AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 12, 1997
Registration Number 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
INTEGRATED HEALTH SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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Delaware 8051 23-2428312
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification No.)
incorporation or organization) Classification Code Number)
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10065 Red Run Boulevard
Owings Mills, Maryland 21117
(410) 998-8400
(Address, including ZIP Code, and telephone number, including area code, of
registrant's principal executive offices)
Marshall A. Elkins, Esq.
Executive Vice President
and General Counsel
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
(410) 998-8400
(410) 998-8500 (FAX)
(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 (FAX) Owings Mills, Maryland 21117
(410) 998-8400
(410) 998-8500 (FAX)
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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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
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9 1/4% Senior Subordinated Notes due 2008, Series A ...... $500,000,000 $147,500.00
============================================================================================================
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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.
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<PAGE>
SUBJECT TO COMPLETION, DATED DECEMBER 12, 1997
PROSPECTUS
INTEGRATED HEALTH SERVICES, INC.
OFFER TO EXCHANGE
all outstanding
9 1/4% Senior Subordinated Notes due 2008
($500,000,000 principal amount outstanding)
for
9 1/4% Senior Subordinated Notes due 2008, Series A
($500,000,000 principal amount)
------------
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON ,
1998, 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 $500,000,000 of its 9 1/4% Senior
Subordinated Notes due 2008, 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 9 1/4% Senior Subordinated
Notes due 2008 (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
September 8, 1997 (the "Registration Rights Agreement"), between the Company and
Smith Barney Inc., Morgan Stanley & Co., Incorporated, 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 September 11, 1997 (the "Indenture") between the
Company and First Union National Bank, as Trustee. The New Notes and the Old
Notes are together referred to herein as the "9 1/4% Notes." See "The Exchange
Offer" and "Description of the 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"), the Company's 10 1/4% Senior Subordinated Notes due
2006 (the "10 1/4% 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
September 30, 1997, 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 9 1/4% Notes
are effectively subordinated was approximately $839.9 million. At September 30,
1997, $600.1 million of indebtedness ranks pari passu with the 9 1/4% Notes. See
"Description of the New Notes."
SEE "RISK FACTORS", WHICH BEGINS ON PAGE 16 OF THIS PROSPECTUS, FOR A
DISCUSSION OF CERTAIN FACTORS TO BE CONSIDERED BY HOLDERS WHO TENDER OLD NOTES
IN THE EXCHANGE OFFER.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECU-
RITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
(cover page text continued on next page)
The date of this Prospectus is , 1997
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.
<PAGE>
(cover page continued)
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 , 1998, 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. First Union National Bank 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.
The Old Notes were sold by the Company on September 11, 1997 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. 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 9 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 January 15, 1998, 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 July 15, 1998. 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 January 15
and July 15 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 intends to apply for
listing of 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 the 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 a Global Note (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), which will
receive New Notes in certificated form. Beneficial interests in the Global Note
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 Note,
New Notes in certificated form will be issued in exchange for the Global Note on
the terms set forth in the Indenture. See "Description of the 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
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PAGE
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Available Information .................................................. 3
Incorporation of Certain Documents by Reference ........................ 3
Prospectus Summary ..................................................... 6
Risk Factors ........................................................... 16
The Company ........................................................... 25
Recent Developments .................................................... 26
The Exchange Offer ..................................................... 30
Certain Federal Income Tax Consequences ................................ 40
Use of Proceeds ........................................................ 40
Capitalization ......................................................... 41
Selected Historical Consolidated Financial Data ........................ 42
Unaudited Pro Forma Financial Information .............................. 47
Business ............................................................... 62
Description of the New Notes ........................................... 80
Description of Certain Indebtedness .................................... 103
Plan of Distribution ................................................... 106
Legal Matters .......................................................... 107
Experts ................................................................ 107
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2
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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 9 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,
including those discussed under "Risk Factors," that could cause actual results
to differ materially from those contemplated in such forward-looking statements.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. 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;
3
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(ii) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended March 31, 1997;
(iii) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended June 30, 1997;
(iv) The Company's Quarterly Report on Form 10-Q for the fiscal quarter
ended September 30, 1997;
(v) 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;
(vi) The Company's Current Report on Form 8-K dated October 19, 1996
reporting the execution of the Agreement and Plan of Merger (the
"Coram Merger Agreement") among the Company, IHS Acquisition XIX,
Inc. and Coram Healthcare Corporation ("Coram"), as amended by
Form 8-K/A filed April 11, 1997 reporting the termination of the
Coram Merger Agreement;
(vii) 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 its 9 1/2% Senior Notes;
(viii) 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 its 9 1/2% Senior Notes and (ii) the
Company's acceptance for payment of an aggregate of $114,975,000
principal amount of its 9 5/8% Senior Notes and an aggregate of
$99,893,000 principal amount of its 10 3/4% Senior Notes pursuant
to cash tender offers;
(ix) 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;
(x) The Company's Current Report on Form 8-K dated September 9, 1997,
reporting the Company's agreement to issue privately an aggregate
of $500 million principal amount of the Old Notes;
(xi) The Company's Current Report on Form 8-K dated September 15, 1997,
as amended, reporting IHS' $1.75 billion revolving credit and term
loan facility (the "New Credit Facility");
(xii) The Company's Current Report on Form 8-K dated September 25, 1997,
as amended, reporting IHS' acquisition of Community Care of
America, Inc. and the Lithotripsy Division of Coram;
(xiii) The Company's Current Report on Form 8-K dated October 21, 1997,
as amended, reporting IHS' acquisition of RoTech; and
(xiv) The Company's Current Report on Form 8-K dated November 3, 1997,
reporting the Company's agreement to purchase 139 owned, leased or
managed long-term care facilities, 12 specialty hospitals and
certain other businesses from HEALTHSOUTH Corporation.
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.
4
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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 , 1998. THE COMPANY UNDERTAKES
TO PROVIDE WITHOUT CHARGE TO EACH PERSON TO WHOM A COPY OF THIS PROSPECTUS HAS
BEEN DELIVERED, UPON THE WRITTEN OR ORAL REQUEST OF ANY SUCH PERSON, A COPY OF
ANY OR ALL OF THE DOCUMENTS INCORPORATED BY REFERENCE HEREIN, OTHER THAN THE
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO THE INFORMATION THAT THIS PROSPECTUS INCORPORATES. WRITTEN OR
ORAL REQUESTS FOR SUCH COPIES SHOULD BE DIRECTED TO THE ADDRESS SET FORTH ABOVE.
5
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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, skilled nursing facility 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
1,900 service locations in 47 states and the District of Columbia.
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. To implement its post-acute
care network strategy, 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; and (iii) developing subacute care units. Given the increasing
importance of managed care in the healthcare marketplace and the continued cost
containment pressures from Medicare, Medicaid and private payors, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, 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 in October 1997 acquired RoTech
Medical Corporation ("RoTech"), a provider of home healthcare products and
services, with an emphasis on home respiratory, home medical equipment and
infusion therapy, principally to patients in non-urban areas (the "RoTech
Acquisition"). In October 1997, IHS also acquired (the "Coram Lithotripsy
Acquisition") the lithotripsy division (the "Coram Lithotripsy Division") of
Coram, which provides lithotripsy services and equipment maintenance in 180
locations in 18 states, in order to expand the mobile diagnostic treatment and
services it offers to patients, payors and other providers. Lithotripsy is a
non-invasive
6
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technique that utilizes shock waves to disintegrate kidney stones. See "Recent
Developments." IHS intends to use the home healthcare setting and the delivery
franchise of its home healthcare branch and agency network to (i) deliver
sophisticated care, such as skilled nursing care, home infusion therapy and
rehabilitation, outside the hospital or nursing home; (ii) serve as an entry
point for patients into the IHS post-acute care network; and (iii) provide a
cost-effective site for case management and patient direction.
IHS has also continued to expand its post-acute care network by increasing
the number of facilities it operates or manages. In September 1997, IHS acquired
Community Care of America, Inc. ("CCA"), which develops and operates skilled
nursing facilities in medically underserved rural communities (the "CCA
Acquisition"). IHS believes that CCA will broaden its post-acute care network to
include more rural markets and will complement its existing home care locations
in rural markets as well as RoTech's business. In addition, in November 1997,
IHS agreed to acquire from HEALTHSOUTH Corporation ("HEALTHSOUTH") 139 owned,
leased or managed long-term care facilities and 12 specialty hospitals, as well
as a contract therapy business having over 1,000 contracts and an institutional
pharmacy business serving approximately 38,000 beds (the "Proposed Facility
Acquisition"). See "Recent Developments."
The Company provides subacute care through medical specialty units
("MSUs"), which are typically 20 to 75 bed specialty units with physical
identities, specialized medical technology and staffs separate from the
geriatric care facilities in which they are located. MSUs are designed to
provide comprehensive medical services to patients who have been discharged from
acute care hospitals but who still require subacute or complex medical
treatment. The levels and quality of care provided in the Company's MSUs are
similar to those provided in the hospital but at per diem treatment costs which
the Company believes are generally 30% to 60% below the cost of such care in
acute care hospitals. Because of the high level of specialized care provided,
the Company's MSUs generate substantially higher net revenue and operating
profit per patient day than traditional geriatric care services.
The Company presently operates 216 geriatric care facilities (169 owned or
leased and 47 managed), including the facilities acquired in the CCA Acquisition
(of which 19 facilities are being held for sale), and 158 MSUs located within 84
of these facilities. Specialty medical services revenues, which include all MSU
charges, all revenue from providing rehabilitative therapies, pharmaceuticals,
medical supplies and durable medical equipment to all its patients, all revenue
from its Alzheimer's programs and all revenue from its provision of pharmacy,
rehabilitation therapy, home healthcare, hospice care and similar services to
third-parties, constituted approximately 57%, 65% and 70% of net revenues during
the years ended December 31, 1994, 1995 and 1996, respectively. 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 and the
RoTech Acquisition, for the year ended December 31, 1996, approximately 44% of
IHS' revenues were derived from home health and hospice care, approximately 36%
were derived from subacute and other ancillary services, approximately 18% were
derived from traditional basic nursing home services and the remaining
approximately 2% were derived from management and other services.
7
<PAGE>
THE NOTE OFFERING
THE OLD NOTES.......... The Old Notes were sold by the Company on September
11, 1997, to Smith Barney Inc., Morgan Stanley & Co.
Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation and Citicorp Securities, Inc.
(the "Initial Purchasers") pursuant to a Purchase
Agreement dated September 8, 1997 (the "Purchase
Agreement"). The Initial Purchasers subsequently
resold the Old Notes to qualified institutional
buyers pursuant to Rule 144A under the Securities
Act.
REGISTRATION RIGHTS
AGREEMENT............... Pursuant to the Purchase Agreement, the Company and
the Initial Purchasers entered into a Registration
Rights Agreement dated September 8, 1997, 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....... $500,000,000 aggregate principal amount of 9 1/4%
Senior Subordinated Notes due 2008, Series A.
THE EXCHANGE OFFER..... $1,000 principal amount of the New Notes in exchange
for each $1,000 principal amount of Old Notes. As of
the date hereof, $500,000,000 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
8
<PAGE>
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 , 1998, 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 January 15, 1998, 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 July 15, 1998.
Accordingly, holders of Old Notes that are accepted
for exchange will not receive interest on the Old
Notes that is accrued but unpaid at the time of
tender. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the
New Notes.
CONDITIONS TO THE
EXCHANGE OFFER.......... The Exchange Offer is subject to certain customary
conditions, which may be waived by the Company in
its sole discretion. See "The Exchange Offer --
Conditions." The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being
tendered.
PROCEDURES FOR TENDERING
OLD NOTES............... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
accompanying Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions
contained herein and therein, and mail or otherwise
deliver such Letter of Transmittal, or such
facsimile, together with the Old Notes and any other
required documentation, to the Exchange Agent at the
address set forth herein prior to 5:00 p.m., New
York City time, on the Expiration Date. By executing
the Letter of Transmittal, each holder will
represent to the Company that, among other things,
the holder or the person receiving such New Notes,
whether or not such person is the holder, is
acquiring the New Notes in the ordinary course of
business and that neither the holder nor any such
other person has any arrangement or understanding
with any person to participate in the distribution
of such New Notes and that neither the holder nor
any such other person is an "affiliate" of the
Company within the meaning of Rule 405. In lieu of
physical delivery of the certificates representing
Old Notes, tendering holders may transfer Old Notes
pursuant to the procedure for book-entry transfer as
set forth under "The Exchange Offer -- Procedures
for Tendering Old Notes" and "-- Guaranteed Delivery
Procedures."
SPECIAL PROCEDURES FOR
BENEFICIAL OWNERS...... Any beneficial owner whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender should contact such registered holder
promptly and instruct such registered holder to
tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's
own behalf, such owner must, prior to 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 pro-
9
<PAGE>
cedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures."
WITHDRAWAL RIGHTS....... Tenders may be withdrawn at any time prior to 5:00
p.m., New York City time, on the Expiration Date
pursuant to the procedures described under "The
Exchange Offer -- Withdrawal of Tenders."
ACCEPTANCE OF OLD NOTES
AND DELIVERY OF NEW
NOTES.................. Subject to the terms and conditions of the Exchange
Offer, including the reservation of certain rights
by the Company, the Company will accept for exchange
any and all Old Notes that are properly tendered in
the Exchange Offer, and not withdrawn, prior to 5:00
p.m., New York City time, on the Expiration Date.
Subject to such terms and conditions, the New Notes
issued pursuant to the Exchange Offer will be
delivered promptly following the Expiration Date.
See "The Exchange Offer -- Terms of the Exchange
Offer" and " -- Conditions."
FEDERAL INCOME TAX
CONSEQUENCES............ The exchange pursuant to the Exchange Offer should
not be a taxable event for Federal income tax
purposes. See "Certain Federal Income Tax
Consequences."
EFFECT ON HOLDERS OF
OLD NOTES.............. As a result of the making of this Exchange Offer,
the Company will have fulfilled one of its
obligations under the Registration Rights Agreement
and holders of Old Notes who do not tender their Old
Notes will not have any further registration rights
under the Registration Rights Agreement or
otherwise. Such holders will continue to hold the
untendered Old Notes and will be entitled to all the
rights and subject to all the limitations applicable
thereto under the Indenture, except to the extent
such rights or limitations, by their terms,
terminate or cease to have further effectiveness as
a result of the Exchange Offer. All untendered Old
Notes will continue to be subject to certain
restrictions on transfer. Accordingly, if any Old
Notes are tendered and accepted in the Exchange
Offer, the trading market for the untendered Old
Notes could be adversely affected. See "Risk Factors
-- Consequences of the Exchange Offer on
Non-Tendering Holders of the Old Notes."
EXCHANGE AGENT.......... First Union National Bank, 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...... $500,000,000 principal amount of 9 1/4% Senior
Subordinated Notes due 2008, Series A.
MATURITY DATE............ January 15, 2008.
INTEREST PAYMENT DATES... January 15 and July 15, commencing July 15, 1998.
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, the 10 1/4% Senior Notes and the
9 1/2% Senior Notes, and
10
<PAGE>
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 September 30,
1997, 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 $839.9 million. See "Recent
Developments."
OPTIONAL REDEMPTION..... The New Notes are redeemable for cash at any time
after January 15, 2003, at the Company's option, in
whole or in part, initially at a redemption price
equal to 104.625% of principal amount, declining to
100% of principal amount on January 15, 2006, plus
accrued interest thereon to the date fixed for
redemption. In addition, the Company may redeem up
to $166,667,000 principal amount of the 9 1/4% Notes
at any time prior to January 15, 2001 at a
redemption price equal to 109.25% of the aggregate
principal amount so redeemed, plus accrued interest
to the redemption date, out of the net cash proceeds
of one or more Public Equity Offerings (as defined
herein); provided that at least $333,333,000
aggregate principal amount of 9 1/4% Notes
originally issued remains outstanding.
CHANGE IN CONTROL...... In the event of a Change in Control, each holder of
New Notes may require the Company to repurchase such
holder's New Notes, in whole or in part, at 101% of
the principal amount thereof, plus accrued interest
to the repurchase date. There is no assurance that
the Company will be able to repurchase the New Notes
upon the occurrence of a Change in Control. The
Company's ability to repurchase the New Notes
following a Change in Control will be dependent upon
the Company having sufficient cash, and may be
limited by the terms of the Company's Senior
Indebtedness or the subordination provisions of the
Indenture. The term Change in Control is limited to
certain specified transactions and, depending upon
the circumstances, may not include other events,
such as highly leveraged transactions,
reorganizations, restructurings, mergers or similar
transactions, that might adversely affect the
financial condition of the Company or result in a
downgrade in the credit rating of the New Notes.
RESTRICTIVE COVENANTS... The Indenture under which the Old Notes have been
issued and the New Notes will be issued contains
certain covenants, including, but not limited to,
covenants with respect to the following matters: (i)
limitations on additional indebtedness unless
certain coverage ratios are met; (ii) limitations on
other subordinated debt; (iii) limitations on liens;
(iv) limitations on the issuance of preferred stock
by the Company's subsidiaries; (v) limitations on
transactions with affiliates; (vi) limitations on
restricted payments; (vii) application of the
proceeds of certain asset sales; (viii) limitations
on restrictions on subsidiary dividends; (ix)
restrictions on mergers, consolidations and the
transfer of all or substantially all of the assets
of the Company to another person; and (x)
limitations on investments and loans.
USE OF PROCEEDS......... There will be no cash proceeds to the Company from
the Exchange Offer. See "Use of Proceeds."
LISTING.................. The Company intends to apply for listing of the New
Notes on the New York Stock Exchange.
11
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT RATIOS AND STATISTICAL AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------------
ACTUAL
-----------------------------------------------------------------------
1992 1993 1994 1995 1996
------------- ------------- ------------- -------------- --------------
<S> <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
Operating income before fixed
charges(5) ....................... 44,546 66,536 146,930 234,321 279,771
Depreciation and amortiza-
tion(6) .......................... 4,334 8,126 26,367 39,961 41,681
Interest, net(7)(8) ............... 1,493 5,705 20,602 38,977 64,110
Loss on impairment of long-
lived assets(9) .................. -- -- -- 83,321 --
Other non-recurring charges
(income)(10) ..................... -- -- -- 49,639 (14,457)
Earnings (loss)(11):
Before income taxes and ex-
traordinary items ............... 19,174 30,790 58,979 (42,259) 111,480
Before extraordinary items ....... $ 11,888 $ 18,782 $ 36,862 $ (25,989) $ 47,765
OTHER FINANCIAL DATA:
EBITDA(12) ........................ $ 25,001 $ 44,621 $ 105,948 $ 169,639 $ 202,814
Ratio of EBITDA to
interest, net(12) ................ 16.7x 7.8x 5.1x 4.4x 3.2x
Ratio of earnings to fixed charg-
es(13) ........................... 2.8x 2.6x 2.4x 0.3x 2.1x
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 Services Rev-
enues(17) ........................ 43.6% 54.7% 56.8% 65.4% 69.6%
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------------------
ACTUAL
----------------------------
PRO FORMA PRO FORMA
1996(1) 1996 1997 1997(2)
--------------- ------------ --------------- ---------------
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA(3)(4):
Net revenues ..................... $ 2,516,432 $ 998,718 $ 1,391,837 $ 1,923,906
Operating income before fixed
charges(5) ....................... 386,182 198,482 296,151 424,481
Depreciation and amortiza-
tion(6) .......................... 106,574 25,909 47,818 92,243
Interest, net(7)(8) ............... 159,501 46,033 71,991 126,968
Loss on impairment of long-
lived assets(9) .................. -- -- -- --
Other non-recurring charges
(income)(10) ..................... 36,874 (34,298) 20,047 32,260
Earnings (loss)(11):
Before income taxes and ex-
traordinary items ............... 939 107,941 80,260 91,190
Before extraordinary items ....... $ 343 $ 45,589 $ 48,959 $ 48,139
OTHER FINANCIAL DATA:
EBITDA(12) ........................ $ 303,887 $ 145,585 $ 220,116 $ 342,662
Ratio of EBITDA to
interest, net(12) ................ 1.9x 3.2x 3.1x 2.7x
Ratio of earnings to fixed charg-
es(13) ........................... 1.0x 2.5x 1.8x 1.6x
Capital expenditures:
Acquisitions(14) ................. $ 46,106 $ 166,822
Other(15) ........................ 104,647 86,656
OTHER OPERATING DATA:
MSU Beds(16) ...................... 3,489 3,705
MSU Occupancy ..................... 78.1% 80.3%
Specialty Medical Services Rev-
enues(17) ........................ 66.6% 78.6%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
-------------------
ACTUAL
-------------------
<S> <C>
BALANCE SHEET DATA:
Cash and temporary investments .................. $ 880,880
Working capital ................................. 980,918
Total assets .................................... 3,228,080
Long-term debt, including current portion ...... 2,198,765
Stockholders' equity ........................... 627,424
</TABLE>
- ----------
(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 ("ILC") in October 1996 (the "ILC
Offering"), (iii) the acquisition of First American in October 1996 (the
"First American Acquisition"), (iv) the acquisition of CCA in September
1997 (the "CCA Acquisition"), (v) the acquisition of the Coram Lithotripsy
Division in October 1997 (the "Coram Lithotripsy Acquisition"), (vi) the
acquisition of RoTech in October 1997 (the "RoTech Acquisition"), (vii) 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, (k) Lifeway Inc., a physician
management and disease management company, in November 1996, (l) In-Home
Health Care, Inc., a home health company, in January 1997 (the "In-Home
Acquisition"), (m) Portable X-Ray
12
<PAGE>
Labs, Inc., a mobile diagnostics company, in February 1997 (the "Portable
X-Ray Acquisition"), (n) Coastal Rehabilitation, Inc., an inpatient
rehabilitation company, in April 1997 (the "Coastal Acquisition"), (o)
Health Care Industries, Inc., a home health company, in June 1997 (the
"Health Care Industries Acquisition"), (p) Rehab Dynamics, Inc. and
Restorative Therapy, Ltd., related contract rehabilitation companies, in
June 1997 (the "Rehab Dynamics Acquisition"), (q) Arcadia Services, Inc., a
home health company, in August 1997 (the "Arcadia Acquisition"), (r)
Ambulatory Pharmaceutical Services, Inc. and APS American, Inc., related
home health companies, in August 1997 (the "APS Acquisition") and (s)
Barton Creek Healthcare, Inc., a home health company, in September 1997
(the "Barton Creek Acquisition"), (viii) the sale of $450 million aggregate
principal amount of the 9 1/2% Senior Notes in May 1997 and the use of
$247.2 million of the net proceeds therefrom 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 therefrom to repay amounts
outstanding under the Company's $700 million revolving credit facility (the
"Prior Credit Facility") and (ix) the sale of the Old Notes and the
application of the net proceeds therefrom as described under "Use of
Proceeds," as if each of the foregoing transactions had occurred on January
1, 1996. The pro forma financial statements do not (i) reflect the
$34,298,000 gain from the Pharmacy Sale recorded in 1996 or (ii) give pro
forma effect to (a) the New Credit Facility, (b) the sale by IHS of its
remaining 37.3% interest in ILC in July 1997 (the "ILC Sale"), (c) the
acquisition of the assets of three small ancillary service businesses
during the nine months ended September 30, 1997, (d) the acquisition of
five mobile diagnostic companies in the nine months ended September 30,
1997, (e) the sale of $150 million aggregate principal amount of the 10
1/4% Senior Notes in May 1996 and the use of the $145.4 million of net
proceeds therefrom to repay amounts outstanding under the Company's Prior
Credit Facility and (f) the Proposed Facility Acquisition. See "Recent
Developments" and "Unaudited Pro Forma Financial Information."
(2) Gives effect to (i) the CCA Acquisition, the Coram Lithotripsy Acquisition,
the RoTech Acquisition, the In-Home Acquisition, the Portable X-Ray
Acquisition, the Coastal Acquisition, the Health Care Industries
Acquisition, the Rehab Dynamics Acquisition, the Arcadia Acquisition, the
APS Acquisition and the Barton Creek Acquisition and (ii) the sale of the
Old Notes and the application of the net proceeds therefrom as described
under "Use of Proceeds," as if each of the foregoing transactions had
occurred on January 1, 1997. The pro forma financial statements do not (i)
reflect (a) the $7,578,000 gain from the Pharmacy Sale recorded in 1997 and
(b) the $4,635,000 gain from the ILC Sale recorded in 1997 or (ii) give pro
forma effect to (a) the Proposed Facility Acquisition, (b) the New Credit
Facility, (c) the sale by IHS of its remaining 37.3% interest in ILC in
July 1997, (d) the acquisition of the assets of three small ancillary
service businesses during the nine months ended September 30, 1997 and (e)
the acquisition of five mobile diagnostic companies in the nine months
ended September 30, 1997. See "Recent Developments" and "Unaudited Pro
Forma Financial Information."
(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.
(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, $3,060,000, $1,034,000, $1,850,000 and
$2,915,000 for the years ended December 31, 1992, 1993, 1994, 1995 and
1996, pro forma for the year ended December 31, 1996, for the nine months
ended September 30, 1996 and 1997 and pro forma for the nine months ended
September 30, 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, $1,459,000, $3,024,000, and $3,024,000 for the
years ended December 31, 1992, 1993, 1994, 1995 and 1996, pro forma for the
year ended December 31, 1996, for the nine months ended September 30, 1996
and 1997 and pro forma for the nine months ended September 30, 1997,
respectively. The Company's average outstanding balance under its bank
credit facility during 1996 was $248,781,000; as a result, interest, net
pro forma for the year ended December 31, 1996 does not reflect interest
income on the $428,640,000 of net proceeds from the sale of the Old Notes
and the 9 1/2% Senior Notes remaining after payment of the average amount
outstanding under the bank credit facility during 1996. During the nine
months ended September 30, 1997 the Company's average outstanding balance
under its bank credit facility was $295,550,000; as a result, interest, net
pro forma for the nine months ended September 30, 1997 does not reflect
interest income (other than interest income actually earned on the
$164,875,000 of net proceeds from the sale of the Old Notes remaining after
paying all amounts outstanding under the Prior Credit Facility, which
interest income is included in the Company's historical financial
statements) on the $381,871,000 of net proceeds from the sale of the Old
Notes and the 9 1/2% Senior Notes remaining after payment of the average
amount outstanding under the bank credit facility during the nine months
ended September 30, 1997.
(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, $2,678,000,
$2,700,000 and $2,700,000 for the years ended December 31, 1992, 1993,
1994, 1995 and 1996, pro forma for the year ended December 31, 1996, for
the nine months ended September 30, 1996 and 1997 and pro forma for the
nine months ended September 30, 1997, respectively.
13
<PAGE>
(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.
(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 ($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 of (i) a gain of $34,298,000 from the Pharmacy
Sale in the third quarter, (ii) a loss of $8,497,000 from its sale of
shares in the ILC Offering in the fourth quarter, (iii) a $7,825,000 loss
in the fourth quarter 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 in the fourth quarter. Because IHS'
investment in the Capstone Pharmacy Services, Inc. ("Capstone") common
stock received in the Pharmacy Sale had a very small tax basis, the taxable
gain on the sale significantly exceeded the gain for financial reporting
purposes, thereby resulting in a disproportionately higher income tax
provision related to the sale. In 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, (iii) bankruptcy costs incurred by
First American of $3,468,000 and (iv) a $22,062,000 non-recurring charge
incurred by CCA. In 1997, consists primarily of (i) a gain of $7,578,000
realized on the shares of Capstone common stock received in the Pharmacy
Sale, (ii) a write-off of $6,555,000 of accounting, legal and other costs
resulting from a proposed transaction to acquire Coram (the "Coram Merger
Transaction"), (iii) the payment to Coram of $21,000,000 in connection with
the termination of the proposed Coram Merger Transaction, (iv) a gain of
$4,635,000 from the ILC Sale and (v) a loss of $4,635,000 resulting from
the closure of certain redundant activities in connection with the RoTech
Acquisition. In 1997, pro forma consists primarily of (i) a write-off of
$6,555,000 of accounting, legal and other costs resulting from the proposed
Coram Merger Transaction, (ii) the payment to Coram of $21,000,000 in
connection with the termination of the proposed Coram Merger Transaction
and (iii) a loss of $4,635,000 resulting from the closure of certain
redundant activities in connection with the RoTech Acquisition. See "Recent
Developments" and "Unaudited Pro Forma Financial Information."
(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 and the nine months ended September
30, 1996 as an extraordinary loss of $1,431,000. During the nine months
ended September 30, 1997, IHS recorded a loss on extinguishment of debt of
$33,692,000, representing approximately (i) $23,554,000 of cash payments
for premium and consent fees relating to the early extinguishment of
$214,868,000 aggregate principal amount of IHS' senior subordinated notes
and (ii) $10,138,000 of deferred financing costs written-off in connection
with the early extinguishment of such debt and the Prior Credit Facility.
Such loss, reduced by the related income tax effect of $13,140,000, is
presented in the statement of operations for the nine months ended
September 30, 1997 as an extraordinary loss of $20,552,000. See "Recent
Developments -- Repurchase of 9 5/8% Senior Subordinated Notes and 10 3/4%
Senior Subordinated Notes," "-- New Credit Facility" and "Selected
Historical Consolidated Financial Data."
(12) EBITDA represents earnings before interest expense, income taxes,
depreciation and amortization, non-recurring charges and extraordinary
items. EBITDA is included herein because management believes that certain
investors find it to be a useful tool for measuring a company's ability to
service its debt; however, EBITDA does not represent cash flow from
operations, as defined by generally accepted accounting principles, and
should not be considered as a substitute for net earnings as an indicator
of the Company's operating performance or cash flow as a measure of
liquidity. Management also believes that the ratio of EBITDA to interest,
net is an accepted measure of debt service ability; however, such ratio
should not be considered a substitute for the ratio of earnings to fixed
charges as a measure of debt service ability. Pro forma EBITDA for the year
ended December 31, 1996 does not give effect to certain benefits the
Company expects will result from the closure of unprofitable and redundant
home healthcare agencies in
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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 such 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, primarily for MSUs, and equipment purchases.
(16) At the end of the period.
(17) As a percentage of net revenues.
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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 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 September 30, 1997, IHS' total long-term debt, including current
portion, accounted for 77.8% of its total capitalization. See "Capitalization."
IHS also has significant lease obligations with respect to the facilities
operated pursuant to long-term leases, which aggregated approximately $200.3
million at September 30, 1997. For the year ended December 31, 1996 and the nine
months ended September 30, 1997, the Company's rent expense was $77.8 million
($84.5 million on a pro forma basis after giving effect to the First American
Acquisition, the ILC Offering, the Pharmacy Sale, the CCA Acquisition, the Coram
Lithotripsy Acquisition, the RoTech Acquisition and certain other acquisitions
consummated in 1996 and 1997) and $75.3 million ($81.6 million on a pro forma
basis after giving effect to the CCA Acquisition, the Coram Lithotripsy
Acquisition, the RoTech Acquisition and certain other acquisitions consummated
in 1997), 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, of which $36.1 million has been recorded at
September 30, 1997. 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 9 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
September 30, 1997, including the Company's 5 3/4% Convertible Senior
Subordinated Debentures due 2001, the Company's 9 5/8% Senior Notes, the
Company's 6% Convertible Subordinated Debentures due 2003, the Company's 10 3/4%
Senior Notes, the Company's 10 1/4% Senior Notes, the Company's 9 1/2% Senior
Notes and all amounts outstanding under the New Credit Facility, are scheduled
to become due prior to the time any principal payments are required to be made
on the 9 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. 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."
In connection with the offering of the Old Notes, Standard & Poors ("S&P")
confirmed its B rating of IHS' other subordinated debt obligations, but with a
negative outlook, and assigned the same rating to the Old Notes. S&P stated that
the Company's speculative-grade ratings reflect the Company's aggressive
transition toward becoming a full-service alternate-site healthcare provider,
and its limited cash flow relative to its heavy debt burden. S&P noted that IHS
would be greatly challenged to control,
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integrate and further expand operations that were only a quarter of their
current size just three years ago, and also noted the continuing uncertainty
with regard to the adequacy of reimbursement from government sponsored programs
for the indigent and elderly. S&P also noted that there is the potential that a
large debt-financed acquisition could lead to a ratings downgrade. In November
1997, S&P placed the Company's senior credit and subordinated debt ratings on
CreditWatch with negative implications due to the Proposed Facility Acquisition.
In connection with the offering of the Old Notes, Moody's Investors Service
("Moody's") downgraded to B2 the Company's other senior subordinated debt
obligations, but noted that the outlook for the rating was stable, and assigned
the new rating to the Old Notes. Moody's stated that the rating action reflects
Moody's concern about the Company's continued rapid growth through acquisitions,
which has resulted in negative tangible equity of $114 million, making no
adjustment for the $259 million of convertible debt outstanding. Moody's also
stated that the availability provided by the New Credit Facility and the Old
Notes positioned the Company to complete sizable acquisition transactions using
solely debt. Moody's further noted that the rating reflects that there are
significant changes underway in the reimbursement of services rendered by IHS,
and that the exact impact of these changes is uncertain.
SUBORDINATION OF THE 9 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 (other than inactive
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 9 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 9 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
September 30, 1997, the aggregate amount of Senior Indebtedness and Indebtedness
of the Company's subsidiaries (excluding intercompany indebtedness) that
effectively ranked senior to the 9 1/4% Notes was approximately $839.9 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 $200.3 million at September 30, 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
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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, 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, RoTech, CCA and the Coram Lithotripsy Division and, if the Proposed
Facility Acquisition is consummated, the facilities and other businesses
acquired from HEALTHSOUTH, 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 and, if the Proposed Facility Acquisition is
consummated, the facilities and other businesses acquired from HEALTHSOUTH 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
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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, 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 were precluded from providing services under risk-sharing fee
arrangements, its managed care strategy would be adversely affected. See "--
Uncertainty of Government Regulation."
RISKS RELATED TO CAPITAL REQUIREMENTS
IHS' growth strategy requires substantial capital for the acquisition of
additional home healthcare and related service providers and geriatric care
facilities and the establishment of new, and expansion of existing, MSUs. The
effective integration, operation and expansion of the existing businesses will
also require substantial capital. 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 senior 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 AND THE PROPOSED FACILITY ACQUISITION
IHS has recently completed several major acquisitions, including the
acquisitions of First American, RoTech, CCA and the Coram Lithotripsy Division,
and is still in the process of integrating those acquired businesses. The IHS
Board of Directors and senior management of IHS face a significant challenge in
their efforts to integrate the acquired businesses, including First American,
RoTech, CCA and the Coram Lithotripsy Division and, if the Proposed Facility
Acquisition is consummated, the facilities and other businesses acquired from
HEALTHSOUTH. The dedication of management resources to such integration may
detract attention from the day-to-day business of IHS. The difficulties of
integra-
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tion may be increased by the necessity of coordinating geographically separated
organizations, integrating personnel with disparate business backgrounds and
combining different corporate cultures. There can be no assurance that there
will not be substantial costs associated with such activities or that there will
not be other material adverse effects of these integration efforts. Further,
there can be no assurance that management's efforts to integrate the operations
of IHS and newly acquired companies will be successful or that the anticipated
benefits of the recent acquisitions will be fully realized.
IHS has recently expanded significantly its home healthcare operations.
During the year ended December 31, 1996 and the nine months ended September 30,
1996 and 1997, home healthcare accounted for approximately 16.3%, 8.1% and
32.1%, respectively, of IHS' total revenues. On a pro forma basis, after giving
effect to the acquisitions of First American (which derives substantially all
its revenues from Medicare), RoTech, CCA and the Coram Lithotripsy Division,
approximately 70.7%, 76.5% and 65.0% of IHS' home healthcare revenues were
derived from Medicare in the year ended December 31, 1996 and the nine months
ended September 30, 1996 and 1997, respectively. On a pro forma basis, after
giving effect to the acquisitions of First American, RoTech, CCA and the Coram
Lithotripsy Division, home nursing services accounted for approximately 64.2%,
67.0% and 55.1%, 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, IHS believes that a prospective payment system would most likely
provide a healthcare provider a predetermined rate for a given service, with
providers that have costs below the predetermined rate being entitled to keep
some or all of this difference. There can be no assurance that Medicare will
implement a prospective payment system for home nursing services in the next
several years or at all. The implementation of a prospective payment system will
require IHS to make contingent payments related to the First American
Acquisition of $155 million over a period of five years. In addition, the
Balanced Budget Act of 1997, enacted in August 1997, reduces the Medicare
national payment limits for oxygen and oxygen equipment used in home respiratory
therapy by 25% in 1998 and 30% (from 1997 levels) in 1999 and each subsequent
year. Approximately 22% of RoTech's total revenues for the year ended July 31,
1997 were derived from the provision of oxygen services to Medicare patients.
The inability of IHS to realize operating efficiencies and provide home
healthcare services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home healthcare operations and its
post-acute care network. See "-- Risk of Adverse Effect of Healthcare Reform"
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 busi-
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ness, 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, has resulted in reduced rates of
reimbursement for services provided by IHS, which has adversely affected, and
may continue to adversely affect, IHS' margins, particularly in its skilled
nursing and subacute facilities. Aspects of certain healthcare reform proposals,
such as cutbacks in the Medicare and Medicaid programs, reductions in Medicare
reimbursement rates and/or limitations on reimbursement rate increases,
containment of healthcare costs on an interim basis by means that could include
a short-term freeze on prices charged by healthcare providers, and permitting
greater state flexibility in the administration of Medicaid, could adversely
affect the Company. See "-- Risk of Adverse Effect of Healthcare Reform." During
the years ended December 31, 1994, 1995 and 1996 and the nine months ended
September 30, 1996 and 1997, the Company derived approximately 56%, 55%, 60%,
57% and 66%, respectively, of its patient revenues from Medicare and Medicaid.
On a pro forma basis after giving effect to the acquisitions of First American
(which derives substantially all its revenues from Medicare), RoTech, CCA and
the Coram Lithotripsy Division and the ILC Offering, approximately 66.7%, 67.6%
and 64.2% of the Company's patient revenues have been derived from Medicare and
Medicaid during the year ended December 31, 1996 and the nine months ended
September 30, 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. 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
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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. The inability of IHS to
provide home healthcare and/or skilled nursing services at a cost below the
established Medicare fee schedule could have a material adverse effect on IHS'
home healthcare operations, post-acute care network and business generally. The
Balanced Budget Act of 1997, enacted in August 1997, provides, among other
things, for a prospective payment system for home nursing to be implemented for
cost reporting periods beginning on or after October 1, 1999, a reduction in
current cost reimbursement for home healthcare pending implementation of a
prospective payment system, reductions (effective January 1, 1998) in Medicare
reimbursement for oxygen and oxygen equipment for home respiratory therapy and a
shift of the bulk of home health coverage from Part A to Part B of Medicare. The
failure to implement a prospective payment system for home nursing services in
the next several years could adversely affect IHS' post-acute care network
strategy. IHS expects that there will continue to be numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for and
availability of healthcare services, including proposals that will further limit
reimbursement under Medicare and Medicaid. It is not clear at this time what
proposals, if any, will be adopted or, if adopted, what effect such proposals
will have on IHS' business. See "-- Risks Related to Recent Acquisitions and the
Proposed Facility Acquisition" 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. 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 9
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,
the quality of services provided and the manner in which such services are
provided and reimbursement for services rendered. Changes in applicable laws and
regulations or new interpretations of existing laws and regulations could have a
material adverse effect on licensure, eligibility for participation, permissible
activities, operating costs and 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 its business, there can be no assurance that it will be able to do so
in the future.
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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
acquisition of poorly performing facilities could adversely affect the Company's
business to the extent remedies are imposed at such facilities.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium is expected to last approximately six months, and
implemented rules requiring home healthcare providers to reapply for Medicare
certification every three years. In addition, HCFA will double the number of
detailed audits of home healthcare providers it completes each year and increase
by 25% the number of home healthcare claims it reviews each year. IHS cannot
predict what effect, if any, these new rules will have on IHS' business and the
expansion of its home healthcare operations.
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 Inspector General of the
Department of Health and Human Services, the Department of Justice and other
federal agencies interpret these fraud and abuse provisions liberally and
enforce them aggressively. Members of Congress have proposed legislation that
would significantly expand the federal government's involvement in curtailing
fraud and abuse and increase the monetary penalties for violation of these
provisions. In addition, some states restrict certain business relationships
between physicians and other providers of healthcare services. Many states
prohibit business corporations from providing, or holding themselves out as a
provider of, medical care. Possible sanctions for violation of any of these
restrictions or prohibitions include loss of licensure or eligibility to
participate in reimbursement programs (including Medicare and Medicaid), asset
forfeitures and civil and criminal penalties. These laws vary from state to
state, are often vague and have seldom been interpreted by the courts or
regulatory agencies. The Company seeks to structure its business arrangements in
compliance with these laws and, from time to time, the Company has sought
guidance as to the interpretation of such laws; however, there can be no
assurance that such laws ultimately will be interpreted in a manner consistent
with the practices of the Company. See "Business -- Government Regulation."
Many states have adopted certificate of need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
or capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the extent certificates of need or other similar
approvals are required for expansion of 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
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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 its 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 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.
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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.
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RECENT DEVELOPMENTS
PROPOSED FACILITY ACQUISITION
On November 3, 1997, IHS and HEALTHSOUTH entered into an agreement pursuant
to which IHS agreed to acquire from HEALTHSOUTH 139 owned, leased or managed
long-term care facilities, 12 specialty hospitals, a contract therapy business
having over 1,000 contracts and an institutional pharmacy business serving
approximately 38,000 beds. The businesses being acquired, which had annual
revenues of approximately $925 million for the 12 months ended August 31, 1997,
were acquired by HEALTHSOUTH in its recent acquisition of Horizon/CMS Healthcare
Corporation.
Under the terms of the agreement, IHS will pay $1.15 billion in cash and
assume approximately $100 million in debt. IHS will fund the purchase price with
available cash from term loan borrowings under the New Credit Facility and the
sale of the Old Notes and borrowings under the revolving credit portion of the
New Credit Facility. On a pro forma basis after giving effect to the acquisition
of these businesses from HEALTHSOUTH, the RoTech Acquisition and the Coram
Lithotripsy Acquisition, IHS' total debt, including current portion, accounted
for approximately 74% of its total pro forma capitalization as of September 30,
1997. Consummation of the transaction, which is expected to close by December
31, 1997, is subject to, among other things, receipt of required regulatory
approvals, consent of IHS' senior lenders and other customary conditions. IHS
has deposited with HEALTHSOUTH $50 million, which amount will be credited
against the purchase price at the closing or retained by HEALTHSOUTH under
certain circumstances if the transaction is not consummated.
There can be no assurance that this transaction will close on these terms,
on different terms or at all.
NEW CREDIT FACILITY
On September 15, 1997, the Company entered into a $1.75 billion revolving
credit and term loan facility with Citibank, N.A., as Administrative Agent, and
certain other lenders (the "New Credit Facility") to replace its existing $700
million revolving credit facility. The New Credit Facility consists of a $750
million term loan facility (the "Term Facility") and a $1 billion revolving
credit facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, matures on September 30, 2004
and will be amortized beginning December 31, 1998 as follows: 1998 -- $7.5
million; each of 1999, 2000, 2001 and 2002 -- $7.5 million (payable in equal
quarterly installments); 2003 -- $337.5 million (payable in equal quarterly
installments); and 2004 -- $375 million (payable in equal quarterly
installments). Any unpaid balance will be due on the maturity date. The Term
Facility bears interest at a rate equal to, at the option of IHS, either (i) in
the case of Eurodollar loans, the sum of (x) one and three-quarters percent or
two percent (depending on the ratio of the Company's Debt (as defined in the New
Credit Facility) to earnings before interest, taxes, depreciation, amortization
and rent, pro forma for any acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio). The Term
Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30, 2001
and $500 million on September 30, 2002, with a final maturity on September 15,
2004; however, the $100 million letter of credit subfacility and $10 million
swing line subfacility will remain at $100 million and $10 million,
respectively, until final maturity. The Revolving Facility bears interest at a
rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans,
the sum of (x) between three-quarters of one percent and one and three-quarters
percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the
London interbank market for loans in an amount substantially equal to the amount
of borrowing and for the period of borrowing selected by IHS or (ii) the sum of
(a) the higher of (1) Citibank, N.A.'s
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base rate or (2) one percent plus the latest overnight federal funds rate plus
(b) a margin of between zero percent and one-half percent (depending on the
Debt/EBITDAR Ratio). Amounts repaid under the Revolving Facility may be
reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins, IHS' Chairman and Chief Executive Officer, or a group
managed by Dr. Elkins, owns more than 40% of IHS' stock. The New Credit Facility
is guaranteed by all of IHS' subsidiaries (other than inactive subsidiaries) and
secured by a pledge of all of the stock of substantially all of IHS'
subsidiaries.
The New Credit Facility replaced the Company's $700 million revolving
credit facility (the "Prior Credit Facility"). As a result, the Company recorded
an extraordinary loss on extinguishment of debt of approximately $2.4 million
(net of related tax benefit of approximately $1.5 million) in the third quarter
of 1997 resulting from the write-off of deferred financing costs of $3.9 million
related to the Prior Credit Facility.
RECENT ACQUISITIONS
RoTech Acquisition. On October 21, 1997, IHS acquired RoTech through merger
of a wholly-owned subsidiary of IHS into RoTech (the "RoTech Merger"), with
RoTech becoming a wholly-owned subsidiary of IHS. RoTech provides home
healthcare products and services, with an emphasis on home respiratory, home
medical equipment and infusion therapy, primarily to patients in non-urban
areas. RoTech currently operates 613 home health locations in 35 states and
approximately 26 primary care physicians practices. According to RoTech's
filings with the Commission, RoTech had revenues of $422.7 million, EBITDA of
$108.2 million and net income of $30.8 million for the fiscal year ended July
31, 1997.
Under the terms of the RoTech Merger, holders of RoTech common stock
("RoTech Common Stock") received for each share of RoTech Common Stock 0.5806 of
a share of IHS Common Stock (the "Exchange Ratio"), having a market value of
$19.16 based on the $33.00 closing price of the IHS Common Stock on October 21,
1997, the effective date of the RoTech Merger. Options to purchase RoTech Common
Stock ("RoTech Options") were converted at the closing into options to purchase
IHS Common Stock based on the Exchange Ratio. IHS issued approximately
15,598,400 shares of IHS Common Stock in the RoTech Merger, and reserved for
issuance approximately 1,841,700 shares of IHS Common Stock issuable upon
exercise of RoTech Options. In addition, RoTech's outstanding $110 million of
convertible subordinated debentures (the "RoTech Debentures") became convertible
into approximately 2,433,000 shares of IHS Common Stock at a conversion price of
$45.21 per share of IHS Common Stock. At October 20, 1997, IHS had outstanding
26,852,396 shares of IHS Common Stock. At September 30, 1997, IHS had
outstanding options and warrants to purchase approximately 9,000,000 shares of
IHS Common Stock, and had reserved for issuance 7,989,275 shares upon conversion
of $258,750,000 principal amount of outstanding convertible debentures. The
RoTech Merger consideration aggregated approximately $514.8 million,
substantially all of which will be recorded as goodwill. The transaction will be
treated as a purchase for accounting and financial reporting purposes.
IHS repaid the $199.7 million of RoTech bank debt assumed in the
transaction with the proceeds of the term loans under its New Credit Facility.
Under the terms of the indenture under which the RoTech Debentures were issued,
RoTech was obligated to offer to repurchase the RoTech Debentures at a purchase
price equal to 100% of the aggregate principal amount thereof immediately
following the RoTech Merger. Holders of $107,836,000 principal amount of the
RoTech Debentures accepted the repurchase offer; $2,164,000 principal amount of
RoTech Debentures, convertible into approximately 47,865 shares of IHS Common
Stock, remains outstanding. IHS used the proceeds of the term loans under its
New Credit Facility and the proceeds from the sale of the Old Notes to make a
capital contribution to RoTech in the amount necessary to enable RoTech to
finance the repurchase of the RoTech Debentures.
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Coram Lithotripsy Acquisition. IHS acquired, effective September 30, 1997,
substantially all of the assets of Coram's Lithotripsy Division, which operates
20 mobile lithotripsy units and 13 fixed-site machines in 180 locations in 18
states. The Coram Lithotripsy Division also provides maintenance services to its
own and third-party equipment. Lithotripsy is a non-invasive technique that
utilizes shock waves to disintegrate kidney stones.
IHS paid approximately $131.0 million in cash for the Coram Lithotripsy
Division, including the payment of $1.0 million of intercompany debt to Coram.
The Coram Lithotripsy Division had revenues of $49.0 million and EBITDA of $28.8
million (before minority interest) for the year ended December 31, 1996 and
revenues of $23.9 million and EBITDA of $14.3 million (before minority interest)
for the six months ended June 30, 1997.
IHS has assumed Coram's agreements with its lithotripsy partners, which
contemplate that IHS will acquire the remaining interest in each partnership at
a defined price in the event that legislation is passed or regulations are
adopted or interpreted that would prevent the physician partners from owning an
interest in the partnership and using the partnership's lithotripsy equipment
for the treatment of his or her patients. Coram has represented to IHS that its
partnership arrangements with physicians in its lithotripsy business are in
compliance with current law.
Within the last three years, HCFA released a proposed rule defining the
rate at which ambulatory surgery centers and certain hospitals would be
reimbursed for the technical component of a lithotripsy procedure. This proposed
rule has not been finalized. IHS cannot predict what the final rate for such
reimbursement will be or what effect, if any, the adoption of this proposed rule
would have on lithotripsy revenue and whether this decreased reimbursement rate
will be applied to lithotripsy procedures performed at hospitals, where a
majority of IHS' lithotripsy machines are currently utilized.
CCA Acquisition. On September 25, 1997, the Company acquired, through a
cash tender offer and subsequent merger, CCA for a purchase price of
approximately $34.3 million in cash. In addition, in connection with the CCA
Acquisition IHS repaid approximately $58.5 million of indebtedness assumed in
the CCA Acquisition (including restructuring fees of $4.9 million) with the
proceeds of the term loans under its New Credit Facility and assumed
approximately $27.0 million of indebtedness. CCA develops and operates skilled
nursing facilities in medically underserved rural communities. CCA currently
operates 54 licensed long-term care facilities with 4,450 licensed beds (of
which 19 facilities are being held for sale), one rural healthcare clinic, two
outpatient rehabilitation centers (one of which is being held for sale), one
child day care center and 124 assisted living units within seven of the
facilities which CCA operates. CCA currently operates in Alabama, Colorado,
Florida, Georgia, Iowa, Kansas, Louisiana, Maine, Missouri, Nebraska, Texas and
Wyoming. According to CCA's filings with the Commission, CCA had revenues of
$127.5 million, EBITDA of $2.1 million and a net loss of $18.9 million for the
year ended December 31, 1996 and revenues of $65.5 million, EBITDA of $4.0
million and a net loss of $2.4 million for the six months ended June 30, 1997.
Dr. Robert N. Elkins, Chairman of the Board and Chief Executive Officer of IHS,
beneficially owned approximately 21.0% of CCA's outstanding common stock
(excluding warrants owned by IHS to purchase approximately 13.5% of CCA's common
stock).
OTHER 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."
From January 1 through October 31, 1997, IHS has, in addition to the
acquisitions described above, acquired nine home healthcare companies, five
mobile diagnostic companies, two rehabilitation companies and a home infusion
company. The total cost for these acquisitions was approximately $115.1 million.
In July 1997, IHS sold its remaining 37% interest in its assisted living
services subsidiary pursuant to a cash tender offer. IHS recognized a gain of
approximately $4.6 million during the third quarter of 1997 as a result of this
transaction. IHS has reached agreements-in-principle to purchase three mobile
diagnostic companies for
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approximately $8.2 million, eight home health companies for approximately $52.4
million, a rehabilitation company for approximately $11.1 million and a
lithotripsy company for approximately $11.2 million. IHS has also agreed in
principle to assume leases of three skilled nursing facility companies for $73.1
million. There can be no assurance that any of these pending acquisitions will
be consummated on the proposed terms, on different terms or at all. See
"Unaudited Pro Forma Financial Information."
In developing its post-acute healthcare system, IHS continuously evaluates
whether owning and operating businesses which provide certain ancillary
services, or contracting with third parties for such services, is more
cost-effective. As a result, 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 its assisted living services division, and
may divest additional divisions or assets in the future. See "Unaudited Pro
Forma Financial Information."
SALE OF 9 1/2% SENIOR SUBORDINATED NOTES DUE 2007
On May 30, 1997, IHS sold privately an aggregate of $450 million principal
amount of its 9 1/2% Senior Subordinated Notes due 2007 to Smith Barney Inc.,
Donaldson, Lufkin & Jenrette Securities Corporation, Morgan Stanley & Co.
Incorporated and Salomon Brothers Inc (the "9 1/2% Initial Purchasers"). The 9
1/2% Senior Subordinated Notes were subsequently resold by the 9 1/2% Initial
Purchasers pursuant to Rule 144A under the Securities Act. IHS used
approximately $247.2 million of the net proceeds to repurchase substantially all
its outstanding 9 5/8% Senior Subordinated Notes and 10 3/4% Senior Subordinated
Notes and the remaining $191.0 million of net proceeds to pay down borrowings
under its revolving credit facility. See "Description of Certain Indebtedness --
9 1/2% Senior Subordinated Notes due 2007."
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 in respect of each $1,000 principal amount tendered,
consisting of $1,089.00 plus accrued and unpaid interest as tender offer
consideration and $5.00 as a consent payment. The total consideration paid
pursuant to the tender offer and consent solicitation to holders of the 10 3/4%
Senior Notes who tendered their notes (and thereby delivered consents to the
proposed amendments to the indenture pursuant to which the 10 3/4% Senior Notes
were issued) prior to 12:00 midnight, New York City time, on the Consent Date
was $1,119.50 plus accrued and unpaid interest to but not including the payment
date in respect of each $1,000 principal amount tendered, consisting of
$1,114.50 plus accrued and unpaid interest as tender offer consideration and
$5.00 as a consent payment. Of the $115,000,000 aggregate principal amount of
the 9 5/8% Senior Notes outstanding, an aggregate of $114,975,000 principal
amount of such notes was tendered. Of the $100,000,000 aggregate principal
amount of the 10 3/4% Senior Notes outstanding, an aggregate of $99,893,000
principal amount of such notes was tendered. The Company used approximately
$247.2 million of the net 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 and accrued interest.
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THE EXCHANGE OFFER
PURPOSE AND EFFECT OF THE EXCHANGE OFFER
The Old Notes were sold by the Company on September 11, 1997, 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. 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
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the distribution of such New Notes and (iv) neither the Holder nor any such
other person is an "affiliate" of the Company within the meaning of Rule 405
under the Securities Act. If the tendering Holder is a broker-dealer that will
receive New Notes for its own account in exchange for Old Notes that were
acquired as a result of market-making activities or other trading activities, it
will be required to acknowledge that it will deliver a prospectus in connection
with any resale of such New Notes.
Following the consummation of the Exchange Offer, Holders of the Old Notes
who did not tender their Old Notes will not have any further registration rights
under the Registration Rights Agreement, and such Old Notes will continue to be
subject to certain restrictions on transfer. Accordingly, the liquidity of the
market for such Old Notes could be adversely affected. See "Risk Factors --
Exchange Offer Procedures" and "-- Consequences of the Exchange Offer on
Non-Tendering Holders of the Old Notes."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this Prospectus
and in the Letter of Transmittal, the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue $1,000 principal amount of New Notes
in exchange for each $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, $500,000,000 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."
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EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean 5:00 p.m., New York City time,
on , 1998, unless the Company, in its sole discretion, extends
the Exchange Offer, in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended.
To extend the Exchange Offer, the Company will notify the Exchange Agent of
any extension by oral or written notice and will mail to the registered Holders
an announcement thereof, each prior to 9:00 a.m., New York City time, on the
next business day after the previously scheduled Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under "-- Conditions"
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer in any manner. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by written
notice thereof to the registered Holders. If the Exchange Offer is amended in a
manner determined by the Company to constitute a material change, the Company
will promptly disclose such amendment by means of a prospectus supplement that
will be distributed to the registered Holders, and, depending upon the
significance of the amendment and the manner of disclosure to the registered
Holders, the Company will extend the Exchange Offer for a period of five to ten
business days if the Exchange Offer would otherwise expire during such five to
ten business day period.
Without limiting the manner in which the Company may choose to make public
announcement of any delay, extension, amendment or termination of the Exchange
Offer, the Company shall have no obligation to publish, advertise or otherwise
communicate any such public announcement, other than by making a timely release
to the Dow Jones News Service.
INTEREST ON THE NEW NOTES
The New Notes will bear interest from their date of issuance. Holders of
Old Notes that are accepted for exchange will receive, in cash, accrued interest
thereon from January 15, 1998, 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 July
15, 1998. 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 January 15
and July 15, commencing July 15, 1998.
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".
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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 (AS DEFINED BELOW) 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 RECOMMENDED THAT HOLDERS USE AN
OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE.
NO LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY.
HOLDERS MAY REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST
COMPANIES OR NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered Holder promptly and instruct such
registered Holder to tender on such beneficial owner's behalf. See "Instructions
to Registered Holder and/or Book-Entry Transfer Facility Participant from Owner"
included with the Letter of Transmittal.
Signatures on the Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed by an Eligible Institution (as defined below)
unless the Old Notes tendered pursuant thereto are tendered (i) by a registered
Holder who has not completed the box entitled "Special Registration
Instructions" or "Special Delivery Instructions" on the Letter of Transmittal or
(ii) for the account of an Eligible Institution. In the event that signatures on
a Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantee must be by a member firm of a
registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office or
correspondent in the United States or an "eligible guarantor institution" within
the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered Holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered Holder as such registered Holder's name appears on such Old Notes
with the signature thereon guaranteed by an Eligible Institution.
If the Letter of Transmittal or any Old Notes or bond powers are signed by
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and, unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
The Company understands that the Exchange Agent will make a request
promptly after the date of this Prospectus to establish accounts with respect to
the Old Notes at the book-entry transfer facility, The Depository Trust Company
(the "Book-Entry Transfer Facility"), for the purpose of facilitating the
Exchange Offer, and, subject to the establishment thereof, any financial
institution that is a participant in the Book-Entry Transfer Facility's system
may make book-entry delivery of the Old Notes by causing such Book-Entry
Transfer Facility to transfer such Old Notes into the Exchange Agent's account
with respect to the Old Notes in accordance with the Book-Entry Transfer
Facility's procedures for such transfer. Although delivery of the Old Notes may
be effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, an appropriate Letter of Transmittal properly
completed and duly executed with any required signature guarantee or an Agent's
Message in connection with a book-entry transfer and all other required
documents must in each case be transmit-
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ted 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 acknowledgment 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 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 a 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 a
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.
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<PAGE>
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.
WITHDRAWAL 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 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
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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.
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
First Union National Bank 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:
First Union National Bank
First Union Customer Information Center
Corporate Trust Operations NC1153
1525 West W.T. Harris Boulevard-3C3
Charlotte, North Carolina 28288
Attention: Mike Klotz
By Overnight Mail or Hand:
First Union National Bank
First Union Customer Information Center
Corporate Trust Operations NC1153
1525 West W.T. Harris Boulevard-3C3
Charlotte, North Carolina 28262-1153
Attention: Mike Klotz
By Facsimile:
First Union National Bank
(704) 590-7628
Confirm: (704) 590-7408
Attention: Mike Klotz
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.
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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.
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 $13.4
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 holder 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) to participate in the distribution of New Notes 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 acknowl-
37
<PAGE>
edge 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 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 First Union National Bank, 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 9 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.
38
<PAGE>
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.
39
<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.
The Company used approximately $321.5 million of the net proceeds from the
sale of the Old Notes to pay all amounts outstanding under the Prior Credit
Facility. The Company is using the remaining approximately $164.9 million of net
proceeds for general corporate purposes, including working capital, and for
acquisitions. Loans under the Prior Credit Facility bore 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 Prior
Credit Facility consisted of a $700 million revolving loan which reduced to $560
million on June 30, 2000 and $315 million on June 30, 2001, with a final
maturity on June 30, 2002. The Company has replaced the Prior Credit Facility
with a $1.75 billion revolving credit and term loan facility. See "Recent
Developments -- New Credit Facility" and "Description of Certain Indebtedness."
40
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1997. 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>
SEPTEMBER 30, 1997
-------------------
(IN THOUSANDS)
<S> <C>
Cash and temporary investments ......................................................... $ 880,880
==========
Short-term debt:
Current portion of long-term debt ..................................................... $ 6,782
==========
Long-term debt, less current portion:
Credit facility ....................................................................... $ 750,000
Other debt ............................................................................ 83,101
9 5/8% Senior Subordinated Notes due 2002, Series A ................................... 25
10 3/4% Senior Subordinated Notes due 2004 ............................................ 107
10 1/4% Senior Subordinated Notes due 2006 ............................................ 150,000
9 1/2% Senior Subordinated Notes due 2007 ............................................. 450,000
9 1/4% Senior Subordinated Notes due 2008 ............................................. 500,000
5 3/4% Convertible Senior Subordinated Debentures due 2001 ............................ 143,750
6% Convertible Subordinated Debentures due 2003 ....................................... 115,000
----------
Total long-term debt ................................................................ 2,191,983
----------
Stockholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares authorized ......................... --
Common Stock, $.001 par value, 150,000,000 shares authorized; 27,081,463 shares issued 27
Additional paid-in capital ............................................................ 531,500
Retained earnings ..................................................................... 108,221
Treasury stock ........................................................................ (12,324)
----------
Total stockholders' equity .......................................................... 627,424
----------
Total capitalization ............................................................... $2,819,407
==========
</TABLE>
41
<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" 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 selected consolidated financial data presented
below for the nine months ended September 30, 1996 and 1997 and as of September
30, 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 nine months
ended September 30, 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 1995 1996
------------ ------------- ------------- ------------- -------------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net revenues:
Basic medical services .................... $100,799 $ 113,508 $ 269,817 $ 368,569 $ 389,773
Specialty medical services ................ 88,065 162,017 404,401 770,554 999,209
Management services and other ............. 13,232 20,779 37,884 39,765 45,713
-------- --------- --------- ---------- ----------
Total .................................. 202,096 296,304 712,102 1,178,888 1,434,695
Cost and expenses:
Operating expenses ........................ 145,623 212,936 528,131 888,551 1,093,948
Corporate administrative and
general ................................. 11,927 16,832 37,041 56,016 60,976
Depreciation and amortization(3) ......... 4,334 8,126 26,367 39,961 41,681
Rent ...................................... 19,509 23,156 42,158 66,125 77,785
Interest, net(4)(5) ....................... 1,493 5,705 20,602 38,977 64,110
Loss on impairment of long-lived
assets(6) ............................... -- -- -- 83,321 --
Other non-recurring charges
(income)(7) ............................. -- -- -- 49,639 (14,457)
-------- --------- --------- ---------- ----------
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items .................................. 19,210 29,549 57,803 (43,702) 110,652
Equity in earnings (loss) of affiliates .... (36) 1,241 1,176 1,443 828
-------- --------- --------- ---------- ----------
Earnings (loss) before income taxes
and extraordinary items ................ 19,174 30,790 58,979 (42,259) 111,480
Income tax provision (benefit) ............. 7,286 12,008 22,117 (16,270) 63,715
-------- --------- --------- ---------- ----------
Earnings (loss) before extraordi-
nary items ............................. 11,888 18,782 36,862 (25,989) 47,765
Extraordinary items(8) ..................... 2,524 2,275 4,274 1,013 1,431
-------- --------- --------- ---------- ----------
Net earnings (loss) ..................... $ 9,364 $ 16,507 $ 32,588 $ (27,002) $ 46,334
======== ========= ========= ========== ==========
OTHER FINANCIAL DATA:
EBITDA(9) .................................. $ 25,001 $ 44,621 $ 105,948 $ 169,639 $ 202,814
Ratio of EBITDA to interest, net(9) ........ 16.7x 7.8x 5.1x 4.4x 3.2x
Ratio of earnings to fixed
charges(10) ............................... 2.8x 2.6x 2.4x 0.3x 2.1x
Capital expenditures:
Acquisitions(11) .......................... $ 13,898 $ 209,214 $ 152,791 $ 82,686 $ 242,819
Other(12) ................................. 27,124 59,959 91,354 145,065 145,902
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
--------------------------
1996 1997
------------ -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net revenues:
Basic medical services .................... $ 296,468 $ 268,268
Specialty medical services ................ 658,297 1,093,571
Management services and other ............. 33,953 29,998
--------- ----------
Total .................................. 988,718 1,391,837
Cost and expenses:
Operating expenses ........................ 745,346 1,039,618
Corporate administrative and
general ................................. 44,890 56,068
Depreciation and amortization(3) .......... 25,909 47,818
Rent ...................................... 53,980 75,322
Interest, net(4)(5) ....................... 46,033 71,991
Loss on impairment of long-lived
assets(6) ............................... -- --
Other non-recurring charges
(income)(7) ............................. (34,298) 20,047
--------- ----------
Earnings (loss) before equity in
earnings (loss) of affiliates, in-
come taxes and extraordinary
items .................................. 106,858 80,973
Equity in earnings (loss) of affiliates .... 1,083 (713)
--------- ----------
Earnings (loss) before income taxes
and extraordinary items ................ 107,941 80,260
Income tax provision (benefit) ............. 62,352 31,301
--------- ----------
Earnings (loss) before extraordi-
nary items ............................. 45,589 48,959
Extraordinary items(8) ..................... 1,431 20,552
--------- ----------
Net earnings (loss) .................... $ 44,158 $ 28,407
========= ==========
OTHER FINANCIAL DATA:
EBITDA(9) .................................. $ 145,585 $ 220,116
Ratio of EBITDA to interest, net(9) ........ 3.2x 3.1x
Ratio of earnings to fixed
charges(10) ............................... 2.5x 1.8x
Capital expenditures:
Acquisitions(11) .......................... $ 46,106 $ 166,822
Other(12) ................................. 104,647 86,656
</TABLE>
42
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ---------------
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 $ 880,880
Working capital ..................... 144,074 69,495 76,383 136,315 57,549 980,918
Total assets ........................ 313,671 776,324 1,255,989 1,433,730 1,993,107 3,228,080
Long-term debt, including current
portion ............................ 142,620 402,536 551,452 770,661 1,054,747 2,198,765
Stockholders' equity ................ 146,013 216,506 453,811 431,528 534,865 627,424
</TABLE>
- ----------
(1) The Company has grown substantially through acquisitions and the opening of
MSUs, which acquisitions and MSU openings materially affect the
comparability of the financial data reflected herein. In addition, IHS sold
its pharmacy division in July 1996, a majority interest in its assisted
living services subsidiary ("ILC") in October 1996 (the "ILC Offering") and
the remaining interest in ILC in July 1997 (the "ILC Sale"). See "Unaudited
Pro Forma Financial Information."
(2) In 1995, the Company merged with IntegraCare, Inc. ("IntegraCare") in a
transaction accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements for all periods prior to the
effective date of the IntegraCare merger have been restated to include the
results of IntegraCare.
(3) Includes amortization of deferred financing costs of $178,000, $306,000,
$621,000, $645,000, $1,457,000, $1,034,000 and $1,850,000 for the years
ended December 31, 1992, 1993, 1994, 1995 and 1996 and the nine months
ended September 30, 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, $1,459,000 and $3,024,000 for the years ended December 31,
1992, 1993, 1994, 1995 and 1996 and the nine months ended September 30,
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, $2,678,000 and $2,700,000
for the years ended December 31, 1992, 1993, 1994, 1995 and 1996 and the
nine months ended September 30, 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.
(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 in the third quarter, (ii) a loss of $8,497,000 from its sale
of shares in the ILC Offering in the fourth quarter, (iii) a $7,825,000
loss in the fourth quarter 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 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 1997, consists primarily of (i) a gain of $7,578,000 realized
on the shares of Capstone common stock received in the Pharmacy Sale, (ii)
the write-off of $6,555,000 of accounting, legal and other costs resulting
from the proposed Coram Merger Transaction, (iii) the payment to Coram of
$21,000,000 in connection with the termination of the proposed Coram Merger
Transaction, (iv) a gain of $4,635,000 from the ILC Sale and (v) a loss of
$4,635,000 resulting from the closure of certain redundant activities in
connection with the RoTech Acquisition. 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
<PAGE>
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 and the nine months
ended September 30, 1996 as an extraordinary loss of $1,431,000. During the
nine months ended September 30, 1997, IHS recorded a loss on extinguishment
of debt of $33,692,000, representing approximately (i) $23,554,000 of cash
payments for premium and consent fees relating to the early extinguishment
of $214,868,000 aggregate principal amount of IHS' senior subordinated
notes and (ii) $10,138,000 of deferred financing costs written off in
connection with the early extinguishment of such debt and the Prior Credit
Facility. Such loss, reduced by the related income tax effect of
$13,140,000, is presented in the statement of operations for the nine
months ended September 30, 1997 as an extraordinary loss of $20,552,000.
See "Recent Developments -- New Credit Facility" and "-- Repurchase of 9
5/8% Senior Subordinated Notes and 10 3/4% Senior Subordinated Notes."
(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 such 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, primarily for MSUs, and equipment purchases.
43
<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)
------------------------------------------------------------------------------
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------------------------- ---------------------
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% 30.0% 19.3%
Specialty medical services ...................... 43.6 54.7 56.8 65.4 69.6 66.6 78.6
Management services and other ................... 6.5 7.0 5.3 3.3 3.2 3.4 2.1
----- ----- ----- ----- ----- ----- -----
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 75.4 74.7
Corporate administrative and general ............. 5.9 5.7 5.2 4.8 4.3 4.5 4.0
----- ----- ----- ----- ----- ----- -----
Operating income before certain fixed ex-
penses .......................................... 22.0 22.4 20.6 19.8 19.5 20.1 21.3
----- ----- ----- ----- ----- ----- -----
Depreciation and amortization .................... 2.1 2.7 3.7 3.4 2.9 2.6 3.4
Rent ............................................. 9.7 7.8 5.9 5.6 5.4 5.5 5.4
Interest, net .................................... 0.7 1.9 2.9 3.3 4.5 4.7 5.2
Loss on impairment of long-lived assets(2) ....... -- -- -- 7.0 -- -- --
Other non-recurring charges (income)(3) .......... -- -- -- 4.2 ( 1.0) ( 3.5) 1.5
----- ----- ----- ----- ----- ----- -----
Earnings (loss) before equity in earnings (loss)
of affiliates, income taxes and extraordinary
items ........................................... 9.5 10.0 8.1 (3.7) 7.7 10.8 5.8
Equity in earnings (loss) of affiliates .......... ( 0.0) 0.4 0.2 0.1 0.1 0.1 0.1
----- ----- ----- ----- ----- ----- -----
Earnings (loss) before income taxes and ex-
traordinary items ............................... 9.5 10.4 8.3 (3.6) 7.8 10.9 5.7
Income tax provision (benefit) ................... 3.6 4.1 3.1 (1.4) 4.5 6.3 2.2
----- ----- ----- ----- ----- ----- -----
Earnings (loss) before extraordinary items ....... 5.9 6.3 5.2 (2.2) 3.3 4.6 3.5
Extraordinary items .............................. 1.3 0.8 0.6 0.1 0.1 0.1 1.5
----- ----- ----- ----- ----- ----- -----
Net earnings (loss) .............................. 4.6% 5.5% 4.6% (2.3)% 3.2% 4.5% 2.0%
===== ===== ===== ===== ===== ===== =====
</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.
(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 (1.9%) 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 in the third quarter (2.4%), (ii) a loss of $8,497,000 from
its sale of shares in the ILC Offering in the fourth quarter (0.6%), (iii) a
$7,825,000 loss in the fourth quarter 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 in the
fourth quarter (0.2%). Because IHS' investment in the Capstone common stock
received in the Pharmacy Sale had a very small tax basis, the taxable gain
on the sale significantly exceeded the gain for financial reporting
purposes, thereby resulting in a disproportionately higher income tax
provision related to the sale. In 1997, consists primarily of (i) a gain of
$7,578,000 realized on the shares of Capstone common stock received in the
Pharmacy Sale (0.5%), (ii) the write-off of $6,555,000 of accounting, legal
and other costs resulting from the proposed Coram Merger Transaction (0.5%),
(iii) the payment to Coram of $21,000,000 in connection with the termination
of the proposed Coram Merger Transaction (1.5%), (iv) a gain of $4,635,000
from the ILC Sale (0.3%) and (v) a loss of $4,635,000 resulting from the
closure of certain redundant activities in connection with the RoTech
Acquisition (0.3%). See "Unaudited Pro Forma Financial Information."
44
<PAGE>
QUARTERLY RESULTS (UNAUDITED)
Set forth below is certain summary information with respect to the
Company's operations for the last eleven fiscal quarters.
<TABLE>
<CAPTION>
THREE MONTHS ENDED(1)
---------------------------------------------------------------------------------------------
1995 1996
---------------------------------------------- ----------------------------------------------
MARCH 31 JUNE 30 SEPT. 30 DEC. 31 MARCH 31 JUNE 30 SEPT. 30 DEC. 31
---------- ---------- ---------- ------------- ---------- ---------- ------------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ..... $ 89,336 $ 87,365 $ 95,482 $ 96,386 $ 97,216 $ 98,063 $ 101,189 $ 93,305
Specialty medical
services .................. 176,158 188,331 193,604 212,461 219,525 226,868 211,904 340,912
Management services and
other ..................... 9,141 10,583 10,039 10,002 10,532 10,849 12,572 11,760
-------- -------- -------- ---------- -------- -------- --------- --------
Total .................... 274,635 286,279 299,125 318,849 327,273 335,780 325,665 445,977
Cost and expenses:
Operating expenses ......... 207,304 214,404 224,457 242,386 249,895 254,274 241,177 348,602
Corporate administrative
and general ............... 12,402 14,174 14,262 15,178 15,093 14,854 14,943 16,086
Depreciation and amorti-
zation .................... 8,960 9,682 9,867 11,452 8,274 8,505 9,130 15,772
Rent ....................... 16,066 16,454 16,726 16,879 17,656 17,879 18,445 23,805
Interest, net .............. 7,330 8,585 10,955 12,107 14,214 15,888 15,931 18,077
Loss on impairment of
long-lived assets ......... -- -- -- 83,321 -- -- -- --
Other non-recurring
charges (income)(2) ....... -- -- 1,939 47,700 -- -- (34,298) 19,841
-------- -------- -------- ---------- -------- -------- --------- --------
Earnings (loss) before
equity in earnings
(loss) of affiliates,
income taxes and
extraordinary items ....... 22,573 22,980 20,919 (110,174) 22,141 24,380 60,337 3,794
Equity in earnings (loss) of
affiliates ................. 315 417 401 310 300 460 323 (255)
-------- -------- -------- ---------- -------- -------- --------- --------
Earnings (loss) before
income taxes and
extraordinary items ....... 22,888 23,397 21,320 (109,864) 22,441 24,840 60,660 3,539
Income tax provision
(benefit) .................. 8,812 9,008 8,208 (42,298) 8,640 9,563 44,149 1,363
-------- -------- -------- ---------- -------- -------- --------- --------
Earnings (loss) before
extraordinary items(2) .... 14,076 14,389 13,112 (67,566) 13,801 15,277 16,511 2,176
Extraordinary items(3) ...... -- 508 -- 505 -- 1,431 -- --
-------- -------- -------- ---------- -------- -------- --------- --------
Net earnings (loss) ........ $ 14,076 $ 13,881 $ 13,112 $ (68,071) $ 13,801 $ 13,846 $ 16,511 $ 2,176
======== ======== ======== ========== ======== ======== ========= ========
<CAPTION>
1997
----------------------------------
MARCH 31 JUNE 30 SEPT. 30
---------- ----------- -----------
<S> <C> <C> <C>
Net revenues:
Basic medical services ..... $88,755 $ 88,055 $ 91,458
Specialty medical
services .................. 362,689 360,113 370,769
Management services and
other ..................... 9,499 9,805 10,694
------- -------- --------
Total ................... 460,943 457,973 472,921
Cost and expenses:
Operating expenses ......... 352,412 338,736 348,470
Corporate administrative
and general ............... 18,016 18,135 19,917
Depreciation and amorti-
zation .................... 15,030 15,814 16,974
Rent ....................... 24,009 25,786 25,527
Interest, net .............. 21,421 23,224 27,346
Loss on impairment of
long-lived assets ......... -- -- --
Other non-recurring
charges (income)(2) ....... (1,025) 21,072 0
------- -------- --------
Earnings (loss) before
equity in earnings
(loss) of affiliates,
income taxes and
extraordinary items ....... 31,080 15,206 34,687
Equity in earnings (loss) of
affiliates ................. 181 (83) (811)
------- -------- --------
Earnings (loss) before
income taxes and
extraordinary items ....... 31,261 15,123 33,876
Income tax provision
(benefit) .................. 12,192 5,898 13,212
------- -------- --------
Earnings (loss) before
extraordinary items(2) .... 19,069 9,225 20,664
Extraordinary items(3) ...... -- 18,168 2,384
------- -------- --------
Net earnings (loss) ........ $19,069 $ (8,943) $ 18,280
======= ======== ========
</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.
(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 primarily of (i) a gain in the
first quarter of $7,578,000 realized on the shares of Capstone common stock
received in the Pharmacy Sale, (ii) the write-off in the first quarter of
$6,555,000 of accounting, legal and other costs resulting from the proposed
Coram Merger Transaction, (iii) the payment in the second quarter to Coram
of $21,000,000 in connection with the termination of the proposed Coram
Merger Transaction, (iv) a gain in the third quarter of $4,635,000 from the
ILC Sale and (v) a loss in the third quarter of $4,635,000 from the closure
of certain redundant activities in connection with the RoTech Acquisition.
(3) During the three months ended June 30, 1995, IHS recorded a loss on
extinguishment of debt of $826,000, relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $318,000, is presented in the statement of operations for the
three months ended June 30, 1995 as an extraordinary loss of $508,000.
During the three months ended December 31, 1995, IHS incurred prepayment
penalties on debt of $821,000. Such loss, reduced by the related income tax
effect of $316,000, is presented in the statement of operations for the
three months ended December 31, 1995 as an extraordinary loss of $505,000.
In the three months ended June 30, 1996, IHS recorded a loss on
extinguishment of debt of $2,327,000, relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $896,000, is presented in the statement of operations for the
three months ended June 30, 1996 as an extraordinary loss of $1,431,000.
During the three months ended June 30, 1997, IHS recorded a loss on
extinguishment of debt of $29,784,000, representing approximately (i)
$23,554,000 of cash payments for premium and consent fees relating to the
early extinguishment of $214,868,000 aggregate principal amount of IHS'
senior subordinated notes and (ii) $6,230,000 of deferred financing costs
written-off in connection with the early extinguishment of such debt. Such
loss, reduced by the related income tax effect of $11,616,000, is presented
in the statement of operations for the three months ended June 30, 1997 as
an extraordinary loss
45
<PAGE>
of $18,168,000. During the three months ended September 30, 1997, IHS recorded
a loss on extinguishment of debt of $3,908,000, relating primarily to the
write-off of deferred financing costs. Such loss, reduced by the related
income tax effect of $1,524,000, is presented in the statement of operations
for the three months ended September 30, 1997 as an extraordinary loss of
$2,384,000. See "Recent Developments -- Repurchase of 9 5/8% Senior
Subordinated Notes and 10 3/4% Senior Subordinated Notes" and " -- New Credit
Facility."
From January 1, 1995 through September 30, 1997, the Company acquired 35
geriatric care facilities (including three facilities which it had previously
leased and 32 facilities which it had managed (including 29 facilities acquired
in the CCA Acquisition which IHS had managed on behalf of CCA)), leased 29
geriatric care facilities (28 of which had previously been managed (including
the lease of 23 facilities acquired in the CCA Acquisition which IHS had managed
on behalf of CCA)) 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 six 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 512 beds. During this period the Company acquired 54 ancillary
service businesses which provide home healthcare services, physical,
occupational and speech therapy services, rehabilitation services, pharmacy
services, hospice services and mobile x-ray and electrocardiogram services.
During this period, the Company sold its pharmacy division and assisted living
division. See "Unaudited Pro Forma Financial Information."
46
<PAGE>
UNAUDITED PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma statements of operations give 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 ("ILC") in October 1996 (the "ILC Offering"), (iii) the acquisition
of First American in October 1996 (the "First American Acquisition"), (iv) the
acquisition of CCA in September 1997 (the "CCA Acquisition"), (v) the
acquisition of the Coram Lithotripsy Division in October 1997 (the "Coram
Lithotripsy Acquisition"), (vi) the acquisition of RoTech in October 1997 (the
"RoTech Acquisition"), (vii) 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 diagnostics
company, in November 1996 (the "Mediq Acquisition"), (j) Total Rehab Services,
LLC and Total Rehab Services 02, LLC, providers of contract rehabilitation and
respiratory services, in November 1996 (the "Total Rehab Acquisition"), (k)
Lifeway Inc., a physician management and disease management company, in November
1996 (the "Lifeway Acquisition"), (l) In-Home Health Care, Inc., a home health
company, in January 1997 (the "In-Home Acquisition"), (m) Portable X-Ray Labs,
Inc., a mobile diagnostics company, in February 1997 (the "Portable X-Ray
Acquisition"), (n) Coastal Rehabilitation, Inc., an inpatient rehabilitation
company, in April 1997 (the "Coastal Acquisition"), (o) Health Care Industries,
Inc., a home health company, in June 1997 (the "Health Care Industries
Acquisition"), (p) Rehab Dynamics, Inc. and Restorative Therapy, Ltd., related
contract rehabilitation companies, in June 1997 (the "Rehab Dynamics
Acquisition"), (q) Arcadia Services, Inc., a home health company, in August 1997
(the "Arcadia Acquisition"), (r) Ambulatory Pharmaceutical Services, Inc. and
APS American, Inc., related home health companies, in August 1997 (the "APS
Acquisition") and (s) Barton Creek Healthcare, Inc., a home health company, in
September 1997 (the "Barton Creek Acquisition"), (viii) the sale of $450 million
aggregate principal amount of the 9 1/2% Senior Notes in May 1997 and the use of
$247.2 million of the net proceeds therefrom to repurchase substantially all its
9 5/8% Senior Notes and 10 3/4% Senior Notes and the remaining $191.0 million of
net proceeds therefrom to repay amounts outstanding under the Company's Prior
Credit Facility and (ix) the sale of the Old Notes and the application of the
net proceeds therefrom as described under "Use of Proceeds." The pro forma
statements of operations for the year ended December 31, 1996 and the nine
months ended September 30, 1997 were prepared as if all of the foregoing
transactions were consummated on January 1, 1996. The pro forma statement of
operations information does not give effect to the sale of $150 million
aggregate principal amount of the 10 1/4% Senior Notes in May 1996 and the use
of the $145.4 million of net proceeds therefrom to repay amounts outstanding
under the Prior Credit Facility or the acquisition of the assets of three small
ancillary service businesses and the acquisition of five mobile diagnostic
companies during the nine months ended September 30, 1997.
47
<PAGE>
The pro forma balance sheet at September 30, 1997 was prepared as if the
Coram Lithotripsy Acquisition and the RoTech Acquisition were consummated at
September 30, 1997. The Pharmacy Sale, the ILC Offering, the First American
Acquisition, the CCA 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, the Lifeway
Acquisition, the In-Home Acquisition, the Portable X-Ray Acquisition, the
Coastal Acquisition, the Health Care Industries Acquisition, the Rehab Dynamics
Acquisition, the APS Acquisition, the Arcadia Acquisition, the Barton Creek
Acquisition and the issuance and sale of the 9 1/2% Senior Notes and the Old
Notes were all consummated prior to September 30, 1997 and are therefore
reflected in the actual September 30, 1997 balance sheet.
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
incorporated by reference in this Prospectus. See "Available Information" and
"Selected Historical Consolidated Financial Information."
48
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA COMBINED BALANCE SHEET AS OF SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
CORAM LITHOTRIPSY DIVISION
IHS ------------------------------- ROTECH ROTECH PRO FORMA
ACTUAL ACTUAL(1) ADJUSTMENTS ACTUAL(1)* ADJUSTMENTS CONSOLIDATED
-------------- ----------- ------------------- ------------ -------------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Current Assets:
Cash and cash equivalents ....... $ 58,915 $ -- $ 12,819 $ 71,734
Temporary investments ........... 821,965 -- $ (131,000) -- $ (288,827)(5) 402,138
Patient accounts and third-
party payor settlements
receivable, net ................ 377,546 1,930 112,341 491,817
Inventories, prepaid
expenses and other
current assets ................. 36,457 4,356 26,980 67,793
Income tax receivable ........... 25,630 -- -- 800 (6) 26,430
---------- ------- ---------- -------- ----------- ----------
Total current assets ........... 1,320,513 6,286 (131,000) 152,140 (288,027) 1,059,912
---------- ------- ---------- -------- ----------- ----------
Property, plant and
equipment, net .................. 948,120 5,776 131,240 1,085,136
Assets held for sale ............. 12,109 -- -- 12,109
Intangible assets ................ 836,804 77,745 62,378 (3) 272,795 306,967 (7) 1,556,689
Other assets ..................... 110,534 3,736 4,557 118,827
---------- ------- ---------- -------- ----------- ----------
Total assets .................. $3,228,080 $93,543 $ (68,622) $560,732 $ 18,940 $3,832,673
========== ======= ========== ======== =========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-
term debt ...................... $ 6,782 $ -- $180,991 $ (180,991)(5) $ 6,782
Accounts payable and 4,750 (6)
accrued expenses ............... 332,813 19,921 $ 5,000 (3) 30,970 10,250 (8) 403,704
---------- ------- ---------- -------- ----------- ----------
Total current liabilities ...... 339,595 19,921 5,000 211,961 (165,991) 410,486
---------- ------- ---------- -------- ----------- ----------
Long-term debt:
Convertible subordinated
debentures ..................... 258,750 -- 110,000 (107,836)(5) 260,914
Other long-term debt less
current maturities ............. 1,933,233 -- -- 1,933,233
---------- ------- -------- ----------- ----------
Total long-term debt ........... 2,191,983 -- 110,000 (107,836) 2,194,147
---------- ------- -------- ----------- ----------
Other long-term liabilities(2) 36,114 -- -- 36,114
Deferred income taxes ............ 27,501 -- 20,735 48,236
Deferred gain on sale-
leaseback transactions .......... 5,463 -- -- 5,463
Redeemable common stock .......... -- -- 4,076 (4,076) (9) --
Stockholders' equity:
Common stock .................... 27 -- 5 11 (10) 43
Additional paid-in capital ...... 531,500 -- 131,269 383,468 (10) 1,046,237
(83,534)(10)
Retained earnings ............... 108,221 73,622 $ (73,622)(4) 83,534 (3,950)(6) 104,271
Treasury stock .................. (12,324) -- (848) 848 (10) (12,324)
---------- ------- ---------- -------- ----------- ----------
Total stockholders'
equity ........................ 627,424 73,622 (73,622) 213,960 296,843 1,138,227
---------- ------- ---------- -------- ----------- ----------
Total liabilities and
stockholders' equity ........ $3,228,080 $93,543 $ (68,622) $560,732 $ 18,940 $3,832,673
========== ======= ========== ======== =========== ==========
</TABLE>
- ----------
* As of July 31, 1997
49
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
FIRST FIRST
IHS PHARMACY ILC AMERICAN AMERICAN
ACTUAL(11) ADJUSTMENTS(12) ADJUSTMENTS(13) ACTUAL(14) ADJUSTMENTS
------------- ----------------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical ser-
vices ............. $ 389,773 $ (16,101)(a) $ --
Specialty medical
services .......... 999,209 $ (52,331)(a) 387,547
Management ser-
vices 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 administra-
tive expenses ...... 1,154,924 (43,279)(a) (12,453)(a) 406,800
Depreciation and
amortization ....... 41,681 (1,785)(a) (833)(a) 5,439 $ 4,501 (e)
Rent .................. 77,785 (838)(a) (1,885)(a) --
Interest, net ......... 64,110 (3,817)(b) (963)(b) 6,208 9,314 (b)
Non-recurring costs
(income) ............ (14,457) 34,298 (c) (8,497)(d) 3,468
------------- ----------------- ----------------- ------------ -----------------
Total costs and ex-
penses ........... 1,324,043 (15,421) (24,631) 421,915 13,815
Earnings (loss) be-
fore equity in
earnings (loss) of
affiliates, income
taxes and extraor-
dinary items ....... 110,652 (36,910) 7,510 (31,253) (13,815)
Equity in earnings
(loss) of affiliates.. 828 722 (671)
------------- ----------------- ----------------- ------------ -----------------
Earnings (loss) be-
fore income taxes
and extraordinary
items .............. 111,480 $ (36,910) $ 8,232 $ (31,924) $ (13,815)
============ ============ ========== ==========
Federal and state in-
come taxes ......... 63,715
-----------
Earnings before ex-
traordinary items .. $ 47,765
===========
<CAPTION>
CORAM LITHOTRIPSY
DIVISION
CCA CCA ------------------------------- ROTECH ROTECH
ACTUAL(15) ADJUSTMENTS ACTUAL(16) ADJUSTMENTS ACTUAL(17)* ADJUSTMENTS
------------ ----------------- ------------ ------------------ ------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Basic medical ser-
vices .............. $ 82,653 $ -- $ --
Specialty medical
services ........... 11,367 48,958 344,590
Management ser-
vices and other .... 2,974 -- --
--------- -------- ----------
Total revenues ..... 96,994 48,958 344,590
Costs and expenses:
Operating, general
and administra-
tive expenses ...... 85,201 20,634 258,891
Depreciation and
amortization ....... 2,056 $ 1,854 (e) 6,773 $ (533) (e) 36,074 $ 2,850 (e)
Rent .................. 5,982 -- --
Interest, net ......... 5,013 1,395 (b) 15 9,746 (b) 9,456 475 (f)
Non-recurring costs
(income) .......... 22,062 -- --
------------ ----------------- ------------ ------------------ ------------- -----------------
Total costs and ex-
penses ............ 120,314 3,249 27,422 9,213 304,421 3,325
Earnings (loss) be-
fore equity in
earnings (loss) of
affiliates, income
taxes and extraor-
dinary items ....... (23,320) (3,249) 21,536 (9,213) 40,169 (3,325)
Equity in earnings
(loss) of affiliates.. -- 312
------------ ----------------- ------------ ------------------ ------------- -----------------
Earnings (loss) be-
fore income taxes
and extraordinary
items ............. $ (23,320) $ (3,249) $21,848 $ (9,213) $ 40,169 $ (3,325)
========= ========== ======== ============ ========== ==========
Federal and state in-
come taxes
Earnings before ex-
traordinary items
<CAPTION>
SENIOR
NOTE
OTHER OTHER OFFERINGS PRO FORMA
ACQUISITIONS ACQUISITIONS PRO FORMA ADJUSTMENTS AS
ACTUAL(18) ADJUSTMENTS CONSOLIDATED (19) ADJUSTED
-------------- ----------------- -------------- ----------------- -------------
<S> <C> <C> <C> <C> <C>
Net revenues:
Basic medical ser-
vices ............. $ 292 $ 456,617 $ 456,617
Specialty medical
services .......... 269,690 2,009,031 2,009,031
Management ser-
vices and other .... 3 50,785 50,785
-------------- -------------- -------------
Total revenues .... 269,985 2,516,432 2,516,432
Costs and expenses:
Operating, general
and administra-
tive expenses ...... 259,532 2,130,250 2,130,250
Depreciation and
amortization ....... 2,359 $ 4,535 (e) 104,971 $ 1,603 (g) 106,574
Rent .................. 3,474 84,518 84,518
Interest, net ......... 5,039 4,683 (b) 110,674 48,827 (h) 159,501
Non-recurring costs
(income) ........... -- 36,874 36,874
-------------- ----------------- -------------- ----------------- -------------
Total costs and ex-
penses ........... 270,404 9,218 2,467,287 50,430 2,517,716
Earnings (loss) be-
fore equity in
earnings (loss) of
affiliates, income
taxes and extraor-
dinary items ....... (419) (9,218) 49,145 $ (50,430) (1,284)
Equity in earnings
(loss) of affiliates 1,032 2,223 2,223
-------------- ----------------- -------------- ----------------- -------------
Earnings (loss) be-
fore income taxes
and extraordinary
items ............. $ 613 $ (9,218) 51,368 $ (50,430) 939
============== ================= =================
Federal and state in-
come taxes ......... 32,634 596
-------------- -------------
Earnings before ex-
traordinary items .. $ 18,734 $ 343
============== =============
</TABLE>
- ----------
*Represents the 12 months ended January 31, 1997
50
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
PRO FORMA STATEMENT OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
IHS PHARMACY ILC CCA
ACTUAL(20) ADJUSTMENTS(12) ADJUSTMENTS(13) ACTUAL(15)
------------- ----------------- ----------------- ------------
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services ... $ 268,268 $ 66,287
Specialty medical ser-
vices .................. 1,093,571 1,086
Management services
and other ............. 29,998 1,408
------------- ------------
Total revenues .......... 1,391,837 68,781
Costs and expenses:
Operating, general and
administrative ex-
penses ................. 1,095,686 60,118
Depreciation and amor-
tization ............... 47,818 1,931
Rent ..................... 75,322 5,702
Interest, net ............ 71,991 3,918
Non-recurring charges,
net ................... 20,047 7,578 (c) 4,635 (d) --
------------- ----------------- ----------------- ------------
Total costs and ex-
penses ................ 1,310,864 7,578 4,635 71,669
Earnings (loss) before
equity in earnings of
affiliates, income taxes
and extraordinary
items .................. 80,973 (7,578) (4,635) (2,888)
Equity in earnings (loss) of
affiliates ............. (713) --
------------- ----------------- ----------------- ------------
Earnings (loss) before in-
come taxes and
extraordinary items ... 80,260 $ (7,578) $ (4,635) $ (2,888)
=========== =========== ========
Federal and state income
taxes ................... 31,301
-----------
Earnings before extraor-
dinary items .......... $ 48,959
===========
<CAPTION>
CORAM LITHOTRIPSY
DIVISION OTHER
CCA ----------------------------- ROTECH ROTECH ACQUISITIONS
ADJUSTMENTS ACTUAL(16) ADJUSTMENTS ACTUAL(17) ADJUSTMENT ACTUAL(21)
----------------- ------------ ---------------- ------------ -------------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Net revenues:
Basic medical services ... $ -- $ -- $ --
Specialty medical ser-
vices .................. 35,873 332,384 95,031
Management services
and other ............. -- -- --
------------ ------------ --------------
Total revenues .......... 35,873 332,384 95,031
Costs and expenses:
Operating, general and
administrative ex-
penses ................. 14,408 245,925 83,288
Depreciation and amor-
tization ............... $ 1,167 (e) 4,184 $ 89 (e) 35,007 $ (1,229) (e) 462
Rent ..................... -- -- 547
Interest, net ............ 1,046 (b) (119) 7,310 (b) 11,131 667 (f) 1,312
Non-recurring charges,
net .................... -- -- --
----------------- ------------ ---------------- ------------ -------------------- --------------
Total costs and ex-
penses ................ 2,213 18,473 7,399 292,063 (562) 85,609
Earnings (loss) before
equity in earnings of
affiliates, income taxes
and extraordinary
items .................. (2,213) 17,400 (7,399) 40,321 562 9,422
Equity in earnings (loss) of
affiliates ............. 465 -- --
----------------- ------------ ---------------- ------------ -------------------- --------------
Earnings (loss) before in-
come taxes and
extraordinary items .... $ (2,213) $17,865 $ (7,399) $ 40,321 $ 562 $ 9,422
================= ============ ================ ============ ==================== ==============
Federal and state income
taxes ...................
Earnings before extraor-
dinary items ...........
<CAPTION>
OTHER SENIOR NOTE PRO FORMA
ACQUISITIONS PRO FORMA OFFERINGS AS
ADJUSTMENTS CONSOLIDATED ADJUSTMENT(19) ADJUSTED
----------------- -------------- --------------- -------------
<S> <C> <C> <C> <C>
Net revenues:
Basic medical services ... $ 334,555 $ 334,555
Specialty medical ser-
vices .................. 1,557,945 1,557,945
Management services
and other .............. 31,406 31,406
-------------- -------------
Total revenues ......... 1,923,906 1,923,906
Costs and expenses:
Operating, general and
administrative ex-
penses ................. 1,499,425 1,499,425
Depreciation and amor-
tization ............... $ 1,749 (e) 91,178 $ 1,065 (g) 92,243
Rent ..................... 81,571 81,751
Interest, net ............ 1,500 (b) 98,756 28,212 (h) 126,968
Non-recurring charges,
net .................... 32,260 32,260
----------------- -------------- --------------- -------------
Total costs and ex-
penses .............. 3,249 1,803,190 29,277 1,832,467
Earnings (loss) before
equity in earnings of
affiliates, income taxes
and extraordinary
items .................. (3,249) 120,716 (29,277) 91,438
Equity in earnings (loss) of
affiliates ............. (248) (248)
----------------- -------------- --------------- -------------
Earnings (loss) before in-
come taxes and
extraordinary items .... $ (3,249) $ 120,468 $ (29,277) 91,190
================= ===============
Federal and state income
taxes .................. 56,872 43,051
----------- -----------
Earnings before extraor-
dinary items ........... $ 63,596 $ 48,139
=========== ===========
</TABLE>
- ----------
*Represents the 9 months ended July 31, 1997
51
<PAGE>
NOTES TO PRO FORMA FINANCIAL INFORMATION
(1) Certain amounts have been reclassified to conform the presentation of the
Coram Lithotripsy Division, RoTech and IHS.
(2) Represents the present value of contingent payments aggregating $50,000,000
due in 2000 and 2001 relating to the First American Acquisition, which
payments IHS deems probable.
(3) Represents the excess of the purchase price for the Coram Lithotripsy
Division over the estimated fair values of the net assets acquired, as
follows:
<TABLE>
<S> <C>
Purchase price ....................................... $131,000,000
Direct costs of acquisition ........................... 5,000,000
Stockholders' equity of Coram Lithotripsy Division ... (73,622,000)
------------
$ 62,378,000
============
</TABLE>
(4) Represents elimination of stockholders' equity of Coram Lithotripsy
Division.
(5) Represents (a) the pay down of $180,991,000 outstanding under RoTech's
credit facility with proceeds from the Company's term loan facility and (b)
the repurchase of $107,836,000 principal amount of RoTech's convertible
subordinated debentures in accordance with the terms of the indenture under
which such debentures were issued with proceeds from the Company's term
loan facility and the sale of the Old Notes. See "Recent Developments --
Recent Acquisitions -- RoTech Acquisition."
(6) Represents nonrecurring charges directly attributable to the RoTech
Acquisition, which will be included in IHS' statement of operations within
the 12 month period following the transaction. Such charges represent the
nonrecurring lump sum payments to certain RoTech officers aggregating
$4,750,000 less related income tax benefit of $800,000.
(7) Represents the excess of the purchase price (based on a price per share of
IHS Common Stock of $33.00 (the closing price of IHS Common Stock on
October 21, 1997 (the date the RoTech Acquisition was consummated)) and
using the 26,866,000 shares of RoTech Common Stock outstanding on October
21, 1997 (including 422,651 shares of redeemable common stock (see note 9
below)) adjusted for the exchange ratio of .5806) including estimated
direct costs of the RoTech Acquisition of $10,250,000 (see note 8 below),
over the estimated fair values of the net assets acquired, as follows:
<TABLE>
<S> <C>
Merger consideration for RoTech .................. $514,753,000
Direct costs of acquisition ........................ 10,250,000
------------
525,003,000
Stockholders' equity of RoTech (including redeemable
common stock of $4,076,000)........................ 218,036,000
------------
$306,967,000
============
</TABLE>
(8) Represents the estimated expenses of the RoTech Acquisition of $10,250,000
as follows: Non-compete payments to certain officers ($5,000,000);
professional fees ($2,500,000); filing fees ($500,000); and other
($2,250,000). Other primarily represents severance payments and related
benefits anticipated to be paid to identified employees whose employment
will be terminated after the RoTech Acquisition in accordance with a
restructuring plan to be adopted.
(9) Represents 422,651 shares of RoTech Common Stock (245,391 shares of IHS
Common Stock after the RoTech Acquisition) subject to put options at the
sole discretion of the RoTech stockholder at prices ranging from $9.75 to
$17.50 per share ($16.79 to $30.14 per share of IHS Common Stock). The put
options expire at various dates between October 1997 and December 1999.
Because the put price is below the current market price of the IHS Common
Stock, IHS has assumed for purposes of these pro forma financial statements
that the put options will not be exercised and,
52
<PAGE>
therefore, the shares of IHS Common Stock issued in exchange for such
RoTech Common Stock have not been classified as redeemable common stock,
but have been included in stockholders' equity.
(10) Represents the RoTech Acquisition consideration of $514,753,000 (see note 7
above), less $16,000 allocated to Common stock and less RoTech's Additional
paid-in capital of $131,269,000. Other adjustments represent eliminations
of RoTech's equity account balances.
(11) 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 12, 13, 14 and 18
below.
(12) 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 $14.7 million was recorded at carryover cost and
classified as securities available for sale. In 1997, IHS recognized the
remaining gain of $7.6 million when restrictions on transferability of such
shares were removed.
(13) On October 9, 1996, Integrated Living Communities, Inc. ("ILC"), at the
time a wholly-owned subsidiary of IHS which provides assisted living and
related services to the private pay elderly market, completed an initial
public offering of ILC common stock. IHS sold 1,400,000 shares of ILC
common stock in the offering, for which it received aggregate net proceeds
of approximately $10.4 million. In addition, ILC used approximately $7.4
million of the net proceeds received by it to repay outstanding
indebtedness to IHS. IHS used the net proceeds from the sale to repay
borrowings under its credit facility. IHS recorded a pre-tax loss of
approximately $8.5 million in the fourth quarter of 1996 as a result of
this transaction. On July 2, 1997, IHS sold the remaining 2,497,900 shares
of ILC common stock it owned, representing 37.3% of the outstanding ILC
common stock, for $11.50 per share in a cash tender offer (the "ILC Sale").
IHS recorded a gain of approximately $4.6 million from the ILC Sale in the
third quarter of 1997.
(14) 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.
53
<PAGE>
(15) On September 25, 1997, IHS acquired through a tender offer and subsequent
merger all the outstanding stock of CCA. IHS paid $34.3 million in cash,
repaid approximately $58.5 million of indebtedness assumed in the merger
(including restructuring fees of $4.9 million) and assumed approximately
$27.0 million of indebtedness. IHS incurred direct costs of acquisition of
approximately $5.2 million. In connection with the CCA Acquisition, the
Company held for sale 19 long-term care facilities. Actual results of CCA
have been adjusted as follows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 25,
1996 1997
--------------------- --------------------
INCREASE/(DECREASE) INCREASE/(DECREASE)
(IN THOUSANDS)
<S> <C> <C>
Revenue .......................................... $ (30,518) $ (24,999)
Operating expense ................................. (31,196) (23,288)
Depreciation .................................... (965) (594)
Rent ............................................. (3,017) (3,125)
Interest .......................................... (323) (900)
Non-recurring costs .............................. (66) --
--------- ---------
Adjustment to earnings (loss) before extraordinary
item .......................................... $ 5,049 $ 2,908
========= =========
</TABLE>
See "Recent Developments -- Recent Acquisitions -- CCA Acquisition."
(16) On October 2, 1997, IHS acquired substantially all the assets of the Coram
Lithotripsy Division for cash of approximately $131.0 million, including
the payment of $1.0 million of indebtedness. See "Recent Developments --
Recent Acquisitions -- Coram Lithotripsy Acquisition."
(17) On October 21, 1997, IHS acquired through merger RoTech. IHS issued
approximately 15,598,400 shares of Common Stock in the merger, repaid
$199.7 million of indebtedness assumed in the merger and assumed $110
million of indebtedness. The actual RoTech results of operations for the 12
months ended January 31, 1997 and the nine months ended July 31, 1997 both
include RoTech's results of operations for the three months ended January
31, 1997. See "Recent Developments -- Recent Acquisitions -- RoTech
Acquisition."
(18) Consists of the following acquisitions:
Vintage Acquisition. In January 1996, IHS purchased Vintage Health Care
Center, a 220 bed skilled nursing and assisted living facility in Denton,
Texas, for $6.9 million. A condominium interest in the assisted living
portion of this facility (valued at $3.5 million) was contributed to ILC on
June 1, 1996.
RMS Acquisition. In March 1996, IHS acquired all of the outstanding
capital stock of Rehab Management Systems, Inc. ("RMS"), which operates
outpatient rehabilitation therapy clinics in central Florida. RMS also
managed one therapy and one physician clinic. Total purchase price was $10.0
million, including $8.0 million representing the issuance of 385,542 shares
of IHS Common Stock. In addition, IHS incurred direct costs of acquisition
of $2.9 million. Total goodwill at the date of acquisition was $12.8
million.
Hospice of the Great Lakes Acquisition. In May 1996, IHS acquired
substantially all the assets of Hospice of the Great Lakes, Inc., a hospice
company in Northbrook, Illinois. Total purchase price was $8.2 million
representing the issuance of 304,822 shares of IHS Common Stock. IHS
incurred direct costs of acquisition of $1.0 million. Total goodwill at the
date of acquisition aggregated $9.0 million.
J.R. Rehab Acquisition. In August 1996, IHS acquired all of the
outstanding capital stock of J.R. Rehab Associates, Inc., an inpatient and
outpatient rehabilitation clinic in Mooresville, North Carolina. Total
purchase price was approximately $2.1 million. IHS incurred direct costs of
acquisition of $200,000. Total goodwill at the date of acquisition
aggregated $3.2 million.
Extendicare Acquisition. In August 1996, IHS acquired substantially all of
the assets of Extendicare of Tennessee, Inc., a home healthcare company in
Memphis, Tennessee. Total purchase price was approximately $3.4 million. IHS
incurred direct costs of acquisition of $200,000. Total goodwill at the date
of acquisition aggregated $1.9 million.
54
<PAGE>
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 143,893 shares of the Company's Common Stock
(after giving effect to the return of 59,828 shares of IHS Common Stock
because of an increase in the share price of the Company's Common Stock
between the date of issuance and the date such shares were registered for
resale). 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
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.
In-Home Acquisition. In January 1997, IHS acquired all the outstanding
capital stock of In-Home Health Care, Inc. ("In-Home"), a home health
company in Salt Lake City, Utah. Total purchase price was $3.2 million. IHS
incurred direct costs of acquisition of $250,000. Total goodwill at the date
of acquisition aggregated $3.9 million.
Portable X-Ray Acquisition. In February 1997, IHS acquired substantially
all the assets of Portable X-Ray Labs, Inc. ("Portable X-Ray"), a mobile
diagnostics company in Anaheim, California. Total purchase price was $4.9
million. IHS incurred direct costs of acquisition of $1.3 million. Total
goodwill at the date of acquisition aggregated $5.7 million.
Coastal Acquisition. In April 1997, IHS acquired substantially all the
assets of Coastal Rehabilitation, Inc. ("Coastal"), an inpatient
rehabilitation company in Indian Harbour, Florida. Total purchase price was
$1.3 million. IHS incurred direct costs of acquisition of $200,000. Total
goodwill at the date of acquisition aggregated $1.8 million.
Health Care Industries Acquisition. In June 1997, IHS acquired all the
outstanding capital stock of Health Care Industries, Inc. ("Health Care
Industries"), a home health company in Florida. Total purchase price was
$1.8 million. IHS incurred direct costs of acquisition of $500,000. Total
goodwill at the date of acquisition aggregated $2.5 million.
55
<PAGE>
Rehab Dynamics Acquisition. In June 1997, IHS acquired substantially all
the assets of Rehab Dynamics, Inc. and Restorative Therapy, Ltd.
(collectively "Rehab Dynamics"), related contract rehab companies. Total
purchase price was $19.7 million, including $11.5 million representing the
issuance of 322,472 shares of the Company's Common Stock. IHS incurred
direct costs of acquisition of $2.5 million. Total goodwill at the date of
acquisition aggregated $21.5 million.
Arcadia Acquisition. In August 1997, IHS acquired all the outstanding
capital stock of Arcadia Services, Inc. ("Arcadia"), a home health company.
Total purchase price was $27.0 million, including $17.2 million representing
the issuance of 531,198 shares of IHS Common Stock. IHS incurred direct
costs of acquisition of $3.0 million. Total goodwill at the date of
acquisition aggregated $39.2 million.
APS Acquisition. In August 1997, IHS acquired all the outstanding capital
stock of Ambulatory Pharmaceutical Services, Inc. and APS American, Inc.
(collectively, "APS"), related home health companies. Total purchase price
was $34.3 million, including $16.1 million representing the issuance of
532,240 shares of IHS Common Stock. IHS incurred direct costs of acquisition
of $2.0 million. Total goodwill at the date of acquisition aggregated $39.6
million.
Barton Creek Acquisition. In September 1997, IHS acquired all the
outstanding capital stock of Barton Creek Health Care, Inc. ("Barton
Creek"), a home health company. Total purchase price was $4.9 million. IHS
incurred direct costs of acquisition of $300,000. Total goodwill at the date
of acquisition aggregated $7.3 million.
(19) In May 1997 the Company issued $450,000,000 aggregate principal amount of
the 9 1/2% Senior Notes and used the net proceeds therefrom 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, to pay premium and consent fees and
accrued interest, and to repay $191,046,000 outstanding under the Company's
Prior Credit Facility. In September 1997 the Company issued $500,000,000
aggregate principal amount of the Old Notes, used $321,500,000 of the net
proceeds therefrom to repay all amounts outstanding under the Prior Credit
Facility and is using the remaining $164,875,000 for general corporate
purposes, including working capital, and for acquisitions.
(20) Includes the results of operations from the respective dates of acquisition
as follows: (i) In-Home from January 10, 1997, (ii) Portable X-Ray from
February 5, 1997, (iii) Coastal from April 7, 1997, (iv) Health Care
Industries from June 10, 1997, (iv) Rehab Dynamics from June 20, 1997, (v)
Arcadia from August 29, 1997, (vi) APS from August 30, 1997, (vii) Barton
Creek from September 23, 1997 and (viii) CCA from September 25, 1997.
(21) Consists of the In-Home Acquisition, the Portable X-Ray Acquisition, the
Coastal Acquisition, the Health Care Industries Acquisition, the Rehab
Dynamics Acquisition, the Arcadia Acquisition, the APS Acquisition and the
Barton Creek Acquisition.
----------------
For purposes of determining the effects of the acquisitions, divestitures and
financings described in Notes 11 through 21 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.
56
<PAGE>
(b) Represents (reduction in) additional interest expense resulting from
(repayment) borrowings under IHS' credit facility to finance
acquisitions based on the interest rate under the credit facility on the
date of (repayment) borrowings, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DEBT MONTHS INTEREST INTEREST
(PROCEEDS) IN 1996 RATE ADJUSTMENT
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
Pharmacy ............................................. $ (91,000) 7.0 7.19% $ (3,817)
ILC Offering ......................................... (17,851) 9.0 7.19% (963)
First American ....................................... 165,000 9.5 7.13% 9,314
CCA borrowings (1) ................................... 98,000 12.0 7.44% 7,291
CCA borrowings repaid (1) ............................ (53,600) 12.0 11.00% (5,896)
Coram Lithotripsy Division ........................... 131,000 12.0 7.44% 9,746
--------- --------
Other Acquisitions
In-Home Health .................................... 3,200 12.0 7.38% 236
Portable X-Ray .................................... 4,900 12.0 7.25% 355
Coastal ........................................... 1,250 12.0 7.19% 90
Health Care Industries ............................ 1,825 12.0 7.19% 131
Rehab Dynamics .................................... 8,203 12.0 7.19% 590
APS ............................................... 18,125 12.0 7.19% 1,303
Barton Creek ...................................... 4,400 12.0 7.44% 327
Total Rehab ....................................... 5,300 10.0 7.13% 315
Mediq ............................................. 4,942 10.0 7.13% 294
Century .......................................... 2,390 8.5 7.25% 123
Signature ......................................... 4,519 9.0 7.19% 244
Edgewater ......................................... 7,974 7.5 7.25% 361
Extendicare ....................................... 3,410 7.5 7.25% 155
J.R. Rehab ........................................ 2,100 7.0 7.25% 89
RMS ............................................... 2,000 2.5 6.88% 29
Vintage ........................................... 6,932 1.0 7.06% 41
--------- --------
Total Other ....................................... 81,470 4,683
--------- --------
Total ................................................ $ 313,019 $ 20,358
========= ========
Effect of 1/8% reduction in interest expense ...... $ 313,019 $ 19,978
Effect of 1/8% increase in interest expense ....... $ 313,019 $ 20,739
</TABLE>
- ----------
(1) In connection with the CCA Acquisition, IHS borrowed an aggregate of
$98,000,000, of which $53,600,000 was used to repay outstanding indebtedness
of CCA bearing interest at 11% per annum.
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MONTHS INTEREST INTEREST
DEBT IN 1997 RATE ADJUSTMENT
------------ --------- ---------- -----------
<S> <C> <C> <C> <C>
CCA borrowings (1) ................................. $ 98,000 9.0 7.44% $ 5,468
CCA borrowings repaid (1) .......................... (53,600) 9.0 11.00% (4,422)
Coram Lithotripsy Division ......................... 131,000 9.0 7.44% 7,310
--------- --------
Other Acquisitions
In-Home Health .................................. $ 3,200 .5 7.38% 10
Portable X-Ray .................................. 4,900 1.3 7.25% 37
Coastal ......................................... 1,250 3.3 7.19% 24
Health Care Industries .......................... 1,825 5.3 7.19% 57
Rehab Dynamics .................................. 8,203 5.5 7.19% 271
APS ............................................. 18,125 8.0 7.19% 869
Barton Creek .................................... 4,400 8.5 7.44% 232
--------- --------
Total Other ..................................... 41,903 1,500
--------- --------
Total .............................................. $ 217,303 $ 9,856
========= ========
Effect of 1/8% reduction in interest expense ....... $ 217,303 $ 9,668
Effect of 1/8% increase in interest expense ........ $ 217,303 $ 10,049
</TABLE>
- ----------
(1) In connection with the CCA Acquisition, IHS borrowed an aggregate of
$98,000,000, of which $53,600,000 was used to repay outstanding indebtedness
of CCA bearing interest at 11% per annum.
(c) Represents gain on the sale of the pharmacy division of $34,298,000 and
$7,578,000 recorded in 1996 and 1997, respectively.
57
<PAGE>
(d) Represents loss on sale of shares in the ILC Offering in 1996 and gain
on sale of shares in the ILC Sale in 1997.
(e) Represents additional amortization relating to goodwill and other
intangibles recorded as a result of the acquisition, amortized using the
straight line method over 15-40 years, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
LESS: PREVIOUSLY ADJUSTED MONTHS
ANNUAL RECORDED ANNUAL IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1996 ADJUSTMENT
- --------------------------------- ------------ ------ -------------- ------------------ -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
First American ............... $ 227,406 40 $ 5,685 $ 0 $ 5,685 9.5 $ 4,501
CCA .......................... 97,009 40 2,425 (571) 1,854 12.0 1,854
Coram Lithotripsy Division ... 140,123 40 3,503 (4,036) (533) 12.0 (533)
RoTech goodwill .............. 574,762 40 14,369 (11,853) 2,516 12.0 2,516
RoTech non-compete ........... 5,000 15 334 0 334 12.0 334
---------- ------- -------- ------- -------
Other Acquisitions
Lifeway .................... 0 40 0 0 0 10.0 0
Total Rehab ................ 11,982 40 300 0 300 10.0 250
Mediq ...................... 15,600 40 390 0 390 10.0 325
Century .................... 12,140 40 304 (5) 299 8.5 211
Signature .................. 21,122 40 528 (24) 504 9.0 378
Edgewater .................. 7,685 40 192 (1) 191 7.5 119
Extendicare ................ 1,945 40 49 0 49 7.5 30
J.R. Rehab ................. 3,159 40 79 (2) 77 7.0 45
Hospice of Great Lakes ..... 9,031 40 226 (2) 224 4.0 75
RMS ........................ 12,832 40 321 0 321 2.5 67
Vintage .................... 0 40 0 0 0 1.0 0
In-Home Health ............. 3,856 40 96 0 96 12.0 96
Portable X-Ray ............. 5,653 40 141 0 141 12.0 141
Coastal .................... 1,764 40 44 0 44 12.0 44
Health Care Industries ..... 2,505 40 63 0 63 12.0 63
Rehab Dynamics ............. 21,478 40 537 0 537 12.0 537
Arcadia .................... 39,233 40 981 0 981 12.0 981
APS ........................ 39,624 40 991 0 991 12.0 991
Barton Creek ............... 7,292 40 182 0 182 12.0 182
---------- -- ------- ---------- ------- ---- -------
216,901 5,423 (34) 5,389 4,535
---------- ------- ---------- ------- -------
Total ........................ $1,261,201 $31,739 $(16,494) $15,245 $13,207
========== ======= ========== ======= =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
NINE LESS: PREVIOUSLY NINE MONTHS MONTHS
MONTHS RECORDED ADJUSTED IN
COMPANY GOODWILL LIFE AMORTIZATION AMORTIZATION AMORTIZATION 1997 ADJUSTMENT
- ----------------------------------- ---------- ------ -------------- ------------------ -------------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CCA ........................... $ 97,009 40 $ 1,819 $ (652) $ 1,167 9.0 $ 1,167
Coram Lithotripsy Division .... 140,123 40 2,627 (2,538) 89 9.0 89
RoTech goodwill ............... 574,762 40 10,777 (12,256) (1,479) 9.0 (1,479)
RoTech non-compete ............ 5,000 15 250 0 250 9.0 250
-------- ------- --------- -------- --- --------
Other Acquisitions
In-Home Health ............... 3,856 40 72 0 72 .5 4
Portable X-Ray ............... 5,653 40 106 0 106 1.3 15
Coastal ...................... 1,764 40 33 0 33 3.3 12
Health Care Industries ....... 2,505 40 47 0 47 5.3 29
Rehab Dynamics ............... 21,478 40 404 0 404 5.5 247
Arcadia ...................... 39,233 40 736 0 736 8.0 654
APS .......................... 39,624 40 743 0 743 8.0 660
Barton Creek ................. 7,292 40 137 0 137 8.5 129
-------- -- ------- --------- -------- --- --------
121,405 2,278 0 2,278 1,749
-------- ------- --------- -------- --------
Total .......................... $938,299 $17,751 $ (15,446) $ 2,305 $ 1,776
======== ======= ========= ======== ========
</TABLE>
58
<PAGE>
(f) Represents additional interest on borrowings by IHS to repay RoTech's
credit facility as follows:
<TABLE>
<CAPTION>
TWELVE MONTHS ENDED NINE MONTHS ENDED
JANUARY 31, 1997 JULY 31, 1997
--------------------- ------------------
<S> <C> <C>
Credit facility:
Average borrowings outstanding during the period .. $ 85,290,000 $ 138,855,000
IHS average borrowing rate during the period ...... 7.13% 7.17%
Pro forma interest ................................ $ 6,081,000 $ 7,467,000
Less actual interest .............................. 5,606,000 6,800,000
------------ -------------
Pro forma adjustment ............................... $ 475,000 $ 667,000
============ =============
</TABLE>
(g) Represents additional amortization of deferred financing costs relating
to the 9 1/2% Senior Notes and the Old Notes, as follows:
YEAR ENDED DECEMBER 31, 1996
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SALE OF 9 1/2% SALE OF
SENIOR NOTES OLD NOTES TOTAL
---------------- ----------- --------
<S> <C> <C> <C>
Financing costs ................................ $ 12,313 $13,625 $25,938
Life ........................................... 10 10 10
Annual amortization ............................ 1,231 1,363 2,594
Less: previously recorded amortization related
to debt paid from proceeds of offering ..... 991 -- 991
-------- ------- -------
Adjusted annual amortization ................... $ 240 $ 1,363 $ 1,603
======== ======= =======
Months included in historical results .......... -- --
Months to be adjusted .......................... 12 12
Adjustment ..................................... $ 240 $ 1,363 $ 1,603
======== ======= =======
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SALE OF 9 1/2% SALE OF
SENIOR NOTES OLD NOTES TOTAL
---------------- ----------- --------
<S> <C> <C> <C>
Financing costs $ 12,313 $13,625 $25,938
Life ........................................... 10 10 10
Annual amortization ............................ 1,231 1,363 2,594
Less: previously recorded amortization related
to debt paid from proceeds of offering ..... 991 -- 991
-------- ------- -------
Adjusted annual amortization ................... $ 240 $ 1,363 $ 1,603
======== ======= =======
Months included in historical results .......... 4 0.5
Months to be adjusted .......................... 5 8.5
Adjustment ..................................... $ 100 $ 965 $ 1,065
======== ======= =======
</TABLE>
59
<PAGE>
(h) Represents additional net interest expense resulting from (i)
the sale of $450,000,000 aggregate principal amount of the 9
1/2% Senior Notes and the use of the net proceeds therefrom 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 $191,046,000 outstanding under the Company's Prior Credit
Facility in May 1997 and (ii) the sale of $500,000,000 aggregate
principal amount of the Old Notes and the use of $321,500,000 of
the net proceeds therefrom to repay all amounts outstanding
under the Prior Credit Facility, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------
9 1/2% OLD
SENIOR NOTES NOTES TOTAL
-------------- -------------- --------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Principal amount .......................................... $ 450,000 $ 500,000 $ 950,000
Interest rate ............................................. 9.5% 9.25%
---------- ----------
Annual interest expense .................................... 42,750 46,250 89,000
Less: interest expense on debt paid down with proceeds of
debt offerings
-9 5/8% Senior Notes, of which $114,975 was repaid with
proceeds from the sale of the 9 1/2% Senior Notes. ...... (11,066) -- (11,066)
-10 3/4% Senior Notes, of which $99,893 was repaid with
proceeds from the sale of the 9 1/2% Senior Notes. ...... (10,738) -- (10,738)
-Revolving credit facility notes due 2002, of which
$191,046 was repaid with proceeds from the sale of the 9
1/2% Senior Notes (interest rate of 7.19%, which is based
on the rate under the Prior Credit Facility on the date of
repayment) and $321,500 was repaid with proceeds from the
sale of the Old Notes (interest rate of 7.19%, which is
based on the rate under the Prior Credit Facility on the
date of repayment)........................................ (13,736) (4,633) (18,369) (1)
---------- ---------- --------------
Adjusted annual interest expense ........................ $ 7,210 $ 41,617 $ 48,827
========== ========== ==============
Months included in historical results .................. -- --
Months to be adjusted ................................. 12 12
---------- ----------
Adjustment for the year ended
December 31, 1996 .................................... $ 7,210 $ 41,617 $ 48,827
========== ========== ==============
</TABLE>
- ----------
(1) Represents total interest expense under the Company's Prior Credit Facility.
60
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, 1997
----------------------------------------------------
9 1/2% OLD
SENIOR NOTES NOTES TOTAL
-------------- ------------ --------------------
<S> <C> <C> <C>
Principal amount .......................................... 450,000 500,000 950,000
Interest rate ............................................. 9.5% 9.25%
------- -------
Nine month interest expense ................................. 32,063 34,687 66,750
Less: interest expense on debt paid down with proceeds of
debt offerings
-9 5/8% Senior Notes, of which $114,975 was repaid with
proceeds from the sale of the 9 1/2% Senior Notes. ...... (8,300) -- (8,300)
-10 3/4% Senior Notes, of which $99,893 was repaid with
proceeds from the sale of the 9 1/2% Senior Notes. ...... (8,054) -- (8,054)
-Revolving credit facility notes due 2002, of which
$191,046 was repaid with proceeds from the sale of the 9
1/2% Senior Notes (interest rate of 7.19%, which is based
on the rate under the Prior Credit Facility on the date of
repayment) and $321,500 was repaid with proceeds from the
sale of the Old Notes (interest rate of 7.19%, which is
based on the rate under the Prior Credit Facility on the
date of repayment) ...................................... (10,302) (7,996) (18,298) (1)
------- ------- -------
Adjusted nine month interest expense .................... $ 5,407 $ 26,691 $ 32,098
========= ======== ===========
Months included in historical results .................. 4 0.5
Months to be adjusted ................................. 5 8.5
--------- --------
Adjustment for the nine months
ended September 30, 1997 .............................. $ 3,004 $ 25,208 $ 28,212
========= ======== ===========
</TABLE>
- ----------
(1) Represents total interest expense under the Company's Prior Credit Facility.
The Company's average outstanding balance under its bank credit facility
during 1996 was $248,781,000; as a result, adjustments for the Senior Notes
Offerings to interest, net for the year ended December 31, 1996 does not reflect
interest income on the $428,640,000 of net proceeds from the sale of the Old
Notes and the 9 1/2% Senior Notes remaining after payment of the average amount
outstanding under the bank credit facility during 1996. During the nine months
ended September 30, 1997 the Company's average outstanding balance under its
bank credit facility was $295,500,000; as a result, adjustments for the Senior
Notes Offerings to interest, net for the nine months ended September 30, 1997
does not reflect interest income (other than interest income actually earned on
the $164,875,000 of net proceeds from the sale of the Old Notes remaining after
paying all amounts outstanding under the Prior Credit Facility, which interest
income is included in the Company's historical financial statements) on the
$381,871,000 of net proceeds from the sale of the Old Notes and the 9 1/2%
Senior Notes remaining after payment of the average amount outstanding under the
bank credit facility during the nine months ended September 30, 1997.
61
<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, skilled nursing
facility 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
1,900 service locations in 47 states and the District of Columbia.
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. To implement its post-acute
care network strategy, 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; and (iii) developing subacute care units. Given the increasing
importance of managed care in the healthcare marketplace and the continued cost
containment pressures from Medicare, Medicaid and private payors, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, 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 in October 1997
acquired RoTech, a provider of home healthcare products and services, with an
emphasis on home respiratory, home medical equipment and infusion therapy,
principally to patients in non-urban areas. In October 1997, IHS also acquired
the Coram Lithotripsy Division, which provides lithotripsy services and
equipment maintenance in 180 locations in 18 states, in order to expand the
mobile diagnostic treatment and services it offers to patients, payors and other
providers. Lithotripsy is a non-invasive technique that utilizes shock waves to
disintegrate kidney stones. See "Recent Developments." IHS intends to use the
home healthcare setting and the delivery franchise of its home healthcare branch
and agency network to (i) deliver sophisticated care, such as skilled nursing
care, home infusion therapy and rehabilitation, outside the hospital or nursing
home; (ii) serve as an entry point for patients into the IHS post-acute care
network; and (iii) provide a cost-effective site for case management and patient
direction.
IHS has also continued to expand its post-acute care network by increasing
the number of facilities it operates or manages. In September 1997, IHS acquired
Community Care of America, Inc., which develops and operates skilled nursing
facilities in medically underserved rural communities. IHS be-
62
<PAGE>
lieves that CCA will broaden its post-acute care network to include more rural
markets and will complement its existing home care locations in rural markets as
well as RoTech's business. In addition, in November 1997, IHS agreed to acquire
from HEALTHSOUTH 139 owned, leased or managed long-term care facilities and 12
specialty hospitals, as well as a contract therapy business having over 1,000
contracts and an institutional pharmacy business serving approximately 38,000
beds.
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. 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 $240.1 million for the nine months ended
September 30, 1996 to $262.9 million for the nine months ended September 30,
1997. MSU revenues as a percentage of total revenues were 35% in 1993, 25% in
each of 1994 and 1995, 23% in 1996 and 24% and 19% in the nine months ended
September 30, 1996 and 1997, respectively. The percentage decrease in 1994 was
primarily the result of the acquisition of facilities which did not have MSUs at
the time of acquisition as well as the acquisition of rehabilitation, pharmacy,
diagnostic, respiratory therapy, home healthcare and related service companies
in connection with 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 216 geriatric care facilities (169 owned or
leased and 47 managed), including the facilities acquired in the CCA Acquisition
(of which 19 facilities are being held for sale), and 158 MSUs located within 84
of these facilities. Specialty medical services revenues, which include all MSU
charges, all revenue from providing rehabilitative therapies, pharmaceuticals,
medical supplies and durable medical equipment to all its patients, all revenue
from its Alzheimer's programs and all revenue from its provision of pharmacy,
rehabilitation therapy, home healthcare, hospice care and similar services to
third-parties, constituted approximately 57%, 65% and 70% of net revenues during
the years ended December 31, 1994, 1995 and 1996, respectively. 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. On a pro forma basis after giving
effect to the acquisitions of First American and RoTech, for the year ended
December 31, 1996, approximately 44% of IHS' revenues were derived from home
health and hospice care, approximately 36% were derived from subacute and other
auxiliary services, approximately 18% were derived from traditional basic
nursing home services and the remaining approximately 2% were derived from
management and other services.
63
<PAGE>
INDUSTRY BACKGROUND
In 1983, the Federal government acted to curtail increases in healthcare
costs under Medicare, a Federal insurance program under the Social Security Act
primarily for individuals age 65 or over. Instead of continuing to reimburse
hospitals on a cost plus basis (i.e., the hospital's actual cost of care plus a
specified return on investment), the Federal government established a new type
of payment system based on prospectively determined prices rather than
retrospectively determined costs, with payment for inpatient hospital services
based on regional and national rates established under a system of
diagnosis-related groups ("DRGs"). As a result, hospitals bear the cost risk of
providing care inasmuch as they receive specified reimbursement for each
treatment regardless of actual cost.
Concurrent with the change in government reimbursement of healthcare costs,
a "managed care" segment of the healthcare industry emerged based on the theme
of cost containment. The health maintenance organizations and preferred provider
organizations, which constitute the managed care segment, are able to limit
hospitalization costs by giving physicians incentives to reduce hospital
utilization and by negotiating discounted fixed rates for hospital services. In
addition, traditional third party indemnity insurers began to limit
reimbursement to pre-determined amounts of "reasonable charges," regardless of
actual cost, and to increase the amount of co-payment required to be paid by
patients, thereby requiring patients to assume more of the cost of hospital
care. These changes have resulted in the earlier discharge of patients from
acute care hospitals.
At the same time, the number of people over the age of 65 began to grow
significantly faster than the overall population. Further, advances in medical
technology have increased the life expectancies of an increasingly large number
of medically complex patients, many of whom require a high degree of monitoring
and specialized care and rehabilitative therapy that is generally not available
outside the acute care hospital. However, the changes in government and
third-party reimbursement and growth of the managed care segment of the
healthcare industry, when combined with the fact that the cost of providing care
to these patients in an acute care hospital is higher than in a non-acute care
hospital setting, provide economic incentives for acute care hospitals and
patients or their insurers to minimize the length of stay in acute care
hospitals. The early discharge from hospitals of patients who are not fully
recovered and still require medical care and rehabilitative therapy has
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.
64
<PAGE>
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, reductions in Medicare reimbursement rates
and/or limitations on reimbursement rate increases, containment of healthcare
costs on an interim basis by means that could include a short-term freeze on
prices charged by healthcare providers, and permitting greater state flexibility
in the administration of Medicaid, could adversely affect the Company. See "--
Sources of Revenue." There can be no assurance that currently proposed or future
healthcare legislation or other changes in the administration or interpretation
of governmental healthcare programs will not have an adverse effect on the
Company. Ongoing consolidation in the healthcare industry could also impact the
Company's business and results of operations. See "Risk Factors -- Risk of
Adverse Effect of Healthcare Reform" and "-- Uncertainty of Government
Regulation."
COMPANY STRATEGY
The Company's post-acute care network strategy is to provide cost-effective
continuity of care for its patients in multiple settings, using geriatric care
facilities as platforms to provide a wide variety of subacute medical and
rehabilitative services more typically delivered in the acute care hospital
setting and using home healthcare to provide those medical and rehabilitative
services which do not require 24-hour monitoring. IHS believes that the success
of its post-acute care strategy will depend in large part on its ability to
control each component of the post-acute care delivery system in order to
provide low-cost, high quality outcomes. The central elements of IHS' business
strategy are:
Vertical Integration of Post-acute Care Services. 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
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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 acquisitions of First American and RoTech are
important components in the implementation of its post-acute healthcare system.
First American and RoTech, together with the Company's existing home healthcare
operations, gives the Company a significant home healthcare presence in 38
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 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 50,000 patients. To date, IHS has service agreements
with approximately 395 managed care organizations. In January 1996, IHS was
chosen as the exclusive capitated provider for five years of long-term care,
subacute care and therapy services to Sierra Health Plan's Health Plan of Nevada
("Sierra Health"), the largest HMO in Nevada with approximately 26,000 Medicare
enrollees and 125,000 commercial enrollees. As the exclusive provider, IHS
provides all contracted services to the HMO's members; as a capitated provider,
IHS accepts full risk of patient care in exchange for a flat fee per enrollee.
The agreement with Sierra Health provides for annual capitation adjustments and
the ability to increase revenue through other non-capitated services, although
there can be no assurance that these provisions will be effective to protect
IHS. In September 1997, this agreement was extended through December 2002. In
addition, in October 1996 IHS entered into a three-year agreement to provide, on
an exclusive basis, long-term and subacute care to patients of Foundation Health
Corporation ("Foundation Health"), an HMO located in Florida, on a capitated
basis. Foundation Health currently has 24,500 Medicare and 60,000 commercial
enrollees. The agreement provides for increased revenues to IHS for reduced
hospital utilization. Although IHS has attempted to minimize its risk under the
contract, there can be no assurance that safeguards it implemented will be
effective. See "Risk Factors -- Risks Related to Managed Care Strategy."
Subacute Care Through Medical Specialty Units. 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
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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 150 MSU beds in the first nine months of
1997, and it anticipates that it will only add an additional 200 to 300 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 1,900 service locations in 47 states and the District of Columbia,
including 216 geriatric care facilities in 31 states (47 of which the Company
manages), with: 58 service locations, including 12 geriatric care facilities (10
of which the Company manages), in California; 293 service locations, including
32 geriatric care facilities (five of which the Company manages), in Florida;
111 service locations, including 14 geriatric care facilities (two of which the
Company manages), in Pennsylvania; and 201 service locations, including 21
geriatric care facilities (seven of which the Company manages), in Texas.
Expansion Through Acquisitions. 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 169 (including
19 facilities held for sale), has increased the number of facilities it manages
from 18 to 47 and has increased the number of MSU programs it operates from 13
to 158. In addition, if the Proposed Facility Acquisition is consummated, the
Company will own or lease 81 additional geriatric facilities and will manage 58
additional geriatric care facilities. Furthermore, 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,
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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 "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
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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 service hours provided by independent contractors, the
Company began in late 1993 to acquire companies which provide physical,
occupational and speech therapy to healthcare facilities.
The Company 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 RoTech Acquisition, the acquisition
of First American and the ILC Sale, IHS had home healthcare revenues of
approximately $549.1 million, $812.3 million, $944.1 million, $650.5 million and
$739.8 million during the years ended December 31, 1994, 1995 and 1996 and the
nine months ended September 30, 1996 and 1997, respectively, representing
approximately 45.4%, 43.6%, 44.9%, 42.7% and 43.7%, respectively, of total pro
forma patient revenues. On a pro forma basis after giving effect to the
acquisition of First American, home nursing services accounted for approximately
80.7%, 77.4%, 64.2%, 67.0% and 55.1% of IHS' home healthcare revenues in 1994,
1995 and 1996 and the nine months ended September 30, 1996 and 1997,
respectively.
Home Nursing. Home nursing is the largest component of home healthcare, the
most labor-intensive and generally the least profitable. Home nursing services
range from skilled care provided by registered and other nurses, typically for
those recently discharged from hospitals, to unskilled services delivered by
home health aides for those needing help with the activities of daily living.
Home nursing also includes physical, occupational and speech therapy, as well as
social worker services. IHS substantially expanded its home nursing services
through the acquisition of First American, and currently provides home nursing
services at approximately 500 locations in 29 states.
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Infusion Therapy. Infusion therapy, the second largest home healthcare
market, involves the intravenous administration of anti-infective, biotherapy,
chemotherapy, pain management, nutrition and other therapies. Infusion therapy
generally requires patient training, specialized equipment and periodic
monitoring by skilled nurses. Technological advances such as programmable pumps
that control frequency and intensity of delivery are increasing the percentage
of infections and diseases that are treatable in the home; previously these
infections and diseases generally required patients to be hospitalized. Home
infusion therapy is more skilled-labor-intensive than other home healthcare
segments. The RoTech Acquisition will significantly expand IHS' home infusion
therapy services. See "Recent Developments."
Respiratory Therapy. Respiratory therapy is provided primarily to older
patients with chronic lung diseases (such as chronic obstructive pulmonary
disease, asthma and cystic fibrosis) or reduced respiratory function. The most
common therapy is home oxygen, delivered through oxygen gas systems, oxygen
concentration or liquid oxygen systems. Respiratory therapy is monitored by
licensed respiratory therapists and other clinical staff under the direction of
physicians. The RoTech Acquisition will significantly expand IHS' respiratory
therapy services. See "Recent Developments."
Home Medical Equipment. Home medical equipment consists of the sale or
rental of medical equipment such as specialized beds, wheelchairs, walkers,
rehabilitation equipment and other patient aids. The RoTech Acquisition will
significantly expand IHS' provision of home medical equipment. See "Recent
Developments."
Alzheimer's Program
IHS also offers a specialized treatment program for persons with
Alzheimer's disease. This program, called "The Renaissance Program," is located
in a specially designed wing separated from the remainder of the facility. The
physical environment is designed to address the problems of disorientation and
perceptual confusion experienced by Alzheimer's sufferers. The Renaissance
Program is designed to help reduce the stress and agitation of Alzheimer's
disease by addressing the problems of short attention spans and hyperactivity.
The staff for this program is specially recruited and staff training is highly
specialized. This program is designed not only to provide care to persons
suffering from Alzheimer's disease, but also to work with the patient's family.
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
patient's 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 47 geriatric care facilities with 5,177 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.
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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 August 1999 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 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 September 30, 1997, 72 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
approximately 500 branches which are managed through three geographic area
offices. The area office provides each of its branches with key management
direction and support services. IHS' organizational structure is designed to
create operating efficiencies associated with certain centralized services and
purchasing while also promoting local decision making.
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
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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 program
and under the Medicaid program 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 Tutera based upon a multiple of Tutera's
earnings. Although the Company's right to purchase the remaining interest in HPC
expired in September 1997, IHS purchased the home infusion division of HPC in
November 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.
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 nine months ended September 30, 1996 and 1997, the Company
derived approximately $409.6 million and $463.0 million, respectively, or 42.9%
and 34.0%, respectively, of its patient revenues from private pay sources and
approximately $545.2 million and $898.8 million, respectively, or 57.1% and
66.0%, respectively, of its patient revenues from government reimbursement
programs. Patient revenues from government reimbursement programs during these
periods consisted of approximately $317.9 million and $667.3 million,
respectively, or 33.3% and 49.0% of total patient revenues, respectively, from
Medicare and approximately $227.2 million and $231.5 million, respectively, or
23.8% and 17.0% 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 RoTech Acquisition, the CCA
Acquisition, the Coram Lithotripsy Acquisition, the acquisition of First
American (which derives substantially all its revenues from Medicare) and the
ILC Sale, during the year ended December 31, 1996, the Company derived
approximately $732.8 million, or 33.3%, of its patient revenues from private pay
sources and approximately $1.5 billion, or 66.7%, of its patient revenues from
government reimbursement programs.
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Pro forma patient revenues from government reimbursement programs during 1996
consisted of approximately $1.1 billion, or 48.5%, from Medicare and
approximately $399.9 million, or 18.2%, from Medicaid. On a pro forma basis
after giving effect to the RoTech Acquisition, the CCA Acquisition, the Coram
Lithotripsy Acquisition, the acquisition of First American and the ILC Sale,
during the nine months ended September 30, 1996 and 1997, IHS derived
approximately $515.0 million and $626.2 million, respectively, or 32.3% and
35.6%, respectively, of its patient revenues from private pay sources and
approximately $1.1 billion and $1.1 billion, respectively, or 67.7% and 64.4%,
respectively, of its patient revenues from government reimbursement programs.
Pro forma patient revenues from government reimbursement programs during these
periods consisted of approximately $784.9 million and $833.9 million, or 49.3%
and 47.3%, respectively, from Medicare and approximately $292.3 million and
$301.5 million, respectively, or 18.4% and 17.1%, 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%, 3.4%, 3.2%, 3.4% and 2.1% of total net revenues for the
years ended December 31, 1994, 1995 and 1996 and the nine months ended September
30, 1996 and 1997, respectively.
Gross third party payor settlements receivable, primarily from federal and
state governments (i.e., Medicare and Medicaid cost reports), were $44.6 million
at September 30, 1997, as compared to $42.6 million at December 31, 1996, $33.0
million at December 31, 1995 and $22.6 million at December 31, 1994.
Approximately $11.8 million, or 26%, of the third party payor settlements
receivable, primarily from Federal and state governments, at September 30, 1997
represent the costs for its MSU patients which exceed regional reimbursement
limits established under Medicare, as compared to approximately $15.6 million,
or 37%, at December 31, 1996, approximately $7.6 million, or 23%, at December
31, 1995 and approximately $6.2 million, or 27%, at December 31, 1994.
The Company's cost of care for its MSU patients generally exceeds regional
reimbursement limits established under Medicare. The success of the Company's
MSU strategy depends in part on its ability to obtain per diem rate approvals
for costs which exceed the Medicare established per diem rate limits and by
obtaining waivers of these limitations. The Company has submitted waiver
requests for 325 cost reports, covering all cost report periods through December
31, 1996. To date, final action has been taken by HCFA on 232 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 contemplated changing Medicare payments for skilled nursing facilities
and home nursing services from a cost-reimbursement system to a prospective
payment system. The Balanced Budget Act of 1997, enacted in August 1997,
provides, among other things, for a prospective payment system for home nursing
to be implemented for cost reporting periods
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beginning on or after October 1, 1999, a reduction in current cost reimbursement
for home healthcare pending implementation of a prospective payment system,
reductions (effective January 1, 1998) in Medicare reimbursement for oxygen and
oxygen equipment for home respiratory therapy and a shift of the bulk of home
health coverage from Part A to Part B of Medicare. The failure to implement a
prospective payment system for home nursing services in the next several years
could adversely affect IHS' post-acute care network strategy. In an attempt to
limit the federal and state budget deficits, there have been, and 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, Missouri, Nebraska,
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
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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 acquisition of poorly performing
facilities could adversely affect the Company's business to the extent remedies
are imposed at such facilities.
In September 1997, President Clinton, in an attempt to curb Medicare fraud,
imposed a moratorium on the certification under Medicare of new home healthcare
companies, which moratorium is expected to last approximately six months, and
implemented rules requiring home healthcare providers to reapply for Medicare
certification every three years. In addition, HCFA will double the number of
detailed audits of home healthcare providers it completes each year and increase
by 25% the number of home healthcare claims it reviews each year. IHS cannot
predict what effect, if any, these new rules will have on IHS' business and the
expansion of its home healthcare operations.
The operations of IHS' home healthcare branches are subject to numerous
federal and state laws governing pharmacies, nursing services, therapy services
and certain types of home health agency activities. Certain of IHS' employees
are subject to state laws and regulations governing the professional practice of
respiratory therapy, physical, occupational and speech therapies, pharmacy and
nursing. The failure to obtain, to renew or to maintain any of the required
regulatory approvals or licenses could adversely affect IHS' home healthcare
business and could prevent the branch involved from offering products and
services to patients. Generally, IHS is required to be licensed as a home health
agency in those states in which it provides traditional home health or home
nursing services. IHS' ability to expand its home healthcare services will
depend upon its ability to obtain licensure as a home health agency, which may
be restricted by state CON laws.
Various Federal and state laws regulate the relationship between providers
of healthcare services and physicians or others able to refer medical services,
including employment or service contracts, leases and investment relationships.
These laws include the fraud and abuse provisions of Medicare and Medicaid and
similar state statutes (the "Fraud and Abuse Laws"), which prohibit the payment,
receipt, solicitation or offering of any direct or indirect remuneration
intended to induce the referral of Medicare or Medicaid patients or for the
ordering or providing of Medicare or Medicaid covered services, items or
equipment. Violations of these provisions may result in civil and criminal
penalties and/or exclusion from participation in the Medicare and Medicaid
programs and from state programs containing similar provisions relating to
referrals of privately insured patients. The Department of Health and Human
Services ("HHS") and other federal agencies have interpreted these provisions
broadly to include the payment of anything of value to influence the referral of
Medicare or Medicaid business. HHS has issued regulations which set forth
certain "safe harbors," representing business relationships and payments that
can safely be undertaken without violation of the Fraud and Abuse Laws. In
addition, certain Federal and state requirements generally prohibit certain
providers from referring patients to certain types of entities in which such
provider has an ownership or investment interest or with which such
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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, reductions in Medicare reimbursement rates and/or limitations
on reimbursement rate increases, containment of healthcare costs on an interim
basis by means that could include a short-term freeze on prices charged by
healthcare providers, and permitting greater state flexibility in the
administration of Medicaid, could adversely affect the Company. See "Risk
Factors -- Uncertainty of Government Regulation" and "-- Sources of Revenue."
There can be no assurance that currently proposed or future healthcare
legislation or other changes in the administration or interpretation of
governmental healthcare programs will not have an adverse effect on 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 9 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
generally exceeds regional reimbursement limits established under Medicare. The
Company has submitted waiver requests to recover these excess costs. See "--
Sources of Revenue." There can be no assurance, however, that the Company will
be able to recover its excess costs under the pending waiver 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.
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The Medicare program reimburses for home healthcare services under two
basic systems: cost-based and charge-based. Under the cost-based system, IHS is
reimbursed at the lowest of IHS' reimbursable costs (based on Medicare
regulations), cost limits established by HCFA or IHS' charges. While a small
amount of corporate level overhead is permitted as part of reimbursable costs
under Medicare regulations, such costs consist predominantly of expenses and
charges directly incurred in providing the related services, and cannot include
any element of profit or net income to IHS. Under the charge-based system,
Medicare reimburses IHS on a "prospective payment" basis, which consists in
general of either a fixed fee for a specific service or a fixed per diem amount
for providing certain services. As a result, IHS can generate profit or net
income from Medicare charge-based revenues by providing covered services in an
efficient, cost-effective manner. All nursing services (including related
products) are Medicare cost-based reimbursed, except for nursing services
provided to hospice patients. Hospice care and all other home healthcare
services (including non-nursing related products) are Medicare charge-based
reimbursed.
The Balanced Budget Act of 1997 provides, among other things, for
implementation of a prospective payment system for home nursing services for
cost reporting periods beginning on or after October 1, 1999. Implementation of
a prospective payment system will be a critical element to the success of IHS'
expansion into home nursing services. Based upon prior legislative proposals,
IHS believes that a prospective payment system would most likely provide a
healthcare provider a predetermined rate for a given service, and that providers
with costs below the predetermined rate will be entitled to keep some or all of
this difference. Under such a prospective payment system, the efficient operator
will be rewarded. Since the largest component of home healthcare costs is labor,
which is basically fixed, IHS believes the differentiating factor in
profitability will be administrative costs. As a result of the First American
Acquisition, IHS, as a large provider of home nursing services, believes it
should be able to achieve administrative efficiencies compared with the small
providers which currently dominate the home healthcare industry, although there
can be no assurance it will be able to do so. There can be no assurance that
Medicare will implement a prospective payment system for home nursing services
in the next several years or at all. The inability of IHS to provide home
healthcare services at a cost below the established Medicare fee schedule could
have a material adverse effect on IHS' home healthcare operations and its
post-acute care network. See "Risk Factors -- Risk of Adverse Effect of
Healthcare Reform."
Under the various Medicaid programs, the federal government supplements
funds provided by the participating states for medical assistance to qualifying
needy individuals. The programs are administered by the applicable state welfare
or social service agencies. Although Medicaid programs vary from state to state,
typically they provide for the payment of certain expenses, up to established
limits. The majority of the MSU programs are not required to participate in the
various state Medicaid programs. However, should the Company's MSU programs be
required to admit Medicaid patients as a condition to continued participation in
such programs by the facility in which the MSU program is located, the Company's
results of operations could be adversely affected since the Company's cost of
care in its MSU programs is substantially in excess of state Medicaid
reimbursement rates.
Funds received by IHS under Medicare and Medicaid are subject to audit with
respect to the proper preparation of annual cost reports upon which
reimbursement is based. Such audits can result in retroactive adjustments of
revenue from these programs, resulting in either amounts due to the government
agency from IHS or amounts due IHS from the government agency.
Both the Medicare and Medicaid programs are subject to statutory and
regulatory changes, administrative rulings, interpretations of policy
determinations by insurance companies acting as Medicare fiscal intermediaries
and governmental funding restrictions, all of which may materially increase or
decrease the rate of program payments to healthcare facilities. Since 1985,
Congress has consistently attempted to limit the growth of federal spending
under the Medicare and Medicaid programs. The Company can give no assurance that
payments under such programs will in the future remain at a level comparable to
the present level or be sufficient to cover the operating and fixed costs
allocable to such patients. Changes in reimbursement levels under Medicare or
Medicaid and changes in applicable governmental regulations could significantly
affect the Company's results of operations. It is uncertain at this time whether
additional legislation on healthcare reform will be implemented or whether other
changes in the administration or interpretation of governmental healthcare
programs will occur. There
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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.
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 September 30, 1997, the Company had approximately 56,000 full-time
and regular part-time employees. Full-time and regular part-time service and
maintenance employees at 17 facilities, totaling approximately 1,300 employees,
are covered by collective bargaining agreements. The Company's corporate staff
consisted of approximately 1,900 people at such date. The Company believes its
relations with its employees are good.
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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.
LEGAL PROCEEDINGS
IHS is from time to time involved in various legal proceedings. Although
IHS does not believe that any currently pending proceeding will materially and
adversely affect IHS, there can be no assurance that any current or future
proceeding will not have a material adverse effect on IHS' financial position or
results of operations.
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DESCRIPTION OF THE NEW NOTES
The Old Notes were issued, and the New Notes will be issued, under an
indenture dated as of September 11, 1997 (the "Indenture"), between the Company
and First Union National Bank, 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 Indenture 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 "9 1/4% Notes."
GENERAL
The 9 1/4% Notes are unsecured obligations of the Company, are limited to
$500,000,000 in aggregate principal amount and mature on January 15, 2008.
The 9 1/4% Notes bear interest at the rate of 9 1/4% per annum from
September 11, 1997 or from the most recent payment date to which interest has
been paid or provided for, payable on January 15 and July 15 of each year,
commencing on January 15, 1998, to holders of record (the "Holders") at the
close of business on December 31 or June 30, as the case may be, immediately
preceding the relevant interest payment date.
Principal, premium, if any, and interest on the 9 1/4% Notes are payable
(i) in respect of 9 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 9 1/4%
Notes issued in certificated form, at the office of the Trustee by check mailed
to the registered addresses of the Holders (provided that payments will be made
by wire transfer to any Holder that provides wire instructions to the Company at
least five business days prior to a payment date), and the 9 1/4% Notes may be
presented for registration of transfer or exchange at the office of the Trustee.
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 9 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 9 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 9 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.
The 9 1/4% Notes rank pari passu with the Company's 10 1/4% Senior
Subordinated Notes due 2006, 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 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 9 1/4% Notes.
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OPTIONAL REDEMPTION OF THE 9 1/4% NOTES
The 9 1/4% Notes may not be redeemed by the Company prior to January 15,
2003. Thereafter, the 9 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
---------------------------------------------- -----------
January 15, 2003 ..................... 104.625%
January 15, 2004 ..................... 103.083%
January 15, 2005 ..................... 101.542%
January 15, 2006 and thereafter ...... 100.000%
Notwithstanding the foregoing, the Company may redeem in the aggregate up
to $166,667,000 principal amount of 9 1/4% Notes at any time and from time to
time prior to January 15, 2001 at a redemption price equal to 109.25% of the
aggregate principal amount so redeemed, plus accrued interest to the redemption
date, out of the net cash proceeds of one or more Public Equity Offerings;
provided that at least $333,333,000 aggregate principal amount of 9 1/4% Notes
originally issued remains outstanding immediately after the occurrence of any
such redemption and that any such redemption occurs within 60 days following the
closing of any such Public Equity Offering.
If less than all of the 9 1/4% Notes are to be redeemed at any time,
selection of the 9 1/4% Notes to be redeemed will be made by the Trustee from
among the outstanding 9 1/4% Notes on a pro rata basis, by lot or in such other
manner as the Trustee shall deem fair and equitable; provided, however, that in
the case of an Asset Sale Offer or if a partial redemption is made with the
proceeds of a Public Equity Offering, selection of the 9 1/4% Notes for
redemption shall be made on a pro rata basis, unless such method is otherwise
prohibited. Notice of redemption will be mailed at least 30 days but not more
than 60 days before the redemption date to each Holder whose 9 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 9 1/4% Notes or the
portions thereof called for redemption.
PURCHASE OF 9 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 9 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 Indebtedness evidenced by the 9 1/4% Notes is subordinated in right of
payment, to the extent set forth in the Indenture, to the prior payment in full
in cash of all existing and future Senior Indebtedness of the Company, whether
outstanding on the date of issuance of the Old Notes or thereafter incurred.
The Indenture provides that in the event of any payment or distribution of
assets of the Company of any kind or character made in connection with any
insolvency or bankruptcy case or proceeding, or any receivership, liquidation,
reorganization or other similar case or proceeding in connection therewith,
relating to the Company or its assets, or any liquidation, dissolution or other
winding-up of the Company, whether voluntary or involuntary, or any assignment
for the benefit of creditors or other marshalling of assets or liabilities of
the Company, or in the event of the acceleration of the maturity of the 9 1/4%
Notes, all Senior Indebtedness of the Company (including any interest on and all
other amounts accruing under or with respect to such Senior Indebtedness
subsequent to the filing of a petition for bankruptcy whether or not such
interest or other amount is an allowed claim) must be paid in full in cash, or
such payment shall be duly provided for to the satisfaction of the holders of
Senior Indebted-
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ness, before any payment or distribution is made on account of the principal of,
premium, if any, or interest on the 9 1/4% Notes, or for the acquisition by the
Company or any of its Subsidiaries of any of the 9 1/4% Notes for cash or
property or otherwise, and until all Senior Indebtedness is paid in full in
cash, any distribution to which the Holders of the 9 1/4% Notes would be
entitled shall be made to the holders of Senior Indebtedness (except that
Holders of the 9 1/4% Notes may receive payments of amounts previously deposited
in trust in accordance with the defeasance provisions of the Indenture described
under "Satisfaction and Discharge").
During the continuance of any default in the payment of principal, premium,
if any, interest on or any other amount due under or with respect to any Bank
Debt or any Senior Indebtedness (other than Bank Debt) in excess of $20 million
beyond any applicable grace period, no direct or indirect payment (except that
Holders of the 9 1/4% Notes may receive payments of amounts previously deposited
in trust in accordance with the defeasance provisions of the Indenture described
under "Satisfaction and Discharge") by or on behalf of the Company or any other
Person on its behalf of any kind or character may be made on account of the
principal of, premium, if any, or interest on, or the purchase, redemption or
other acquisition of, the 9 1/4% Notes unless and until such default has been
cured or waived or has ceased to exist or such Senior Indebtedness shall have
been paid in full in cash.
In addition, no payment (except that Holders of the 9 1/4% Notes may
receive payments of amounts previously deposited in trust in accordance with the
defeasance provisions of the Indenture described under "Satisfaction and
Discharge") of any kind or character may be made by the Company on account of
the principal of, premium, if any, or interest on, or the purchase, redemption
or other acquisition of, the 9 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 an event of default, in each case with respect to the financial
covenants under the Credit Agreement. These financial covenants may be changed
from time to time by the banks that are party to the Credit Agreement and the
Company without the consent of the Holders of the 9 1/4% Notes, and such changes
may be adverse to the Holders of the 9 1/4% Notes and may result in the Company
being prohibited from making payments on account of the principal of, or
premium, if any, or interest on the 9 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 earliest to
occur of the following events: (i) 179 days has elapsed since the receipt of
such notice, (ii) such default with respect to the financial covenants under the
Credit Agreement is cured or waived or ceases to exist, or such 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) such Payment Blockage Period shall have been terminated by written notice
to the Company or the Trustee from the Bank Agent, after which the Company shall
promptly resume making any and all required payments in respect of the 9 1/4%
Notes, including any missed payments. Only one Payment Blockage Period with
respect to the 9 1/4% Notes may be commenced within any 365 consecutive day
period. 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 from the receipt by the Trustee of the notice initiating
such Payment Blockage Period and there must be a 186 consecutive day period in
any 365 day period during which no Payment Blockage Period is in effect.
If the Company fails to make any payment on the 9 1/4% Notes when due or
within any applicable grace period, whether or not on account of the payment
blockage provisions referred to above, such failure would constitute an Event of
Default under the Indenture and would enable the Holders of the 9 1/4% Notes to
accelerate the maturity thereof. See "-- Events of Default."
By reason of such subordination, in the event of liquidation or insolvency,
creditors of the Company who are holders of Senior Indebtedness may recover
more, ratably, than the Holders of the 9 1/4% Notes, and funds which would be
otherwise available for payment to the Holders of the 9 1/4% Notes will be
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paid to the holders of the Senior Indebtedness to the extent necessary to pay
the Senior Indebtedness in full in cash prior to the payment of any funds to the
Holders of the 9 1/4% Notes. As a result, the Company may be unable to meet its
obligations fully with respect to the 9 1/4% Notes. See "Risk Factors --
Subordination of the 9 1/4% Notes; Holding Company Structure."
The 9 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 9 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 9 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 9 1/4% Notes; Holding Company Structure."
The 9 1/4% Notes are 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 9 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 interest 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 September 30, 1997, the aggregate amount of Senior
Indebtedness outstanding and the aggregate amount of Indebtedness of the
Company's Subsidiaries (excluding intercompany indebtedness) to which the 9 1/4%
Notes are effectively subordinated as of such date was approximately $839.9
million. In addition, the 9 1/4% Notes are effectively subordinated to the lease
obligations of the Company's Subsidiaries, which aggregated $200.3 million at
September 30, 1997, and other liabilities, including trade payables, the amount
of which could be material. At September 30, 1997, $600.1 million of
indebtedness ranks pari passu with the 9 1/4% Notes.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
LIMITATIONS ON ADDITIONAL INDEBTEDNESS. The Indenture provides that, after
the date of the Indenture, 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), 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 December 31, 1998,
(ii) 2.25 to 1, if such date is after December 31, 1998 and on or prior
to December 31, 1999, and
(iii) 2.50 to 1, if such date is after December 31, 1999,
in each case determined on a pro forma basis as if the incurrence of such
additional Indebtedness 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.
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Notwithstanding the foregoing: (a) the Company and its Subsidiaries may (i)
incur Indebtedness under one or more Credit Facilities not to exceed $700.0
million at any one time outstanding; (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 and its
Subsidiaries 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 any Credit Facility that is designated in such
Credit Facility 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 (including by way of pledge of assets) that is subordinate in right of
payment to any Senior Indebtedness unless such Subsidiary also Guarantees the 9
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 9 1/4% Notes. If such
other Indebtedness of the Company is (1) pari passu with the 9 1/4% Notes, such
Guarantee of such pari passu Indebtedness shall be pari passu with or expressly
subordinated to such Guarantee of the 9 1/4% Notes, or (2) subordinated in right
of payment to the 9 1/4% Notes, such Guarantee of such subordinated Indebtedness
shall be expressly subordinated to such Guarantee of the 9 1/4% Notes, at least
to the extent that such subordinated Indebtedness is subordinated or junior to
the 9 1/4% Notes. Notwithstanding the foregoing, any Guarantee of the 9 1/4%
Notes by a Subsidiary of the Company may provide by its terms that it shall be
automatically and unconditionally released and discharged upon the release or
discharge of the Guarantee which resulted in the creation of such Guarantee of
the 9 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 (other than Preferred Stock issued prior to the date of the
Indenture), 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 May 15, 1996, exceeds the sum of: (1) 50% of
the Company's Consolidated Net Income accrued during the period (taken as a
single period) commencing May 15, 1996, to and including the most recent
fiscal quarter ended immediately prior to the date of such Restricted Payment
and for which financial results have been reported (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 (a) Capital Stock that is not Disqualified Stock, including net
cash proceeds received upon the exercise of any options or warrants to
purchase shares of Capital Stock other than Disqualified Stock (other
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than to a Subsidiary of the Company), and (b) debt securities or other
securities that are convertible or exercisable or exchangeable for such
Capital Stock that is not Disqualified Stock and that have been so converted
or exercised or exchanged, after May 15, 1996; (3) aggregate net cash
proceeds received by the Company after the date of the Indenture as capital
contributions to the Company; and (4) $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
the following Restricted Payments (provided, however, that such Restricted
Payments shall be included for purposes of computing the amount of Restricted
Payments previously made under clause (ii) of the preceding paragraph):
(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; and
(y) 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 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 and (i) customary restrictions in purchase money debt or leases
relating to the property covered thereby.
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 9 1/4% Notes.
LIMITATIONS ON SUBSIDIARIES AND UNRESTRICTED SUBSIDIARIES. The Indenture
provides that the Company may, by written notice to the Trustee, designate any
Subsidiary (including a newly acquired or a newly formed Subsidiary) to be an
Unrestricted Subsidiary; provided, however, that (i) no Default or
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Event of Default shall have occurred and be continuing or would arise therefrom,
(ii) such designation, when considered as an Investment as described in the next
sentence, is at that time permitted under the covenant described under
"Limitations on Restricted Payments" and (iii) immediately after giving effect
to such designation, the Company could incur $1.00 of additional Indebtedness
pursuant to the covenant described under "Limitations on Additional
Indebtedness." For purposes of the covenant described under "Limitations on
Restricted Payments" above, (i) an "Investment" shall be deemed to have been
made at the time any Subsidiary is designated as an Unrestricted Subsidiary in
an amount (proportionate to the Company's percentage Equity Interest in such
Subsidiary) equal to the net worth of such Subsidiary at the time that such
Subsidiary is designated as an Unrestricted Subsidiary; (ii) at any date the
aggregate amount of all Restricted Payments made as Investments since May 15,
1996 shall exclude and be reduced by an amount (proportionate to the Company's
percentage Equity Interest in such Subsidiary) equal to the net worth of any
Unrestricted Subsidiary from and after the date that such Unrestricted
Subsidiary is designated a Subsidiary, not to exceed, in the case of any such
redesignation of an Unrestricted Subsidiary as a Subsidiary, the amount of
Investments previously made by the Company and its Subsidiaries in such
Unrestricted Subsidiary (in the case of either clauses (i) or (ii) above, "net
worth" to be calculated based upon the fair market value of the assets of such
Subsidiary as of any such date of designation); and (iii) any property
transferred to or from an Unrestricted Subsidiary shall be valued at its fair
market value at the time of such transfer. As of the date of issuance of the 9
1/4% Notes, there were no Unrestricted Subsidiaries.
The Indenture provides that notwithstanding the foregoing, the Board of
Directors of the Company may not designate any Subsidiary of the Company to be
an Unrestricted Subsidiary if, after such designation, (a) the Company or any
Subsidiary of the Company provides credit support for, or a guarantee of, any
Indebtedness or other obligation (contingent or otherwise) of such Subsidiary
(including any undertaking, agreement or instrument evidencing such Indebtedness
or obligation) or is otherwise subject to recourse or obligated thereunder or
therefor, (b) a default with respect to any Indebtedness of such Subsidiary
(including any right which the holders thereof may have to take enforcement
action against such Subsidiary) would permit (upon notice, lapse of time or
both) any holder of any other Indebtedness of the Company or any Subsidiary of
the Company to declare a default on such other Indebtedness or cause the payment
thereof to be accelerated or payable prior to its final scheduled maturity
(whether or not any such default had occurred or was continuing as of the time
of such designation), (c) such Subsidiary owns any Equity Interests in, or owns
or holds any Lien on any property of, any Subsidiary which is not a Subsidiary
of the Subsidiary to be so designated, (d) such Subsidiary has any contract,
arrangement, agreement or understanding with the Company, or any Subsidiary of
the Company, whether written or oral, other than a transaction having terms no
less favorable to the Company or such Subsidiary of the Company than those which
might be obtained at the time from persons who are not Affiliates of the
Company, or (e) the Company or any Subsidiary of the Company has any obligation
to subscribe for any Equity Interest in such Subsidiary or to maintain or
preserve such Subsidiary's financial condition or to cause such Subsidiary to
achieve specified levels of operating results.
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
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involves in excess of $5 million, 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
criteria set forth in clause (iii) above.
LIMITATIONS ON LIENS. The Indenture provides that the Company will not, and
will not permit any Subsidiary to, directly or indirectly, create, incur or
affirm any Lien of any kind securing any Indebtedness which is pari passu or
subordinate in right of payment to the 9 1/4% Notes (including any assumption,
guarantee or other liability with respect thereto by any Subsidiary) upon any
property or assets (including any intercompany notes) of the Company or any
Subsidiary owned on the date of the Indenture or acquired after the date of the
Indenture, or any income or profits therefrom, unless the 9 1/4% Notes are
directly secured equally and ratably with (or, in the case of subordinated
Indebtedness, prior or senior thereto, with the same relative priority as the 9
1/4% Notes shall have with respect to such subordinated Indebtedness) the
obligation or liability secured by such Lien except for Liens (A) securing any
Indebtedness which became Indebtedness pursuant to a transaction permitted under
"-- Limitations on Mergers and Consolidations" or securing Acquired Indebtedness
which, in each case, were created prior to (and not created in connection with,
or in contemplation of) the incurrence of such pari passu Indebtedness or
subordinated Indebtedness by the Company or any Subsidiary and which
Indebtedness is permitted under the provisions of "-- Limitations on Additional
Indebtedness," (B) securing any Indebtedness incurred in connection with any
refinancing, renewal, substitutions or replacements of any such Indebtedness
described in clause (A), or (C) created in favor of the Company; provided,
however, that in the case of clauses (A) and (B), any such Lien only extends to
the assets that were subject to such Lien securing such Indebtedness prior to
the related acquisition by the Company or its Subsidiaries.
LIMITATIONS ON ASSET SALES. The Indenture provides that the Company will
not, and will not permit any of its Subsidiaries to, consummate any Asset Sale
unless (i) the Company or its Subsidiaries receive consideration at the time of
such Asset Sale at least equal to the fair market value of the assets or Capital
Stock included in such Asset Sale (as determined in good faith by the Board of
Directors, whose determination shall be conclusive and evidenced by a board
resolution) and (ii) not less than 50% of such consideration is in the form of
cash or Cash Equivalents (provided, however, that this clause (ii) shall not be
applicable to a transaction involving assets acquired and designated as held for
sale, which assets represent in aggregate since the date of the Indenture 5% or
less of the net tangible assets previously acquired by the Company or a
Subsidiary pursuant to acquisitions since the date of the Indenture and which
assets are disposed of no later than one year following their initial
acquisition). The Indenture will further provide that the Net Proceeds of Asset
Sales shall, within 360 days of receipt thereof, (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 9 1/4% Notes. In any such Asset Sale Offer,
the Company shall offer to purchase 9 1/4% Notes on a pro rata basis, unless
such method is otherwise prohibited (in which case the 9 1/4% Notes to be
purchased shall be selected by lot or in such other manner as the Trustee shall
deem fair and equitable), at a purchase price equal to 100% of the aggregate
principal amount of the 9 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
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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 9 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 9 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 9 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 will provide that, without the consent of Holders of at least
66 2/3% of the aggregate principal amount of the outstanding 9 1/4% Notes, the
Indenture may not be amended to adversely affect the right of Holders to require
the Company to repurchase 9 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 Holders of at least 66 2/3% of the aggregate
principal amount of the outstanding 9 1/4% Notes. The Change in Control
Repurchase may not be modified or conditioned in any manner.
A Change in Control or a Change in Control Repurchase may cause the
acceleration of other indebtedness of the Company. In the event of a Change in
Control Repurchase and a simultaneous acceleration of other indebtedness, the
Company may not be able to meet all of its debt payment obligations. Failure by
the Company to repurchase the 9 1/4% Notes when required will result in an Event
of Default with respect to the 9 1/4% Notes whether or not such repurchase is
permitted by the subordination provisions of the Indenture. 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 9 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.
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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 9 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 9 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 $1.00 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 9 1/4% Notes are outstanding,
the Company will furnish to the Holders of 9 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
9 1/4% Notes: (a) default in the payment of principal of or any premium on any 9
1/4% Notes when due (even if such payment is prohibited by the subordination
provisions of the Indenture), whether at Stated Maturity, upon redemption, upon
acceleration or otherwise; (b) default in the payment of any interest on any 9
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 covenant of the Company in the Indenture (other than a
default in the performance or breach of a convenant or agreement which is
specifically dealt with in clause (a) or (b) above) 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 9 1/4%
Notes then outstanding; (d) acceleration of the maturity of Indebtedness of the
Company or its Subsidiaries having in the aggregate 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 9 1/4% Notes shall occur and be continuing, the Trustee or the Holders of
not less than 25% in aggregate principal amount of the 9 1/4% Notes then
outstanding may declare the principal of all such 9 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 9 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 9 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 9 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 9 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.
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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 9 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 9 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
notes identical in all material respects to the 9 1/4% Notes pursuant to an
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 9 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 9 1/4% Notes then outstanding; provided, however, that
no such modification or amendment may, (a) without the consent of the Holder of
each such 9 1/4% Note, (i) change the Stated Maturity of the principal of, or
any installment of interest on, such 9 1/4%Note, (ii) reduce the principal
amount of, or premium, if any, or interest on, such 9 1/4% Note, (iii) change
the place or currency of payment of principal of, or premium, if any, or
interest on, such 9 1/4% Note, (iv) impair the right to institute suit for the
enforcement of any such payment on or with respect to such 9 1/4%Note, or (v)
reduce the percentage in principal amount of 9 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 and (b) without the consent of the Holders of
at least 66 2/3% of the aggregate principal amount of the outstanding 9 1/4%
Notes, (i) alter the provisions of the Indenture relating to optional redemption
of the 9 1/4% Notes by the Company, (ii) amend, change or modify the obligations
of the Company with respect to a Change in Control Repurchase upon a Change in
Control or modify any of the provisions or definitions relating thereto or (iii)
modify or change any provision of the Indenture affecting the subordination or
ranking of the 9 1/4% Notes in a manner adverse to Holders of the 9 1/4% Notes.
The Holders of a majority in aggregate principal amount of the 9 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 9 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 9 1/4% Notes, except a Default or Event of Default in the
payment of principal of, or premium, if any, or interest on the 9 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 9 1/4% 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 9 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 9 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
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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 permits the Company to terminate all of its
obligations under the Indenture (including its obligations to pay interest on
and the principal of the 9 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 9 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 9 1/4% Notes will be governed by, and construed in
accordance with the laws of, the State of New York, without giving effect to
such State's conflicts of laws principles.
INFORMATION CONCERNING THE TRUSTEE
The Company and its Subsidiaries may maintain deposit accounts and conduct
other banking transactions with the Trustee in the ordinary course of business.
The Trustee serves as trustee with respect to the Company's 9 1/2% Senior
Subordinated Notes due 2007.
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.
"Acquired Indebtedness" means (a) with respect to any Person (including an
Unrestricted Subsidiary) 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.
Acquired Indebtedness shall be deemed to be incurred on the date such person
becomes a Subsidiary or the date of the related asset 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.
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"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) a transaction or
a series of related transactions in which either (x) the fair market value of
the asset(s) 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 Agent" means Citibank, N.A., as Administrative Agent under the Credit
Agreement, or any successor Administrative Agent thereunder.
"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 designated) the equity (including,
without limitation, common stock, preferred stock and partnership and joint
venture interests) of such Person. Solely for purposes of clause (ii)(2) of the
"Limitations on Restricted Payments" covenant, "the Company's Capital Stock"
shall include Capital Stock (other than Disqualified Stock) issued by a
subsidiary trust of the Company which is not conducting business operations,
provided, that the calculation pursuant to clause (ii)(2) of the "Limitations on
Restricted Payments" covenant shall not include (i) the subsequent issuance of
Capital Stock of the Company in exchange for or upon conversion of such
subsidiary trust's Capital Stock or (ii) any proceeds received by the subsidiary
trust from the sale of Capital Stock by such trust to the Company or any
Subsidiary or Affiliate of the Company, and provided further that to the extent
the subsidiary trust uses the proceeds of its sale of Capital Stock to purchase
debt securities of the Company, (i) such debt securities are subordinated in
right of payment to the 9 1/4% Notes and (ii) distributions on the Capital Stock
of the subsidiary trust may be suspended at the option of the Company or the
subsidiary trust for a period extending up to the lesser of five years or the
maturity of the underlying debt security of the Company issued to the subsidiary
trust.
"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.
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"Cash Equivalents" means, at any time, (i) any evidence of Indebtedness
with a maturity of 180 days or less issued or directly and fully guaranteed or
insured by the United States of America or any agency or instrumentality thereof
(provided that the full faith and credit of the United States of America is
pledged in support thereof); (ii) certificates of deposit or acceptance with a
maturity of 180 days or less of any financial institution that is a member of
the Federal Reserve System having combined capital and surplus and undivided
profits of not less than $500.0 million or (iii) commercial paper, maturing not
more than 180 days after the date of acquisition, issued by any corporation
(other than an Affiliate or Subsidiary of the Company) organized and existing
under the laws of the United States of America with a rating, at the time as of
which any investment therein is made, of "P-1" (or higher) according to Moody's
Investor Service, Inc. or any successor rating agency, or "A-1" (or higher)
according to Standard and Poor's Corporation or any successor rating agency.
"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 the Company means the ratio
of (i) Consolidated EBITDA of the Company to (ii) the aggregate amount of
Consolidated Interest Expense of the Company for the four full fiscal quarters
immediately preceding the date of the transaction giving rise to the need to
calculate the Consolidated Coverage Ratio and for which such quarters' financial
results have been reported; 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 9 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 Asset Sale was consummated or 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 during such four
quarter period or on any later date on or prior to the date of the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio, such
calculation shall be made on a pro forma basis, giving effect to each such Asset
Sale 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 (except that if any
calculation of the Consolidated Coverage Ratio requires the use of any quarter
prior to the acquisition of First American Health Care of Georgia, Inc. ("First
American"), then the results of operations for First
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American shall be reflected in such calculation from the date 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 acquisition) as if it had occurred at
the beginning of the four-quarter period used to make such calculation). The
calculation of the Consolidated Coverage Ratio shall also give pro forma effect
to (i) the incurrence, repayment or retirement of any other Indebtedness, and
the issuance or redemption of any Preferred Stock, by the Company and its
Subsidiaries and (ii) the discontinuance of any operations by the Company and
its Subsidiaries, in any case occurring during such four quarter period or on
any later date on or prior to the date of the transaction giving rise to the
need to calculate the Consolidated Coverage Ratio as if such Indebtedness was
incurred, repaid or retired or such Preferred Stock was issued or redeemed at
the beginning of such four-quarter period. For purposes of calculating the
Consolidated Coverage Ratio, (i) the Consolidated Interest Expense attributable
to interest on any Indebtedness computed on a pro forma basis and (A) bearing a
floating interest rate shall be computed as if the average rate over the
applicable period had been the applicable rate for the entire period and (B)
which was not outstanding during the period for which the computation is being
made but which bears, at the option of the Company, a fixed or floating rate of
interest, shall be computed by applying at the option of the Company either the
fixed or floating rate and (ii) in making such calculation, the Consolidated
Interest Expense of the Company attributable to interest on any Indebtedness
under a revolving credit facility computed on a pro forma basis shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period.
"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 (to the extent
reducing Consolidated Net Income), 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 of the Company.
"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 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
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(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 or loss,
together with any related provisions for taxes on any such gain or loss,
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. For purposes of
calculating the Consolidated Coverage Ratio, any unusual or non-recurring charge
shall be excluded from the calculation of Consolidated Net Income.
"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) 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.
"Credit Facility" means the Credit Agreement and one or more borrowing
arrangements to be entered into by and between the Company and/or one or more of
its Subsidiaries and a commercial bank or other institutional lender, including
any related notes, security documentation, guarantees, collateral documents,
instruments and agreements executed in connection therewith, in each case as
amended, modified, supplemented, restructured, renewed, restated, refunded,
replaced or refinanced or extended from time to time on one or more occasions.
"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 9 1/4% Notes for cash or debt securities at any time
prior to any such final maturity, or is convertible into or exchangeable for
debt securities at any time prior to any such final maturity.
"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;
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(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.
"Equity Interest" means, with respect to any Person, any and all shares or
other equivalents (however designated) of capital stock, partnership interests
or any other participation, right or other interests in the nature of an equity
interest in such Person or any option, warrant or other security convertible
into or exchangeable for the foregoing.
"Existing Indebtedness" means all of the Indebtedness of the Company and
its Subsidiaries that is outstanding on the date of the Indenture.
"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.
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"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 arrangements 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).
"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) 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
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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 Investment" means (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 acquisition or holding by
the Company or any Subsidiary of receivables owing to the Company or such
Subsidiary, if created or acquired in the ordinary course of business and
payable or dischargeable in accordance with customary trade terms; (iii) the
acquisition or holding by the Company or any Subsidiary of 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; (v) Investments acquired or retained from another
Person in connection with any sale, conveyance, transfer, lease or other
disposition of any properties or assets to such Person in accordance with the
covenant described under "-- Limitations on Asset Sales"; and (vi) Investments
not otherwise permitted by clauses (i) through (v) above in an aggregate amount
not exceeding $10 million.
"Person" means any individual, corporation, limited liability company,
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.
"Public Equity Offering" means a public offering by the Company of shares
of its common stock (however designated and whether voting or non-voting but
excluding Disqualified Stock) and any and all rights, warrants or options to
acquire such common stock pursuant to a registration statement registered under
the Securities Act.
"Refinancing Indebtedness" means Indebtedness that refunds, refinances or
extends any Existing Indebtedness or other Indebtedness permitted to be incurred
under the Indenture (other than Existing Indebtedness under the Credit
Agreement); provided that: (i) the Refinancing Indebtedness is the obligation of
the same Person as was obligated on the Indebtedness being refinanced and has a
ranking in priority relative to the 9 1/4% Notes equal to or junior to that of
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 options, warrants or other rights to
acquire such Capital Stock, or any other payment or distribution
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made in respect thereof, either directly or indirectly; (iii) the making of any
payment of principal, premium or interest on, or any payment on account of the
purchase, redemption, retirement, defeasance or other acquisition for value
(prior to any scheduled maturity, scheduled repayment, scheduled sinking fund
payment or scheduled interest payment date) of, Indebtedness of the Company or
its Subsidiaries which is pari passu with or subordinated in right of payment to
the 9 1/4% Notes and has a scheduled maturity date subsequent to the maturity of
the 9 1/4% Notes; or (iv) the making of any Investment in any Person other than
a Permitted Investment; 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," (II) any payment described in clause (i)
above made by a Subsidiary that is not a Wholly Owned Subsidiary to all holders
of Capital Stock of such Subsidiary on a pro rata basis or (III) 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. Notwithstanding the
foregoing, the following shall not constitute Restricted Payments: (X) the
retirement, repurchase, redemption or other acquisition of Indebtedness of the
Company or any Subsidiary out of the net proceeds of a substantially concurrent
sale (other than to a Subsidiary of the Company) of new Indebtedness of the
Company; provided (a) the principal amount of such new Indebtedness does not
exceed the principal amount of Indebtedness so retired, repurchased, redeemed or
otherwise acquired (plus the amount of any premium required to be paid in
connection with such retirement, repurchase, redemption or acquisition), (b)
such Indebtedness has a ranking in priority relative to the 9 1/4% Notes equal
to or junior to that of the Indebtedness so retired, repurchased, redeemed or
otherwise acquired, (c) such Indebtedness has a Stated Maturity for its final
scheduled principal payment later than the Stated Maturity for the final
scheduled principal payment of the 9 1/4% Notes and (d) such Indebtedness has a
Weighted Average Life to Maturity equal to or greater than the remaining
Weighted Average Life to Maturity of the 9 1/4% Notes; and (Y) the retirement,
repurchase, redemption or other acquisition of shares of the Company's Capital
Stock or Indebtedness of the Company or a Subsidiary of the Company 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); provided, however, that the proceeds of such a sale of Capital Stock
shall not be included in the calculation of aggregate net cash proceeds from the
issuance and sale of the Company's Capital Stock pursuant to clause (ii)(2) of
the "Limitations on Restricted Payments" covenant above.
"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.
"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 9 1/4% Notes, the Company's 10 1/4% Senior
Subordinated Notes due 2006, 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 9 1/2% Senior Subordinated Notes due 2007, 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 9 1/4% Notes;
provided that Senior Indebtedness will not include (i) any Indebtedness,
liability or obligation of the Company to (A)
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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. Notwithstanding the foregoing, an Unrestricted
Subsidiary shall not be deemed a Subsidiary of the Company other than for
purposes of the definition of Unrestricted Subsidiary, unless the Company shall
have designated such Unrestricted Subsidiary as a "Subsidiary" by written notice
to the Trustee. An Unrestricted Subsidiary may be designated as a Subsidiary at
any time by the Company by written notice to the Trustee; provided, however,
that (i) no Default or Event of Default shall have occurred and be continuing or
would arise therefrom and (ii) if such Unrestricted Subsidiary is an obligor of
any Indebtedness, any such designation shall be deemed to be an incurrence as of
the date of such designation by the Company of such Indebtedness and immediately
after giving effect to such designation, the Company could incur $1.00 of
additional Indebtedness pursuant to the covenant described under "Limitations on
Additional Indebtedness".
"Unrestricted Subsidiary" means any Subsidiary of the Company which shall
have been designated as an Unrestricted Subsidiary in accordance with the
Indenture. An Unrestricted Subsidiary may be designated as a Subsidiary at a
later date in the manner provided in the definition of "Subsidiary" above.
"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 ("DTC")
and registered in the name of Cede & Co., as nominee of DTC.
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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DTC is a limited-purpose trust company that was created to hold securities
for its participating organizations (collectively, the "Participants" or "DTC
Participants") and to facilitate the clearance and settlement of transactions in
such securities between Participants through electronic book-entry changes in
accounts of its Participants. DTC's Participants include securities brokers and
dealers (including the Initial Purchasers), banks and trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
(collectively, the "Indirect Participants" or "DTC'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 DTC only through DTC's Participants or
DTC's Indirect Participants.
The Company expects that pursuant to procedures established by DTC
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 DTC (with respect to the interests of DTC's Participants), DTC's
Participants and DTC's Indirect Participants. Neither the Company nor the
Trustee will have any responsibility or liability for any aspect of the records
of DTC or for maintaining, supervising or reviewing any records of DTC 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 DTC or its nominee is the registered owner of the Global Note,
DTC or such nominee 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 DTC 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, DTC
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. Neither the
Company nor the Trustee will have any responsibility or liability for any aspect
of the records of DTC or for maintaining, supervising or reviewing any records
of DTC relating to the New Notes.
Payments in respect of the principal of, premium, if any, and interest on
any New Notes represented by the Global Note and registered in the name of DTC
or its nominee on the applicable record date will be payable by the Trustee to
or at the direction of DTC or its nominee 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 New Notes
represented by 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. The Company believes, however, that
it is currently the policy of DTC to immediately credit 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 DTC. Payments by DTC's Participants and DTC'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 DTC's Participants and
DTC's Indirect Participants.
Neither the Company nor the Trustee will be liable for any delay by DTC or
its nominee 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 DTC or its nominees for all purposes.
CERTIFICATED SECURITIES
Institutional "accredited investors" (within the meaning of Rule 501(a)(1),
(2), (3) or (7) of the Securities Act) own Old Notes in the form of certificated
securities. Subject to certain conditions, any
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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 DTC 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 DTC 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 September 30, 1997, IHS' total long-term debt,
including current portion, accounted for 77.8% of its total capitalization. In
connection with the offering of the Old Notes, S&P confirmed its B rating of
IHS' other subordinated debt obligations, but with a negative outlook, and
assigned the same rating to the Old Notes, and Moody's downgraded the Company's
debt obligations to B2, but noted that the outlook for the rating was stable,
and assigned the new rating to the Old Notes. In November 1997, S&P placed the
Company's senior credit and subordinated debt ratings on CreditWatch with
negative implications due to the Proposed Facility Acquisition. See
"Capitalization," "Unaudited 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."
NEW CREDIT FACILITY
On September 15, 1997, the Company entered into a $1.75 billion revolving
credit and term loan facility with Citibank, N.A., as Administrative Agent, and
certain other lenders (the "New Credit Facility") to replace its existing $700
million revolving credit facility. The New Credit Facility consists of a $750
million term loan facility (the "Term Facility") and a $1 billion revolving
credit facility, including a $100 million letter of credit subfacility and a $10
million swing line subfacility (the "Revolving Facility"). The Term Facility,
all of which was borrowed on September 17, 1997, matures on September 30, 2004
and will be amortized beginning September 30, 1998 as follows: 1998 -- $7.5
million; each of 1999, 2000, 2001 and 2002 -- $7.5 million (payable in equal
quarterly installments); 2003 -- $337.5 million (payable in equal quarterly
installments); and 2004 -- $375 million (payable in equal quarterly
installments). Any unpaid balance will be due on the maturity date. The Term
Facility bears interest at a rate equal to, at the option of IHS, either (i) in
the case of Eurodollar loans, the sum of (x) one and three-quarters percent or
two percent (depending on the ratio of the Company's Debt (as defined in the New
Credit Facility) to earnings before interest, taxes, depreciation, amortization
and rent, pro forma for any acquisitions or divestitures during the measurement
period (the "Debt/EBITDAR Ratio")) and (y) the interest rate in the London
interbank market for loans in an amount substantially equal to the amount of
borrowing and for the period of borrowing selected by IHS or (ii) the sum of (a)
the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the latest
overnight federal funds rate plus (b) a margin of one-half percent or
three-quarters of one percent (depending on the Debt/EBITDAR Ratio). The Term
Facility can be prepaid at any time in whole or in part without penalty.
The Revolving Facility will reduce to $800 million on September 30, 2001
and $500 million on September 30, 2002, with a final maturity on September 15,
2004; however, the $100 million letter of credit subfacility and $10 million
swing line subfacility will remain at $100 million and $10 million,
respectively, until final maturity. The Revolving Facility bears interest at a
rate equal to, at the option of IHS, either (i) in the case of Eurodollar loans,
the sum of (x) between three-quarters of one percent and one and three-quarters
percent (depending on the Debt/EBITDAR Ratio) and (y) the interest rate in the
London interbank market for loans in an amount substantially equal to the amount
of borrowing and for the period of borrowing selected by IHS or (ii) the sum of
(a) the higher of (1) Citibank, N.A.'s base rate or (2) one percent plus the
latest overnight federal funds rate plus (b) a margin of between zero percent
and one-half percent (depending on the Debt/EBITDAR Ratio). Amounts repaid under
the Revolving Facility may be reborrowed prior to the maturity date.
The New Credit Facility limits IHS' ability to incur indebtedness or
contingent obligations, to make additional acquisitions, to sell or dispose of
assets, to create or incur liens on assets, to pay dividends, to purchase or
redeem IHS' stock and to merge or consolidate with any other person. In
addition, the New Credit Facility requires that IHS meet certain financial
ratios, and provides the banks with the right to require the payment of all
amounts outstanding under the facility, and to terminate all commitments under
the facility, if there is a change in control of IHS or if any person other than
Dr. Robert N. Elkins,
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IHS' Chairman and Chief Executive Officer, or a group managed by Dr. Elkins,
owns more than 40% of IHS' stock. The New Credit Facility is guaranteed by all
of IHS' subsidiaries (other than inactive subsidiaries) and secured by a pledge
of all of the stock of substantially all of IHS' subsidiaries.
The New Credit Facility replaced the Company's $700 million credit facility
(the "Prior Credit Facility"). As a result, the Company recorded an
extraordinary loss on extinguishment of debt of approximately $2.4 million (net
of related tax benefit of approximately $1.5 million) in the third quarter of
1997 resulting from the write-off of deferred financing costs of $3.9 million
related to the Prior Credit Facility.
The Company used approximately $321.5 million of the net proceeds of the
sale of the Old Notes to repay outstanding borrowings under the Prior Credit
Facility.
5 3/4% CONVERTIBLE SENIOR SUBORDINATED DEBENTURES DUE 2001
The Company has outstanding $143,750,000 principal amount of the Company's
5 3/4% Convertible Senior Subordinated Debentures due 2001 (the "5 3/4%
Debentures"). Interest on the 5 3/4% Debentures is payable semi-annually on
January 1 and July 1. The 5 3/4% Debentures are redeemable in whole or in part
at the option of the Company at 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
IHS has outstanding $450,000,000 aggregate principal amount of its 9 1/2%
Senior Subordinated Notes due 2007 (the "9 1/2% Senior Notes"). Interest on the
9 1/2% Senior Notes is payable semi-annually on March 15 and September 15. The 9
1/2% Senior Notes are redeemable in whole or in part at the option of IHS at any
time on or after September 15, 2002, at a price, expressed as a percentage of
the principal amount, initially equal to 104.75% and declining to 100% on
September 15, 2005, plus accrued interest thereon. In addition, IHS may redeem
up to $150,000,000 aggregate principal amount of 9 1/2% Senior Notes at any time
and from time to time prior to September 15, 2000 at a redemption price equal to
108.50% of the aggregate principal amount thereof, plus accrued interest
thereon, out of the net cash proceeds of one or more Public Equity Offerings (as
defined in the indenture under which the 9 1/2% Senior Notes were issued (the "9
1/2% Senior Notes Indenture")). In the event of a change in control of IHS (as
defined in the 9 1/2% Senior Notes Indenture), each holder of 9 1/2% Senior
Notes may require IHS to repurchase such holder's 9 1/2% Senior Notes, in whole
or in part, at 101% of the principal amount thereof, plus accrued interest to
the repurchase date. The 9 1/2% Senior Notes Indenture con-
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tains certain covenants, including, but not limited to, covenants with respect
to the following matters: (i) limitations on additional indebtedness unless
certain coverage ratios are met; (ii) limitations on other subordinated
indebtedness; (iii) limitations on liens; (iv) limitations on the issuance of
preferred stock by IHS' subsidiaries; (v) limitations on transactions with
affiliates; (vi) limitations on restricted payments and investments; (vii)
application of the proceeds of certain asset sales; (viii) limitations on
restrictions on subsidiary dividends; and (ix) restrictions on mergers,
consolidations and the transfer of all or substantially all of the assets of IHS
to another person.
10 1/4% SENIOR SUBORDINATED NOTES DUE 2006
IHS has outstanding $150,000,000 aggregate principal amount of its 10 1/4%
Senior Subordinated Notes due 2006 (the "10 1/4% Senior Notes"). Interest on the
10 1/4% Senior Notes is payable semi-annually on April 30 and October 30. The 10
1/4% Senior Notes are redeemable for cash at any time after April 30, 2001, at
IHS' option, in whole or in part, initially at a redemption price equal to
105.125% of the principal amount, declining to 100% of the principal amount on
April 30, 2004, plus accrued interest thereon to the date fixed for redemption.
In the event of a change in control of IHS (as defined in the indenture under
which the 10 1/4% Senior Notes were issued), each holder of 10 1/4% Senior Notes
may require IHS to repurchase such holder's 10 1/4% Senior Notes, in whole or in
part, at 101% of the principal amount thereof, plus accrued interest to the
repurchase date. The indenture under which the 10 1/4% Senior Notes were issued
contains certain covenants, including, but not limited to, covenants with
respect to the following matters: (i) limitations on additional indebtedness
unless certain ratios are met; (ii) limitations on other subordinated debt;
(iii) limitations on liens; (iv) limitations on the issuance of preferred stock
by IHS' subsidiaries; (v) limitations on transactions with affiliates; (vi)
limitations on certain payments, including dividends; (vii) application of the
proceeds of certain asset sales; (viii) restrictions on mergers, consolidations
and the transfer of all or substantially all of the assets of IHS to another
person; and (ix) limitations on investments and loans.
10 3/4% SENIOR SUBORDINATED NOTES DUE 2004
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
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.
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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
IHS' contingent liabilities (other than liabilities in respect of
litigation and the contingent payments in respect of the First American
Acquisition) aggregated approximately $48.0 million as of September 30, 1997.
IHS is obligated to purchase its Greenbriar facility upon a change in control of
IHS. The net purchase price of the facility is approximately $4.0 million. IHS
has guaranteed approximately $6.6 million of the lessor's indebtedness. IHS is
required, upon certain defaults under the lease, to purchase its Orange Hills
facility at a purchase price equal to the greater of $7.1 million or the
facility's fair market value. IHS has guaranteed approximately $4.0 million owed
by Tutera Group, Inc. and Sunset Plaza Limited Partnership, a partnership
affiliated with a partnership in which IHS has a 49% interest, to Finova Capital
Corporation. IHS has established several irrevocable standby letters of credit
with the Bank of Nova Scotia totaling $26.3 million at September 30, 1997 to
secure certain of IHS' self-insured workers' compensation obligations, health
benefits and other obligations. The Company entered into a guaranty agreement
whereby the Company has guaranteed a maximum of $49,900 owed by Newco Management
to First Union National Bank of Florida. In addition, the Company has
obligations under operating leases aggregating approximately $200.3 million at
September 30, 1997. The Company is also obligated under certain circumstances to
make contingent payments of up to $155 million in respect of its acquisition of
First American, of which $36.1 million was recorded on the balance sheet at
September 30, 1997. The Company is obligated to purchase the remaining interests
in its lithotripsy partnerships at a defined price in the event legislation is
passed or regulations adopted that would prevent the physician partners from
owning an interest in the partnership and using the partnership's lithotripsy
equipment for the treatment of his or her patients.
See "Recent Developments -- Recent Acquisitions."
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
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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 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 October 31,
1997, partners of 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 incorporated by
reference in this Prospectus and elsewhere 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 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,
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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.
The consolidated financial statements of Community Care of America, Inc. 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 this Prospectus
and in the Registration Statement from IHS' Current Report on Form 8-K (dated
September 25, 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 refers to a change in accounting method in 1996
to adopt Statement of Financial Accounting Standards No. 121 relating to the
impairment of long-lived assets.
The financial statements of RoTech Medical Corporation as of July 31, 1996
and 1997 and for each of the years in the three-year period ended July 31, 1997
incorporated in this Prospectus and in the Registration Statement by reference
from IHS' Current Report on Form 8-K (dated October 21, 1997) have been audited
by Deloitte & Touche LLP, independent auditors, as stated in their report, which
is incorporated herein by reference, and have been so incorporated in reliance
upon the report of such firm given upon their authority as experts in accounting
and auditing.
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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.
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1.01 Purchase Agreement, dated September 8, 1997, among Integrated Health Services, Inc., Smith
Barney Inc., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin and Jenrette Securities
Corporation and Citicorp Securities, Inc.(1)
3.01 Third Restated Certificate of Incorporation, as amended.(2)
3.02 Amendment to Third Restated Certificate of Incorporation, dated May 26, 1995.(3)
3.03 Certificate of Designation of Series A Junior Participating Cumulative Preferred Stock.(4)
3.04 Bylaws, as amended.(5)
4.01 Indenture, dated as of September 11, 1997, between Integrated Health Services, Inc. and First
Union National Bank, as Trustee.(1)
4.02 Form of 9 1/4% Senior Subordinated Notes due 2008 and 9 1/4% Senior Subordinated Notes
due 2008, Series A (included as exhibits to 4.01).(1)
5.01 Opinion of Fulbright & Jaworski L.L.P.
10.01 Registration Rights Agreement, dated as of September 8, 1997, among Integrated Health
Services, Inc., Smith Barney Inc., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin
and Jenrette Securities Corporation 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.
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II-1
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23.02 Consent of Fulbright & Jaworski L.L.P. (included in their opinion filed as Exhibit 5.01).
23.03 Consent of Deloitte & Touche LLP
24.01 Powers of Attorney of certain officers and directors of Integrated Health Services, Inc.
(included on the signature page).
25.01 Form T-1, Statement of Eligibility under the Trust Indenture Act of 1939 of First Union
National Bank.
99.01 Form of Letter of Transmittal.
99.02 Form of Notice of Guaranteed Delivery.
99.03 Form of Instructions to Registered Holder and/or Book-Entry Transfer Facility Participant
from Beneficial Owner.
</TABLE>
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(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-77754, effective June 29, 1994.
(3) Incorporated by reference to Company's Registration Statement on Form S-4,
No. 33-94130, effective September 20, 1995.
(4) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
ITEM 22. UNDERTAKINGS.
The Registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth in
the registration statement;
iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(3) To remove from registration by means of post-effective amendment any
of the securities being registered which remain unsold at the termination of
the offering.
(4) That, for purposes of determining any liability under the Securities
Act of 1933, each filing of the registrant's annual report pursuant to
section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and,
where applicable, each filing of an employee benefit plan's annual report
pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be the initial bona
fide offering thereof.
(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 pro-
II-2
<PAGE>
spectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other items
of the applicable form.
(6) That every prospectus: (i) that is filed pursuant to paragraph (1)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to
the registration statement and will not be used until such amendment is
effective, and that, for purposes of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to
be the initial bona fide offering thereof.
(7) Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise,
the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Securities Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the Company of expenses incurred or paid by a director,
officer or controlling person of the Company in the successful defense of
any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
Company will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by the
final adjudication of such issue.
(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first-class mail or equally prompt means. This
includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(9) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Owings
Mills, State of Maryland, on December 11, 1997.
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Robert N. Elkins
--------------------------------------
Robert N. Elkins
Chairman of the Board and
Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert N. Elkins, Lawrence P. Cirka, Eleanor
Harding and W. Bradley Bennett, jointly and severally, his true and lawful
attorneys-in-fact and agents, each with full power of substitution and
resubstitution, for him and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this registration statement, and
to file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite or necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that each of said
attorneys-in-fact and agents, or his substitute or substitutes, may lawfully do
or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------- --------------------------------------- ------------------
<S> <C> <C>
/s/ Robert N. Elkins Chairman of the Board and Chief December 11, 1997
- ------------------------- Executive Officer (Principal Executive
(Robert N. Elkins) Officer)
/s/ Lawrence P. Cirka
- ------------------------- President and Director December 11, 1997
(Lawrence P. Cirka)
- ------------------------- Director December , 1997
(Edwin M. Crawford)
/s/ Kenneth M. Mazik
- ------------------------- Director December 11, 1997
(Kenneth M. Mazik)
/s/ Robert A. Mitchell
- ------------------------- Director December 11, 1997
(Robert A. Mitchell)
II-4
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ---------------------------- ------------------------------------ ------------------
<S> <C> <C>
/s/ Charles W. Newhall, III
- ------------------------- Director December 11, 1997
(Charles W. Newhall, III)
/s/ Timothy F. Nicholson
- ------------------------- Director December 11, 1997
(Timothy F. Nicholson)
/s/ John L. Silverman
- ------------------------- Director December 11, 1997
(John L. Silverman)
/s/ George H. Strong
- ------------------------- Director December 11, 1997
(George H. Strong)
/s/ W. Bradley Bennett
- ------------------------- Executive Vice President - Chief December 11, 1997
(W. Bradley Bennett) Accounting Officer (Principal
Accounting Officer)
/s/ Eleanor C. Harding Executive Vice President - Finance December 11, 1997
- ------------------------- (Principal Financial Officer)
(Eleanor C. Harding)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION PAGE
- -------- -------------------------------------------------------------------------------------- -----
<S> <C> <C>
1.01 Purchase Agreement, dated September 8, 1997, among Integrated Health Services,
Inc., Smith Barney Inc., Morgan Stanley & Co. Incorporated, Donaldson, Lufkin and
Jenrette Securities Corporation and Citicorp Securities Inc.(1)
3.01 Third Restated Certificate of Incorporation, as amended.(2)
3.02 Amendment to Third Restated Certificate of Incorporation, dated May 26, 1995.(3)
3.03 Certificate of Designation of Series A Junior Participating Cumulative Preferred
Stock.(4)
3.04 Bylaws, as amended.(5)
4.01 Indenture, dated as of September 11, 1997, between Integrated Health Services, Inc.
and First Union National Bank, as Trustee.(1)
4.02 Form of 9 1/4% Senior Subordinated Notes due 2008 and 9 1/4% Senior
Subordinated Notes due 2008, Series A (included as exhibits to
4.01).(1)
5.01 Opinion of Fulbright & Jaworski L.L.P.
10.01 Registration Rights Agreement, dated as of September 8, 1997, among Integrated
Health Services, Inc., Smith Barney Inc., Morgan Stanley & Co. Incorporated,
Donaldson, Lufkin and Jenrette Securities Corporation 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).
23.03 Consent of Deloitte & Touche LLP.
24.01 Powers of Attorney of certain officers and directors of Integrated Health Services,
Inc. (included on the signature page).
25.01 Form T-1, Statement of Eligibility under the Trust Indenture Act of 1939 of First
Union National Bank.
99.01 Form of Letter of Transmittal.
99.02 Form of Notice of Guaranteed Delivery.
99.03 Form of Instructions to Registered Holder and/or Book-Entry Transfer Facility Par-
ticipant from Beneficial Owner.
</TABLE>
- ----------
(1) Incorporated by reference to the Company's Quarterly Report on Form 10-Q for
the fiscal quarter ended September 30, 1997.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-77754, effective June 29, 1994.
(3) Incorporated by reference to Company's Registration Statement on Form S-4,
No. 33-94130, effective September 20, 1995.
(4) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 1995.
(5) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1994.
December 10, 1997
FULBRIGHT & JAWORSKI
L.L.P.
<TABLE>
<CAPTION>
<S> <C> <C>
TELPHONE: 212/318-3000 A REGISTERED LIMITED LIABILITY PARTNERSHIP HOUSTON
FACSIMILE: 212/752-5958 666 FIFTH AVENUE WASHINGTON, D.C.
WRITER'S INTERNET ADDRESS: NEW YORK, NEW YORK 10103-3198 AUSTIN
SAN ANTONIO
WRITER'S DIRECT DIAL NUMBER: DALLAS
NEW YORK
LOS ANGELES
LONDON
HONG KONG
</TABLE>
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Dear Sirs:
We refer to the Registration Statement on Form S-4 (the "Registration
Statement") to be filed by Integrated Health Services, Inc. (the "Company") with
the Securities and Exchange Commission under the Securities Act of 1933, as
amended, relating to $500,000,000 aggregate principal amount of the Company's 9
1/4% Senior Subordinated Notes due 2008, Series A (the "New Notes") proposed to
be issued under and pursuant to the Indenture, dated as of September 11, 1997,
between the Company and First Union National Bank, as Trustee (the "Indenture"),
in exchange for the Company's 9 1/4% Senior Subordinated Notes due 2008.
We assume that appropriate action will be taken, prior to the offer and
sale of the New Notes, to register and qualify such New Notes for sale under all
applicable state securities or "blue sky" laws.
In our examination of the foregoing documents, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, the conformity to original documents of all documents submitted
to us as certified or photostatic copies, and the authenticity of the originals
of such latter documents.
Based on the foregoing, we advise you that in our opinion the New Notes
being issued by the Company have been duly and validly authorized for issuance
by the Company, and, when duly executed and authenticated in accordance with the
terms of the Indenture and delivered as contemplated in the Prospectus forming
part of the Registration Statement, the New Notes will be legal, valid and
binding obligations of the Company (subject to bankruptcy, insolvency and other
laws which affect the rights of creditors generally, including the laws of the
State of Delaware relating to compromises, arrangements and reorganizations).
We consent to the filing of this opinion as an exhibit to the
Registration Statement and the reference to this firm under the caption "Legal
Matters" in the Prospectus contained therein. This consent is not to be
construed as an admission that
<PAGE>
Integrated Health Services, Inc.
December 10, 1997
Page 2
we are a person whose consent is required to be filed with the Registration
Statement under the provisions of the Securities Act of 1933.
Very truly yours,
Fulbright & Jaworski L.L.P.
EXHIBIT 12.01
INTEGRATED HEALTH SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
Sept 30,
1996 Sept 30, Sept 30, 1997
1992 1993 1994 1995 1996 Pro Forma 1996 1997 Pro forma
---- ---- ---- ---- ---- --------- ---- ---- ---------
<S> <C> <C> <C> <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 $ 939 $107,941 $ 80,260 $ 91,438
Fixed charges:
Interest expense (1) 3,831 10,082 25,374 46,653 71,600 168,594 51,204 79,565 135,607
Portion of rental expense
representative of interest
factor (2) 6,503 7,719 14,053 22,042 25,928 28,173 17,993 25,107 27,190
Capitalized interest (860) (1,402) (3,030) (5,155) (3,800) (3,800) (2,633) (2,700) (2,700)
Equity earnings of less than
fifty percent owned joint
ventures 36 (83) (142) (431) 2 2 (348) 958 958
---- ---- ---- ---- ---- --------- ---- ---- ---------
Earnings available for fixed
charges $28,684 $47,106 $95,234 $ 20,850 $205,210 $193,908 $174,157 $183,190 $252,493
====== ====== ====== ======= ======= ======= ======= ======= =======
Fixed charges:
Interest expense (1) $ 3,831 $10,082 $25,374 $ 46,653 $ 71,600 $168,594 $ 51,204 $ 79,565 $135,607
Portion of rental expense
representative of interest
factor (2) 6,503 7,719 14,053 22,042 25,928 28,173 17,993 25,107 27,190
-- ----- ----- ------ ------ ------ ------ ------ ------ ------
Total fixed charges $10,334 $17,801 $39,427 $ 68,695 $ 97,528 $196,767 $ 69,197 $104,672 $162,797
====== ====== ====== ======= ======= ======= ======= ======= =======
Ratio of earnings to fixed
charges 2.78 2.65 2.42 0.30 2.10 0.99 2.52 1.75 1.55
==== ==== ==== ==== ==== ==== ==== ==== ====
- ----------------
(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
Interest expense calculation:
Interest, net $1,493 $ 5,705 $20,602 $38,977 $64,110 $159,501 $46,033 71,991 126,968
Capitalized interest 860 1,402 3,030 5,155 3,800 3,800 2,678 2,700 2,700
Interest income 1,300 2,669 1,121 1,876 2,233 2,233 1,459 3,024 3,024
----- ----- ----- ----- ----- ----- ----- ----- -----
Interest expense 3,653 9,776 24,753 46,008 70,143 165,534 50,170 77,715 132,692
Def. financing
amortization (a) 178 306 621 645 1,457 3,060 1,034 1,850 2,915
--- --- --- --- ----- ----- ----- ----- -----
Interest expense per
above $3,831 $10,082 $25,374 $46,653 $71,600 $168,594 $51,204 $79,565 $135,607
===== ====== ====== ====== ====== ======= ====== ====== =======
- -----------------
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.
</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 report dated March 24, 1997 relating to the
consolidated financial statements of Integrated Health Services, Inc. and
subsidiaries, incorporated by reference herein, our report dated October 17,
1996 relating to the consolidated financial statements of First American Health
Care of Georgia, Inc. and subsidiaries, incorporated by reference herein, and
our report dated April 14, 1997 relating to the consolidated financial
statements of Community Care of America, Inc. and subsidiaries, incorporated by
reference herein, and to the reference to our firm under the heading "Experts"
in the registration statement.
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. Our report dated April 14, 1997 refers to the change in
accounting method, in 1996, to adopt Statement of Financial Accounting Standards
No. 121 relating to impairment of long-lived assets.
KPMG PEAT MARWICK LLP
Baltimore, Maryland
December 10, 1997
EXHIBIT 23.03
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this registration statement
on Form S-4 of Integrated Health Services, Inc. (IHS) of our report dated
September 18, 1997 (October 21, 1997 as to Note 1), appearing in the Annual
Report on Form 10-K of RoTech Medical Corporation for the year ended July 31,
1997, which report appears in the Form 8-K dated October 21, 1997, as amended,
of IHS, and to the reference to us under the heading experts in the registration
statement.
Deloitte & Touche LLP
Orlando, Florida
December 8, 1997
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM T-1
STATEMENT OF ELIGIBILITY AND QUALIFICATION
UNDER THE TRUST INDENTURE ACT FOR 1939, AS AMENDED,
OF A CORPORATION DESIGNATED TO ACT AS TRUSTEE
Check if an application to determine eligibility of a trustee pursuant to
Section 305(b) (2) _____
FIRST UNION NATIONAL BANK
(Exact name of Trustee as specified in its charter)
230 SOUTH TRYON STREET, 9TH FL.
CHARLOTTE, NC 28288-1179 56-0900030
(Address of principal (Zip Code) (I.R.S. Employer
executive office) Identification No.)
Patricia A. Welling, (804) 788-9663
901 E. Cary Street, Richmond, Virginia 23219
INTEGRATED HEALTH SERVICES, INC.
(Exact name of obligor as specified in its charter)
Delaware 23-2428312
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
10065 Red Run Boulevard
Ownings Mill, MD 21117
(Address of principal executive offices) (Zip Code)
9 1/4 % SENIOR SUBORDINATED NOTES DUE 1/15/2008
(Title of the indenture securities)
================================================================================
<PAGE>
1. GENERAL INFORMATION.
(a) The following are the names and addresses of each examining or
supervising authority to which the Trustee is subject:
The Comptroller of the Currency, Washington, D.C.
Federal Reserve Bank of Richmond, Richmond, Virginia.
Federal Deposit Insurance Corporation, Washington, D.C.
Securities and Exchange Commission, Division of Market Regulation,
Washington, D.C.
(b) The Trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH OBLIGOR.
The obligor is not an affiliate of the Trustee.
3. VOTING SECURITIES OF THE TRUSTEE.
Not applicable.
(See answer to Item 13)
4. TRUSTEESHIPS UNDER OTHER INDENTURES.
Not applicable.
(See answer to Item 13)
5. INTERLOCKING DIRECTORATES AND SIMILAR RELATIONSHIPS WITH THE OBLIGOR OR
UNDERWRITERS.
Not applicable.
(See answer to Item 13)
6. VOTING SECURITIES OF THE TRUSTEE OWNED BY THE OBLIGOR OR ITS OFFICIALS.
Not applicable.
(See answer to Item 13)
7. VOTING SECURITIES OF THE TRUSTEE OWNED BY UNDERWRITERS OR THEIR OFFICIALS.
Not applicable.
(See answer to Item 13)
8. SECURITIES OF THE OBLIGOR OWNED OR HELD BY THE TRUSTEE.
Not applicable.
2
<PAGE>
(See answer to Item 13)
9. SECURITIES OF UNDERWRITERS OWNED OR HELD BY THE TRUSTEE.
Not applicable.
(See answer to Item 13)
10. OWNERSHIP OR HOLDINGS BY THE TRUSTEE OF VOTING SECURITIES OF CERTAIN
AFFILIATES OR SECURITY HOLDERS OF THE OBLIGOR.
Not applicable.
(See answer to Item 13)
11. OWNERSHIP OF HOLDERS BY THE TRUSTEE OF ANY SECURITIES OF A PERSON OWNING 50
PERCENT OR MORE OF THE VOTING SECURITIES OF THE OBLIGOR.
Not applicable.
(See answer to Item 13)
12. INDEBTEDNESS OF THE OBLIGOR TO THE TRUSTEE.
Not applicable.
(See answer to Item 13)
13. DEFAULTS BY THE OBLIGOR.
A. None
B. None
14. AFFILIATIONS WITH THE UNDERWRITERS.
Not applicable.
(See answer to Item 13)
15. FOREIGN TRUSTEE.
Trustee is a national banking association organized under the laws of
the United States.
16. LIST OF EXHIBITS.
(1) Articles of Incorporation. (Incorporated by reference from Exhibit 25
to Registration 333-25575, filed June 5, 1997.)
3
<PAGE>
(2) Certificate of Authority of the Trustee to conduct business.
(Incorporated by reference from Exhibit 25 to Registration 333-25575,
filed June 5, 1997.)
(3) Certificate of Authority of the Trustee to exercise corporate trust
powers. (Incorporated by reference from Exhibit 25 to Registration
333-25575, filed June 5, 1997)
(4) By-Laws. (Incorporated by reference from Exhibit 25 to Registration
333-25575, filed June 5, 1997.)
(5) Inapplicable.
(6) Consent by the Trustee required by Section 321(b) of the Trust
Indenture Act of 1939. Included at Page 5 of this Form T-1 Statement.
(7) Report of condition of Trustee.
(8) Inapplicable.
(9) Inapplicable.
4
<PAGE>
SIGNATURE
Pursuant to the requirements of the Trust Indenture Act of 1939, as
amended, the Trustee, FIRST UNION NATIONAL BANK, a national association
organized and existing under the laws of the United States of America, has duly
caused this statement of eligibility and qualification to be signed on its
behalf by the undersigned, thereunto duly authorized, all in the City of
Richmond, and Commonwealth of Virginia on the 5th day of December, 1997.
FIRST UNION NATIONAL BANK
(Trustee)
BY:/s/ Patricia A. Welling
-----------------------------------
Patricia A. Welling, Vice President
EXHIBIT T-1 (6)
CONSENTS OF TRUSTEE
Under section 321(b) of the Trust Indenture Act of 1939 and in connection
with the proposed issuance by Integrated Health Services, Inc. of its 9 1/4%
Senior Subordinated Notes due 1/15/ 2008, First Union National Bank, as the
Trustee herein named, hereby consents that reports of examinations of said
Trustee by Federal, State, Territorial or District authorities may be furnished
by such authorities to the Securities and Exchange Commission upon requests
therefor.
FIRST UNION NATIONAL BANK
BY:/s/ John A. Dracos, Jr.
-----------------------------------
John A. Dracos, Jr., Vice President
Dated: December 5, 1997
5
CONSOLIDATED REPORT OF CONDITION FOR INSURED COMMERCIAL
AND STATE-CHARTERED SAVINGS BANKS FOR JUNE 30, 1997
All schedules are to be reported in thousands of dollars. Unless otherwise
indicated, report the amount outstanding as of the last business day of the
quarter.
SCHEDULE RC--BALANCE SHEET
<TABLE>
<CAPTION>
C400
Dollar Amounts in Thousands RCFD Bil Mil Thou
- ----------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C> <C>
1. Cash and balances due from depository institutions (from Schedule RC-A):
a. Noninterest-bearing balances and currency and coin(1).................................. 0081 4,473,562 1.a.
b. Interest-bearing balances(2)........................................................... 0081 159,113 1.b.
2. Securities:
a. Held-to-maturity securities (from schedule RC-B, column A)............................. 1754 1,303,183 2.a.
b. Available-for-sale securities (from Schedule RC-B, column D)........................... 1773 7,934,740 2.b.
3. Federal funds sold and securities purchased under agreements to resell..................... 1350 2,305,347 3.
4. Loans and lease financing receivables:
a. Loans and leases, net of unearned income (from Schedule RC-C) RCFD 2122 59,060,409 4.a.
b. LESS: Allowance for loan and lease losses.................. RCFD 3123 875,011 4.b.
c. LESS: Allocated transfer risk reserve...................... RCFD 3128 0 4.c.
d. Loans and leases, net of unearned income,
allowance, and reserve (item 4.a minus 4.b and 4.c).................................... 2125 58,185,398 4.d.
5. Trading assets (from Schedule RC-D)........................................................ 3545 2,298,398 5.
6. Premises and fixed assets (including capitalized leases)................................... 2145 1,622,300 6.
7. Other real estate owned (from Schedule RC-M)............................................... 2160 48,538 7.
8. Investments in unconsolidated subsidiaries and associated companies (from Schedule RC-M)... 2130 74,680 8.
9. Customers' liability to this bank on acceptances outstanding............................... 2155 643,693 9.
10. Intangible assets (from Schedule RC-M)..................................................... 2143 1,469,446 10.
11. Other assets (from Schedule RC-F).......................................................... 2160 3,381,292 11.
12. Total assets (sum of items 1 through 11)................................................... 2170 83,899,690 12.
</TABLE>
- ---------------
(1) Includes cash items in process of collection and unposted debits.
(2) Includes time certificates of deposit not held for trading.
<PAGE>
SCHEDULE RC-- Continued
<TABLE>
<CAPTION>
Dollar Amounts in Thousands Bil Mil Thou
- ----------------------------------------------------------------------------------------------------------------------------
LIABILITIES
<S> <C> <C> <C>
13. Deposits:
a. In domestic offices (sum of totals of columns A and C from Schedule RC-E,
part I).............................................................................. RCOM 2200 50,765,146 13.a.
(1) Noninterest-bearing(1)............................... RCON 6631 12,218,938 13.a.(1)
(2) Interest-bearing..................................... RCON 6636 38,548,208 13.a.(2)
b. In foreign offices, Edge and Agreement subsidiaries, and IRFs (from Schedule RC-E,
part II)............................................................................. RCFN 2200 7,831,207 13.b.
(1) Noninterest-bearing................................. RCFN 6631 0 13.b.(1)
(2) Interest-bearing.................................... RCFN 6636 7,831,207 13.b.(2)
14. Federal funds purchased and securities sold under agreements to repurchase................ RCFD 2800 10,011,148 14.
15 a. Demand notes issued to the U.S. Treasury............................................... RCON 2840 211,051 15.a.
b. Trading liabilities (from Schedule RC-D)............................................... RCFD 3548 2,297,315 15.b.
16. Other borrowed money (included mortgage indebtedness and obligations under
capitalized leases):
a. With a remaining maturity of one year or less........................................ RCFD 2332 2,202,979 16.a.
b. With a remaining maturity of more than one year through three years.................. RCFD A547 524,062 16.b.
c. With a remaining maturity of more than three years................................... RCFD A548 22,062 16.c.
17. Not applicable
18. Bank's liability on acceptances executed and outstanding.................................. RCFD 2920 643,693 18.
19. Subordinated notes and debentures(2)...................................................... RCFD 3200 1,899,753 19.
20. Other liabilities (from Schedule RC-G).................................................... RCFD 2930 1,475,586 20.
21. Total liabilities (sum of items 13 through 20)............................................ RCFD 2948 77,884,002 21.
22. Not applicable
EQUITY CAPITAL
23. Perpetual preferred stock and related surplus............................................. RCFD 3838 0 23.
24. Common Stock.............................................................................. RCFD 3230 82,795 24.
25. Surplus (exclude all surplus related to preferred stock).................................. RCFD 3839 3,709,471 25.
26. a. Undivided profits and capital reserves............................................... RCFD 3632 2,191,664 26.a.
b. Net unrealized holding gains (losses) on available-for-sale securities............... RCFD 8434 31,858 26.b.
27. Cumulative foreign currency translation adjustments....................................... RCFD 3284 0 27.
28. Total equity capital (sum of items 23 through 27)......................................... RCFD 3210 6,015,688 28.
29. Total liabilities and equity capital (sum of items 21 and 28)............................. RCFD 3300 83,899,690 29.
</TABLE>
<TABLE>
Memorandum
To be reported only with the March Report of Condition.
1. Indicate in the box at the right the number of the statement below that best describes the
most comprehensive level of auditing work performed for the bank by independent external
auditors as of any date during 1996..........................................................RCFD 6724 N/A M.1.
<S> <C>
1 * Independent audit of the bank conducted in accordance 4 * Directors' examination of the bank performed by other
with generally accepted auditing standards by a certified external auditors (may be required by state chartering
public accounting firm which submits a report on the bank authority)
2. * Independent audit of the bank's parent holding company 5 * Review of the bank's financial statements by external
conducted in accordance with generally accepted auditing auditors
standards by a certified public accounting firm which 6 * Compilation of the bank's financial statements by external
submits a report on the consolidated holding company auditors
(but not on the bank separately) 7 * Other audit procedures (excluding tax preparation work)
3 * Directors' examination of the bank conducted in 8 * No external audit work
accordance with generally accepted auditing standards
by a certified public accounting firm (may be required by
state chartering authority)
</TABLE>
- --------------
(1) Includes total demand deposits and noninterest-bearing time and savings
deposits.
(2) Includes limited-life preferred stock and related surplus.
LETTER OF TRANSMITTAL
INTEGRATED HEALTH SERVICES, INC.
To Tender 9 1/4% Senior Subordinated Notes due 2008
In Exchange for 9 1/4% Senior Subordinated Notes due 2008, Series A
THE EXCHANGE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT
5:00 P.M., NEW YORK CITY TIME, ON , 1998,
UNLESS THE OFFER IS EXTENDED
TO FIRST UNION NATIONAL BANK (THE "EXCHANGE AGENT")
<TABLE>
<S> <C> <C>
BY REGISTERED OR CERTIFIED MAIL: BY FACSIMILE TRANSMISSION BY OVERNIGHT MAIL OR HAND:
First Union National Bank (FOR ELIGIBLE INSTITUTIONS ONLY): First Union National Bank
First Union Customer Information Center First Union National Bank First Union Customer Information Center
Corporate Trust Operations NC1153 (704) 590-7628 Corporate Trust Operations NC1153
1525 West W.T. Harris Boulevard - 3C3 Confirm: (704) 590-7408 1525 West W.T. Harris Boulevard - 3C3
Charlotte, North Carolina 28288 Attention: Mike Klotz Charlotte, North Carolina 28262-1153
Attention: Mike Klotz Attention: Mike Klotz
</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 9 1/4% Senior Subordinated Notes due 2008, 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 9 1/4% Senior
Subordinated Notes due 2008 (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 , 1998, 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>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF OLD NOTES TENDERED
- ------------------------------------------------------------------------------------------------------------------
(3)
AGGREGATE PRINCIPAL (4)
(1) (2) AMOUNT PRINCIPAL AMOUNT
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S) REGISTRATION REPRESENTED BY TENDERED
(PLEASE FILL IN) NUMBERS* OLD NOTES** (IF LESS THAN ALL)**
<S> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
Total
- ------------------------------------------------------------------------------------------------------------------
</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 DTC,
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 -- WITHDRAWAL OF TENDERS."
<PAGE>
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>
<CAPTION>
SPECIAL REGISTRATION INSTRUCTIONS SPECIAL DELIVERY INSTRUCTIONS
<S> <C>
To be completed ONLY if the New Notes and To be completed ONLY if the New Notes and any Old Notes
any Old Notes delivered herewith but not delivered herewith but not exchanged are to be sent to
exchanged are to be issued in the name someone other than the undersigned, or to the undersigned,
of someone other than the undersigned or or to the undersigned at an address other than that shown
are to be returned by credit an account under "Description of Old Notes Tendered."
maintained by a book-entry transfer facility
Issued New Notes and any Old Notes delivered Mail New Notes and any 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 DTC'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.
<PAGE>
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.
<PAGE>
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: FIRST UNION NATIONAL BANK
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 PART 1 - PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND CERTIFY
FORM W-9 BY SIGNING AND DATING BELOW. ------------------
DEPARTMENT OF THE TREASURY SOCIAL SECURITY
INTERNAL REVENUE PART 2 - CHECK THE BOX IF YOU ARE NOT SUBJECT TO BACKUP WITHOLDING NUMBER OR
SERVICE UNDER THE PROVISIONS OF SECTION 3406(a)(1)(C) OF THE INTERNAL EMPLOYER
REVENUE CODE BECAUSE (1) YOU HAVE NOT BEEN NOTIFIED THAT YOU IDENTIFICATION
IDENTIFICATION ARE SUBJECT TO BACKUP WITHHOLDING AS A RESULT OF NUMBER
FAILURE TO REPORT ALL INTEREST OR DIVIDENDS OR (2) THE INTERNAL
REVENUE SERVICE HAS NOTIFIED YOU THAT YOU ARE NO LONGER SUBJECT TO
BACKUP WITHHOLDING.
[ ]
--------------------------------------------------------------------------------------------
CERTIFICATION: UNDER THE PENALTIES OF PERJURY, I CERTIFY THAT THE
THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT AND PART 3
COMPLETE.
AWAITING TIN [ ]
PAYER'S REQUEST FOR TAXPAYER SIGNATURE: ------------------ DATED: -------
IDENTIFICATION NUMBER ("TIN")
- ---------------------------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY CASH PAYMENTS MADE TO YOU.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF SUBSTITUTE FORM W-9.
- ---------------------------------------------------------------------------------------------------------------------------
CERTIFICATE OF AWAITING TAX IDENTIFICATION NUMBER
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 R DELIVER AN APPLICATION IN THE EAR 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.
- ----------------------------------------------------------- ---------------- , 199
SIGNATURE DATE
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 9 1/4% Senior
Subordinated Notes due 2008 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 , 1998.
TO FIRST UNION NATIONAL BANK
(THE "EXCHANGE AGENT")
BY REGISTERED OR CERTIFIED MAIL: BY OVERNIGHT MAIL OR HAND:
First Union National Bank First Union National Bank
First Union Customer Information Center First Union Customer Information Center
Corporate Trust Operations NC1153 Corporate Trust Operations NC1153
1525 West W.T. Harris Boulevard - 3C3 1525 West W.T. Harris Boulevard - 3C3
Charlotte, North Carolina 28288 Charlotte, North Carolina 28288
Attention: Mike Klotz Attention: Mike Klotz
BY FACSIMILE TRANSMISSION
(FOR ELIGIBLE INSTITUTIONS ONLY):
Confirm: (704) 590-7408
First Union National Bank
(704) 590-7628
Attention: Mike Klotz
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: -------------- , 199
- -------------------------------------------------
<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 -----------------------, 199
NOTE: DO NOT SEND CERTIFICATES REPRESENTING OLD NOTES WITH THIS FORM.
CERTIFICATES REPRESENTING OLD NOTES SHOULD BE SENT ONLY WITH
A LETTER OF TRANSMITTAL.
- --------------------------------------------------------------------------------
<PAGE>
INSTRUCTIONS
TO REGISTERED HOLDER AND/OR
BOOK-ENTRY TRANSFER FACILITY PARTICIPANT FROM BENEFICIAL OWNER
OF
INTEGRATED HEALTH SERVICES, INC.
9 1/4% SENIOR SUBORDINATED NOTES DUE 2008
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 9 1/4% Senior Subordinated Notes due 2008 (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 9 1/4% Senior Subordinated Notes due 2008
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 OLD 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:
---------------------------------------------------------------------------
- --------------------------------------------------------------------------------
