709 8710 8711 8712
(2)Purchased options.................. RCON NO NE RCON NO NE RCON NO NE RCON NO NE 14.d.(2)
8713 8714 8715 8716
e. Swaps................................... RCON NO NE RCON NO NE RCON NO NE RCON NO NE 14.e.
3450 3826 8719 8720
15. Total gross notional amount of derivative RCON NO NE RCON NO NE RCON NO NE RCON NO NE
contracts held for trading.................. A126 A127 8723 8724
16. Total gross notional amount of derivative
contracts held for purposes other than
trading:
a. Contracts marked to market.................. RCON NO NE RCON NO NE RCON NO NE RCON NO NE 16.a.
8725 8726 8727 8728
b. Contracts not marked to market.............. RCON NO NE RCON NO NE RCON NO NE RCON NO NE 16.b
8729 8730 8731 8732
</TABLE>
<TABLE>
<CAPTION>
MEMORANDA
Dollar Amounts in Thousands Mil Thou
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1.-2. Not applicable
3. Unused commitments with an original maturity exceeding one year that are
reported in Schedule RC-L, items 1.a through 1.e, above (report only the
unused portions of commitments that are fee paid or otherwise legally
binding)................................................................. RCON NO NE M.3.
3833
</TABLE>
<PAGE>
FFIEC 034
Page RC-13
[21]
Schedule RC-M--Memoranda
<TABLE>
<CAPTION>
C185
Dollar Amounts in Thousands Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Extensions of credit by the reporting bank to its executive officers,
directors, principal shareholders, and their related as of the report date:
a. Aggregate amount of all extensions of credit to all executive officers,
directors, principal shareholders, and their related interests........... RCON NO NE 1.a.
b. Number of executive officers, directors, and principal shareholders to 6164
whom the amount of all extensions of credit by the reporting bank
(including extensions of credit to related interests) equals or exceeds
the lesser of $500,000 or 5 percent of total capital as defined for this Number
purpose in agency regulations ...........................................RCON NONE 1.b.
2. Not applicable 6165
3. a. Noninterest-bearing balances due from commercial banks in the U.S.
(included in Schedule RC, item 1.)(exclude balances due from Federal
Reserve Banks and cash items in process of collection)................... RCON 6 905 3.a.
0050
b. Currency and coin (included in Schedule RC, item 1.a).................... RCON NO NE 3.b.
0080
4. Outstanding principal balance of 1-4 family residential mortgage loans
serviced for others (include both retained servicing and purchased
servicing):
a. Mortgages serviced under a GNMA contract................................. RCON NO NE 4.a.
5500
b. Mortgages serviced under a FHLMC contract:
(1) Serviced with recourse to servicer................................... RCON NO NE 4.b.(1)
5501
(2) Serviced without recourse to servicer................................ RCON NO NE 4.b.(2)
c. Mortgages serviced under a FNMA contract: 5502
(1) Serviced under a regular option contract.............................. RCON NO NE 4.c.(1)
5503
(2) Serviced under a special option contract.............................. RCON NO NE 4.c.(2)
5504
d. Mortgages serviced under other servicing contracts ...................... RCON NO NE 4.d
5505
5. Not applicable
6. Intangible assets:
a. Mortgage servicing rights................................................ RCON NO NE 6.a
b. Other identifiable intangible assets: 3164
(1) Purchased credit card relationships................................... RCON NO NE 6.b.(1)
5506
(2) All other identifiable intangible assets.............................. RCON NO NE 6.b.(2)
5507
c. Goodwill................................................................. RCON NO NE 6.c.
3163
d. Total (sum of items 6.a through 6.c)(must equal Schedule RC, item 10).... RCON NO NE 6.d.
2143
e. Amount of intangible assets (included in item 6.b.(2) above) that have been
grandfathered or are otherwise qualifying for regulatory capital purposes. RCON NO NE 6.e.
6442
7. Mandatory convertible debt, net of common or perpetual preferred stock
dedicated to redeem the debt................................................ RCON NO NE 7.
8.a. Other real estate owned 3905
(1) Direct and indirect investments in real estate ventures................ RCON NO NE 8.a.(1)
(2) All other real estate owned: 5372
(a) Construction and land development.................................. RCON NO NE 8.a.(2)(a)
5508
(b) Farmland........................................................... RCON NO NE 8.a.(2)(b)
5509
(c) 1-4 family residential properties.................................. RCON NO NE 8.a.(2)(c)
5510
(d) Multifamily (5 or more) residential properties..................... RCON NO NE 8.a.(2)(d)
5511
(e) Nonfarm nonresidential properties.................................. RCON NO NE 8.a.(2)(e)
5512
(3) Total (sum of items 8.a.(1) and 8.a.(2))(must equal Schedule RC, item 7) RCON NO NE 8.a.(3)
2150
b. Investments in unconsolidated subsidiaries and associated companies:
(1) Direct and indirect investments in real estate ventures................. RCON NO NE 8.b.(1)
5374
(2) All other investments in unconsolidated subsidiaries and associated
companies............................................................... RCON NO NE 8.b.(2)
5378
(3) Total (sum of items 8.b.(1) and 8.b.(2))(must equal Schedule RC, item 8) RCON NO NE 8.b.(3)
2130
c. Total assets of unconsolidated subsidiaries and associated companies........ RCON NO NE 8.c.
5376
</TABLE>
<PAGE>
FFIEC 034
Page RC-14
[22]
Signet Trust Company
- ------------------------------
Legal Title of Bank
FDIC Certificates Number | | | | | | |
-------------
Schedule RC-M--Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Mil Thou
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
9. Noncumulative perpetual preferred stock and related surplus included in
Schedule RC, item 23, "Perpetual preferred stock and related surplus".......RCON NO NE 9.
3778
10. Mutual fund and annuity dales during the quarter (include proprietary,
private label, and third party products):...................................
a. Money market funds.......................................................RCON NO NE 10.a.
6441
b. Equity securities funds..................................................RCON NO NE 10.b.
8427
c. Debt securities funds....................................................RCON NO NE 10.c.
8428
d. Other mutual funds.......................................................RCON NO NE 10.d.
8429
e. Annuities................................................................RCON NO NE 10.e.
8430
f. Sales of proprietary mutual funds and annuities (included in items 10.a
through 10.e above)......................................................RCON NO NE 10.f.
8784
</TABLE>
<TABLE>
<CAPTION>
MEMORANDUM Dollar Amounts in Thousands Mil Thou
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
1. Interbank holdings of capital instruments (to be completed for the December
report only):
a. Reciprocal holdings of banking organizations' capital instruments......... RCON N/A M.1.a.
3838
b. Nonreciprocal holdings of banking organizations' capital instruments...... RCON N/A M.1.b.
3837
</TABLE>
<PAGE>
FFIEC 034
Page RC-15
[23]
Schedule RC-N--Past Due and Nonaccrual Loans,(1) Leases, and Other Assets
The FFIEC regards the information reported in all of Memorandum item 1, items 1
through 7, column A, and in Memorandum items 2 through 4, column A, as
confidential.
<TABLE>
<CAPTION>
[C170]
(Column A) (Column B) (Column C)
Past due Past due 90 Nonaccrual
30 through 89 days or more
days and still and still
accruing accruing
Dollar Amounts in Thousands Mil Thou Mil Thou Mil Thou
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1. Real estate loans........................................ RCON NO NE RCON NO NE RCON NO NE 1.
1210 1211 1212
2. Installment loans........................................ RCON NO NE RCON NO NE RCON NO NE 2.
1214 1215 1216
3. Credit cards and related plans........................... RCON NO NE RCON NO NE RCON NO NE 3.
1218 1219 1220
4. Commercial (time and demand) and all other loans ........ RCON NO NE RCON NO NE RCON NO NE 4.
1222 1223 1224
5. Lease financing receivables.............................. RCON NO NE RCON NO NE RCON NO NE 5.
1226 1227 1228
6. Debt securities and other assets (exclude other real
estate owned and other repossessed assets)............... RCON NO NE RCON NO NE RCON NO NE 6.
3505 3506 3507
=========================================================================================================================
</TABLE>
Amounts reported in items 1 through 5 above include guaranteed and unguaranteed
portions of past due and nonaccrual loans and leases. Report in item 7 below
certain guaranteed loans and leases that have already been included in the
amounts reported in items 1 through 5.
<TABLE>
<CAPTION>
Mil Thou Mil Thou Mil Thou
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
7. Loans and leases reported in items 1 through 5 above
which are wholly or partially guaranteed by the U.S.
Government............................................... RCON NO NE RCON NO NE RCON NO NE 7.
5612 5613 5614
a. Guaranteed portion of loans and leases included in
item 7 above.......................................... RCON NO NE RCON NO NE RCON NO NE 7.a.
5615 5616 5617
</TABLE>
MEMORANDA
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou Mil Thou Mil Thou
1. Restructed loans and leases included in Schedule
RC-N, items 1 through 5, above (and not reported in RCON NO NE RCON NO NE RCON NO NE
Schedule RC-C, Part 1, Memorandum item 1)............ 1658 1659 1661
2. To be completed by banks with loans to finance
agricultural production and other loans to farmers
(Schedule RC-C, part 1, item 3) exceeding five percent RCON NO NE RCON NO NE RCON NO NE
of total loans: ..................................... 1230 1231 1232
3. Loans to finance commercial real estate,
construction, and land development activities (not
secured by real estate) included in Schedule RC-N, RCON NO NE RCON NO NE RCON NO NE
items 2 through 4, above............................. 5421 5422 5423
4. Real estate loans (sum of Memorandum items 4.a
through 4.e must equal Schedule RC-N, item 1, above): .
a. Construction and land development...................RCON NO NE RCON NO NE RCON NO NE
5424 5425 5426
b. Secured by farmland.................................RCON NO NE RCON NO NE RCON NO NE
5427 5428 5429
<PAGE>
c. Secured by 1-4 family residential properties:
(1) Revolving, open-end loans secured by 1-4 family
residential properties and extended under lines RCON NO NE RCON NO NE RCON NO NE
of credit........................................5430 5431 5432
(2) All other loans secured by 1-4 family RCON NO NE RCON NO NE RCON NO NE
residential properties......................... 5433 5434 5435
d. Secured by multifamily (5 or more) residential RCON NO NE RCON NO NE RCON NO NE
properties..........................................5436 5437 5438
e. Secured by nonfarm nonresidential properties........RCON NO NE RCON NO NE RCON NO NE
5439 54440 5441
</TABLE>
(1) See instructions for loan classifications used in this schedule.
<PAGE>
FFIEC 034
Page RC-16
[24]
SIGNET TRUST COMPANY
LEGAL OF TITLE OF BANK
FDIC CERTIFICATE NUMBER
SCHEDULE RC-O--OTHER DATA FOR DEPOSIT INSURANCE ASSESSMENTS
<TABLE>
<CAPTION>
[C175]
<S> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
- ----------------------------------------------------------------------------------------------------------------------
1. Unposted debits (see instructions):
a. Actual amount of all unposted debits ........................................... RCON NO NE
0030
OR
b. Separate amount of unposted debits:
(1) Actual amount of unposted debits to demand deposits......................... RCON NO NE 1.a.
0031
(2) Actual amount of unposted debits to time and savings deposits'.............. RCON NO NE
0032
2. Unposted credits (see instructions):
a. Actual amount of all unposted credits........................................... RCON NO NE 1.b.(1)
3510
OR 1.b.(2)
b. Separate amount of unposted credits:
2.a.
(1) Actual amount of unposted credit to demands deposits........................ RCON NO NE
3512
(2) Actual amount of unposted credits to time and savings deposits(1)........... RCON NO NE
3514 2.b.
3. Uninvested trust funds (cash) held in bank's own trust department (not included in
total deposits).................................................................... RCON NO NE 2.b.(2)
3520
4. Deposits of consolidated subsidiaries (not included in total deposits): 3.
a. Demand deposits of consolidated subsidiaries.................................... RCON NO NE 4.a.
2211
b. Time and savings deposits' of consolidated subsidiaries......................... RCON NO NE 4.b.
2351
c. Interest accrued and unpaid on deposits of consolidated subsidiaries............ RCON NO NE 4.c.
5514
5. Not applicable
</TABLE>
Item 6 is not applicable to state nonmember banks that have not been authorized
by the Federal Reserve to act as pass-through correspondents.
<TABLE>
<CAPTION>
<S> <C>
6. Reserve balances actually passed through to the Federal Reserve by the reporting
bank on behalf of its respondent depository institutions that are also reflected as
deposit liabilities of the reporting bank:
a. Amount reflected in demand deposits (included in Schedule RC-E, item 4 or 5, column B) RCON N/A 6.a.
2314
b. Amount reflected in time and savings deposits(1) (included in Schedule RC-E, item 4 RCON N/A. 6.b.
or 5, column A or C, but not column B)............................................. 2315
7. Unamortized premiums and discounts on time and savings deposits:
a. Unamortized premiums............................................................... RCON N/A 7.a.
5516
b. Unamortized discounts.............................................................. RCON N/A 7.b.
5517
8. To be completed by banks with "Oakar deposits."
Total "Adjusted Attributable Deposits" of all institutions acquired under Section
5(d)(3) of the Federal Deposit Insurance Act (from most recent FDIC Oakar Transaction
Worksheet(s)) ......................................................................... RCON N/A 8.
5518
9. Deposits in lifeline accounts....................................................... RCON 9.
5596
10.Benefit-responsive "Depository Institution Investment Contracts" (included in
total deposits)........................................................................ RCON N/A 10.
8432
</TABLE>
(1)For FDIC insurance assessment purposes, "time and savings deposits" consists
of nontransaction accounts and all transaction accounts other than demand
deposits.
<PAGE>
FFIEC 034
Page RC-17
[25]
SIGNET TRUST COMPANY
LEGAL OF TITLE OF BANK
FDIC CERTIFICATE NUMBER [ ][ ][ ][ ][ ]
SCHEDULE RC-O--CONTINUED
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
11. Adjustments to demand deposits reported in Schedule RC-E for certain
reciprocal demand balances:
a. Amount by which demand deposits would be reduced if reciprocal demand
balances between the reporting bank and savings associations were reported
on a net basis rather than a gross basis in Schedule RCON
RC-E....................................................................... 8785 NO NE 11.a.
b. Amount by which demand deposits would be increased if reciprocal demand
balances between the reporting bank and U.S. branches and agencies of
foreign banks were reported on a gross basis rather than a net basis in RCON
Schedule RC-E.............................................................. A181 NO NE 11.b.
c. Amount by which demand deposits would be reduced if cash items in process
of collection were included in the calculation of net reciprocal demand
balances between the reporting bank and the domestic offices of U.S. banks RCON
and savings associations in Schedule RC-E.................................. A182 NO NE 11.c.
</TABLE>
MEMORANDA (TO BE COMPLETED EACH QUARTER EXCEPT AS NOTED)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Dollar Amounts in Thousands Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
1. Total deposits of the bank (sum of Memorandum items 1.a.(1) and 1.b.(1) must
equal Schedule RC, item 13.a): .................................................
a. Deposit accounts of $100,000 or less:
RCON
(1) Amount of deposit accounts of $100,000 or less............................. 2701 NO NE M.1.a.(1)
(2) Number of deposit accounts of $100,000 or less RCON Number
(to be completed for theJune report only) ........3779 NONE M.1.a.(2)
b. Deposit accounts of more than $100,000:
RCON
(1) Amount of deposit accounts of more than $100,000 ......................... 2710 NO NE M.1.b.(1)
RCON Number
(2) Number of deposit accounts of more than $100,000 ....2722 NONE
2. Estimated amount of uninsured deposits of the bank:
a. An estimate of your bank's uninsured deposits can be determined by
multiplying the number of deposit accounts of more than $100,000 reported in
Memorandum item 1.b.(2) above by $100,000 and subtracting the result from the
amount of deposit accounts of more than $100,000 reported in Memorandum item
1.b.(1) above.
Indicate in the appropriate box at the right whether your bank has a method YES NO
or procedure for determining a better estimate of uninsured deposits than the RCON
estimate described above..................................................... 6861 X M.2.a.
b. If the box marked YES has been checked, report the estimate of uninsured RCON Mil Thou
deposits determined by using your bank's method or procedure................. 5597 NO NE M.2.b.
- ------------------------------------------------------------------------------------------------------------------------------------
Person to whom questions about the Reports of Condition and Income should be
directed: [C177]
Angela Radford, Accounting Officer (804) 771-7571
-------------------------------------------------------------------------------
Name and Title (TEXT 8901) Area code/phone number/extension (text 8902)
</TABLE>
<PAGE>
FFIEC 034
Page RC-18
[26]
Signet Trust Company
Legal Title of Bank
FDIC Certificate Number
Schedule RC-R--Regulatory Capital
This schedule must be completed by all banks as follows: Banks that reported
total assets of $1 billion or more in Schedule RC, item 12, for June 30, 1995,
must complete items 2 through 9 and Memoranda item 1 and 2. Banks with assets of
less than $1 billion must complete items 1 through 3 below or Schedule RC-R in
its entirety, depending on their response to item 1 below.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
1. Test for determining the extent to which Schedule RC-R must be completed. To
be completed only by banks with total assets of less than $1 billion. [C100]
Indicate in the appropriate box a the right whether the bank has total RCON YES NO
capital greater than or equal to eight percent of adjusted total assets. 6056 1.
For purposes of this test, adjusted total assets equals total assets less
cash, U.S. Treasuries, U.S. Government agency obligations, and 80 percent of
U.S. Government-sponsored agency obligations plus the allowance for loan and
lease losses and selected off-balance sheet items as reported on Schedule
RC-L (see instructions).
If the box marked YES has been checked, then the bank only has to complete
items 2 and 3 below. If the box marked No has been checked, the bank must
complete the remainder of this schedule.
A NO response to item 1 does not necessarily mean that the bank's actual
risk-based capital ratio is less than eight percent or that the bank's actual
risk-based capital ratio is less than eight percent or that the bank is not
in compliance with the risk-based capital guidelines.
- --------------------------------------------------------------------------------
NOTE: ALL BANKS ARE REQUIRED TO COMPLETE ITEMS 2 AND 3 BELOW.
SEE OPTIONAL WORKSHEET FOR ITEMS 3.A THROUGH 3.F.
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
(Column A) (Column B)
Subordinated Other
Debt(1) and Inter- Limited-Life
mediate Term Capital
Dollar Amounts in Thousands Preferred Stock Instruments
- -------------------------------------------------------------------------------- ------------------ ------------
2. Subordinated debt(1) and other limited-life capital instruments (original
weighted average maturity of at least five years) with a remaining maturity
of: Mil Thou Mil Thou
RCON RCON
a. One year or less........................................................... 3780 NO NE 3786 NO NE 2.a.
RCON RCON
b. Over one year through two years ........................................... 3781 NO NE 3787 NO NE 2.b.
RCON RCON
c. Over two years through three years ........................................ 3782 NO NE 3788 NO NE 2.c.
RCON RCON
d. Over three years through four years ....................................... 3783 NO NE 3789 NO NE 2.d.
RCON RCON
e. Over four years through two years ......................................... 3784 NO NE 3790 NO NE 2.e.
RCON RCON
f. Over five years............................................................ 3785 NO NE 3791 NO NE 2.f.
3. Amounts used in calculating regulatory capital ratios (report amounts
determined by the bank for its own internal regulatory capital analyses):
RCON
a. Tier 1 capital............................................................. 8274 11 787 3.a.
RCON
b. Tier 2 capital............................................................. 8275 0 3.b.
RCON
c. Total risk-based capital .................................................. 3792 11 787 3.c.
RCON
d. Excess allowance for loan and lease losses ................................ A222 0 3.d.
RCON
e. Risk-weighted assets ...................................................... A223 7 562 3.e.
RCON
f. "Average total assets" .................................................... A224 12 183 3.f.
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM 4-9 AND MEMORANDA ITEMS 1 AND 2 ARE TO BE COMPLETED (Column A) (Column B)
BY BANKS THAT ANSWERED NO TO ITEM 1 ABOVE AND BY BANKS Assets Credit Equiv-
WITH TOTAL ASSETS OF $1 BILLION OR MORE Recorded alent Amount
on the of Off-Balance
Balance Sheet Sheet Items(2)
<S> <C> <C> <C> <C>
Mil Thou Mil Thou
4. Assets and credit equivalent amounts of off-balance sheet items assigned to
the Zero percent risk category:
a. Assets recorded on the balance sheet:
(1) Securities issued by, other claims on, and claims unconditionally
guaranteed by, the U.S. Government and its agencies and other OECD RCON
central governments................................................... 3794 N/A 4.a.(1)
RCON
(2) All other............................................................. 3795 N/A 4.a.(2)
RCON
b. Credit equivalent amount of off-balance sheet items........................ 3796 N/A 4.b.
</TABLE>
(1) Exclude mandatory convertible debt reported in Schedule RC-M, item 7.
(2) Do not report in column B the risk-weighted amount of assets reported in
column A.
<PAGE>
FFIEC 034
Page RC-19
[27]
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Schedule RC-R--Continued (Column A) (Column B)
Assets Credit Equiv-
Recorded alent Amount
on the of Off-Balance
Balance Sheet Sheet Items(1)
Dollar Amounts in Thousands Mil Thou Mil Thou
- ------------------------------------------------------------------------------------------------------------------------------------
5. Assets and credit equivalent amounts of off-balance sheet items assigned to
the 20 percent risk category:
a. Assets recorded on the balance sheet:
(1) Claims conditionally guaranteed by the U.S.
Government and its agencies and other OBCD central
governments.......................................................... RCON N/A 5.a.(1)
(2) Claims collateralized by securities issued by the 3798
U.S. Government and its agencies and other OBCD central
governments; by securities issued by U.S. RCON
Government-sponsored agencies; and by cash on deposit................ 3799 N/A 5.a.(2)
(3) All other............................................................ RCON
3800 N/A 5.a.(3)
b. Credit equivalent amount of off-balance sheet items...................... RCON
3801 N/A 5.b.
6. Assets and credit equivalent amounts of off-balance sheet items assigned to
the 50 percent risk category: RCON
a. Assets recorded on the balance sheet...................................... 3802 N/A 6.a.
b. Credit equivalent amount of off-balance sheet items....................... RCON
3803 N/A 6.b.
7. Assets and credit equivalent amounts of off-balance sheet items assigned to
the 100 percent risk category: RCON
a. Assets recorded on the balance sheet...................................... 3804 N/A 7.a.
b. Credit equivalent amount of off-balance sheet items....................... RCON
3805 N/A 7.b.
8. On-balance sheet asset values excluded from the calculation of the risk-based
capital ratio(2)............................................................ RCON
3806 N/A 8.
9. Total assets recorded on the balance sheet (sum of items 4.a, 5.a, 6.a, 7.a,
and 8, column A)(must equal Schedule RC, Item 12.c plus items 4.b and 4.c). RCON
3807 N/A 9.
MEMORANDA
Dollar Amounts in Thousands
- ------------------------------------------------------------------------------------------------------------------------------------
Mil Thou
1. Current credit exposure across all off-balance sheet derivative RCON NO NE M.1.
contracts covered by the risk-based capital standards...................... 8764
</TABLE>
<TABLE>
<CAPTION>
With a remaining maturity of
(Column A) (Column B) (Column C)
One year Over Over
or less one year five years
through
five years
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
2. National principal amounts of off-balance
sheet derivative contracts:(3) Mil Thou Mil Thou Mil Thou
a. Interest rate contracts................................................... RCON NO NE RCON NO NE RCON NO NE M.2.a
3809 8766 8767
b. Foreign exchange contracts................................................ RCON NO NE RCON NO NE RCON NO NE M.2.b.
3912 8769 8770
c. Gold contracts............................................................ RCON NO NE RCON NO NE RCON NO NE M.2.c.
8771 8772 8773
d. Other precious metals contracts........................................... RCON NO NE RCON NO NE RCON NO NE M.2.d.
8774 8775 8776
e. Other commodity contracts................................................. RCON NO NE RCON NO NE RCON NO NE M.2.e.
8777 8778 8779
f. Equity derivative contracts.............................................. .RCON NO NE RCON NO NE RCON NO NE M.2.f.
A000 A001 A002
</TABLE>
(1) Do not report in column B the risk-weighted amount of assets reported in
column A.
(2) Include the difference between the fair value and the amortized cost of
available-for-sale securities in item 8 and report the amortized cost of
these securities in items 4 through 7 above. Item 8 also includes
on-balance sheet asset values (or portions thereof) of off-balance sheet
interest rate, foreign exchange rate, and commodity contracts and those
contracts (e.g., futures contracts) not subject to risk-based capital.
Exclude from item 8 margin accounts and accrued receivables as well as any
portion of the allowance for loan and lease losses in excess of the amount
that may be included in Tier 2 capital.
(3) Exclude foreign exchange contracts with an original maturity of 14 days or
less and all futures contracts.
<PAGE>
FDIC Certificate Number [ ][ ][ ][ ][ ]
EFIC 034
Page RC-20
[28]
OPTIONAL NARRATIVE STATEMENT CONCERNING THE AMOUNTS
REPORTED IN THE REPORTS OF CONDITION AND INCOME
AT CLOSE OF BUSINESS ON ________________, 19______
- -------------------------------------- -------------------, -----------------
Legal Title of Bank City State
The management of the reporting bank both on agency computerized records
may, if it wishes, submit a brief and in computer-filed releases to the
narrative statement on the amounts public.
reported in the Reports of Condition
and Income. This Optional statement All information furnished by the bank
will be made available to the public, in the narrative statement must be
along with the publicly available accurate and not misleading.
data in the Reports of Conditon and Appropriate efforts shall be taken by
Income, in response to any request for the submitting bank to ensure the
individual bank report data. However, statement's accuracy. The statement
the information reported in column A must be signed, in the space provided
and in all of Memorandum item 1 of below, by a senior officer of the bank
Schedule RC-N is regarded as who thereby attests to its accuracy.
confidential and will not be released
to the public. BANKS CHOOSING TO
SUBMIT THE NARRATIVE STATEMENT SHOULD If, subsequent to the original
ENSURE THAT THE STATEMENT DOES NOT submission, material changes are
CONTAIN THE NAMES OR OTHER submitted for the data reported in the
IDENTIFICATIONS OF INDIVIDUAL BANK Reports of Condition and Income, the
CUSTOMERS. REFERENCES TO THE AMOUNTS existing narrative statement will be
REPORTED IN THE CONFIDENTIAL ITEMS IN deleted from the files, and from
SCHEDULE RC-N, OR ANY OTHER disclosure; the bank, at its option,
INFORMATION THAT THEY ARE NOT WILLING may replace it with a statement, under
TO HAVE MADE PUBLIC OR THAT WOULD signature, appropriate to the amended
COMPROMISE THE PRIVACY OF THEIR data.
CUSTOMERS. Banks choosing not to make
a statement may check the "No comment" The optional narrative statement will
box below and should make no entries appear in agency records and in
of any kind in the space provided for release to the public exactly as
the narrative statement; i.e., DO NOT submitted (or amended as described in
enter in this space such phrases as the preceding paragraph) by the
"No statement," "Not applicable," management of the bank (except for the
""N/A," "No comment," and "None." truncation of statements exceeding the
750-character limit described above).
The optional statement must be entered THE STATEMENT WILL NOT BE EDITED OR
on this sheet.The statement should not SCREENED IN ANY WAY BY THE SUPERVISORY
exceed 100 words. Further, regardless AGENCIES FOR ACCURACY OR
of the number of words, the statement RELEVANCE. DISCLOSURE OF THE STATEMENT
must not exceed 750 characters, SHALL NOT SIGNIFY THAT ANY FEDERAL
including punctuation, indentation,and SUPERVISORY AGENCY HAS VERIFIED OR
standard spacing between words and CONFIRMED THE ACCURACY OF THE
sentences. If any submission should INFORMATION CONTAINED THEREIN. A
exceed 750 characters, as defined, it STATEMENT TO THIS EFFECT WILL APPEAR
will be truncated at 750 characters ON ANY PUBLIC RELEASE OF THE OPTIONAL
with no notice to the submitting bank STATEMENT SUBMITTED BY THE MANAGEMENT
and the truncated statement will OF THE REPORTING BANK.
appear as the bank's statement
- --------------------------------------------------------------------------------
[C171][C172]
No comment [X] (RCON 6979)
BANK MANAGEMENT STATEMENT (please type or print clearly):
(TEXT 6980)
/s/ 7/18/99
--------------------------------------------- -------------------
Signature of Executive Officer of Bank Date of Signature
<PAGE>
[29]
THIS PAGE IS TO BE COMPLETED BY ALL BANKS
- --------------------------------------------------------------------------------
NAME AND ADDRESS OF BANK OMB NO. FOR OCC: 1557-0081
OMB NO. FOR FDIC 3064-0052
PLACE LABEL HERE OMB NO. FOR FEDERAL RESERVE: 7100-0036
EXPIRATION DATE: 3/31/99
SPECIAL REPORT
(Dollar Amounts in Thousands)
Close of Business FDIC Certificate Number
DATE [ ] [ ] [ ] [ ] [ ] [C-700]
LOANS TO EXECUTIVE OFFICERS (Complete as of each Call Report Date)
The following information is required by Public Laws 90-44 and 102-242, but does
not constitute a part of the Reportf of Condition. With each Report of
Condition, these Laws require all banks to furnish a report of all loans or
other extensions of credit to their executive officers makd esince the date of
the previous Report of Condition. Data regarding individual loands or other
extensions of credit are not required. If no such loans or other extensions of
credit were made during the period, inser "none" against subitem (a). (Exclude
the first $15,000 of indebtedness of each executive officer under bank credit
card plan.) See Sections 215.2 and 215.3 of Title 12 of the Code of Federal
Regulations (Federal Reserve Board Regulation O) for the definitions of
"executive officer" and "extension of credit," respectively. Exclude loans and
other extensions of credit to directors and principal shareholders who are not
executive officers.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
<S> <C> <C>
a. Number of loans made to executive officers since the previous Call Report
date........................................................................RCON a.
3361
b. Total dollar amount of above loans (in thousands of dollars)................RCON b.
3562
c. Range of interest charged on above loans RCON RCON
(example: 9 3/4%=9.75)............................................... 7701 % to 7702 % c.
/s/Raymond E. Williams 7/18/96
- --------------------------------------------------------------------------------------------------------
SIGNATURE AND TITLE OF OFFICER AUTHORIZED TO SIGN REPORT DATE (Month, Day, Year)
RAYMOND E. WILLIAMS, SENIOR VICE PRESIDENT (804) 771-7115
- ----------------------------------------------------------------------------------------------------------------
NAME AND TITLE OF PERSON TO WHOM INQUIRIES MAY BE DIRECTED [TEXT 8903] AREA CODE/PHONE NUMBER/EXTENSION
[TEXT 8904]
Angela Radford, Accounting Officer (804) 771-7571
- ------------------------------------------------------------------------------------------------------
FDIC 8040/53 (6-95)
</TABLE>
2
LETTER OF TRANSMITTAL
INTEGRATED HEALTH SERVICES, INC.
To Tender 10 1/4 % Senior Subordinated Notes due 2006 In Exchange
for 10 1/4 % Senior Subordinated Notes due 2006, Series A
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON __________ __, 1996,
UNLESS THE OFFER IS EXTENDED
<TABLE>
<CAPTION>
<S> <C> <C>
To Signet Trust Company (the "Exchange Agent")
By Registered or Certified Mail: By Facsimile Transmission (for By Overnight Mail or Hand:
Signet Trust Company 7 St. Paul Street Eligible Institutions Only): (410) Signet Trust Company 7 St. Paul Street
6th Floor, Corporate Trust Department 752-8642 Confirm: (410) 332-5857 6th Floor, Corporate Trust Department
Baltimore, MD 21202 Attention: Diane TenHoopen Baltimore, MD 21202
Attention: Diane TenHoopen Attention: Diane TenHoopen
</TABLE>
Delivery of this instrument to an address other than as set forth above or
transmission of instructions via a facsimile number other than the one listed
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.
The undersigned hereby acknowledges receipt of the Prospectus dated
___________ __, 1996 (the "Prospectus") of Integrated Health Services, Inc. (the
"Company") and this Letter of Transmittal (the "Letter of Transmittal"), which
together constitute the Company's offer (the "Exchange Offer") to exchange
$1,000 principal amount of its 10 1/4 % Senior Subordinated Notes due 2006,
Series A (the "New Notes"), which have been registered under the Securities Act
of 1933, as amended (the "Securities Act"), pursuant to a Registration Statement
of which the Prospectus is a part, for each $1,000 principal amount of its
outstanding 10 1/4 % Senior Subordinated Notes due 2006 (the "Old Notes"). The
terms of the New Notes are identical in all material respects (including
principal amount, interest rate and maturity) to the terms of the Old Notes for
which they may be exchanged pursuant to the Exchange Offer, except that (i) the
New Notes have been registered under the Securities Act and, therefore, will not
bear legends restricting the transfer thereof and (ii) holders of New Notes will
not be entitled to certain rights of holders of Old Notes under the Registration
Rights Agreement. The term "Expiration Date" shall mean 5:00 p.m., New York City
time, on __________ __, 1996, unless the Company, in its sole discretion,
extends the Exchange Offer, in which case the term shall mean the latest date
and time to which the Exchange Offer is extended. Capitalized terms used but not
defined herein have the meaning given to them in the Prospectus.
Holders who wish to tender their Old Notes must, at a minimum, fill in the
necessary account information in the table below entitled "Account Information"
(the "Account Information Table"), complete columns (1) through (3) in the table
below entitled "Description of Old Notes Tendered" (the "Description Table") and
complete and sign in the box below entitled "SIGN HERE." If a holder wishes to
tender less than all of such Old Notes delivered to the Exchange Agent, column
(4) of the Description Table must be completed in full. See Instruction 3.
The undersigned has completed, executed and delivered this Letter of
Transmittal to indicate the action the undersigned agrees to take with respect
to the Exchange Offer. Holders who wish to tender their Old Notes must complete
this Letter of Transmittal in its entirety.
PLEASE READ THE ENTIRE LETTER OF TRANSMITTAL, INCLUDING THE ACCOMPANYING
INSTRUCTIONS, AND THE PROSPECTUS CAREFULLY BEFORE CHECKING ANY BOX BELOW.
YOUR BANK OR BROKER CAN ASSIST YOU IN COMPLETING THIS FORM. THE INSTRUCTIONS
INCLUDED WITH THIS LETTER OF TRANSMITTAL MUST BE FOLLOWED. QUESTIONS AND
REQUESTS FOR ASSISTANCE OR FOR ADDITIONAL COPIES OF THE PROSPECTUS AND THIS
LETTER OF TRANSMITTAL MAY BE DIRECTED TO THE EXCHANGE AGENT OR THE COMPANY. SEE
INSTRUCTION 9.
List below the Old Notes to which this Letter of Transmittal relates. If the
space indicated below is inadequate, the Certificate Numbers and Principal
Amounts should be listed on a separately signed schedule affixed hereto.
<PAGE>
<TABLE>
<CAPTION>
DESCRIPTION OF OLD NOTES TENDERED
(3)
Aggregate Principal (4)
(1) (2) Amount Principal Amount
Name(s) and Address(es) of Registered Holder(s) Registration Represented by Tendered
(Please fill in).............................. Numbers* Old Notes** (if less than all)**
<S> <C> <C> <C>
- ---------------------------------------------- ---------------- ----------------------- ----------------------
- ---------------------------------------------- ---------------- ----------------------- ----------------------
- ---------------------------------------------- ---------------- ----------------------- ----------------------
- ---------------------------------------------- ---------------- ----------------------- ----------------------
- ---------------------------------------------- ---------------- ----------------------- ----------------------
Total
- ---------------------------------------------- ---------------- ----------------------- ----------------------
<FN>
* Need not be completed by book-entry Holders.
** Unless otherwise indicated, the holder will be deemed to have tendered the full aggregate principal amount
represented by such Old Notes. All tenders must be in integral multiples of $1,000.
</FN>
</TABLE>
This Letter of Transmittal is to be used (i) if certificates of Old Notes are
to be forwarded herewith, (ii) if delivery of Old Notes is to be made by
book-entry transfer to an account maintained by the Exchange Agent at The
Depository Trust Company, pursuant to the procedures set forth in "The Exchange
Offer--Procedures for Tendering Old Notes" in the Prospectus or (iii) if tender
of the Old Notes is to be made according to the guaranteed delivery procedures
described in the Prospectus under the caption "The Exchange Offer--Guaranteed
Delivery Procedures." See Instruction 2. Delivery of documents to a book-entry
transfer facility does not constitute delivery to the Exchange Agent.
The term "Holder" with respect to the Exchange Offer means any person in
whose name Old Notes are registered on the books of the Company or any other
person who has obtained a properly completed bond power from the registered
holder.
o CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY BOOK-ENTRY
TRANSFER MADE TO AN ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH A BOOK ENTRY
TRANSFER FACILITY AND COMPLETE THE FOLLOWING:
Name of Tendering Institution
---------------------------------------------------
o The Depository Trust Company
Account Number Transaction Code Number
-------------------- ---------------------
Holders whose Old Notes are not immediately available or who cannot deliver
their Old Notes and all other documents required hereby to the Exchange Agent on
or prior to the Expiration Date must tender their Old Notes according to the
guaranteed delivery procedure set forth in the Prospectus under the caption "The
Exchange Offer--Guaranteed Delivery Procedures". See Instruction 2.
o CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE
OF GUARANTEED DELIVERY AND COMPLETE THE FOLLOWING:
Name of Registered Holder(s)
Name of Eligible Institution that Guaranteed Delivery
------------------------------------------
If delivered by book-entry transfer:
Account Number Transaction Code Number
-------------------- ---------------------
o CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO.
Name Address
------------------------------- -----------------------------------
2
<PAGE>
PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the principal amount of the Old Notes
indicated above in exchange for a like principal amount of the New Notes.
Subject to, and effective upon, the acceptance for exchange of such Old Notes
tendered hereby, the undersigned hereby exchanges, assigns and transfers to, or
upon the order of, the Company all right, title and interest in and to such Old
Notes as are being tendered hereby, including all rights to accrued and unpaid
interest thereon as of the Expiration Date 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 Old Notes tendered hereby. The undersigned hereby irrevocably
constitutes and appoints the Exchange Agent the true and lawful agent and
attorney-in-fact of the undersigned (with full knowledge that said Exchange
Agent acts as the agent of the Company in connection with the Exchange Offer) to
cause the Old Notes to be assigned, transferred and exchanged. The undersigned
represents and warrants that (a) it has full power and authority to tender,
exchange, assign and transfer the Old Notes and to acquire New Notes issuable
upon the exchange of such tendered Old Notes; and (b) when the same are accepted
for exchange, the Company will acquire good and unencumbered title to the
tendered Old Notes, free and clear of all liens, restrictions, charges and
encumbrances and not subject to any adverse claim.
The undersigned is the registered owner of all tendered Old Notes and the
undersigned represents that it has received from each beneficial owner of
tendered Old Notes ("Beneficial Owners'") a duly completed and executed form of
"Instructions to Registered Holder and/or Book-Entry Transfer Facility
Participant from Beneficial Owner" accompanying this Letter of Transmittal,
instructing the undersigned to take the action described in this Letter of
Transmittal.
The undersigned understands that, subject to the terms and conditions of the
Exchange Offer, Old Notes properly tendered and not withdrawn will be exchanged
for New Notes. If any amount of tendered Old Notes is not exchanged for any
reason, or if certificates are submitted that evidence a greater principal
amount of Old Notes than the principal amount to be tendered, such unexchanged
Old Notes or Old Notes for untendered amounts, as the case may be, will be
returned, without expense, to the undersigned, either to the book-entry transfer
facility account from which tender was effected or to the address below if Old
Notes were tendered in physical form.
The undersigned hereby represents to the Company that (i) the New Notes
acquired pursuant to the Exchange Offer are being obtained in the ordinary
course of business of the person receiving such New Notes, whether or not such
person is the undersigned, and (ii) neither the undersigned nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes. If the undersigned or the person receiving the
New Notes covered hereby is a broker-dealer that is receiving the New Notes for
its own account in exchange for Old Notes that were acquired as a result of
market-making activities or other trading activities, the undersigned
acknowledges that it or such other person will deliver a prospectus in
connection with any resale of such New Notes; however, by so acknowledging and
by delivering a prospectus, the undersigned will not be deemed to admit that it
is an "underwriter" within the meaning of the Securities Act. The undersigned
and any such other person acknowledge that, if they are participating in the
Exchange Offer for the purpose of distributing the New Notes, (i) they cannot
rely on the position of the staff of the Securities and Exchange Commission
enunciated in Exxon Capital Holdings Corporation (available May 13, 1988),
Morgan Stanley & Co., Incorporated (available June 5, 1991) or similar no-action
letters and, in the absence of an exemption therefrom, must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with the resale transaction and (ii) failure to comply with such
requirements in such instance could result in the undersigned or any such other
person incurring liability under the Securities Act for which such persons are
not indemnified by the Company. If the undersigned or the person receiving the
New Notes covered by this letter is an affiliate (as defined under Rule 405 of
the Securities Act) of the Company, the undersigned represents to the Company
that the undersigned understands and acknowledges that such New Notes may not be
offered for resale, resold or otherwise transferred by the undersigned or such
other person without registration under the Securities Act or an exemption
therefrom.
The undersigned also warrants that it will, upon request, execute and deliver
any additional documents deemed by the Exchange Agent or the Company to be
necessary or desirable to complete the exchange, assignment and transfer of
tendered Old Notes or transfer ownership of such Old Notes on the account books
maintained by a book-entry transfer facility. The undersigned further agrees
that acceptance of any tendered Old Notes by the Company and the issuance of New
Notes in exchange therefor shall constitute performance in full by the Company
of its obligations under the Registration Rights Agreement and that the Company
shall have no further obligations or liabilities thereunder for the registration
of the Old Notes or the New Notes.
The Exchange Offer is subject to certain conditions set forth in the
Prospectus under the caption "The Exchange Offer -- Conditions." The undersigned
recognizes that as a result of these conditions (which may be waived, in whole
or in part, by the Company), as more particularly set forth in the Prospectus,
the Company may not be required to exchange any of the Old Notes tendered hereby
and, in such event, the Old Notes not exchanged will be returned to the
undersigned at the address shown below the signature of the undersigned.
TENDERS OF OLD NOTES MADE PURSUANT TO THE EXCHANGE OFFER MAY NOT BE WITHDRAWN
AFTER 5:00 P.M., NEW YORK CITY TIME, ON THE EXPIRATION DATE. A PURPORTED NOTICE
OF WITHDRAWAL WILL BE EFFECTIVE ONLY IF DELIVERED TO THE EXCHANGE AGENT IN
ACCORDANCE WITH THE SPECIFIC PROCEDURES SET FORTH IN THE PROSPECTUS UNDER THE
HEADING "THE EXCHANGE OFFER -- WITHDRAWAL OF TENDERS."
All authority herein conferred or agreed to be conferred shall survive the
death or incapacity of the undersigned and every obligation of the undersigned
hereunder shall be binding upon the heirs, personal representatives, successors
and assigns of the undersigned. Tendered Old Notes may be withdrawn at any time
prior to the Expiration Date only in accordance with the procedures set forth in
the Instructions contained in the Letter of Transmittal and the Prospectus.
Unless otherwise indicated in the box entitled "Special Registration
Instructions" or the box entitled "Special Delivery Instructions" in this Letter
of Transmittal, certificates for all New Notes delivered in exchange for
tendered Old Notes, and any Old Notes delivered herewith but not exchanged, will
be registered in the name of the undersigned and shall be delivered to the
undersigned at the address shown below the signature of the undersigned. If a
New Note is to be issued to a person other than the person(s) signing this
Letter of Transmittal, or if the New Note is to be mailed to someone other than
the person(s) signing this Letter of Transmittal or to the person(s) signing
this Letter of Transmittal at an address different than the address shown on
this Letter of Transmittal, the appropriate boxes of this Letter of Transmittal
should be completed. If Old Notes are surrendered by Holder(s) that have
completed either the box entitled "Special Registration Instructions" or the box
entitled "Special Delivery Instructions" in this Letter of Transmittal,
signature(s) on this Letter of Transmittal must be guaranteed by an Eligible
Institution (defined in Instruction 2).
3
<PAGE>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
To be completed ONLY if the New Notes To be completed ONLY if the Notes are
are to be issued in the name of to be sent to someone other than the
someone other than the undersigned. undersigned, or to the undersigned at
Issue New Note to: an address other than that shown under
"Description of Old Notes Tendered
Name Hereby."
-------------------------------- Mail New Notes to:
Address:
----------------------------- Name:
---------------------------------
-----------------------------
(Please print or type) Address:
------------------------------
------------------------------
(Please Print or type)
REGISTERED HOLDER(S) OF OLD NOTES SIGN HERE
In addition, complete Substitute Form W-9
Below)
X
--------------------------------------------
X
--------------------------------------------
(Signature(s) of Registered Holder(s))
Must be signed by registered holder(s)
exactly as name(s) appear(s) on the Old Notes
or on a security position listing as the owner
of the Old Notes or by person(s) authorized to
become registered holder(s) by properly
completed bond powers transmitted herewith. If
signature is by attorney-in-fact, trustee,
executor, administrator, guardian, officer of
a corporation or other person acting in a
fiduciary capacity, please provide the
following information
(Please print or type):
Name and Capacity (full title):
--------------
Address (including zip):
----------------------
Area Code and Telephone Number:
----------------
Dated:
----------------------------------------
Signature Guarantee (If required -- See
Instruction 4)
Authorized Signature:
---------------------------
(Signature of Representative of Signature
Guarantor)
Name and Title:
-------------------------------
Name of Firm:
--------------------------------
Area Code and Telephone Number:
---------------
(Please print or type)
Dated:
----------------------------------------
4
<PAGE>
INSTRUCTIONS
FORMING PART OF THE TERMS AND
CONDITIONS OF THE EXCHANGE OFFER
1.Delivery of this Letter of Transmittal and Old Notes.
All physically delivered Old Notes or confirmation of any book-entry transfer
to the Exchange Agent's account at a book-entry transfer facility of Old Notes
tendered by book-entry transfer, as well as a properly completed and duly
executed copy of this Letter of Transmittal or facsimile thereof, and any other
documents required by this Letter of Transmittal, must be received by the
Exchange Agent at any of its addresses set forth herein on or prior to the
Expiration Date (as defined in the Prospectus). The method of delivery of this
Letter of Transmittal, the Old Notes and any other required documents is at the
election and risk of the Holder, and, except as otherwise provided below, the
delivery will be deemed made only when actually received by the Exchange Agent.
If such delivery is by mail, it is suggested that registered mail with return
receipt requested, properly insured, be used. In all cases, sufficient time
should be allowed to ensure timely delivery.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering Holders, by execution of this Letter of Transmittal (or
facsimile thereof), shall waive any right to receive notice of the acceptance of
the Old Notes for exchange.
Delivery to an address other than as set forth herein, or instructions via a
facsimile number other than the one set forth herein, will not constitute a
valid delivery.
2.Guaranteed Delivery Procedures.
Holders who wish to tender their Old Notes, but whose Old Notes are not
immediately available and thus cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent (or comply
with the procedures for book-entry transfer) prior to the Expiration Date, may
effect a tender if:
(a) the tender is made through a member firm of a registered national
securities exchange or of the National Association of Securities Dealers, Inc.,
a commercial bank or trust company having an office or correspondent in the
United States or an "eligible guarantor institution" within the meaning of Rule
17Ad-15 under the Exchange Act (an "Eligible Institution");
(b) prior to the Expiration Date, the Exchange Agent receives from such
Eligible Institution a properly completed and duly executed Notice of Guaranteed
Delivery (by facsimile transmission, mail or hand delivery) setting forth the
name and address of the Holder, the registration number(s) of such Old Notes and
the principal amount of Old Notes tendered, stating that the tender is being
made thereby and guaranteeing that, within three New York Stock Exchange trading
days after the Expiration Date, the Letter of Transmittal (or facsimile
thereof), together with the Old Notes (or a confirmation of book-entry transfer
of such Old Notes into the Exchange Agent's account at the book-entry transfer
facility) and any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and
(c) such properly completed and executed Letter of Transmittal (or facsimile
thereof), as well as all tendered Old Notes in proper form for transfer (or a
confirmation of book-entry transfer of such Old Notes into the Exchange Agent's
account at the book-entry transfer facility) and all other documents required by
the Letter of Transmittal, are received by the Exchange Agent within three New
York Stock Exchange trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery will be
sent to Holders who wish to tender their Old Notes according to the guaranteed
delivery procedures set forth above. Any holder who wishes to tender Old Notes
pursuant to the guaranteed delivery procedures described above must ensure that
the Exchange Agent receives the Notice of Guaranteed Delivery relating to such
Old Notes prior to the Expiration Date. Failure to complete the guaranteed
delivery procedures outlined above will not, of itself, affect the validity or
effect a revocation of any Letter of Transmittal form properly completed and
executed by a Holder who attempted to use the guaranteed delivery procedures.
3.Partial Tenders; Withdrawals.
Tenders of Old Notes will be accepted only in integral multiples of $1,000.
The aggregate principal amount of all Old Notes delivered to the Exchange Agent
will be deemed to have been tendered unless otherwise indicated in the
Description Table. If less than the entire principal amount of Old Notes
evidenced by a submitted certificate is tendered, the tendering Holder should
fill in the principal amount tendered in the column entitled "Principal Amount
Tendered (if less than all)" in the Description Table. A newly issued Old Note
for the principal amount of Old Notes submitted but not tendered will be sent to
such Holder as soon as practicable after the Expiration Date. Book-entry
transfer to the Exchange Agent should be made in the exact principal amount of
Old Notes tendered.
Old Notes tendered pursuant to the Exchange Offer may be withdrawn at any
time prior to the Expiration Date, after which tenders of Old Notes are
irrevocable. To be effective, a written, telegraphic or facsimile transmission
notice of withdrawal must be timely received by the Exchange Agent. Any such
notice of withdrawal must (i) specify the name of the person having deposited
the Old Notes to be withdrawn (the "Depositor"), (ii) identify the Old Notes to
be withdrawn (including the registration number(s) and principal amount of such
Old Notes, or, in the case of Old Notes transferred by book-entry transfer, the
name and number of the account at the book-entry transfer facility to be
credited), (iii) be signed by the Holder in the same manner as the original
signature on this Letter of Transmittal (including any required signature
guarantees) or be accompanied by documents of transfer sufficient to have the
Trustee with respect to the Old Notes register the transfer of such Old Notes
into the name of the person withdrawing the tender and (iv) specify the name in
which any such Old Notes are to be registered, if different from that of the
Depositor. If Old Notes have been tendered pursuant to the procedures for
book-entry transfer, any notice of withdrawal must also comply with the
Depository Trust Company's procedures. All questions as to the validity, form
and eligibility (including time of receipt) of such notices will be determined
by the Company, whose determination shall be final and binding on all parties.
Any Old Notes so withdrawn will be deemed not to have been validly tendered for
purposes of the Exchange Offer and no New Notes will be issued with respect
thereto unless the Old Notes so withdrawn are validly retendered. Any Old Notes
which have been tendered but which are not accepted for exchange will be
returned to the Holder thereof without cost to such Holder as soon as
practicable after withdrawal, rejection of tender or termination of the Exchange
Offer.
5
<PAGE>
4. Signature on This Letter of Transmittal; Written Instruments and
Endorsements; Guarantee of Signatures.
If this Letter of Transmittal is signed by the registered Holder(s) of the
Old Notes tendered hereby, the signature must correspond with the name(s) as
written on the face of the certificates without alteration or enlargement or any
change whatsoever. If this Letter of Transmittal is signed by a participant in
the Book-Entry Transfer Facility, the signature must correspond with the name as
it appears on the security position listing as the owner of the Old Notes.
If any of the Old Notes tendered hereby are owned of record by two or more
joint owners, all such owners must sign this Letter of Transmittal.
If a number of Old Notes registered in different names are tendered, it will
be necessary to complete, sign and submit as many separate copies of this Letter
of Transmittal as there are different registrations of Old Notes.
Signatures on this Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution unless the Old Notes
tendered hereby are tendered (i) by a registered Holder who has not completed
the box entitled "Special Registration Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution.
If this Letter of Transmittal is signed by the registered Holder or Holders
of Old Notes (which term, for the purposes described herein, shall include a
participant in the Book-Entry Transfer Facility whose name appears on a security
listing as the owner of the Old Notes) listed and tendered hereby, no
endorsements of the tendered Old Notes or separate written instruments of
transfer or exchange are required. In any other case, the registered Holder (or
acting Holder) must either properly endorse the Old Notes or transmit properly
completed bond powers with this Letter of Transmittal (in either case, executed
exactly as the name(s) of the registered Holder(s) appear(s) on the Old Notes,
and, with respect to a participant in the Book-Entry Transfer Facility whose
name appears on a security position listing as the owner of Old Notes, exactly
as the name of the participant appears on such security position listing), with
the signature on the Old Notes or bond power guaranteed by an Eligible
Institution (except where the Old Notes are tendered for the account of an
Eligible Institution).
Only a Holder in whose name tendered Old Notes are registered on the books of
the registrar (or the legal representative or attorney-in-fact of such
registered Holder) may execute and deliver this Letter of Transmittal. Any
Beneficial Owner of tendered Old Notes who is not the registered Holder must
arrange promptly with the registered Holder to execute and deliver this Letter
of Transmittal on his or her behalf through the execution and delivery to the
registered Holder of the Instructions to Registered Holder and/or Book-Entry
Transfer Facility Participant from Beneficial Owner form accompanying this
Letter of Transmittal.
If this Letter of Transmittal, any certificates or separate written
instruments of transfer or exchange are signed by trustees, executors,
administrators, guardians, attorneys-in-fact, officers of corporations or others
acting in a fiduciary or representative capacity, such persons should so
indicate when signing, and, unless waived by the Company, proper evidence
satisfactory to the Company of their authority so to act must be submitted.
5.Special Registration and Delivery Instructions.
Tendering Holders should indicate, in the applicable box, the name and
address (or account at the Book-Entry Transfer Facility) in which the New Notes
or substitute Old Notes for principal amounts not tendered or not accepted for
exchange are to be issued (or deposited), if different from the names and
addresses or accounts of the person signing this Letter of Transmittal. In the
case of issuance in a different name, the employer identification number or
social security number of the person named must also be indicated and the
tendering Holder should complete the applicable box.
If no instructions are given, the New Notes (and any Old Notes not tendered
or not accepted) will be issued in the name of and sent to the acting Holder of
the Old Notes or deposited at such Holder's account at the Book-Entry Transfer
Facility.
6.Transfer Taxes.
The Company shall pay or cause to be paid all security transfer taxes, if
any, applicable to the transfer and exchange of Old Notes to it or its order
pursuant to the Exchange Offer. If a transfer tax is imposed for any other
reason other than the transfer and exchange of Old Notes to the Company or its
order pursuant to the Exchange Offer, the amount of any such transfer taxes
(whether imposed on the registered Holder or any other person) will be payable
by the tendering Holder. If satisfactory evidence of payment of such taxes or
exception therefrom is not submitted herewith, the amount of such transfer taxes
will be billed directly to such tendering Holder.
Except as provided in this Instruction 6, it will not be necessary for
transfer stamps to be affixed to the Old Notes listed in this Letter of
Transmittal.
7.Waiver of Conditions.
The Company reserves the absolute right to waive, in whole or in part, any of
the conditions to the Exchange Offer set forth in the Prospectus.
8.Mutilated, Lost, Stolen or Destroyed Old Notes.
Any Holder whose Old Notes have been mutilated, lost, stolen or destroyed
should contact the Exchange Agent at the address indicated above for further
instructions.
9.Requests for Assistance or Additional Copies.
Questions relating to the procedure for tendering as well as requests for
additional copies of the Prospectus and this Letter of Transmittal may be
directed to the Exchange Agent at the address and telephone number(s) set forth
above. In addition, all questions relating to the Exchange Offer, as well as
requests for assistance or additional copies of the Prospectus and this Letter
of Transmittal, may be directed to the Company at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 Attention: Marc B. Levin, Executive Vice President
- -- Investor Relations (telephone: (410) 998-8400).
6
<PAGE>
10.Validity and Form.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in this Letter of Transmittal) will be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such time as the Company shall determine.
Although the Company intends to notify Holders of defects or irregularities with
respect to tenders of Old Notes, neither the Company, the Exchange Agent nor any
other person shall incur any liability for failure to give such notification.
Tenders of Old Notes will not be deemed to have been made until such defects or
irregularities have been cured or waived. Any Old Notes received by the Exchange
Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned by the Exchange
Agent to the tendering Holders as soon as practicable following the Expiration
Date.
11.Substitute Form W-9.
Federal income tax laws require each tendering Holder to provide the Company
with a correct taxpayer identification number ("TIN") on the Substitute Form W-9
which is provided under "Important Tax Information" below, and to indicate
whether or not the Holder is subject to backup withholding by checking the box
in Part 2 of the Form. Failure to provide the information on the Form or to
check the box in Part 2 of the Form may subject the tendering Holder to 31%
Federal income tax withholding on the payments made to the Holder. The box in
Part 3 of the Form may be checked if the tendering Holder has not been issued a
TIN and has applied for a TIN or intends to apply for a TIN in the near future.
If the box in Part 3 is checked and the Holder is not provided with a TIN within
sixty (60) days, the Company will withhold 31% on all such payments thereafter
until a TIN is provided to the Company.
IMPORTANT: This Letter of Transmittal or a facsimile thereof (together with
Old Notes or confirmation of book-entry transfer and all other required
documents) or a Notice of Guaranteed Delivery must be received by the Exchange
Agent on or prior to the Expiration Date.
IMPORTANT TAX INFORMATION
The Federal income tax discussion set forth below is included for general
information only. Each Holder is urged to consult a tax advisor to determine the
particular tax consequences to it (including the application and effect of
foreign, state and local tax laws) of the offer. Certain Holders (including
insurance companies, tax exempt organizations and foreign tax payors) may be
subject to special rules not discussed below. The discussion does not consider
the effect of any applicable foreign, state and local tax laws. Under Federal
income tax law, a Holder tendering Old Notes is required to provide the Exchange
Agent with such Holder's correct TIN on Substitute Form W-9 below. If such
Holder is an individual, the TIN is the Holder's social security number. The
Certificate of Awaiting Tax Identification Number should be completed if the
tendering Holder has not been issued a TIN and has applied for a number or
intends to apply for a number in the near future. If the Exchange Agent is not
provided with the correct TIN, the Holder may be subject to a $50 penalty
imposed by the Internal Revenue Service. In addition, payments that are made to
such Holder with respect to tendered Old Notes may be subject to backup
withholding.
Certain Holders (including, among others, all corporations and certain
foreign individuals and foreign entities) are not subject to these backup
withholding and reporting requirements. A corporation, however, must complete
the Substitute Form W-9, including providing its TIN and indicating that it is
exempt from backup withholding, in order to establish its exemption from backup
withholding. In order for a foreign individual to qualify as an exempt
recipient, that holder must submit to the Exchange Agent a properly completed
Internal Revenue Service Form W-8, signed under penalties of perjury, attesting
to that Holder's exempt status. Such forms can be obtained from the Exchange
Agent.
If backup withholding applies, the Exchange Agent is required to withhold 31%
of any amounts otherwise payable to the Holder. Backup withholding is not an
additional tax. Rather, the 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.
Purpose of Substitute Form W-9
To prevent backup withholding on payments that are made to a Holder with
respect to Old Notes tendered for exchange, the Holder is required to notify the
Exchange Agent of his or her correct TIN by completing the form herein
certifying that the TIN provided on Substitute Form W-9 is correct (or that such
Holder is awaiting a TIN) and that (i) such Holder has not been notified by the
Internal Revenue Service that he or she is subject to backup withholding as a
result of failure to report all interest or dividends or (ii) the Internal
Revenue Service has notified such Holder that he or she is no longer subject to
backup withholding.
What Number to Give the Exchange Agent
Each Holder is required to give the Exchange Agent the social security number
or employer identification number of the record Holder(s) of the Old Notes. If
Old Notes are in more than one name or are not in the name of the actual Holder,
consult the instructions on Internal Revenue Service Form W-9, which may be
obtained from the Exchange Agent, for additional guidance on which number to
report.
Certificate of Awaiting Tax Identification Number
If the tendering Holder has not been issued a TIN and has applied for a
number or intends to apply for a number in the near future, check the box in
Part 3 on Substitute Form W-9, sign and date the form and the Certificate of
Awaiting Taxpayer Identification Number and return them to the Exchange Agent.
If such certificate is completed and the Exchange Agent is not provided with the
TIN within 60 days, the Exchange Agent will withhold 31% of all payments made
thereafter until a TIN is provided to the Exchange Agent.
7
<PAGE>
Payor's Name: Signet Trust Company
This Substitute Form W-9 Must Be Completed and Signed
Please provide your social security number or other taxpayer identification
number on the following Substitute Form W-9 and certify therein that you are not
subject to backup withholding.
<TABLE>
<S> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND SOCIAL SECURITY
FORM W-9 CERTIFY BY SIGNIFY AND DATING BELOW. NUMBER OR
DEPARTMENT OF THE TREASURY EMPLOYER
INTERNAL REVENUE SERVICE PART 2 -- CHECK THE BOX IF YOU ARE NOT SUBJECT TO BACKUP IDENTIFICATION
WITHHOLDING UNDER THE PROVISIONS OF SECTION 3406(a)(1)(C) OF NUMBER
INTERNAL REVENUE CODE BECAUSE (1) YOU HAVE NOT BEEN
NOTIFIED THAT YOU ARE SUBJECT TO BACKUP WITHHOLDING AS A
RESULT OF FAILURE TO REPORT ALL INTEREST OR DIVIDENDS OR (2)
THE INTERNAL REVENUE SERVICE HAS NOTIFIED YOU THAT YOU ARE
NO LONGER SUBJECT TO BACKUP WITHHOLDING.
------------------------------------------------------------
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT
THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND
COMPLETE. PART 3 --
PAYER'S REQUEST FOR TAXPAYER SIGNATURE: DATED:
IDENTIFICATION NUMBER ("TIN") -------------------------------- ---------- AWAITING TIN [ ]
- ------------------------------- ----------------------------------------------------------------- -----------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY CASH
PAYMENTS MADE TO YOU.
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
</TABLE>
I CERTIFY UNDER PENALTIES OF PERJURY THAT A TAXPAYER IDENTIFICATION NUMBER HAS
NOT BEEN ISSUED TO ME, AND EITHER (A) 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 (B) I INTEND TO MAIL
OR DELIVER AN APPLICATION IN THE NEAR FUTURE. I UNDERSTAND THAT IF I DO NOT
PROVIDE A TAXPAYER IDENTIFICATION NUMBER WITHIN 60 DAYS, 31% OF ALL REPORTABLE
PAYMENTS MADE TO ME THEREAFTER WILL BE WITHHELD UNTIL I PROVIDE A NUMBER.
- ----------------------------------------- -----------------, 1996
SIGNATURE DATE
8
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTY)
As set forth in the Prospectus dated _______________, 1996 (the "Prospectus")
in the section entitled "The Exchange Offer -- Procedures for Tendering Old
Notes" and in the accompanying Letter of Transmittal (the "Letter of
Transmittal") and Instruction 2 thereto, this form or one substantially
equivalent hereto must be used to accept the Exchange Offer if certificates
representing 10 1/4 % Senior Subordinated Notes due 2006 of Integrated Health
Services, Inc. (the "Old Notes") are not immediately available or time will not
permit such holder's Old Notes or other required documents to reach the Exchange
Agent, or complete the procedures for book-entry transfer, prior to the
Expiration Date (as defined in the Prospectus) of the Exchange Offer. This form
may be delivered by hand or sent by overnight courier, facsimile transmission or
registered or certified mail to the Exchange Agent and must be received by the
Exchange Agent prior to 5:00 p.m., New York City time on ______, 1996.
TO SIGNET TRUST COMPANY
(THE "EXCHANGE AGENT")
By Registered or Certified Mail: By Overnight Mail or Hand:
Signet Trust Company Signet Trust Company
7 St. Paul Street 7 St. Paul Street
6th Floor, Corporate Trust 6th Floor, Corporate Trust
Baltimore, MD 21202 Baltimore, MD 21202
Attention: Diane TenHoopen Attention: Diane TenHoopen
By Facsimile Transmission
(for Eligible Institutions Only):
(410) 752-8642
Confirm: (410) 332-5857
Attention: Diane TenHoopen
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR
TRANSMISSION VIA FACSIMILE 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 a
Letter of Transmittal is required to be guaranteed by an "Eligible Institution"
under the instructions thereto, such signature guarantee must appear in the
applicable space provided in the signature box on the Letter of Transmittal.
<PAGE>
Ladies and Gentlemen:
The undersigned hereby tender(s) to Integrated Health Services, Inc. the
principal amount of the Old Notes listed below, upon the terms of and subject to
the conditions set forth in the Prospectus and the related Letter of Transmittal
and the instructions thereto (which together constitute the "Exchange Offer"),
receipt of which is hereby acknowledged, pursuant to the guaranteed delivery
procedures set forth in the Prospectus, as follows:
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
AMOUNT REPRESENTED TENDERED (MUST BE IN INTEGRAL
CERTIFICATE NOS. BY CERTIFICATE(S) MULTIPLES OF $1,000)
---------------- ----------------- --------------------
- ------------------------ ------------------------ ----------------------------
- ------------------------ ------------------------ ----------------------------
- ------------------------ ------------------------ ----------------------------
- ------------------------ ------------------------ ----------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly as
their name(s) appear on certificates for Old Notes or on a security position
listing as the owner of Old Notes, or by person(s) authorized to become
Holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery.
The Book-Entry Transfer Facility Account Number (if the
Old Notes will be tendered by book-entry transfer)
- --------------------------------------------------
- --------------------------------------------------
Sign Here
- --------------------------------------------------
Account Number
- --------------------------------------------------
Principal Amount Tendered
(must be in integral multiples of $1,000)
- --------------------------------------------------
Number and Street or P.O. Box
- --------------------------------------------------
City, State, Zip Code
- --------------------------------------------------
Signatures(s)
Dated: ________________, 1996
<PAGE>
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities exchange,
a member of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office in the United States, or
otherwise an "eligible guarantor institution" within the meaning of Rule 17
Ad-15 under the Securities Exchange Act of 1934, as amended, guarantees (a) that
the above named person(s) "own(s)" the principal amount of 10 1/4 % Senior
Subordinated Notes due 2006 of Integrated Health Services, Inc. (the "Old
Notes") tendered hereby within the meaning of Rule 14e-4 under the Securities
Exchange Act of 1934, as amended, (b) that such tender of such Old Notes
complies with Rule 14e-4 and (c) to deliver to the Exchange Agent the
certificates representing the Old Notes tendered hereby or confirmation of
book-entry transfer of such Old Notes into the Exchange Agent's account at The
Depository Trust Company, in proper form for transfer, together with the Letter
of Transmittal (or facsimile thereof), properly completed and duly executed,
with any required signature guarantees and any other required documents, within
three (3) New York Stock Exchange trading days after the Expiration Date.
- -------------------------------- --------------------------------
Name of Firm Authorized Signature
- -------------------------------- --------------------------------
Address Title
- --------------------------------
Zip Code Name
----------------------------
Please Type or Print
- --------------------------------
Area Code and Tel. No. Name
----------------------------
Dated
----------------------, 1996
NOTE: DO NOT SEND CERTIFICATES REPRESENTING OLD NOTES WITH THIS FORM.
CERTIFICATES REPRESENTING OLD NOTES SHOULD BE SENT ONLY WITH
A LETTER OF TRANSMITTAL.
INSTRUCTIONS
TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
INTEGRATED HEALTH SERVICES, INC.
10 1/4 % SENIOR SUBORDINATED NOTES DUE 2006
To Registered Holder and/or Participant of the Book-Entry Transfer
Facility:
The undersigned hereby acknowledges receipt of the Prospectus, dated
- ----,1996 (the "Prospectus") of Integrated Health Services, Inc., a Delaware
corporation (the "Company"), and the accompanying Letter of Transmittal (the
"Letter of Transmittal"), that together constitute the Company's offer (the
"Exchange Offer"). Capitalized terms used but not defined herein have the
meanings ascribed to them in the Prospectus.
This will instruct you, the registered holder and/or book-entry transfer
facility participant, as to action to be taken by you relating to the Exchange
Offer with respect to the 10 1/4 % Senior Subordinated Notes due 2006 (the
"Notes") held by you for the account of the undersigned.
The aggregate face amount of the Old Notes held by you for the account of the
undersigned is (fill in amount):
$ of the 10 1/4 % Senior Subordinated Notes due 2006
With respect to the Exchange Offer; the undersigned hereby instructs you
(CHECK APPROPRIATE BOX):
[ ] TO TENDER the following Old Notes held by you for the account of the
undersigned (INSERT PRINCIPAL AMOUNT OF NOTES TO BE TENDERED, IF ANY): $
[ ] NOT TO TENDER any Old Notes held by you for the account of the
undersigned.
If the undersigned instructs you to tender the Old Notes held by you for the
account of the undersigned, it is understood that you are authorized (a) to
make, on behalf of the undersigned (and the undersigned, by its signature below,
hereby makes to you), the representations and warranties contained in the Letter
of Transmittal that are to be made with respect to the undersigned as a
beneficial owner, including but not limited to the representations that (i) the
undersigned's principal residence is in the state of (FILL IN
STATE), (ii) the undersigned is acquiring the New Notes in the ordinary course
of business of the undersigned, (iii) the undersigned is not participating, does
not participate, and has no arrangement or understanding with any person to
participate in the distribution of the New Notes, (iv) the undersigned
acknowledges that any person participating in the Exchange Offer for the purpose
of distributing the New Notes must comply with the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended (the "Securities
Act"), in connection with a secondary resale transaction of the New Notes
acquired by such person and cannot rely on the position of the Staff of the
Securities and Exchange Commission set forth in no-action letters that are
discussed in the section of the Prospectus entitled "The Exchange Offer --
Resale of the New Notes," and (v) the undersigned is not an "affiliate," as
defined in Rule 405 under the Securities Act, of the Company; to agree, on
behalf of the undersigned, as set forth in the Letter of Transmittal; and to
take such other action as necessary under the Prospectus or the Letter of
Transmittal to effect the valid tender of such Old Notes.
[ ] Check this box if the Beneficial Owner of the Notes is a Participating
Broker-Dealer and such Participating Broker-Dealer acquired the Old Notes
for its own account as a result of market-making activities or other
trading activities.
<PAGE>
SIGN HERE
Name of beneficial owner(s):
----------------------------------------------------
Signature(s):
-------------------------------------------------------------------
Name (please print):
------------------------------------------------------------
Address:
------------------------------------------------------------------------
------------------------------------------------------------------------
------------------------------------------------------------------------
Telephone number:
---------------------------------------------------------------
Taxpayer Identification or Social Security Number:
------------------------------
Date:
---------------------------------------------------------------------------
2
