As filed with the Securities and Exchange Commission on July 29, 1997
Registration Number 333-12685
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
INTEGRATED HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<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)
</TABLE>
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
(410) 998-8719
(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. Senior 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
(212) 752-5958 Owings Mills, Maryland 21117
(410) 998-8400
(410) 998-8719
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.[ ]
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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>
SUBJECT TO COMPLETION, DATED JULY 29, 1997
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 , 1997, 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, the
Company's 9 5/8% Senior Subordinated Notes due 2002, Series A (the "9 5/8%
Senior Notes"), the Company's 10 3/4% Senior Subordinated Notes due 2004 (the
"10 3/4% Senior Notes") and the Company's 9 1/2% Senior Subordinated Notes due
2007 (the "9 1/2% Senior Notes"), 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
March 31, 1997, after giving effect to the issuance of $450 million aggregate
principal amount of the 9 1/2% Senior Notes and the use of proceeds therefrom to
repurchase approximately $214.9 million of its outstanding senior subordinated
notes and to repay approximately $191 million under its revolving credit
facility, 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 $273.8 million. At March 31,
1997, after giving effect to the issuance of $450 million aggregate principal
amount of the 9 1/2% Senior Notes and the use of proceeds therefrom to
repurchase approximately $214.9 million of its outstanding senior subordinated
notes and to repay approximately $191 million under its revolving credit
facility, $450.1 million of indebtedness ranks pari passu with the 10 1/4%
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 , 1997, 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. Upon consummation of the Exchange
Offer, holders of the Old Notes, whether or not tendered, will no longer be
entitled to the contingent increases in the interest rate provided for in the
Old Notes.
SEE "RISK FACTORS", WHICH BEGINS ON PAGE 15 OF THIS PROSPECTUS, FOR A
DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY HOLDERS WHO TENDER OLD NOTES
IN THE EXCHANGE OFFER.
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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)
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
The date of this Prospectus is , 1997
<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 April 30, 1997, the date of the last payment of interest on 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, 1997. 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.
IHS has not sought, and does not intend to seek, its own no-action letter, and
there can be no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer.
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 has applied 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>
(cover page continued)
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."
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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.
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TABLE OF CONTENTS
PAGE
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Available Information ................................. 4
Incorporation of Certain Documents by Reference ...... 4
Prospectus Summary .................................... 6
Risk Factors .......................................... 15
The Company .......................................... 23
Recent Developments .................................... 24
The Exchange Offer .................................... 28
Certain Federal Income Tax Consequences ............... 37
Use of Proceeds ....................................... 37
Capitalization ....................................... 38
Selected Historical Consolidated Financial Data ...... 39
Pro Forma Financial Information ........................ 43
Business ............................................. 49
Description of the New Notes ........................ 66
Description of Certain Indebtedness .................. 86
Plan of Distribution ................................. 89
Legal Matters ....................................... 90
Experts ................................................ 90
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 periodic reports, proxy statements and other information with
the Commission. Such reports, proxy statements and other information filed with
the Commission may be inspected and copied at the Public Reference Section 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 Web site on the Internet that contains reports, proxy and
information statements and other information regarding the Company and other
registrants that file electronically with the Commission and that is located at
http://www.sec.gov.
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.
Private Securities Litigation Reform Act Safe Harbor Statement. This
Prospectus (including the documents incorporated by reference herein) contains
certain forward-looking statements (as such term is defined in the Private
Securities Litigation Reform Act of 1995) and information relating to IHS that
are based on the beliefs of the management of IHS, as well as assumptions made
by and information currently available to the management of IHS. When used in
this Prospectus, the words "estimate," "project," "believe," "anticipate,"
"intend," "expect" and similar expressions are intended to identify
forward-looking statements. Such statements reflect the current views of IHS
with respect to future events and are subject to risks and uncertainties that
could cause actual results to differ materially from those contemplated in such
forward-looking statements, including those discussed under "Risk Factors."
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. IHS does not undertake any
obligation to publicly release any revisions to these forward-looking statements
to reflect events or circumstances after the date hereof or to reflect the
occurrence of unanticipated events.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The information in the following documents filed by IHS with the Commission
(File No. 1-12306) pursuant to the Exchange Act is hereby incorporated by
reference herein:
(i) The Company's Annual Report on Form 10-K for the year ended December
31, 1996;
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<PAGE>
(ii) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1997;
(iii)The Company's Current Report on Form 8-K dated October 17, 1996
reporting the acquisition of First American Health Care of Georgia,
Inc., as amended by Form 8-K/A filed November 26, 1996 and Amendment
No. 1 to Form 8-K/A filed July 11, 1997;
(iv) The Company's Current Report on Form 8-K dated October 19, 1996
reporting the execution of the Agreement and Plan of Merger among the
Company, IHS Acquisition XIX, Inc. and Coram Healthcare Corporation
(the "Merger Agreement"), as amended by Form 8-K/A filed April 11,
1997, reporting the termination of the Merger Agreement;
(v) The Company's Current Report on Form 8-K dated May 23, 1997 reporting
the Company's agreement to issue privately an aggregate of $450
million principal amount of the 9 1/2% Senior Notes;
(vi) The Company's Current Report on Form 8-K dated May 30, 1997 reporting
(i) the Company's issuance of an aggregate of $450 million principal
amount of the 9 1/2% Senior Notes and (ii) the Company's acceptance
for payment of an aggregate of $114,975,000 principal amount of the 9
5/8% Senior Notes and an aggregate of $99,893,000 principal amount of
the 10 3/4% Senior Notes pursuant to cash tender offers; and
(vii)The Company's Current Report on Form 8-K dated July 6, 1997, reporting
the execution of the Agreement and Plan of Merger among the Company,
IHS Acquisition XXIV, Inc. and RoTech Medical Corporation ("RoTech")
relating to the Company's proposed acquisition of RoTech.
All documents filed by the Company with the Commission pursuant to Sections
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
respective dates of filing of such documents. Any statement contained in this
Prospectus or in a 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.
The information relating to IHS contained in this Prospectus should be read
together with the information in the documents incorporated by reference.
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 , 1997. 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.
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<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. IHS' post-acute care services include subacute care, home
care and inpatient and outpatient rehabilitation, hospice and diagnostic
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. The
Company believes that its post-acute care network can be extended beyond
post-acute care to also provide "pre-acute" care, i.e., services to patients
which reduce the likelihood of a need for a hospital stay. IHS' post-acute care
network currently consists of approximately 1,100 service locations in 41
states.
The Company's post-acute care network 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 network strategy, the Company has focused on (i) expanding
the range of home healthcare and related services it offers to patients directly
in order to provide patients with a continuum of care throughout their recovery,
to better control costs and to meet the growing desire by payors for one-stop
shopping; (ii) developing market concentration for its post-acute care services
in targeted states due to increasing payor consolidation and the increased
preference of payors, physicians and patients for dealing with only one service
provider; (iii) developing subacute care units; and (iv) forming strategic
alliances with health maintenance organizations, hospital groups and physicians.
Given the increasing importance of managed care in the healthcare marketplace
and the continued cost containment pressures from Medicare, Medicaid and private
payors, IHS has been restructuring its operations to enable IHS to focus on
obtaining contracts with managed care organizations and to provide capitated
services. IHS' strategy is to become a preferred or exclusive provider of
post-acute care services to managed care organizations.
In implementing its post-acute care network 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 October 1996 acquired First American Health Care of Georgia, Inc.
("First American"), a provider of home health services, principally home
nursing, in 21 states, primarily Alabama, California, Florida, Georgia,
Michigan, Pennsylvania and Tennessee, and has entered into an agreement to
acquire RoTech Medical Corporation ("RoTech"), a provider of home healthcare
products and services, with an emphasis on respiratory and home infusion
services, principally to patients in non-urban areas. See "Recent Developments."
IHS intends to use the home healthcare setting and the delivery franchise of the
home healthcare branch and agency network to (i) deliver sophisticated care,
6
<PAGE>
such as skilled nursing care, home infusion therapy and rehabilitation, outside
the hospital or nursing home; (ii) serve as a referral base for IHS' other
services and healthcare capabilities; and (iii) provide a cost-effective site
for case management and patient direction.
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 172 geriatric care facilities (116 owned or
leased and 56 managed) and 158 MSUs located within 84 of these facilities.
Specialty medical services revenues, which include all MSU charges, all revenue
from providing rehabilitative therapies, pharmaceuticals, medical supplies and
durable medical equipment to all its patients, all revenue from its Alzheimer's
programs and all revenue from its provision of pharmacy, rehabilitation therapy,
home healthcare, hospice care and similar services to third- parties,
constituted approximately 57%, 65% and 70% of net revenues during the years
ended December 31, 1994, 1995 and 1996, respectively. 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. For the year ended December 31, 1996, approximately
17% of IHS' revenues were derived from home health and hospice care,
approximately 53% were derived from subacute and other ancillary services,
approximately 27% were derived from basic nursing home services and the
remaining approximately 3% were derived from management and other services. On a
pro forma basis after giving effect to the acquisition of First American, for
the year ended December 31, 1996, approximately 35% of IHS' revenues were
derived from home health and hospice care, approximately 41% were derived from
subacute and other ancillary services, approximately 21% were derived from
traditional basic nursing home services and the remaining approximately 3% were
derived from management and other services.
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.
7
<PAGE>
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
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. 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, 1997, 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 April 30, 1997, the date of
the last payment of interest on 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,
1997. Accord-
8
<PAGE>
ingly, 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 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."
9
<PAGE>
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 be freely transferable
by holders thereof (subject to the restrictions discussed elsewhere herein), and
(ii) the holders of New Notes will 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,
1997.
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 9 5/8% Senior Notes,
the 10 3/4% Senior Notes and the 9 1/2% Senior
Notes, 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. At March 31, 1997, after giving
effect to the issuance of $450 million
10
<PAGE>
aggregate principal amount of the 9 1/2% Senior
Notes and the use of proceeds therefrom to repur
chase approximately $214.9 million of its
outstanding senior subordinated notes and to repay
approximately $191 million under its revolving
credit facility, 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 $273.8 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 has applied for listing of the New
Notes on the New York Stock Exchange.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------------------
ACTUAL
---------------------------------------------------------------
PRO FORMA
1992 1993 1994 1995 1996 1996(1)
----------- ----------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3)(4):
Net revenues ......... $ 202,096 $ 296,304 $ 712,102 $ 1,178,888 $ 1,434,695 $ 1,881,193
Operating income be-
fore fixed charges(5) . 44,546 66,536 146,930 234,321 279,711 250,671
Depreciation and amor-
tization(6) ........... 4,334 8,126 26,367 39,961 41,681 52,764
Interest, net(7)(8) ... 1,493 5,705 20,602 38,977 64,110 88,178
Loss from impairment
of long-lived assets(9) - - - 83,321 - -
Other non-recurring
charges (income)(10) . - - - 49,639 (14,457) 14,812
Earnings (loss)(11):
Before income taxes
and extraordinary
items ............... 19,174 30,790 58,979 (42,259) 111,480 19,849
Before extraordinary
items ............... $ 11,888 $ 18,782 $ 36,862 $ (25,989) $ 47,765 $ 7,394
OTHER FINANCIAL DATA:
EBITDA(12) ............ $ 25,001 $ 44,621 $ 105,948 $ 169,639 $ 202,814 $ 175,603
Ratio of EBITDA to
interest, net(12) ... 16.7x 7.8x 5.1x 4.4x 3.2x 2.0x
Ratio of earnings to
fixed charges(13) ... 2.8x 2.6x 2.4x 0.3x 2.1x 1.1x
Capital expenditures:
Acquisitions(14) ...... $ 13,898 $ 209,214 $ 152,791 $ 82,686 $ 242,819
Other(15) ............ 27,124 59,959 91,354 145,065 145,902
OTHER OPERATING DATA:
MSU Beds(16) ......... 624 1,206 2,304 3,172 3,555
MSU Occupancy ......... 60.1% 69.4% 71.4% 72.0% 77.0%
Specialty Medical Ser-
vices Revenues(17) .... 43.6% 54.7% 56.8% 65.4% 69.6%
<PAGE>
<CAPTION>
THREE MONTHS ENDED MARCH 31,
------------------------------------
ACTUAL
----------------------- PRO FORMA
1996 1997 1997(2)
----------- ---------- ------------
<S> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3)(4):
Net revenues ......... $ 327,273 $ 460,943 $ 460,943
Operating income be-
fore fixed charges(5) . 62,285 90,515 90,515
Depreciation and amor-
tization(6) 8,274 15,030 15,171
Interest, net(7)(8) ... 14,214 21,421 23,223
Loss from impairment
of long-lived assets(9) - - -
Other non-recurring
charges (income)(10) . - (1,025) (1,025)
Earnings (loss)(11):
Before income taxes
and extraordinary
items ............... 22,441 31,261 29,318
Before extraordinary
items ............... $ 13,801 $ 19,069 $ 17,884
OTHER FINANCIAL DATA:
EBITDA(12) ............ $ 44,929 $ 66,687 $ 66,687
Ratio of EBITDA to
interest, net(12) ... 3.2x 3.1x 2.9x
Ratio of earnings to
fixed charges(13) ... 2.0x 2.0x 1.9x
Capital expenditures:
Acquisitions(14) ...... $ 16,581 $ 10,975
Other(15) ............ 35,705 41,096
OTHER OPERATING DATA:
MSU Beds(16) ......... 3,319 3,620
MSU Occupancy ......... 75.0% 79.6%
Specialty Medical Ser-
vices Revenues(17) .... 67.1% 78.7%
</TABLE>
MARCH 31, 1997
---------------------------
ACTUAL PRO FORMA(18)
----------- -------------
BALANCE SHEET DATA:
Cash and temporary investments .................. $ 40,504 $ 40,504
Working capital ................................. 83,886 104,179
Total assets .................................... 2,058,078 2,075,322
Long-term debt, including current portion ...... 1,096,689 1,140,775
Stockholders' equity ........................... 574,786 556,618
- ----------
(1) Gives effect to (i) the sale by IHS of its pharmacy division in July 1996
(the "Pharmacy Sale"), (ii) the sale by IHS of a majority interest in its
assisted living services subsidiary in October 1996 (the "ILC Offering"),
(iii) the acquisition of First American in October 1996 (the "First
American Acquisition"), (iv) the acquisition of (a) Vintage Health Care
Center, a skilled nursing and assisted living facility, in January 1996,
(b) Rehab Management Systems, Inc., an outpatient rehabilitation company,
in March 1996, (c) Hospice of the Great Lakes, Inc., a hospice company, in
May 1996, (d) J.R. Rehab Associates, Inc., an inpatient and outpatient
rehabilitation center, in August 1996, (e) Extendicare of Tennessee, Inc.,
a home health company, in August 1996, (f) Edgewater Home Infusion
Services, Inc., a home infusion company, in August 1996, (g) Century Home
Services, Inc., a home health services company, in September 1996, (h)
Signature Home Care, Inc., a home health company, in September 1996, (i)
Mediq Mobile X-Ray Services, Inc., a mobile diagnostic company, in November
1996, (j) Total Rehab Services, LLC and Total Rehab Services 02, LLC,
providers of contract rehabilitation and respiratory services, in November
1996, and (k) Lifeway Inc., a physician and disease state management
company, in
12
<PAGE>
November 1996, (v) the sale of the Old Notes and the application of the net
proceeds therefrom as described under "Use of Proceeds," and (vi) the sale
of $450 million aggregate principal amount of the Company's 9 1/2% Senior
Subordinated Notes due 2007 and the use of proceeds therefrom to repurchase
approximately $214.9 million of its outstanding senior subordinated notes
and to repay approximately $191 million under its revolving credit
facility, as if each of the foregoing transactions had occurred on January
1, 1996. See "Recent Developments-Sale of 9 1/2% Senior Subordinated Notes
due 2007" and "Unaudited Pro Forma Financial Statements."
(2) Adjusted to reflect the sale of $450 million aggregate principal amount of
the 9 1/2% Senior Notes and the use of proceeds therefrom to repurchase
approximately $214.9 million of its outstanding senior subordinated notes
and to repay approximately $191 million under its revolving credit facility
as if such sale of 9 1/2% Senior Notes and application of net proceeds
therefrom had occurred on January 1, 1997. See "Recent Developments-Sale of
9 1/2% Senior Subordinated Notes due 2007."
(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(o) of Notes to Consolidated 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 $178,000, $306,000,
$621,000, $645,000, $1,457,000, $2,212,000, $256,000, $560,000 and $701,000
for the years ended December 31, 1992, 1993, 1994, 1995 and 1996, pro forma
for the year ended December 31, 1996, for the three months ended March 31,
1996 and 1997 and pro forma for the three months ended March 31, 1997,
respectively.
(7) Net of interest income of $1,300,000, $2,669,000, $1,121,000, $1,876,000,
$2,233,000, $2,233,000, $1,144,000, $740,000 and $740,000 for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996, pro forma for the year
ended December 31, 1996, for the three months ended March 31, 1996 and 1997
and pro forma for the three months ended March 31, 1997, respectively.
(8) Interest, net does not include capitalized interest of $860,000,
$1,402,000, $3,030,000, $5,155,000, $3,800,000, $3,800,000, $900,000,
$900,000 and $900,000 for the years ended December 31, 1992, 1993, 1994,
1995 and 1996, pro forma for the year ended December 31, 1996, for the
three months ended March 31, 1996 and 1997 and pro forma for the three
months ended March 31, 1997, 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 $83,321,000.
See "Selected Historical Consolidated Financial Data" and Notes 1(k) and 18
of Notes to Consolidated Financial Statements.
(10) In 1995, consists of (i) expenses of $1,939,000 related to the merger with
IntegraCare, (ii) a $21,915,000 loss on the write-off of accrued management
fees, loans and contract acquisition costs related to the Company's
termination of its agreement, entered into in January 1994, to manage 23
long-term care and psychiatric facilities owned by Crestwood Hospital and
(iii) the write-off of $25,785,000 of deferred pre-opening costs resulting
from a change in accounting estimate regarding the future benefit of
deferred pre-opening costs. In 1996, consists primarily of (i) a gain of
$34,298,000 from the Pharmacy Sale, (ii) a loss of $8,497,000 from its sale
of shares in the ILC Offering, (iii) a $7,825,000 loss on the write-off of
accrued management fees and loans resulting from the Company's termination
of its 10-year agreement, entered into in September 1994, to manage six
geriatric care facilities owned by All Seasons and (iv) a $3,519,000 exit
cost resulting from the closure of redundant home healthcare agencies.
Because IHS' investment in the Capstone common stock received in the
Pharmacy Sale had a very small tax basis, the taxable gain on the sale
significantly exceeded the gain for financial reporting purposes, thereby
resulting in a disproportionately higher income tax provision related to
the sale. In 1996, pro forma consists primarily of (i) a $7,825,000 loss on
write-off of accrued management fees and loans resulting from the Company's
termination of its 10-year agreement, entered into in September 1994, to
manage six geriatric care facilities owned by All Seasons, (ii) a
$3,519,000 exit cost resulting from the closure of redundant home
healthcare agencies and (iii) bankruptcy costs incurred by First American
of $3,468,000. In 1997 and 1997 pro forma, consists of (i) a gain of
$7,578,000 realized on the shares of Capstone Pharmacy Services, Inc.
("Capstone") common stock received in the Pharmacy Sale and (ii) the
write-off of $6,553,000 of accounting, legal and other costs resulting from
the proposed transaction with Coram Healthcare Corporation. See "Recent
Developments," "Unaudited Pro Forma Financial Information" and Notes 1(g),
1(o) and 18 of Notes to Consolidated Financial Statements.
13
<PAGE>
(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
effect 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 effect 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 effect 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. In 1996, the Company recorded a loss on extinguishment of
debt of $2,327,000 relating primarily to prepayment charges and the
write-off of deferred financing costs. Such loss, reduced by the related
income tax effect of $896,000, is presented in the statement of operations
for the year ended December 31, 1996 as an extraordinary loss of
$1,431,000. See "Selected Historical Consolidated Financial Data." As a
result of the repurchase of its outstanding 9 5/8% Senior Notes and 10 3/4%
Senior Notes with the proceeds of the sale of the 9 1/2% Senior Notes, the
Company will record an extraordinary loss on extinguishment of debt of
approximately $18,168,000 (net of related income tax effect of
approximately $11,616,000) in the second quarter of 1997. See "Recent
Developments - Repurchase of 9 5/8% Senior Subordinated Notes and 10 3/4%
Senior Subordinated Notes" and "- Sale of 9 1/2% Senior Subordinated Notes
due 2007."
(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. Pro forma EBITDA for the year
ended December 31, 1996 does not give effect to the benefits the Company
expects will result from the closure of unprofitable and redundant home
healthcare agencies in the fourth quarter of 1996 and the ability to spread
home healthcare administrative costs over a larger base following the First
American Acquisition.
(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 on
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 on impairment of long-lived assets and other non-recurring charges
would have been 2.2x for the year ended December 31, 1995.
(14) Does not include assumed indebtedness and other liabilities of acquired
companies.
(15) Includes renovation costs and equipment purchases.
(16) At the end of the period.
(17) As a percentage of net revenues.
(18) Adjusted to reflect IHS' issuance of $450 million aggregate principal
amount of 9 1/2% Senior Notes and the use of proceeds therefrom to
repurchase approximately $214.9 million of its outstanding senior
subordinated notes and to repay approximately $191 million under its
revolving credit facility. See "Recent Developments - Repurchase of 9 5/8%
Senior Subordinated Notes and 10 3/4% Senior Subordinated Notes" and "Sale
of 9 1/2% Senior Subordinated Notes due 2007."
14
<PAGE>
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.
RISKS RELATED TO SUBSTANTIAL INDEBTEDNESS
The Company's indebtedness is substantial in relation to its stockholders'
equity. At March 31, 1997, IHS' total long-term debt, net of current portion,
accounted for 65.3% of its total capitalization. On a pro forma basis, after
giving effect to the issuance of $450 million aggregate principal amount of 9
1/2% Senior Notes and the use of proceeds therefrom to repurchase approximately
$214.9 million of its outstanding senior subordinated notes and to repay
approximately $191 million under its revolving credit facility, IHS' total
long-term debt, net of current portion, at March 31, 1997 accounted for 66.9% of
its total pro forma capitalization. See "Capitalization." IHS also has
significant lease obligations with respect to the facilities operated pursuant
to long-term leases, which aggregated approximately $224.0 million at March 31,
1997. For the year ended December 31, 1996 and the three months ended March 31,
1996 and 1997, the Company's rent expense was $77.8 million ($77.0 million on a
pro forma basis after giving effect to the First American Acquisition, the ILC
Offering, the Pharmacy Sale and certain other acquisitions consummated in 1996),
$17.7 million and $24.0 million, respectively. In addition, IHS is obligated to
pay up to an additional $155 million in respect of the acquisition of First
American during 2000 to 2004 under certain circumstances. See "Recent
Developments - First American Acquisition." The Company's strategy of expanding
its specialty medical services and growing through acquisitions may require
additional borrowings in order to finance working capital, capital expenditures
and the purchase price of any acquisitions. The degree to which the Company is
leveraged, as well as its rent expense, could have important consequences to
holders of the 10 1/4% Notes, including: (i) IHS' ability to obtain additional
financing in the future for working capital, capital expenditures, acquisitions
or general corporate purposes may be impaired, (ii) a substantial portion of
IHS' cash flow from operations may be dedicated to the payment of principal and
interest on its indebtedness and rent expense, thereby reducing the funds
available to IHS for its operations, (iii) substantially all of the Company's
indebtedness at June 30, 1997, 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 Senior 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 IHS' borrowings bear, and will
continue to bear, variable rates of interest, which expose IHS to increases in
interest rates, and (v) certain of IHS' indebtedness contains financial and
other restrictive covenants, including those restricting the incurrence of
additional indebtedness, the creation of liens, the payment of dividends and
sales of assets and imposing minimum net worth requirements. In addition, IHS'
leverage may also adversely affect IHS' ability to respond to changing business
and economic conditions or continue its growth strategy. There can be no
assurance that IHS' operating results will be sufficient for the payment of IHS'
indebtedness. In connection with the offering of 9 1/2% Senior Notes, both
Moody's and Standard & Poors in May 1997 confirmed their ratings of IHS' other
long-term debt obligations, but with a negative outlook. Moody's stated that it
retained a negative outlook anticipating that IHS will continue to be an
aggressive acquirer of companies, and that it would view negatively any increase
in leverage. Standard & Poors stated that its ratings reflected the Company's
aggressive transition towards becoming a full service alternate-site healthcare
provider and its limited cash flow relative to its heavy debt burden. If IHS
were unable to meet interest, principal or lease payments, or satisfy financial
covenants, it could be required to seek renegotiation of such payments and/or
covenants or obtain additional equity or debt financing. To the extent IHS
finances its activities with additional debt, IHS may become subject to certain
additional financial and other covenants that may restrict its ability to pursue
its growth strategy. There can be no assurance that any such efforts would be
successful or timely or that the terms of any such financing or refinancing
would be acceptable to IHS. See "- Risks Related to Capital Requirements" and
"Description of Certain Indebtedness."
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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, 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 10 1/4%
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 Certain Indebtedness." At March 31, 1997, after
giving effect to the issuance of $450 million aggregate principal amount of 9
1/2% Senior Notes and the use of proceeds therefrom to repurchase approximately
$214.9 million of its outstanding senior subordinated notes and to repay
approximately $191 million under its revolving credit facility, 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 $273.8 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 $224.0 million at March 31, 1997, 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."
RISKS ASSOCIATED WITH GROWTH THROUGH ACQUISITIONS AND INTERNAL DEVELOPMENT
IHS' growth strategy involves growth through acquisitions and internal
development and, as a result, IHS is subject to various risks associated with
this growth strategy. The Company's planned expansion and growth require 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, that additional MSUs be established in the
Company's existing facilities and that the Company acquire, lease or acquire the
right to manage for others additional facilities in which MSUs can be
established. Such expansion and growth will depend on 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, that MSUs can be
successfully established in acquired 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,
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including competition for acquisitions. The Company anticipates that
competition for acquisition opportunities will intensify due to the ongoing
consolidation in the healthcare industry. See "- Risks Related to Managed Care
Strategy" and "- Competition."
The successful integration of acquired businesses, including First American
and, if the acquisition of RoTech is consummated, RoTech, 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 integration of the Company's recent acquisitions will require
substantial attention from management. The diversion of the attention of
management, and any difficulties encountered in the transition process, could
have a material adverse effect on the Company's operations and financial
results. In addition, the process of integrating the various businesses could
cause the interruption of, or a loss of momentum in, the activities of some or
all of these businesses, which could have a material adverse effect on 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.
IHS' current and anticipated future growth has placed, and will continue to
place, significant demands on the management, operational and financial
resources of IHS. IHS' ability to manage its growth effectively will require it
to continue to improve its operational, financial and management information
systems and to continue to attract, train, motivate, manage and retain key
employees. There can be no assurance that IHS will be able to manage its
expanded operations effectively. See "- Risks Related to Capital Requirements."
There can be no assurance that the Company will be successful in
implementing its strategy or in responding to ongoing changes in the healthcare
industry which may require adjustments to its strategy. If IHS fails to
implement its strategy successfully or does not respond timely and adequately to
ongoing changes in the healthcare industry, the Company's business, financial
condition and results of operations will be materially adversely affected.
RISKS RELATED TO MANAGED CARE STRATEGY
Managed care payors and traditional indemnity insurers have experienced
pressure from their policyholders to curb or reduce the growth in premiums paid
to such organizations for healthcare services. This pressure has resulted in
demands on healthcare service providers to reduce their prices or to share in
the financial risk of providing care through alternate fee structures such as
capitation or fixed case rates. Given the increasing importance of managed care
in the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has been restructuring its operations to enable IHS
to focus on obtaining contracts with managed care organizations and to provide
capitated services. The Company believes that its home healthcare capabilities
will be an important component of its ability to provide services under
capitated and other alternate fee arrangements. However, to date there has been
limited demand among managed-care organizations for post-acute care network
services, and there can be no assurance that demand for such services will
increase. Further, IHS has limited experience in providing services under
capitated and other alternate fee arrangements and setting the applicable rates.
Accordingly, there can be no assurance that the fees received by IHS will cover
the cost of services provided. If revenue for capitated services is insufficient
to cover the treatment costs, IHS' operating results could be adversely
affected. As a result, the success of IHS' managed care strategy will depend in
large part on its ability to increase demand for post-acute care services among
managed care organizations, to obtain favorable agreements with managed care
organizations and to manage effectively its operating and healthcare delivery
costs through various methods, including utilization management and competitive
pricing for purchased services. Additionally, there can be no assurance that
pricing pressures faced by healthcare providers will not have a material adverse
effect on the Company's business, results of operations and financial condition.
Further, pursuing a strategy focused on risk-sharing fee arrangements
entails certain regulatory risks. Many states impose restrictions on a service
provider's ability to provide capitated services unless it meets certain
financial criteria, and may view capitated fee arrangements as an insurance
activity,
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subjecting the entity accepting the capitated fee to regulation as an insurance
company rather than merely a licensed healthcare provider accepting a business
risk in connection with the manner in which it is charging for its services. The
laws governing risk-sharing fee arrangements for healthcare service providers
are evolving and are not certain at this time. If the risk sharing activities of
IHS require licensure as an insurance company, there can be no assurance that
IHS could obtain or maintain the necessary licensure, or that IHS would be able
to meet any financial criteria imposed by a state. If the Company was precluded
from providing services under risk sharing fee arrangements, its managed care
strategy would be adversely affected. See "Uncertainty of Government
Regulation."
RISKS RELATED TO CAPITAL REQUIREMENTS
IHS' growth strategy requires substantial capital for the acquisition of
additional home healthcare and related service providers and geriatric care
facilities and the establishment of new, and expansion of existing, MSUs. The
effective integration, operation and expansion of the existing businesses will
also require substantial capital. 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. IHS may
raise additional capital through the issuance of long-term or short-term
indebtedness or the issuance of additional equity securities in private or
public transactions, at such times as management deems appropriate and the
market allows. Any of such financings could result in dilution of existing
equity positions, increased interest and amortization expense or decreased
income to fund future expansion. There can be no assurance that acceptable
financing for future acquisitions or for the integration and expansion of
existing businesses and operations can be obtained. The Company's bank credit
facility limits the Company's ability to make acquisitions, and certain of the
indentures under which the Company's outstanding subordinated debt securities
were issued, including the Indenture, limit the Company's ability to incur
additional indebtedness unless certain financial tests are met. See "- Risks
Related to Substantial Indebtedness," "Business - Company Strategy,"
"Description of the New Notes - Certain Covenants - Limitations on Additional
Indebtedness" and "Description of Certain Indebtedness."
RISKS RELATED TO RECENT ACQUISITIONS
IHS has recently completed several major acquisitions, including the
acquisition of First American, and is still in the process of integrating those
acquired businesses. The IHS Board and senior management of IHS face a
significant challenge in their efforts to integrate the acquired businesses,
including First American and, if the acquisition of RoTech is consummated,
RoTech. The dedication of management resources to such integration may detract
attention from the day-to-day business of IHS. There can be no assurance that
there will not be substantial costs associated with such activities or that
there will not be other material adverse effects of these integration efforts.
Further, there can be no assurance that management's efforts to integrate the
operations of IHS and newly acquired companies will be successful or that the
anticipated benefits of the recent acquisitions will be fully realized.
IHS has recently expanded significantly its home healthcare operations. On
a pro forma basis, after giving effect to the acquisition of First American
(which derives substantially all its revenues from Medicare), approximately 88%,
89% and 85% of IHS' home healthcare revenues were derived from Medicare in the
year ended December 31, 1996 and the three months ended March 31, 1996 and 1997,
respectively. On a pro forma basis, after giving effect to the First American
Acquisition, home nursing services accounted for approximately 97.6%, 97.3% and
92.9%, respectively, of IHS' home healthcare revenues in these periods. Medicare
has developed a national fee schedule for infusion therapy, respiratory therapy
and home medical equipment which provides reimbursement at 80% of the amount of
any fee on the schedule. The remaining 20% is paid by other third party payors
(including Medicaid in the case of "medically indigent" patients) or patients;
with respect to home nursing, Medicare generally reimburses for the cost
(including a rate of return) of providing such services, up to a regionally
adjusted allowable maximum per visit and per discipline with no fixed limit on
the number of visits. There generally is no deductible or coinsurance. As a
result, there is no reward for efficiency, provided that costs are below the
cap, and traditional home healthcare services carry relatively low margins.
However, the Company expects that Medicare will implement a prospective payment
system for home nursing
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services in the next several years, and implementation of a prospective payment
system will be a critical element to the success of IHS' expansion into home
nursing services. Based upon prior legislative proposals, IHS believes that a
prospective payment system would most likely provide a healthcare provider a
predetermined rate for a given service, with providers that have costs below the
predetermined rate being entitled to keep some or all of this difference. There
can be no assurance that Medicare will implement a prospective payment system
for home nursing services in the next several years or at all. The
implementation of a prospective payment system will require the Company to make
contingent payments related to the First American Acquisition of $155 million
over a period of five years. The inability of IHS to realize operating
efficiencies and provide home healthcare services at a cost below the
established Medicare fee schedule could have a material adverse effect on IHS'
home healthcare operations and its post-acute care network. See "- Risk of
Adverse Effect of Healthcare Reform," "Recent Developments - First American
Acquisition" and "Unaudited Pro Forma Financial Information."
RISKS RELATED TO HISTORICAL FINANCIAL PERFORMANCE OF FIRST AMERICAN
During the year ended December 31, 1995 and the nine months ended September
30, 1996, First American recorded a net loss of $110.4 million and $36.2
million, respectively. Numerous factors have affected First American's
performance and financial condition prior to its acquisition by IHS, including,
among others, high administrative costs and the settlement of claims for
reimbursement of certain overpayments and unallowable reimbursements under
Medicare (which settlement resulted in a reduction to patient service revenues
of $54.6 million for the year ended December 31, 1995 and $10.4 million for the
nine months ended September 30, 1996). In addition, in February 1996, in
response to the stoppage by the Health Care Financing Administration ("HCFA") of
its bi-weekly periodic interim payments ("PIP") to First American, First
American was forced to declare bankruptcy. In March 1996, the bankruptcy court
ordered HCFA to resume PIP payments to First American. However, the bankruptcy
filing and operation of First American in bankruptcy until its acquisition by
IHS adversely affected the business, results of operations and financial
condition of First American. There can be no assurance that these factors or the
First American bankruptcy will not continue to have an adverse effect on First
American's and IHS' business, financial condition and results of operations in
the future. There can be no assurance that the historical losses incurred by
First American will not continue. See "Recent Developments - First American
Acquisition."
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 it operates under Medicaid. The healthcare industry
is experiencing a trend toward cost containment, as government and other third
party payors seek to impose lower reimbursement and utilization rates and
negotiate reduced payment schedules with service providers. These cost
containment measures, combined with the increasing influence of managed care
payors and competition for patients, has resulted in reduced rates of
reimbursement for services provided by IHS. 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, 1995 and 1996 and the three months ended March 31, 1996
and 1997, the Company derived approximately 56%, 55%, 60%, 57% and 67%,
respectively, of its patient revenues from Medicare and Medicaid. Substantially
all of First American's revenues are derived from Medicare. On a pro forma basis
after giving effect to the acquisition of First American and the ILC Offering,
approximately 69%, 68%, 68% and 67% of the Company's patient revenues have been
derived from Medicare and Medicaid during the years ended December 31, 1995 and
1996 and the three months ended March 31, 1996 and 1997, respectively.
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
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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."
Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. Consequently, the healthcare needs of a large percentage of the United
States population are provided by a small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate IHS as a preferred provider and/or engage IHS'
competitors as a preferred or exclusive provider, the business of IHS could be
materially adversely affected.
RISK OF ADVERSE EFFECT OF HEALTHCARE REFORM
In addition to extensive existing government healthcare regulation, there
are numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services,
including a number of proposals that would significantly limit reimbursement
under Medicare and Medicaid. It is not clear at this time what proposals, if
any, will be adopted or, if adopted, what effect such proposals would have on
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. In
addition, there have been proposals to convert the current cost reimbursement
system for home nursing services covered under Medicare to a prospective payment
system. The prospective payment system proposals generally provide for
prospectively established per visit payments to be made for all covered
services, which are then subject to an annual aggregate per episode limit at the
end of the year. Home health agencies that are able to keep their total expenses
per visit during the year below their per episode annual limits will be able to
retain a specified percentage of the difference, subject to certain aggregate
limitations. Such changes could have a material adverse effect on the Company
and its growth strategy. The implementation of a prospective payment system will
require the Company to make contingent payments related to the First American
Acquisition of $155 million over a period of five years. Additionally, the May
1997 balanced budget agreement between the President and Congress contemplates
changing Medicare payments for skilled nursing facilities and home nursing
services from a cost-reimbursement system to a prospective payment system. The
inability of IHS to provide home healthcare and/or skilled nursing services at a
cost below the established Medicare fee schedule could have a material adverse
effect on IHS' home healthcare operations, post-acute care network and business
generally. See "Risks Related to Recent Acquisitions," "- Reliance on
Reimbursement by Third Party Payors," and "Recent Developments - First American
Acquisition." There can be no assurance that currently proposed or future
healthcare legislation or other changes in the administration or interpretation
of governmental healthcare programs will not have an adverse effect on 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."
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 reim-
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bursement 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 authorities 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. In addition, in the conduct of its business the Company's
operations are subject to review by federal and state regulatory agencies. In
the course of these reviews, problems are from time to time identified by these
agencies. Although the Company has to date been able to resolve these problems
in a manner satisfactory to the regulatory agencies without a material adverse
effect on the Company, there can be no assurance that the Company will be able
to do so in the future.
Recently effective provisions of the regulations adopted under the Omnibus
Budget Reconciliation Act of 1987 ("OBRA") have implemented stricter guidelines
for annual state surveys of long-term care facilities and expanded remedies
available to HCFA to enforce compliance with the detailed regulations mandating
minimum healthcare standards and may significantly affect the consequences to
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 Bills",
which prohibit, with limited exceptions, financial relationships between
ancillary service providers and referring physicians and the federal,
"anti-kickback law", which prohibits, among other things, the offer, payment,
solicitation or receipt of any form of remuneration in return for the referral
of Medicare and Medicaid patients. The Office of 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."
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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 the Company's 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.
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 Company's business, results of operations and financial
condition. See "- Risk of Adverse Effect of Healthcare Reform."
COMPETITION
The healthcare industry is highly competitive and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. 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 more limited extent, price. The Company also
competes with other providers in the acquisition and development of additional
facilities and service providers. 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, other home
healthcare companies 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. New service introductions
and enhancements, acquisitions, continued industry consolidation and the
development of strategic relationships by IHS' competitors could cause a
significant decline in sales or loss of market acceptance of IHS' services or
intense price competition or make IHS' services noncompetitive. Further,
technological advances in drug delivery systems and the development of new
medical treatments that cure certain complex diseases or reduce the need for
healthcare services could adversely impact the business of IHS. There can be no
assurance that IHS will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on IHS' business, financial condition and results of operations.
IHS also competes with various healthcare providers with respect to attracting
and retaining qualified management and other personnel. Any significant failure
by IHS to attract and retain qualified employees could have a material adverse
effect on IHS' business, results of operations and 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 or under any applicable state securities
laws 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 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, as permitted by applicable laws and regulations. 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
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<PAGE>
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 under 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.
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, the terms "IHS" and the
"Company" include Integrated Health Services, Inc. and its subsidiaries.
23
<PAGE>
RECENT DEVELOPMENTS
FIRST AMERICAN ACQUISITION
On October 17, 1996, the Company acquired through merger First American
Health Care of Georgia, Inc., a provider of home health services in 21 states,
principally Alabama, California, Florida, Georgia, Michigan, Pennsylvania and
Tennessee. The Company believes the acquisition of First American is an
important component in the implementation of its post-acute care network. See
"Business - Company Strategy."
The purchase price for First American was $154.1 million in cash plus
contingent payments of up to $155 million. The contingent payments will be
payable if (i) legislation is enacted that changes the Medicare reimbursement
methodology for home health services to a prospectively determined rate
methodology, in whole or in part, or (ii) in respect of any year the percentage
increase in the seasonally unadjusted Consumer Price Index for all Urban
Consumers for the Medical Care expenditure category (the "Medical CPI") is less
than 8% or, even if the Medical CPI is greater than 8% in such year, in any
subsequent year prior to 2004 the percentage increase in the Medical CPI is less
than 8%. If payable, the contingent payments will be paid as follows: $10
million for 1999, which must be paid on or before February 14, 2000; $40 million
for 2000, which must be paid on or before February 14, 2001; $51 million for
2001, which must be paid on or before February 14, 2002; $39 million for 2002,
which must be paid on or before February 14, 2003; and $15 million for 2003,
which must be paid on or before February 14, 2004. IHS has concluded, based on
its current expectations with respect to the Medical CPI, that the contingent
payments due in 2000 and 2001 are probable of occurrence. Accordingly, IHS has
accrued on its March 31, 1997 balance sheet a long-term liability of $34.6
million, representing the present value of the $50 million aggregate contingent
payments due in 2000 and 2001. The Company borrowed the cash purchase price paid
at the closing under its revolving credit facility. $115 million of the $154.1
million paid at closing was paid to HCFA, the Department of Justice and the
United States Attorney for the Southern District of Georgia in settlement of
claims by the United States government seeking repayment from First American of
certain overpayments and unallowable reimbursements under Medicare. The total
settlement with the United States government was $255 million; the remaining
$140 million will be paid from the contingent payments to the extent such
payments become due. In addition, HCFA and First American agreed to a specified
bi-weekly PIP payment from August 27, 1996 through December 31, 1996, without
adjustment for any liability, overpayment or underpayment.
Substantially all of First American's revenues are derived from Medicare.
The following table summarizes certain selected financial and operating data of
First American for the three years ended December 31, 1995 and the nine months
ended September 30, 1995 and 1996. The selected historical financial information
of First American has been derived from, and should be read in conjunction with,
the historical consolidated financial statements of First American, including
the notes thereto, incorporated by reference herein. The results for the nine
months ended September 30, 1996 are not necessarily indicative of the results
achieved for the full fiscal year.
24
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------- ------------ ------------
($ IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Total revenues(1) ............ $ 340,897 $ 452,163 $ 563,747 $ 439,873 $ 370,654
Total expenses(2) ............ 356,387 496,647 673,658 515,332 402,106
Loss from operations ......... (15,490) (44,484) (109,911) (75,459) (31,452)
Net loss ..................... (15,557) (55,314) (110,376) (75,776) (36,189)
Visits to patient homes ...... 5,036,000 7,433,203 9,024,271 6,966,451 5,731,026
Number of States ............ 17 22 23 21 21
Number of service locations ... 288 379 456 426 410
Number of employees (est.) ... 9,000 12,000 16,000 15,000 13,700
</TABLE>
- ----------
(1) As a result of the settlement of the HCFA claims, First American recorded
reductions to patient service revenues of $8.7 million for the period
ending December 31, 1992, $11.4 million, $29.3 million and $54.6 million
for the years ended December 31, 1993, 1994 and 1995, respectively, and
$41.0 million and $10.4 million for the nine months ended September 30,
1995 and 1996, respectively.
(2) As a result of the settlement of the HCFA claims, First American recorded
expenses for fines, penalties and accretion of interest on the settlement
of $32.3 million for the year ended December 31, 1995 and $24.2 million for
the nine months ended September 30, 1995.
See "Risk Factors - Risks Related to Historical Financial Performance of
First American" and "Unaudited Pro Forma Financial information."
PROPOSED ACQUISITION OF ROTECH MEDICAL CORPORATION
On July 6, 1997, the Company, IHS Acquisition XXIV, Inc., a wholly-owned
subsidiary of IHS ("Merger Sub"), and RoTech Medical Corporation ("RoTech")
entered into a definitive agreement and plan of merger (the "RoTech Merger
Agreement") providing for the merger of Merger Sub into RoTech, with RoTech
becoming a wholly-owned subsidiary of IHS. RoTech provides comprehensive home
healthcare and primary care physician services, principally to patients in
non-urban areas. RoTech's home healthcare business provides a diversified range
of products and services, with emphasis on respiratory and home infusion
services. RoTech currently operates over 600 home health locations and
approximately 26 primary care physicians practices. According to RoTech's
filings with the Commission, RoTech had revenues of $263.0 million and net
income of $20.6 million for the year ended July 31, 1996 and revenues of $297.6
million and net income of $21.9 million for the nine months ended April 30,
1997.
Under the terms of the RoTech Merger Agreement, which was approved by the
Board of Directors of both IHS and RoTech, holders of RoTech common stock
("RoTech Common Stock") will receive for each share of RoTech Common Stock
0.5806 of a share of IHS Common Stock (the "Exchange Ratio"), having a market
value of $22.61 based on the closing price of the IHS Common Stock on the last
business day prior to the signing of the RoTech Merger Agreement. Options to
purchase RoTech Common Stock will be converted at the closing into options to
purchase IHS Common Stock based on the Exchange Ratio. At June 30, 1997 RoTech
had outstanding 26,362,269 shares of RoTech Common Stock and options to purchase
3,469,706 shares of RoTech Common Stock ("RoTech Options"). IHS will issue
approximately 15,306,000 shares of IHS Common Stock under the RoTech Merger
Agreement, and will reserve for issuance approximately 2,014,000 shares of IHS
Common Stock issuable upon exercise of RoTech Options. In addition, RoTech's
outstanding $110 million of subordinated convertible debentures (the "RoTech
Debentures") will become convertible into approximately 2,433,000 shares of IHS
Common Stock following the closing at a conversion price of $45.21 per share of
IHS Common Stock. At June 30, 1997, IHS had outstanding 25,428,319 shares of IHS
Common Stock and options and warrants to purchase approximately 9,513,000 shares
of IHS Common Stock, and had reserved for
25
<PAGE>
issuance 7,989,275 shares upon conversion of $258,750,000 principal amount of
outstanding convertible debentures. IHS will assume approximately $300 million
of debt in the transaction, including $110 million of the RoTech Debentures.
The merger is intended to qualify as a tax free reorganization, as
permitted by the Internal Revenue Code, and will be treated as a purchase for
accounting and financial reporting purposes. Completion of the transaction,
which is expected to occur in the fourth quarter of 1997, is subject to, among
other things, approval by each company's stockholders, receipt of required
regulatory approvals, consent of senior bank lenders and other customary
conditions. Each party may terminate the RoTech Merger Agreement if the average
trading price of the IHS Common Stock over the 10 trading days ending on the
fifth trading day prior to the RoTech stockholders meeting to approve the merger
is less than $33.00. The RoTech Merger Agreement also provides for the payment
of break-up fees under certain circumstances.
ACQUISITIONS AND DIVESTITURES
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. See "Risk Factors -
Risks Associated with Growth Through Acquisitions and Internal Development" and
"Unaudited Pro Forma Financial Information."
On October 19, 1996, IHS and Coram Healthcare Corporation ("Coram") entered
into a definitive agreement and plan of merger (the "Merger Agreement")
providing for the merger of a wholly-owned subsidiary of IHS into Coram, with
Coram becoming a wholly-owned subsidiary of IHS. Under the terms of the Merger
Agreement, holders of Coram common stock were to receive for each share of Coram
common stock 0.2111 of a share of the Company's Common Stock. As a result of the
merger, IHS would have assumed approximately $375 million of indebtedness. On
April 4, 1997, IHS notified Coram that it had exercised its rights to terminate
the Merger Agreement. IHS also terminated the March 30, 1997 letter amendment,
setting forth proposed revisions to the terms of the merger (which included a
reduction in the exchange ratio to 0.15 of a share of IHS Common Stock for each
share of Coram common stock), prior to the revisions becoming effective at the
close of business on April 4, 1997. On May 5, 1997, IHS and Coram entered into a
settlement agreement pursuant to which the Company paid Coram $21 million in
full settlement of all claims Coram might have against IHS pursuant to the
Merger Agreement. The Company wrote-off $6.6 million of accounting, legal and
other costs relating to the proposed merger in the first quarter of 1997, and
recorded a charge of $21.0 million resulting from the settlement in the second
quarter of 1997.
In developing its post-acute healthcare system, IHS continuously evaluates
whether owning and operating businesses which provide certain ancillary
services, or contracting with third parties for such services, is more
cost-effective. As a result, the Company is continuously evaluating its existing
operations to determine whether to retain or divest operations. To date, IHS has
divested its pharmacy division and a majority interest in its assisted living
services division, and may divest additional divisions or assets in the future.
See "Unaudited Pro Forma Financial Information."
REPURCHASE OF 9 5/8% SENIOR SUBORDINATED NOTES AND 10 3/4% SENIOR SUBORDINATED
NOTES
On May 30, 1997 the Company completed cash tender offers to purchase its
outstanding 9 5/8% Senior Subordinated Notes due 2002, Series A (the "9 5/8%
Senior Notes") and its 10 3/4% Senior Subordinated Notes due 2004 (the "10 3/4%
Senior Notes") and related consent solicitations to eliminate certain
restrictive covenants and other provisions in the indentures pursuant to which
the 9 5/8% Senior Notes and 10 3/4% Senior Notes were issued in order to improve
the operating and financial flexibility of the Company. The consideration paid
pursuant to the tender offer and consent solicitation to holders of the 9 5/8%
Senior Notes who tendered their notes (and thereby delivered consents to the
proposed amendments to the indenture pursuant to which the 9 5/8% Senior Notes
were issued) prior to 12:00 midnight, New York City time, on May 14, 1997 (the
"Consent Date") was $1,094.00 plus accrued and unpaid interest to but not
including the payment date, consisting of $1,089.00 plus accrued and unpaid
26
<PAGE>
interest as tender offer consideration and $5.00 as a consent payment. The total
consideration paid pursuant to the tender offer and consent solicitation to
holders of the 10 3/4% Senior Notes who tendered their notes (and thereby
delivered consents to the proposed amendments to the indenture pursuant to which
the 10 3/4% Senior Notes were issued) prior to 12:00 midnight, New York City
time, on the Consent Date was $1,119.50 plus accrued and unpaid interest to but
not including the payment date, consisting of $1,114.50 plus accrued and unpaid
interest as tender offer consideration and $5.00 as a consent payment. Of the
$115,000,000 aggregate principal amount of the 9 5/8% Senior Notes outstanding,
an aggregate of $114,975,000 principal amount of such notes was tendered. Of the
$100,000,000 aggregate principal amount of the 10 3/4% Senior Notes outstanding,
an aggregate of $99,893,000 principal amount of such notes was tendered. The
Company used $237.6 million of the proceeds from the sale of $450,000,000
aggregate principal amount of the 9 1/2% Senior Notes to pay the tender offer
and consent solicitation payments.
SALE OF 9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
On May 30, 1997, the Company sold privately pursuant to Rule 144A under the
Securities Act an aggregate of $450 million principal amount of its 9 1/2%
Senior Notes. The Company used approximately $237.6 million of the net proceeds
to repurchase substantially all its outstanding 9 5/8% Senior Notes and 10 3/4%
Senior Notes and the remaining $191.0 million of net proceeds to pay down
borrowings under its revolving credit facility. See "Capitalization" and
"Description of Certain Indebtedness - 9 1/2% Senior Subordinated Notes due
2007."
27
<PAGE>
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. Since the Commission has not considered the
Exchange Offer in the context of a no-action letter, there can be no assurance
that the staff of the Commission would make a similar determination with respect
to the Exchange Offer. 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 "affiliate" of the Company within the
28
<PAGE>
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 ,
1997, 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."
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time, on,
, 1997, 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.
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<PAGE>
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 April 30, 1997, the date of the last payment of interest on 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, 1997. 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, 1997.
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 through The Depository Trust
Company's Automated Tender Offer Program ("ATOP"), for which the transaction
will be eligible, 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.
THE METHOD OF DELIVERY OF THE OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT, INCLUDING DELIVERY THROUGH
THE BOOK-ENTRY TRANSFER FACILITY AND ANY ACCEPTANCE OF AN AGENT'S MESSAGE
TRANSMITTED THROUGH ATOP, IS AT THE ELECTION AND RISK OF THE HOLDER. INSTEAD OF
DELIVERY BY MAIL, IT IS RECOM-
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MENDED 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 or an Agent's
Message in connection with a book-entry transfer 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.
The term "Agent's Message" means a message transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
the confirmation of a book-entry transfer, which states that the Book-Entry
Transfer Facility has received an express acknowledgement from the participants
in the Book-Entry Transfer Facility described in such Agent's Message, stating
the aggregate principal amount of Old Notes which have been tendered by such
participants pursuant to the Exchange Offer and that such participants have
received this Prospectus and the Letter of Transmittal and agree to be bound by
the terms of this Prospectus and the Letter of Transmittal and the Company may
enforce such agreement against such participants.
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
31
<PAGE>
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 required signature guarantees) or be
accompanied by documents of transfer sufficient to have the Trustee 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
32
<PAGE>
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 Old Notes" 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 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.
33
<PAGE>
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: Diane TenHoopen
By Overnight Mail or Hand:
Signet Trust Company
7 St. Paul Street
6th Floor, Corporate Trust Department
Baltimore, MD 21202
Attention: Diane TenHoopen
By Facsimile:
Signet Trust Company
(410) 752-8642
Confirm: (410) 332-5857
Attention: Diane 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 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.
34
<PAGE>
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.
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
35
<PAGE>
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 10 1/4% 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 tenders 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 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.
36
<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 revolving 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 revolving 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 revolving 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
"Capitalization" and "Description of Certain Indebtedness."
37
<PAGE>
CAPITALIZATION
The following table sets forth (i) the capitalization of the Company at
March 31, 1997 and (ii) such capitalization as adjusted to give effect to the
issuance of $450 million aggregate principal amount of the 9 1/2% Senior Notes
and the use of proceeds therefrom to repurchase approximately $214.9 million of
its outstanding senior subordinated notes and to repay approximately $191
million under its revolving credit facility. 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.
<TABLE>
<CAPTION>
MARCH 31, 1997
--------------------------
(IN THOUSANDS)
AS
ACTUAL ADJUSTED
------------ -----------
<S> <C> <C>
Cash and temporary investments .................................... $ 40,504 $ 40,504
=========== ===========
Short-term debt:
Current portion of long-term debt ................................. $ 15,738 $ 15,738
=========== ===========
Long-term debt, less current portion:
Credit facility(1) ................................................ $ 389,650 $ 198,604
Other debt ......................................................... 67,551 67,551
9 1/2% Senior Subordinated Notes due 2007 .......................... - 450,000
10 1/4% Senior Subordinated Notes due 2006 ....................... 150,000 150,000
9 5/8% Senior Subordinated Notes due 2002, Series A .............. 115,000 25
10 3/4% Senior Subordinated Notes due 2004 ....................... 100,000 107
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 ............................................. 1,080,951 1,125,037
----------- -----------
Stockholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares authorized ...... - -
Common Stock, $.001 par value, 150,000,000 shares authorized;
24,748,680 shares issued actual and as adjusted .................. 25 25
Additional paid-in capital ....................................... 475,878 475,878
Retained earnings(2) ............................................. 98,883 80,715
----------- -----------
Total stockholders' equity ....................................... 574,786 556,618
----------- -----------
Total capitalization .......................................... $1,655,737 $1,681,655
=========== ===========
</TABLE>
- ----------
(1) Subsequent to March 31, 1997 and as of June 30, 1997, the Company had
additional net borrowings (after giving effect to the pay-down with the
proceeds from the sale of 9 1/2% Senior Notes) under its revolving credit
facility of $80.2 million.
(2) As adjusted reflects extraordinary loss on extinguishment of debt of
approximately $18,168,000 (net of related income tax effect of
approximately $11,616,000) resulting from the Company's repurchase of its
outstanding 9 5/8% Senior Notes and 10 3/4% Senior Notes with the proceeds
of the sale of the 9 1/2% Senior Notes consummated on May 30, 1997.
38
<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, 1996 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, 1995 and 1996 and for each of the years in the three-year
period ended December 31, 1996 and the report thereon are included elsewhere
herein. The selected consolidated financial data presented below for the three
months ended March 31, 1996 and 1997 and as of March 31, 1997 have been prepared
on the same basis as the audited financial statements and, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the information set forth therein. The
results as of and for the three months ended March 31, 1997 are not necessarily
indicative of the results to be achieved for the full fiscal year.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------
1992 1993 1994
----------- ----------- ------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net revenues:
Basic medical services .................. $ 100,799 $ 113,508 $ 269,817
Specialty medical services ............ 88,065 162,017 404,401
Management services and other ......... 13,232 20,779 37,884
--------- -------- ---------
Total ................................. 202,096 296,304 712,102
Cost and expenses:
Operating expenses ..................... 145,623 212,936 528,131
Corporate administrative and
general .............................. 11,927 16,832 37,041
Depreciation and amortization(3) ......... 4,334 8,126 26,367
Rent .................................... 19,509 23,156 42,158
Interest, net(4)(5) ..................... 1,493 5,705 20,602
Loss on impairment of long-lived
assets(6) .............................. - - -
Other non-recurring charges
(income)(7) ........................... - - -
--------- -------- ---------
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items ................................. 19,210 29,549 57,803
Equity in earnings (loss) of affiliates (36) 1,241 1,176
--------- -------- ---------
Earnings (loss) before income taxes
and extraordinary items ............... 19,174 30,790 58,979
Income tax provision (benefit) ............ 7,286 12,008 22,117
--------- -------- ---------
Earnings (loss) before extraordi-
nary items 11,888 18,782 36,862
Extraordinary items(8) .................. 2,524 2,275 4,274
--------- -------- ---------
Net earnings (loss) .................. $ 9,364 $ 16,507 $ 32,588
========= ======== =========
OTHER FINANCIAL DATA:
EBITDA(9) ................................. $ 25,001 $ 44,621 $ 105,948
Ratio of EBITDA to interest, net(9) . 16.7x 7.8x 5.1x
Ratio of earnings to fixed
charges(10) .............................. 2.8x 2.6x 2.4x
Capital expenditures:
Acquisitions(11) ........................ $ 13,898 $ 209,214 $ 152,791
Other(12) .............................. 27,124 59,959 91,354
<PAGE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
--------------------------- -----------------------
1995 1996 1996 1997
------------- ------------- ---------- ---------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net revenues:
Basic medical services .................. $ 368,569 $ 389,773 $ 97,216 $ 88,755
Specialty medical services ............ 770,554 999,209 219,525 362,689
Management services and other ......... 39,765 45,713 10,532 9,499
---------- ---------- -------- --------
Total ................................. 1,178,888 1,434,695 327,273 460,943
Cost and expenses:
Operating expenses ..................... 888,551 1,093,948 249,895 352,412
Corporate administrative and
general .............................. 56,016 60,976 15,093 18,016
Depreciation and amortization(3) ......... 39,961 41,681 8,274 15,030
Rent .................................... 66,125 77,785 17,656 24,009
Interest, net(4)(5) ..................... 38,977 64,110 14,214 21,421
Loss on impairment of long-lived
assets(6) .............................. 83,321 - - -
Other non-recurring charges
(income)(7) ........................... 49,639 (14,457) - (1,025)
---------- ---------- -------- --------
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items ................................. (43,702) 110,652 22,141 31,080
Equity in earnings (loss) of affiliates 1,443 828 300 181
---------- ---------- -------- --------
Earnings (loss) before income taxes
and extraordinary items ............... (42,259) 111,480 22,441 31,261
Income tax provision (benefit) ............ (16,270) 63,715 8,640 12,192
---------- ---------- -------- --------
Earnings (loss) before extraordi-
nary items (25,989) 47,765 13,801 19,069
Extraordinary items(8) .................. 1,013 1,431 - -
---------- ---------- -------- --------
Net earnings (loss) .................. $ (27,002) $ 46,334 $ 13,801 $ 19,069
========== ========== ======== ========
OTHER FINANCIAL DATA:
EBITDA(9) ................................. $ 169,639 $ 202,814 $ 44,929 $ 66,687
Ratio of EBITDA to interest, net(9) . 4.4x 3.2x 3.2x 3.1x
Ratio of earnings to fixed
charges(10) .............................. 0.3x 2.1x 2.0x 2.0x
Capital expenditures:
Acquisitions(11) ........................ $ 82,686 $ 242,819 $ 16,581 $ 10,975
Other(12) .............................. 145,065 145,902 35,705 41,096
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
-------------------------------------------------------- -----------
1992 1993 1994 1995 1996 1997
---------- --------- ----------- ----------- ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and temporary investments $103,858 $65,295 $ 63,347 $ 41,304 $ 41,072 $ 40,504
Working capital ............... 144,074 69,495 76,383 136,315 57,549 83,886
Total assets .................. 313,671 776,324 1,255,989 1,433,730 1,993,107 2,058,078
Long-term debt, including current
portion ........................ 142,620 402,536 551,452 770,661 1,054,747 1,096,689
Stockholders' equity ............ 146,013 216,506 453,811 431,528 538,640 574,786
</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.
(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(o) of Notes to Consolidated Financial Statements.
(3) Includes amortization of deferred financing costs of $178,000, $306,000,
$621,000, $645,000, $1,457,000, $256,000 and $560,000 for the years ended
December 31, 1992, 1993, 1994, 1995 and 1996 and the three months ended
March 31, 1996 and 1997, respectively.
(4) Net of interest income of $1,300,000, $2,669,000, $1,121,000, $1,876,000,
$2,233,000, $1,144,000 and $740,000 for the years ended December 31, 1992,
1993, 1994, 1995 and 1996 and the three months ended March 31, 1996 and
1997, respectively.
(5) Interest, net does not include capitalized interest of $860,000,
$1,402,000, $3,030,000, $5,155,000, $3,800,000, $900,000 and $900,000 for
the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and the three
months ended March 31, 1996 and 1997, 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 $83,321,000.
See Notes 1(k) and 18 of Notes to Consolidated Financial Statements.
(7) In 1995, consists of (i) expenses of $1,939,000 related to the merger with
IntegraCare, (ii) a $21,915,000 loss on the write-off of accrued management
fees ($8,496,000), loans ($11,097,000) and contract acquisition costs
($2,322,000) related to the Company's termination of its agreement, entered
into in January 1994, to manage 23 long-term care and psychiatric
facilities owned by Crestwood Hospital and (iii) the write-off of
$25,785,000 of deferred pre-opening costs resulting from a change in
accounting estimate regarding the future benefit of deferred pre-opening
costs. In 1996, consists primarily of (i) a gain of $34,298,000 from the
Pharmacy Sale, (ii) a loss of $8,497,000 from its sale of shares in the ILC
Offering, (iii) a $7,825,000 loss on write-off of accrued management fees
and loans resulting from the Company's termination of its 10-year
agreement, entered into in September 1994, to manage six geriatric care
facilities owned by All Seasons and (iv) a $3,519,000 exit cost resulting
from the closure of redundant home healthcare agencies. Because IHS'
investment in the Capstone common stock received in the Pharmacy Sale had a
very small tax basis, the taxable gain on the sale significantly exceeded
the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale. In
1997, consists of (i) a gain of $7,578,000 realized on the shares of
Capstone common stock received in the Pharmacy Sale and (ii) the write-off
of $6,553,000 of accounting, legal and other costs resulting from the
proposed transaction with Coram. See "Unaudited Pro Forma Financial
Information."
(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
effect 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
effect 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
effect 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. In 1996,
IHS recorded a loss on extinguishment of debt of $2,327,000, relating
primarily to the write-off of deferred financing costs. Such loss, reduced
by the related income tax effect of $896,000, is presented in the statement
of operations for the year ended December 31, 1996 as an extraordinary loss
of $1,431,000.
(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 on
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 on 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.
40
<PAGE>
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)
----------------------------------------------------------------------
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ........................ 49.9% 38.3% 37.9% 31.3% 27.2% 29.7% 19.3%
Specialty medical services ..................... 43.6 54.7 56.8 65.4 69.6 67.1 78.7
Management services and other .................. 6.5 7.0 5.3 3.3 3.2 3.2 2.0
------ ------ ------ ------- ------ ------ ------
Total ....................................... 100.0 100.0 100.0 100.0 100.0 100.0 100.0
Facility operating expenses ..................... 72.1 71.9 74.2 75.4 76.2 76.4 76.5
Corporate administrative and general ............ 5.9 5.7 5.2 4.8 4.3 4.6 3.9
------ ------ ------ ------- ------ ------ ------
Operating income before certain fixed ex-
penses .......................................... 22.0 22.4 20.6 19.8 19.5 19.0 19.6
------ ------ ------ ------- ------ ------ ------
Depreciation and amortization .................. 2.1 2.7 3.7 3.4 2.9 2.5 3.3
Rent ............................................. 9.7 7.8 5.9 5.6 5.4 5.4 5.2
Interest, net .................................... 0.7 1.9 2.9 3.3 4.5 4.3 4.6
Loss on impairment of long-lived assets(2) . - - - 7.0 - - -
Other non-recurring charges (income)(3) ......... - - - 4.2 (1.0) - (0.2)
------ ------ ------ ------- ------ ------ ------
Earnings (loss) before equity in earnings (loss)
of affiliates, income taxes and extraordinary
items .......................................... 9.5 10.0 8.1 (3.7) 7.7 6.8 6.7
Equity in earnings (loss) of affiliates ......... (0.0) 0.4 0.2 0.1 0.1 0.1 0.0
------ ------ ------ ------- ------ ------ ------
Earnings (loss) before income taxes and ex-
traordinary items ............................... 9.5 10.4 8.3 (3.6) 7.8 6.9 6.7
Income tax provision (benefit) .................. 3.6 4.1 3.1 (1.4) 4.5 2.7 2.6
------ ------ ------ ------- ------ ------ ------
Earnings (loss) before extraordinary items ...... 5.9 6.3 5.2 (2.2) 3.3 4.2 4.1
Extraordinary items .............................. (1.3) (0.8) (0.6) (0.1) 0.1 - -
------ ------ ------ ------- ------ ------ ------
Net earnings (loss) .............................. 4.6 5.5 4.6 (2.3) 3.2 4.2 4.1
====== ====== ====== ======= ====== ====== ======
</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(o) of Notes
to Consolidated Financial Statements.
(2) In December 1995, IHS elected early implementation of SFAS No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of, resulting in a non-cash charge of $83,321,000.
(3) In 1995, consists of (i) expenses of $1,939,000 related to the merger with
IntegraCare (0.2%), (ii) a $21,915,000 loss on the write-off of accrued
management fees ($8,496,000), loans ($11,097,000) and contract acquisition
costs ($2,322,000) related to the Company's termination of its agreement,
entered into in January 1994, to manage 23 long-term care and psychiatric
facilities owned by Crestwood Hospital (1.8%) and (iii) the write-off of
$25,785,000 of deferred pre-opening costs resulting from a change in
accounting estimate regarding the future benefit of deferred pre-opening
costs (2.2%). In 1996, consists of (i) a gain of $34,298,000 from the
Pharmacy Sale (2.4%), (ii) a loss of $8,497,000 from its sale of shares in
the ILC Offering (0.6%), (iii) a $7,825,000 loss on write-off of accrued
management fees and loans resulting from the Company's termination of its
10-year agreement, entered into in September 1994, to manage six geriatric
care facilities owned by All Seasons (0.5%) and (iv) a $3,519,000 exit cost
resulting from the closure of redundant home healthcare agencies (0.2%).
Because IHS' investment in the Capstone common stock received in the sale
had a very small tax basis, the taxable gain on the sale significantly
exceeded the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale. In
1997, consists of (i) a gain of $7,578,000 realized on the shares of
Capstone common stock received in the Pharmacy Sale (0.2%) and (ii) the
write-off of $6,553,000 of accounting, legal and other costs resulting from
the proposed transaction with Coram (0.1%). See "Recent Developments" and
"Unaudited Pro Forma Financial Information."
41
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the
Company's operations for the last nine fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
---------------------------------------------
1995
---------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- --------- ---------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services .................. $89,336 $87,365 $95,482 $ 96,386
Specialty medical services ............ 176,158 188,331 193,604 212,461
Management services and other ......... 9,141 10,583 10,039 10,002
-------- -------- -------- ----------
Total ................................. 274,635 286,279 299,125 318,849
Cost and expenses:
Operating expenses ..................... 207,304 214,404 224,457 242,386
Corporate administrative and gen-
eral 12,402 14,174 14,262 15,178
Depreciation and amortization ......... 8,960 9,682 9,867 11,452
Rent .................................... 16,066 16,454 16,726 16,879
Interest, net ........................... 7,330 8,585 10,955 12,107
Loss on impairment of long-lived
assets ................................. - - - 83,321
Other non-recurring charges (in-
come)(2) ................................ - - 1,939 47,700
-------- -------- -------- ----------
Earnings (loss) before equity in
earnings (loss) of affiliates, income
taxes and extraordinary items ......... 22,573 22,980 20,919 (110,174)
Equity in earnings (loss) of affiliates ... 315 417 401 310
-------- -------- -------- ----------
Earnings (loss) before income taxes
and extraordinary items ............... 22,888 23,397 21,320 (109,864)
Income tax provision (benefit) ............ 8,812 9,008 8,208 (42,298)
-------- -------- -------- ----------
Earnings (loss) before extraordinary
items(2) .............................. 14,076 14,389 13,112 (67,566)
Extraordinary items(3) .................. - 508 - 505
-------- -------- -------- ----------
Net earnings (loss) ..................... $14,076 $13,881 $13,112 $ (68,071)
======== ======== ======== ==========
<PAGE>
<CAPTION>
1996 1997
------------------------------------------- -----------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31
---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services .................. $97,216 $ 98,063 $ 101,189 $ 93,305 $ 88,755
Specialty medical services ............ 219,525 226,868 211,904 340,912 362,689
Management services and other ......... 10,532 10,849 12,572 11,760 9,499
-------- --------- -------- -------- --------
Total ................................. 327,273 335,780 325,665 445,977 460,943
Cost and expenses:
Operating expenses ..................... 249,895 254,274 241,177 348,602 352,412
Corporate administrative and gen-
eral .................................... 15,093 14,854 14,943 16,086 18,016
Depreciation and amortization ......... 8,274 8,505 9,130 15,772 15,030
Rent .................................... 17,656 17,879 18,445 23,805 24,009
Interest, net ........................... 14,214 15,888 15,931 18,077 21,421
Loss on impairment of long-lived
assets ................................. - - - - -
Other non-recurring charges (in-
come)(2) - - (34,298) 19,841 (1,025)
-------- --------- -------- -------- --------
Earnings (loss) before equity in
earnings (loss) of affiliates, income
taxes and extraordinary items ......... 22,141 24,380 60,337 3,794 31,080
Equity in earnings (loss) of affiliates ... 300 460 323 (255) 181
-------- --------- -------- -------- --------
Earnings (loss) before income taxes
and extraordinary items ............... 22,441 24,840 60,660 3,539 31,261
Income tax provision (benefit) ............ 8,640 9,563 44,149 1,363 12,192
-------- --------- -------- -------- --------
Earnings (loss) before extraordinary
items(2) .............................. 13,801 15,277 16,511 2,176 19,069
Extraordinary items(3) .................. - 1,431 - - -
-------- --------- -------- -------- --------
Net earnings (loss) ..................... $13,801 $ 13,846 $ 16,511 $ 2,176 $ 19,069
======== ========= ======== ======== ========
</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(o) of Notes
to Consolidated Financial Statements.
(2) In 1995, consists of (i) expenses $1,939,000 related to the merger with
IntegraCare in the third quarter, (ii) a $21,915,000 loss on the write-off
of accrued management fees, loans and contract acquisition costs related to
the Company's termination of its agreement to manage 23 long-term care and
psychiatric facilities owned by Crestwood Hospital in the fourth quarter and
(iii) the write-off of $25,785,000 of deferred pre-opening costs resulting
from a change in accounting estimate regarding the future benefit of
deferred pre-opening costs in the fourth quarter. In 1996, consists of (i) a
gain of $34,298,000 in the third quarter from the Pharmacy Sale, (ii) a loss
in the fourth quarter of $8,497,000 from its sale of shares in the ILC
Offering, (iii) a $7,825,000 loss on write-off of accrued management fees
and loans resulting from the Company's termination of its 10-year agreement
to manage six geriatric care facilities owned by All Seasons in the fourth
quarter and (iv) a $3,519,000 exit cost resulting from the closure of
redundant home healthcare agencies in the fourth quarter. Because IHS'
investment in the Capstone common stock received in the Pharmacy Sale had a
very small tax basis, the taxable gain on the sale significantly exceeded
the gain for financial reporting purposes, thereby resulting in a
disproportionately higher income tax provision related to the sale in the
third quarter of 1996. In 1997, consists of (i) a gain of $7,578,000
realized on the shares of Capstone common stock received in the Pharmacy
Sale and (ii) the write-off of $6,553,000 of accounting, legal and other
costs resulting from the proposed transaction with Coram.
(3) Extraordinary items relate to extinguishments of debt. See Note 15 of Notes
to Consolidated Financial Statements.
From January 1, 1995 through March 31, 1997, the Company acquired six
geriatric care facilities (including three facilities which it had previously
leased and three facilities which it had managed), leased six geriatric care
facilities (five of which had previously been managed) and entered into
management agreements to manage 35 geriatric care facilities and four assisted
living facilities. During this period, the Company sold its interest in four
geriatric care facilities and seven retirement facilities (five owned and two
leased) and agreements to manage 60 facilities were terminated. In addition,
during this period the Company opened 42 MSUs totalling 875 beds and expanded
existing MSUs (including MSUs opened during this period) by 432 beds. During
this period the Company acquired 43 ancillary service businesses which provide
home healthcare services, physical, occupational speech and therapy services,
rehabilitation services, pharmacy services, hospice services and mobile x-ray
and electrocardiogram services. During this period, the Company's assisted
living division completed its initial public offering, reducing the Company's
interest in the division to 37%, and the Company sold its pharmacy division. See
"Unaudited Pro Forma Financial Information" and Note 2 of Notes to Consolidated
Financial Statements.
42
<PAGE>
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information gives effect to (i)
the sale by IHS of its pharmacy division in July 1996 (the "Pharmacy Sale"),
(ii) the sale by IHS of a majority interest in its assisted living services
subsidiary in October 1996 (the "ILC Offering"), (iii) the acquisition of First
American in October 1996 (the "First American Acquisition"), (iv) the
acquisition of (a) Vintage Health Care Center, a skilled nursing and assisted
living facility, in January 1996 (the "Vintage Acquisition"), (b) Rehab
Management Systems, Inc., an outpatient rehabilitation company, in March 1996
(the "RMS Acquisition"), (c) Hospice of the Great Lakes, Inc., a hospice
company, in May 1996 (the "Hospice Acquisition"), (d) J.R. Rehab Associates,
Inc., an inpatient and outpatient rehabilitation center, in August 1996 (the
"J.R. Rehab Acquisition"), (e) Extendicare of Tennessee, Inc., a home health
company, in August 1996 (the "Extendicare Acquisition"), (f) Edgewater Home
Infusion Services, Inc., a home infusion company, in August 1996 (the "Edgewater
Acquisition"), (g) Century Home Services, Inc., a home health services company,
in September 1996 (the "Century Acquisition"), (h) Signature Home Care, Inc., a
home health company, in September 1996 (the "Signature Acquisition"), (i) Mediq
Mobile X-Ray Services, Inc., a mobile diagnostic company, in November 1996 (the
"Mediq Acquisition"), (j) Total Rehab Services, LLC and Total Rehab Services 02,
LLC, providers of contract rehabilitation and respiratory services, in November
1996 (the "Total Rehab Acquisition"), and (k) Lifeway Inc., a physician and
disease state management company, in November 1996 (the "Lifeway Acquisition"),
(v) the sale of the Old Notes and the application of the net proceeds therefrom
as described under "Use of Proceeds," and (vi) the sale of $450 million
aggregate principal amount of the Company's 9 1/2% Senior Notes and the use of
proceeds therefrom to repurchase approximately $214.9 million of its outstanding
senior subordinated notes and to repay approximately $191 million under its
revolving credit facility. See Note 2 of Notes to Consolidated Financial
Statements.
No pro forma balance sheet is presented because the sale of the Old Notes,
the Pharmacy Sale, the ILC Offering, the First American Acquisition, the Vintage
Acquisition, the RMS Acquisition, the Hospice Acquisition, the J.R. Rehab
Acquisition, the Extendicare Acquisition, the Edgewater Acquisition, the Century
Acquisition, the Signature Acquisition, the Mediq Acquisition, the Total Rehab
Acquisition and the Lifeway Acquisition were all consummated prior to December
31, 1996 and are therefore reflected in the actual March 31, 1997 balance sheet.
The pro forma effect of the sale of the 9 1/2% Senior Notes and the use of
proceeds therefrom to repurchase approximately $214.9 million of IHS'
outstanding senior subordinated notes and to repay approximately $191 million
under its revolving credit facility on the Company's March 31, 1997 balance
sheet is set forth under "Capitalization". The pro forma statement of operations
for the year ended December 31, 1996 was prepared as if the sale of the Old
Notes and the application of the net proceeds therefrom, the sale of $450
million aggregate principal amount of 9 1/2% Senior Notes and the use of
proceeds therefrom, the Pharmacy Sale, the ILC Offering, the First American
Acquisition, the Vintage Acquisition, the RMS Acquisition, the Hospice
Acquisition, the J.R. Rehab Acquisition, the Extendicare Acquisition, the
Edgewater Acquisition, the Century Acquisition, the Signature Acquisition, the
Mediq Acquisition, the Total Rehab Acquisition and the Lifeway Acquisition were
consummated on January 1, 1996. The pro forma effect of the sale of the 9 1/2%
Senior Notes and the use of proceeds therefrom to repurchase approximately
$214.9 million of IHS' outstanding senior subordinated notes and to repay
approximately $191 million under its revolving credit facility on the Company's
statement of operations for the three months ended March 31, 1997 is set forth
under "Prospectus Summary-Summary Consolidated Financial Data".
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 IHS'
financial position or the results of operations that actually would have
occurred if the transactions had been consummated on the dates shown. In
addition, they are not intended to be a projection of results of operations that
may be obtained by IHS in the future. The unaudited pro forma financial
information should be read in conjunction with the consolidated financial
statements and related notes thereto of IHS and certain acquired companies
included or incorporated by reference in this Prospectus. See "Available
Information" and "Selected Historical Consolidated Financial Information."
43
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
IHS PHARMACY ILC FIRST AMERICAN
ACTUAL(1) ADJUSTMENTS(2) ADJUSTMENTS(3) ACTUAL(4)
------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services ........................ $ 389,773 $ (16,101)(a) $ -
Specialty medical services .................. 999,209 $ (52,331)(a) 387,547
Management services and other ............... 45,713 (1,020)(a) 3,115
---------- ------------ -----------
Total revenues .............................. 1,434,695 (52,331) (17,121) 390,662
Costs and expenses:
Operating, general and administrative
expenses .................................... 1,154,924 (43,279)(a) (12,453)(a) 406,800
Depreciation and amortization ............... 41,681 (1,785)(a) (833)(a) 5,439
Rent .......................................... 77,785 (838)(a) (1,885)(a) -
Interest, net ................................. 64,110 (3,817)(b) (932)(d) 6,208
Non-recurring costs (income) .................. (14,457) 34,298 (c) (8,497)(e) 3,468
---------- ------------ ------------ -----------
Total costs and expenses ..................... 1,324,043 (15,421) (24,600) 421,915
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes and
extraordinary items ........................ 110,652 (36,910) 7,479 (31,253)
Equity in earnings (loss) of affiliates ...... 828 722 (671)
---------- ------------ -----------
Earnings (loss) before income taxes and
extraordinary items ........................ 111,480 $ (36,910) $ 8,201 $ (31,924)
============ ============ ===========
Federal and state income taxes ............... 63,715
----------
Earnings before extraordinary items ......... $ 47,765
==========
<CAPTION>
FIRST OTHER OTHER NOTE
AMERICAN CONSOLIDATED CONSOLIDATED PRO FORMA OFFERING
ADJUSTMENTS ACTUAL(5) ADJUSTMENTS CONSOLIDATED ADJUSTMENTS(6)
--------------- --------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ........................ $ 292 $ 373,964
Specialty medical services .................. 124,993 1,459,418
Management services and other ............... 3 47,811
---------- ----------
Total revenues .............................. 125,288 1,881,193
Costs and expenses:
Operating, general and administrative
expenses .................................... 124,530 1,630,522
Depreciation and amortization ............... $ 4,501 (f) 1,506 $ 1,500 (f) 52,009 755(h)
Rent .......................................... 1,917 76,979
Interest, net ................................. 9,314 (g) 3,088 1,651 (g) 79,622 8,555(i)
Non-recurring costs (income) .................. - 14,812
---------- ----------
Total costs and expenses ..................... 13,815 131,041 3,151 1,853,944
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes and
extraordinary items ........................ (13,815) (5,753) (3,151) 27,249
Equity in earnings (loss) of affiliates ...... 1,032 1,911
---------- ----------
Earnings (loss) before income taxes and
extraordinary items ........................ $(13,815) $ (4,721) $ (3,151) 29,160
========== ========= ==========
Federal and state income taxes ............... 18,297
----------
Earnings before extraordinary items ......... $ 10,863
==========
<CAPTION>
PRO FORMA
----------
<S> <C>
Net revenues:
Basic medical services ........................ $ 373,964
Specialty medical services .................. 1,459,418
Management services and other ............... 47,811
----------
Total revenues .............................. 1,881,193
Costs and expenses:
Operating, general and administrative
expenses .................................... 1,630,522
Depreciation and amortization ............... 52,764
Rent .......................................... 76,979
Interest, net ................................. 88,178
Non-recurring costs (income) .................. 14,812
----------
Total costs and expenses ..................... 1,863,255
Earnings (loss) before equity in earnings
(loss) of affiliates, income taxes and
extraordinary items ........................ 17,938
Equity in earnings (loss) of affiliates ...... 1,911
----------
Earnings (loss) before income taxes and
extraordinary items ........................ 19,849
Federal and state income taxes ............... 12,455
Earnings before extraordinary items ......... $ 7,394
==========
</TABLE>
44
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(1) Includes the results of operations of (i) its pharmacy division through
July 30, 1996, the date of the Pharmacy Sale, (ii) its assisted living
services subsidiary through October 9, 1996, the date of closing of the ILC
Offering, (iii) First American from October 17, 1996, the date of closing
of the First American Acquisition, (iv) Vintage Health Care Center from
January 29, 1996, the date of closing of the Vintage Acquisition, (v) Rehab
Management Systems, Inc. from March 19, 1996, the date of closing of the
RMS Acquisition, (vi) Hospice of the Great Lakes, Inc. from May 1, 1996,
the date of closing of the Hospice Acquisition, (vii) J.R. Rehab
Associates, Inc. from August 1, 1996, the date of closing of the J.R. Rehab
Acquisition, (viii) Extendicare of Tennessee, Inc. from August 12, 1996,
the date of closing of the Extendicare Acquisition, (ix) Edgewater Home
Infusion Services, Inc. from August 19, 1996, the date of closing of the
Edgewater Acquisition, (x) Century Home Services, Inc. from September 13,
1996, the date of closing of the Century Acquisition, (xi) Signature Home
Care, Inc. from September 25, 1996, the date of closing of the Signature
Acquisition, (xii) Mediq Mobile X-Ray Services, Inc. from November 7, 1996,
the date of closing of the Mediq Acquisition, (xiii) Total Rehab Services,
LLC and Total Rehab Services 02, LLC from November 8, 1996, the date of
closing of the Total Rehab Acquisition and (xiv) Lifeway Inc. from November
8, 1996, the date of closing of the Lifeway Acquisition. Also includes from
October 9, 1996 IHS' equity in ILC's earnings. See notes 2, 3, 4 and 5
below and Note 2 of Notes to Consolidated Financial Statements.
(2) In July 1996, IHS sold its pharmacy division to Capstone Pharmacy Services,
Inc. ("Capstone") for a purchase price of $150 million, consisting of cash
of $125 million and shares of Capstone common stock having a value of $25
million. IHS used the net proceeds of the sale to repay borrowings under
its revolving credit facility. IHS had a pre-tax gain of $34.3 million.
Because IHS' investment in the pharmacy division had a very small tax
basis, the taxable gain on the sale significantly exceeded the gain for
financial reporting purposes, thereby resulting in a disproportionately
higher income tax provision related to the sale. IHS' investment in
Capstone common stock of $14.6 million represents less than 20% of the
total Capstone shares. Accordingly, such investment is recorded at
carryover cost and classified as securities available for sale. An
unrealized gain of $9.4 million is reflected in stockholders' equity with
respect to such investment, as the current market value of the Capstone
shares at December 31, 1996 was approximately $24.0 million.
(3) On October 9, 1996, Integrated Living Communities, Inc. ("ILC"), at the
time a wholly-owned subsidiary of IHS which provides assisted living and
related services to the private pay elderly market, completed an initial
public offering of ILC common stock. IHS sold 1,400,000 shares of ILC
common stock in the offering, for which it received aggregate net proceeds
of approximately $10.4 million. In addition, ILC used approximately $7.4
million of the net proceeds received by it to repay outstanding
indebtedness to IHS. Following the offering, IHS continues to own 2,497,900
shares of ILC common stock, representing 37.3% of the outstanding ILC
common stock. IHS used the net proceeds from the sale to repay borrowings
under its credit facility. IHS recorded a pre-tax loss of approximately
$8.5 million in the fourth quarter of 1996 as a result of this transaction.
(4) In October 1996, IHS acquired through merger First American. The purchase
price was $154.1 million in cash, which IHS borrowed under its credit
facility, plus contingent payments of up to $155 million payable at various
times through 2004. See "Recent Developments - First American Acquisition."
(5) Consists of the following acquisitions:
Vintage Acquisition. In January 1996, IHS purchased Vintage Health
Care Center, a 220 bed skilled nursing and assisted living facility in
Denton, Texas, for $6.9 million. A condominium interest in the assisted
living portion of this facility (valued at $3.5 million) was contributed to
ILC on June 1, 1996.
RMS Acquisition. In March 1996, IHS acquired all of the outstanding
capital stock of Rehab Management Systems, Inc. ("RMS"), which operates
outpatient rehabilitation therapy clinics in central Florida. RMS also
managed one therapy and one physician clinic. Total purchase price was
$10.0 million, including $8.0 million representing the issuance of 385,542
shares of IHS Common Stock. In addition, IHS incurred direct costs of
acquisition of $2.9 million. Total goodwill at the date of acquisition was
$12.8 million.
45
<PAGE>
Hospice of the Great Lakes Acquisition. In May 1996, IHS acquired
substantially all the assets of Hospice of the Great Lakes, Inc., a hospice
company in Northbrook, Illinois. Total purchase price was $8.2 million
representing the issuance of 304,822 shares of IHS Common Stock. IHS
incurred direct costs of acquisition of $1.0 million. Total goodwill at the
date of acquisition aggregated $9.1 million.
J.R. Rehab Acquisition. In August 1996, IHS acquired all of the
outstanding capital stock of J.R. Rehab Associates, Inc., an inpatient and
outpatient rehabilitation clinic in Mooresville, North Carolina. Total
purchase price was approximately $2.1 million. IHS incurred direct costs of
acquisition of $200,000. Total goodwill at the date of acquisition
aggregated $3.1 million.
Extendicare Acquisition. In August 1996, IHS acquired substantially
all of the assets of Extendicare of Tennessee, Inc., a home healthcare
company in Memphis, Tennessee. Total purchase price was approximately $3.4
million. IHS incurred direct costs of acquisition of $200,000. Total
goodwill at the date of acquisition aggregated $1.9 million.
Edgewater Acquisition. In August 1996, IHS acquired substantially all
the assets of Edgewater Home Infusion Services, Inc., a home infusion
company in Miami, Florida. Total purchase price was approximately $8.0
million. IHS incurred direct costs of acquisition of $300,000. Total
goodwill at the date of acquisition aggregated $7.7 million.
Century Acquisition. In August 1996, IHS acquired substantially all
the assets of Century Health Services, Inc., a home healthcare company in
Murfreesboro, Tennessee. Total purchase price was approximately $2.4
million. In addition, IHS used borrowings under its revolving credit
facility to repay approximately $1.6 million of debt of Century assumed in
the acquisition. IHS incurred direct costs of acquisition of $200,000.
Total goodwill at the date of acquisition aggregated $12.1 million.
Signature Acquisition. In September 1996, IHS acquired all of the
outstanding capital stock of Signature Home Care, Inc., a home care company
in Dallas, Texas. Total purchase price was approximately $9.2 million,
including $4.7 million representing the issuance of 196,374 shares of IHS
Common Stock. In addition, IHS used borrowings under its revolving credit
facility to repay approximately $1.9 million of Signature's debt. IHS
incurred direct costs of acquisition of $2.5 million. Total goodwill at the
date of acquisition aggregated $21.1 million.
Mediq Acquisition. In November 1996, the Company acquired the assets
of Mediq Mobile X-Ray Services, Inc., which provides mobile diagnostic
services. The total purchase price was $10.1 million, including $5.2
million representing the issuance of 203,721 shares of the Company's Common
Stock. In addition, the Company incurred direct costs of acquisition of
$5.5 million. Total goodwill at the date of acquisition was $15.6 million.
Total Rehab Acquisition. In November 1996, the Company acquired the
assets of Total Rehab Services, LLC and Total Rehab Services 02, LLC, which
provide contract rehabilitative and respiratory services. The total
purchase price was $8.0 million, including $2.7 million representing the
issuance of 106,559 shares of the Company's Common Stock. In addition, the
Company repaid approximately $3.9 million of Total Rehab's debt. In
addition, the Company incurred direct costs of acquisition of $1.3 million.
Total goodwill at the date of acquisition was $12.0 million.
Lifeway Acquisition. In November 1996, the Company acquired all of the
outstanding stock of Lifeway, Inc., which provides physician and disease
state management services. The total purchase price was $900,000
representing the issuance of 38,502 shares of the Company's Common Stock.
IHS also issued 48,129 shares of Common Stock to Robert Elkins, Chairman
and Chief Executive Officer of the Company, in payment of outstanding loans
of $1.1 million from Mr. Elkins to Lifeway. In addition, the Company
incurred direct costs of acquisition of $275,000.
(6) In May 1996, the Company issued $150 million aggregate principal amount of
the Old Notes. The Company used all the net proceeds from the sale of Old
Notes to repay $145.0 million outstanding under the Company's revolving
credit facility. In May 1997, the Company issued $450 million aggregate
principal amount of the 9 1/2% Senior Notes. The Company used all the net
proceeds from the sale of the 9 1/2% Senior Notes to repurchase $99,893,000
of the outstanding 10 3/4% Senior Notes and $114,975,000 of the outstanding
9 5/8% Senior Notes and to repay approximately $191.0 million under its
revolving credit facility.
46
<PAGE>
----------------
For purposes of determining the effects of the acquisitions and divestitures
described in Notes 1 through 5 above, including those events which are (i)
directly attributable to the transaction, (ii) expected to have a continuing
impact on IHS, and (iii) factually supportable, the following estimates and
adjustments have been made:
(a) Represents actual revenues and expenses of divisions sold.
(b) Represents reduction of interest expense resulting from repayment of
$91,000,000 outstanding under IHS' revolving credit facility, based on
IHS' interest rate of 7.19% under the revolving credit facility on
July 30, 1996. The indentures under which IHS' senior subordinated
notes were issued require that IHS use the proceeds of asset sales (as
defined in the indentures) to either (i) invest in healthcare
businesses, (ii) repay senior indebtedness or (iii) repurchase the
senior subordinated notes issued under the indentures. See
"Description of Certain Indebtedness."
(c) Represents gain on the sale of the pharmacy division recorded in July
1996.
(d) Represents reduction of interest expense resulting from repayment of
$17,851,000 outstanding under IHS' revolving credit facility with
proceeds from the ILC Offering, based on IHS' interest rate of 7.19%
under the revolving credit facility on October 9, 1996. The indentures
under which IHS' senior subordinated notes were issued require that
IHS use the proceeds of asset sales (as defined in the indentures) to
either (i) invest in healthcare businesses, (ii) repay senior
indebtedness or (iii) repurchase the senior subordinated notes issued
under the indentures. See "Description of Certain Indebtedness."
(e) Represents loss on sale of shares in the ILC Offering.
(f) Represents additional amortization relating to goodwill recorded as a
result of the acquisition, amortized using the straight line method
over 40 years, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LESS: PREVIOUSLY MONTHS
ANNUAL RECORDED ANNUAL IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1996 ADJUSTMENT
- ---------------------------- ----------- ------ -------------- ------------------ -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
First American ......... $ 227,406 40 $ 5,685 $ 0 $5,685 9.5 $4,501
---------- --- -------- ------ ------- ----- -------
Lifeway ............... 0 40 0 0 0 10.0 0
Total Rehab ............ 11,982 40 300 0 300 10.0 250
Mediq .................. 15,600 40 390 0 390 10.0 325
Century ............... 12,140 40 304 (5) 299 8.5 211
Signature ............ 21,122 40 528 (24) 504 9.0 378
Edgewater ............ 7,685 40 192 (1) 191 7.5 119
Extendicare ............ 1,945 40 49 0 49 7.5 30
J.R. Rehab ............ 3,159 40 79 (2) 77 7.0 45
Hospice of Great Lakes 9,031 40 226 (2) 224 4.0 75
RMS .................. 12,832 40 321 0 321 2.5 67
Vintage ............... 0 40 0 0 0 1.0 0
---------- --- -------- ------ ------- ----- -------
95,496 2,389 (34) 2,355 1,500
---------- -------- ------ ------- -------
Total .................. $ 322,902 $ 8,074 $ (34) $8,040 $6,001
========== ======== ====== ======= =======
</TABLE>
47
<PAGE>
(g) Represents (reduction in) additional interest expense resulting from
(repayment) borrowings under IHS' revolving credit facility to finance
acquisitions based on the interest rate under the revolving credit
facility on the date of (repayment) borrowing, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEBT MONTHS INTEREST INTEREST
(PROCEEDS) IN 1996 RATE ADJUSTMENT
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Pharmacy .................................... $ (91,000) 7.0 7.19% $ (3,817)
ILC Offering ................................. (17,851) 9.0 7.19% (932)
First American .............................. 165,000 9.5 7.13% 9,314
--------- ----- ------- ---------
Lifeway ....................................... 0 10.0 7.13% 0
Total Rehab ................................. 5,300 10.0 7.13% 315
Mediq ....................................... 4,942 10.0 7.13% 294
Century .................................... 2,390 8.5 7.25% 123
Signature .................................... 4,519 9.0 7.19% 244
Edgewater .................................... 7,974 7.5 7.25% 361
Extendicare ................................. 3,410 7.5 7.25% 155
J.R. Rehab ................................. 2,100 7.0 7.25% 89
Hospice of Great Lakes ..................... 0 4.0 6.94% 0
RMS .......................................... 2,000 2.5 6.88% 29
Vintage .................................... 6,932 1.0 7.06% 41
--------- ---------
39,567 1,651
---------- ---------
Total ....................................... $ 95,716 7.08%(1) $ 6,216
========== =========
Effect of 1/8% reduction in interest expense $ 95,716 6.95%(1) $ 6,074
Effect of 1/8% increase in interest expense ... $ 95,716 7.20%(1) $ 6,292
</TABLE>
- ----------
(1) Percentage is weighted average based on amount (repaid) borrowed.
(h) Represents additional amortization of deferred financing costs
relating to the Old Notes (5 months) and the 9 1/2% Senior Notes (12
months).
(i) Represents additional net interest expense resulting from (i) the sale
of $150 million aggregate principal amount of Old Notes and the use of
proceeds therefrom to repay $145.0 million outstanding under the
revolving credit facility (5 months) and (ii) the sale of $450 million
aggregate principal amount of the 9 1/2% Senior Notes and the use of
proceeds therefrom to repurchase $214.9 million of its outstanding
senior subordinated notes and $191.0 million outstanding under the
revolving credit facility. The interest reduction resulting from the
repayment of amounts outstanding under the revolving credit facility
is based on the interest rate under the revolving credit facility on
the date of repayment.
48
<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.
IHS' post-acute care services include subacute care, home care and inpatient and
outpatient rehabilitation, hospice and diagnostic 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. The
Company believes that its post- acute care network can be extended beyond
post-acute care to also provide "pre-acute" care, i.e., services to patients
which reduce the likelihood of a need for a hospital stay. IHS' post-acute care
network currently consists of approximately 1,100 service locations in 41
states.
The Company's post-acute care network 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 network strategy, the Company has focused on (i) expanding
the range of home healthcare and related services it offers to patients directly
in order to provide patients with a continuum of care throughout their recovery,
to better control costs and to meet the growing desire by payors for one-stop
shopping; (ii) developing market concentration for its post-acute care services
in targeted states due to increasing payor consolidation and the increased
preference of payors, physicians and patients for dealing with only one service
provider; (iii) developing subacute care units; and (iv) forming strategic
alliances with health maintenance organizations, hospital groups and physicians.
Given the increasing importance of managed care in the healthcare marketplace
and the continued cost containment pressures from Medicare, Medicaid and private
payors, IHS has been restructuring its operations to enable IHS to focus on
obtaining contracts with managed care organizations and to provide capitated
services. IHS' strategy is to become a preferred or exclusive provider of
post-acute care services to managed care organizations.
In implementing its post-acute care network 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 October 1996 acquired First American, a provider of home health
services, principally home nursing, in 21 states, primarily Alabama, California,
Florida, Georgia, Michigan, Pennsylvania and Tennessee, and has entered into an
agreement to acquire RoTech, a provider of home healthcare products and
services, with an emphasis on respiratory and home infusion services,
principally to patients in non-urban areas. See "Recent Developments." IHS
intends to use the home healthcare setting and the delivery franchise of the
home healthcare branch and agency network to (i) deliver sophisticated care,
such as skilled nursing care, home infusion therapy and rehabilitation, outside
the hospital or nursing home; (ii) serve as a referral base for IHS' other
services and healthcare capabilities; and (iii) provide a cost-effective site
for case management and patient direction.
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
49
<PAGE>
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, $290.2
million for the year ended December 31, 1995 and $324.0 million for the year
ended December 31, 1996 and from $78.1 million for the three months ended March
31, 1996 to $85.5 million for the three months ended March 31, 1997. MSU
revenues as a percentage of total revenues were 35% in 1993, 25% in each of 1994
and 1995, 23% in 1996 and 24% and 19% in the three months ended March 31, 1996
and 1997, respectively. The percentage decrease in 1994 was primarily the result
of the acquisition of facilities which did not have MSUs at the time of
acquisition as well as the acquisition of rehabilitation, pharmacy, diagnostic,
respiratory therapy, home healthcare and related service companies in connection
with the Company's vertical integration strategy and the implementation of the
Company's post-acute care 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 home healthcare, rehabilitation and similar service
companies.
The Company presently operates 172 geriatric care facilities (116 owned or
leased and 56 managed) and 158 MSUs located within 84 of these facilities.
Specialty medical services revenues, which include all MSU charges, all revenue
from providing rehabilitative therapies, pharmaceuticals, medical supplies and
durable medical equipment to all its patients, all revenue from its Alzheimer's
programs and all revenue from its provision of pharmacy, rehabilitation therapy,
home healthcare, hospice care and similiar services to third-parties,
constituted approximately 57%, 65% and 70% of net revenues during the years
ended December 31, 1994, 1995 and 1996, respectively. 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. For the year ended December 31, 1996, approximately
17% of IHS' revenues were derived from home health and hospice care,
approximately 53% were derived from subacute and other ancillary services,
approximately 27% were derived from traditional basic nursing home services and
the remaining approximately 3% were derived from management and other services.
On a pro forma basis after giving effect to the acquisition of First American,
for the year ended December 31, 1996 approximately 35% of IHS' revenues were
derived from home health and hospice care, approximately 41% were derived from
subacute and other ancillary services, approximately 21% were derived from
traditional basic nursing home services and the remaining approximately 3% were
derived from management and other services.
INDUSTRY BACKGROUND
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for inpatient hospital services
based on regional and national rates established under a system of
diagnosis-related groups ("DRGs"). As a result, hospitals bear the cost risk of
providing care inasmuch as they receive specified reimbursement for each
treatment regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs,
a "managed care" segment of the healthcare industry emerged based on the theme
of cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by 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.
50
<PAGE>
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. The early discharge from hospitals of patients who are not fully
recovered and still require medical care and rehabilitative therapy has
contributed significantly to the rapid growth of the home healthcare industry,
as have recent advances in medical technology, which have facilitated the
delivery of services in alternate sites, demographic trends, such as an aging
population, and a preference for home healthcare among patients. As a result,
home healthcare is among the fastest growing areas in healthcare.
However, for some of these patients home healthcare is not a viable
alternative because of their continued need for a high degree of monitoring,
more intensive and specialized medical care, 24-hour per day nursing care and a
comprehensive array of rehabilitative therapy. As a result, 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.
The traditional nursing home, despite its skilled care license and
eligibility for Medicare certification, has focused on providing custodial care
to Medicaid eligible persons until they die. The state Medicaid reimbursement
program reinforces this focus by typically setting "cost ceilings" on
reimbursement for each patient based on overall average state costs for all
patients. Since the "average" patient is a long-stay, non-medically complex
patient, nursing homes face an economic disincentive to treat medically complex
patients because Medicaid reimburses the nursing home as if it had provided only
custodial care to a non-medically complex patient regardless of the type of care
actually provided. In addition, state laws impose substantial restrictions on or
prohibitions against the ability of a facility to reduce the number of Medicaid
certified beds in a facility, thus making the process of converting to the
treatment of more medically complex non-Medicaid eligible persons a long and
financially risky process. As a result, most traditional nursing homes, with
high Medicaid census and earnings and cash flow under pressure, are reluctant to
spend the capital required to upgrade staff, implement medical procedures (such
as infection control) and equip a nursing home to treat subacute and medically
complex patients and provide the comprehensive rehabilitative therapy required
by many of these patients.
Moreover, recent healthcare reform proposals, which have focused on
containment of healthcare costs, together with the desire of third-party payors
to contract with one service provider for all post- acute care services, the
increasing complexity of medical services provided, growing regulatory and
compliance requirements and increasingly complicated reimbursement systems, have
resulted in a trend of consolidation of smaller, local operators who lack the
sophisticated management information systems, operating efficiencies and
financial resources to compete effectively into larger, more established
regional or national operators that offer a broad range of services, either
through its own network or through subcontracts with other third-party service
providers.
There are numerous initiatives on the federal and state levels for
comprehensive reforms affecting the payment for and availability of healthcare
services. It is not clear at this time what proposals, if any, will be adopted
or, if adopted, what effect such proposals would have on 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
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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 network 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. IHS believes
that the success of its post-acute care strategy will depend in large part on
its ability to control each component of the post-acute care delivery system in
order to provide low-cost, high quality outcomes. The central elements of IHS'
business strategy are:
Vertical Integration of Post-acute Care Services. 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. In addition to subacute care, the Company is now able to offer
directly to its patients, rather than through third-party providers, home
healthcare, rehabilitation (physical, occupational and speech), hospice care and
mobile x-ray and electrocardiogram services. As a full service provider, IHS
believes that it is better able to respond to the needs of its patients and
referral sources. In addition, 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 offering capitated
rates, whereby IHS assumes the financial risk for the cost of care.
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. In addition, 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 pre-acute, as
well as post-acute, 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
offering capitated rates. IHS believes that the changing healthcare
reimbursement environment, with the focus on cost containment, will require
healthcare providers to go "at risk" under capitated service agreements, and
that home healthcare will be a critical component of its ability to do so.
IHS believes that the acquisition of First American is an important
component in the implementation of its post-acute healthcare system. First
American, together with the Company's existing home healthcare operations, gives
the Company a significant home healthcare presence in 21 states, including those
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 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 for home nursing
services in the next several years. Currently, Medicare provides reimbursement
for home nursing care on a cost basis which includes a rate of return, subject
to a cap. There is no reward for efficiency, provided that costs are below the
cap. Under current prospective payment proposals, a healthcare provider would
receive a predetermined rate for a given service. Providers with costs below the
predetermined rate will be entitled to keep some or all of this difference.
Under prospective pay, the efficient operator will be rewarded. Since the
largest component of home nursing care costs is labor, which is basically fixed,
the Company believes the differentiating factor in profitability will be
administrative costs. As a result of the
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First American Acquisition, the Company, as a large provider of home nursing
services, should be able to achieve administrative efficiencies compared with
the small providers which currently dominate the home healthcare industry,
although there can be no assurance it will be able to do so. There can be no
assurance that Medicare will implement a prospective payment system for home
nursing services in the next several years or at all. See "Risk Factors - Risk
of Adverse Effect of Healthcare Reform."
Focus on Managed Care. Given the increasing importance of managed care in
the healthcare marketplace and the continued cost containment pressures from
Medicare and Medicaid, IHS has, over the past year, begun to restructure its
operations to position IHS to focus on obtaining contracts with managed care
organizations and to provide capitated services. IHS' strategy is to become a
preferred or exclusive provider to managed care organizations. Although to date
there has been limited demand among managed care organizations for post-acute
care services, IHS believes demand will increase as HMOs continue to attempt to
control healthcare costs and to penetrate the Medicare market. As part of its
focus on managed care and capitated rates, IHS spent several years collecting
outcome data for more than 25,000 patients. To date, IHS has service agreements
with approximately 350 managed care organizations. In January 1996, IHS was
chosen as the exclusive capitated provider for five years of long-term care,
subacute care and therapy services to Sierra Health Plan's Health Plan of Nevada
("Sierra Health"), the largest HMO in Nevada with approximately 26,000 Medicare
enrollees and 116,000 commercial enrollees. As the exclusive provider, IHS
provides all contracted services to the HMOs members; as a capitated provider,
IHS accepts full risk of patient care in exchange for a flat fee per enrollee.
The agreement with Sierra Health provides for bi-annual price resets, stop-loss
agreements and cancellation clauses, although there can be no assurance that
these provisions will be effective to protect IHS. In addition, in October 1996
IHS entered into a three-year agreement to provide, on an exclusive basis,
long-term and sub-acute care to patients of Foundation Health Corporation, an
HMO located in Florida, on a capitated basis. Foundation Health currently has
26,000 Medicare and 60,000 commercial enrollees. The agreement provides for
increased revenues to IHS for reduced hospital utilization. Although IHS has
attempted to minimize its risk under the contract, there can be no assurance
that safeguards it implemented will be effective. See "Risk Factors - Risks
Related to Managed Care Strategy."
Subacute Care Through Medical Specialty Units. 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, wound management programs and cardiac care programs; other programs
offered include subacute rehabilitation, oncology and HIV. IHS opened its first
MSU program in April 1988 and currently operates 158 MSU programs in 84
facilities. IHS also emphasizes the care of medically complex patients through
the provision of a comprehensive array of respiratory, physical, speech,
occupational and physiatric therapy. 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. IHS believes
that its subacute care programs will also serve as an important referral base
for its home healthcare and ancillary services. In expanding its post-acute care
network, IHS expects to place less emphasis on subacute care through MSUs and
more emphasis on home healthcare. While IHS added 1,098 MSU beds in 1994 and 868
MSU beds in 1995, it only added an additional 383 MSU beds in 1996 and 65 MSU
beds in the first quarter of 1997, and it anticipates that it will only add an
additional 300 to 400 MSU beds in each of 1997 and 1998.
Concentration on Targeted Markets. The Company has implemented a strategy
focused on the development of market concentration for its post-acute care
services in targeted states due to increasing payor consolidation. 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 has
approximately 1,100 service locations in 41
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states, including 172 geriatric care facilities in 30 states (56 of which the
Company manages), with 61 service locations, including 23 geriatric care
facilities (21 of which the Company manages), in California, 164 service
locations, including 32 geriatric care facilities (five of which the Company
manages), in Florida, 73 service locations, including 14 geriatric care
facilities (two of which the Company manages), in Pennsylvania, and 139 service
locations, including 20 geriatric care facilities (six of which the Company
manages), in Texas.
Expansion Through Acquisition. The Company has grown substantially through
acquisitions and the opening of MSUs and the acquisition of home healthcare and
related service providers, and expects to continue to expand its business by
expanding the amount of home healthcare and related services it offers directly
to its patients rather than through third-party providers, by establishing
additional MSUs and rehabilitation programs in its existing geriatric care
facilities, by acquiring additional geriatric care facilities in which to
establish MSUs and rehabilitation programs and by expanding the number of MSU
programs offered. From January 1, 1991 to date, the Company has increased the
number of geriatric care facilities it owns or leases from 25 to 116, has
increased the number of facilities it manages from 18 to 56 and has increased
the number of MSU programs it operates from 13 to 158. In addition, the Company
now offers certain related services, such as home healthcare, rehabilitation,
x-ray and electrocardiogram, directly to its patients rather than relying on
third-party providers. The Company's planned expansion and growth require that
the Company expand its home healthcare services through the acquisition of
additional home healthcare providers, that the Company acquire, or establish
relationships with, third-parties which provide other post-acute care services
not currently provided by the Company, that additional MSUs be established in
the Company's existing facilities and that the Company acquire, lease or acquire
the right to manage for others additional facilities in which MSUs can be
established. See "Risk Factors - Risks Associated with Growth Through
Acquisitions and Internal Development."
PATIENT SERVICES
Basic Medical Services
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.
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
158 MSUs at 84 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
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"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, oncology and HIV.
Complex Care Program. This program is designed to treat persons who are
generally subacute or chronically ill and sick enough to be treated in an acute
care hospital. Persons requiring this care include post-surgical patients,
cancer patients and patients with other diseases requiring long recovery
periods. This program is designed to provide the monitoring and specialized care
these patients require but in a less institutional and more cost efficient
setting than provided by hospitals. Some of the monitoring and specialized care
provided to these patients are apnea monitoring, continuous peripheral
intravenous therapy with or without medication, continuous subcutaneous
infusion, chest percussion and postural drainage, gastrostomy or naso-gastric
tube feeding, ileostomy or fistula care (including patient teaching),
post-operative care, tracheostomy care, and oral, pharyngeal or tracheal
suctioning. Patients in this program also typically undergo intensive
rehabilitative services to allow them to return home.
Ventilator Program. This program is designed for persons who require
ventilator assistance for breathing because of respiratory disease or
impairment. Persons requiring ventilation include sufferers of chronic
obstructive pulmonary disease, muscular atrophy and respiratory failure,
pneumonia, cancer, spinal cord or traumatic brain injury and other diseases or
injuries which impair respiration. Ventilators assist or effect respiration in
patients unable to breathe adequately for themselves by injecting heated,
humidified, oxygen-enriched air into the lungs at a pre-determined volume per
breath and number of breaths per minute and by controlling the relationship of
inhalation time to exhalation time. Patients in this program undergo respiratory
rehabilitation to wean them from ventilators by teaching them to breathe on
their own once they are medically stable. Patients are also trained to use the
ventilators on their own.
Wound Management Programs. These programs are designed to treat persons
suffering from post operative complications and persons infected by certain
forms of penicillin and other antibiotic resistant bacteria, such as methicillin
resistant staphylococcus aureus ("MRSA"). Patients infected with these types of
bacteria must be isolated under strict infection control procedures to prevent
the spread of the resistant bacteria, which makes MSUs an ideal treatment site
for these patients. Because of the need for strict infection control, including
isolation, treatment of this condition in the home is not practical.
Cardiac Care Program. This program is designed to treat persons suffering
from congestive heart failure, severe cardiac arrhythmia, pre/post transplants
and other cardiac diagnoses. The monitoring and specialized care provided to
these patients includes electrocardiographic monitoring/telemetry, continuous
hemodynamic monitoring, infusion therapy, cardiac rehabilitation, stress
management and dietary counseling, planning and education.
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.
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The Company also offers a rehabilitation program to stroke victims and
persons who have undergone hip replacement.
Home Healthcare Services
IHS provides a broad spectrum of home healthcare services to the
recovering, disabled, chronically ill or terminally ill person. Home healthcare
services may be as basic as assisting with activities of daily living or as
complex as cancer chemotherapy. Care involves either or both a service component
(provided by registered nurses, home health aides, therapists and technicians
through periodic visits) and a product component (drugs, equipment and related
supplies). Time spent with a patient may range from one or two visits to
around-the-clock care. Patients may be treated for several weeks, several months
or the remainder of their lives.
The home healthcare market is generally divided into four segments: nursing
services; infusion therapy; respiratory therapy; and home medical equipment. On
a pro forma basis after giving effect to the acquisition of First American and
the ILC Offering, IHS had home healthcare revenues of approximately $457.0
million, $646.0 million, $622.0 million, $154.1 million and $155.7 million
during the years ended December 31, 1994, 1995 and 1996 and the three months
ended March 31, 1996 and 1997, respectively, representing approximately 41.1%,
38.4%, 35.3%, 34.3% and 33.8%, respectively, of total pro forma patient
revenues. On a pro forma basis after giving effect to the acquisition of First
American, home nursing services accounted for approximately 97.1%, 97.3%, 97.6%,
97.3% and 92.9% of IHS' home healthcare revenues in 1994, 1995 and 1996 and the
three months ended March 31, 1996 and 1997, respectively.
Home Nursing. Home nursing is the largest component of home healthcare, the
most labor-intensive and generally the least profitable. Home nursing services
range from skilled care provided by registered and other nurses, typically for
those recently discharged from hospitals, to unskilled services delivered by
home health aides for those needing help with the activities of daily living.
Home nursing also includes physical, occupational and speech therapy, as well as
social worker services. IHS substantially expanded its home nursing services
through the acquisition of First American, and currently provides home nursing
services at approximately 450 locations in 25 states.
Infusion Therapy. Infusion therapy, the second largest home healthcare
market, involves the intravenous administration of anti-infective, biotherapy,
chemotherapy, pain management, nutrition and other therapies. Infusion therapy
generally requires patient training, specialized equipment and periodic
monitoring by skilled nurses. Technological advances such as programmable pumps
that control frequency and intensity of delivery are increasing the percentage
of infections and diseases that are treatable in the home; previously these
infections and diseases generally required patients to be hospitalized. Home
infusion therapy is more skilled-labor-intensive than other home healthcare
segments.
Respiratory Therapy. Respiratory therapy is provided primarily to older
patients with chronic lung diseases (such as chronic obstructive pulmonary
disease, asthma and cystic fibrosis) or reduced respiratory function. The most
common therapy is home oxygen, delivered through oxygen gas systems, oxygen
concentration or liquid oxygen systems. Respiratory therapy is monitored by
licensed respiratory therapists and other clinical staff under the direction of
physicians.
Home Medical Equipment. Home medical equipment consists of the sale or
rental of medical equipment such as specialized beds, wheelchairs, walkers,
rehabilitation equipment and other patient aides.
Alzheimer's Program
IHS also offers a specialized treatment program for persons with
Alzheimer's disease. This program, called "The Renaissance Program," is located
in a specially designed wing separated from the remainder of the facility. The
physical environment is designed to address the problems of disorientation and
perceptual confusion experienced by Alzheimer's sufferers. The Renaissance
Program is designed to help reduce the stress and agitation of Alzheimer's
disease by addressing the problems of short attention spans and hyperactivity.
The staff for this program is specially recruited and staff training is highly
specialized. This program is designed not only to provide care to persons
suffering from Alzheimer's
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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 395 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 provides hospice services, including medical care, counseling
and social services, to the terminally ill in the greater Chicago metropolitan
area, Michigan and Pennsylvania. Hospice care is a coordinated program of
support services providing physical, psychological, social and spiritual care
for dying persons and their families. Services are provided in the home and/or
inpatient settings. The goal of hospice care is typically to improve a terminal
patients' quality of life rather than trying to extend life. The Company also
provides hospice care to the terminally ill at its facility in Miami, Florida.
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 56 geriatric care facilities with 6,337 licensed beds. 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 July 1997 and
May 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.
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.
Facility administrator bonuses are dependent in part upon their facility's
evaluation. 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
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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. 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 June 30, 1997, 68 of the Company's facilities had been fully
accredited by the JCAHO.
OPERATIONS
The day-to-day operations of each facility are managed by an on-site state
licensed administrator, and an on-site business office manager monitors the
financial operations of each facility. The administrator of each facility is
supported by other professional personnel, including the facility's medical
director, social workers, dietician and recreation staff. Nursing departments in
each facility are under the supervision of a director of nursing who is
state-registered. The nursing staffs are composed of registered nurses and
licensed practical nurses as well as nursing assistants.
The Company's home healthcare businesses are conducted through nearly 450
branches which are managed through three geographic area offices. The area
office provides each of its branches with key management direction and support
services. IHS' organizational structure is designed to create operating
efficiencies associated with certain centralized services and purchasing while
also promoting local decision making.
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 and branch location. The Company has standardized
operating procedures and monitors its facilities and branch locations to assure
consistency of operations. IHS emphasizes frequent communications, the setting
of operational goals and the monitoring of actual results. 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 and branch location 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
The Company has a 49% interest in a partnership formed in 1993 to manage
and operate approximately 8,000 geriatric care and assisted retirement beds
("Tutera"), and a 40% interest in HPC America, Inc., a Delaware corporation
("HPC") that operates home infusion and home healthcare companies in addition to
owning and managing physician practices. IHS does not participate in the
day-to-day operations of Tutera or HPC, although its consent is required for
certain material transactions. Under certain circumstances, IHS has the right to
purchase the remaining interest in these entities, based upon a multiple of such
entity's earnings, although the Company's right to purchase the remaining
interest in HPC expires in September 1997.
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 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.
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During the years ended December 31, 1994, 1995 and 1996, the Company
derived approximately $297.8 million, $509.3 million and $562.5 million,
respectively, or 44.2%, 44.7% and 40.5%, respectively, of its patient revenues
from private pay sources and approximately $376.4 million, $629.8 million and
$826.4 million, respectively, or 55.8%, 55.3% and 59.5%, respectively, of its
patient revenues from government reimbursement programs. Patient revenues from
government reimbursement programs during these periods consisted of
approximately $225.6 million, $387.2 million and $516.7 million, or 33.5%, 34.0%
and 37.2% of total patient revenues, respectively, from Medicare and
approximately $150.8 million, $242.6 million and $309.7 million, respectively,
or 22.3%, 21.3% and 22.3% of total patient revenues, respectively, from
Medicaid. During the three months ended March 31, 1996 and 1997, the Company
derived approximately $136.6 million and $150.8 million, respectively, or 43.2%
and 33.4%, respectively, of its patient revenues from private pay sources and
approximately $180.1 million and $300.7 million, respectively, or 56.8% and
66.6%, respectively, of its patient revenues from government reimbursement
programs. Patient revenues from government reimbursement programs during these
periods consisted of approximately $104.2 million and $222.1 million, or 33.0%
and 49.2% of total patient revenues, respectively, from Medicare and
approximately $75.9 million and $78.6 million, respectively, or 23.8% and 17.4%
of total patient revenues, respectively, from Medicaid. The increase in the
percentage of revenue from government reimbursement programs is due to the
higher level of Medicare and Medicaid patients serviced by the respiratory
therapy, rehabilitative therapy, home healthcare and mobile diagnostic companies
acquired in 1994, 1995 and 1996.
On a pro forma basis after giving effect to the acquisition of First
American and the ILC Offering, during the years ended December 31, 1995 and
1996, the Company derived approximately $514.8 million and $561.1 million,
respectively, or 30.6% and 31.9%, respectively, of its patient revenues from
private pay sources and approximately $1.2 billion and $1.2 billion,
respectively, or 69.4% and 68.1%, respectively, of its patient revenues from
government reimbursement programs. Pro forma patient revenues from government
reimbursement programs during these periods consisted of approximately $919.2
million and $885.7 million, or 54.6% and 50.3%, respectively, from Medicare and
approximately $248.2 million and $313.6 million, respectively, or 14.8% and
17.8%, respectively, from Medicaid. On a pro forma basis after giving effect to
the acquisition of First American and the ILC Offering, during the three months
ended March 31, 1996 and 1997, IHS derived approximately $135.7 million and
$150.8 million, respectively, or 30.9% and 33.4%, respectively, of its patient
revenues from private pay sources and approximately $303.1 million and $300.7
million, respectively, or 69.1% and 66.6%, respectively, of its patient revenues
from government reimbursement programs. Pro forma patient revenues from
government reimbursement programs during these periods consisted of
approximately $226.5 million and $222.1 million, or 51.6% and 49.2%,
respectively, from Medicare and approximately $76.6 million and $78.8 million,
respectively, or 17.5% and 17.4%, respectively, from Medicaid.
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 patients in
those programs has traditionally increased. In addition, the Company received
payments from third parties for its management services, which constituted
approximately 5.3%, 3.3%, 3.2%, 3.2% and 2.0% of total net revenues for the
years ended December 31, 1994, 1995 and 1996 and the three months ended March
31, 1996 and 1997, respectively.
Gross third party payor settlements receivable, primarily from federal and
state governments (i.e., Medicare and Medicaid cost reports), were $35.7 million
at March 31, 1997, as compared to $42.6 million at December 31, 1996, $33.0
million at December 31, 1995 and $22.6 million at December 31, 1994.
Approximately $10.3 million, or 29%, of the third party payor settlements
receivable, primarily from Federal and state governments, at March 31, 1997
represent the costs for its MSU patients which exceed regional reimbursement
limits established under Medicare, as compared to approximately $15.6 million,
or 37%, at December 31, 1996, approximately $7.6 million, or 23%, at December
31, 1995 and approximately $6.2 million, or 27%, at December 31, 1994.
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
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and by obtaining waivers of these limitations. The Company has submitted waiver
requests for 225 cost reports, covering all cost report periods through December
31, 1995. To date, final action has been taken by HCFA on 221 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. The May 1997 balanced budget agreement between the President and
Congress contemplates changing Medicare payments for skilled nursing facilities
and home nursing services from a cost-reimbursement system to a prospective
payment system. 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 and care. Changes in
applicable laws and regulations or new interpretations of existing laws and
regulations could have a material adverse effect on licensure of 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. In
addition, in the conduct of its business the Company's operations are subject to
review by federal and state regulatory agencies. In the course of these reviews,
problems are from time to time identified by these agencies. Although the
Company has to date been able to resolve these problems in a manner satisfactory
to the regulatory agencies without a material adverse effect on the Company,
there can be no assurance that the Company will be able to do so in the
future.See "Risk Factors - Uncertainty of Government Regulation."
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 services or capital
expenditures. These state determinations of need or CON programs are designed to
comply with certain minimum federal standards and to enable states to
participate in certain federal and state health related programs. Elimination or
relaxation of CON requirements may result in increased competition in such
states and may also result in increased expansion possibilities in such states.
Of the states in which the Company operates, the following require CONs for the
facilities that are owned, operated or managed by the Company: Alabama,
Colorado, Delaware, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky,
Louisiana, Maryland, Massachusetts, Michigan, Mississippi,
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Missouri, Nevada, New Hampshire, New Jersey, North Carolina, Ohio, South
Carolina, Tennessee, Texas, Virginia, Washington, West Virginia and Wisconsin.
To date the conversion of geriatric care beds to MSU beds has not required a
CON.
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.
The operations of IHS' home healthcare branches are subject to numerous
federal and state laws governing pharmacies, nursing services, therapy services
and certain types of home health agency activities. Certain of IHS' employees
are subject to state laws and regulations governing the professional practice of
respiratory therapy, physical, occupational and speech therapies, pharmacy and
nursing. The failure to obtain, to renew or to maintain any of the required
regulatory approvals or licenses could adversely affect IHS' home healthcare
business and could prevent the branch involved from offering products and
services to patients. Generally, IHS is required to be licensed as a home health
agency in those states in which it provides traditional home health or home
nursing services. IHS' ability to expand its home healthcare services will
depend upon its ability to obtain licensure as a home health agency, which may
be restricted by state CON laws.
Various Federal and state laws regulate the relationship between providers
of healthcare services and physicians or others able to refer medical services,
including employment or service contracts, leases and investment relationships.
These laws include the fraud and abuse provisions of Medicare and Medicaid and
similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment,
receipt, solicitation or offering of any direct or indirect remuneration
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil and criminal
penalties and/or exclusion
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from participation in the Medicare and Medicaid programs and from state programs
containing similar provisions relating to referrals of privately insured
patients. The Department of Health and Human Services ("HHS") and other federal
agencies have interpreted these provisions broadly to include the payment of
anything of value to influence the referral of Medicare or Medicaid business.
HHS has issued regulations which set forth certain "safe harbors," representing
business relationships and payments that can safely be undertaken without
violation of the Fraud and Abuse Laws. In addition, certain Federal and state
requirements generally prohibit certain providers from referring patients to
certain types of entities in which such provider has an ownership or investment
interest or with which such provider has a compensation arrangement, unless an
exception is available. 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, there
can be no assurance that all of IHS' existing or future arrangements will
withstand scrutiny under the Fraud and Abuse Laws, safe harbor regulations or
other state or federal legislation or regulations, nor can it predict the effect
of such rules and regulations on these arrangements in particular or on IHS'
operations in general.
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 governmental healthcare regulation, there
are numerous initiatives on the federal and state levels for comprehensive
reforms affecting the payment for and availability of healthcare services. It is
not clear at this time what proposals, if any, will be adopted or, if adopted,
what effect such proposals would have on 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, results of operations and financial condition.
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 gener-
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ally 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 requests 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 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.
The Medicare program reimburses for home healthcare services under two
basic systems: cost-based and charge-based. Under the cost-based system, IHS is
reimbursed at the lowest of IHS' reimbursable costs (based on Medicare
regulations), cost limits established by HCFA or IHS' charges. While a small
amount of corporate level overhead is permitted as part of reimbursable costs
under Medicare regulations, such costs consist predominantly of expenses and
charges directly incurred in providing the related services, and cannot include
any element of profit or net income to IHS. Under the charge-based system,
Medicare reimburses IHS on a "prospective payment" basis, which consists in
general of either a fixed fee for a specific service or a fixed per diem amount
for providing certain services. As a result, IHS can generate profit or net
income from Medicare charge-based revenues by providing covered services in an
efficient, cost-effective manner. All nursing services (including related
products) are Medicare cost-based reimbursed, except for nursing services
provided to hospice patients. Hospice care and all other home healthcare
services (including non-nursing related products) are Medicare charge-based
reimbursed.
IHS expects that Medicare will implement a prospective payment system for
home nursing services in the next several years, and implementation of a
prospective payment system will be a critical element to the success of IHS'
expansion into home nursing services. Based upon prior legislative proposals,
IHS believes that a prospective payment system would most likely provide a
healthcare provider a predetermined rate for a given service. Providers with
costs below the predetermined rate will be entitled to keep some or all of this
difference. Under such a prospective payment system, the efficient operator will
be rewarded. Since the largest component of home healthcare costs is labor,
which is basically fixed, IHS believes the differentiating factor in
profitability will be administrative costs. As a result of the First American
acquisition, IHS, as a large provider of home nursing services, believes it
should be able to achieve administrative efficiencies compared with the small
providers which currently dominate the home healthcare industry, although there
can be no assurance it will be able to do so. There can be no assurance that
Medicare will implement a prospective payment system for home nursing services
in the next several years or at all. The inability of IHS to provide home
healthcare services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home healthcare operations and its
post-acute care network. See "Risk Factors - Risk of Adverse Effect of
Healthcare Reform."
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to qualifying
needy individuals. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
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
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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 and is subject to continuing
changes in the provision of services and the selection and compensation of
providers. 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
and service providers. 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 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.
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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, 1997, the Company had approximately 57,000 full-time and
regular part-time employees. Full-time and regular part-time service and
maintenance employees at 17 facilities, totaling approximately 1,300 employees,
are covered by collective bargaining agreements. The Company's corporate staff
consisted of approximately 1,900 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 healthcare industry
is intense, particularly with respect to nurses. Many areas are already facing
nursing shortages, and it is expected that the shortages will increase in the
future. Although 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, results of operations and financial
condition.
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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. Pursuant to the Registration Rights Agreement,
the Company was obligated to take certain actions to effect the Exchange Offer
within specified periods; since the Exchange Offer was not commenced within the
time periods specified in the Registration Rights Agreement, on November 25,
1996 the interest rate on the Old Notes increased to 11.00%, on February 23,
1997 the interest rate on the Old Notes increased to 10.75% and on May 24, 1997
the interest rate on the Old Notes increased to 11.00%. As a result of the
commencement of the Exchange Offer on the date hereof, the interest rate on the
Old Notes has decreased to 10 1/4%. Upon consummation of the Exchange Offer,
holders of the Old Notes, whether or not tendered, will no longer be entitled to
the contingent increases in the interest rate provided for in the Registration
Rights Agreement.
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, the Company's 10 3/4% Senior
Subordinated Notes due 2004 and the Company's 9 1/2% Senior Subordinated Notes
due 2007, 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 March 31, 1997, after giving effect to the issuance of
$450 million aggregate principal amount of the 9 1/2% Senior Notes and the use
of proceeds therefrom to repurchase approximately $214.9 million of its
outstanding senior subordinated notes and to repay approximately $191 million
under its revolving credit
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facility, 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 $273.8 million. In addition, the 10 1/4% Notes
are effectively subordinated to the lease obligations of the Company's
Subsidiaries, which aggregated $224.0 million at March 31, 1997, and other
liabilities, including trade payables, the amount of which could be material.
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
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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.
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.
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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 agreements 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
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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 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.
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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 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,
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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 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.
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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 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 9 5/8% Senior Notes, the 10
3/4% Senior Notes 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: (i) 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 or 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 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 New 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 New 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 New
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 New 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 New Notes,
the Global Note Holder will be considered the sole holder under the Indenture of
any New Notes evidenced by the Global Note. Beneficial owners of New 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 New 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 New 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 New 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 New Notes will be
governed by standing instructions and customary practice and will be the
responsibility of the Depositary's Participants or 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 New
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 New 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 New Notes in the form of
certificated securities under the Indenture, then, upon surrender by the Global
Note Holder of its Global Note, New 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 New Notes.
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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 March 31, 1997, IHS' total long-term debt, net of
current portion, accounted for 66.9% of its total capitalization after giving
effect to the issuance of $450 million aggregate principal amount of the
Company's 9 1/2% Senior Notes and the use of proceeds therefrom to repurchase
approximately $214.9 million of its outstanding senior subordinated notes and to
repay approximately $191.0 million under its revolving credit facility. In
connection with the issuance of the 9 1/2% Senior Notes, both Moody's and
Standard & Poors in May 1997 confirmed their ratings of IHS' other long-term
debt obligations, but with a negative outlook. Moody's stated that it retained a
negative outlook anticipating that IHS will continue to be an aggressive
acquirer of companies, and that it would view negatively any increase in
leverage. Standard & Poors stated that its ratings reflected the Company's
aggressive transition towards becoming a full service alternate-site healthcare
provider and its limited cash flow relative to its heavy debt burden. See
"Capitalization," "Pro Forma Financial Information" and "Risk Factors - Risks
Related to Substantial Indebtedness." The summary is not a complete description
of such indebtedness. Copies of the material agreements relating to such
indebtedness have been filed with the Commission and the description set forth
below is qualified in its entirety by reference to such agreements. See
"Available Information."
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 "Credit
Facility"). The 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 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 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 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 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 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 Credit Facility may be reborrowed until June 30, 2002.
The $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 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 June 30,
1997, $278.9 million was outstanding under the Credit Facility, bearing interest
at 7.2%.
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
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part at the option of the Company 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 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 103.6% in 1997 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.
9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
The Company has outstanding $450,000,000 aggregate principal amount of its
9 1/2% Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"). Interest
on the 9 1/2% Senior Notes is payable semi-annually on March 15 and September
15. The 9 1/2% Senior Notes are redeemable in whole or in part at the option of
the Company at any time on or after September 15, 2002, at a price, expressed as
a percentage of the principal amount, initially equal to 104.75% and declining
to 100% on September 15, 2005, plus accrued interest thereon. In addition, the
Company may redeem up to $150,000,000 aggregate principal amount of 9 1/2%
Senior Notes at any time and from time to time prior to September 15, 2000 at a
redemption price equal to 108.50% of the aggregate principal amount thereof,
plus accrued interest thereon, out of the net cash proceeds of one or more
Public Equity Offerings (as defined in the indenture under which the 9 1/2%
Senior Notes were issued (the "9 1/2% Senior Notes Indenture")). In the event of
a change in control of IHS (as defined in the 9 1/2% Senior Notes Indenture),
each holder of 9 1/2% Senior Notes may require IHS to repurchase such holder's 9
1/2% Senior Notes, in whole or in part, at 101% of the principal amount thereof,
plus accrued interest to the repurchase date. The 9 1/2% Senior Notes Indenture
contains certain covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitations on additional indebtedness
unless certain coverage ratios are met; (ii) limitations on other subordinated
indebtedness; (iii) limitations on liens; (iv) limitations on the issuance of
preferred stock by IHS' subsidiaries; (v) limitations on transactions with
affiliates; (vi) limitations on restricted payments and investments; (vii)
application of the proceeds of certain asset sales; (viii) limitations on
restrictions on subsidiary dividends; and (ix) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of IHS
to another person.
10 3/4% SENIOR SUBORDINATED NOTES DUE 2004
The Company has outstanding $107,000 aggregate principal amount of its
10 3/4% Senior Subordinated Notes due 2004 (the "10 3/4% Senior Notes").
Interest on the 10 3/4% Senior Notes is payable semi-annually on January 15 and
July 15. The 10 3/4% Senior Notes are redeemable in whole or in part at the
option of 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 (the "10 3/4% Senior Notes
Indenture")), each holder of
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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 10 3/4% Senior Notes Indenture
contains certain limited covenants, including a covenant with respect to the
application of the proceeds of certain asset sales.
On May 30, 1997, the Company repurchased $99,893,000 aggregate principal
amount of the 10 3/4% Senior Notes pursuant to a cash tender offer. As a
condition of the Company's obligation to repurchase tendered 10 3/4% Senior
Notes, tendering holders consented to amendments to the 10 3/4% Senior Notes
Indenture which eliminated or modified most of the restrictive covenants
previously contained in such indenture.
9 5/8% SENIOR SUBORDINATED NOTES DUE 2002, SERIES A
The Company has outstanding $25,000 aggregate principal amount of its 9
5/8% Senior Subordinated Notes due 2002, Series A (the "9 5/8% Senior Notes").
Interest on the 9 5/8% Senior Notes is payable semi-annually on May 31 and
November 30. The 9 5/8% Senior Notes are not redeemable prior to maturity. In
the event of a change in control of IHS (as defined in the indenture under which
the 9 5/8% Senior Notes were issued (the "9 5/8% Senior Notes Indenture")), each
holder of 9 5/8% Senior Notes may require IHS to repurchase such holder's 9 5/8%
Senior Notes, in whole or in part, at 101% of the principal amount thereof, plus
accrued interest to the repurchase date. The 9 5/8% Senior Notes Indenture
contains certain limited covenants, including a covenant with respect to the
application of the proceeds of certain asset sales.
On May 30, 1997, the Company repurchased $114,975,000 aggregate principal
amount of the 9 5/8% Senior Notes pursuant to a cash tender offer. As a
condition of the Company's obligation to repurchase tendered 9 5/8% Senior
Notes, tendering holders consented to amendments to the 9 5/8% Senior Notes
Indenture which eliminated or modified most of the restrictive covenants
previously contained in such indenture.
CERTAIN OTHER OBLIGATIONS
The Company's contingent liabilities (other than liabilities in respect of
litigation and the contingent payment in respect of the First American
Acquisition) aggregated approximately $72.3 million as of March 31, 1997. 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
$4.0 million. 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
guaranteed approximately $4.0 million owed by Tutera Group, Inc. and Sunset
Plaza Limited Partnership, a partnership affiliated with a partnership in which
IHS has a 49% interest, to Finova Capital Corporation. 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 March 31, 1997. The Company has guaranteed
approximately $539,000 owed by a managed facility to National Health Investors
Inc. and approximately $8.9 million owed by Litchfield Asset Management
Corporation to National Health Investors Inc. The Company has guaranteed
approximately $4.8 million owed by Community Care of America ("CCA"), a related
party company to which IHS provides certain management services, to Daiwa
Healthco-2 LLC. The Company has also guaranteed approximately $10.0 million owed
by CCA to Health and Retirement Properties Trust under a loan and lease
financing agreement. In addition, the Company has established an irrevocable
standby line of credit with CCA with a maximum amount of $5,000,000 available to
CCA at March 31, 1997. The Company has also established three irrevocable
standby letters of credit in the total amount of $10.0 million. The Company owns
warrants to purchase approximately 14.9% of CCA, and the Company's Chairman and
Chief Executive Officer beneficially owns approximately 21.1% of CCA's
outstanding common stock. In addition, the Company has obligations under
operating leases aggregating
88
<PAGE>
approximately $224.0 million at March 31, 1997. 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. IHS is also obligated under certain circumstances to make contingent
payments of up to $155 million in respect of the First American acquisition.
See "Recent Developments - First American Acquisition."
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 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
89
<PAGE>
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 July 7, 1997,
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 1996 and for each of the years in
the three-year period ended December 31, 1996, have been included or
incorporated by reference into this Prospectus and elsewhere in the Registration
Statement in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, included or incorporated by reference herein, and
upon the authority of said firm as experts in accounting and auditing. The
report of KPMG Peat Marwick LLP refers to changes in accounting methods, in
1995, to adopt Statement of Financial Accounting Standards No. 121 related to
impairment of long-lived assets and, in 1996, from deferring and amortizing
pre-opening costs of Medical Specialty Units to recording them as expenses when
incurred.
The consolidated financial statements of First American Health Care of
Georgia, Inc. as of December 31, 1994 and 1995 and for each of the years in the
three year period ended December 31, 1995, have been incorporated by reference
in this Prospectus and in the Registration Statement from IHS' Current Report on
Form 8-K/A, as amended (dated October 17, 1996 and filed with the Commission on
July 11, 1997) in reliance upon the report of KPMG Peat Marwick LLP, independent
certified public accountants, incorporated by reference herein, and upon the
authority of said firm as experts in accounting and auditing. The report of KPMG
Peat Marwick LLP contains an explanatory paragraph regarding the uncertainty
with respect to certain contingent payments which may be payable under a
settlement agreement with the Health Care Financing Administration.
90
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report ................................................... F-2
Consolidated Balance Sheets at December 31, 1995 and 1996 .................. F-3
Consolidated Statements of Operations for the years ended December 31, 1994,
1995 and 1996 ............................................................ F-4
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1994, 1995 and 1996 .......................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1994,
1995 and 1996 ............................................................ 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, 1995 and 1996 and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in notes 1(k) and 18 to the consolidated financial statements, in
1995 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."
Also, effective January 1, 1996, the Company changed its accounting method from
deferring and amortizing pre-opening costs of medical specialty units to
recording them as an expense when incurred.
Baltimore, Maryland KPMG PEAT MARWICK LLP
March 24, 1997
F-2
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
--------------------------- ------------
1995 1996 1997
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ....................................... $ 38,917 $ 39,028 $ 38,767
Temporary investments .......................................... 2,387 2,044 1,737
Patient accounts and third-party payor settlements receivable,
net (note 3) ................................................ 230,282 326,883 339,496
Inventories, prepaid expenses and other current assets ......... 25,629 26,243 31,887
Income tax receivable .......................................... 16,517 20,992 10,379
----------- ----------- -----------
Total current assets .......................................... 313,732 415,190 422,266
Property, plant and equipment, net (note 5) ..................... 758,127 864,335 887,395
Intangible assets (notes 2 and 6) .............................. 288,033 572,159 605,487
Investments in and advances to affiliates (note 4) ............ 29,362 76,047 74,499
Other assets ................................................... 44,476 65,376 68,431
----------- ----------- -----------
Total assets ................................................ $ 1,433,730 $1,993,107 $2,058,078
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt (note 8) .................. $ 5,404 $ 16,547 $ 15,738
Accounts payable and accrued expenses (note 7) ............... 172,013 341,094 322,642
----------- ----------- -----------
Total current liabilities .................................... 177,417 357,641 338,380
----------- ----------- -----------
Long-term debt (note 8):
Convertible subordinated debentures ........................... 258,750 258,750 258,750
Other long-term debt less current maturities .................. 506,507 779,450 822,201
----------- ----------- -----------
Total long-term debt .......................................... 765,257 1,038,200 1,080,951
----------- ----------- -----------
Other long-term liabilities (note 9) ........................... - 33,851 34,562
Deferred income taxes (note 12) ................................. 52,279 22,283 23,431
Deferred gain on sale-leaseback transactions .................. 7,249 6,267 5,968
Commitments and contingencies (notes 4, 9, 10, 11 and 13) Stock-
holders' equity (note 11): Preferred stock, authorized 15,000,000
shares; no shares issued and outstanding in 1995 and 1996 ...... - - -
Common stock, $0.001 par value Authorized 150,000,000 shares;
issued 21,785,334 shares in 1995 and 23,628,250 shares in 1996
(including 400,600 treasury shares in 1995) .................. 22 24 25
Additional paid-in capital .................................... 410,345 445,667 475,878
Retained earnings ............................................. 33,951 79,814 98,883
Unrealized gain on available for sale securities ............... - 9,360 -
Treasury stock, at cost (400,600 shares in 1995) (note 11) ... (12,790) - -
----------- ----------- -----------
Total stockholders' equity .................................... 431,528 534,865 574,786
----------- ----------- -----------
Total liabilities and stockholders' equity .................. $ 1,433,730 $1,993,107 $2,058,078
=========== =========== ===========
</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>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
--------------------------------------- MARCH 31,
---------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services .................................... $ 269,817 $ 368,569 $ 389,773 $97,216 $ 88,755
Specialty medical services ................................. 404,401 770,554 999,209 219,525 362,689
Management services and other .............................. 37,884 39,765 45,713 10,532 9,499
---------- ---------- ---------- -------- --------
Total revenues ............................................. 712,102 1,178,888 1,434,695 327,273 460,943
---------- ---------- ---------- -------- --------
Costs and expenses:
Operating expenses:
Salaries, wages, and benefits .............................. 332,812 549,766 694,137 158,933 225,015
Other operating expenses ................................. 195,319 338,785 399,811 90,962 127,397
Corporate administrative and general ........................ 37,041 56,016 60,976 15,093 18,016
Depreciation and amortization .............................. 26,367 39,961 41,681 8,274 15,030
Rent (note 10) ............................................. 42,158 66,125 77,785 17,656 24,009
Interest (net of investment income of $1,121 in 1994, $1,876
in 1995, and $2,233 in 1996) (note 8) ..................... 20,602 38,977 64,110 14,214 21,421
Loss on impairment of long-lived assets (note 18) ......... - 83,321 - - -
Other non-recurring charges (income), net (notes 6 and
18) ...................................................... - 49,639 (14,457) - (1,025)
---------- ---------- ---------- -------- --------
Total costs and expenses ................................. 654,299 1,222,590 1,324,043 305,132 429,863
---------- ---------- ---------- -------- --------
Earnings (loss) before equity in earnings of affiliates, in-
come taxes and extraordinary items 57,803 (43,702) 110,652 22,141 31,080
Equity in earnings of affiliates (note 4) .................. 1,176 1,443 828 300 181
---------- ---------- ---------- -------- --------
Earnings (loss) before income taxes and extraordinary
items ................................................... 58,979 (42,259) 111,480 22,441 31,261
Federal and state income taxes (note 12) ..................... 22,117 (16,270) 63,715 8,640 12,192
---------- ---------- ---------- -------- --------
Earnings (loss) before extraordinary items ............... 36,862 (25,989) 47,765 13,801 19,069
Extraordinary items (note 15) .............................. 4,274 1,013 1,431 - -
---------- ---------- ---------- -------- --------
Net earnings (loss) ....................................... $ 32,588 $ (27,002) $ 46,334 $13,801 $ 19,069
========== ========== ========== ======== ========
Per Common Share - primary:
Earnings (loss) before extraordinary item .................. $ 1.99 $ (1.21) $ 2.03 $ 0.62 $ 0.74
Net earnings (loss) ....................................... 1.75 (1.26) 1.97 0.62 0.74
========== ========== ========== ======== ========
Per Common Share - fully diluted:
Earnings (loss) before extraordinary item .................. $ 1.73 $ (1.21) $ 1.82 $ 0.54 $ 0.63
Net earnings (loss) ....................................... 1.57 (1.26) 1.78 0.54 0.63
========== ========== ========== ======== ========
</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
STOCK STOCK CAPITAL
----------- -------- ------------
<S> <C> <C> <C>
Balance at December 31, 1993 ..................... $- $ 14 $ 187,294
Issuance of 2,620,309 common shares in
connection with acquisitions .................. - 2 92,429
Issuance of warrants in connection with
acquisitions ................................. - - 3,000
Exercise of warrants for 113,848 common
shares ....................................... - - 2,508
Issuance of 21,670 common shares in con-
nection with employee stock purchase
plan .......................................... - - 551
Issuance of 3,477,384 common shares in
connection with a public offering, less
issuance costs ................................. - 4 98,634
Exercise of employee stock options for
521,992 common shares ........................ - 1 7,986
Declaration of cash dividend, $0.02 per
common share ................................. - - -
Net earnings .................................... - - -
--- ----- ----------
Balance at December 31, 1994 ..................... - 21 392,402
Issuance of 385,216 common shares in
connection with acquisitions .................. - 1 9,794
Issuance of warrants in connection with
acquisitions ................................. - - 339
Issuance of 49,377 common shares in con-
nection with employee stock purchase
plan .......................................... - - 1,339
Acquisition of 400,600 common shares of
treasury stock ................................. - - -
Exercise of employee stock options for
340,244 common shares ........................ - - 5,676
Exercise of warrants for 44,181 common
shares ....................................... - - 795
Declaration of cash dividend, $0.02 per
common share ................................. - - -
Net loss ....................................... - - -
--- ----- ----------
Balance at December 31, 1995 ..................... - 22 410,345
Issuance of 1,632,873 common shares in
connection with acquisitions and man-
agement agreements - 2 35,435
Re-issuance of 400,600 common shares of
treasury stock in payment of earn-out in
connection with prior acquisitions ............ - - (3,592)
Issuance of 68,661 common shares in con-
nection with employee stock purchase
plan .......................................... - - 1,401
Exercise of employee stock options for
141,382 common shares ........................ - - 2,078
Unrealized gain on available for sale secu-
rities - - -
Declaration of cash dividend, $0.02 per
common share ................................. - - -
Net earnings .................................... - -
----- ----------
Balance at December 31, 1996 ..................... - 24 445,667
--- ----- ----------
Issuance of 976,504 shares of common stock
in payment of earn-out in connection with
prior acquisition .............................. - 1 26,438
Issuance of 30,248 shares of common stock
in connection with employee stock pur-
chase plan - - 647
Exercise of employee stock options for
113,678 shares of common stock .................. - - 3,126
Realized gains on available for sale securities . - - -
Net earnings .................................... - - -
--- ----- ----------
Balance at March 31, 1997 ........................ $- $ 25 $ 475,878
=== ===== ==========
<PAGE>
<CAPTION>
UNREALIZED
GAIN ON
AVAILABLE FOR
RETAINED SALE TREASURY
EARNINGS SECURITIES STOCK TOTAL
------------ -------------- ------------ ------------
<S> <C> <C> <C> <C>
Balance at December 31, 1993 ..................... $ 29,198 $ - $ - $ 216,506
Issuance of 2,620,309 common shares in
connection with acquisitions .................. - - - 92,431
Issuance of warrants in connection with
acquisitions ................................. - - - 3,000
Exercise of warrants for 113,848 common
shares ....................................... - - - 2,508
Issuance of 21,670 common shares in con-
nection with employee stock purchase
plan .......................................... - - - 551
Issuance of 3,477,384 common shares in
connection with a public offering, less
issuance costs ................................. - - - 98,638
Exercise of employee stock options for
521,992 common shares ........................ - - - 7,987
Declaration of cash dividend, $0.02 per
common share ................................. (398) - - (398)
Net earnings .................................... 32,588 - - 32,588
--------- -------- --------- ----------
Balance at December 31, 1994 ..................... 61,388 - - 453,811
Issuance of 385,216 common shares in
connection with acquisitions .................. - - - 9,795
Issuance of warrants in connection with
acquisitions ................................. - - - 339
Issuance of 49,377 common shares in con-
nection with employee stock purchase
plan .......................................... - - - 1,339
Acquisition of 400,600 common shares of
treasury stock ................................. - - (12,790) (12,790)
Exercise of employee stock options for
340,244 common shares ........................ - - - 5,676
Exercise of warrants for 44,181 common
shares ....................................... - - - 795
Declaration of cash dividend, $0.02 per
common share ................................. (435) - - (435)
Net loss ....................................... (27,002) - - (27,002)
--------- -------- --------- ----------
Balance at December 31, 1995 ..................... 33,951 - (12,790) 431,528
Issuance of 1,632,873 common shares in
connection with acquisitions and man-
agement agreements - - - 35,437
Re-issuance of 400,600 common shares of
treasury stock in payment of earn-out in
connection with prior acquisitions ............ - - 12,790 9,198
Issuance of 68,661 common shares in con-
nection with employee stock purchase
plan .......................................... - - - 1,401
Exercise of employee stock options for
141,382 common shares ........................ - - - 2,078
Unrealized gain on available for sale secu-
rities - 9,360 - 9,360
Declaration of cash dividend, $0.02 per
common share ................................. (471) - - (471)
Net earnings .................................... 46,334 - - 46,334
--------- -------- --------- ----------
Balance at December 31, 1996 ..................... 79,814 9,360 - 534,865
--------- -------- --------- ----------
Issuance of 976,504 shares of common stock
in payment of earn-out in connection with
prior acquisition .............................. - - - 26,439
Issuance of 30,248 shares of common stock
in connection with employee stock pur-
chase plan - - - 647
Exercise of employee stock options for
113,678 shares of common stock .................. - - - 3,126
Realized gains on available for sale securities . - (9,360) - (9,360)
Net earnings .................................... 19,069 - - 19,069
--------- -------- --------- ----------
Balance at March 31, 1997 ........................ $ 98,883 $ - $ - $ 574,786
========= ======== ========= ==========
</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>
YEARS ENDED DECEMBER 31, THREE MONTHS ENDED
-------------------------------------------- MARCH 31,
-----------------------
1994 1995 1996 1996 1997
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) ................................. $ 32,588 $ (27,002) $ 46,334 $ 13,801 $ 19,069
Adjustments to reconcile net earnings (loss) to net
cash provided by operating activities: ...............
Extraordinary items ................................. 6,839 1,647 2,327 - -
Loss from impairment of long-lived assets ............ - 83,321 - - -
Other non-recurring charges (income) ............... - 47,700 (14,457) - (1,025)
Undistributed results of affiliates .................. (142) (431) 2 (55) 0
Depreciation and amortization ........................ 26,367 39,961 41,681 8,274 15,030
Deferred income taxes and other non-cash items . 2,628 (22,920) 3,462 1,142 1,396
Amortization of deferred gain on sale-leaseback . (680) (1,018) (982) (285) (299)
Increase in patient accounts and third-party payor
settlements receivable .............................. (42,998) (62,512) (44,232) (15,260) (10,386)
(Increase) decrease in supplies, inventories, pre-
paid expenses and other current assets (349) (6,121) 82 (788) (5,581)
Increase (decrease) in accounts payable and ac-
crued expenses 1,205 1,177 4,086 (22,493) (18,935)
(Increase) decrease in income taxes receivable ...... - (16,517) (4,475) 2,950 10,613
Increase (decrease) in income taxes payable ......... 1,681 (5,686) - - -
---------- ----------- ---------- -------- ---------
Net cash provided by operating activities ......... 27,139 31,599 33,828 (12,714) 9,882
---------- ----------- ---------- -------- ---------
Cash flows from financing activities:
Proceeds from issuance of capital stock, net ......... 109,683 8,399 3,479 1,259 3,773
Proceeds from long-term borrowings .................. 308,467 510,659 1,087,175 96,737 139,928
Repayment of long-term borrowings ..................... (191,338) (307,440) (830,434) (11,286) (97,639)
Proceeds from sale-leaseback transactions, net ...... 28,210 - - - -
Deferred financing costs .............................. (11,156) (5,512) (10,251) (329) (698)
Purchase of treasury stock ........................... - (12,790) - - -
Dividends paid ....................................... - (398) (435) (435) (471)
---------- ----------- ---------- -------- --------
Net cash provided by financing activities ......... 243,866 192,918 249,534 85,946 44,893
---------- ----------- ---------- -------- --------
Cash flows from investing activities:
Purchases of temporary investments .................. (48,909) (401) (5,645) 0 (48)
Sales of temporary investments ........................ 102,498 672 5,988 67 355
Business acquisitions ................................. (152,791) (82,686) (242,819) (16,581) (10,975)
Purchases of property, plant, and equipment ......... (91,354) (145,065) (145,902) (35,705) (41,096)
Disposition of assets ................................. - 33,153 136,709 - -
Intangible assets .................................... (7,201) (14,183) - - -
Investment in affiliates and other assets ............ (21,401) (37,779) (31,582) (30,370) (3,272)
---------- ----------- ---------- -------- --------
Net cash used by investing activities ............... (219,158) (246,289) (283,251) (82,589) (55,036)
---------- ----------- ---------- -------- ---------
Increase (decrease) in cash and equivalents ......... 51,847 (21,772) 111 (9,357) (261)
Cash and cash equivalents, beginning of period ......... 8,842 60,689 38,917 38,917 39,028
---------- ----------- ---------- -------- ---------
Cash and cash equivalents, end of period ............... $ 60,689 $ 38,917 $ 39,028 $ 29,560 $ 38,767
========== =========== ========== ======== =========
</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, 1994, 1995 AND 1996
(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 for such adjustments and 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 Investments in Debt and Equity Securities
Cash equivalents consist of highly liquid debt instruments with original
maturities of three months or less at the date of investment by the Company. The
Company's temporary investments, consisting primarily of preferred stocks and
municipal bonds, are classified as a trading security portfolio and are recorded
at their fair value, with net unrealized gains or losses included in earnings.
The Company classifies its other investments in marketable equity securities as
available for sale, which are reported at fair value, with net unrealized
holding gains and losses excluded from income and reported as a separate
component of stockholders' equity (see note 4). 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 and ancillary business units; 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 classified 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)
(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
Through December 31, 1995, direct costs incurred to initiate and implement
new medical specialty units (MSUs) at nursing facilities (e.g., respiratory
therapy, rehabilitation and Alzheimers' units) were deferred during the
pre-opening period and amortized on a straight-line basis over five years, which
corresponded to the period over which the Company receives reimbursement from
Medicare. Effective January 1, 1996, the Company changed its policy to expense
such costs when incurred (see note 18).
(h) Intangible Assets Acquired
Intangible assets of businesses acquired (primarily goodwill) are amortized
by the straight-line method primarily over 40 years, the period over which such
costs are recoverable through operating cash flows (see note 6).
(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) Stock-Based Compensation
The Company applies Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," ("APB No. 25") in accounting for
its stock options. Additional information required by Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("SFAS
No. 123") is discussed in note 11.
(k) 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 estimates the
projected undiscounted cash flows, excluding interest, of the related individual
facilities and business units (the lowest level for which there are identifiable
cash flows independent of other groups of assets) to determine if an impairment
loss should be recognized. The amount of impairment loss is determined by
comparing the historical
F-8
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(k) Impairment of Long-Lived Assets - (Continued)
carrying value of the asset to its estimated fair value. Estimated fair value is
determined through an evaluation of recent financial performance and projected
discounted cash flows of its facilities and business units using standard
industry valuation techniques, including the use of independent appraisals when
considered necessary. 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 and evaluated as described
above in determining the recoverability of that asset.
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.
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. The effect of the adoption of
SFAS 121 in December 1995 required the Company to perform this analysis on a
facility-by-facility and individual business unit basis. This resulted in the
recognition of a loss on impairment of long-lived assets (see note 18). If the
facility-by-facility and individual business unit analysis had been adopted
prior to December 1995, the Company may have incurred the loss on impairment of
long-lived assets prior to December 1995.
(l) 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 the legislation is enacted.
(m) 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. The weighted
average number of common and common equivalent shares outstanding for the year
ended December 31, 1995 does not include the assumed conversion of the
convertible subordinated debentures or the related interest expense and
underwriting costs, as such conversion would be anti-dilutive. 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>
THREE MONTHS ENDED
YEARS ENDED DECEMBER 31, MARCH 31,
-------------------------------------- -------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Weighted Average Shares:
Primary ................................................ 18,568,599 21,463,464 23,574,311 22,257,083 25,782,728
Fully diluted .......................................... 27,154,153 21,463,464 31,652,620 30,317,265 34,043,843
Adjustment for interest on convertible debentures ...... $ 10,048 $ - $ 9,888 $ 2,472 $ 2,452
=========== =========== =========== =========== ===========
</TABLE>
(n) Business and Credit Concentrations
The Company's medical services revenues are generated through 1,100 service
locations in 40 states, including 174 owned, leased and managed geriatric care
facilities. The Company generally does not
F-9
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(n) Business and Credit Concentrations - (Continued)
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).
(o) 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 and the consolidated financial statements and related notes for
1994 and 1995 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 consolidated statements
of operations include revenues of $29,650 in 1994 and $17,886 in 1995 and net
earnings of $1,648 in 1994 and $891 in 1995 related to the operations of Integra
prior to the date of the merger.
(p) Management Agreements
IHS manages geriatric care facilities under contract for others for a fee
which generally is equal to 4% to 8% of the gross revenue of the geriatric care
facility. Under the terms of the contract, IHS is responsible for providing all
personnel, marketing, nursing, resident care, dietary and social services,
accounting and data processing reports and services for these facilities,
although such services are provided at the facility owner's expense. In
addition, certain management agreements also provide IHS with an incentive fee
based on the amount of the facility's operating income in excess of 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 agreement. Management agreements
generally have an initial term of ten years, with IHS having a right to renew in
most cases. Contract acquisition costs for legal and other direct costs incurred
by IHS to acquire long-term management contracts are capitalized and amortized
over the term of the related contract. Management periodically evaluates its
deferred contract costs for recoverability by assessing the projected
undiscounted cash flows, excluding interest, of the managed facilities; any
impairment in the financial condition of the facility will result in a writedown
by IHS of its deferred contract costs.
(q) Reclassifications
Certain amounts presented in 1994 and 1995 have been reclassified to
conform with the presentation for 1996.
(r) Interim Consolidated Financial Statements
The consolidated financial statements as of March 31, 1997 and for the
three months ended March 31, 1996 and 1997 (and related footnote information)
are unaudited and have been prepared on a basis substantially consistent with
the audited consolidated financial statements, and, in the opinion of
management, include all adjustments (consisting of only normal recurring
adjustments) necessary for fair presentation of the results of these interim
periods. Related footnote information for such periods generally has been
omitted as provided by SEC regulation S-X concerning interim financial
statements. The results of the three months ended March 31, 1997 are not
necessarily indicative of the results to be expected for the entire year.
F-10
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) BUSINESS ACQUISITIONS
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1996
Acquisitions in 1996 and the manner of payment are summarized as follows:
MONTH TRANSACTION DESCRIPTION
- ----------- --------------------------------------------------------------------
January Assets Of Vintage Healthcare Center, a 110 Bed Facility In Denton,
Texas
January Assets of two mobile x-ray service companies in Louisiana and Mis-
souri
March Stock of Rehab Management Systems, Inc., a multi-state operator
of outpatient rehabilitative clinics and inpatient therapy centers
May Assets of Hospice of the Great Lakes, Inc., an Illinois hospice ser-
vice provider
May Operating leases of Cheyenne Care Center, a 96 bed nursing facility,
and Cheyenne Residential and Nursing Center, a 240 bed facility in
Las Vegas, Nevada
May Preferred Care, Inc. purchase option deposits in connection with
management agreements
July Operating lease of Sunset House, a 55 bed facility in Burbank, Illi-
nois
August Stock of J.R. Rehab Associates, Inc., a North Carolina provider of
rehabilitative therapy services to nursing homes, hospitals and oth-
ers
August Assets of Colorado Portable X-Ray Inc., a mobile diagnostic ser-
vices provider
August Assets of Extendicare of Tennessee Inc., a home health provider
August Assets of Edgewater Home Infusion Services Inc., a home infusion
services provider
September Assets of Century Health Services Inc., a home health provider
September Stock of Signature Home Care, Inc., a home health provider October
Stock of First American Health Care of Georgia, Inc., a home health
services provider
Various Litchfield Asset Management, Inc., purchase option deposits in con-
nection with operating leases
November Assets of Mediq Mobile X-Ray Services, Inc., a mobile diagnostic
service provider
November Assets of Total Rehab Services, LLC and Total Rehab Services O2,
LLC, a provider of contract rehabilitative and respiratory services
December Stock, at carryover basis, of Lifeway, Inc., a provider of physician
management and disease management services
Various Contingent purchase price payments on prior acquisition of The
Rehab People in 1994
Various Other acquisitions
Cash payments of acquisition costs accrued in 1995 and 1996
COMMON
STOCK ACCRUED CASH
MONTH TOTAL COST ISSUED(1) LIABILITIES PAID
- ----------- ------------ ----------- ------------- ---------
January $ 6,900 $ - $ - $ 6,900
January 520 - - 520
March 12,900 8,000 2,900 2,000
May 9,200 8,200 1,000 -
May 110 - - 110
May 10,350 7,250 - 3,100
July 100 - - 100
August 2,300 - 200 2,100
August 390 - - 390
August 3,611 - 200 3,411
August 8,274 - 300 7,974
September 4,192 - 200 3,992
September 13,672 4,725 2,500 6,447
October 176,084 - 22,000 154,084
Various 4,018 - - 4,018
November 15,642 5,200 5,500 4,942
November 13,123 2,700 1,250 9,173
December (230) (1,440) 275 935
Various 10,000 10,000 - -
Various 1,511 - 65 1,446
- - (31,177) 31,177
--------- -------- -------- ---------
$ 292,667 $ 44,635 $ 5,213 $242,819
========= ======== ======== =========
- ----------
(1) Represents shares of IHS common stock as follows: 385,542 shares for RMS,
304,822 shares for Hospice, 305,300 shares for Preferred Care, 196,374 shares
for Signature, 203,721 shares for Mediq, 106,559 shares for Total Rehab,
95,615 shares for Lifeway, and 435,540 shares for The Rehab People.
F-11
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Business Acquisitions - (Continued)
The allocation of the total cost of the 1996 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COSTS
---------- ----------- ---------- ------------ ------------- ------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Vintage .............................. $ - $ 6,900 $ - $ - $ - $ - $ 6,900
Two mobile x-ray service companies ... - 114 - 1,186 (780) - 520
Rehab Management Systems (RMS) ...... 1,644 1,021 165 12,832 (1,848) (914) 12,900
Hospice of the Great Lakes (Hospice) . - 144 25 9,031 - - 9,200
Cheyenne Care Center and Cheyenne .
Residential and Nursing Center ...... - 110 - - - - 110
Preferred Care ........................ - 10,350 - - - - 10,350
Sunset House ........................ - 100 - - - - 100
J.R. Rehab ........................... 532 149 - 3,159 (1,540) - 2,300
Colorado Portable X-Ray ............... - 50 - 372 (32) - 390
Extendicare ........................... 2,229 18 - 1,945 (581) - 3,611
Edgewater ........................... 1,789 160 1 7,685 (1,313) (48) 8,274
Century .............................. 5,628 139 202 12,140 (13,917) - 4,192
Signature ........................... 19,938 7,521 99 21,122 (18,077) (16,931) 13,672
First American ........................ 44,608 22,438 73,226 227,406 (152,095) (39,499) 176,084
Litchfield ........................... - 4,018 - - - - 4,018
Mediq ................................. 4,518 431 21 15,600 (4,928) - 15,642
Total Rehab ........................... 5,505 128 - 11,982 (4,492) - 13,123
Lifeway .............................. 158 270 70 - (728) - (230)
Rehab People ........................ - - - 10,000 - - 10,000
Other acquisitions .................. - 1,489 - 42 (20) - 1,511
--------- --------- --------- ---------- ---------- ---------- ----------
Totals .............................. $ 86,549 $ 55,550 $ 73,809 $ 334,502 $ (200,351) $ (57,392) $ 292,667
========= ========= ========= ========== ========== ========== ==========
</TABLE>
F-12
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Business Acquisitions - (Continued)
ACQUISITIONS DURING THE YEAR ENDED DECEMBER 31, 1995
Acquisitions in 1995 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- ----------- --------------------------------------------------------------------
<S> <C>
January Assets of four ancillary service companies
Assets of ProCare Group, Inc., and its affiliated entities, a home
health service provider in Broward, Dade and Palm Beach counties,
February Florida
Assets of Epsilon Medical Equipment Corporation, a mobile video
February flouroscopy company in Illinois
Management agreement with Total Home Health Care, Inc. and To-
tal Health Services, Inc., private-duty and Medicare certified home
February health agencies in Dallas/Ft. Worth, Texas.
Management agreement to manage 34 geriatric care facilities in
Texas, California, Florida, Nevada and Mississippi (known collec-
March tively as the "Preferred Care Facilities")
Stock of Samaritan Management, Inc., a hospice service provider in
March Michigan
Substantially all the assets of Fidelity Health Care, Inc., a home
March healthcare, temporary staffing and infusion services provider in
Ohio
January- Stock of five physician practices (acquisitions by IntegraCare, Inc.
April prior to that company's merger with IHS in August, 1995) Assets of
Hometown Nurses Registry, a home healthcare provider in
April Tennessee
Assets of Bernard's X-Ray Mobile Service, an x-ray service provider
April to long-term care and subacute care facilities in California
Assets of Stewart's Portable X-Ray, Inc. an x-ray service provider to
May long-term care and subacute care facilities in California
Stock of Immediate Care Clinic, an emergency clinic in Amarillo,
May Texas
Stock of three ancillary service companies providing mobile x-ray
and electrocardiagram services to long-term care and subacute care
June facilities
Stock of Senior Life Care Enterprises, Inc. ("SLC"), a home health,
August supplemental staffing and management service provider
August Stock of Avenel, a 120 bed facility in Plantation, Florida
Operating lease with Cherry Creek, a nursing home facility in Colo-
August rado.
Hershey at Woodlands, a 213 bed nursing and personal care facility
August in Pennsylvania
Partnership interest in Mobile X-Ray Limited Partnership, an
electrocardiagram service service provider in Maryland, West Vir-
September ginia, and the District of Columbia
Stock of Southern Nevada Physical Therapy Associates, an outpa-
September tient physical therapy provider
Operating lease with Mill Hill, a 110 bed facility, in Massachusetts
September and Winthrop, a 150 bed facility in Massachusetts
Stock of Chesapeake Health, an electrocardiagram service provider
November in Maryland
November Stock of Governor's Park, a 150 bed facility in Illinois
November Clara Burke, a 69 bed skilled nursing facility in Pennsylvania
December Stock of Miller Portable X-Ray, a mobile x-ray provider in Florida
Stock of Carrington Pointe, an assisted living facility in Massachu-
December setts
Litchfield Asset Management, Inc., purchase option deposits in con-
Various nection with operating leases
Various Other acquisitions
Cash payments of acquisition costs accrued in 1994 and 1995
<CAPTION>
COMMON
STOCK ACCRUED CASH
MONTH TOTAL COST ISSUED(1) LIABILITIES PAID
- ----------- ------------ ----------- ------------- ----------
<S> <C> <C> <C> <C>
January $ 3,624 $ 300 $ - $ 3,324
February 4,575 3,600 675 300
February 1,661 - 500 1,161
February - - - -
March 10,200 - - 10,200
March 6,500 - 1,000 5,500
March 2,490 - 350 2,140
January-
April 1,134 589 - 545
April 650 - 150 500
April 100 - - 100
May 2,000 - 100 1,900
May 355 - 130 225
June 2,200 - - 2,200
August 6,700 6,000 700 -
August 6,360 - - 6,360
August - - - -
August 2,100 - - 2,100
September 1,400 - - 1,400
September 610 - 110 500
September 405 - - 405
November 1,175 - 75 1,100
November 10,035 - - 10,035
November 330 - - 330
December 295 - - 295
December 11,800 - - 11,800
Various 4,018 - - 4,018
Various (355) (355) - -
- - (16,248) 16,248
--------- -------- ---------- ---------
$ 80,362 $ 10,134 $ (12,458) $ 82,686
========= ======== ========== =========
- ----------
</TABLE>
(1) Represents shares of IHS common stock as follows: 7,935 shares for four
ancillary service companies, 95,062 shares for ProCare, 92,434 shares for
the PCP earnout, and 189,785 shares of SLC.
F-13
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Business Acquisitions - (Continued)
The allocation of the total cost of the 1995 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COST
--------- ----------- ----------- ------------ ------------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Four ancillary service companies ... $ - $ 501 $ - $ 3,155 $ - $ (32) $ 3,624
ProCare .............................. 57 154 47 4,434 - (117) 4,575
Epsilon .............................. 109 78 (140) 1,865 (251) - 1,661
Preferred Care ..................... - 10,200 - - - - 10,200
Samaritan of Michigan ............... 265 - - 6,775 (540) - 6,500
Fidelity ........................... 8 183 - 2,299 - - 2,490
Five physician practices ............ - 1,134 - - - - 1,134
Hometown Nursing ..................... 3 1 - 646 - - 650
Bernard's ........................... - 10 - 90 - - 100
Stewart's ........................... - 190 - 1,810 - - 2,000
Immediate Care ..................... - 14 - 341 - - 355
Diagnostics ........................ - 176 - 2,458 (434) - 2,200
Senior Life Care Enterprises (SLC) ... 4,314 103 (202) 5,638 (1,428) (1,725) 6,700
Avenel .............................. - 6,360 - - - - 6,360
Hershey .............................. - 7,870 - - - (5,770) 2,100
Mobile X of Md ..................... - 230 - 1,770 (600) - 1,400
Southern Nevada ..................... - 81 - 529 - - 610
Mill Hill and Winthrop Leases ...... - 405 - - - - 405
Chesapeake ........................ - 110 - 1,065 - - 1,175
Governor's Park ..................... 832 9,203 - - - - 10,035
Clara Burke ........................ - 6,830 - - - (6,500) 330
Miller .............................. - 20 - 275 - - 295
Carrington Pointe .................. - 11,800 - - - - 11,800
Litchfield ........................... - 4,018 - - - - 4,018
Other acquisitions .................. - (355) - - - - (355)
-------- -------- -------- --------- ---------- ---------- ---------
Totals .............................. $ 5,588 $ 59,316 $ (295) $ 33,150 $ (3,253) $ (14,144) $ 80,362
======== ======== ======== ========= ========== ========== =========
</TABLE>
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, 1994
Acquisitions in 1994 and the manner of payment are summarized as follows:
<TABLE>
<CAPTION>
MONTH TRANSACTION DESCRIPTION
- ----------- -------------------------------------------------------------------------
<S> <C>
February Crestwood, Inc. purchase option deposit on a management agreement
April Assets of Homestead, a geriatric care facility located in Denton, Md.
June Assets of Treemont, a facility in Dallas, Texas which was previously
leased
July IFIDA, purchase option deposit in connection with operating leases.
July Stock of Cooper Holding Corporation, a mobile x-ray and electrocar-
diagram service provider to long-term care and subacute care facili-
ties.
August Substantially all the assets of Pikes Peak Pharmacy, Inc., a
pharmacy service provider to patients at nine facilities in Colorado
Springs, Col- orado.
August Litchfield Asset Management, Inc., purchase option deposit in connec-
tion with operating leases
September Substantially all the assets of Pace Therapy, Inc., a physical,
occupational, speech and audiology therapy services provider to
approximately 60 facilities in Southern California and Nevada
September Stock of Quail Creek of Amarillo, a 160 bed facility in Amarillo,
Texas
October Stock of Amcare, Inc., an institutional multi-state pharmacy serving
approximately 135 skilled nursing facilities.
October Substantially all the assets of Pharmaceutical Dose Services of La.,
Inc., ("PDS") an institutional pharmacy serving 14 facilities
November Stock of CareTeam Management Services, Inc. ("CareTeam"), a
multi- state provider of home healthcare services.
November Stock of Therapy Resources, Inc., a physical, occupational, speech
and audiology services provider to approximately 22 geriatric care
facilities and the operator of seven outpatient rehabilitation
facilities.
November Stock of The Rehab People, Inc. ("Rehab People"), a multi-state
physical, occupational, and speech therapy services provider to ap-
proximately 38 geriatric care facilities.
November Substantially all the assets of Medserv Corporation's Hospital
Service Division ("Primedica"), a multi-state respiratory therapy
service provider
December Rights of Jules Institutional Supply, Inc., under a management
agreement with Samaritan Care, Inc.
December Assets of Houston Hospital, a 60 bed facility in Texas
December Stock of Partners Home Health, Inc. ("Partners"), a home infusion
company operating in seven states
Various Other acquisitions
Cash payments of acquisition costs accrued in 1994 and 1993
<CAPTION>
COMMON
STOCK ACCRUED CASH
MONTH TOTAL COST ISSUED(1) LIABILITIES PAID
- ----------- ------------ ----------- ------------- ---------
<S> <C> <C> <C> <C>
February $ 10,984 $ 4,728 $ - $ 6,256
April 1,400 - - 1,400
June 7,395 - - 7,395
July 9,227 3,027 - 6,200
July 79,058 19,890 7,400 51,768
August 646 - - 646
August 31,500 3,000 - 28,500
September 8,666 5,798 1,300 1,568
September 586 - - 586
October 24,700 10,500 3,700 10,500
October 5,565 3,896 1,375 294
November 6,576 5,221 675 680
November 1,900 - 300 1,600
November 11,875 10,000 1,875 -
November 25,600 - 4,600 21,000
December 14,720 14,000 720 -
December 10,000 - - 10,000
December 13,428 12,403 1,025 -
Various 7,366 7,366 - -
- - (4,398) 4,398
--------- -------- -------- ---------
$271,192 $99,829 $ 18,572 $152,791
========= ======== ======== =========
</TABLE>
- ----------
(1) Represents shares of IHS common stock as follows: 593,953 shares for Cooper,
181,882 shares for Pace, 291,101 shares for Amcare, 122,117 shares for PDS,
147,068 shares for CareTeam, 318,471 shares for The Rehab People, 332,516
shares for Partners, 375,134 shares for Samaritan, 168,067 shares for
Crestwood, and 90,000 shares for IFIDA.
F-15
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Business Acquisitions - (Continued)
The allocation of the total cost of the 1994 acquisitions to the assets
acquired and liabilities assumed is summarized as follows:
<TABLE>
<CAPTION>
PROPERTY,
CURRENT PLANT AND OTHER INTANGIBLE CURRENT LONG-TERM TOTAL
ASSETS EQUIPMENT ASSETS ASSETS LIABILITIES LIABILITIES COST
--------- ----------- -------- ------------ ------------- ------------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
Crestwood ............... $ - $ 10,984 $ - $ - $ - $ - $ 10,984
Homestead ............... - 1,400 - - - - 1,400
Treemont ............... - 22,625 - - - (15,230) 7,395
IFIDA .................. - 9,227 - - - - 9,227
Cooper .................. 8,962 826 922 73,945 (1,364) (4,233) 79,058
Pikes Peak ............ 139 41 50 432 (16) - 646
Litchfield ............ 7,500 24,000 - - - - 31,500
Pace .................. 1,869 - 148 6,672 (23) - 8,666
Amarillo ............... 1,675 10,886 108 - (1,547) (10,536) 586
Amcare .................. 7,295 3,819 (261) 20,300 (5,656) (797) 24,700
PDS ..................... 549 90 - 5,696 (770) - 5,565
CareTeam ............... 2,094 472 628 7,651 (3,520) (749) 6,576
Therapy Resources ...... 576 506 39 3,776 (2,997) - 1,900
Rehab People ............ 1,542 380 734 13,693 (3,978) (496) 11,875
Primedica ............... 3,797 8,530 84 21,348 (8,159) - 25,600
Samaritan ............... 1,106 1,028 - 18,632 (6,046) - 14,720
Houston Hospital ...... 662 10,000 12 - (674) - 10,000
Partners ............... 836 1,788 1,256 17,146 (5,422) (2,176) 13,428
Other .................. - 4,124 - 3,642 - (400) 7,366
-------- --------- ------- --------- ---------- ---------- ---------
Totals .................. $38,602 $110,726 $3,720 $192,933 $ (40,172) $ (34,617) $271,192
======== ========= ======= ========= ========== ========== =========
</TABLE>
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, 1995 and 1996 are presented below. Such pro forma
presentation has been prepared assuming that the acquisitions had been made as
of January 1, 1995.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
--------------------------
1995 1996
------------ -----------
<S> <C> <C>
Revenues .......................................... $ 1,823,024 $1,846,637
Earnings (loss) before extraordinary items ...... (125,076) 6,396
Net earnings (loss) .............................. (126,089) 4,965
Per common share-primary:
Earnings (loss) before extraordinary items ...... (5.52) 0.26
Net earnings (loss) .............................. (5.56) 0.20
</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)
(2) Business Acquisitions - (Continued)
In connection with its business acquisitions, the Company incurs
transaction costs, costs to exit certain activities and costs to terminate or
relocate certain employees of acquired companies. Liabilities accrued in the
acquisition cost allocations represent direct costs of acquisitions, which
consist primarily of transaction costs for legal, accounting and consulting fees
of $3,376 in 1995 and $16,299 in 1996, as well as exit costs and employee
termination and relocation costs of $414 in 1995 and $20,091 in 1996. Accrued
acquisition liabilities for exit costs and employee termination and relocation
costs are recognized in accordance with EITF 95-3, "Recognition Of Liabilities
In Connection With A Purchase Business Combination" and are summarized as
follows for the years ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
EMPLOYEE
TERMINATION AND
EXIT RELOCATION
COSTS COSTS TOTAL
----------- ---------------- ---------
<S> <C> <C> <C>
Acquired companies - 1995 ............... $ - $ 414 $ 414
Payments charged against liability ...... - (414) (414)
Adjustments recorded to:
Cost of acquisitions .................. - - -
Operations .............................. - - -
-------- -------- --------
Balance at December 31, 1995 ............ - - -
Acquired companies - 1996 ............... 8,203 11,888 20,091
Payments charged against liability ...... (2,326) (6,198) (8,524)
Adjustments recorded to:
Cost of acquisitions .................. - (528) (528)
Operations .............................. - - -
-------- -------- --------
Balance at December 31, 1996 ............ $ 5,877 $ 5,162 $ 11,039
======== ======== ========
</TABLE>
The Company has not finalized its plans to exit activities (exit plans) and
to terminate or relocate employees (termination plans) of certain companies
acquired in 1996. Accordingly, unresolved issues could result in additional
liabilities to the acquisition cost. These adjustments will be reported
primarily as an increase or decrease in goodwill.
The exit plans at December 31, 1996 consist primarily of the
discontinuation of certain activities of First American, including estimates for
costs related to the closure of duplicative facilities, lease termination fees
and other exit costs as defined in EITF 95-3. Significant exit activities are
expected to be completed by December 31, 1997. There were no significant exit
plans at December 31, 1995.
The termination plans at December 31, 1996 relate primarily to the
following employee groups with the indicated anticipated dates of completion of
termination/relocation: First American by October 1997, Mediq by November 1997,
RMS by March 1997, Signature by September 1997, Total Rehab by November 1997,
Hospice of Great Lakes by May 1997, and Edgewater by August 1997. Such plans at
December 31, 1995 related to SLC by August 1996, and Epsilon and ProCare by
February 1996.
In addition to the accrued acquisition liabilities described above, the
Company allocates the cost of its business acquisitions to the respective assets
acquired and liabilities assumed, including preacquisition contingencies, on the
basis of estimated fair values at the date of acquisition. Often the Company
must await additional information for the resolution or final measurement of
such contingencies during the allocation period, which usually does not exceed
one year from the date of acquisition. Accordingly, the effect of the resolution
or final measurement of preacquisition contingencies during the allocation
period is treated as an acquisition adjustment primarily to the amount of
goodwill recorded. After the allocation period, such resolution or final
measurement is recognized in the determination of net earnings. Preacquisition
contingencies in connection with the Company's business acquisitions primarily
relate to
F-17
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(2) Business Acquisitions - (Continued)
Medicare and Medicaid regulatory compliance matters, claims subject to
intermediary audits, income tax matters and legal proceedings. During the three
years ended December 31, 1996, the Company resolved or completed the final
measurement of certain preacquisition contingencies related to business
acquisitions. Accordingly, the Company adjusted the original allocation of these
businesses by increasing goodwill, decreasing certain third-party payor
settlements receivable, and increasing certain current liabilities. Management
is aware of certain adjustments that might be required with respect to
acquisitions recorded at December 31, 1996; accordingly, the original allocation
could be adjusted to the extent that finalized amounts differ from the estimates
(see note 9).
(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, 1995 and 1996:
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Patient accounts receivable .......................................... $226,821 $340,803
Allowance for doubtful accounts .................................... 18,128 41,527
--------- ---------
208,693 299,276
Third party payor settlements, less allowance for contractual adjust-
ments of $11,442 and $14,979 21,589 27,607
--------- ---------
$230,282 $326,883
========= =========
</TABLE>
Gross patient accounts receivable and third-party payor settlements
receivable from the Federal government (Medicare) were $73,726 and $148,791 at
December 31, 1995 and 1996, 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 $7,611 and $15,640 at December 31,
1995 and 1996, respectively. Amounts receivable from various states (Medicaid)
were $57,723 and $61,675 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,
1995 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
1995 1996
--------- --------
<S> <C> <C>
Investments accounted for by the equity method: ......
HPC ................................................ $ 7,967 $ 8,003
Tutera ............................................. 7,788 7,551
Speciality .......................................... 9,250 9,379
Integrated Living Communities ..................... - 24,531
Other ................................................ 898 799
-------- --------
25,903 50,263
Other investments:
Capstone Pharmacy Services, Inc. .................. - 24,019
Other ................................................ 3,459 1,765
-------- --------
$29,362 $76,047
======== ========
</TABLE>
F-18
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) Investments in and Advances to Affiliates- (Continued)
Investments in significant unconsolidated affiliates are summarized below.
HPC AMERICA, INC. (HPC)
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. Southwood had a right of first
refusal to purchase the remaining 60% interest in HPC at any time through March
1997 and has the exclusive right to purchase the remaining 60% interest in HPC
for the six month period beginning March 1997, in each case based upon a
multiple of HPC's earnings.
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. 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, under the following circumstances: (a) if earnings decline and the
general partner fails to implement operational changes recommended by IHS; (b)
if the general partner discontinues its relationship with the partnership and
the general partner fails to accept IHS' suggested replacement; or (c) if the
general partner defaults on its revolving credit and security agreement with
Continental Bank and fails to pay obligations within 36 months of the default.
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 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 subscribed for in November 1994.
In June 1995 the Company loaned an additional $8,575 to Speciality bearing
interest at 12%; this loan was subsequently repaid in August 1995. In addition
the Company invested an additional $4,384 in Speciality. As a result of the
Company's additional investment, the Company has a 21.30% interest in the common
stock and a 63.65% interest in the 6% cumulative convertible preferred stock.
Upon conversion of the preferred stock, the Company will own approximately
31.38% of Speciality (assuming no further issuances).
INTEGRATED LIVING COMMUNITIES, INC. (ILC)
In November 1995, the Company formed ILC as a wholly-owned subsidiary to
operate the Company's assisted living and other senior housing facilities owned,
leased and managed by the Company. Following formation of ILC, the Company
transferred to ILC as a capital contribution the Company's
F-19
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) Investments in and Advances to Affiliates- (Continued)
ownership interests in three facilities, condominium interests in three
facilities and agreements to manage nine facilities (five of which have
subsequently been terminated), and sublet to ILC two facilities. On October 9,
1996, ILC completed an initial public offering of its shares at $8.00 per share,
in which ILC sold 2,800,000 shares and received aggregate net proceeds of
approximately $19,100, and the Company sold 1,400,000 shares and received
aggregate net proceeds of approximately $10,400. In addition, ILC repaid $7,400
owed to the Company. The Company continues to own 2,497,900 shares of ILC common
stock, representing 37.3% of the outstanding ILC common stock. Following the
offering, the Company loaned ILC $3,400, which loan bears interest at 14% and is
being repaid in 24 equal monthly installments of principal and interest
beginning December 1996. ILC currently operates 23 residential- style
assisted-living communities.
CAPSTONE PHARMACY SERVICES, INC. (CAPSTONE)
On July 30, 1996, the Company sold its pharmacy division to Capstone
Pharmacy Services, Inc. for a purchase price of $150,000, consisting of cash of
$125,000 and unregistered shares of Capstone common stock having a value of
approximately $25,000. The Company's investment in Capstone common stock
represents less than 8% of the total Capstone shares. Such investment is
recorded at carryover basis of $14,659 and classified as securities available
for sale. An unrealized gain of $9,360 is reflected in stockholders' equity with
respect to such investment, as the current market value of the Capstone shares
at December 31, 1996 was $24,019. The Capstone shares were registered with the
Securities and Exchange Commission in the first fiscal quarter of 1997.
The Company's equity in earnings (loss) of affiliates for the years ended
December 31, 1994, 1995 and 1996 is summarized as follows:
1994 1995 1996
--------- ---------- ---------
HPC ................................. $ - $ (185) $ 82
Tutera .............................. 1,181 960 883
Integrated Living Communities ...... - - (241)
Speciality ........................ 167 668 104
Other .............................. (172) - -
------- ------- ------
$ 1,176 $ 1,443 $ 828
======= ======= ======
At December 31, 1996 the Company's investment in Tutera and HPC exceeded
its equity in the underlying net assets by $3,450 and $5,119 respectively, which
are being amortized over 15 years. The Com pany received cash distributions from
its affiliates of $1,034, in 1994, $1,012 in 1995 and $830 in 1996. During 1996,
the Company's 250,000 common shares or $2,600 investment in Hearing Health
Services, Inc. was repurchased for approximately $2,600. The Company continues
to hold an investment in Hearing Health Services, Inc. preferred stock. In
addition, during 1996 the Company made approximately $900 in other investments.
Selected financial information for the combined affiliates accounted for
under the equity method is as follows:
DECEMBER 31, DECEMBER 31,
1995 1996
-------------- -------------
Working capital ...... $ 5,904 $ 2,007
Total assets ......... 74,065 141,167
Long-term debt ......... 34,000 19,399
Equity ............... $ 28,555 $ 82,707
======== ========
F-20
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(4) Investments in and Advances to Affiliates- (Continued)
YEARS ENDED DECEMBER 31,
---------------------------------
1994 1995 1996
--------- --------- ---------
Revenues ......... $25,906 $64,294 $118,995
Net earnings ...... 3,381 1,316 1,550
======== ======== ========
(5) PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment at December 31, 1995 and 1996 are summarized
as follows:
1995 1996
---------- ---------
Land ................................................ $ 39,158 $ 38,236
Buildings and improvements ........................... 381,447 356,063
Leasehold improvements and leasehold interests ...... 172,025 218,107
Equipment ............................................. 153,918 270,248
Construction in progress ........................... 57,809 67,169
Pre-construction and pre-acquisition costs ......... 10,120 19,603
--------- ---------
814,477 969,426
Less accumulated depreciation and amortization ...... 56,350 105,091
--------- ---------
Net property, plant and equipment .................. $758,127 $864,335
========= =========
Included in leasehold improvements and leasehold interests are purchase
option deposits on 89 facilities of $57,147 at December 31, 1995 of which
$25,357 is refundable and $74,131 at December 31, 1996 of which $29,375 is
refundable.
(6) INTANGIBLE ASSETS
Intangible assets are summarized as follows at December 31, 1995 and 1996:
1995 1996
---------- ---------
Intangible assets of businesses acquired ...... $287,439 $570,651
Deferred financing costs. ..................... 17,461 26,842
--------- ---------
304,900 597,493
Less accumulated amortization .................. 16,867 25,334
--------- ---------
Net intangible assets ........................ $288,033 $572,159
========= =========
The Company amortizes goodwill primarily over 40 years. Management
regularly evaluates whether events or circumstances have occurred that would
indicate an impairment in the value or the life of goodwill. 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, including goodwill, is not recoverable, the Company estimates the
projected undiscounted cash flows, excluding interest, of the related business
unit to determine if an impairment loss should be recognized. Such impairment
loss is determined by comparing the carrying amount of the asset, including
goodwill, to its estimated fair value. With its adoption of SFAS 121 in December
1995, the Company performed the impairment analysis at the individual facility
and business unit basis. Prior to the adoption of SFAS 121 the Company performed
the analysis on an entity-wide basis (see note 18).
In addition, in the fourth quarter of 1995 IHS adopted a change in
accounting estimate and wrote- off $25,785 of deferred pre-opening costs (see
note 18). Effective January 1, 1996, the Company changed its accounting method
from deferring and amortizing pre-opening costs to recording them as an expense
when incurred.
F-21
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(7) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses at December 31, 1995 and 1996 are
summarized as follows:
<TABLE>
<CAPTION>
1995 1996
---------- ---------
<S> <C> <C>
Accounts payable ................................................... $102,999 $185,248
Accrued salaries and wages ....................................... 32,093 53,572
Accrued workers' compensation and other claims .................. 10,715 38,141
Accrued interest ................................................ 15,921 16,892
Accrued acquisition liabilities (exit costs and employee termina-
tion and relocation costs) - 11,039
Other accrued expenses .......................................... 10,285 36,202
--------- ---------
$172,013 $341,094
========= =========
</TABLE>
(8) LONG-TERM DEBT
Long-term debt at December 31, 1995 and 1996 is summarized as follows:
<TABLE>
<CAPTION>
1995 1996
---------- -----------
<S> <C> <C>
Revolving credit facility notes due June 2002 (March 31, 2001 in 1995) .................. $220,500 $ 342,650
10.125% mortgage note payable in monthly installments of $64, including interest, due
August 1997 ........................................................................... 5,723 5,502
8.094% note payable, due December 2001 ................................................ 9,508 9,314
Prime plus 1.25% note payable (9.50% at December 31, 1996), due December 2000 ......... 8,252 8,087
Mortgages payable in monthly installments of $62, including interest at rates ranging from
9% to 14% .............................................................................. 10,512 8,604
9.75% mortgage note payable in monthly installments of $107, including interest, with
final payment of $13,087 in October 1998 ................................................. 14,845 13,332
Prime plus 1% (9.25% at December 31, 1996) note payable in monthly installments of $89,
including interest, with final payment in January 2020 ................................. 9,905 9,793
Seller notes, interest rates ranging from 10% to 14%, with final payment of $2,971 in July
2000 .................................................................................... 3,585 3,710
LIBOR plus 1.75% (7.95% at December 31, 1996) mortgage note payable in monthly in-
stallments of $51, including interest, with final payment due December 2000.............. 6,500 6,392
8.8% factored receivables note due December 8, 1998, interest payable monthly ............ - 5,000
Prime plus 1% note payable due May 1997 (9.25% at December 31, 1996) ..................... - 1,500
12.0% note payable in monthly installments of $153, including interest, with final
payment due May 2000 .................................................................... - 5,130
Other .................................................................................... 7,581 11,983
Subordinated debt:
5 3/4% convertible senior subordinated debentures due January 1, 2001, with interest pay-
able 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 ...................................................... 115,000 115,000
10 1/4% Senior Subordinated Notes due April 30, 2006, with interest payable semi-annually
in April 30 and October 30 ............................................................ - 150,000
--------- -----------
Total debt .............................................................................. 770,661 1,054,747
Less current portion ..................................................................... 5,404 16,547
--------- -----------
Total long-term debt, less current portion ............................................. $765,257 $1,038,200
========= ===========
</TABLE>
F-22
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(8) Long-Term Debt - (Continued)
REVOLVING CREDIT FACILITY
In May 1996, IHS entered into a $700,000 revolving credit facility,
including a $100,000 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 $700,000 revolving loan which reduces to
$560,000 on June 30, 2000 and $315,000 on June 30, 2001, with a final maturity
on June 30, 2002. The $100,000 subcommitment for letters of credit will remain
at $100,000 until final maturity. The New Credit Facility is guaranteed by IHS'
subsidiaries and secured by a pledge of all of the stock of substantially all of
IHS' subsidiaries. At the option of IHS, 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 IHS.
The New Credit Facility limits IHS' 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 IHS' stock. In
addition, the New Credit Facility requires that IHS 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 IHS or if any person other than Dr. Robert N. Elkins or a group
managed by Dr. Elkins owns more than 40% of IHS' capital stock. Amounts repaid
under the New Credit Facility may be reborrowed until June 30, 2002. The New
Credit Facility replaced IHS' $500,000 revolving credit facility (the "Prior
Credit Facility"). On May 15, 1996, IHS borrowed $328,200 under the New Credit
Facility to repay amounts outstanding under the Prior Credit Facility. As a
result, IHS recorded a loss on extinguishment of debt, net of related tax
benefits, of $1,431 in the second quarter of 1996.
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 which the
Company entered into during 1994. Amounts outstanding under the revolving loan
on April 30, 1997 were to be converted to a term loan with a final maturity date
of March 31, 2001. The revolving credit and term loan agreement was secured by a
pledge of all of the stock of substantially all of the Company's subsidiaries.
Interest was based upon the LIBOR plus 1.5% which was 6.94% at December 31,
1995. The $500,000 revolving credit and term loan facility was used to finance
the Company's working capital requirements, to make acquisitions and for general
corporate purposes.
In 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 be converted to a term
loan with a final maturity date of September 30, 2001. The Facility was secured
by a pledge of all of the stock of substantially all of the Company's
subsidiaries. Interest was based upon various market indices (7.97% at December
31, 1994).
SUBORDINATED DEBT
The Company's $150,000 aggregate principal amount of 10 1/4% Senior
Subordinated Notes (the "10 1/4% Senior Notes") are due on April 30, 2006. The
10 1/4% Senior Notes were sold to certain initial purchasers which sold the 10
1/4% Senior Notes to qualified institutional buyers under Rule 144A of the
Securities Act and to a limited number of institutional accredited investors.
Pursuant to an agreement
F-23
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(8) Long-Term Debt - (Continued)
with the initial purchasers, IHS is obligated to take certain actions to effect
an exchange offer within specified periods whereby each holder of 10 1/4% Senior
Notes would be offered the opportunity to exchange such notes for new notes
identical in all material respects to the 10 1/4% Senior Notes, except that the
new notes would be registered under the Securities Act. IHS has not to date
commenced the exchange offer and, as a result, beginning November 25, 1996 the
interest rate on the 10 1/4% Senior Notes increased to 10.5%, and will continue
to increase by 0.25% each 90 days until the exchange offer is commenced.
The Company's $115,000 aggregate principal amount of 9 5/8% Senior
Subordinated Notes, Series A (the "9 5/8% Series A Senior Notes") are due on May
31, 2002. The 9 5/8% Series A Senior Subordinated Notes were issued in October
1995 in exchange for, and are identical to the 9 5/8% Senior Subordinated Notes
issued in May 1995, except that the Series A Senior Notes have been registered
under the Securities Act of 1933, and are listed on the New York Stock Exchange.
The net proceeds of the 9 5/8% Series A Senior Notes were used to repay $78,000
of the credit facility among other things.
The Company's $100,000 aggregate principal amount of 10 3/4 % Senior
Subordinated Notes (the "10 3/4% Senior Notes") are due on July 15, 2004. The
net proceeds were used to repay the remaining outstanding balance under the term
loan facility and the revolving credit facility notes.
The Company's $115,000 aggregate principal amount of 6% convertible
subordinated debentures (the "6% Debentures") are due December 31, 2003. The
Company's 5 3/4% convertible senior subordinated debentures (the "5 3/4%
Debentures") in the aggregate principal amount of $143,750 are due January 1,
2001. At any time prior to redemption or final maturity, the 5 3/4% Debentures
and the 6% Debentures are convertible into Common Stock of the Company, at
$32.60 per share and $32.125 per share, respectively, at the option of the
holder, subject to adjustment upon the occurrence of certain events.
The subordinated debt is redeemable for cash at the Company's option, in
whole or in part, plus accrued interest, as follows:
<TABLE>
<CAPTION>
INITIAL REDEMPTION PRICE
EXPRESSED AS
PERMITTED A PERCENTAGE
AFTER OF PRINCIPAL
----------------- --------------------------
<S> <C> <C>
5 3/4% Debentures .................. January 2, 1997 103.29 %
6 % Debentures .................. January 1, 1996 104.2 %
10 3/4% Senior Notes ............... July 15, 1999 105.375%
9 5/8% Series A Senior Notes ...... Not redeemable -
10 1/4% Senior Notes ............... April 30, 2001 105.125%
</TABLE>
In the event of a change in control of IHS (as defined), each debt holder
may require the Company to repurchase the debt, in whole or in part, at
redemption prices of 100% of the principal amount in the case of the 5 3/4%
Debentures and the 6% Debentures and 101% of the principal amount in the case of
the 10 3/4% Senior Notes, 9 5/8% Series A Senior Notes and 10 1/4% Senior Notes.
The indentures under which each of the 10 1/4% Senior Notes, the 9 5/8%
Series A Senior Notes and the 10 3/4% Senior Notes were issued contain 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.
F-24
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(8) Long-Term Debt - (Continued)
At December 31, 1996, the aggregate maturities of long-term debt for the
five years ending December 31, 2001 and thereafter are as follows:
1997 ............ $ 16,547
1998 ............ 31,242
1999 ............ 1,800
2000 ............ 10,611
2001 ............ 172,631
Thereafter ...... 821,916
-----------
$1,054,747
===========
Interest capitalized to construction in progress was $3,030 in 1994, $5,155
in 1995 and $3,800 in 1996.
(9) OTHER LONG-TERM LIABILITIES AND CONTINGENCIES RELATED TO FIRST AMERICAN
ACQUISITION
As indicated in note 2, the Company acquired all of the outstanding stock
of First American Health Care of Georgia, Inc. in October 1996. The purchase
price includes contingent payments, certain of which have been determined to be
probable, and the present value thereof is recorded as other long-term
liabilities as of December 31, 1996.
Prior to its acquisition by the Company, First American was under
protection of the U.S. Bankruptcy Court, with which it had filed a petition for
reorganization under Chapter 11 of the Bankruptcy Code on February 21, 1996 (the
petition date) following its and its two principal shareholders' convictions on
multiple counts of having made improper Medicare reimbursement claims.
Immediately preceding the Chapter 11 filing, First American and its principal
shareholders had entered into a merger agreement with the Company. In connection
with the bankruptcy proceedings and the establishment and approval of First
American's plan of reorganization, the merger agreement was amended and
confirmed by the Bankruptcy Court on October 4, 1996.
Pursuant to the terms of the First American plan of reorganization and the
amended merger agreement, the purchase price included contingent payments of up
to $155,000. The contingent payments will be payable (1) if legislation is
enacted that changes the Medicare reimbursement methodology for home health
services to a prospectively determined rate methodology, in whole or in part, or
(2) if, in respect to payments contingently payable for any year through 2003,
the percentage increase through 2004 in the seasonally unadjusted Consumer Price
Index for all Urban Consumers for the Medical Care expenditure category (the
Medical CPI) is less than 8%. If payable, the contingent payments will be due on
February 14 as follows: $10,000 in 2000; $40,000 in 2001; $51,000 in 2002;
$39,000 in 2003; and $15,000 in 2004. The contingent payments would be payable
to the Health Care Financing Administration (HCFA) for $140,000 and to the
former shareholders of First American for $15,000.
The contingent payments to HCFA, which are due only if the contingent
payments described above become payable, and $95,000 of the cash purchase price
paid by the Company, which was paid to HCFA, are in full settlement of HCFA's
claims made to the Bankruptcy Court related to First American's Medicare
reimbursement claims for all periods prior to the petition date and of any
claims by HCFA related to First American's Medicare reimbursement claims made
after the petition date through December 31, 1996.
The Company has accrued the present value of the payments contingently
payable to HCFA and the former shareholders of First American of $10,000 in 2000
and $40,000 in 2001. The present value of these payments of $33,851 at December
31, 1996 was determined using a discount rate of 10% per annum from the dates of
probable payment. Management is presently studying the likelihood of the
remaining contingent payments which, if payable, will be due in the years 2002,
2003 and 2004. The entire amount is not considered probable because the
legislative and/or regulatory changes which would
F-25
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(9) Other Long-Term Liabilities and Contingencies Related to First American
Acquisition - (Continued)
trigger the full amount to be payable cannot be considered probable at this
time. The contingent payments due in 2000 and 2001 are considered probable at
this time because management believes the anticipated Medical CPI in 1999 and
2000 will probably trigger the required payments. However, management is unable
to predict what the Medical CPI will be in years subsequent to 2000. Management
will continue to evaluate the likelihood of the contingencies being met, and
will accrue the additional payments within one year as a purchase price
adjustment or will expense such amounts payable to HCFA if such probability is
determined subsequent to one year in accordance with SFAS No. 38, "Accounting
for Preacquisition Contingencies of Purchased Enterprises."
(10) LEASES
The Company has entered into operating leases as lessee of 77 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,
1996 are summarized as follows:
1997 ..................... $ 43,065
1998 ..................... 42,696
1999 ..................... 42,620
2000 ..................... 41,787
2001 ..................... 27,691
Subsequent to 2001 ...... 37,930
---------
Total .................. $235,789
=========
The Company also leases equipment under short-term operating leases having
rentals of approximately $20,201 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 three 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 $53,581 at December 31, 1996, of which $29,375 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
$2,596 in 1994, $2,777 in 1995 and $3,565 in 1996.
F-26
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(11) 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, 1995 and 1996, there were no
shares of Preferred Stock outstanding.
The Company declared a $0.02 per share cash dividend in 1995 and 1996.
At December 31, 1994 and 1995 the Company had outstanding stock options as
follows:
<TABLE>
<CAPTION>
1995 1996
----------- ----------
<S> <C> <C>
Stock options outstanding pursuant to:
Equity Incentive Plan .......................................... 14,969 13,169
1990 Employee Stock Option Plan ................................. 889,956 832,906
1992 Employee Stock Option Plan ................................. 905,120 903,715
Stock Option Plan for Non-Employee Directors .................. 300,000 200,000
1994 Stock Incentive Plan ....................................... 1,439,080 2,316,355
Senior Executives' Stock Option Plan ........................... 2,100,000 1,800,000
Stock Option Compensation Plan for Non-Employee Directors ...... 250,000 200,000
1995 Board of Director's Plan .................................... 300,000 300,000
1996 Employee Stock Option Plan ................................. - 1,886,000
Other options ................................................... 178,429 297,954
---------- ----------
Total stock options outstanding .............................. 6,377,554 8,750,099
========== ==========
</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, the 1992 Employee Stock Option
Plan and the 1996 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 has 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 10,428,571
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. The options' maximum term is 10
years. Vesting for the 1990, 1992, and 1994 Employee Stock Option Plans are
graded over six years. Vesting for the 1996 Plan is over four years. Vesting for
the directors' plans is one year after the date of grant. Vesting for the Senior
Executive's Plan is generally over three years. 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-27
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(11) Capital Stock - (Continued)
Stock option transactions are summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------------------- ---------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
----------- ---------- ----------- ---------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding-beginning of period 5,658,789 $24.23 5,879,832 $25.98 6,377,554 $20.19
Granted ................................. 873,300 32.90 1,059,146 28.81 3,096,500 22.14
Exercised .............................. (521,992) 18.95 (340,244) 19.61 (141,382) 14.55
Cancelled .............................. (130,265) 24.50 (221,180) 29.63 (582,573) 20.66
---------- ------- ---------- ------- ---------- -------
Options outstanding-end of period ...... 5,879,832 25.98 6,377,554 20.19 8,750,099 20.94
---------- ------- ---------- ------- ---------- -------
Options exercisable-end of period ...... 1,839,015 $24.19 2,731,876 $20.15 3,914,843 $20.18
========== ======= ========== ======= ========== =======
</TABLE>
The following summarizes information about stock options outstanding as of
December 31, 1996.
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ -------------------------
WEIGHTED
AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/96 LIFE PRICE AT 12/31/96 PRICE
- ----------------- ------------- ------------- ---------- ------------- ---------
<S> <C> <C> <C> <C> <C>
under $15 ...... 182,931 3.44 $11.52 121,561 $11.23
$15 to $20 ...... 781,393 5.19 17.86 501,185 17.72
$20 to $25 ...... 7,735,128 8.54 21.37 3,287,097 20.88
over $25......... 50,647 8.74 36.61 5,000 26.00
---------- ----- ------- ---------- -------
8,750,099 8.14 $20.94 3,914,843 $20.18
========== ===== ======= ========== =======
</TABLE>
The Company applies APB No. 25 and related interpretations in accounting
for its stock options. Accordingly, no compensation expense has been recognized
in connection with its stock options. Had compensation expense for the Company's
stock options been determined consistent with SFAS No. 123, the Company's net
earnings (loss) and earnings (loss) per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
1995 1996
--------------------------- --------------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA
------------- ----------- ------------- ----------
<S> <C> <C> <C> <C>
Net earnings (loss) ........................... $ (27,002) $ (44,752) $46,334 $43,082
Primary earnings (loss) per share ............ (1.26) (2.09) 1.97 1.91
Fully diluted earnings (loss) per share ...... (1.26) (2.09) 1.78 1.67
</TABLE>
The fair value of the options including the Employee Stock Purchase Plan
for purposes of the above pro forma disclosure was estimated on the date of
grant or modification using the Black-Scholes option pricing model and the
following assumptions: a risk-free interest rate of 5.40% to 6.74%, weighted
average expected lives of 4 to 9 years for options and 6 months for the Employee
Stock Purchase Plan, 0.1% dividend yield and volatility of 26.3%. The effects of
applying SFAS No. 123 in the pro forma net earnings (loss) and earnings (loss)
per share for 1995 and 1996 may not be representative of the effects on such pro
forma information for future years. In November 1995, the Board of Directors
authorized a modification to the options outstanding under the Company's option
plans which resulted in the change of the exercise price to $20.875, the market
price on the date of the modification, for certain options with exercise prices
over $21.00. Because no compensation was recognized for the original options,
the mod-
F-28
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(11) Capital Stock - (Continued)
ified options are treated as a new grant. Under SFAS 123, compensation cost of
$23,655 in 1995 is recognized immediately for vested options for the fair value
of the new options on the modification date. The effect of this modification has
been included in the pro forma earnings (loss) per share amounts above.
Warrant transactions are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
1994 PRICE 1995 PRICE 1996 PRICE
------------- ---------- ------------ ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
Warrants outstanding-beginning of year 311,029 $24.65 497,181 $29.28 518,000 $31.30
Granted to sellers ..................... 300,000 31.33 65,000 37.95 - -
Exercised .............................. (113,848) 22.03 (44,181) 18.35 - -
Cancelled .............................. - - - - (20,000) 38.02
---------- ------- --------- ------- --------- -------
Warrants outstanding-end of year ...... 497,181 $29.28 518,000 $31.30 498,000 $31.03
========== ======= ========= ======= ========= =======
</TABLE>
As discussed in note 10, the Company is contingently obligated to
repurchase up to 13,944 shares of its Common Stock, aggregating approximately
$353 at December 31, 1996.
In 1995, the Company's Board of Directors authorized the repurchase in the
open market of up to $50,000 of the Company's Common Stock. The purpose of the
repurchase program was 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 were funded from cash from
operations and drawings under the Company's revolving credit facility. In 1995,
the Company repurchased 400,600 shares of Common Stock for an aggregate purchase
price of approximately $12,790. No shares were repurchased in 1996. The
repurchase program was discontinued in September 1996. During 1996 the Company
reissued all 400,600 shares in partial satisfaction of earn-out payments.
(12) 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,
------------------------------------
1994 1995 1996
---------- ----------- ---------
<S> <C> <C> <C>
Federal ......... $ 18,388 $ (13,341) $ 55,577
State ......... 3,729 (2,929) 8,138
--------- ---------- ---------
$ 22,117 $ (16,270) $ 63,715
========= ========== =========
Current ......... $ 19,905 $ 7,732 $ 21,515
Deferred ...... 2,212 (24,002) 42,200
--------- ---------- ---------
$ 22,117 $ (16,270) $ 63,715
========= ========== =========
</TABLE>
F-29
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(12) Income Taxes- (Continued)
The amount computed by applying the Federal corporate tax rate of 35% in
1994, 1995 and 1996 to earnings before income taxes and extraordinary items is
summarized as follows:
<TABLE>
<CAPTION>
1994 1995 1996
---------- ----------- ---------
<S> <C> <C> <C>
Income tax computed at statutory rates ............... $ 20,643 $ (14,791) $ 39,018
State income taxes, net of Federal tax benefit ...... 2,424 (1,904) 5,290
Amortization of non-deductible intangibles ......... 993 1,975 2,293
Basis difference on assets sold ..................... - - 16,136
Valuation allowance adjustment ........................ (1,675) (2,111) (1,353)
Other ................................................ (268) 561 2,331
--------- ---------- ---------
$ 22,117 $ (16,270) $ 63,715
========= ========== =========
</TABLE>
Deferred income tax (assets) liabilities at December 31, 1995 and 1996 are
as follows:
<TABLE>
<CAPTION>
1995 1996
------------ ----------
<S> <C> <C>
Excess of book over tax basis of assets ........................ $ 76,097 $ 109,900
Deferred pre-opening costs ....................................... 199 84
Accrued workers compensation .................................... (3,769) (10,874)
Deferred gain on sale-leaseback ................................. (2,775) (2,413)
Allowance for doubtful accounts ................................. (11,384) (21,753)
Accrued third-party payor settlements ........................... - (23,523)
Accrued claims ................................................ - (7,354)
Accrued vacation ................................................ - (4,059)
Other accrued expenses not yet deductible for tax ............... - (12,729)
Pre-acquisition separate company net operating loss carryforwards (7,612) (4,679)
Other ......................................................... 170 (317)
--------- ----------
$ 50,926 $ 22,283
Valuation allowance ............................................. 1,353 -
--------- ----------
$ 52,279 $ 22,283
========= ==========
</TABLE>
The decrease in the valuation allowance for deferred tax assets of $1,353
is attributable to the utilization of pre-acquisition separate company net
operating loss carryforwards in the year ended December 31, 1996. Also, the
Company recorded deferred tax assets in connection with business acquisitions
(primarily First American) of $70,843 in 1996, which has been applied as a
reduction of goodwill.
At December 31, 1996, certain subsidiaries of the Company had
pre-acquisition net operating loss carryforwards available for Federal and state
income tax purposes of approximately $12,154 which expire in the years 1997
through 2008. The annual utilization of these net operating loss carryforwards
is subject to certain limitations under the Internal Revenue Code.
(13) OTHER COMMITMENTS AND CONTINGENCIES
IHS' contingent liabilities (other than liabilities in respect of
litigation and the First American acquisition) aggregated approximately $52,449
as of December 31, 1996. IHS is obligated to purchase its Greenbriar facility
upon a change in control of IHS. The net price of the facility is approximately
$4,014. 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 IHS
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. IHS has agreed to purchase such shares if Messrs. Elkins
and Nicholson fail to do so. This amount aggregated approximately $353 at
December 31, 1996. IHS has guaranteed approxi-
F-30
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(13) Other Commitments and Contingencies - (Continued)
mately $6,600 of the lessor's indebtedness. IHS is required, upon certain
defaults under the lease, to purchase its Orange Hills facility at a purchase
price equal to the greater of $7,130 or the facility's fair market value. IHS
has jointly and severally guaranteed a $1,231 construction loan made to River
City Limited Partnership in which IHS has a 30% general partnership interest.
IHS has guaranteed approximately $4,020 owed by Tutera Group, Inc. and Sunset
Plaza Limited Partnership, a partnership affiliated with a partnership in which
IHS has a 49% interest, to Finova Capital Corporation. IHS has guaranteed
approximately $3,994 of a construction loan for Trizec, the entity from which
IHS purchased the Central Park Lodges facilities. IHS has established several
irrevocable standby letters of credit with the Bank of Nova Scotia to secure
certain of IHS' self-insured workers' compensation obligations, health benefits
and other obligations. The maximum obligation was $15,670 at December 31, 1996.
IHS has guaranteed approximately $539 owed by a managed facility to National
Health Investors Inc. IHS has guaranteed approximately $8,898 owed by Litchfield
Asset Management Corporation to National Health Investors Inc. In addition, with
respect to certain acquired businesses IHS is obligated to make certain
contingent payments if earnings of the acquired business increase or earnings
targets are met. IHS is also obligated under certain circumstances to make
contingent payments of up to $155,000 in respect of IHS' acquisition of First
American (see note 9). In addition, IHS has obligations under operating leases
aggregating approximately $235,789 at December 31, 1996. (See note 10).
IHS leases ten facilities from Meditrust, a publicly-traded real estate
investment trust. With respect to all the facilities leased from Meditrust, IHS
is obligated to pay additional rent in an amount equal to a specified percentage
(generally five percent) of the amount by which the facility's gross revenues
exceed a specified amount (generally based on the facility's gross revenues
during its first year of operation). If an event of default occurs under any
Meditrust lease or any other agreement IHS has with Meditrust, Meditrust has the
right to require IHS to purchase the facility leased from the partnership at a
price equal to the higher of the then current fair market value of the facility
or the original purchase price of the facility paid by Meditrust plus (i) the
cost of certain capital expenditures paid for by Meditrust, (ii) an adjustment
for the increase in the cost of living index since the commencement of the lease
and (iii) all rent then due and payable (all such amounts to be determined
pursuant to the prescribed formula contained in the lease). In addition, each
Meditrust lease provides that a default under any other Meditrust lease or any
other agreement IHS has with Meditrust constitutes a default under such lease.
Upon such default, Meditrust has the right to terminate the leases and to seek
damages based upon lost rent.
(14) SUPPLEMENTAL CASH FLOW INFORMATION
See note 2 for information concerning significant non-cash investing and
financing activities related to business acquisitions for the years ended
December 31, 1994, 1995 and 1996. Other significant non-cash investing and
financing activities are as follows:
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 Company declared cash dividends, which resulted in increases in current
liabilities offset by decreases in retained earnings of $398 in 1994, $435
in 1995 and $471 in 1996.
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 18).
F-31
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(14) Supplemental Cash Flow Information - (Continued)
o In 1995, the write off of long lived assets in connection with SFAS No. 121
resulted in a decrease in property of $81,788, a decrease in intangible
assets of $1,533, and a non-cash charge to income of $83,321. Also, the
write-off of deferred pre-opening costs resulted in a decrease in
intangible assets and a non-cash charge to income of $25,785 (see note 18).
o The sale of the Pharmacy division in 1996 resulted in a decrease in current
assets of $25,901, a decrease in property of $9,399, a decrease in
intangible assets of $52,173, an increase in investments in affiliates of
$24,019, an increase in current liabilities of $17,888 and an increase in
unrealized gain on available for sale securities of $9,360. Cash received
for the sale of the Pharmacy division was $125,000 (see note 4).
o The sale of a majority interest in the assisted living division in 1996
resulted in a decrease in current assets of $1,716, a decrease in property
of $48,375, a decrease in intangible assets of $1,667, an increase in
investments in affiliates of $24,772 and a decrease in current liabilities
of $8,073. Total cash received from the sale was $10,416 (see note 4).
o The sale of certain non-strategic assets in 1996 resulted in decreases in
net current assets of $449, property of $8,730, other assets of $3,803, an
increase in net current liabilities of $144 and a decrease in long term
debt of $4,008. Total cash received from the sales was $1,293.
Cash payments for interest were $20,728 in 1994, $49,863 in 1995 and
$56,883 in 1996. Cash payments for income taxes were $13,761 in 1994, $27,549 in
1995 and $38,193 in 1996.
(15) EXTRAORDINARY ITEMS
In the second quarter of 1996, the Company replaced its $500,000 revolving
credit and term loan facility with the $700,000 revolving credit facility (see
note 8). This event has been accounted for as an extinguishment of debt and the
Company has recorded a loss on extinguishment of debt of $2,327 relating
primarily to the write-off of deferred financing costs. Such loss, reduced by
the related income tax effect of $896, is presented in the statement of earnings
as an extraordinary item of $1,431.
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 (see note 8). 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 with a $250,000 revolving credit and term loan facility (see
note 8). 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.
(16) 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
F-32
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(16) Disclosures About Fair Value of Financial Instruments - (Continued)
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. The Company has notes receivable from unaffiliated
individuals and untraded companies totaling $26,115 and $28,102 at December 31,
1995 and 1996, respectively. Also, the Company has guaranteed the indebtedness
of two of its leased facilities and has purchase option deposits of $57,147 and
$74,131 on 89 leased and managed facilities of which $25,357 and $29,375 is
refundable at December 31, 1995 and 1996, 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.
(17) RELATED PARTY TRANSACTIONS
In December 1996, the Company loaned $2,000 to Community Care of America,
Inc. ("CCA") and received a management agreement and warrants to purchase up to
9.9% of CCA's common stock at a price of $3.25 per share. The loan bears
interest at the annual rate of interest set forth in the Company's Revolving
Credit Agreement plus 2% and is due on December 27, 1998. Dr. Robert N. Elkins,
Chairman and Chief Executive Officer of the Company, is a director of CCA, and
John Silverman, a director and employee of the Company, is Chairman of the board
of directors of CCA.
In November 1996, the Company purchased LifeWay, Inc., ("LifeWay") a
disease management company in Miami, Florida for approximately $900 through the
issuance of 38,502 shares of common stock. Prior to the purchase, IHS owned
approximately 10% of LifeWay and Dr. Robert N. Elkins, IHS' Chairman and Chief
Executive Officer, beneficially owned approximately 65%. IHS also issued 48,129
shares of Common Stock to Mr. Elkins in payment of outstanding loans of $1,125
from Mr. Elkins to LifeWay and 8,784 shares in partial payment of a bonus to a
stockholder of LifeWay.
In October 1996, the Company loaned $3,445 to ILC. Dr. Robert N. Elkins,
Chairman and Chief Executive Officer of the Company, is Chairman of the Board of
Directors of ILC and Lawrence P. Cirka, President and Chief Operating Officer of
the Company, is a director of ILC.
In 1994, the Company sold and leased back three of its geriatric care
facilities in a transaction with affiliates of Capstone Capital Corporation
("Capstone Capital"), at the time 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 Capital and Richard M. Scrushy, at the time a
director of the Company, is Chairman of the Board of Capstone Capital. 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 PLC. 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 has a 21.3% interest in the Common Stock and a 63.65% interest in the 6%
cumulative convertible preferred stock. The Company's equity in Speciality Care
PLC was $9,379 at December 31, 1996 (see note 4).
F-33
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(18) LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS AND OTHER NON-RECURRING CHARGES
LOSS ON IMPAIRMENT OF LONG-LIVED ASSETS IN 1995
In the fourth quarter of 1995, the Company, as well as industry analysts,
believed that Medicare and Medicaid reform was imminent. Both the House and
Senate balanced budget proposals proposed a reduction in future growth in
Medicare and Medicaid spending from 10% a year to approximately 4-6% a year.
While Medicare and Medicaid reform had been discussed prior to the fourth
quarter, the Company came to believe that a future reduction in the growth of
Medicare and Medicaid spending was now virtually a certainty. Such reforms
include, in the near term, a continued freeze in the Medicare routine cost limit
(RCL), followed by reduced increases in later years, more stringent
documentation requirements for Medicare RCL exception requests, reduction in the
growth in Medicaid reimbursement in most states, as well as salary equivalency
in rehabilitative services and, in the longer term (2-3 years), a switch to a
prospective payment system for home care and nursing homes, and repeal of the
"Boren Amendment", which requires that states pay hospitals "reasonable and
adequate" rates. The Company estimated the effect of the aforementioned reforms
on each nursing and subacute facility, as well as on its rehabilitative
services, respiratory therapy, home care, mobile diagnostic and pharmacy
divisions by reducing (or in some cases increasing) the future revenues and
expense growth rates for the impact of each of the aforementioned factors.
Accordingly, these events and circumstances triggered the early adoption of
Statement of Financial Accounting Standards No. 121 in the fourth quarter of
1995. In accordance with SFAS No. 121, the Company estimated the future cash
flows expected to result from those assets to be held and used.
In estimating the future cash flows for determining whether an asset is
impaired, and if expected future cash flows used in measuring assets are
impaired, the Company grouped its assets at the lowest level for which there are
identifiable cash flows independent of other groups of assets. These levels were
each of the individual nursing/subacute facilities, and each of the home health,
rehabilitative therapy, respiratory therapy, pharmacy and mobile diagnostics
divisions. The results of comparing future undiscounted cash flows to historical
carrying value were that 12 individual nursing facilities and one assisted
living facility were identified for an impairment charge. None of the remaining
facilities or business units were identified since only those facilities or
business units where the carrying value exceeded the undiscounted cash flows are
considered impaired. The business units having significant goodwill were not
identified for an impairment charge because projected undiscounted cash flows
were sufficient to recover goodwill over the remainder of the 40 year estimated
useful life. Prior to adoption of SFAS 121, the Company evaluated impairment on
the entity level. Such an evaluation yielded no impairment as of September 30,
1995.
After determining the facilities eligible for an impairment charge, the
Company determined the estimated fair value of such facilities. Also, the
Company obtained valuation estimates prepared by independent appraisers or had
received offers from potential buyers on 6 of the 12 facilities identified for
impairment, comprising 72% of the total charge. Such valuation estimates were
obtained to corroborate the Company's estimate of value. The excess carrying
value of goodwill, buildings and improvements, leasehold improvements and
equipment above the fair value was $83,321 (of which $1,533 represented goodwill
and $81,788 represented property and equipment), which was included in the
statement of operations for 1995 as loss on impairment of long-lived assets.
F-34
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(18) Loss On Impairment Of Long-Lived Assets and Other Non-Recurring Charges -
(Continued)
OTHER NON-RECURRING CHARGES (INCOME)
<TABLE>
<CAPTION>
1995 1996
---------- ------------
<S> <C> <C>
Other non-recurring charges (income) are summarized as follows:
Write-off of deferred pre-opening costs in connection with
change in accounting estimate .............................. $ 25,785 $ -
Loss on management contract termination ..................... 21,915 7,825
IntegraCare merger costs .................................... 1,939 -
Gain on sale of Pharmacy division ........................... - (34,298)
Loss on sale of majority interest in Integrated Living Commu-
nities, Inc. .............................................. - 8,497
Loss on closure of redundant home health agencies ............ - 3,519
--------- ----------
$ 49,639 $ (14,457)
========= ==========
</TABLE>
During the fourth quarter of 1995, the Company terminated the Crestwood
management contract, a 10 year contract entered into in January 1994 to manage
23 long-term care and psychiatric facilities in California owned by Crestwood
Hospital. The terms of the contract required the payment of a management fee to
IHS and a preferred return to the Crestwood owners. IHS terminated the
management contract with Crestwood Hospital due primarily to changes in
California Medicaid rates which no longer provided sufficient cash flow at the
facilities to support both IHS' management fee and the preferred return to the
owners. As a result, the Company incurred a $21,915 loss on the termination of
this contract. Such loss consists of the write-off of $8,496 of management fees,
$11,097 of loans made to Crestwood Hospital and the owners of Crestwood, as well
as the interest thereon, and $2,322 of contract acquisition costs.
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.
In connection with the adoption of SFAS No. 121 described above, the
Company adopted a change in accounting estimate to write-off in 1995 all
deferred pre-opening costs of MSUs. This change was made in recognition of the
circumstances, discussed above, which raised doubt about and thereby triggered
the assessment of recoverability of long-lived assets in 1995. These
circumstances also raised doubt as to the estimated future benefit and
recoverability of deferred pre-opening costs, resulting in the Company's
decision to write-off $25,785 of deferred pre-opening costs. In connection with
the change in accounting estimate regarding the future benefits and
recoverability of deferred pre-opening costs, the Company has changed its
accounting method beginning in 1996 from deferring and amortizing pre-opening
costs to recording them as an expense when incurred. The effect of this change
in 1996 was to decrease amortization expense by approximately $3,900 and to
increase operating expenses by approximately $3,900.
On July 30, 1996, the Company sold its pharmacy division to Capstone
Pharmacy Services, Inc. ("Capstone") for a purchase price of $150,000,
consisting of cash of $125,000 and shares of Capstone Common Stock having a
value of approximately $25,000. The Company had determined that its ownership of
pharmacy operations is not critical to the development and implementation of its
post-acute care network strategy. As a result of the sale, the Company recorded
a $34,298 pre-tax gain ($298 gain after income taxes). Because IHS's investment
in the pharmacy division had a very small tax basis, the taxable gain on the
sale significantly exceeded the gain for financial reporting purposes, thereby
resulting in a disproportionately higher income tax provision related to the
sale (see note 4).
F-35
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(18) Loss On Impairment Of Long-Lived Assets and Other Non-Recurring Charges -
(Continued)
On October 9, 1996, ILC, a wholly owned subsidiary of IHS, completed an
initial public offering of ILC common stock. The Company had determined that the
direct operation of assisted-living communities is not required for its
post-acute care network strategy. In connection with the ILC offering the
Company sold 1,400,000 of ILC common stock and recorded a $8,497 loss. Following
the offering, the Company continues to own 2,497,900 shares of ILC Common Stock,
representing 37.3% of the outstanding ILC common stock (see note 4).
The Company's strategy is to expand its home health care services to take
advantage of health care payors' increasing focus on having healthcare provided
in the lowest-cost setting possible and patients' desires to be treated at home.
As a result, during the fourth quarter of 1996, the Company acquired 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. In addition, the Company has acquired
other home care companies during 1994, 1995 and 1996. In the fourth quarter of
1996, the Company, as a large provider of home nursing service, has recorded a
$3,519 non-recurring charge resulting from the closure of certain redundant home
care agencies in markets where First American presently provides home health
services.
In connection with the acquisition of First American, the Company
terminated the All Seasons management contract, a 10 year contract entered into
in September 1994 to manage six geriatric care facilities in Washington State.
As a result of the lack of synergies with First American home care agencies, as
well as changes to the reimbursement environment within the state of Washington,
the Company believed it was in its best interest to terminate such contract. As
a result, the Company incurred a $7,825 loss on the termination. Such loss
consists of the write-off of $3,803 of management fees and $4,022 of loans made
to All Seasons.
(19) CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
The following information is provided in accordance with the AICPA
Statement of Position No. 94-6, "Disclosure of Certain Significant Risks and
Uncertainties."
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;
o Ability to obtain per diem rates approvals for costs which exceed the
Federal Medicare established per diem rates;
o Government regulations, government budgetary constraints and proposed
legislative and regulatory changes; and
o Lawsuits alleging malpractice and related claims.
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.
F-36
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(19) Certain Significant Risks and Uncertainties - (Continued)
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 and/or services are provided, are located under Medicaid.
Revenue derived from Medicare and various state Medicaid reimbursement programs
represented 37.2% and 22.3%, respectively, of the Company's revenue for the year
ended December 31, 1996, 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 mechanisms, 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 care networks
is dependent upon successfully effecting economics of scale, the recruitment of
skilled personnel and the expansion of services and related revenues.
(20) SUBSEQUENT EVENTS
In January 1997, the Company acquired all of the outstanding stock of
In-Home Healthcare, Inc., which provides home health care services. The total
purchase price was $3,200.
In February 1997, the Company acquired the assets of Portable X-Ray Labs
Inc., which provides mobile x-ray services. Total purchase price was $4,900.
In February 1997, the Company acquired the assets of Professional Health
Services, Inc., which provides mobile x-ray services. Total purchase price was
$350.
In March 1997, the Company acquired the assets of Doctor's Home Health
Agency, Inc., which provides home healthcare in Florida. Total purchase price
was $350.
In addition, IHS has reached agreements in principle to acquire a contract
rehabilitation company in Florida for approximately $1,350, a mobile x-ray
company in North Carolina for approximately $225, a contract rehabilitation
company in the midwest for approximately $23,100, and a contract to manage a
home health company in Tennessee. There can be no assurance that any of these
pending acquisitions will be consummated on the proposed terms, different terms,
or at all.
F-37
<PAGE>
INTEGRATED HEALTH SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(21) PROPOSED CORAM MERGER
On October 19, 1996, IHS and Coram entered into a definitive agreement and
plan of merger (the "Merger Agreement") providing for the merger of a
wholly-owned subsidiary of IHS into Coram, with Coram becoming a wholly-owned
subsidiary of IHS. On March 30, 1997, IHS and Coram agreed to amend the terms of
the merger agreement, effective the close of business on Friday April 4, 1997,
unless either party terminates the amendment prior to its effectiveness. Under
the amended agreement, the exchange ratio will be reduced to 0.15 shares of IHS
Common Stock for each share of Coram common stock from the original exchange
ratio of 0.2111 shares of IHS Common Stock for each share of Coram common stock.
Based on the closing price of the IHS Common Stock on the last business day
prior to execution of the amendment agreement, IHS is paying $4.35 per share of
Coram Common Stock. IHS expects to issue approximately 7.11 million shares in
the merger, and to reserve approximately 2.35 million shares for issuance upon
exercise of outstanding Coram options and warrants. IHS expects to assume
approximately $375 million of Coram's indebtedness in connection with the
transaction. The amendment is subject to approval by both Boards of Directors,
and may be terminated by either party for any reason before the close of
business on Friday April 4, 1997.
F-38
<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>
<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 Ser-
vices, 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.(6)
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.
</TABLE>
II-1
<PAGE>
<TABLE>
<S> <C>
23.01 Consents of KPMG Peat Marwick LLP.
23.02 Consent of Fulbright & Jaworski L.L.P. (included in their opinion filed as Exhibit 5.01).(6)
24.01 Powers of Attorney of certain officers and directors of Integrated Health Services, Inc. (in-
cluded on the signature page).(6)
25.01 Form T-1, Statement of Eligibility under the Trust Indenture Act of 1939 of Signet Trust
Company.(6)
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.
99.04 Certified Resolution.
</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.
(6) Previously filed.
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 Amendment No. 1 to Registration Statement to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Owings Mills, State of Maryland, on July 29, 1997.
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Robert N. Elkins*
--------------------------------------
Robert N. Elkins
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to 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 July 29, 1997
- ------------------------- Executive Officer (Principal Executive
(Robert N. Elkins) Officer)
/s/ Lawrence P. Cirka* President, Chief Operating Officer and July 29, 1997
- ------------------------- Director
(Lawrence P. Cirka)
/s/ Edwin M. Crawford* Director July 29, 1997
-------------------------
(Edwin M. Crawford)
/s/ Kenneth M. Mazik* Director July 29, 1997
-------------------------
(Kenneth M. Mazik)
/s/ Robert A. Mitchell* Director July 29, 1997
-------------------------
(Robert A. Mitchell)
/s/ Charles W. Newhall, III* Director July 29, 1997
-------------------------
(Charles W. Newhall, III)
/s/ Timothy F. Nicholson* Director July 29, 1997
-------------------------
(Timothy F. Nicholson)
/s/ John L. Silverman* Director July 29, 1997
-------------------------
(John L. Silverman)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ------------------------------------ -------------
<S> <C> <C>
/s/ George H. Strong* Director July 29, 1997
- -------------------------
(George H. Strong)
/s/ W. Bradley Bennett Executive Vice President - Chief July 29, 1997
- ------------------------- Accounting Officer (Principal
(W. Bradley Bennett) Accounting Officer)
/s/ Eleanor C. Harding* Executive Vice President - Finance July 29, 1997
- ------------------------- (Principal Financial Officer)
(Eleanor C. Harding)
</TABLE>
*By: /s/ W. Bradley Bennett
-------------------------
(W. Bradley Bennett)
(as attorney-in-fact for
each of the persons indicated)
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- --------- --------------------------------------------------------------------------------------------- -----
<S> <C> <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.(6)
10.01 Registration Rights Agreement, dated as of May 23, 1996, among Integrated Health
Services, Inc., Smith Barney Inc., Donaldson, Lufkin and Jenrette Securities Corpo-
ration and Citicorp Securities, Inc.(1)
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges.
23.01 Consents of KPMG Peat Marwick LLP.
23.02 Consent of Fulbright & Jaworski L.L.P. (included in their opinion filed as Exhibit 5.01).(6)
24.01 Powers of Attorney of certain officers and directors of Integrated Health Services, Inc.
(included on the signature page).(6)
25.01 Form T-1, Statement of Eligibility under the Trust Indenture Act of 1939 of Signet Trust
Company.(6)
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 Partici-
pant from Beneficial Owner.
99.04 Certified Resolution.
</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.
(6) Previously filed.
INTEGRATED HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
1996
1992 1993 1994 1995 1996 Pro Forma
-------- -------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations
before income taxes and extraordinary
item 19,174 30,790 58,979 (42,259) 111,480 29,160
Fixed charges:
Interest expense (1) 3,831 10,082 25,374 46,653 71,600 87,112
Portion of rental expense representative
of interest factor (2) 6,503 7,719 14,053 22,042 25,928 25,660
Capitalized interest (860) (1,402) (3,030) (5,155) (3,800) (3,800)
Equity earnings of less than fifty percent
owned joint ventures 36 (83) (142) (431) 2 2
-------- -------- -------- -------- -------- --------
Earnings available for
fixed charges 28,684 47,106 95,234 20,850 205,210 138,134
======== ======== ======== ======== ======== ========
Fixed charges:
Interest expense (1) 3,831 10,082 25,374 46,653 71,600 87,112
Portion of rental expense representative
of interest factor (2) 6,503 7,719 14,053 22,042 25,928 25,660
-------- -------- -------- -------- -------- --------
Total fixed charges 10,334 17,801 39,427 68,695 97,528 112,772
======== ======== ======== ======== ======== ========
Ratio of earnings to fixed charges 2.78 2.65 2.42 0.30 2.10 1.22
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1996
Pro Forma March 31,
As March 31, March 31, 1997
Adjusted 1996 1997 Pro forma
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Earnings from continuing operations
before income taxes and extraordinary
item 19,849 22,441 31,261 29,318
Fixed charges:
Interest expense (1) 96,423 15,514 23,621 25,564
Portion of rental expense representative
of interest factor (2) 25,660 5,885 8,003 8,003
Capitalized interest (3,800) (900) (900) (900)
Equity earnings of less than fifty percent
owned joint ventures 2 (55) 0 0
-------- -------- -------- -------
Earnings available for fixed charges 138,134 43,885 61,985 61,985
======== ======== ======== =======
Fixed charges:
Interest expense (1) 96,423 16,514 23,621 25,564
Portion of rental expense representative
of interest factor (2) 25,660 5,885 8,003 8,003
-------- -------- -------- -------
Total fixed charges 122,083 22,399 31,624 33,567
======== ======== ======== =======
Ratio of earnings to fixed charges 1.13 1.96 1.96 1.85
======== ======== ======== ========
</TABLE>
(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>
1996
Pro Forma March 31,
1996 As March 31, March 31, 1997
1992 1993 1994 1995 1996 Pro Forma Adjusted 1996 1997 Pro forma
----- ------ ------ ------ ------ --------- -------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest expense calculation:
Interest, net 1,493 5,705 20,602 38,977 61,110 79,622 88,178 14,214 21,423 23,223
Capitalized interest 860 1,402 3,030 5,155 3,800 3,800 3,800 900 900 900
Interest income 1,300 2,669 1,121 1,876 2,233 2,233 2,233 1,144 740 740
----- ------ ------ ------ ------ --------- -------- -------- -------- ----------
Interest exp 3,653 9,776 24,753 46,008 70,143 85,655 94,211 16,258 23,061 24,863
Def. financing amort (a) 178 306 621 645 1,457 1,457 2,212 256 560 701
----- ------ ------ ------ ------ --------- -------- -------- -------- ----------
Interest exp per above 3,831 10,082 25,374 46,653 71,600 87,112 96,423 16,514 23,621 25,564
===== ====== ====== ====== ====== ========= ======== ======== ======== ==========
</TABLE>
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.
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
SUMMARY OF CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
1992 1993 1994 1995 1996
------ ------ -------- ------- --------
<S> <C> <C> <C> <C> <C>
RATIO OF EBITDA TO INTEREST EXPENSE
EBITDA
Net Earnings 9,364 16,507 32,588 (27,002) 46,334
Interest Expense, Net 1,493 5,705 20,602 38,977 64,110
Income Taxes 7,286 12,008 22,117 (16,270) 63,715
Depreciation & Amortization 4,334 8,126 26,367 39,961 41,681
One-time Charges 0 0 0 132,960 (14,457)
Extraordinary Items 2,524 2,275 4,274 1,013 1,431
------ ------ -------- ------- --------
Total EBITDA 25,001 44,621 105,948 169,639 202,814
Divided by Interest Expense 1,493 5,705 20,602 38,977 64,110
------ ------ -------- ------- --------
Equals Ratio of EBITDA to Interest Expense 16.7 7.8 5.1 4.4 3.2
====== ====== ======== ======= ========
</TABLE>
<TABLE>
<CAPTION>
As adjusted Pro Forma
Pro Forma Pro Forma March 31, March 31, March 31,
1996 1996 1996 1997 1996
------- ------- ------ ------ -------
<S> <C> <C> <C> <C> <C>
RATIO OF EBITDA TO INTEREST EXPENSE
EBITDA
Net Earnings 12,626 6,574 13,801 19,069 17,884
Interest Expense, Net 79,622 88,178 14,214 21,421 23,223
Income Taxes 15,103 11,844 8,640 12,192 11,434
Depreciation & Amortization 52,009 52,764 8,274 15,030 15,171
One-time Charges 14,812 14,812 0 (1,025) (1,025)
Extraordinary Items 1,431 1,431 0 0 0
------- ------- ------ ------ -------
Total EBITDA 175,603 175,603 44,929 66,687 66,687
Divided by Interest Expense 79,622 88,178 14,214 21,421 23,223
------- ------- ------ ------ -------
Equals Ratio of EBITDA to Interest Expense 2.2 2.0 3.2 3.1 2.9
======= ======= ====== ======= =======
</TABLE>
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 24, 1997 refers to changes in accounting methods, in
1995, to adopt Statement of Financial Accounting Standards No. 121 relating to
impairment of long-lived assets and, in 1996, from deferring and amortizing
pre-opening costs of medical specialty units to recording them as expenses when
incurred. Our report dated October 17, 1996 contains an explanatory paragraph
regarding the uncertainty with respect to certain contingent payments which may
be payable under a settlement agreement with the Health Care Financing
Administration.
/s/ KPMG Peat Marwick LLP
Baltimore, Maryland
July 28, 1997
EXHIBIT 99.01
CUSIP 45812C AL 0
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 __________ __, 1997,
UNLESS THE OFFER IS EXTENDED
<TABLE>
<CAPTION>
TO SIGNET TRUST COMPANY (THE "EXCHANGE AGENT")
<S> <C> <C>
BY REGISTERED OR CERTIFIED MAIL: BY FACSIMILE TRANSMISSION BY OVERNIGHT MAIL OR HAND:
Signet Trust Company (FOR ELIGIBLE INSTITUTIONS ONLY): Signet Trust Company 7 St. Paul Street
7 St. Paul Street (410) 752-8642 6th Floor, Corporate Trust Department
6th Floor, Corporate Trust Department Confirm: (410) 332-5857 Baltimore, MD 21202
Baltimore, MD 21202 Attention: Diane TenHoopen 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
___________ __, 1997 (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 __________ __, 1997, 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"),
complete and sign in the box below entitled "Registered Holder(s) of Old Notes
Sign Here" and complete the Substitute Form W-9. 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.
Holders of Old Notes that are tendering by book-entry transfer to the
Exchange Agent's account at The Depository Trust Company ("DTC") can execute the
exchange through the DTC Automated Tender Offer Program ("ATOP"), for which the
transaction will be eligible. DTC participants that are accepting the exchange
should transmit their acceptance to DTC, which will edit and verify the
acceptance and execute a book-entry delivery to the Exchange Agent's account at
DTC. DTC will then send an agent's message to the Exchange Agent for its
acceptance. Delivery of the agent's message by DTC will satisfy the terms of the
exchange as to execution and delivery of a Letter of Transmittal by the
participant identified in the agent's message. DTC participants may also accept
the exchange by submitting a notice of guaranteed delivery through ATOP.
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>
DESCRIPTION OF OLD NOTES TENDERED
<TABLE>
<CAPTION>
(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>
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
Total
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
* 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.
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.
ACCOUNT INFORMATION
[ ] 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 __________________________________________________
If delivered by book-entry transfer:
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.
[ ] 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 _________________
[ ] 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 __________________________________
<PAGE>
NOTE: SIGNATURES MUST BE PROVIDED BELOW
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 -- WITHDRAWALS 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).
<PAGE>
<TABLE>
<S> <C>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
To be completed ONLY if the New Notes To be completed ONLY if the New Notes
and any Old Notes delivered herewith but and any Old Notes delivered herewith but
not exchanged are to be issued in the not exchanged are to be sent to someone
name of someone other than the other than the undersigned, or to the
undersigned or are to be returned by undersigned at an address other than
credit to an account maintained by a that shown under "Description of Old
book-entry transfer facility. Issue New Notes Tendered." Mail New Note and any
Note and any Old Notes delivered Old Notes delivered herewith but not
herewith but not exchanged to: exchanged to:
Name ___________________________________
Name ___________________________________
Address: _______________________________
Address: _______________________________
_______________________________
_______________________________ (Please print or type)
(Please print or type)
Credit New Notes and any Old Notes
delivered herewith but not exchanged to
the following book-entry transfer
facility account:
________________________________________
(Name of book-entry transfer facility)
________________________________________
(Account number)
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 code):____________________
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:_______________________________________
</TABLE>
<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, INCLUDING
DELIVERY BY BOOK-ENTRY TRANSFER AND ANY ACCEPTANCE OR AGENT'S MESSAGE DELIVERED
THROUGH ATOP, 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, unless otherwise
provided in the appropriate box on this Letter of Transmittal. 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, unless otherwise provided in the appropriate box on this Letter of
Transmittal.
<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 a
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 a 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 a 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 a 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 a 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 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).
<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, unless otherwise provided in the appropriate box on this Letter of
Transmittal.
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 does not provide the Company 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.
12. CONFLICTS.
In the event of any conflict between the terms of the Prospectus and the
terms of this Letter of Transmittal, the terms of the Prospectus will control.
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.
<PAGE>
THE FOREGOING DISCUSSION OF CERTAIN FEDERAL INCOME TAX CONSIDERATIONS DOES
NOT CONSIDER THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY HOLDER'S SITUATION OR
STATUS. THE SUMMARY IS BASED ON THE PROVISIONS OF THE CODE, REGULATIONS,
PROPOSED REGULATIONS, RULINGS AND JUDICIAL DECISIONS NOW IN EFFECT, ALL OF WHICH
ARE SUBJECT TO CHANGE, POSSIBLY ON A RETROACTIVE BASIS. HOLDERS OF OLD NOTES
(INCLUDING HOLDERS OF OLD NOTES WHO DO NOT EXCHANGE THEIR OLD NOTES FOR NEW
NOTES) SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL, FOREIGN
AND OTHER LAWS, OF THE EXCHANGE OF OLD NOTES FOR NEW NOTES. FOR ADDITIONAL
INFORMATION, SEE "CERTAIN FEDERAL INCOME TAX CONSEQUENCES" IN THE PROSPECTUS.
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>
<CAPTION>
<S> <C> <C>
SUBSTITUTE
FORM W-9 PART 1 -- PLEASE PROVIDE YOUR TIN IN THE BOX
DEPARTMENT OF THE TREASURY AT RIGHT AND CERTIFY BY SIGNING AND DATING
INTERNAL REVENUE SERVICE BELOW. ----------------
SOCIAL SECURITY
NUMBER OR
PART 2 -- CHECK THE BOX IF YOU ARE NOT EMPLOYER
SUBJECT TO BACKUP WITHHOLDING UNDER THE IDENTIFICATION
PROVISIONS OF SECTION 3406(A)(1)(C) OF THE 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. [ ]
PAYER'S REQUEST FOR TAXPAYER Certification: Under the penalties of PART 3
IDENTIFICATION NUMBER ("TIN") perjury, I certify that the information AWAITING TIN [ ]
provided on this form is true, correct and
complete.
Signature: ____________________ Dated: ______
</TABLE>
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
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
_____________________________________________ ________________, 1997
SIGNATURE DATE
EXHIBIT 99.02
CUSIP 45812C AL 0
INTEGRATED HEALTH SERVICES, INC.
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
As set forth in the Prospectus dated ___________________, 1997 (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 ________________, 1997.
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 Department 6th Floor, Corporate Trust Department
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:
<TABLE>
<CAPTION>
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
AMOUNT REPRESENTED TENDERED (MUST BE IN INTEGRAL
CERTIFICATE NOS. BY CERTIFICATE(S) MULTIPLES OF $1,000)
- ------------------------ ------------------------ ---------------------------------
<S> <C> <C>
- ------------------------ ------------------------ ---------------------------------
- ------------------------ ------------------------ ---------------------------------
- ------------------------ ------------------------ ---------------------------------
- ------------------------ ------------------------ ---------------------------------
- ------------------------ ------------------------ ---------------------------------
</TABLE>
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: ________________________, 1997
<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 17Ad-15 under the
Securities Exchange Act of 1934, as amended, guarantees that, within three (3)
New York Stock Exchange trading days from the date of this Notice of Guaranteed
Delivery, a properly completed and validly executed Letter of Transmittal (or a
facsimile thereof), together with Old Notes tendered hereby in proper form for
transfer (or confirmation of the book-entry transfer of such Old Notes into the
Exchange Agent's account at The Depository Trust Company pursuant to the
procedures for book-entry transfer set forth in the Prospectus under the caption
"The Exchange Offer--Procedures for Tendering Old Notes") and all other required
documents will be deposited by the undersigned with the Exchange Agent at its
address set forth above.
The Institution that completes this form must communicate the guarantee to the
Exchange Agent and must deliver the Letter of Transmittal and Old Notes to the
Exchange Agent within the time period shown herein. Failure to do so could
result in a financial loss to the undersigned.
_______________________________________ ____________________________________
Name of Firm Authorized Signature
_______________________________________ ____________________________________
Address Title
_______________________________________
Zip Code Name________________________________
Please Type or Print
_______________________________________
Area Code and Tel. No.
Name________________________________
Dated _______________________, 1997
NOTE: DO NOT SEND CERTIFICATES REPRESENTING OLD NOTES WITH THIS FORM.
CERTIFICATES REPRESENTING OLD NOTES SHOULD BE SENT ONLY WITH
A LETTER OF TRANSMITTAL.
EXHIBIT 99.03
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 , 1997
(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 "Old
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 New Notes," and (v) the undersigned is not an "affiliate," as defined
in Rule 405 under the Securities Act, of the Company; (b) to agree, on behalf of
the undersigned, as set forth in the Letter of Transmittal; and (c) 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: __________________________________________________________________________
Exhibit 99.04
INTEGRATED HEALTH SERVICES, INC.
Assistant Secretary's Certificate
I, Leslie A. Glew, Assistant Secretary of Integrated Health Services,
Inc., a Delaware corporation (the "Corporation"), do hereby certify that set
forth below is a true and correct copy of a resolution, duly adopted by the
Board of Directors of the Corporation at a meeting duly called and held on April
18, 1996 at which a quorum was present, in connection with the Corporation's
Registration Statement on Form S-4 (No. 333-12685) (the "Registration
Statement") and any amendment(s) or post-effective amendment(s) thereto,
pertaining to the authorization of the name of officers signing the Registration
Statement or any amendment(s) or post-effective amendment(s) thereto to be
signed pursuant to a power of attorney, and that such resolution has not been
rescinded or modified and is still in full force and effect.
IN WITNESS WHEREOF, the undersigned has executed this Certificate this
24th day of July, 1997.
/s/ Leslie A. Glew
-----------------------------------
Leslie A. Glew, Assistant Secretary
"RESOLVED, that the officers and directors of the Company who
are required to execute the Registration Statement be, and they hereby
are, and each of them hereby is, authorized to execute and deliver a
power-of-attorney appointing Robert N. Elkins, Lawrence A. Cirka, W.
Bradley Bennett and Eleanor Harding to be the attorneys-in-fact and
agents with full power of substitution and resubstitution, for each of
such directors and officers and in their name, place and stead, in any
and all capacities, to sign any amendment(s) to the Registration
Statement, including any post-effective amendment(s), to file the same
with the Commission and to perform all other acts necessary in
connection with any matter relating to the Registration Statement and
any amendment(s) or post-effective amendment(s) thereto."
