PROSPECTUS SUPPLEMENT RELATING TO
REGISTRATION STATEMENT NO. 333-31121
FILED PURSUANT TO RULE 424(B)(3)
PROSPECTUS
999,406 Shares
IHS
INTEGRATED HEALTH SERVICES, INC.
COMMON STOCK
This Prospectus relates to 999,406 shares (the "Shares") of Common Stock,
par value $0.001 per share (together with the Preferred Stock Purchase Rights
associated therewith, the "Common Stock"), of Integrated Health Services, Inc.
("IHS" or the "Company") which are being offered for sale by certain selling
stockholders (the "Selling Stockholders"). See "Selling Stockholders." The
Company's Common Stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "IHS." On July 23, 1997, the closing price of the Common Stock, as
reported in the consolidated reporting system, was $33.50 per share.
The Company will not receive any of the proceeds from sales of the Shares
by the Selling Stockholders. The Shares may be offered from time to time by the
Selling Stockholders (and their donees and pledgees) through ordinary brokerage
transactions, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices. See "Plan of
Distribution."
The Selling Stockholders may be deemed to be "Underwriters" as defined in
the Securities Act of 1933, as amended (the "Securities Act"). If any
broker-dealers are used to effect sales, any commissions paid to broker-dealers
and, if broker-dealers purchase any of the Shares as principals, any profits
received by such broker-dealers on the resale of the Shares, may be deemed to be
underwriting discounts or commissions under the Securities Act. In addition, any
profits realized by the Selling Stockholders may be deemed to be underwriting
commissions. All costs, expenses and fees in connection with the registration of
the Shares will be borne by the Company. Brokerage commissions, if any,
attributable to the sale of the Shares will be borne by the Selling Stockholders
(or their donees and pledgees).
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SEE "RISK FACTORS", WHICH BEGINS ON PAGE 6 OF THIS PROSPECTUS,
FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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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.
The date of this Prospectus is July 24, 1997
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and, in
accordance therewith, files reports, proxy statements and other information with
the Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also may be obtained by mail from the
Public Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
materials and other information concerning the Company may be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Additionally,
the Commission maintains a Web site on the Internet that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission and that is located at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus does not contain all of the information set
forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock, reference is
hereby made to the Registration Statement. Statements contained herein
concerning the provisions of any contract, agreement or other document are not
necessarily complete, and in each instance reference is made to the copy of such
contract, agreement or other document filed as an exhibit to the Registration
Statement or otherwise filed with the Commission. Each such statement is
qualified in its entirety by such reference. Copies of the Registration
Statement together with exhibits may be inspected at the offices of the
Commission as indicated above without charge and copies thereof may be obtained
therefrom upon payment of a prescribed fee.
Private Securities Litigation Reform Act Safe Harbor Statement. This
Prospectus (including the documents incorporated by reference herein) contains
certain forwardlooking 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.
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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 incorporated by
reference in this Prospectus:
(a) Annual Report on Form 10-K for the year ended December 31, 1996;
(b) Quarterly Report on Form 10-Q for the quarter ended March 31, 1997;
(c) 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;
(d) 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;
(e) 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 9 1/2% Senior Subordinated Notes due 2007;
(f) 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 9
1/2% Senior Subordinated Notes due 2007 and (ii) the Company's acceptance
for payment of an aggregate of $114,975,000 principal amount of its 9 5/8%
Senior Subordinated Notes due 2002, Series A and an aggregate of
$99,893,000 principal amount of its 10 3/4% Senior Subordinated Notes due
2004 pursuant to cash tender offers;
(g) 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;
(h) The description of the Company's Common Stock contained in Item 1
of the Company's Registration Statement on Form 8-A dated September 1,
1993; and
(i) The description of the Company's Preferred Stock Purchase Rights
contained in Item 1 of the Company's Registration Statement on Form 8-A
dated September 28, 1995.
All documents filed by the Company 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 filing of a post-effective amendment which indicates that all Shares offered
have been sold or which deregisters all Shares then remaining unsold shall be
deemed to be incorporated by reference in this Prospectus and to be a part
hereof from the date of filing of such documents. Any statement contained herein
or in a previously filed document incorporated or deemed to be incorporated by
reference herein shall be deemed to be modified or superseded for purposes of
this Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or was deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statements 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 BY REFERENCE DOCUMENTS WHICH ARE NOT
PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO
SUCH DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE)
ARE AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED,
UPON WRITTEN OR ORAL REQUEST. REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO
INTEGRATED HEALTH SERVICES, INC., 10065 RED RUN BOULEVARD, OWINGS MILLS,
MARYLAND 21117, ATTENTION: MARC B. LEVIN, EXECUTIVE VICE PRESIDENT-INVESTOR
RELATIONS, TELEPHONE: (410) 998-8400.
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THE COMPANY
Integrated Health Services, Inc. is one of the nation's leading
providers of postacute 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 "preacute" 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. 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 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.
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The Company presently operates 174 geriatric care facilities (118 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 traditional basic nursing services, and 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 Company was incorporated in March 1986 as a Pennsylvania
corporation and reorganized as a Delaware corporation in November 1986. The
Company's principal executive offices are located at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 and its telephone number is (410) 998-8400. Unless
the context indicates otherwise, Integrated Health Services, Inc. and its
subsidiaries are referred to herein collectively as "IHS" or the "Company."
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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 purchasing the shares of Common Stock offered hereby. 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, the
Company's total long-term debt, net of current portion, accounted for 65.3% of
its total capitalization (66.7% on a pro forma basis after giving effect to the
issuance of $450 million aggregate principal amount of its 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). The
Company 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
acquisition of First American, the sale of IHS' pharmacy division and a majority
interest in its assisted living services division and certain other acquisitions
consummated in 1996), $17.7 million and $24.0 million, respectively. In
addition, the Company 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. 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 stockholders, including: (i)
the Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions or general corporate purposes may be
impaired; (ii) a substantial portion of the Company's cash flow from operations
may be dedicated to the payment of principal and interest on its indebtedness
and rent expense, thereby reducing the funds available to the Company for its
operations; (iii) certain of the Company's borrowings bear, and will continue to
bear, variable rates of interest, which expose the Company to increases in
interest rates; and (iv) certain of the Company's indebtedness contains
financial and other restrictive covenants, including those restricting the
incurrence of additional indebtedness, the creation of liens, the payment of
dividends and sales of assets and imposing minimum net worth requirements. In
addition, the Company's leverage may also adversely affect the Company's ability
to respond to changing business and economic conditions or continue its growth
strategy. There can be no assurance that the Company's operating results will be
sufficient for the payment of the Company's indebtedness. Both Moody's and
Standard & Poors in May 1997 confirmed their ratings of IHS' 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 the
Company 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. If additional
funds are raised by issuing equity securities, the Company's stockholders may
experience dilution. Further, such equity securities may have rights,
preferences or privileges senior to those of the Common Stock. To the extent the
Company finances its activities with additional debt, the Company may become
subject to certain additional financial and other covenants that may restrict
its ability to pursue its growth strategy and to pay dividends on the Common
Stock. 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 the Company. See "--Risks Related to Capital Requirements."
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
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various risks associated with its 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 that
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, 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, 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 the
Company to focus on obtaining contracts with managed care organizations and to
provide capitated services. IHS believes that its home healthcare capabilities
will be an important component of its ability to provide services under
capitated and other
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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, 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 the Company require licensure as an insurance company,
there can be no assurance that the Company could obtain or maintain the
necessary licensure, or that the Company 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 limit the Company's ability to incur additional
indebtedness unless certain financial tests are met. See "--Risks Related to
Substantial Indebtedness."
Risks Related to Recent Acquisitions. IHS has recently completed
several major acquisitions, including the First American acquisition, and is
still in the process of integrating those acquired businesses. The Company's
Board of Directors and senior management face a significant challenge in their
efforts to integrate the acquired businesses, including First American. 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. 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 revenue from Medicare), approximately 88%,
89% and 85% of IHS' home healthcare revenues were derived from Medi-
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care 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, 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, the Company believes that a prospective payment system would most
likely provide a healthcare provider a predetermined rate for a given service,
with providers that have costs below the predetermined rate being entitled to
keep some or all of this difference. There can be no assurance that Medicare
will implement a prospective payment system for home nursing services in the
next several years or at all. The implementation of a prospective payment system
will require IHS to make contingent payments related to the First American
acquisition of $155 million over a period of five years. The inability of IHS to
realize operating efficiencies and 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
of Adverse Effect of Healthcare Reform."
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.
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, have 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
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derived from Medicare. On a pro forma basis after giving effect to the First
American acquisition and the sale of a majority interest in its assisted living
division, approximately 69%, 68%, 68% and 67% of the Company's patient revenues
would 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 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.
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. See "--Risks Related to Recent
Acquisitions" and "--Reliance on Reimbursement by Third Party Payors." There can
be no assurance that currently proposed or future healthcare legislation or
other changes in the administration or interpretation of governmental healthcare
programs will not have an adverse effect on the Company or that payments under
governmental programs will remain at levels comparable to present levels or will
be sufficient to cover the costs allocable to patients eligible for
reimbursement pursuant to such programs. See "--Uncertainty of 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
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existing facilities, construction of new facilities, acquisition of existing
facilities, additions of new services, certain capital expenditures and
reimbursement for services rendered. Changes in applicable laws and regulations
or new interpretations of existing laws and regulations could have a material
adverse effect on licensure, eligibility for participation, permissible
activities, operating costs and the levels of reimbursement from governmental
and other sources. There can be no assurance that regulatory 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.
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<PAGE>
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.
Effect of Certain Anti-Takeover Provisions. IHS' Third Restated
Certificate of Incorporation and By-laws, as well as the Delaware General
Corporation Law (the "DGCL"), contain certain provisions that could have the
effect of making it more difficult for a third party to acquire, or discouraging
a third party from attempting to acquire, control of IHS. These provisions could
limit the price that certain investors might be willing to pay in the future for
shares of Common Stock. Certain of these provisions allow IHS to issue, without
stockholder approval, preferred stock having voting rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, the IHS Stockholders' Rights Plan, which
provides for discount purchase rights to certain stockholders of IHS upon
certain acquisitions of 20% or more of the outstanding shares of Common Stock,
may also inhibit a change in control of IHS. As a Delaware corporation, IHS is
subject to Section 203 of the DGCL, which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) for three years following the date such person became
an interested stockholder unless certain conditions are satisfied.
Possible Volatility of Stock Price. There may be significant volatility
in the market price of the Common Stock. Quarterly operating results of IHS,
changes in general conditions in the economy, the
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<PAGE>
financial markets or the healthcare industry, or other developments affecting
IHS or its competitors, could cause the market price of the Common Stock to
fluctuate substantially. In addition, in recent years the stock market and, in
particular, the healthcare industry segment, has experienced significant price
and volume fluctuations. This volatility has affected the market price of
securities issued by many companies for reasons unrelated to their operating
performance. In the past, following periods of volatility in the market price of
a company's securities, securities class action litigation has often been
initiated against such company. Such litigation could result in substantial
costs and a diversion of management's attention and resources, which could have
a material adverse effect upon IHS' business, operating results and financial
condition.
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<PAGE>
USE OF PROCEEDS
The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders.
SELLING STOCKHOLDERS
The following table sets forth certain information as of July 1, 1997
(except as otherwise indicated) and as adjusted to reflect the sale of the
Common Stock in the offering, as to the security ownership of the Selling
Stockholders. Except as set forth below, none of the Selling Stockholders has
held any position or office or had any other material relationship with the
Company or any of its predecessors or affiliates within the past three years.
SHARES OF
SHARES OF COMMON
COMMON STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER
TO OFFERING BEING SOLD OFFERING
DRIFTWOOD HEALTH CARE MANAGERS ------------- ---------- ------------
- ------------------------------
Driftwood Health Care Managers, Inc. (1) 3,000 3,000 0
SIGNATURE HOME CARE, INC. (2)
- ----------------------------
Alvin R. Albe, Jr. 234 234 0
Donald V. Barrett 690 690 0
Peter E. Bennett 548 548 0
Charles G. Berg 239 239 0
David Monte Blumberg 847 847 0
Carmel Burke Bonesso 10 10 0
Austin Broadhurst, Jr. 156 156 0
Louis Church 580 580 0
Robert A. Day 626 626 0
James deVenny 783 783 0
Robert F. Doviak c/o 313 313 0
Dale L. McCullough, Special Master
Doviak Partners Ltd., Marla Reynolds,
Agent 1,409 1,409 0
Ian J. Dowie 1,566 1,566 0
Escrow Fund (3) 166,251 166,251 0
Everen Clearing Corp. Cust.
FBO Terry Martin McGann IRA 522 522 0
Everen Clearing Corp. Cust.
FBO Rhonda Rife McGann IRA 261 261 0
FG-HS 3,915 3,915 0
Alan H. Fishman 391 391 0
Steven J. Gilbert 6,500 6,500 0
Gary Gladstein 704 704 0
Clark Good 42 42 0
James E. Gordon 196 196 0
Ruth Ann Hardisty 10 10 0
Steven D. Holzman 234 234 0
Alex M. Jernigan 391 391 0
Donna Kirk 9 9 0
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<PAGE>
SHARES OF
SHARES OF COMMON
COMMON STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER
TO OFFERING BEING SOLD OFFERING
----------- ---------- --------
Michael Kluger 690 690 0
H. C. Kresge 861 861 0
Susan Kresge 113 113 0
Anthony J. LeVecchio 1,384 1,384 0
Gary D. Markoff 234 234 0
Joseph Maturo 64 64 0
Joleen Moden 38 38 0
Cathy Nakashima 9 9 0
John H. Pinder 313 313 0
Steven B. Potter 156 156 0
Robert D. Reed 783 783 0
Gerry M. Ritterman 234 234 0
Samaritan Health System 2,417 2,417 0
Barry A. Schwimmer 234 234 0
Rick A. Short 48 48 0
Elliot Stein, Jr. 234 234 0
Stern Family Partnership 24 24 0
Mark Alexander Thompson 313 313 0
Jerry L. Tomlinson 115 115 0
Beatrice B. Trust, Marc I. Stern, Trustee 210 210 0
Stephen F. Wiggins 239 239 0
Paul S. Wolansky 234 234 0
MEDIQ MOBILE X-RAY SERVICES, INC. (4)
- -------------------------------------
MEDIQ Mobile X-Ray Services, Inc. 143,893 143,893 0
TOTAL REHAB SERVICES (5)
- ------------------------
Timothy H. Dacy 18,271 18,271 0
Shari Kaplan 6,102 6,102 0
David S. Krause 18,271 18,271 0
Bruce Paler 6,102 6,102 0
Ronald Paler 6,102 6,102 0
Total Rehab Services, LLC 9,745 9,745 0
Total Rehab Services 02, LLC 9,745 9,745 0
CAMBRIDGE (6)
- -------------
Bank of New York, Trustee for
Annuity Trust under Benefit Plan
of Exxon Corp. and Participating
Affiliates 285 285 0
LIFEWAY, INC. (7)
- ----------------
Lifeway Partners LLC (8) 75,936 75,936 0
Fred McCall-Perez 19,679 19,679 0
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<PAGE>
SHARES OF
SHARES OF COMMON
COMMON STOCK STOCK
BENEFICIALLY BENEFICIALLY
OWNED PRIOR SHARES OWNED AFTER
TO OFFERING BEING SOLD OFFERING
------------- ---------- ------------
RESTORATIVE THERAPY (9)
- ----------------------
Michael Favilla 58,866 58,866 0
Beth Kessler 117,732 117,732 0
David Nechas 117,732 117,732 0
Synergy Two, Inc. 37,049 37,049 0
ROBERT N. ELKINS (10) 3,080,458 154,522 2,925,936
- ----------------
- ----------
(1) The shares sold hereunder represent shares issuable upon exercise of a
Warrant to Purchase Shares of Common Stock issued to Driftwood Health Care
Managers, Inc. ("Driftwood") on July 1, 1992 in connection with the
Company's lease of a skilled nursing home facility owned by Driftwood.
(2) Shares are being sold hereunder by the former stockholders of Signature
Home Care, Inc. ("Signature"). The shares sold hereunder represent shares
received in exchange for the shares of Signature pursuant to the Stock
Purchase Agreement dated as of August 23, 1996. Pursuant to the terms of
such agreement, additional shares of Common Stock may be issued as a
purchase price adjustment based on an audit of Signature's closing date
balance sheet.
(3) Represents shares held in escrow to secure any purchase price adjustment in
favor of the Company, any breach of the representations, warranties and
covenants of Signature and the indemnification obligations of Signature
under the Stock Purchase Agreement.
(4) The shares sold hereunder represent shares received in exchange for the
assets of MEDIQ Mobile X-Ray Services, Inc., pursuant to the Asset Purchase
Agreement dated as of November 6, 1996. These shares are pledged as
collateral pursuant to a Credit Agreement dated as of October 1, 1996 among
MEDIQ/PRN Life Support Services, Inc. as borrower, MEDIQ Incorporated and
PRN Holdings, Inc. as parent guarantors, the initial lenders named therein,
Banque Nationale de Paris, as Administrative Agent and initial issuing
bank, and NationsBank, N.A., as Documentation Agent.
(5) The shares sold hereunder represent shares received in exchange for the
assets of Total Rehab Services, LLC and Total Rehab Services 02, LLC
pursuant to the Asset Purchase Agreement dated as of October 23, 1996. Of
the shares of Common Stock being registered hereunder, 25,653 are currently
held in escrow to secure indemnification obligations and purchase price
adjustments pursuant to the Asset Purchase Agreement. Purchase price
adjustments may be made based on a review of the closing date balance sheet
of the sellers or on the inability of the Company to enter into a specified
management agreement within thirty days of the closing (or the termination
of such agreement), all on the terms set forth in the Asset Purchase
Agreement.
(6) Represents shares issuable upon exercise of stock options.
(7) The shares sold hereunder represent shares received in exchange for the
stock of Lifeway, Inc., pursuant to the Agreement and Plan of
Reorganization dated as of November 8, 1996.
(8) Dr. Robert N. Elkins, the Chairman and Chief Executive Officer of IHS, owns
99% of Lifeway Partners LLC, and his wife owns the remaining 1%. Does not
include shares beneficially owned by Dr. Elkins. See Note 10.
(9) The shares sold hereunder represent shares received in exchange for the
assets of Rehab Dynamics, Inc. and Restorative Therapy Limited pursuant to
the Asset Purchase Agreement dated as of May 20, 1997. 294,330 of such
shares were originally issued to Restorative Therapy Limited (which has
since changed its name to Synergy Two, Inc.) and have subsequently been
distributed to its shareholders and one employee, each of whom is a selling
stockholder hereunder and is currently employed by a wholly owned
subsidiary of the Company. 8,907 of the shares held by Synergy Two, Inc.
and registered hereunder are currently in escrow to secure purchase price
adjustments. Purchase price adjustments may be made based upon a review of
the working capital and long-term liabilities relating to the purchased
assets as of the closing date and based upon earnings relating to the
purchased assets in the year following the closing, all on the terms set
forth in the Asset Purchase Agreement.
(10) The shares beneficially owned by Dr. Elkins include 2,850,000 shares
issuable upon exercise of options and 75,936 shares owned by Lifeway
Partners LLC, a Selling Stockholder hereunder. See Note 8 above. The shares
sold hereunder represent shares acquired by Dr. Elkins in the open market.
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<PAGE>
TRANSACTIONS INVOLVING SELLING STOCKHOLDERS
On July 1, 1992, the Company entered into a Lease Agreement with
Driftwood Health Care Managers, Inc. ("Driftwood"), pursuant to which the
Company agreed to lease a 160-bed skilled nursing home facility located in
Charleston, South Carolina from Driftwood. The lease runs for a term of 10
years, with two additional five-year renewal periods. In addition, the Company
acquired an option to purchase the facility from Driftwood. In connection with
the execution of the lease, the Company issued a Warrant to Purchase Shares of
Common Stock to Driftwood. The 3,000 shares of common stock issuable upon the
exercise of such warrant are being offered hereby.
On September 25, 1996, the Company acquired all of the outstanding
stock of Signature Home Care, Inc., a Delaware corporation which provides home
nursing services, infusion services, respiratory therapy and home medical
equipment in Arizona, Florida, Kansas, New Jersey and Texas as well as
management services to home health providers. The purchase price was $9.2
million, including $4.7 million paid through the issuance of 196,374 shares of
the Company's Common Stock (the "Signature Shares").
The Signature Shares are being offered hereby.
On November 6, 1996, the Company acquired substantially all the assets,
and assumed certain liabilities, of MEDIQ Mobile X-Ray Services, Inc. ("Mediq"),
which provides portable X-ray, EKG and nutritional services to residents of
nursing homes and other institutions and home care patients and ancillary
services related thereto. The purchase price was $10.1 million, of which $5.2
million was paid through the issuance of 143,893 shares of the Company's Common
Stock (the "Mediq Shares"). The Company is required to make a contingent payment
of up to $2.0 million through February 2000 unless, prior to February 1, 2000,
there is an alteration, modification or other change in the amount of EKG
transportation reimbursement paid to IHS which has the effect of eliminating or
reducing the reimbursement amount for such services. The Mediq Shares are being
offered hereby.
On November 8, 1996, the Company acquired substantially all the assets
of Total Rehab Services, LLC and Total Rehab Services 02, LLC, which provides
respiratory services and contract rehabilitation services, including speech and
language pathology, occupational therapy and physical therapy services, in
Illinois and New York. The purchase price was $8.0 million, including $2.7
million paid through the issuance of 74,338 shares of the Company's Common Stock
(the "Total Rehab Shares"). The Total Rehab Shares are being offered hereby.
On November 13, 1996, the Company acquired the remaining 90% of
Lifeway, Inc. ("Lifeway"), a physician management and disease management company
in Miami, Florida. The purchase price was $900,000, which was paid through the
issuance of 38,502 shares of the Company's Common Stock (the "Acquisition
Shares"). In connection with the Lifeway acquisition, the Company repaid
outstanding loans to Lifeway from Dr. Robert N. Elkins, the Company's Chairman
and Chief Executive Officer, aggregating $1,125,000 through the issuance of
48,129 shares of the Company's Common Stock (the "Loan Shares"), and issued
8,984 shares of Common Stock in partial payment of a bonus to Mr. McCall-Perez
(the "Bonus Shares" and, together with the Acquisition Shares and the Loan
Shares, the "Lifeway Shares"). Prior to the acquisition, IHS owned 10% of
Lifeway, which interest it acquired in August 1995, and Dr. Elkins beneficially
owned approximately 65% of Lifeway. The Lifeway Shares are being offered hereby.
On June 20, 1997, the Company acquired substantially all the assets,
and assumed certain liabilities, of Rehab Dynamics, Inc. and Restorative Therapy
Limited (which has since changed its name to Synergy Two, Inc.), which provide
contract rehabilitation services, including speech and language pathology,
occupational therapy and physical therapy services, to patients in a variety of
settings. The purchase price was $31.4 million, of which $8.4 million was paid
in cash at the closing, $11.8 million was paid through the issuance of 331,379
shares of the Company's Common Stock (the "Restorative Therapy Shares") and the
remainder is to be paid after determination of any purchase price adjustment due
to earnings relating to the purchased assets in the year following the closing.
The Restorative Therapy Shares are being offered hereby.
Dr. Robert N. Elkins, the Company's Chairman and Chief Executive
Officer, acquired 148,465 shares of Common Stock in open market purchases and
6,057 shares of Common Stock as a gift from his spouse. These shares of Common
Stock are being offered hereby.
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<PAGE>
PLAN OF DISTRIBUTION
The Company is registering the Shares on behalf of the Selling
Stockholders. All costs, expenses and fees in connection with the registration
of the Shares offered hereby will be borne by the Company. Brokerage
commissions, if any, attributable to the sale of Shares will be borne by the
Selling Stockholders (or their donees and pledgees).
Sales of Shares may be effected from time to time in transactions
(which may include block transactions) on the New York Stock Exchange, in
negotiated transactions, or a combination of such methods of sale, at fixed
prices which may be changed, at market prices prevailing at the time of sale, or
at negotiated prices. The Selling Stockholders have advised the Company that
they have not entered into any agreements, understandings or arrangements with
any underwriters or broker-dealers regarding the sale of their securities. The
Selling Stockholders may effect such transactions by selling Common Stock
directly to purchasers or to or through broker-dealers which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Stockholder and/or the
purchasers of Common Stock for whom such broker-dealers may act as agents or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). The Selling
Stockholders and any broker-dealers that act in connection with the sale of the
Common Stock might be deemed to be "underwriters" within the meaning of Section
2(11) of the Securities Act and any commission received by them and any profit
on the resale of the shares of Common Stock as principal might be deemed to be
underwriting discounts and commissions under the Securities Act. The Selling
Stockholders may agree to indemnify any agent, dealer or broker-dealer that
participates in transactions involving sales of the shares against certain
liabilities, including liabilities arising under the Securities Act. Liabilities
under the federal securities laws cannot be waived.
The Signature Group has agreed not to sell in excess of 75,000 shares
of Common Stock during any thirty day period and to effect sales solely through
Smith Barney Inc., Cowen & Co. or PaineWebber Incorporated. Mediq has agreed not
to sell in excess of 100,000 shares of Common Stock during any thirty day
period, until such time as at least 100,000 of the Mediq Shares have been sold,
and to effect sales solely through Smith Barney Inc. The Total Rehab Group has
agreed not to sell in excess of 50,000 shares of Common Stock during any thirty
day period and to effect sales solely through Smith Barney Inc. The Lifeway
Group has agreed to effect sales solely through Smith Barney Inc., and Fred
McCall-Perez has agreed not to transfer any of the Lifeway Shares received by
him for a period of one year following the issuance of such shares. The
Restorative Therapy Group has agreed not to sell in excess of 100,000 shares of
Common Stock during any thirty day period and to effect sales solely through
Smith Barney Inc.
Because the Selling Stockholders may be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act, the Selling
Stockholders will be subject to prospectus delivery requirements under the
Securities Act. Furthermore, in the event of a "distribution" of the Shares,
such Selling Stockholder, any selling broker or dealer and any "affiliated
purchasers" may be subject to Regulation M under the Securities Exchange Act of
1934, as amended, which Regulation would prohibit, with certain exceptions, any
such person from bidding for or purchasing any security which is the subject of
such distribution until his participation in that distribution is completed. In
addition, Regulation M under the Exchange Act prohibits, with certain
exceptions, any "stabilizing bid" or "stabilizing purchase" for the purpose of
pegging, fixing or stabilizing the price of Common Stock in connection with this
offering.
The Selling Stockholders may be entitled under agreements entered into
with the Company to indemnification against liabilities under the Securities
Act.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby have been passed upon for the Company by Marshall A. Elkins,
Executive Vice President and General Counsel of the Company. Mr. Elkins is the
brother of Robert N. Elkins, the Company's Chairman of the Board and Chief
Executive Officer. Mr. Marshall Elkins owns 17,299 shares of Common Stock and
options to purchase 161,535 shares of Common Stock.
-18-
<PAGE>
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 incorporated by
reference in the Registration Statement 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 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
the Registration Statement from IHS' Current Report on Form 8-K/A (dated October
17, 1996 and filed with the Commission on November 26, 1996), 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.
-19-
<PAGE>
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NO PERSON IS AUTHORIZED IN
CONNECTION WITH ANY OFFERING MADE
HEREBY TO GIVE ANY INFORMATION OR TO
MAKE ANY REPRESENTATION NOT CONTAINED
IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION OR 999,406
REPRESENTATION MUST NOT BE RELIED Shares
UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY
SECURITY OTHER THAN THE COMMON STOCK
OFFERED HEREBY, NOR DOES IT
CONSTITUTE AN OFFER TO SELL OR A INTEGRATED HEALTH
SOLICITATION OF AN OFFER TO BUY ANY SERVICES, INC.
OF THE SECURITIES OFFERED HEREBY TO
ANY PERSON IN ANY JURISDICTION IN
WHICH IT IS UNLAWFUL TO MAKE SUCH AN
OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPEC- TUS NOR ANY
SALE MADE HEREUNDER SHALL UNDER ANY
CIRCUMSTANCES CREATE ANY IMPLICATION Common Stock
THAT THE INFORMATION CONTAINED HEREIN
IS CORRECT AS OF ANY DATE SUBSEQUENT
TO THE DATE HEREOF.
-------------------------------
TABLE OF CONTENTS
PAGE PROSPECTUS
Available Information ..............2
Incorporation of Certain -------------------------------
Documents by Reference .......... 3
The Company ....................... 4
Risk Factors....................... 6
Use of Proceeds................... 14
Selling Stockholders...............14 July 24, 1997
Plan of Distribution...............18
Legal Matters .....................18
Experts............................19
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