AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INTEGRATED HEALTH SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2428312
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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10065 Red Run Boulevard
Owings Mills, Maryland 21117
(410) 998-8400
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
Marshall A. Elkins, Esq.
Executive Vice President and General Counsel
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
(410) 998-8400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies of all communications, including all communications sent to the agent for
service, should be sent to:
<TABLE>
<S> <C> <C>
Carl E. Kaplan, Esq. Leslie A. Glew, Esq. Frederick W. Kanner, Esq.
Fulbright & Jaworski L.L.P. Senior Vice President and Associate General Counsel Dewey Ballantine LLP
666 Fifth Avenue Integrated Health Services, Inc. 1301 Avenue of the Americas
New York, New York 10103 10065 Red Run Boulevard New York, New York 10019
(212) 318-3000 Owings Mills, Maryland 21117 (212) 259-8000
(212) 752-5958(FAX) (410) 998-8400 (212) 259-6333 (FAX)
(410) 998-8500(FAX)
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box: [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box: [ ]
CALCULATION OF REGISTRATION FEE
================================================================================
<TABLE>
<CAPTION>
TITLE OF EACH CLASS OF AMOUNT OF SHARES PROPOSED MAXIMUM OFFERING PROPOSED MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $.001 par value per share
(including the Preferred Stock Purchase
Rights)(3) ............................ 3,579,766 $ 37.00 $132,451,342 $ 39,073.15
</TABLE>
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(1) The Registration Statement relates to the issuance by the Registrant of a
maximum of 3,579,766 shares of Common Stock either (1) upon the conversion
of the Registrant's outstanding 6% Convertible Subordinated Debentures due
2003, or (2) pursuant to the standby arrangements described in the
Prospectus, and the sale from time to time by Smith Barney Inc. of any such
shares so acquired by it.
(2) Estimated solely for the purpose of calculating the registration fee. Such
estimates have been calculated in accordance with Rule 457(c) under the
Securities Act of 1933 and are based upon the average of the high and low
prices per share of the Registrant's Common Stock on the New York Stock
Exchange Composite Transaction Tape on May 27, 1998.
(3) The Preferred Stock Purchase Rights, which are attached to the shares of
Common Stock being registered, will be issued for no additional
consideration; no additional registration fee is required.
--------------
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 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY
DETERMINE.
================================================================================
<PAGE>
SUBJECT TO COMPLETION, DATED MAY 29, 1998
PROSPECTUS
3,579,766 SHARES
[IHS LOGO]
INTEGRATED HEALTH SERVICES, INC.
COMMON STOCK
--------------
This Prospectus covers the issuance and sale of up to 3,579,766 shares of
Common Stock, $.001 par value per share (together with the Preferred Stock
Purchase Rights associated therewith, the "Common Stock"), of Integrated Health
Services, Inc., a Delaware corporation ("IHS" or the "Company"), issuable either
to (a) holders of outstanding 6% Convertible Subordinated Debentures due 2003 of
the Company (the "Debentures") upon conversion of the Debentures, or (b) Smith
Barney Inc. (the "Purchaser") pursuant to the standby arrangements described
herein and the resale from time to time by the Purchaser of any such shares of
Common Stock.
The Company has called for redemption on June 29, 1998 (the "Redemption
Date") all Debentures at a redemption price of 103.0% of the principal amount,
plus accrued interest of $29.83 from January 1, 1998 to the Redemption Date for
each $1,000 principal amount of Debentures, making a total of $1,059.83 payable
for each such $1,000 principal amount. Prior to 5:00 p.m. New York City time
(the "Close of Business") on the Redemption Date, at the option of the holder,
the Debentures (or any portion thereof which is $1,000 or an integral multiple
thereof) may be converted into shares of Common Stock of the Company at a
conversion price of $32.125 per share of Common Stock (equivalent to 31.13
shares of Common Stock for each $1,000 principal amount of Debentures). Cash
will be paid in lieu of any fractional shares of Common Stock issuable upon
conversion of the Debentures. Debentures surrendered for conversion will not be
entitled to interest accrued to the date of conversion. See "Redemption of
Debentures and Alternatives to Redemption." ANY DEBENTURES NOT SO SURRENDERED
FOR CONVERSION PRIOR TO THE CLOSE OF BUSINESS ON THE REDEMPTION DATE WILL BE
REDEEMED FOR CASH ON THE REDEMPTION DATE AND NO FURTHER INTEREST SHALL ACCRUE.
After the Redemption Date, the Debentures will no longer be deemed to be
outstanding and all rights of the holders of the Debentures will cease, except
the right to receive the redemption price, without interest from and after the
Redemption Date, upon surrender of the Debentures.
(continued on next page)
--------------
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR CERTAIN INFORMATION THAT SHOULD
BE CONSIDERED BY PROSPECTIVE INVESTORS.
--------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
--------------
SALOMON SMITH BARNEY
May , 1998
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>
(continued from previous page)
The Common Stock is traded on the New York Stock Exchange ("NYSE") under
the symbol "IHS." On May 28, 1998, the reported closing price of the Common
Stock on the NYSE Composite Tape was $38.1875 per share. A holder of Debentures
who converted such Debentures on that date would have received Common Stock (and
cash in lieu of a fractional share) having a market value, based on such price
on that date, of approximately $1,188.78 for each $1,000 principal amount of
Debentures converted. If such Debentures were surrendered for redemption on the
Redemption Date, such holder would receive $1,059.83 in cash for each $1,000
principal amount.
AS LONG AS THE MARKET PRICE OF THE COMMON STOCK REMAINS AT OR ABOVE $34.05
PER SHARE, THE HOLDERS OF DEBENTURES WHO ELECT TO CONVERT WILL RECEIVE, UPON
CONVERSION, COMMON STOCK (INCLUDING CASH, IF ANY, RECEIVED IN LIEU OF FRACTIONAL
SHARES) HAVING A GREATER MARKET VALUE THAN THE AMOUNT OF CASH RECEIVABLE UPON
REDEMPTION OF SUCH DEBENTURES (BEFORE DEDUCTING ANY TAXES, COMMISSIONS AND OTHER
COSTS WHICH WOULD LIKELY BE INCURRED ON SALE OF THE COMMON STOCK RECEIVED UPON
CONVERSION OF THE DEBENTURES). IT SHOULD BE NOTED, HOWEVER, THAT THE PRICE OF
THE COMMON STOCK RECEIVED UPON CONVERSION WILL FLUCTUATE IN THE MARKET. NO
ASSURANCE CAN BE GIVEN AS TO THE PRICE OF THE COMMON STOCK AT ANY FUTURE TIME,
AND THE HOLDERS SHOULD EXPECT TO INCUR VARIOUS EXPENSES OF SALE IF SUCH COMMON
STOCK IS SOLD.
The conversion right expires at the Close of Business on the Redemption
Date, time being of the essence. From and after that date and time, holders of
Debentures will be entitled only to the redemption price, without interest from
and after the Redemption Date.
The Company has entered into a standby purchase agreement with the
Purchaser pursuant to which the Purchaser has agreed, subject to certain
conditions, to purchase from the Company such number of shares of Common Stock
(the "Purchased Shares") as would have been issuable upon the conversion of
those Debentures which have not been duly surrendered for conversion by the
Close of Business on the Redemption Date. The purchase price for the Purchased
Shares will be an amount equal to a price per share of $34.05. The Purchaser may
also purchase Debentures in the open market or otherwise prior to the Close of
Business on the Redemption Date. The Purchaser has agreed to convert into Common
Stock all Debentures owned by it or so acquired. See "Standby Arrangements" for
a description of the Purchaser's compensation and indemnification arrangements
with the Company.
--------------
Prior to and after the Redemption Date, the Purchaser may offer shares of
Common Stock, including shares of Common Stock acquired pursuant to the standby
arrangements or upon the conversion of Debentures, directly to the public at
prices set from time to time by the Purchaser. The Purchaser may also make sales
to dealers at prices which represent a concession from the prices at which such
shares of Common Stock are then being offered to the public. The amount of such
concessions will be determined from time to time by the Purchaser. In effecting
such transactions, the Purchaser may realize profits or losses independent of
the compensation described under "Standby Arrangements." Any shares of Common
Stock will be offered by the Purchaser when, as and if accepted by the Purchaser
and subject to the Purchaser's right to reject orders in whole or in part. This
Prospectus does not constitute an offer to sell any securities other than the
Common Stock offered by the Purchaser. The Common Stock and any shares acquired
through conversion of Debentures are listed, and application will be made for
listing of the Purchased Shares, on the NYSE.
--------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING OVERALLOTMENT, ENTERING STABILIZING BIDS, EFFECTING COVERING
TRANSACTIONS AND IMPOSING PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "STANDBY ARRANGMEMENTS."
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Securities and Exchange Commission (the "Commission"). The reports, proxy
statements and other information filed by the Company with the Commission can be
inspected and copied at the public reference facilities of the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
Commission's Regional Offices at 7 World Trade Center, 13th Floor, New York, New
York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60661. Copies of such material also may be obtained by mail from the
Public Reference Section of the Commission, Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. In addition, reports, proxy
materials and other information concerning the Company may be inspected at the
offices of the NYSE, 20 Broad Street, New York, New York 10005. Additionally,
the Commission maintains a Web site on the Internet that contains reports, proxy
and information statements and other information regarding registrants that file
electronically with the Commission and that is located at http://www.sec.gov.
This Prospectus constitutes a part of a Registration Statement on Form S-3
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act of 1933, as amended (the "Securities Act"). This Prospectus does
not contain all of the information set forth in the Registration Statement,
certain parts of which are omitted in accordance with the rules and regulations
of the Commission. For further information with respect to the Company and the
Common Stock, reference is hereby made to the Registration Statement. Statements
contained herein concerning the provisions of any contract, agreement or other
document are not necessarily complete, and in each instance reference is made to
the copy of such contract, agreement or other document filed as an exhibit to
the Registration Statement or otherwise filed with the Commission. Each such
statement is qualified in its entirety by such reference. Copies of the
Registration Statement together with exhibits may be inspected at the offices of
the Commission as indicated above without charge and copies thereof may be
obtained therefrom upon payment of a prescribed fee.
Private Securities Litigation Reform Act Safe Harbor Statement. This
Prospectus (including the documents incorporated by reference herein) contains
certain 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.
3
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The information in the following documents filed by IHS with the Commission
(File No. 1-12306) pursuant to the Exchange Act is incorporated by reference in
this Prospectus:
(a) The Company's Annual Report on Form 10-K for the year ended December
31, 1997, as amended by Form 10-K/A filed May 29, 1998;
(b) The Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998, as amended by Form 10-Q/A filed May 29, 1998;
(c) The Company's Current Report on Form 8-K dated October 17, 1996 and
filed October 25, 1996, reporting the acquisition of First American Health
Care of Georgia, Inc., as amended by Form 8-K/A filed November 26, 1996 and
Amendment No. 1 to Form 8-K/A filed July 11, 1997;
(d) The Company's Current Report on Form 8-K dated September 25, 1997 and
filed October 10, 1997, reporting the Company's acquisition of Community Care
of America, Inc. and the Lithotripsy Division of Coram Healthcare
Corporation, as amended by Form 8-K/A filed November 25, 1997 and Amendment
No. 1 to Form 8-K/A filed May 29, 1998;
(e) The Company's Current Report on Form 8-K dated October 21, 1997 and
filed November 5, 1997, reporting the Company's acquisition of RoTech Medical
Corporation, as amended by Form 8-K/A filed November 25, 1997;
(f) The Company's Current Report on Form 8-K dated December 31, 1997 and
filed January 14, 1998, reporting the acquisition of 139 owned, leased or
managed long-term care facilities, 12 specialty hospitals and certain other
businesses from HEALTHSOUTH Corporation, as amended by Form 8-K/A filed March
16, 1998 and Amendment No. 1 to Form 8-K/A filed May 29, 1998;
(g) The Company's Current Report on Form 8-K dated March 4, 1998 and
filed March 12, 1998, reporting the Company's revenues and operating results
for the fourth quarter and year ended December 31, 1997;
(h) The description of the Company's Common Stock contained in Item 1 of
the Company's Registration Statement on Form 8-A dated September 1, 1993; and
(i) The description of the Company's Preferred Stock Purchase Rights
contained in Item 1 of the Company's Registration Statement on Form 8-A dated
September 28, 1995.
All documents filed by the Company 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 termination of the offering made hereby shall be deemed to be
incorporated by reference in this Prospectus and to be a part hereof from the
date of filing of such documents. Any statement contained herein or in a
previously filed document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this
Prospectus to the extent that a statement contained herein or in any other
subsequently filed document which also is or was deemed to be incorporated by
reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The information relating to IHS contained in this Prospectus should be read
together with the information in the documents incorporated by reference.
THIS PROSPECTUS INCORPORATES BY REFERENCE DOCUMENTS WHICH ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN EXHIBITS TO SUCH
DOCUMENTS UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED BY REFERENCE) ARE
AVAILABLE WITHOUT CHARGE TO ANY PERSON TO WHOM THIS PROSPECTUS IS DELIVERED,
UPON WRITTEN OR ORAL REQUEST. REQUESTS FOR SUCH DOCUMENTS SHOULD BE DIRECTED TO
INTEGRATED HEALTH SERVICES, INC., 10065 RED RUN BOULEVARD, OWINGS MILLS,
MARYLAND 21117, ATTENTION: MARC B. LEVIN, EXECUTIVE VICE PRESIDENT-INVESTOR
RELATIONS, TELEPHONE: (410) 998-8400.
4
<PAGE>
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN
THE COMMON STOCK OR AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH
COMMON STOCK IN ANY CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE THEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THEREOF OR THAT THE
INFORMATION CONTAINED HEREIN OR THEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO
ITS DATE.
5
<PAGE>
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,
skilled nursing facility care, home respiratory care, home health nursing care,
other homecare services and contract rehabilitation, hospice, lithotripsy 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. IHS'
post-acute healthcare system is intended to provide cost-effective continuity of
care for its patients in multiple settings and enable payors to contract with
one provider to provide all of a patient's needs following discharge from acute
care hospitals. 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 2,000 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, IHS has focused on (i) developing market concentration
for its post-acute care services in targeted states due to increasing payor
consolidation and the increased preference of payors, physicians and patients
for dealing with only one service provider; (ii) expanding the range of home
healthcare and related services it offers to patients directly in order to
provide patients with a continuum of care throughout their recovery, to better
control costs and to meet the growing desire by payors for one-stop shopping;
and (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, the Company has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. IHS' strategy is
to become a preferred or exclusive provider of post-acute care services to
managed care organizations and other payors.
In implementing its post-acute care network strategy, IHS has recently
focused on expanding its home healthcare services to take advantage of
healthcare payors' increasing focus on having healthcare provided in the
lowest-cost setting possible, recent advances in medical technology which have
facilitated the delivery of medical services in alternative sites and patients'
desires to be treated at home. Consistent with the Company's strategy, IHS in
October 1996 acquired First American Health Care of Georgia, Inc. ("First
American"), a provider of home health services, principally home nursing, in 21
states, primarily Alabama, California, Florida, Georgia, Michigan, Pennsylvania
and Tennessee. IHS in October 1997 acquired RoTech 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 lithotripsy division (the "Coram Lithotripsy
Division") of Coram Healthcare Corporation ("Coram"), which provided 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. IHS intends to use the home
healthcare setting and the delivery franchise of the home healthcare branch and
agency network to (i) deliver sophisticated care, such as skilled nursing care,
home respiratory 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
6
<PAGE>
"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
December 1997, IHS acquired 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 "Facility
Acquisition").
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
IHS believes are generally 30% to 60% below the cost of such care in acute care
hospitals. Because of the high level of specialized care provided, the Company's
MSUs generate substantially higher net revenue and operating profit per patient
day than traditional geriatric care services.
IHS presently operates 313 geriatric care facilities (258 owned or leased
and 55 managed), excluding 13 facilities acquired in the CCA Acquisition and 42
facilities acquired in the Facility Acquisition which 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
65%, 70% and 79% of net revenues during the years ended December 31, 1995, 1996
and 1997, respectively, and 79% and 72% of net revenues in the three months
ended March 31, 1997 and 1998, respectively. IHS also offers a wide range of
basic medical services as well as a comprehensive array of respiratory,
physical, speech, occupational and physiatric therapy in all its geriatric care
facilities. For the year ended December 31, 1997 and the three months ended
March 31, 1998, approximately 35% and 31%, respectively, of IHS' revenues were
derived from home health and hospice care, approximately 44% and 41%,
respectively, were derived from subacute and other ancillary services,
approximately 19% and 28%, respectively, were derived from traditional basic
nursing home services, and approximately 2% and 1%, respectively, were derived
from management and other services. On a pro forma basis after giving effect to
the acquisitions consummated by IHS in 1997, for the year ended December 31,
1997, approximately 30% of IHS' revenues were derived from home health and
hospice care, approximately 43% were derived from subacute and other ancillary
services, approximately 26% were derived from traditional basic nursing home
services and the remaining approximately 1% were derived from management and
other services.
Integrated Health Services, Inc. was incorporated in March 1986 as a
Pennsylvania corporation and reorganized as a Delaware corporation in November
1986. IHS' principal executive offices are located at 10065 Red Run Boulevard,
Owings Mills, Maryland 21117 and its telephone number is (410) 998-8400. Unless
the context indicates otherwise, the terms "IHS" and the "Company" include
Integrated Health Services, Inc. and its subsidiaries.
7
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business before purchasing the shares of Common Stock offered hereby. This
Prospectus contains, in addition to historical information, forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed below, as well as
those discussed elsewhere in this Prospectus (including the documents
incorporated by reference herein).
Risks Related to Substantial Indebtedness. The Company's indebtedness is
substantial in relation to its stockholders' equity. At March 31, 1998, IHS'
total long-term debt, including current portion, accounted for 73.3% of its
total capitalization (70.8% on a pro forma basis after giving effect to the
redemption of the Debentures and the issuance of Common Stock upon conversion
thereof or pursuant to the standby arrangement with the Purchaser). See
"Capitalization." IHS also has significant lease obligations with respect to the
facilities operated pursuant to long-term leases, which aggregated approximately
$684.0 million at March 31, 1998. For the year ended December 31, 1997 and the
three months ended March 31, 1998 the Company's rent expense was $105.1 million
($163.7 million on a pro forma basis after giving effect to the acquisitions
consummated by IHS in 1997) and $35.4 million, respectively. In addition, IHS is
obligated to pay an additional $155 million in respect of the acquisition of
First American during 2000 to 2004, of which $115.2 million (representing the
present value thereof) has been recorded at March 31, 1998. 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 securityholders, including: (i) IHS' ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions or general corporate purposes may be impaired, (ii) a
substantial portion of IHS' cash flow from operations may be dedicated to the
payment of principal and interest on its indebtedness and rent expense, thereby
reducing the funds available to IHS for its operations, (iii) certain of IHS'
borrowings bear, and will continue to bear, variable rates of interest, which
expose IHS to increases in interest rates, and (iv) certain of IHS' indebtedness
contains financial and other restrictive covenants, including those restricting
the incurrence of additional indebtedness, the creation of liens, the payment of
dividends and sales of assets and imposing minimum net worth requirements. In
addition, IHS' leverage may also adversely affect IHS' ability to respond to
changing business and economic conditions or continue its growth strategy. There
can be no assurance that IHS' operating results will be sufficient for the
payment of IHS' indebtedness. If IHS were unable to meet interest, principal or
lease payments, or satisfy financial covenants, it could be required to seek
renegotiation of such payments and/or covenants or obtain additional equity or
debt financing. If additional funds are raised by issuing equity securities, the
Company's stockholders may experience dilution. Further, such equity securities
may have rights, preferences or privileges senior to those of the Common Stock.
To the extent 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 and to pay dividends on the Common
Stock. There can be no assurance that any such efforts would be successful or
timely or that the terms of any such financing or refinancing would be
acceptable to IHS. See "-- Risks Related to Capital Requirements."
In connection with IHS' offering of its 9 1/4% Senior Subordinated Notes
due 2008 in September 1997 (the "9 1/4% Senior Notes"), Standard & Poors ("S&P")
confirmed its B rating of IHS' other subordinated debt obligations, but with a
negative outlook, and assigned the same rating to the 9 1/4% Senior Notes. 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 and in January 1998 S&P downgraded IHS' corporate credit and bank
loan ratings to B+ and its subordinated debt ratings to B- as a result of the
Facility Acquisition. S&P stated that the speculative grade ratings reflect the
Company's high debt leverage and aggressive acquisition strategy, uncertainties
with respect to future government efforts to control Medicare and Medicaid and
the unknown impact on IHS of recent changes in healthcare regulation providing
for a prospective payment system for both nursing homes and home healthcare. S&P
noted IHS' outlook was stable. In connection with the offering of the 9 1/4%
Senior Notes, Moody's Investors Service ("Moody's") downgraded to B2 the
Company's other senior
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subordinated debt obligations, but noted that the outlook for the rating was
stable, and assigned the new rating to the 9 1/4% Senior Notes. Moody's stated
that the rating action reflects Moody's concern about 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 of IHS outstanding. Moody's also stated that the availability provided by
the Company's new credit facility and the 9 1/4% Senior 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.
Risks Associated with Growth Through Acquisitions and Internal Development.
IHS' growth strategy involves growth through acquisitions and internal
development and, as a result, IHS is subject to various risks associated with
this growth strategy. The Company's planned expansion and growth require that
the Company expand its home healthcare services through the acquisition of
additional home healthcare providers and that the Company acquire, or establish
relationships with, third parties which provide post-acute care services not
currently provided by the Company and that the Company acquire, lease or acquire
the right to manage for others additional facilities. Such expansion and growth
will depend on the Company's ability to create demand for its post-acute care
programs, the availability of suitable acquisition, lease or management
candidates and the Company's ability to finance such acquisitions and growth.
The successful implementation of the Company's post-acute healthcare system,
including the capitation of rates, will depend on the Company's ability to
expand the amount of post-acute care services it offers directly to its patients
rather than through third-party providers. There can be no assurance that
suitable acquisition candidates will be located, that acquisitions can be
consummated, that acquired facilities and companies can be successfully
integrated into the Company's operations, or that 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, the Coram Lithotripsy Division and 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 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. The Company's 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.
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Risks Related to Managed Care Strategy. Managed care payors and traditional
indemnity insurers have experienced pressure from their policyholders to curb or
reduce the growth in premiums paid to such organizations for healthcare
services. This pressure has resulted in demands on healthcare service providers
to reduce their prices or to share in the financial risk of providing care
through alternate fee structures such as capitation or fixed case rates. Given
the increasing importance of managed care in the healthcare marketplace and the
continued cost containment pressures from Medicare and Medicaid, IHS has been
restructuring its operations to enable IHS to focus on obtaining contracts with
managed care organizations and to provide capitated services. The Company
believes that its home healthcare capabilities will be an important component of
its ability to provide services under capitated and other alternate fee
arrangements. However, to date there has been limited demand among managed care
organizations for post-acute care network services, and there can be no
assurance that demand for such services will increase. Further, IHS has limited
experience in providing services under capitated and other alternate fee
arrangements and setting the applicable rates. Accordingly, there can be no
assurance that the fees received by IHS will cover the cost of services
provided. If revenue for capitated services is insufficient to cover the
treatment costs, IHS' operating results could be adversely affected. As a
result, the success of IHS' managed care strategy will depend in large part on
its ability to increase demand for post-acute care services among managed care
organizations, to obtain favorable agreements with managed care organizations
and to manage effectively its operating and healthcare delivery costs through
various methods, including utilization management and competitive pricing for
purchased services. Additionally, there can be no assurance that pricing
pressures faced by healthcare providers will not have a material adverse effect
on the Company's business, results of operations and financial condition.
Further, pursuing a strategy focused on risk-sharing fee arrangements
entails certain regulatory risks. Many states impose restrictions on a service
provider's ability to provide capitated services unless it meets certain
financial criteria, and may view capitated fee arrangements as an insurance
activity, 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. 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
limit the Company's ability to incur additional indebtedness unless certain
financial tests are met. See "-- Risks Related to Substantial Indebtedness."
Risks Related to Recent Acquisitions. IHS has recently completed several
major acquisitions, including the acquisitions of First American, RoTech, CCA
and the Coram Lithotripsy Division and the Facility Acquisition, 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, the
Coram Lithotripsy Division and 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
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integration may be increased by the necessity of coordinating geographically
separated organizations, integrating personnel with disparate business
backgrounds and combining different corporate cultures. There can be no
assurance that there will not be substantial costs associated with such
activities or that there will not be other material adverse effects of these
integration efforts. Further, there can be no assurance that management's
efforts to integrate the operations of IHS and newly acquired companies will be
successful or that the anticipated benefits of the recent acquisitions will be
fully realized.
IHS has recently expanded significantly its home healthcare operations.
During the years ended December 31, 1996 and 1997 and the three months ended
March 31, 1997 and 1998, home healthcare accounted for approximately 16.3%,
35.4%, 33.8% and 30.2%, respectively, of IHS' total revenues. On a pro forma
basis, after giving effect to the acquisitions and divestitures consummated by
IHS in 1996 and 1997, home healthcare accounted for approximately 28.8% and
29.6% of IHS' total revenues in 1996 and 1997, respectively. On a pro forma
basis, approximately 70.7% and 73.0% of IHS' home healthcare revenues were
derived from Medicare in the years ended December 31, 1996 and 1997,
respectively. On a pro forma basis, after giving effect to the acquisitions and
divestitures consummated by IHS in 1996 and 1997, home nursing services
accounted for approximately 64.2% and 56.2%, respectively, of IHS' home
healthcare revenues in these periods. Medicare has developed a national fee
schedule for infusion 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 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 prior to 1998. 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. The Balanced Budget Act of 1997 (the "BBA"), enacted in August 1997,
provides for a reduction in current cost reimbursement for home nursing care
pending 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, 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
requires IHS to make contingent payments related to the First American
Acquisition of $155 million over a period of five years. Until a prospective
payment system for home nursing services is introduced, IHS anticipates that
margins for home nursing will remain low and may adversely impact its financial
performance. IHS is currently exploring ways to reduce the impact of its home
nursing business on its financial performance, which may include a "spin-off" of
such operations. In addition, the BBA 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 50% of RoTech's total revenues for 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."
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
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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. There can be no
assurance that adequate reimbursement levels will continue to be available for
services to be provided by IHS which are currently being reimbursed by Medicare,
Medicaid or private payors. Significant limits on the scope of services
reimbursed and on reimbursement rates and fees could have a material adverse
effect on the Company's results of operations and financial condition. See "--
Risk of Adverse Effect of Healthcare Reform." During the years ended December
31, 1995, 1996 and 1997 and the three months ended March 31, 1997 and 1998, the
Company derived approximately 55%, 60%, 66%, 67% and 63%, respectively, of its
patient revenues from Medicare and Medicaid. On a pro forma basis after giving
effect to the acquisitions and divestitures consummated by IHS in 1996 and 1997,
approximately 69% of the Company's patient revenues have been derived from
Medicare and Medicaid in each of the years ended December 31, 1996 and 1997.
The sources and amounts of the Company's patient revenues derived from the
operation of its geriatric care facilities and MSU programs are determined by a
number of factors, including licensed bed capacity of its facilities, occupancy
rate, the mix of patients and the rates of reimbursement among payor categories
(private, Medicare and Medicaid). Changes in the mix of the Company's patients
among the private pay, Medicare and Medicaid categories can significantly affect
the profitability of the Company's operations. The Company's cost of care for
its MSU patients generally exceeds regional reimbursement limits established
under Medicare. The success of the Company's MSU strategy will depend in part on
its ability to obtain per diem rate approvals for costs which exceed the
Medicare established per diem rate limits and by obtaining waivers of these
limitations. There can be no assurance that the Company will be able to obtain
the waivers necessary to enable the Company to recover its excess costs.
Managed care organizations and other third party payors have continued to
consolidate to enhance their ability to influence the delivery of healthcare
services. Consequently, the healthcare needs of a large percentage of the United
States population are provided by a small number of managed care organizations
and third party payors. These organizations generally enter into service
agreements with a limited number of providers for needed services. To the extent
such organizations terminate IHS as a preferred provider and/or engage IHS'
competitors as a preferred or exclusive provider, the business of IHS could be
materially adversely affected.
Risk of Adverse Effect of Healthcare Reform. In addition to extensive
existing government healthcare regulation, there are numerous initiatives on the
federal and state levels for comprehensive reforms affecting the payment for and
availability of healthcare services, including a number of proposals that would
significantly limit reimbursement under Medicare and Medicaid. It is not clear
at this time what proposals, if any, will be adopted or, if adopted, what effect
such proposals would have on the Company's business. Aspects of certain of these
healthcare proposals, such as cutbacks in the Medicare and Medicaid programs,
containment of healthcare costs on an interim basis by means that could include
a short-term freeze on prices charged by healthcare providers, and permitting
greater state flexibility in the administration of Medicaid, could adversely
affect the Company. 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 "-- 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
Company's securities in the future. See "--Uncertainty of Government
Regulation."
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The BBA provides, among other things, for a prospective payment system for
skilled nursing facilities to be implemented for cost reporting periods
beginning on or after July 1, 1998, 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 nursing care
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 BBA also instituted consolidated billing for
skilled nursing facility services, under which payments for non-physician Part B
services for beneficiaries no longer eligible for Part A skilled nursing
facility care will be made to the facility, regardless of whether the item or
service was furnished by the facility, by others under arrangement or under any
other contracting or consulting arrangement, effective for items or services
furnished on or after July 1, 1997. With respect to Medicaid, the BBA repeals
the so-called Boren Amendment, which required state Medicaid programs to
reimburse nursing facilities for the costs that are incurred by efficiently and
economically operated providers in order to meet quality and safety standards.
As a result, states now have considerable flexibility in establishing payment
rates. 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.
Under the new prospective payment system for Medicare reimbursement to
skilled nursing facilities, facilities will receive a pre-established daily rate
for each individual Medicare beneficiary being cared for, based on the activity
level of the patient. The pre-established daily rate will cover all routine,
ancillary and capital costs. It is anticipated that this prospective payment
system will be phased in over four years on a blended rate of the
facility-specific costs and the new federal per diem, which has not to date been
established. The blended rate for the first year of transition will take 75% of
the facility-specific per diem rate and 25% of the federal per diem rate. In
each subsequent transition year, the facility-specific per diem rate component
will decrease by 25% and the federal per diem rate component will increase by
25%, ultimately resulting in a rate based 100% upon the federal per diem. The
facility-specific per diem rate is based upon the facility's 1995 cost report
for routine, ancillary and capital services, updated using a skilled nursing
market basket index. The federal per diem is calculated by the weighted average
of each facility's standardized costs, based upon the historical national
average per diem for freestanding facilities. Prospective payment for IHS' owned
and leased skilled nursing facilities will be effective beginning January 1,
1999 for all facilities other than the facilities acquired from HEALTHSOUTH,
which will become subject to prospective payment on June 1, 1999. Prospective
payment for skilled nursing facilities managed by IHS will be effective for each
facility at the beginning of its first cost reporting period beginning on or
after July 1, 1998. The new prospective payment system will also cover ancillary
services provided to patients at skilled nursing facilities.
IHS anticipates that the prospective payment system for home nursing will
provide for prospectively established per visit payments to be made for all
covered services, which will then be 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 requires the Company to make contingent payments related to the
acquisition of First American of $155 million over a period of five years. The
failure to implement a prospective payment system for home nursing services in
the next several years could adversely affect IHS' postacute care network
strategy. See "-- Risks Related to Recent Acquisitions."
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
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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 to assure continued compliance with various standards, their continued
licensing under state law and their certification under the Medicare and
Medicaid programs. In the course of these reviews, problems are from time to
time identified by these agencies. 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, and the Company believes that it will
be able to resolve all current reviews in a manner satisfactory to the
regulatory agencies without a material adverse effect on its business. However,
there can be no assurance that IHS will be able to satisfactorily resolve all
current or future reviews.
In 1995 the Health Care Financing Administration ("HCFA") implemented
stricter guidelines for annual state surveys of long-term care facilities and
expanded remedies available to enforce compliance with the detailed regulations
mandating minimum healthcare standards. 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 expired in January 1998, 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.
Federal and state regulatory and law enforcement authorities have recently
expanded the scope of enforcement activities with respect to laws applicable to
the Company's business, including with respect to Medicare and Medicaid fraud
and abuse regulations, other reimbursement laws and laws relating to quality of
patient care. In addition, media attention to enforcement activities has
recently increased. There can be no assurance that any such enforcement
activities with respect to the Company or its competitors, or any resultant
media attention given to such matters, will not directly or indirectly have a
material adverse effect on the Company's business, financial condition, results
of operations or the market price of the Common Stock.
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 Acts,"
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
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agencies interpret these fraud and abuse provisions liberally and enforce them
aggressively. The BBA contains new civil monetary penalties for violations of
these laws and imposes an affirmative duty on providers to insure that they do
not employ or contract with persons excluded from the Medicare program. The BBA
also provides a minimum 10 year period for exclusion from participation in
Federal healthcare programs of persons convicted of a prior healthcare
violation. 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.
Many states have adopted certificate of need or similar laws which
generally require that the appropriate state agency approve certain acquisitions
or capital expenditures in excess of defined levels and determine that a need
exists for certain new bed additions, new services and the acquisition of such
medical equipment or capital expenditures or other changes prior to beds and/or
services being added. Many states have placed a moratorium on granting
additional certificates of need or otherwise stated their intent not to grant
approval for new beds. To the extent certificates of need or other similar
approvals are required for expansion of the Company's operations, either through
facility acquisitions or expansion or provision of new services or other
changes, such expansion could be adversely affected by the failure or inability
to obtain the necessary approvals, changes in the standards applicable to such
approvals and possible delays in, and the expenses associated with, obtaining
such approvals.
The Company is unable to predict the future course of federal, state or
local regulation or legislation, including Medicare and Medicaid statutes and
regulations. Further changes in the regulatory framework could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "-- Risk of Adverse Effect of Healthcare Reform."
Competition. The healthcare industry is highly competitive and is subject
to continuing changes in the provision of services and the selection and
compensation of providers. The Company competes on a local and regional basis
with other providers on the basis of the breadth and quality of its services,
the quality of its facilities and, to a more limited extent, price. The Company
also competes with other providers in the acquisition and development of
additional facilities and service providers. The Company's current and potential
competitors include national, regional and local operators of geriatric care
facilities, acute care hospitals and rehabilitation hospitals, extended care
centers, retirement centers and community home health agencies, other home
healthcare companies and similar institutions, many of which have significantly
greater financial and other resources than the Company. In addition, the Company
competes with a number of tax-exempt nonprofit organizations which can finance
acquisitions and capital expenditures on a tax-exempt basis or receive
charitable contributions unavailable to the Company. New service introductions
and enhancements, acquisitions, continued industry consolidation and the
development of strategic relationships by IHS' competitors could cause a
significant decline in sales or loss of market acceptance of IHS' services or
intense price competition or make IHS' services noncompetitive. Further,
technological advances in drug delivery systems and the development of new
medical treatments that cure certain complex diseases or reduce the need for
healthcare services could adversely impact the business of IHS. There can be no
assurance that IHS will be able to compete successfully against current or
future competitors or that competitive pressures will not have a material
adverse effect on IHS' business, financial condition and results of operations.
IHS also competes with various healthcare providers with respect to attracting
and retaining qualified management and other personnel. Any significant failure
by IHS to attract and retain qualified employees could have a material adverse
effect on its business, results of operations and financial condition.
Effect of Certain Anti-Takeover Provisions. IHS' Third Restated Certificate
of Incorporation and By-laws, as well as the Delaware General Corporation Law
(the "DGCL"), contain certain provisions that could have the effect of making it
more difficult for a third party to acquire, or discouraging a third
15
<PAGE>
party from attempting to acquire, control of IHS. These provisions could limit
the price that certain investors might be willing to pay in the future for
shares of Common Stock. Certain of these provisions allow IHS to issue, without
stockholder approval, preferred stock having voting rights senior to those of
the Common Stock. Other provisions impose various procedural and other
requirements that could make it more difficult for stockholders to effect
certain corporate actions. In addition, the IHS Stockholders' Rights Plan, which
provides for discount purchase rights to certain stockholders of IHS upon
certain acquisitions of 20% or more of the outstanding shares of Common Stock,
may also inhibit a change in control of IHS. As a Delaware corporation, IHS is
subject to Section 203 of the DGCL, which, in general, prevents an "interested
stockholder" (defined generally as a person owning 15% or more of the
corporation's outstanding voting stock) from engaging in a "business
combination" (as defined) for three years following the date such person became
an interested stockholder unless certain conditions are satisfied. See
"Description of Capital Stock -- Stockholders' Rights Plan."
Possible Volatility of Stock Price. There may be significant volatility in
the market price of the Common Stock. Quarterly operating results of IHS,
changes in general conditions in the economy, the financial markets or the
healthcare industry, or other developments affecting IHS or its competitors,
could cause the market price of the Common Stock to fluctuate substantially. In
addition, in recent years the stock market and, in particular, the healthcare
industry segment, has experienced significant price and volume fluctuations.
This volatility has affected the market price of securities issued by many
companies for reasons unrelated to their operating performance. In the past,
following periods of volatility in the market price of a company's securities,
securities class action litigation has often been initiated against such
company. Such litigation could result in substantial costs and a diversion of
management's attention and resources, which could have a material adverse effect
upon IHS' business, operating results and financial condition.
RECENT DEVELOPMENTS
In March 1998 the Company sold five long-term care facilities to Omega
Healthcare Investors, Inc. ("Omega"), a publicly-traded real estate investment
trust, for approximately $50.5 million. Omega immediately leased these
facilities to Lyric Health Care LLC ("Lyric") at an annual rent of approximately
$4.95 million. Lyric is a newly-formed company 50% owned by IHS and 50% owned by
TFN Healthcare Investors, Inc., an entity controlled by Timothy Nicholson, a
director of the Company. The Company manages these facilities as well as five
other long-term care facilities which the Company sold to Omega and Omega leased
to Lyric in January 1998. The Company receives a base management fee of 3% of
gross revenues, subject to increase if gross revenues exceed $350 million, and a
franchise fee of 1% of gross revenues. The management agreement with Lyric
provides for an incentive management fee equal to 70% of annual net cash flow
(as defined in the management agreement). IHS did not recognize a gain or loss
on the sale.
In April 1998 the Company reached an agreement in principle to sell 44
facilities to Monarch Properties, Inc., a newly-formed real estate investment
trust ("Monarch"), for an aggregate purchase price of approximately $371
million. It is currently contemplated that Monarch will lease 42 of these 44
facilities to Lyric, and that Lyric will engage the Company to manage the
facilities pursuant to the arrangements described above. The transactions with
Monarch and Lyric are subject to completion of definitive documentation and
completion of Monarch's initial public offering, and there can be no assurance
that the transaction will be completed on these terms, on different terms or at
all. Dr. Robert N. Elkins, the Company's Chairman of the Board, Chief Executive
Officer and President, is Chairman of the Board of Directors of Monarch, and it
is currently contemplated that he will beneficially own between five and ten
percent of Monarch following completion of Monarch's public offering.
In April 1998 IHS acquired a company that operates 13 skilled nursing
facilities for approximately $15.9 million. In April 1998, the Company also
purchased, for an aggregate of approximately $5.5 million, seven companies which
provide respiratory therapy services. In May 1998 the Company acquired five
companies which provide respiratory therapy services for an aggregate of
approximately $15.1 million.
The Company has reached agreements in principle to purchase a company which
operates 31 skilled nursing facilities for approximately $53.2 million, a
skilled nursing facility for $4.7 million, two lithotripsy operations for an
aggregate of approximately $20.4 million and 18 respiratory companies for
approximately $30.7 million. There can be no assurance that any of these
acquisitions will be consummated on these terms, on different terms or at all.
16
<PAGE>
USE OF PROCEEDS
The net proceeds, if any, received by the Company from the sale of Common
Stock to the Purchaser pursuant to the standby arrangements described under
"Standby Arrangements" will be used to fund the redemption of any Debentures not
surrendered for conversion. Any other amounts received by the Company from the
Purchaser pursuant to the standby arrangements will be used for general
corporate purposes. The amount of the proceeds to be received by the Company
from the Purchaser is not determinable at this time, because neither the number
of shares, if any, that will be sold to the Purchaser nor the amount of profit,
if any, that the Purchaser may realize upon resale of such shares can be
determined at this time. The Company will not receive any cash proceeds from the
issuance of Common Stock upon conversion of the Debentures.
CAPITALIZATION
The following table sets forth the capitalization of the Company at March
31, 1998 and as adjusted to give effect to the assumed conversion of all the
outstanding Debentures and the issuance of 3,579,766 shares of Common Stock, net
of certain expenses associated therewith.
<TABLE>
<CAPTION>
MARCH 31, 1998
------------------------------
(IN THOUSANDS)
AS
ACTUAL ADJUSTED(1)
------------- --------------
<S> <C> <C>
Short-term debt:
Current portion of long-term debt ....................................... $ 35,526 $ 35,526
========== ==========
Long-term debt, less current portion:
Revolving credit and term loan facility ................................. $1,745,849 $1,745,849
Other senior debt ....................................................... 160,454 160,454
9 5/8% Senior Subordinated Notes due 2002, Series A ..................... 25 25
10 3/4% Senior Subordinated Notes due 2004 .............................. 107 107
10 1/4% Senior Subordinated Notes due 2006 .............................. 150,000 150,000
9 1/2% Senior Subordinated Notes due 2007 ............................... 450,000 450,000
9 1/4% Senior Subordinated Notes due 2008 ............................... 500,000 500,000
5 1/4% Convertible Subordinated Debentures due 2003 of RoTech
Medical Corporation ................................................... 2,164 2,164
5 3/4% Convertible Senior Subordinated Debentures due 2001 .............. 143,750 143,750
6% Convertible Subordinated Debentures due 2003 ......................... 115,000 --
---------- ----------
Total long-term debt, less current portion ............................ 3,267,349 3,152,349
---------- ----------
Stockholders' equity:
Preferred Stock, $.01 par value, 15,000,000 shares authorized............ -- --
Common Stock, $.001 par value, 150,000,000 shares authorized;
45,221,385 shares issued; 48,801,151 shares issued as adjusted ........ 45 49
Additional paid-in capital .............................................. 1,137,763 1,248,953
Retained earnings ....................................................... 83,575 83,575
Treasury stock .......................................................... (19,813) (19,813)
---------- ----------
Total stockholders' equity ............................................ 1,201,570 1,312,764
---------- ----------
Total capitalization ................................................. $4,468,919 $4,465,113
========== ==========
</TABLE>
- ----------
(1) To the extent that Common Stock is purchased or received upon conversion of
Debentures by the Purchaser pursuant to the standby arrangements, the
Company may incur additional fees payable to the Purchaser, including
underwriting fees. See "Standby Arrangements."
17
<PAGE>
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the New York Stock Exchange under the symbol
"IHS." The following table sets forth for the periods indicated the high and low
last reported sale prices for the Common Stock as reported by the New York Stock
Exchange.
<TABLE>
<CAPTION>
HIGH LOW
------------ ------------
<S> <C> <C>
CALENDAR YEAR 1996
First Quarter ................................. $ 26 $20 1/8
Second Quarter ................................ 27 7/8 23 3/8
Third Quarter ................................. 25 7/8 20 1/2
Fourth Quarter ................................ 27 22
CALENDAR YEAR 1997
First Quarter ................................. $ 32 3/8 $23 3/4
Second Quarter ................................ 39 26 7/8
Third Quarter ................................. 39 1/8 32 11/16
Fourth Quarter ................................ 33 7/8 28 5/16
CALENDAR YEAR 1998
First Quarter ................................. $ 39 5/16 $28 1/4
Second Quarter (through May 28, 1998) ......... 39 15/16 36
</TABLE>
On May 28, 1998, the reported last sales price of the Common Stock on the
NYSE Composite Tape was $38.1875 per share. Prospective purchasers of shares of
Common Stock are urged to obtain current quotations for the market price.
In 1996 and 1997 the Company declared a cash dividend of $0.02 per share.
The payment of any future dividends will be at the discretion of the Company's
Board of Directors and will depend upon, among other things, future earnings,
operations, capital requirements, the general financial condition of the
Company, contractual restrictions and general business conditions. The Company's
term loan and revolving credit facility and the indentures under which the
Company's 10 1/4% Senior Subordinated Notes due 2006, 9 1/2% Senior Subordinated
Notes due 2007 and 9 1/4% Senior Subordinated Notes due 2008 were issued limit
the amount of dividends which may be paid.
18
<PAGE>
SELECTED 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, 1997 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 three months ended March 31, 1997 and 1998 and as of March 31,
1998 have been prepared on the same basis as the audited financial statements
and, in the opinion of management, include all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the information set
forth therein. The results as of and for the three months ended March 31, 1998
are not necessarily indicative of the results to be achieved for the full fiscal
year.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------------------------------
1993 1994 1995 1996 1997
-------------- -------------- -------------- ------------ -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net revenues:
Basic medical services ........................... $ 113,508 $ 269,817 $ 368,569 $ 389,773 $382,274
Specialty medical services ....................... 162,017 404,401 770,554 999,209 1,571,704
Management services and other .................... 20,779 37,884 39,765 45,713 39,219
---------- ---------- --------- --------- ---------
Total ........................................... 296,304 712,102 1,178,888 1,434,695 1,993,197
Costs and expenses:
Operating, general and administrative ............ 229,768 565,172 944,567 1,154,924 1,555,830
Depreciation and amortization .................... 8,126 26,367 39,961 41,681 70,750
Rent ............................................. 23,156 42,158 66,125 77,785 105,136
Interest, net .................................... 5,705 20,602 38,977 64,110 115,201
Loss from impairment of long-lived assets and
other non-recurring charges (income)(3) ......... -- -- 132,960 (14,457) 133,042
---------- ---------- --------- --------- ---------
Earnings (loss) before equity in earnings of
affiliates, income taxes, extraordinary items
and cumulative effect of accounting change 29,549 57,803 (43,702) 110,652 13,238
Equity in earnings of affiliates .................. 1,241 1,176 1,443 828 88
---------- ---------- --------- --------- ---------
Earnings (loss) before income taxes, extraor-
dinary items and cumulative effect of ac-
counting change ................................ 30,790 58,979 (42,259) 111,480 13,326
Income tax provision (benefit) .................... 12,008 22,117 (16,270) 63,715 24,449
---------- ---------- --------- --------- ---------
Earnings (loss) before extraordinary items
and cumulative effect of accounting change 18,782 36,862 (25,989) 47,765 (11,123)
Extraordinary items(4) ............................ 2,275 4,274 1,013 1,431 20,552
---------- ---------- --------- --------- ---------
Earnings (loss) before cumulative effect of
accounting change .............................. 16,507 32,588 (27,002) 46,334 (31,675)
Cumulative effect of accounting change(5) ......... -- -- -- -- 1,830
---------- ---------- --------- --------- ---------
Net earnings (loss) ............................. $ 16,507 $ 32,588 $ (27,002) $ 46,334 $(33,505)
========== ========== ========= ========= =========
Per Common Share(6):
Basic:
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ 1.50 $ 2.18 $ (1.21) $ 2.12 $ (0.39)
Earnings (loss) before cumulative effect of
accounting change .............................. 1.32 1.93 (1.26) 2.06 (1.12)
Net earnings (loss) ............................. $ 1.32 $ 1.93 $ (1.26) $ 2.06 $ (1.19)
Diluted:
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ 1.36 $ 1.77 $ (1.21) $ 1.83 $ (0.39)
Earnings (loss) before cumulative effect of
accounting change .............................. 1.23 1.61 (1.26) 1.78 (1.12)
Net earnings (loss) ............................. $ 1.23 $ 1.61 $ (1.26) $ 1.78 $ (1.19)
Weighted average number of common shares out-
standing(6)
Basic ........................................... 12,522 16,910 21,463 22,529 28,253
Diluted ......................................... 17,101 26,558 21,463 31,564 28,253
========== ========== ========= ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THREE MONTHS
ENDED MARCH 31,
-------------------------
1997 1998
----------- -------------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C>
STATEMENT OF OPERATIONS DATA(1)(2):
Net revenues:
Basic medical services ........................... $ 88,755 $ 234,899
Specialty medical services ....................... 362,689 612,196
Management services and other .................... 9,499 7,785
-------- ---------
Total ........................................... 460,943 854,880
Costs and expenses:
Operating, general and administrative ............ 370,428 650,137
Depreciation and amortization .................... 15,030 38,591
Rent ............................................. 24,009 35,414
Interest, net .................................... 21,421 66,465
Loss from impairment of long-lived assets and
other non-recurring charges (income)(3) ......... (1,025) --
-------- ---------
Earnings (loss) before equity in earnings of
affiliates, income taxes, extraordinary items
and cumulative effect of accounting change 31,080 64,273
Equity in earnings of affiliates .................. 181 270
-------- ---------
Earnings (loss) before income taxes, extraor-
dinary items and cumulative effect of ac-
counting change ................................ 31,261 64,543
Income tax provision (benefit) .................... 12,192 26,463
-------- ---------
Earnings (loss) before extraordinary items
and cumulative effect of accounting change 19,069 38,080
Extraordinary items(4) ............................ -- --
-------- ---------
Earnings (loss) before cumulative effect of
accounting change .............................. 19,069 38,080
Cumulative effect of accounting change(5) ......... -- --
-------- ---------
Net earnings (loss) ............................. $19,069 $ 38,080
======== =========
Per Common Share(6):
Basic:
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ 0.81 $ 0.88
Earnings (loss) before cumulative effect of
accounting change .............................. 0.81 0.88
Net earnings (loss) ............................. $ 0.81 $ 0.88
Diluted:
Earnings (loss) before extraordinary items
and cumulative effect of accounting change $ 0.64 $ 0.74
Earnings (loss) before cumulative effect of
accounting change .............................. 0.64 0.74
Net earnings (loss) ............................. $ 0.64 $ 0.74
Weighted average number of common shares out-
standing(6)
Basic ........................................... 23,660 43,229
Diluted ......................................... 33,822 54,461
======== =========
</TABLE>
19
<PAGE>
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------------------- MARCH 31,
1993 1994 1995 1996 1997 1998
----------- ------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Cash and temporary investments .................... $ 65,295 $ 63,347 $ 41,304 $ 41,072 $ 61,007 $ 112,406
Working capital ................................... 69,495 76,383 136,315 57,549 63,117 224,240
Total assets ...................................... 776,324 1,255,989 1,433,730 1,993,107 5,063,144 5,246,908
Long-term debt, including current portion ......... 402,536 551,452 770,661 1,054,747 3,238,233 3,302,875
Stockholders' equity .............................. 216,506 453,811 431,528 534,865 1,088,161 1,201,570
</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 and the remaining
interest in ILC in July 1997 (the "ILC Sale").
(2) In 1995, the Company merged with IntegraCare, Inc. ("IntegraCare") in a
transaction accounted for as a pooling of interests. Accordingly, the
Company's historical financial statements for all periods prior to the
effective date of the merger have been restated to include the results of
IntegraCare.
(3) 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 acquisi- tion 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, (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 and (iv) a loss of
$83,321,000 resulting from the Company's election in December 1995 of early
implementation of SFAS No. 121, Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to Be Disposed Of. In 1996, consists
primarily of (i) a gain of $34,298,000 from the sale of its pharmacy
division, (ii) a loss of $8,497,000 from its sale of shares in its assisted
living services subsidiary, (iii) a $7,825,000 loss on write-off of accrued
management fees and loans resulting from the Company's termination of its
ten year management contract with All Seasons, originally entered into
during September 1994 and (iv) a $3,519,000 exit cost resulting from the
closure of redundant home healthcare agencies. Because IHS' investment in
the Capstone common stock received in the sale of its 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. In 1997,
consists primarily of (i) a gain of $7,580,000 realized on the shares of
Capstone common stock received in the sale of its pharmacy division in the
first quarter, (ii) the write-off of $6,555,000 of accounting, legal and
other costs resulting from the proposed merger transaction with Coram in the
first quarter, (iii) the payment to Coram of $21,000,000 in connection with
the termination of the proposed merger transaction with Coram, (iv) a gain
of $3,914,000 from the ILC Sale, (v) a loss of $4,750,000 resulting from
termination payments in connection with the RoTech Acquisition and (vi) a
loss of $112,231,000 resulting from its plan to dispose of certain
non-strategic assets to allow the Company to focus on its core operations.
(4) In 1993, the Company recorded a loss on extinguishment of debt of $3,730,000
relating primarily to the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $1,455,000, is presented for the
year ended December 31, 1993 as an extraordinary loss of $2,275,000. In
1994, the Company recorded a loss on extinguishment of debt of $6,839,000
relating primarily to the write-off of deferred financing costs. Such loss,
reduced by the related income tax effect of $2,565,000, is presented for the
year ended December 31, 1994 as an extraordinary loss of $4,274,000. In
1995, the Company recorded a loss on extinguishment of debt of $1,647,000
relating primarily to prepayment charges and the write-off of deferred
financing costs. Such loss, reduced by the related income tax effect of
$634,000, is presented for the year ended December 31, 1995 as an
extraordinary loss of $1,013,000. In 1996, the Company recorded a loss on
extinguishment of debt of $2,327,000, relating primarily to the write-off of
deferred financing costs. Such loss, reduced by the related income tax
effect of $896,000, is presented in the statement of operations for the year
ended December 31, 1996 as an extraordinary loss of $1,431,000. In 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 Company's revolving credit facility. Such loss, reduced by
the related income tax effect of $13,140,000, is presented in the statement
of operations for the year ended December 31, 1997 as an extraordinary loss
of $20,552,000.
(5) Represents the write-off, net of income tax benefit, of the unamortized
balance of costs of business process reengineering and information
technology projects.
(6) The share and per share information for the years ended December 31, 1993,
1994, 1995 and 1996 and the three months ended March 31, 1997 have been
restated to reflect share and per share information in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share,"
which was required to be adopted by the Company effective with its financial
statements for the year ended December 31, 1997. The diluted weighted
average number of common shares outstanding for the years ended December 31,
1993, 1994 and 1996 and the three months ended March 31, 1997 and 1998
includes the assumed conversion of the Debentures into Common Stock.
Additionally, interest expense and amortization of underwriting costs
related to such Debentures are added, net of tax, to income for the purpose
of calculating diluted earnings per share. Such amounts aggregated
$4,516,000, $10,048,000, $9,888,000, $2,452,000 and $2,388,000 for the years
ended December 31, 1993, 1994 and 1996 and the three months ended March 31,
1997 and 1998, respectively. The diluted weighted average number of common
shares outstanding for the years ended December 31, 1995 and 1997 does not
include the assumed conversion of the Debentures or the related interest
expense and underwriting costs, as such conversion would be anti-dilutive.
20
<PAGE>
REDEMPTION OF THE DEBENTURES
AND ALTERNATIVES TO REDEMPTION
The Company has called for redemption, on the Redemption Date (June 29,
1998), unless previously converted into Common Stock, all of the outstanding
Debentures. As of May 28, 1998, $115,000,000 aggregate principal amount of
Debentures was outstanding.
The following alternatives are available to holders of Debentures:
1. Conversion into Common Stock. Holders may convert Debentures (or any
portion thereof which is $1,000 or an integral multiple thereof) into the Common
Stock of the Company at a conversion price of $32.125 per share of Common Stock
(equivalent to 31.13 shares of Common Stock for each $1,000 principal amount of
Debentures). No fractional shares of Common Stock will be issued upon conversion
of Debentures. Instead, the Company will pay a cash adjustment in respect of
such fraction in an amount equal to the same fraction of the Closing Price (as
defined below) at the Close of Business on the day of conversion (or, if such
day is not a Trading Day (as defined below), on the Trading Day immediately
preceding such day). Debentures surrendered for conversion will not be entitled
to interest accrued to the date of conversion. "Closing Price" means the last
reported sales price regular way or, in case no such reported sale takes place
on such day, the average of the reported closing bid and asked prices regular
way, in either case on the NYSE. "Trading Day" means each Monday, Tuesday,
Wednesday, Thursday and Friday, other than any day on which securities are
generally not traded on the NYSE. The Debentures will not be convertible after
5:00 P.M., New York City time, on the Redemption Date.
To convert Debentures into Common Stock, the holder thereof must surrender
such Debentures prior to 5:00 P.M. New York City time, on the Redemption Date to
The Bank of New York, as paying and conversion agent (the "Paying and Conversion
Agent"). Such surrender of any Debenture must be accompanied by a duly executed
notice of the holder's election to convert in the form provided on the reverse
side of such Debenture (the "Conversion Notice"). The Conversion Notice must
also state the name or names, together with the address or addresses, in which
the Common Stock shall be issuable upon the conversion if different from the
registered holder of the Debentures surrendered. Each Debenture surrendered for
conversion must be accompanied by proper assignments thereof to the Company or
in blank for transfer and any requisite federal or state transfer tax stamps.
The Conversion Notice that must be given to the Paying and Conversion Agent may
be provided by surrendering Debentures accompanied by a properly completed
Letter of Transmittal in the form provided to all registered holders of
Debentures (each, a "Letter of Transmittal"). Each holder's signature in a
Letter of Transmittal or any other Conversion Notice must be guaranteed by a
commercial bank or trust company having an office or correspondent in the United
States, a member firm of a national securities exchange or the National
Association of Securities Dealers, Inc. or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (each, an "Eligible
Institution") if shares of Common Stock are to be delivered other than to and in
the name of the registered holder of the Debentures converted. Holders should
inquire of such Eligible Institutions sufficiently in advance of the Redemption
Date whether there are any dollar limitations on the principal amount of
Debentures with respect to which signatures may be guaranteed by such Eligible
Institutions. A Letter of Transmittal and any other Conversion Notice, once
given to the Paying and Conversion Agent, is not revocable. As promptly as
practicable after the surrender of a Debenture as aforesaid, the Company shall
deliver to the holder at the office of the Paying and Conversion Agent a
certificate or certificates for the number of full shares of Common Stock
issuable upon the conversion of such Debenture or portion thereof and a check in
an amount equivalent to the value of any fractional shares otherwise issuable
upon such conversion. Debentures surrendered for conversion will not be entitled
to interest accrued to the date of conversion. See "Paying and Conversion
Agent."
Debenture holders wishing to convert their Debentures whose Debentures are
not immediately available or who cannot deliver their Debentures and all other
documents required by the Letter of Transmittal to the Paying and Conversion
Agent on or prior to 5:00 p.m., New York City time, on the Redemption Date may
elect to convert their Debentures pursuant to the following procedures: (a) such
election to convert must be made by or through an Eligible Institution, (b) a
properly completed and
21
<PAGE>
duly executed Notice of Guaranteed Delivery in the form provided by the Company
to all registered holders of Debentures (each, a "Notice of Guaranteed
Delivery") must be received by the Paying and Conversion Agent on or prior to
5:00 p.m., New York City time, on the Redemption Date, and (c) the Debentures in
proper form for transfer, together with a properly completed and duly executed
Letter of Transmittal and all other documents required thereby, must be received
by the Paying and Conversion Agent within three business days after the date
such Notice of Guaranteed Delivery is received by the Paying and Conversion
Agent. Notwithstanding the foregoing, shares of Common Stock will be issued in
respect of Debentures surrendered for conversion only after timely receipt by
the Paying and Conversion Agent of the surrendered Debentures, a properly
completed and duly executed Letter of Transmittal and any other documents
required by the Letter of Transmittal.
Each holder of Debentures that does not directly hold certificates for its
Debentures, but instead maintains its holdings indirectly in an account with a
broker or other intermediary (each, a "Beneficial Holder") must comply with the
procedures of such intermediary to convert such Beneficial Holder's Debentures.
Such an intermediary may maintain its holdings with The Depository Trust Company
("DTC"). In those instances, the procedures of DTC must also be followed for a
Beneficial Holder to convert its Debentures.
IT IS THE RESPONSIBILITY OF EACH BENEFICIAL HOLDER TO GIVE INSTRUCTIONS TO
ITS INTERMEDIARY IN SUFFICIENT TIME FOR THAT INTERMEDIARY, ANY HIGHER
INTERMEDIARIES AND THE RECORD HOLDER OF SUCH BENEFICIAL HOLDER'S DEBENTURES
(WHICH MAY BE DTC) TO TAKE THE ACTIONS WHICH ARE NECESSARY TO EFFECT CONVERSION
OF SUCH BENEFICIAL HOLDER'S DEBENTURES PRIOR TO 5:00 P.M., NEW YORK CITY TIME,
ON THE REDEMPTION DATE.
The Company will decide, in its sole discretion, all questions as to the
form of documents and the validity, eligibility (including time of receipt) and
acceptance for conversion by the Company of any Debentures. Any defect or
irregularity in the surrender or delivery of any document in connection with the
conversion of Debentures may result in such Debentures not being converted into
Common Stock and, therefore, being redeemed on the Redemption Date.
THE RIGHT TO CONVERT DEBENTURES INTO COMMON STOCK EXPIRES AT THE CLOSE OF
BUSINESS ON THE REDEMPTION DATE, TIME BEING OF THE ESSENCE. FROM AND AFTER THAT
DATE AND TIME, HOLDERS OF DEBENTURES WILL BE ENTITLED ONLY TO THE REDEMPTION
PRICE, WITHOUT INTEREST.
The Common Stock is traded on the NYSE under the symbol "IHS." On May 28,
1998, the reported closing price of the Common Stock on the NYSE Composite Tape
was $38.1875 per share. A holder of Debentures who converted such Debentures on
that date would have received Common Stock (and cash in lieu of a fractional
share) having a market value, based on such price on that date, of approximately
$1,188.78 for each $1,000 principal amount of Debentures converted. If such
Debentures were surrendered for redemption on the Redemption Date, such holder
would receive $1,059.83 in cash for each $1,000 principal amount.
AS LONG AS THE MARKET PRICE OF THE COMMON STOCK REMAINS AT OR ABOVE $34.05
PER SHARE, THE HOLDERS OF DEBENTURES WHO ELECT TO CONVERT WILL RECEIVE, UPON
CONVERSION, COMMON STOCK (INCLUDING CASH, IF ANY, RECEIVED IN LIEU OF FRACTIONAL
SHARES) HAVING A GREATER MARKET VALUE THAN THE AMOUNT OF CASH RECEIVABLE UPON
REDEMPTION OF SUCH DEBENTURES (BEFORE DEDUCTING ANY TAXES, COMMISSIONS AND OTHER
COSTS WHICH WOULD LIKELY BE INCURRED ON SALE OF THE COMMON STOCK RECEIVED UPON
CONVERSION OF THE DEBENTURES). IT SHOULD BE NOTED, HOWEVER, THAT THE PRICE OF
THE COMMON STOCK RECEIVED UPON CONVERSION WILL FLUCTUATE IN THE MARKET. NO
ASSURANCE CAN BE GIVEN AS TO THE PRICE OF THE COMMON STOCK AT ANY FUTURE TIME,
AND THE HOLDERS SHOULD EXPECT TO INCUR VARIOUS EXPENSES OF SALE IF SUCH COMMON
STOCK IS SOLD.
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<PAGE>
2. Sale in Open Market. Holders may sell the Debentures in the open market.
Holders of Debentures who wish to sell their Debentures in the open market
should consult with their own advisors regarding if and when they should sell
their Debentures and the tax consequences thereof. Holders may incur various
fees and expenses in connection with any such sale.
3. Redemption. Holders may allow the Debentures to be redeemed on June 29,
1998. Pursuant to the terms of the Indenture between the Company and The Bank of
New York, as Trustee, dated as of December 1, 1992, holders of the Debentures
will be entitled to receive upon redemption 103.0% of the principal amount
thereof, plus interest accruing from January 1, 1998 to the Redemption Date (the
"Redemption Price"). A holder of $1,000 principal amount of Debentures redeemed
at the Redemption Price would receive $1,059.83 in cash. Payment of the
Redemption Price will be made by the Paying and Conversion Agent upon surrender
of Debentures to the Paying and Conversion Agent by holders of Debentures
accompanied by a properly completed Letter of Transmittal. Each holder's
signature in a Letter of Transmittal must be guaranteed by an Eligible
Institution if the Redemption Price for Debentures surrendered by such holder
for redemption is to be paid other than to the registered holder of such
Debentures. Holders should inquire of such Eligible Institutions sufficiently in
advance of the Redemption Date whether there are any dollar limitations on the
principal amount of Debentures with respect to which signatures may be
guaranteed by such Eligible Institutions. On and after the Redemption Date,
interest will cease to accrue and holders of Debentures will not have any rights
as such holders other than the right to receive the Redemption Price. See
"Paying and Conversion Agent."
The alternatives available to the holders of Debentures are illustrated,
in tabular form, below, based upon the Redemption Price of $1,059.83. Reference
is made to "Certain Federal Income Tax Considerations."
<TABLE>
<CAPTION>
ALTERNATIVES WITH RESPECT ASSUMPTIONS WITH RESPECT TO CONSIDERATION/VALUE RECEIVED
TO $1,000 PRINCIPAL AMOUNT $1,000 PRINCIPAL AMOUNT WITH RESPECT TO $1,000 PRINCIPAL
OF DEBENTURES OF DEBENTURES AMOUNT OF DEBENTURES
- ----------------------------- -------------------------------- ------------------------------------
<S> <C> <C>
Convert Debentures into Market price of Common Stock Common Stock (including cash
Common Stock greater than $34.05 in lieu of any fractional share)
$1,059.83/31.13) having a market value greater
than $1,059.83
Market price of Common Stock Common Stock (including cash
less than $34.05 in lieu of any fractional share)
$1,059.83/31.13) having a market value less than
$ 1,059.83
Redeem Debentures All cases $1,059.83 (in cash)
Sell Debentures in the open All cases Market price on the date of sale,
market less commissions and other ex-
penses
</TABLE>
23
<PAGE>
PAYING AND CONVERSION AGENT
The Bank of New York has been appointed as Paying and Conversion Agent for
the redemption and conversion of the Debentures. The surrender of Debentures for
conversion or redemption should be accompanied by a properly completed Letter of
Transmittal and be delivered to the Paying and Conversion Agent by hand
delivery, overnight courier or mail as follows:
REDEMPTION ONLY:
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Fiscal Agencies-7E Fiscal Agencies-7E Church Street Station
New York, NY 10286 New York, NY 10286 New York, NY 10286
Attn: Fiscal Agencies
Dept. 101B-7E
</TABLE>
CONVERSION ONLY:
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Reorg. Dept.-7E Reorg. Dept.-7E Church Street Station
New York, NY 10286 New York, NY 10286 New York, NY 10286
Attn: Reorg. Dept. 101B-7E
</TABLE>
The Company will pay the Paying and Conversion Agent its reasonable and
customary fees for its services and will reimburse it for all of its reasonable
out-of-pocket expenses in connection therewith.
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<PAGE>
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain United States federal income
tax considerations relevant to the conversion, redemption or sale of Debentures
by a beneficial owner of Debentures. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations (including
proposed regulations and temporary regulations) promulgated thereunder, Internal
Revenue Service ("IRS") rulings, official pronouncements and judicial decisions,
all as in effect on the date hereof and all of which are subject to change,
possibly with retroactive effect, or different interpretations. This summary is
applicable only to holders who are "United States persons" for federal income
tax purposes and who hold Debentures as capital assets and who will hold any
Common Stock received on conversion of Debentures as capital assets.
Additionally, this summary is not applicable to non-United States persons who
have an indirect interest in Debentures or Common Stock through a United States
partnership, trust or estate, or other flow-through entity.
This summary does not discuss all the tax consequences that may be relevant
to a particular holder in light of the holder's particular circumstances and it
is not intended to be applicable in all respects to all categories of investors,
some of whom -- such as insurance companies, tax-exempt persons, financial
institutions, regulated investment companies, dealers in securities or
currencies, persons that hold the Debentures as a position in a "straddle," as
part of a "synthetic security," "hedge," "conversion transaction" or other
integrated investment, persons that enter into "short sales against the box" or
certain other "constructive sales" involving the Debentures or substantially
identical property, or persons whose functional currency is other than United
States dollars -- may be subject to different rules not discussed below. In
addition, this summary does not address any state, local or foreign tax
considerations that may be relevant to a particular holder.
HOLDERS OF DEBENTURES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
CONVERSION, SALE OR REDEMPTION OF THE DEBENTURES IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
CONVERSION OF DEBENTURES
In general, no gain or loss will be recognized on conversion of Debentures
solely into Common Stock. The tax basis for the Common Stock received upon such
conversion will be equal to the tax basis of the Debentures converted (reduced
by the portion of such basis allocable to any fractional share of Common Stock
paid in cash). The holding period for the Common Stock generally will include
the holding period of the Debentures converted. Except as discussed below under
"Market Discount," a holder generally will recognize gain (or loss) upon a
conversion to the extent that any cash paid in lieu of a fractional share of
Common Stock exceeds (or is less than) its tax basis in such fractional share.
SALE OR REDEMPTION OF DEBENTURES
Generally, the sale or redemption of Debentures will result in taxable gain
or loss equal to the difference between (i) the amount realized (except to the
extent such amount is attributable to accrued interest not previously included
in income, which amount generally will be taxable as ordinary income) and (ii)
the holder's adjusted tax basis in the Debentures. Except as discussed below
under "Market Discount," such gain or loss will be capital gain or loss. Such
gain or loss will be long-term capital gain or loss if the holding period for
the Debentures exceeds one year. In the case of a non-corporate holder of
Debentures, any such capital gain will be subject to tax at a maximum federal
income tax rate of 28% if the holder's holding period in the Debentures is more
than one year but not more than 18 months and at a maximum federal income tax
rate of 20% if the holder's holding period in the Debentures is more than 18
months.
MARKET DISCOUNT
Special rules will apply to Debentures acquired with market discount. A
market discount note is, generally, a note the principal amount of which exceeds
the holder's basis in the note immediately after acquisition by more than a
specified de minimis amount. Generally, any gain recognized on the sale or
25
<PAGE>
redemption of a market discount note will be treated as ordinary income to the
extent of the accrued market discount on such note not previously included in
income. In general, market discount accrues on a straight line basis or, at the
option of the holder, at a constant yield to maturity basis.
Although the matter is not free from doubt, a holder of a Debenture with
market discount should not have to recognize income on the conversion of the
Debenture, even with respect to market discount that has accrued but has not
been taken into account. Market discount not recognized on conversion will carry
over to the Common Stock acquired upon conversion thereof and will be recognized
as ordinary income to the extent of gain recognized upon the disposition of such
Common Stock, including any deemed disposition of fractional shares of Common
Stock for cash at the time of conversion.
SALE OR DISPOSITION OF COMMON STOCK
Subject to the discussion under "Market Discount" above, a holder will
recognize gain or loss on the sale or exchange of Common Stock received upon
conversion of a Debenture equal to the difference between the amount realized on
such sale or exchange and the holder's adjusted tax basis in the Common Stock
sold or exchanged.
BACKUP WITHHOLDING
A holder of a Debenture or Common Stock issued upon conversion of a
Debenture may be subject to backup withholding at a rate of 31% with respect to
the proceeds of a sale or redemption of such Debenture or Common Stock, as the
case may be, unless (i) such holder is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (ii)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with applicable backup
withholding rules. The amount of backup withholding from a payment to a holder
will be allowed as a credit against the holder's federal income tax liability.
26
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary does not purport to be complete and is subject in all
respects to the applicable provisions of the DGCL, IHS' Third Restated
Certificate of Incorporation, as amended (the "IHS Certificate"), and the terms
of IHS' Stockholders' Rights Plan, each of which is an exhibit to the
Registration Statement of which this Prospectus is a part.
AUTHORIZED CAPITAL STOCK
IHS is authorized to issue up to 150,000,000 shares of Common Stock, par
value $.001 per share, 46,425,880 shares of which were issued and outstanding at
May 27, 1998, and 15,000,000 shares of Preferred Stock, none of which is
outstanding as of the date hereof. Each outstanding share of Common Stock
currently has attached to it one preferred share purchase right, as described
under "-- Stockholders' Rights Plan."
COMMON STOCK
Holders of Common Stock are entitled to one vote for each share held of
record on all matters to be submitted to a vote of the stockholders and do not
have preemptive rights. Subject to preferences that may be applicable to any
outstanding shares of Preferred Stock, holders of Common Stock are entitled to
receive ratably such dividends, if any, as may be declared from time to time by
the IHS Board of Directors (the "IHS Board") out of funds legally available
therefor. All outstanding shares of Common Stock are fully paid and
nonassessable. In the event of any liquidation, dissolution or winding-up of the
affairs of IHS, holders of Common Stock will be entitled to share ratably in the
assets of IHS remaining after payment or provision for payment of all of IHS'
debts and obligations and liquidation payments to holders of any outstanding
shares of Preferred Stock.
PREFERRED STOCK
The IHS Board, without further stockholder authorization, is authorized to
issue shares of Preferred Stock in one or more series and to determine and fix
the rights, preferences and privileges of each series, including dividend rights
and preferences over dividends on the Common Stock and one or more other series
of Preferred Stock, conversion rights, voting rights (in addition to those
provided by law), redemption rights and the terms of any sinking fund therefor,
and rights upon liquidation, dissolution or winding up, including preferences
over the Common Stock and one or more series of Preferred Stock. Although IHS
has no present plans to issue any shares of Preferred Stock, the issuance of
shares of Preferred Stock, or the issuance of rights to purchase such shares,
may have the effect of delaying, deferring or preventing a change in control of
IHS or an unsolicited acquisition proposal.
IHS has designated 750,000 shares of Preferred Stock as Series A Junior
Participating Cumulative Preferred Stock, $.01 par value per share (the "Series
A Preferred Stock"). The rights, preferences and privileges of the Series A
Preferred Stock are set forth under "-- Stockholders' Rights Plan."
STOCKHOLDERS' RIGHTS PLAN
The following is a description of IHS' Stockholders' Rights Plan (the
"Rights Plan"). The description thereof set forth below is qualified in its
entirety by reference to the Rights Plan, a copy of which has been filed with
the Commission. See "Available Information" and "Incorporation of Certain
Documents by Reference."
The Rights Plan provides that one preferred stock purchase right (a
"Right") will be issued with each share of Common Stock (whether originally
issued or from IHS' treasury) prior to the Rights Distribution Date (as defined
herein). When exercisable, each Right entitles the registered holder to purchase
from IHS one one-hundredth of a share of Series A Preferred Stock at a price of
$135.00 per one one-hundredth of a share of Series A Preferred Stock (the
"Purchase Price"), subject to adjustment.
Until the earlier to occur of (i) 10 days following a public announcement
that a person or group of affiliated or associated persons (an "Acquiring
Person") has acquired beneficial ownership of 20% or more of the outstanding
Common Stock or (ii) 10 business days (or such later date as may be deter-
27
<PAGE>
mined by action of the IHS Board prior to such time as any person or group of
affiliated persons becomes an Acquiring Person) following the commencement of,
or announcement of an intention to make, a tender offer or exchange offer the
consummation of which would result in the beneficial ownership by a person or
group of 20% or more of the outstanding Common Stock (the earlier of such dates
being called the "Distribution Date"), the Rights will be evidenced by all the
Common Stock share certificates and will be transferred with the Common Stock
certificates, and no separate Rights certificates will be distributed. As soon
as practicable following the Distribution Date, separate certificates evidencing
the Rights ("Right Certificates") will be mailed to holders of record of the
Common Stock as of the close of business on the Distribution Date and such
separate Right Certificates alone will evidence the Rights.
The Rights are not exercisable until the Distribution Date. The Rights will
expire on September 26, 2005 (the "Final Expiration Date"), unless the Final
Expiration Date is extended or unless the Rights are earlier redeemed or
exchanged by IHS, in each case, as described below.
The Purchase Price payable, and the number of shares of Series A Preferred
Stock or other securities or property issuable, upon exercise of the Right are
subject to adjustment from time to time to prevent dilution (i) in the event of
a stock dividend on, or a subdivision, combination or reclassification of, the
Series A Preferred Stock, (ii) upon the grant to holders of the Series A
Preferred Stock of certain rights or warrants to subscribe for or purchase
shares of Series A Preferred Stock with a conversion price less than the
then-current market price of the Series A Preferred Stock or (iii) upon the
distribution to holders of the Series A Preferred Stock of evidences of
indebtedness or assets (excluding regular periodic cash dividends paid out of
earnings or retained earnings or dividends payable in Series A Preferred Stock)
or of subscription rights or warrants (other than those referred to above).
The number of outstanding Rights and the number of one one-hundredths of a
share of Series A Preferred Stock issuable upon exercise of each Right are also
subject to adjustment in the event of a stock split of the Common Stock or a
stock dividend on the Common Stock payable in Common Stock or subdivisions,
consolidations or combinations of the Common Stock occurring, in any such case,
prior to the Distribution Date.
Series A Preferred Stock purchasable upon exercise of the Rights will not
be redeemable. Each share of Series A Preferred Stock will be entitled to a
minimum preferential quarterly dividend payment of $1 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of Common Stock. In the event of liquidation, the holders of the Series A
Preferred Stock will be entitled to a minimum preferential liquidation payment
of $100 per share but will be entitled to an aggregate payment of 100 times the
payment made per share of Common Stock. Each share of Series A Preferred Stock
will have 100 votes, voting together with the shares of Common Stock. Finally,
in the event of any merger, consolidation or other transaction in which Common
Stock is exchanged, each share of Series A Preferred Stock will be entitled to
receive 100 times the amount received per share of Common Stock. These rights
are protected by customary antidilution provisions. The Series A Preferred Stock
will, if issued, be junior to any other series of Preferred Stock which may be
authorized and issued by IHS, unless the terms of any such other series provide
otherwise. Once the shares of Series A Preferred Stock are issued, the IHS
Certificate may not be amended in a manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of
two-thirds or more of the outstanding shares of Series A Preferred Stock, voting
separately as a class.
Because of the nature of the Series A Preferred Stock's dividend,
liquidation and voting rights, the value of the one one-hundredth interest in a
share of Series A Preferred Stock purchasable upon exercise of each Right should
approximate the value of one share of Common Stock.
In the event that IHS is acquired in a merger or other business combination
transaction or 50% or more of its consolidated assets or earning power are sold
after a person or group has become an Acquiring Person, proper provision will be
made so that each holder of a Right will thereafter have the right to receive,
upon the exercise thereof at the then current exercise price of the Right, that
number of shares of common stock of the acquiring company which at the time of
such transaction will have a
28
<PAGE>
market value of two times the exercise price of the Right. In the event that any
person or group of affiliated or associated persons becomes an Acquiring Person,
proper provision shall be made so that each holder of a Right, other than Rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise such number of one
one-hundredths of a share of Series A Preferred Stock as shall equal the result
obtained by (x) multiplying the then current Purchase Price by the number of one
one-hundredths of a share of Series A Preferred Stock for which a Right is then
exercisable and dividing that product by (y) 50% of the then current per share
market price of the Common Stock.
At any time after any person or group becomes an Acquiring Person and prior
to the acquisition by such person or group of 50% or more of the outstanding
Common Stock, the IHS Board may exchange the Rights (other than Rights owned by
such person or group which will have become void), in whole or in part, for
consideration consisting of one-half the securities of IHS that would be
issuable at such time upon exercise of one Right.
With certain exceptions, no adjustment in the Purchase Price will be
required until cumulative adjustments require an adjustment of at least 1% in
such Purchase Price. No fractional shares of Series A Preferred Stock will be
issued (other than fractions which are integral multiples of one one-hundredth
of a share of Series A Preferred Stock, which may, at the election of IHS, be
evidenced by depositary receipts) and in lieu thereof, an adjustment in cash
will be made based on the market price of the Series A Preferred Stock on the
last trading day prior to the date of exercise.
At any time prior to the tenth day following the acquisition by a person or
group of affiliated or associated persons of beneficial ownership of 20% or more
of the outstanding Common Stock, the IHS Board may redeem the Rights in whole,
but not in part, at a price of $.01 per Right (the "Redemption Price");
provided, however, that, for the 120-day period after any date of a change
(resulting from a proxy or consent solicitation) in a majority of the IHS Board
in office at the commencement of such solicitation, the Rights may only be
redeemed if (A) there are directors then in office who were in office at the
commencement of such solicitation and (B) the IHS Board, with the concurrence of
a majority of such directors then in office, determines that such redemption is,
in their judgment, in the best interests of IHS and its stockholders. The
redemption of the Rights may be made effective at such time on such basis with
such conditions as the IHS Board in its sole discretion may establish.
Immediately upon any redemption of the Rights, the right to exercise the Rights
will terminate and the only right of the holders of Rights will be to receive
the Redemption Price.
The terms of the Rights may be amended by the IHS Board without the consent
of the holders of the Rights, except that from and after a Distribution Date no
such amendment may adversely affect the interests of the holders of the Rights.
Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of IHS, including, without limitation, the right to vote
or to receive dividends.
The Rights have certain anti-takeover effects. The Rights will cause
substantial dilution to a person or group that attempts to acquire IHS without
conditioning the offer on the Rights being redeemed or a substantial number of
Rights being acquired. The effect of the Rights may be to inhibit a change in
control of IHS (including through a third party tender offer at a price which
reflects a premium to the then prevailing trading price) that may be beneficial
to IHS stockholders. See "Risk Factors -- Effect of Certain Anti-Takeover
Provisions."
LIMITATIONS ON LIABILITY OF OFFICERS AND DIRECTORS
IHS' Certificate contains a provision eliminating or limiting director
liability to IHS and its stockholders for monetary damages arising from acts or
omissions in the director's capacity as a director. The provision does not,
however, eliminate or limit the personal liability of a director (i) for any
breach of such director's duty of loyalty to IHS or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under the DGCL for unlawful dividends or
unlawful stock purchases or redemptions, or (iv) for any transaction from which
the director derived an improper personal benefit. This provision offers persons
who serve on the IHS Board
29
<PAGE>
protection against awards of monetary damages resulting from breaches of their
duty of care (except as indicated above). As a result of this provision, the
ability of IHS or a stockholder thereof to successfully prosecute an action
against a director for a breach of his duty of care is limited. However, the
provision does not affect the availability of equitable remedies such as an
injunction or rescission based upon a director's breach of his duty of care. The
Commission has taken the position that the provision will have no effect on
claims arising under the federal securities laws.
In addition, the IHS Certificate and the IHS By-laws provide for mandatory
indemnification rights, subject to limited exceptions, to any director, officer,
employee or agent of IHS who, by reason of the fact that he or she is a
director, officer, employee or agent of IHS, is involved in a legal proceeding
of any nature. Such indemnification rights include reimbursement for expenses
incurred by such director, officer, employee, or agent in advance of the final
disposition of such proceeding in accordance with the applicable provisions of
the DGCL. In addition, IHS has entered into indemnification agreements with its
officers and directors.
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is American Stock
Transfer & Trust Company, New York, New York.
30
<PAGE>
STANDBY ARRANGEMENTS
Under the terms and subject to the conditions in the Standby Agreement
dated May 29, 1998 between the Company and the Purchaser (the "Standby
Agreement"), the Purchaser has agreed to purchase from the Company, at the
Company's option, for settlement on July 2, 1998, such number of shares of
Common Stock as would have been issuable upon conversion of any Debentures that
were not surrendered for conversion by the Close of Business on the Redemption
Date for a purchase price per share equal to $34.05.
On or prior to the Redemption Date, the Purchaser may also purchase
Debentures in the open market or otherwise. The Purchaser has agreed to convert
into Common Stock all Debentures owned by it. Such Common Stock may be used by
the Purchaser to cover any short position in the Common Stock established by the
Purchaser.
The Company has been advised by the Purchaser that it proposes to offer for
resale to the public at prices set from time to time by the Purchaser any shares
of Common Stock purchased from the Company or acquired upon conversion and not
used to cover any short position. The Purchaser may also make sales of such
shares to certain securities dealers at prices that may reflect concessions from
the prices at which such shares are then being offered to the public. The amount
of such concessions will be determined from time to time by the Purchaser.
Pursuant to the terms of the Standby Agreement and in consideration of its
obligations thereunder, the Company has agreed to pay the Purchaser the sum of
(1) $1,828,213 and (2) an additional $1.36 per share for Purchased Securities
(as defined below) and Compensible Conversion Securities (as defined below), but
the fee specified in clause (2) will be payable only if the Purchased Securities
and Compensible Conversion Securities exceed, in the aggregate, 178,988 shares
of Common Stock and then only with respect to that number of shares of Purchased
Securities and Compensible Conversion Securities that in the aggregate exceeds
178,988 shares. Additionally, the Purchaser has agreed to pay to the Company 50%
of the excess, if any, of (a) the aggregate proceeds received by the Purchaser
from the sale by the Purchaser of Purchased Securities (net of selling
concessions and other reasonable expenses of sale and any transfer taxes) over
(b) an amount equal to the aggregate number of Purchased Securities multiplied
by the average price paid by the Purchaser for such shares. For purposes hereof,
the term "Purchased Securities" means shares of Common Stock purchased by the
Purchaser pursuant to the Standby Agreement, and "Compensible Conversion
Securities" means shares of Common Stock acquired by the Purchaser upon
conversion of Debentures, or that the Purchaser obtained the right to acquire
upon conversion of Debentures, on a date when the last reported sale price of
the Common Stock on the NYSE was less than or equal to $34.05.
The Company has agreed to indemnify the Purchaser against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Purchaser may be required to make in respect thereof.
The Company and its executive officers have agreed, with certain
exceptions, from the date of the Standby Agreement through the Redemption Date
(and the Company and its executive officers have agreed that, if the Purchaser
purchases or receives, in the aggregate, more than 450,000 shares, for an
additional period of 90 days after the Redemption Date) without the prior
written consent of the Purchaser, not to offer, sell or contract to sell, or
otherwise dispose of (or enter into any transaction which is designed to, or
might reasonably be expected to, result in the disposition (whether by actual
disposition or effective economic disposition due to cash settlement or
otherwise) by the Company or such individuals), directly or indirectly, or
announce the offering of, any other shares of Common Stock or any securities
convertible into, or exchangeable for, shares of Common Stock.
The Purchaser has performed investment banking services for the Company
from time to time in the ordinary course of its business for which it has
received customary compensation, including acting as the financial advisor to
the Company in connection with the Company's acquisition of the Coram
Lithotripsy Division and as lead manager in connection with private offerings of
the Company's 9 1/2% Senior Subordinated Notes due 2007 in May 1997 and the
Company's 9 1/4% Senior Subordinated Notes due 2008 in September 1997. The
Purchaser may assist the Company in providing information regarding conversion
of Debentures but will not receive any compensation by the Company for any such
assistance.
31
<PAGE>
In connection with the sale of Common Stock to the Purchaser pursuant to
the Standby Agreement, the Purchaser may purchase Debentures, which may result
in the maintenance of the price of the Common Stock at a level above that which
might otherwise prevail in the open market or may otherwise affect the market
price of the Common Stock. Such purchases are not required, and, if undertaken,
may be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Fulbright & Jaworski
L.L.P., New York, New York and for the Purchaser by Dewey Ballantine LLP, New
York, New York. At April 30, 1998, partners of Fulbright & Jaworski L.L.P. owned
an aggregate of 300 shares of Common Stock.
EXPERTS
The consolidated financial statements of Integrated Health Services, Inc.
and subsidiaries as of December 31, 1996 and 1997 and for each of the years in
the three-year period ended December 31, 1997 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), 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 the 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.
The financial statements of selected facilities operated by Horizon/CMS
Healthcare Corporation to be sold to Integrated Health Services, Inc. as of May
31, 1997 and 1996 and for each of the years in the two year period ended May 31,
1997 incorporated in this Prospectus and in the Registration Statement by
reference from IHS' Current Report on Form 8-K (dated December 31, 1997) have
been audited by Arthur Andersen 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.
32
<PAGE>
================================================================================
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS
PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR BY THE PURCHASER.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY ANY SECURITY OTHER THAN THE COMMON STOCK OFFERED HEREBY, NOR DOES
IT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS
UNLAWFUL TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE ANY
IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY DATE
SUBSEQUENT TO THE DATE HEREOF.
-----------------------------------
TABLE OF CONTENTS
PAGE
-----
Available Information ......................... 3
Incorporation of Certain Documents by
Reference .................................. 4
The Company ................................... 6
Risk Factors .................................. 8
Recent Developments ........................... 16
Use of Proceeds ............................... 17
Capitalization ................................ 17
Price Range of Common Stock and Divi-
dend Policy ................................ 18
Selected Consolidated Financial Data .......... 19
Redemption of the Debentures and Alter-
natives to Redemption ...................... 21
Paying and Conversion Agent ................... 24
Certain Federal Income Tax Considerations 25
Description of Capital Stock .................. 27
Standby Arrangements .......................... 31
Legal Matters ................................. 32
Experts ....................................... 32
================================================================================
<PAGE>
================================================================================
3,579,766
SHARES
[IHS LOGO]
INTEGRATED HEALTH
SERVICES, INC.
COMMON STOCK
-----------------------------------
PROSPECTUS
-----------------------------------
May , 1998
SALOMON SMITH BARNEY
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following is an itemized statement of the estimated amounts of all
expenses payable by the Registrant in connection with the registration of the
Shares:
<TABLE>
<CAPTION>
ITEM AMOUNT
- --------------------------------------------------------------------- ---------------
<S> <C>
Registration Fee - Securities and Exchange Commission .......... $ 39,073.15
New York Stock Exchange listing fee ............................ 12,600.00*
Legal fees and expenses ........................................ 100,000.00*
Accounting fees and expenses ................................... 100,000.00*
Printing and engraving costs ................................... 50,000.00*
Miscellaneous .................................................. 48,326.85*
-------------
Total ....................................................... $ 350,000.00*
=============
</TABLE>
- ----------
* Estimated.
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under 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'
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.
Under Section 8 of the Standby Purchase Agreement, the Purchaser is
obligated under certain circumstances, to indemnify officers, directors and
controlling persons of the Company against certain liabilities, including
liabilities under the Securities Act of 1933. Reference is made to the form of
Standby Purchase Agreement filed as Exhibit 1 hereto.
ITEM 16. EXHIBITS.
1 -- Form of Standby Agreement.
4.1 -- Third Restated Certificate of Incorporation, as amended. (1)
4.2 -- Amendment to the Third Restated Certificate of Incorporation, dated
May 26, 1995. (2)
II-1
<PAGE>
4.3 -- Certificate of Designation of Series A Junior Participating
Cumulative Preferred Stock. (3)
4.4 -- By-laws, as amended. (4)
4.5 -- Indenture, dated as of December 1, 1992, between Integrated Health
Services, Inc. and The Bank of New York (as successor in interest
to Signet Trust Company), as Trustee, relating to the Company's
6% Convertible Subordinated Debentures. (5)
4.6 -- Form of 6% Debenture (included in 4.5). (5)
5 -- Opinion of Fulbright & Jaworski L.L.P.
23.1 -- Consents of KPMG Peat Marwick LLP.
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Arthur Andersen LLP.
23.4 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5).
24 -- Power of Attorney (included on signature page).
99.1 -- Form of Letter of Transmittal
99.2 -- Form of Notice of Redemption
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-77754, effective June 29, 1994.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 33-94130, effective September 15, 1995.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
dated September 27, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-54458, effective December 9, 1992.
ITEM 17. UNDERTAKINGS.
(a) The undersigned 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;
Provided, however, that paragraphs (a)(1)(i) and (a)(1)(ii) do not apply if
the information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant pursuant to
Section 13 or Section 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference 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 a post-effective amendment
any of the securities being registered which remain unsold at the termination
of the offering.
II-2
<PAGE>
(b) The undersigned registrant hereby undertakes 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 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 deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the provisions described under Item 15 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant 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 registrant 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 whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-3 and 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 May 28, 1998.
INTEGRATED HEALTH SERVICES, INC.
By: /s/ Robert N. Elkins
------------------------------------
Robert N. Elkins, Chairman of the
Board, President 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 and C. Taylor Pickett, 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, President May 28, 1998
- ------------------------------- and Chief Executive Officer
(Robert N. Elkins) (Principal Executive Officer)
Director May , 1998
- -----------------------------
(Edwin M. Crawford )
/s/ KENNETH M. MAZIK Director May 28, 1998
- -----------------------------
(Kenneth M. Mazik)
/s/ ROBERT A. MITCHELL Director May 28, 1998
- -----------------------------
(Robert A. Mitchell)
/s/ CHARLES W. NEWHALL, III Director May 28, 1998
- -----------------------------
(Charles W. Newhall, III)
Director May , 1998
- -----------------------------
(Timothy F. Nicholson)
</TABLE>
II-4
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------- ----------------------------------- -------------
<S> <C> <C>
/s/ JOHN L. SILVERMAN Director May 28, 1998
- -----------------------------
(John L. Silverman)
Director May , 1998
- -----------------------------
(George H. Strong)
/s/ C. TAYLOR PICKETT Executive Vice President- May 28, 1998
- ----------------------------- Chief Financial Officer (Principal
(C. Taylor Pickett) Financial Officer)
/s/ W. BRADLEY BENNETT Executive Vice President- May 28, 1998
- ----------------------------- Chief Accounting Officer
(W. Bradley Bennett) (Principal Accounting Officer)
</TABLE>
II-5
<PAGE>
INDEX TO EXHIBITS
1 -- Form of Standby Agreement.
4.1 -- Third Restated Certificate of Incorporation, as amended. (1)
4.2 -- Amendment to the Third Restated Certificate of Incorporation, dated
May 26, 1995. (2)
4.3 -- Certificate of Designation of Series A Junior Participating
Cumulative Preferred Stock. (3)
4.4 -- By-laws, as amended. (4)
4.5 -- Indenture, dated as of December 1, 1992, between Integrated Health
Services, Inc. and The Bank of New York (as successor in interest
to Signet Trust Company), as Trustee, relating to the Company's
6% Convertible Subordinated Debentures. (5)
4.6 -- Form of 6% Debenture (included in 4.5). (5)
5 -- Opinion of Fulbright & Jaworski L.L.P.
23.1 -- Consents of KPMG Peat Marwick LLP.
23.2 -- Consent of Deloitte & Touche LLP.
23.3 -- Consent of Arthur Andersen LLP.
23.4 -- Consent of Fulbright & Jaworski L.L.P. (included in Exhibit 5).
24 -- Power of Attorney (included on signature page).
99.1 -- Form of Letter of Transmittal
99.2 -- Form of Notice of Redemption
- ----------
(1) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-77754, effective June 29, 1994.
(2) Incorporated by reference to the Company's Registration Statement on Form
S-4, No. 33-94130, effective September 15, 1995.
(3) Incorporated by reference to the Company's Current Report on Form 8-K
dated September 27, 1995.
(4) Incorporated by reference to the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(5) Incorporated by reference to the Company's Registration Statement on Form
S-3, No. 33-54458, effective December 9, 1992.
EXHIBIT 1
DRAFT OF 5/28/98
INTEGRATED HEALTH SERVICES, INC.
6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
STANDBY AGREEMENT
New York, New York
May 29, 1998
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
Integrated Health Services, Inc., a Delaware corporation (the
"Company"), intends to call for redemption on June 29, 1998 (the "Redemption
Date") all of its 6% Convertible Subordinated Debentures due 2003 (the
"Debentures") at a total redemption price of $1,059.83 per $1,000 principal
amount of Debentures (which amount includes accrued interest to the date of
redemption and the required redemption premium) (the "Redemption Price"). The
Debentures are convertible into shares of the Common Stock, $.001 par value, of
the Company ("Common Stock"), at any time prior to the close of business (5:00
P.M., New York City time) on the Redemption Date.
In order to ensure that the Company will have available
sufficient funds to redeem any Debentures not converted prior to or on the
Redemption Date, the Company desires to make arrangements pursuant to which
Smith Barney Inc. (the "Purchaser") will, following the Redemption Date,
purchase shares of Common Stock that would have been issuable upon the
conversion of the Debentures that have not been surrendered for conversion prior
to 5:00 P.M., New York City time, on the Redemption Date.
Any reference herein to the Registration Statement, a
Preliminary Prospectus or the Prospectus shall be deemed to refer to and include
the documents incorporated by reference therein pursuant to Form S-3 which were
filed under the Exchange Act on or before the Effective Date of the Registration
Statement or the issue date of such Preliminary Prospectus or the Prospectus, as
the case may be; and any reference herein to the terms "amend," "amendment" or
"supplement" with respect to the Registration Statement, any Preliminary
Prospectus or the Prospectus shall be deemed to refer to and include the filing
of any document under the Exchange Act after the Effective Date of the
Registration Statement, or the issue date of any Preliminary Prospectus or the
Prospectus, as the case may be, deemed to be incorporated therein by reference.
Certain terms used herein are defined in Section 17 hereof.
<PAGE>
1. REPRESENTATIONS AND WARRANTIES. The Company represents and
warrants to, and agrees with, the Purchaser as set forth below in this Section
1.
(a) The Company meets the requirements for use of Form S-3
under the Act and has prepared and filed with the Commission a
registration statement (file number 333- ) on Form S-3, including a
related preliminary prospectus, for the registration under the Act of
the issuance by the Company of the shares of Common Stock issuable upon
conversion of Debentures and the sale by the Purchaser of any shares of
Common Stock that may be acquired by it hereunder. The Company may have
filed one or more amendments thereto, including a related preliminary
prospectus, each of which has previously been furnished to you. The
Company will next file with the Commission one of the following: either
(1) prior to the Effective Date of such registration statement, a
further amendment to such registration statement, including the form of
final prospectus or (2) after the Effective Date of such registration
statement, a final prospectus in accordance with Rule 424(b). In the
case of clause (2), the Company has included in such registration
statement, as amended at the Effective Date, all information required
by the Act and the rules thereunder to be included in such registration
statement and the Prospectus; provided, however, that the Company makes
no representations or warranties as to the information contained in or
omitted from the Registration Statement or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with information
furnished herein or in writing to the Company by or on behalf of the
Purchaser specifically for inclusion in the Registration Statement or
the Prospectus (or any supplement thereto). As filed, such amendment
and form of final prospectus, or such final prospectus, shall contain
all such required material information, and, except to the extent the
Purchaser shall agree in writing to a modification, shall be in all
substantive respects in the form furnished to you prior to the
Execution Time or, to the extent not completed at the Execution Time,
shall contain only such specific additional information and other
changes (beyond those contained in the latest Preliminary Prospectus)
as the Company has advised you, prior to the Execution Time, will be
included or made therein. If the Registration Statement contains the
undertaking specified by Regulation S-K Item 512(a), the Registration
Statement, at the Execution Time, meets the requirements set forth in
Rule 415(a)(1)(x).
(b) On the Effective Date, the Registration Statement did
or will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and, on the Redemption Date and on the
Closing Date (as defined herein), the Prospectus (and any supplements
thereto) will, comply in all material respects with the applicable
requirements of the Act and the Exchange Act and the respective rules
thereunder; on the Effective Date and at the Execution Time, the
Registration Statement did not or will not contain any untrue statement
of a material fact or omit to state any material fact required to be
stated therein or necessary in order to make the statements therein not
misleading; and, on the Effective Date, the Prospectus, if not filed
pursuant to Rule 424(b), did not or will
2
<PAGE>
not, and on the date of any filing pursuant to Rule 424(b), on the
Redemption Date and on the Closing Date, the Prospectus (together with
any supplement thereto) will not, include any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading; provided, however, that the
Company makes no representations or warranties as to the information
contained in or omitted from the Registration Statement or the
Prospectus (or any supplement thereto) in reliance upon and in
conformity with information furnished herein or in writing to the
Company by or on behalf of the Purchaser specifically for inclusion in
the Registration Statement or the Prospectus (or any supplement
thereto).
(c) The Debentures are convertible into Common Stock at a
conversion price of $32.125 per $1,000 principal amount of Debentures.
At the Execution Time, there was outstanding $115,000,000 aggregate
principal amount of Debentures. The redemption of all the outstanding
Debentures has been duly authorized by the Company. By the close of
business on the Business Day following the date of execution hereof,
all of the Debentures will have been duly called for redemption in
accordance with the terms of that certain Indenture dated as of
December 1, 1992 between the Company and The Bank of New York (as
successor to Signet Trust Company) (the "Indenture"); and the right to
convert the Debentures into shares of Common Stock will, as a result of
such calls, expire at 5:00 P.M., New York City time, on the Redemption
Date. Copies of the form of notice of redemption and the related
letter of transmittal (collectively, the "Notice of Redemption") with
respect to the Debentures have been heretofore delivered to you by the
Company. The Debentures have been duly and validly authorized and
issued and constitute valid and binding obligations of the Company
entitled to the benefits of the Indenture, enforceable in accordance
with their terms except as enforcement thereof may be limited by
bankruptcy, fraudulent conveyance, insolvency, reorganization,
moratorium and other laws affecting the enforcement of creditors'
rights generally and by general equitable principles.
(d) The Company has neither taken nor will take, directly
or indirectly, any action designed to cause or result in, or that has
constituted or that might be reasonably expected to cause or result in,
stabilization or manipulation of the price of any security of the
Company to facilitate the conversion of the Debentures (provided that
the Company does not make any representation as to any actions that may
be taken by the Purchaser); and the Company has not distributed and
will not distribute any prospectus or other offering material in
connection with the issue and sale of the Securities (as defined
herein) other than the Registration Statement, any preliminary
prospectus filed with the Commission or the Prospectus or other
material permitted by the Act.
(e) The Registration Statement has become effective; no
stop order suspending the effectiveness of the Registration Statement
is in effect; and
3
<PAGE>
no proceedings for such purpose are pending before or, to the knowledge
of the Company, threatened by the Commission.
(f) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse change
in the condition (financial or other), business, business prospects,
properties, net worth or results of operations of the Company and its
Subsidiaries (as defined herein) taken as a whole (a "Material Adverse
Effect"), and (B) there have been no transactions entered into by the
Company or any of its Subsidiaries, other than those in the ordinary
course of business, which are material with respect to the Company and
its Subsidiaries taken as a whole.
(g) This Agreement has been duly authorized, executed and
delivered by the Company.
(h) All the outstanding shares of capital stock of the
Company have been duly authorized and validly issued, are fully paid
and nonassessable and are free of any preemptive or, except as set
forth in the Prospectus, similar rights and were issued and sold in
compliance with all applicable federal and state securities laws; and
the authorized capital stock of the Company conforms in all material
respects to the description thereof in the Prospectus.
(i) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware
with full corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus,
and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify does
not have a Material Adverse Effect.
(j) All the Company's subsidiaries (as defined in the Act) included in
Exhibit 21 to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997, other than those indicated as inactive in such
Exhibit 21, are referred to herein individually as a "Subsidiary" and
collectively as the "Subsidiaries." Each Subsidiary is a corporation or
limited partnership duly organized, validly existing and in good
standing in the jurisdiction of its organization, with full corporate
or partnership power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus,
and is duly registered and qualified to conduct its business and is in
good standing in each jurisdiction or place where the nature of its
properties or the conduct of its business requires such registration or
qualification, except where the failure so to register or qualify or be
in good standing does not have a Material Adverse Effect. None of the
subsidiaries of the Company other than the Subsidiaries is engaged in
any business activities or operations or has any material
4
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assets or liabilities. All the outstanding shares of capital stock of
each of the Subsidiaries which is a corporation have been duly
authorized and validly issued, are fully paid and nonassessable, and
are wholly owned by the Company directly or indirectly through one of
the other Subsidiaries, free and clear of any lien, adverse claim,
security interest, equity or other encumbrance, except as described in
the Prospectus and except for the shares of capital stock of certain
Subsidiaries pledged to Citibank, N.A., as administrative agent
("Citibank"), in connection with the Company's Revolving Credit and
Term Loan Agreement dated as of September 15, 1997, as amended, with
Citibank and the lenders from time to time party thereto (the "Credit
Agreement") and/or to Meditrust Mortgage Investments, Inc. and/or any
of its affiliates (collectively, "Meditrust"). Each limited
partnership agreement pursuant to which the Company or a Subsidiary
holds a general partnership interest in a limited partnership which is
a Subsidiary is in full force and effect and constitutes the legal,
valid and binding agreement of the parties thereto, enforceable
against such parties in accordance with the terms thereof, except as
enforcement thereof may be limited by bankruptcy, insolvency or other
similar laws affecting the enforcement of creditors' rights generally
and by general equitable principles; and there has been no material
breach of or default under, and no event which with notice or lapse of
time would constitute a material breach of or default under, such
agreements by the Company or any Subsidiary or, to the Company's best
knowledge, any other party to such agreements.
(k) There are no legal or governmental proceedings pending
or, to the knowledge of the Company, threatened, against the Company or
any of the Subsidiaries, or to which the Company or any of the
Subsidiaries, or to which any of their respective properties, is
subject, that are not disclosed in the Prospectus and which, if
adversely decided, are reasonably likely to cause a Material Adverse
Effect or materially affect the consummation of the transactions
contemplated hereby. There are no material agreements, contracts,
indentures, leases or other instruments that are not described in the
Prospectus or that are required to be filed as an exhibit to the
Registration Statement or any document incorporated by reference
therein that are not so filed. Neither the Company nor any Subsidiary
is involved in any strike, job action or labor dispute with any group
of employees, and, to the Company's knowledge, no such action or
dispute is threatened, which is reasonably likely to have a Material
Adverse Effect.
(l) Neither the Company nor any of the Subsidiaries is (i)
in violation of its certificate or articles of incorporation or by-laws
or other organizational documents, or of any law, ordinance,
administrative or governmental rule or regulation applicable to the
Company or any of the Subsidiaries or of any decree of any court or
governmental agency or body having jurisdiction over the Company or any
of the Subsidiaries, except where any such violation or violations in
the aggregate would not have a Material Adverse Effect or (ii) in
default in any material respect in the performance of any obligation,
agreement or condition contained in any bond, debenture, note or any
other
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<PAGE>
evidence of indebtedness or in any material agreement, indenture, lease
or other instrument to which the Company or any of the Subsidiaries is
a party or by which any of them or any of their respective properties
may be bound, except as may be disclosed in the Prospectus.
(m) None of the call of the Debentures for redemption, the
conversion or redemption thereof, the issue and sale of the Securities,
the execution, delivery and performance by the Company of this
Agreement or the consummation by the Company of the transactions
contemplated herein and compliance by the Company with its obligations
hereunder (i) requires any consent, approval, authorization or other
order of or registration or filing with, any court, regulatory body,
administrative agency or other governmental body, agency or official
(except such as may be required for the registration of the Securities
under the Act, the listing of the Purchased Securities on the New York
Stock Exchange and compliance with the securities or Blue Sky laws of
various jurisdictions, all of which have been or will be effected in
accordance with this Agreement), (ii) conflicts or will conflict with
or constitutes or will constitute a breach of, or a default under, the
certificate or articles of incorporation or bylaws or other
organizational documents of the Company or any of its Subsidiaries,
(iii) conflicts or will conflict with or constitutes or will constitute
a breach of, or a default under, any agreement, indenture, lease or
other instrument to which the Company or any of its Subsidiaries is a
party or by which any of them or any of their respective properties may
be bound, except for such conflicts, breaches or defaults which would
not, individually or in the aggregate, have a Material Adverse Effect,
(iv) violates or will violate any statute, law, regulation or judgment,
injunction, order or decree applicable to the Company or any of its
Subsidiaries, except for such violations which would not, individually
or in the aggregate, have a Material Adverse Effect, or (v) will result
in the creation or imposition of any lien, adverse claim, security
interest, equity or other encumbrance (each a "Lien") upon any property
or assets of the Company or any of its Subsidiaries pursuant to the
terms of any agreement or instrument to which any of them is a party or
by which any of them may be bound or to which any of the property or
assets of any of them is subject, except for such Liens which would
not, individually or in the aggregate, have a Material Adverse Effect.
(n) The accountants, KPMG Peat Marwick LLP, Deloitte &
Touche LLP and Arthur Andersen LLP, who have certified or shall certify
the financial statements incorporated by reference in the Registration
Statement and the Prospectus (or any amendment or supplement thereto),
are independent certified public accountants as required by the Act.
(o) The historical financial statements, together
with the related schedules and notes forming part of the Registration
Statement and the Prospectus (and any amendment or supplement thereto),
comply as to form with the requirements of the Act and present fairly
in all material respects the consolidated financial position, results
of operations and changes in stockholders' equity and
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<PAGE>
cash flows of each of the Company and its Subsidiaries, First American
Health Care of Georgia, Inc. ("First American"), Community Care of
America, Inc. ("CCA"), RoTech Medical Corporation ("RoTech") and the
selected facilities operated by Horizon/CMS Healthcare Corporation
("Horizon/CMS") to be sold to Integrated Health Services, Inc. on the
basis stated in the Registration Statement at the respective dates or
for the respective periods to which they apply; such statements and
related schedules and notes have been prepared in accordance with
generally accepted accounting principles consistently applied
throughout the periods involved, except as disclosed therein; and the
other financial and statistical information and data set forth in the
Registration Statement and the Prospectus (and any amendment or
supplement thereto) is accurately presented and, to the extent such
information and data is derived from the financial books and records of
the Company and its Subsidiaries, First American, CCA, RoTech or
Horizon/CMS, as the case may be, is prepared on a basis consistent with
such financial statements and books and records. The pro forma
financial statements and other pro forma financial information included
or incorporated by reference in the Registration Statement have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial information and have been properly
compiled on the basis described therein, and the assumptions used in
the preparation thereof are, in the Company's opinion, reasonable.
(p) Each of the Company and the Subsidiaries has good and
marketable title to all property (real and personal) described in the
Prospectus as being owned by it, free and clear of all liens, claims,
security interests or other encumbrances except such as are described
in the Prospectus or in a document incorporated by reference therein,
and all the property described in the Prospectus as being held under
lease by each of the Company and the Subsidiaries is held by it under
valid, subsisting and enforceable leases, with only such exceptions as
in the aggregate are not materially burdensome and do not interfere in
any material respect with the conduct of the business of the Company
and the Subsidiaries taken as a whole.
(q) Each of the Company and the Subsidiaries and, to the
Company's knowledge, the owners of the facilities and other businesses
managed by the Company or any Subsidiary have such permits, licenses,
franchises, certificates and other approvals or authorizations of
governmental or regulatory authorities ("Permits") as are necessary
under applicable law to own their respective properties and to conduct
their respective business in the manner described in the Prospectus
(including, without limitation, such Permits as are required under such
federal, state and other health care laws, and under such HMO or
similar licensure laws and such insurance laws and regulations, as are
applicable thereto), and with respect to those facilities and other
businesses that participate in Medicare and/or Medicaid, to receive
reimbursement under Medicare and Medicaid, subject in each case to such
qualifications as may be set forth in the Prospectus and except to the
extent that the failure to have such Permits would not have a Material
Adverse Effect; the Company and each of the
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<PAGE>
Subsidiaries have fulfilled and performed in all material respects all
their respective material obligations with respect to the Permits, and
no event has occurred which allows, or after notice or lapse of time
would allow, revocation or termination thereof or results in any other
material impairment of the rights of the holder of any such Permit,
subject in each case to such qualifications as may be set forth in the
Prospectus and except to the extent that any such revocation or
termination would not have a Material Adverse Effect; and, except as
described in the Prospectus, none of the Permits contains any
restriction that is materially burdensome to the Company or any of the
Subsidiaries.
(r) The business practices of the Company and each of its
Subsidiaries do not violate in any material respect any applicable
provisions of federal or state law governing Medicare or any state
Medicaid program, including without limitation, Sections 1320a-7a and
1320a-7b of Title 42 of the United States Code, and no individual with
an ownership or control interest, as defined in 42 U.S.C.
ss.1320a-3(a)(3), in the Company or any of its Subsidiaries, or who is
an officer, director, or managing employee, as defined in 42 U.S.C.
ss.1320a-5(b), of the Company or any of its Subsidiaries is a person
described in 42 U.S.C. ss.1320a-7(b)(8)(B), and the Company's and each
of its Subsidiaries' business practices do not violate in any material
respect any applicable provisions of federal or state law regarding
physician ownership of, or financial relationship with, or referral to
entities providing health care related goods or services, or laws
requiring disclosure of financial interests held by physicians in
entities to which they may refer patients for the provision of health
care related goods or services.
(s) The Company maintains a system of internal accounting
controls sufficient to provide reasonable assurances that (i)
transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at
reasonable intervals and appropriate action is taken with respect to
any differences.
(t) Neither the Company nor any of the Subsidiaries nor, to
the Company's knowledge, any employee or agent of the Company or any
Subsidiary has made any payment of funds of the Company or any
Subsidiary or received or retained any funds in violation of any law,
rule or regulation, which violation would have a Material Adverse
Effect.
(u) Except as disclosed in the Prospectus, the Company and
each of the Subsidiaries have filed all tax returns required to be
filed, which returns are true and correct in all material respects, and
neither the Company nor any Subsidiary is in default in the payment of
any taxes which were payable pursuant to said returns or any
assessments with respect thereto, except where the
8
<PAGE>
failure to file such returns and make such payments would not have a
Material Adverse Effect.
(v) The Company and the Subsidiaries own or possess all
patents, trademarks, trademark registrations, service marks, service
mark registrations, trade names, copyrights, licenses, inventions,
trade secrets and rights (collectively, "Intellectual Property")
described in the Prospectus as being owned by any of them or necessary
for the conduct of their respective businesses, except where the
failure to own or possess any such Intellectual Property would not,
individually or in the aggregate, have a Material Adverse Effect, and
the Company is not aware of any claim to the contrary or any challenge
by any other person to the rights of the Company and the Subsidiaries
with respect to any Intellectual Property, except for any such claims
or challenges as would not, individually or in the aggregate, have a
Material Adverse Effect.
(w) The Company is not and, upon consummation of the
transactions contemplated hereby, will not be an "investment company"
within the meaning of the Investment Company Act of 1940, as amended.
(x) The documents incorporated by reference in the
Registration Statement and the Prospectus and heretofore filed were
filed in a timely manner and, when they were filed (or, if any
amendment with respect to any such document was filed, when such
amendment was filed), conformed in all material respects to the
requirements of the Exchange Act and did not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading; and any further documents incorporated by reference in the
Registration Statement and the Prospectus will, when so filed, be filed
in a timely manner and conform in all material respects to the
requirements of the Exchange Act and will not contain an untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading.
(y) Except as disclosed in the Prospectus or as could not
be reasonably expected to materially and adversely affect consummation
of the transactions contemplated by this Agreement, no holder of any
security of the Company has any right to require registration of shares
of Common Stock or any other security of the Company because of the
filing of the Registration Statement or consummation of the
transactions contemplated by this Agreement. Except as described in the
Prospectus, there are no outstanding options, warrants or other rights
calling for the issuance of, and, except in connection with
acquisitions of healthcare facilities or businesses disclosed in the
Prospectus, there are no commitments, plans or arrangements to issue,
any shares of Common Stock of the Company or any security convertible
into or exchangeable or exerciseable for Common Stock of the Company.
9
<PAGE>
(z) The Company has received the consent of the lenders
party to the Credit Agreement in connection with the consummation of
the transactions contemplated hereby, a copy of which has been
previously furnished to the Purchaser.
2. Purchase and Conversion of Debentures. Subject to the terms
and conditions and in reliance upon the representations and warranties herein
set forth:
(a) The Purchaser agrees to surrender for conversion into
Common Stock at or prior to 5:00 P.M., New York City time, on the
Redemption Date all Debentures then held by the Purchaser and purchased
by the Purchaser pursuant to Section 4 hereof or otherwise acquired by
the Purchaser. The shares of Common Stock issued to the Purchaser upon
the conversion of Debentures are herein referred to as the "Conversion
Securities."
(b) If any Debentures have not been surrendered for
conversion prior to 5:00 P.M., New York City time, on the Redemption
Date, at the option of the Company, exercisable by giving notice in
writing to the Purchaser not later than 8:00 P.M., New York City time,
on the Redemption Date, the Company shall sell to the Purchaser, and
the Purchaser shall purchase from the Company, at a purchase price of
$34.05 per share of Common Stock that would have been issuable upon
conversion of Debentures not surrendered for conversion, such number of
shares of Common Stock as shall be specified in such notice (but, in
each case, not in excess of such number of shares of Common Stock as
would have been issuable upon the conversion of all Debentures not
surrendered for conversion). The shares of Common Stock to be purchased
pursuant to this Section 2(b) are herein referred to as the "Purchased
Securities" and, together with the Conversion Securities, the
"Securities."
(c) It is understood that the Purchaser intends to resell
the Securities from time to time at prices prevailing in the open
market. On or prior to the fifteenth day after the Redemption Date, the
Purchaser shall remit to the Company 50% of the excess, if any, of (i)
the aggregate proceeds received by the Purchaser from the sale of
Purchased Securities (net of selling concessions, transfer taxes and
other expenses of sale) over (ii) an amount equal to the average cost
to the Purchaser of purchasing the Purchased Securities pursuant to
paragraph (b) above multiplied by the number of Purchased Securities.
Upon completion of the sale of the Purchased Securities, the Purchaser
shall furnish to the Company a statement setting forth the aggregate
proceeds received on the sale thereof and the applicable selling
concessions, transfer taxes and other expenses of sale. For purposes of
the foregoing determination, any Purchased Securities not sold by or
for the account of the Purchaser prior to the close of business on the
tenth day after the Redemption Date shall be deemed to have been sold
on such tenth day for an amount equal to the last reported sale price
of the Common Stock on such day. Nothing contained herein shall limit
the right of the Purchaser, in its discretion, to determine the price
or prices at which, or the time or times when,
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<PAGE>
any Securities shall be sold, whether or not prior to the Redemption
Date and whether or not for long or short account.
(d) Delivery of and payment for the Purchased Securities
shall be made at 10:00 A.M., New York City time, on July 2, 1998, which
date and time may be postponed by agreement between the Purchaser and
the Company (such date and time of delivery and payment for the
Purchased Securities being herein called the "Closing Date"). Delivery
of the Purchased Securities shall be made to the Purchaser against
payment by the Purchaser of the purchase price thereof to or upon the
order of the Company by wire transfer payable in same-day funds to an
account specified by the Company. Delivery of the Purchased Securities
shall be made through the facilities of The Depository Trust Company
unless the Purchaser shall otherwise instruct. The closing of the
purchase and sale of the Purchased Securities shall be made at the
office of Fulbright & Jaworski L.L.P., New York, New York.
3. Compensation. As compensation for the commitment of the
Purchaser hereunder, the Company will pay to the Purchaser an amount equal to
the sum of (a) $1,828,213 plus (b) an additional $1.36 per share for each
Purchased Security and Compensible Conversion Security, but no amount shall be
payable pursuant to this clause (b) unless the number of Purchased Securities
and Compensible Conversion Securities in the aggregate exceeds 178,988 shares
(the "Take-up Threshold") and then only with respect to that number of Purchased
Securities and Compensible Conversion Securities that in the aggregate exceed
the Take-up Threshold. "Compensible Conversion Security" means any Conversion
Security that is acquired by the Purchaser or that the Purchaser obtained the
right to acquire on a date when the last reported sale price of the Common Stock
on the New York Stock Exchange was less than or equal to $34.05.
Such compensation shall be paid to the Purchaser by wire
transfer payable in same-day funds to an account specified by the Purchaser, on
(A) if the Purchaser is required to purchase any Purchased Securities, the
Closing Date, or (B) otherwise, as soon as practicable after the Redemption Date
(but in no event later than two Business Days thereafter).
4. Additional Purchases. The Purchaser may purchase
Debentures, in the open market or otherwise, in such amounts and at such prices
as the Purchaser may deem advisable. All Debentures so purchased will be
converted by the Purchaser into Common Stock in accordance with Section 2(a)
hereof. The Common Stock acquired by the Purchaser upon conversion of any
Debentures acquired pursuant to this Section 4 may be sold at any time or from
time to time by the Purchaser. It is understood that, for the purpose of
stabilizing the price of the Common Stock or otherwise, the Purchaser may make
purchases and sales of Common Stock, in the open market or otherwise, for long
or short account, on such terms as it may deem advisable and it may overallot in
arranging sales.
5. Agreements. The Company agrees with the Purchaser that:
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<PAGE>
(a) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and any
amendment thereof, to become effective. Prior to the termination of the
offering of the Securities, the Company will not file any amendment of
the Registration Statement or supplement to the Prospectus unless the
Company has furnished you a copy for your review prior to filing and
will not file any such proposed amendment or supplement to which you
reasonably object in writing; provided, however, that the preceding
clause shall not apply to the filing of any document required to be
filed by the Company under the Exchange Act that upon filing is deemed
to be incorporated by reference in the Registration Statement, except
that the Company shall furnish you a copy of any such document a
reasonable time prior to filing. Subject to the foregoing sentence, if
filing of the Prospectus is required under Rule 424(b), the Company
will cause the Prospectus, properly completed, and any supplement
thereto to be filed with the Commission pursuant to the applicable
paragraph of Rule 424(b) within the time period prescribed and will
provide evidence satisfactory to the Purchaser of such timely filing.
The Company will promptly advise the Purchaser (1) when the
Registration Statement (and any amendment thereto), if not effective at
the Execution Time, shall have become effective, (2) when the
Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b), (3) when, prior
to termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (4)
of any request by the Commission or its staff for any amendment of the
Registration Statement or for any supplement to the Prospectus or for
any additional information, (5) of the issuance by the Commission of
any stop order suspending the effectiveness of the Registration
Statement or the institution or threatening of any proceeding for that
purpose and (6) of the receipt by the Company of any notification with
respect to the suspension of the qualification of the Securities for
sale in any jurisdiction or the institution or threatening of any
proceeding for such purpose. The Company will use its best efforts to
prevent the issuance of any such stop order or the suspension of any
such qualification and, if issued, to obtain as soon as possible the
withdrawal thereof.
(b) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it shall
be necessary to amend the Registration Statement or supplement the
Prospectus to comply with the Act or the Exchange Act or the respective
rules thereunder, the Company promptly will (1) notify the Purchaser of
such event, (2) prepare and file with the Commission, subject to the
second sentence of paragraph (a) of this Section 5, an amendment or
supplement which will correct such statement or omission or effect such
compliance and (3) supply any supplemented Prospectus to you in such
quantities as you may reasonably request.
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<PAGE>
(c) As soon as practicable, the Company will make generally
available to its security holders an earnings statement or statements
of the Company and its subsidiaries which will satisfy the provisions
of Section 11(a) of the Act and Rule 158 under the Act.
(d) The Company will furnish to each of the Purchaser and
counsel for the Purchaser, without charge, copies of manually executed
signature pages to the Registration Statement, it being understood that
the originals of such pages will be retained in the Company's files as
required by the rules of the Commission, and copies of the Registration
Statement (including exhibits thereto) and, so long as delivery of a
prospectus by the Purchaser or dealer may be required by the Act, as
many copies of each Preliminary Prospectus and the Prospectus and any
supplement thereto as the Purchaser may reasonably request. The Company
will pay the expenses of printing or other production of all documents
relating to the transactions contemplated hereby. The Company will pay
all transfer taxes as may be imposed on the Purchaser in connection
with its purchase of Purchased Securities pursuant hereto.
(e) The Company will use its best efforts to qualify the
Securities for sale under the laws of such jurisdictions as the
Purchaser may designate and will maintain such qualifications in effect
so long as required for the distribution of the Securities; provided
that in no event shall the Company be obligated to qualify to do
business in any jurisdiction where it is not now so qualified or to
execute a general consent to service of process in any state or to
otherwise subject itself to taxation (other than stock transfer taxes)
in connection with any such qualification.
(f) The Company will mail or cause to be mailed not later
than the Business Day following the date of execution hereof the Notice
of Redemption by first class mail to the registered holders of the
Debentures as of the close of business on the date of execution hereof,
which mailing will conform to the requirements of the Indenture. The
Company will not withdraw or revoke the Notice of Redemption or attempt
to do so.
(g) The Company will advise the Purchaser daily of the
amount of Debentures surrendered in the previous day for redemption or
for conversion.
(h) The Company will not take any action the effect of
which would be to require an adjustment in the conversion price of the
Debentures.
(i) The Company will not, prior to the Redemption Date and,
if the aggregate number of the Securities exceeds 450,000 shares, for
an additional period of 90 days following the Redemption Date (the
"Lock-up Period"), without the prior written consent of Smith Barney
Inc., offer, sell or contract to sell, or otherwise dispose of (or
enter into any transaction which is designed to, or might reasonably be
expected to, result in the disposition (whether by actual disposition
13
<PAGE>
or effective economic disposition due to cash settlement or otherwise)
by the Company) directly or indirectly, or announce the offering of,
any other shares of Common Stock (other than the Securities) or any
securities convertible into, or exercisable or exchangeable for, shares
of Common Stock, except for (i) grants of options to employees of and
consultants to the Company pursuant to the Company's option plans and
stock purchase plans, (ii) issuances of shares of Common Stock upon
exercise of outstanding options and warrants, (iii) issuances of Common
Stock (or any securities convertible into or exercisable or
exchangeable for Common Stock) in connection with the acquisition of
any related business or geriatric care facility (including a leasehold
interest therein or a management agreement therefor), (iv) issuances of
securities pursuant to the Company's Rights Plan (as defined in the
Registration Statement) and (v) issuances of shares of Common Stock
upon conversion of the Debentures; provided, however, that in the case
of any securities issued pursuant to the foregoing clause (iii), such
securities and the underlying Common Stock shall, until expiration of
the Lock-up Period, not be registered under the Act unless registration
under the Act within the Lock-up Period is required pursuant to the
terms of any written agreement to which the Company is a party and
which written agreement was in existence prior to the date of this
Agreement
(j) The Company will apply the net proceeds from the
sale of Securities substantially in accordance with the description set
forth in the Prospectus.
(k) The Company will have the Securities listed,
subject to notice of issuance, on the New York Stock Exchange on or
before the Closing Date.
6. Conditions to the Obligations of the Purchaser. The
obligations of the Purchaser to convert Debentures and to purchase any Purchased
Securities shall be subject to the accuracy of the representations and
warranties on the part of the Company contained herein as of the Execution Time,
each Effective Date occurring after the Execution Time, the Redemption Date and,
as to the purchase of the Purchased Securities, the Closing Date, to the
accuracy of the statements of the Company made in any certificates pursuant to
the provisions hereof, to the performance by the Company of its obligations
hereunder and to the following additional conditions:
(a) If the Registration Statement has not become
effective prior to the Execution Time, unless the Purchaser agrees in
writing to a later time, the Registration Statement shall have become
effective not later than 6:00 P.M., New York City time, on the date of
execution hereof; if filing of the Prospectus, or any supplement
thereto, is required pursuant to Rule 424(b), the Prospectus, and any
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<PAGE>
such supplement, shall have been filed in the manner and within the
time period required by Rule 424(b); and no stop order suspending the
effectiveness of the Registration Statement shall have been issued and
no proceedings for that purpose shall have been instituted or
threatened.
(b) On the date of this Agreement (after the
Effective Time and prior to the mailing of the Notice of Redemption)
and on the Closing Date, the Company shall have furnished to the
Purchaser the opinion of Fulbright & Jaworski L.L.P., counsel for the
Company, dated the date of this Agreement and the Closing Date,
respectively, to the effect that:
(i) The Company is a corporation duly incorporated
and validly existing in good standing under the laws of the
State of Delaware with full corporate power and authority to
own, lease and operate its properties and to conduct its
business as described in the Registration Statement and the
Prospectus (and any amendment or supplement thereto);
(ii) Each Significant Subsidiary (as defined in
Section 1.02(w) of Regulation S-X promulgated under the Act)
is a corporation validly existing and in good standing under
the laws of the jurisdiction of its organization, with full
corporate power and authority to own, lease, and operate its
properties and to conduct its business as described in the
Registration Statement and the Prospectus (and any amendment
or supplement thereto); and all the outstanding shares of
capital stock of each of the Significant Subsidiaries have
been duly authorized and validly issued, are fully paid and
nonassessable, and to the knowledge of such counsel, are
wholly owned by the Company directly, or indirectly through
one of the other Subsidiaries, free and clear of any security
interest, lien, adverse claim, equity or other encumbrance,
except as described in the Prospectus and except for the
shares of capital stock of certain Significant Subsidiaries
pledged to Citibank as agent in connection with the Credit
Agreement and/or to Meditrust;
(iii) The authorized capital stock of the Company is
as set forth under the caption "Capitalization" in the
Prospectus; and the authorized capital stock of the Company
conforms in all material respects as to legal matters to the
description thereof contained in the Prospectus under the
caption "Description of Capital Stock";
(iv) The Company has corporate power and authority to
enter into this Agreement, and this Agreement has been duly
authorized, executed and delivered by the Company;
(v) The Debentures have been duly and validly
authorized by the Company and constitute valid and binding
obligations of the Company entitled to the benefits of the
Indenture, subject to the qualification that the
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enforceability of the Company's obligations thereunder may be
limited by bankruptcy, fraudulent conveyance, insolvency,
reorganization, moratorium, and other laws relating to or
affecting creditors' rights generally and by general equitable
principles;
(vi) Assuming the mailing of the Notice of Redemption
in accordance with Section 1(c) hereof, all the Debentures
will have been duly called for redemption by the close of
business on the Business Day following the date of execution
hereof and the right to convert the Debentures into shares of
Common Stock will expire at 5:00 P.M., New York City time, on
June 29, 1998; the shares of Common Stock issuable upon
conversion of the Debentures have been duly and validly
authorized and, when issued and delivered upon conversion of
any Debentures pursuant to this Agreement, will be fully paid
and nonassessable; the Purchased Securities have been duly and
validly authorized and, when issued and delivered to and paid
for by the Purchaser pursuant to this Agreement, will be fully
paid and nonassessable; the Conversion Securities (and, for
the opinion to be delivered on the Closing Date only, the
Purchased Securities) are duly listed, and admitted and
authorized for trading, subject to official notice of
issuance, on the New York Stock Exchange; the certificates for
the Securities conform in all material respects to the
requirements of the Delaware General Corporation Law (the
"DGCL"); and the holders of outstanding shares of capital
stock of the Company are not entitled to preemptive rights
under the Company's Certificate of Incorporation or the DGCL
or, to the knowledge of such counsel, other rights to
subscribe for the Securities or the shares of Common Stock
issuable upon conversion of the Debentures;
(vii) None of the call of the Debentures for
redemption, the conversion or redemption thereof, the issue
and sale of the Securities or the execution, delivery and
performance by the Company of this Agreement and the
consummation by the Company of the transactions contemplated
herein constitutes or will constitute a breach or violation
of, or a default under, in any material respect, the
certificate or articles of incorporation or bylaws or other
organizational documents of the Company or any of the
Significant Subsidiaries or any material agreement, indenture,
lease or other instrument to which the Company or any of the
Significant Subsidiaries is a party or by which any of them or
any of their respective properties is bound that is an exhibit
to the
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Registration Statement or any document incorporated by
reference therein or is otherwise known to such counsel, or
will result in the creation or imposition of any lien, charge
or encumbrance upon any property or assets of the Company or
any of the Significant Subsidiaries pursuant to the terms of
any material agreement or instrument to which any of them is a
party or by which any of them may be bound or to which any of
the property or assets of any of them is subject that is an
exhibit to the Registration Statement or any document
incorporated by reference therein or is otherwise known to
such counsel, nor will any such action result in any violation
(assuming compliance with all applicable state securities and
Blue Sky laws), in any material respect of any existing law,
or any regulation, ruling, judgment, injunction, order or
decree known to such counsel to be applicable to the Company
or the Significant Subsidiaries or any of their respective
properties;
(viii) No consent, approval, authorization or other
order of, or registration or filing with, any court,
regulatory body, administrative agency or other governmental
body, agency, or official is required on the part of the
Company (except as have been obtained under the Act, the
listing of the Purchased Securities on the New York Stock
Exchange or such as may be required under state securities or
Blue Sky laws governing the purchase and distribution of the
Securities, as to which such counsel need not express an
opinion) for the redemption by the Company of the Debentures
and the valid issuance and sale of the Securities to you as
contemplated by this Agreement;
(ix) Such counsel has been advised by the staff of
the Commission that the Registration Statement and all
post-effective amendments, if any, have become effective under
the Act and, to the knowledge of such counsel, no stop order
suspending the effectiveness of the Registration Statement has
been issued and no proceedings for that purpose are pending
before or contemplated by the Commission; and any required
filing of the Prospectus pursuant to Rule 424(b) has been made
in accordance with Rule 424(b);
(x) The Registration Statement and the Prospectus and
any supplements or amendments thereto (except for the
financial statements and the notes thereto and the schedules
and other financial and statistical data included or
incorporated by reference therein, as to which such counsel
need not express any opinion) appear on their face to comply
as to form in all material respects with the requirements of
the Act;
(xi) The documents incorporated by reference in the
Registration Statement (except for the financial statements
and the notes thereto and the schedules and other financial
and statistical data included or incorporated by reference
therein, as to which such counsel need not express any
opinion), at the time they were filed, appeared on their face
to have complied as to form in all material respects with the
requirements of the Exchange Act;
(xii) To the knowledge of such counsel, (A) there are
no legal or governmental proceedings pending or threatened
against the Company or any of the Subsidiaries, or to which
the Company or any of the
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Subsidiaries, or any of their property, are subject, which are
not disclosed in the Prospectus and which, if adversely
decided, are reasonably likely to cause a Material Adverse
Effect or materially affect the consummation of the
transactions contemplated hereby and (B) there are no material
agreements, contracts, indentures, leases or other instruments
of a character required to be described in the Registration
Statement and the Prospectus (or any amendment or supplement
thereto) or that are required to be filed as an exhibit to the
Registration Statement or any document incorporated by
reference therein that are not described or filed as required;
(xiii) The statements in the Registration Statement
and the Prospectus, insofar as they are descriptions of
contracts, agreements or other legal documents, or refer to
statements of law or legal conclusions, are accurate in all
material respects and present fairly the information described
therein;
(xiv) The Company is not and, after giving effect to
the issue and sale of the Securities and the application of
the proceeds thereof as described in the Prospectus, will not
be, an "investment company" as defined in the Investment
Company Act of 1940, as amended;
(xv) To the knowledge of such counsel, except as
disclosed in the Prospectus or as could not be reasonably
expected to materially and adversely affect consummation of
the transactions contemplated by this Agreement, no holders of
securities of the Company have rights to the registration of
such securities under the Registration Statement;
(xvi) The statements in the Prospectus under the
caption "Certain Federal Income Tax Considerations" and in the
Notice of Redemption under the caption "Federal Income Tax
Considerations," in each case insofar as such statements
constitute summaries of the legal matters referred to therein,
fairly present the information called for with respect to such
legal matters and fairly summarize the matters referred to
therein; and
(xvii) Although such counsel has not undertaken,
except as otherwise indicated in its opinion, to determine
independently, and does not assume any responsibility for, the
accuracy, completeness or fairness of the statements in the
Registration Statement and the Prospectus, such counsel has
participated in the preparation of the Registration Statement
and the Prospectus, including review and discussion of the
contents thereof, and has reviewed the documents incorporated
by reference therein, and, relying as to materiality to a
large extent upon the opinions of officers and other
representatives of the Company, nothing has come to the
attention of such counsel that has caused such counsel to
believe that the Registration Statement on the Effective Date
contained an untrue
18
<PAGE>
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as
of its date and as of the Closing Date, contained an untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances
under which they were made, not misleading (it being
understood that such counsel need express no opinion with
respect to the financial statements and the notes thereto and
the schedules and other financial and statistical data
included or incorporated by reference in the Registration
Statement or the Prospectus and information furnished by or on
behalf of the Purchaser).
The opinion of such counsel shall be limited to the laws of
the United States, the State of New York and the internal corporation
law of the State of Delaware. In delivering their opinion pursuant to
clause (ii) above and clause (vii) above with respect to organizational
documents such counsel may rely on the opinion of Florida councel with
respect to RoTech Medical Corporation, a Florida Corporation, provided,
that (A) each such local counsel is acceptable to the Purchaser, (B)
such reliance is expressly authorized by each opinion so relied upon
and a copy of each such opinion is delivered to the Purchaser and is,
in form and substance, reasonably satisfactory to it and its counsel,
and (C) counsel shall state in their opinion that they have no reason
to believe that such counsel and the Purchaser are not justified in
relying thereon.
(c) On the date of this Agreement (after the
Effective Time and prior to the mailing of the Notice of Redemption)
and on the Closing Date, the Company shall have furnished to the
Purchaser the opinion of Marshall A. Elkins, Esq., General Counsel of
the Company, dated the date of this Agreement and the Closing Date,
respectively, to the effect that:
(i) The Company is duly registered and qualified to
conduct its business and is in good standing as a foreign
corporation in each jurisdiction or place where the nature of
its properties or the conduct of its business requires such
registration or qualification, except where the failure so to
register or qualify or to be in good standing would not have a
Material Adverse Effect;
(ii) All the outstanding shares of capital stock of
the Company have been duly authorized and validly issued, are
fully paid and nonassessable;
(iii) Each Subsidiary is duly registered and
qualified to conduct its business and is in good standing as a
foreign corporation or limited partnership in each
jurisdiction or place where the nature of its properties or
the conduct of its business requires such registration or
qualification,
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except where the failure so to register or qualify or to be in
good standing would not have a Material Adverse Effect;
(iv) Neither the Company nor any of the Subsidiaries
is in violation in any material respect of its respective
certificate or articles of incorporation or bylaws, or other
organizational documents, or to the best knowledge of such
counsel after reasonable inquiry, is in default in any
material respect in the performance of any material
obligation, agreement or condition contained in any bond,
debenture, note or other evidence of indebtedness or in any
material agreement, indenture, lease or other instrument to
which the Company or any of the Subsidiaries is a party or by
which any of them or any of their respective properties may be
bound, except as disclosed in the Prospectus and except to the
extent that any such violation or default would not have a
Material Adverse Effect;
(v) Such counsel has no reason to believe that the
Company and its Subsidiaries do not have all Permits
(including, without limitation, such Permits as are necessary
under such federal and state health care laws and under such
HMO and similar licensure laws and such insurance laws and
regulations as are applicable to the Company and its
Subsidiaries) as are necessary to own, lease and operate its
properties and conduct its business, except to the extent that
the failure to have such Permits would not have a Material
Adverse Effect; and to the best knowledge of such counsel
after reasonable inquiry there are no proceedings pending or
threatened against the Company or any of its Subsidiaries that
may cause any such Permit that is material to the conduct of
the business of the Company or any of its Subsidiaries to be
revoked, withdrawn, cancelled, suspended or not renewed;
(vi) Such counsel has no reason to believe that (a)
the business practices of the Company or any of its
Subsidiaries violate in any material respect any applicable
provisions of federal or state law governing Medicare or any
state Medicaid program, including without limitation, Sections
1320a-7a and 1320a-7b of Title 42 of the United States Code,
or that any individual with an ownership or control interest,
as defined in 42 U.S.C. ss.1320a-3(a)(3), in the Company or
any of its Subsidiaries or who is an officer, director, or
managing employee as defined in 42 U.S.C. ss.1320a-5(b), of
the Company or any of its Subsidiaries is a person described
in 42 U.S.C. ss.1320a-7(b)(8)(B), or that (b) the Company's or
any Subsidiary's business practices violate in any material
respect any applicable provisions of federal or state law
regarding physician ownership of, or financial relationship
with, or referral to entities providing health care related
goods or services, or laws requiring disclosure of financial
interests held by physicians in entities to which they may
refer patients for the provision of health care related goods
or services; and to the best knowledge of such counsel after
reasonable inquiry, neither the Company
20
<PAGE>
nor any of its Subsidiaries is in violation of any other law,
ordinance, administrative or governmental rule or regulation
applicable to the Company or any of its Subsidiaries or of any
decree of any court or governmental agency or body having
jurisdiction over the Company or any of its Subsidiaries,
except to the extent that any such violation would not have a
Material Adverse Effect; and
(vii) Although such counsel has not undertaken,
except as otherwise indicated in such counsel's opinion, to
determine independently, and does not assume any
responsibility for, the accuracy, completeness or fairness of
the statements in the Registration Statement and the
Prospectus, such counsel has participated in the preparation
of the Registration Statement and the Prospectus and the
documents incorporated by reference therein, and nothing has
come to the attention of such counsel that has caused such
counsel to believe that the Registration Statement, on the
Effective Date or at the Execution Time, contained an untrue
statement of material fact or omitted to state a material fact
required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as
of its date and as of the Closing Date, contained any untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary in order to
make the statements therein, in light of the circumstances
under which they were made, not misleading (it being
understood that such counsel need express no opinion with
respect to the financial statements and the notes thereto and
the schedules and other financial and statistical data
included or incorporated by reference in the Registration
Statement or the Prospectus and information furnished by or on
behalf of the Purchaser).
(d) On the date of this Agreement (after the
Effective Time and prior to the mailing of the Notice of Redemption)
and on the Closing Date, the Purchaser shall have received from Dewey
Ballantine LLP, counsel for the Purchaser, such opinion or opinions,
dated the date of this Agreement and the Closing Date, respectively,
and addressed to the Purchaser, with respect to this Agreement, the
Registration Statement, the Prospectus and such other related matters
as the Purchaser may reasonably require, and the Company shall have
furnished to such counsel such documents as they request for the
purpose of enabling them to pass upon such matters.
(e) On the date of this Agreement (after the Effective Time and prior
to the mailing of the Notice of Redemption), on each Effective Date
occurring after the Execution Time and on the Closing Date, the Company
shall have furnished to the Purchaser a certificate of the Company,
signed by the Chief Executive Officer (or the Chief Operating Officer)
and Chief Financial Officer of the Company (or such other officers as
are acceptable to the Purchaser), dated the date of delivery, to the
effect that the signers of such certificate have carefully
21
<PAGE>
examined the Registration Statement, the Prospectus, any supplements to
the Prospectus and this Agreement and to the effect that:
(i) the representations and warranties of the Company
in this Agreement are true and correct in all material
respects on and as of the date of such certificate as if made
on the date of such certificate and the Company has complied
with all the agreements and satisfied all the conditions on
its part to be performed or satisfied at or prior to the date
of such certificate;
(ii) no stop order suspending the effectiveness of
the Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the Company's
knowledge, threatened; and
(iii) since the date of the most recent financial
statements included in the Prospectus (exclusive of any
supplement thereto), there has been no material adverse change
or development involving a prospective material adverse change
in the condition (financial or other), business, business
prospects, properties, net worth or results of operations of
the Company and the Subsidiaries, taken as a whole, whether or
not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the
Prospectus (exclusive of any supplement thereto).
(f) On the date of this Agreement (after the
Effective Time and prior to the mailing of the Notice of Redemption),
on each Effective Date occurring after the Execution Time on which
financial information is included or incorporated in the Registration
Statement or the Prospectus and on the Closing Date, each of KPMG Peat
Marwick LLP, Deloitte & Touche LLP and Arthur Andersen LLP shall have
furnished to the Purchaser a letter, dated respectively as of the
Execution Time, each such Effective Date and as of the Closing Date, in
form and substance satisfactory to the Purchaser, confirming that they
are independent accountants within the meaning of the Act and the
Exchange Act and the respective applicable published rules and
regulations thereunder and containing statements and information of the
type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in or incorporated by reference in the
Registration Statement and Prospectus.
(g) Subsequent to the Execution Time or, if earlier, the dates
as of which information is given in the Registration Statement
(exclusive of any amendment thereof) and the Prospectus (exclusive of
any supplement thereto), there shall not have been (i) any change in
the capital stock, increase in long-term debt or any decreases in
consolidated net current assets or stockholders' equity of the Company
and its subsidiaries on a consolidated basis as compared with amounts
shown in the most recent balance sheet incorporated by
22
<PAGE>
reference in the Prospectus or, for the period commencing on the date
following the end of the most recent period for which a consolidated
income statement of the Company is incorporated by reference in the
Prospectus, any decreases, as compared with the corresponding period in
the preceding year, in consolidated net revenues or in the total or
per-share consolidated amounts of earnings before extraordinary items
or of net earnings specified in the letters referred to in paragraph
(f) of this Section 6 or (ii) any change, or any development involving
a prospective change, in or affecting the condition (financial or
other), business, business prospects, properties, net worth or results
of operations of the Company and its subsidiaries, taken as a whole,
whether or not arising from transactions in the ordinary course of
business, except as set forth in or contemplated in the Prospectus
(exclusive of any supplement thereto), the effect of which, in any case
referred to in clause (i) or (ii) above, is, in the sole judgment of
the Purchaser, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities
as contemplated by the Registration Statement (exclusive of any
amendment thereof) and the Prospectus (exclusive of any supplement
thereto).
(h) Subsequent to the Execution Time, there shall not
have been any decrease in the rating of any of the Company's debt
securities by any "nationally recognized statistical rating
organization" (as defined for purposes of Rule 436(g) under the Act) or
any notice given of any intended or potential decrease in any such
rating or of a possible change in any such rating that does not
indicate the direction of the possible change.
(i) The Securities shall have been approved for
listing on the New York Stock Exchange, subject to official notice of
issuance, and satisfactory evidence of such action shall have been
provided to the Purchaser.
(j) At the Execution Time, the Company shall have
furnished to the Purchaser a letter substantially in the form of
Exhibit A hereto addressed to the Purchaser from each of the executive
officers of the Company.
(k) On the date of this Agreement (after the
Effective Time and prior to the mailing of the Notice of Redemption),
on each Effective Date occurring after the Execution Time and on the
Closing Date, the Purchaser shall have received a certificate signed by
the Chief Accounting Officer of the Company substantially in the form
heretofore approved by the Purchaser, respecting the Company's
compliance with the financial covenants set forth in each of the
Company's indentures, the Credit Agreement and certain other agreements
of the Company.
(l) The Company shall have furnished to the Purchaser
such further information, certificates and documents as the Purchaser
may reasonably request.
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If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions, letters and certificates mentioned above
or elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Purchaser and counsel for the
Purchaser, this Agreement and all obligations of the Purchaser hereunder may be
canceled at, or at any time prior to, the Closing Date by the Purchaser. Notice
of such cancellation shall be given to the Company in writing or by telephone or
facsimile confirmed in writing.
The documents required to be delivered by this Section 6 shall
be delivered at the office of Fulbright & Jaworski L.L.P., counsel for the
Company, at 666 Fifth Avenue, New York, New York, on the due date for delivery
thereof.
7. Reimbursement of Purchaser's Expenses. If the sale of the
Securities provided for herein is not consummated because any condition to the
obligations of the Purchaser set forth in Section 6 hereof is not satisfied
other than by reason of a breach by the Purchaser, because of any termination
pursuant to Section 10 hereof or because of any refusal, inability or failure on
the part of the Company to perform any agreement herein or comply with any
provision hereof other than by reason of a default by the Purchaser, the Company
will reimburse the Purchaser on demand for all out-of-pocket expenses (including
reasonable fees and disbursements of counsel) that shall have been incurred by
it in connection with the proposed purchase and sale of the Securities.
8. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless
the Purchaser, the directors, officers, employees and agents of the
Purchaser and each person who controls the Purchaser within the meaning
of either the Act or the Exchange Act against any and all losses,
claims, damages or liabilities, joint or several, to which they or any
of them may become subject under the Act, the Exchange Act or other
Federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue
statement or alleged untrue statement of a material fact contained in
the registration statement for the registration of the Securities as
originally filed or in any amendment thereof, or in any Preliminary
Prospectus or the Prospectus, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, and agrees
to reimburse each such indemnified party, as incurred, for any legal or
other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or
action; provided, however, that the Company will not be liable in any
such case to the extent that any such loss, claim, damage or liability
arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made therein in
reliance upon and in conformity
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<PAGE>
with written information furnished to the Company by or on behalf of
the Purchaser specifically for inclusion therein; provided, further,
that with respect to any untrue statement or omission of material fact
made in any Preliminary Prospectus, the indemnity agreement contained
in this Section 8(a) shall not inure to the benefit of the Purchaser to
the extent that any such loss, claim, damage or liability occurs under
the circumstance where it shall have been determined by a court of
competent jurisdiction by final and nonappealable judgment that (w) the
Company had previously furnished copies of the Prospectus to the
Purchaser, (x) delivery of the Prospectus was required by the Act to be
made to the person asserting the loss, claim, damage or liability, (y)
the untrue statement or omission of a material fact contained in the
Preliminary Prospectus was corrected in the Prospectus and (z) there
was not sent or given to such person, at or prior to the written
confirmation of the sale of such securities to such person, a copy of
the Prospectus. This indemnity agreement will be in addition to any
liability which the Company may otherwise have.
(b) The Purchaser agrees to indemnify and hold
harmless the Company, each of its directors, each of its officers who
signs the Registration Statement and each person who controls the
Company within the meaning of either the Act or the Exchange Act, to
the same extent as the foregoing indemnity from the Company to the
Purchaser, but only to the extent that any such loss, claim, damage or
liability arises out of or is based upon any such untrue statement or
omission, or alleged untrue statement or omission or alleged omission
made in the documents referred to in the foregoing indemnity in
reliance upon and in conformity with written information relating to
the Purchaser furnished to the Company by or on behalf of the Purchaser
specifically for inclusion in the documents referred to in the
foregoing indemnity, and agrees to reimburse each such indemnified
party, as incurred, for any legal or other expenses reasonably incurred
by them in connection with investigating or defending any such loss,
claim, damage, liability or action. This indemnity agreement will be in
addition to any liability which the Purchaser may otherwise have. The
Company acknowledges that (i) the legend in block capital letters on
the cover page related to stabilization and (ii) the third and last
paragraphs under the heading "Standby Arrangements" in any Preliminary
Prospectus and the Prospectus constitute the only information furnished
in writing by or on behalf of the Purchaser for inclusion in any
Preliminary Prospectus or the Prospectus, and you confirm that such
statements are correct in all material respects.
(c) Promptly after receipt by an indemnified party
under this Section 8 of notice of the commencement of any action, such
indemnified party will, if a claim in respect thereof is to be made
against the indemnifying party under this Section 8, notify the
indemnifying party in writing of the commencement thereof; but the
failure so to notify the indemnifying party (i) will not relieve it
from liability under paragraph (a) or (b) above unless and to the
extent it did not otherwise learn of such action and such failure
results in the forfeiture by the indemnifying party of substantial
rights and defenses and (ii) will
25
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not, in any event, relieve the indemnifying party from any obligations
to any indemnified party other than the indemnification obligation
provided in paragraph (a) or (b) above. The indemnifying party shall be
entitled to appoint counsel of the indemnifying party's choice at the
indemnifying party's expense to represent the indemnified party in any
action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or
parties except as set forth below); provided, however, that such
counsel shall be reasonably satisfactory to the indemnified party.
Notwithstanding the indemnifying party's election to appoint counsel to
represent the indemnified party in an action, the indemnified party
shall have the right to employ separate counsel (including local
counsel), and the indemnifying party shall bear the reasonable fees,
costs and expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party
would present such counsel with a conflict of interest, (ii) the actual
or potential defendants in, or targets of, any such action include both
the indemnified party and the indemnifying party and the indemnified
party shall have been advised by its counsel that representation of
such indemnified party and any indemnifying party by the same counsel
would be inappropriate under applicable standards of professional
conduct (whether or not such representation by the same counsel has
been proposed) due to actual or potential differing interests between
them, (iii) the indemnifying party shall not have employed counsel
satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of such
action or (iv) the indemnifying party shall authorize the indemnified
party to employ separate counsel at the expense of the indemnifying
party. It is understood, however, that the Company shall, in connection
with any one such action or separate but substantially similar or
related actions in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees
and expenses of only one separate firm of local counsel at any time for
the Purchaser and all controlling persons, which firm shall be
designated in writing by Smith Barney Inc. An indemnifying party will
not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with
respect to any pending or threatened claim, action, suit or proceeding
in respect of which indemnification or contribution may be sought
hereunder (whether or not the indemnified parties are actual or
potential parties to
26
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such claim or action) unless such settlement, compromise or consent
includes an unconditional release of each indemnified party from all
liability arising out of such claim, action, suit or proceeding and
does not include a statement as to or an admission of fault,
culpability or a failure to act by or on behalf of any indemnified
party. An indemnifying party shall not be liable under this Section 8
to any indemnified party regarding any settlement or compromise or
consent to the entry of any judgment with respect to any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not
the indemnified parties are actual or potential parties to such claim
or action) unless such settlement, compromise or consent is consented
to by such indemnifying party, which consent shall not be unreasonably
withheld.
(d) In the event that the indemnity provided in
paragraph (a) or (b) of this Section 8 is unavailable to or
insufficient to hold harmless an indemnified party for any reason, the
Company and the Purchaser agree to contribute to the aggregate losses,
claims, damages and liabilities (including legal or other expenses
reasonably incurred in connection with investigating or defending same)
(collectively "Losses") to which the Company and the Purchaser may be
subject in such proportion as is appropriate to reflect the relative
benefits received by the Company on the one hand and by the Purchaser
on the other from the offering of the Securities; provided, however,
that in no case shall the Purchaser be responsible for any amount in
excess of the fees payable by the Company to the Purchaser pursuant to
Section 3 hereof. If the allocation provided by the immediately
preceding sentence is unavailable for any reason, the Company and the
Purchaser shall contribute in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of
the Company on the one hand and of the Purchaser on the other in
connection with the statements or omissions which resulted in such
Losses as well as any other relevant equitable considerations. Benefits
received by the Company shall be deemed to be equal to the sum of (i)
the aggregate Redemption Price for the Debentures converted by the
Purchaser pursuant to Section 2(a) hereof and (ii) the amount paid by
the Purchaser to the Company pursuant to Section 2(b) hereof (less the
total fees payable by the Company to the Purchaser pursuant to Section
3 hereof), and benefits received by the Purchaser shall be deemed to be
equal to the total fees payable by the Company to the Purchaser
pursuant to Section 3 hereof. Relative fault shall be determined by
reference to, among other things, whether any untrue or any alleged
untrue statement of a material fact or the omission or alleged omission
to state a material fact relates to information provided by the Company
on the one hand or the Purchaser on the other, the intent of the
parties and their relative knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission.
The Company and the Purchaser agree that it would not be just and
equitable if contribution were determined by pro rata allocation or any
other method of allocation which does not take account of the equitable
considerations referred to above. Promptly after receipt by a party
entitled to contribution under this Section 8 of notice of the
commencement of any action, such party will, if a claim for
contribution in respect thereof is to be made against another party or
parties under this paragraph (d), notify such party or parties in
writing of the commencement thereof; but the failure so to notify such
party or parties (i) will not relieve such party or parties from
liability under this paragraph (d) unless and to the extent it or they
did not otherwise learn of such action and such failure results in the
forfeiture by such party or parties of substantial rights and defenses
and (ii) will not, in any event, relieve such party or parties from any
obligations to any party entitled to contribution other than the
contribution obligation provided in this paragraph (d). Notwithstanding
the
27
<PAGE>
provisions of this paragraph (d), no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act)
shall be entitled to contribution from any person who was not guilty of
such fraudulent misrepresentation. For purposes of this Section 8, each
person who controls the Purchaser within the meaning of either the Act
or the Exchange Act and each director, officer, employee and agent of
the Purchaser shall have the same rights to contribution as the
Purchaser, and each person who controls the Company within the meaning
of either the Act or the Exchange Act, each officer of the Company who
shall have signed the Registration Statement and each director of the
Company shall have the same rights to contribution as the Company,
subject in each case to the applicable terms and conditions of this
paragraph (d).
9. Soliciting Conversions. The Purchaser may assist the
Company in soliciting conversion of the Debentures by the holders thereof but
shall not be entitled to compensation by the Company for any such assistance.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Purchaser, by notice given to the
Company at any time prior to the Closing Date, if at any time prior to such time
(i) trading in the Company's Common Stock or the Debentures shall have been
suspended by the Commission or the New York Stock Exchange or trading in
securities generally on the New York Stock Exchange shall have been suspended or
limited or minimum prices shall have been established on such Exchange, (ii) a
banking moratorium shall have been declared either by Federal or New York State
authorities or (iii) there shall have occurred any outbreak or escalation of
hostilities, declaration by the United States of a national emergency or war or
other calamity or crisis the effect of which on financial markets is such as to
make it, in the sole judgment of the Purchaser, impracticable or inadvisable to
proceed with the offering or delivery of the Securities as contemplated by the
Prospectus (exclusive of any supplement thereto).
11. Representations and Indemnities to Survive. The respective
agreements, representations, warranties, indemnities and other statements of the
Company or its officers and of the Purchaser set forth in or made pursuant to
this Agreement will remain in full force and effect, regardless of any
investigation made by or on behalf of the Purchaser or the Company or any of the
officers, directors or controlling persons referred to in Section 8 hereof, and
will survive the conversion of any Debentures and the delivery of and payment
for any Securities. The provisions of Sections 7 and 8 hereof shall survive the
termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in writing
and effective only on receipt, and, if sent to the Purchaser, will be mailed,
delivered or telefaxed to the Smith Barney Inc. General Counsel (fax no.: (212)
816-7912) and confirmed to the General Counsel, Smith Barney Inc., at 388
Greenwich Street, 32nd Floor, New York, New York 10013, or, if sent to the
Company, will be mailed, delivered or telefaxed to Integrated Health Services,
Inc., 10065 Red Run Boulevard, Owings Mills, Maryland 21117 (fax no.: (410)
998-8700), attention of the General Counsel.
28
<PAGE>
13. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
officers and directors and controlling persons referred to in Section 8 hereof,
and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by and
construed in accordance with the laws of the State of New York.
15. Counterparts. This Agreement may be signed in one or more
counterparts, each of which shall constitute an original and all of which
together shall constitute one and the same agreement.
16. Headings. The section headings used herein are for
convenience only and shall not affect the construction hereof.
17. Definitions. The terms which follow, when used in this
Agreement, shall have the meanings indicated.
"Act" shall mean the Securities Act of 1933, as amended, and
the rules and regulations of the Commission promulgated thereunder.
"Business Day" shall mean any day other than a Saturday, a
Sunday or a legal holiday or a day on which banking institutions or
trust companies are authorized or obligated by law to close in New York
City.
"Commission" shall mean the Securities and Exchange
Commission.
"Effective Date" shall mean each date and time that the
Registration Statement and any post-effective amendment or amendments
thereto became or become effective under the Act and each date after
the date hereof on which a document incorporated by reference in the
Registration Statement is filed under the Exchange Act.
"Effective Time" shall mean the time the Registration
Statement is initially declared effective by the Commission.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended, and the rules and regulations of the Commission promulgated
thereunder.
"Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph 1(a) above.
29
<PAGE>
"Prospectus" shall mean the prospectus relating to the
Securities that is first filed pursuant to Rule 424(b) after the
Execution Time or, if no filing pursuant to Rule 424(b) is required,
shall mean the form of final prospectus relating to the Securities
included in the Registration Statement at the Effective Date.
"Registration Statement" shall mean the registration statement
referred to in paragraph 1(a) above, including exhibits and financial
statements, as amended at the Execution Time (or, if not effective at
the Execution Time, in the form in which it shall become effective)
and, in the event any post-effective amendment thereto becomes
effective prior to the Closing Date, shall also mean such registration
statement as so amended.
"Rule 415" and "Rule 424" refer to such rules under the Act.
30
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
between the Company and the Purchaser.
Very truly yours,
Integrated Health Services, Inc.
By:
------------------------------
Name:
Title:
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Smith Barney Inc.
By:
------------------------------
Name:
Title:
31
<PAGE>
EXHIBIT A
Integrated Health Services, Inc.
Standby Underwriting of Common Stock
, 1998
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
Ladies and Gentlemen:
This letter is being delivered to you in connection with the
proposed Standby Agreement (the "Standby Agreement") between Integrated Health
Services, Inc., a Delaware corporation (the "Company"), and you (the
"Purchaser"), relating to a call for redemption by the Company of all of its
outstanding 6% Convertible Subordinated Debentures due 2003. Such Debentures are
convertible into shares of the Common Stock, $.001 par value, of the Company
("Common Stock"), at any time prior to 5:00 P.M., New York City time, on the
Redemption Date (as defined in the Standby Agreement).
In order to induce the Purchaser to enter into the Standby
Agreement, the undersigned hereby agrees that, without the prior written consent
of Smith Barney Inc. (which will not be unreasonably withheld), the undersigned
will not, prior to or on the Redemption Date (and, if the aggregate number of
the Securities (as defined in the Standby Agreement) exceeds 450,000 shares, for
an additional period of 90 days following the Redemption Date), offer, sell,
contract to sell, pledge or otherwise dispose of, or file (or participate in the
filing of) a registration statement with the Securities and Exchange Commission
which the Company has agreed not to file pursuant to the Standby Agreement in
respect of, or establish or increase a put equivalent position or liquidate or
decrease a call equivalent position within the meaning of Section 16 of the
Securities Exchange Act of 1934, as amended, and the rules and regulations of
the Securities and Exchange Commission promulgated thereunder with respect to,
any shares of capital stock of the Company or any securities convertible into or
exercisable or exchangeable for such capital stock, or publicly announce an
intention to effect any such transaction, other than shares of Common Stock
disposed of as bona fide gifts approved by Smith Barney Inc., which approval
will not be unreasonably withheld.
A-1
<PAGE>
If for any reason the Standby Agreement shall be terminated
prior to the Closing Date (as defined in the Standby Agreement), the agreement
set forth above shall likewise be terminated.
Yours very truly,
---------------------------
[Name]
EXHIBIT 5
[LETTERHEAD OF FULBRIGHT & JAWORSKI L.L.P.]
May 28, 1998
The Board of Directors
Integrated Health Services, Inc.
10065 Red Run Boulevard
Owings Mills, Maryland 21117
Dear Sirs:
We are acting as counsel to Integrated Health Services, Inc., a Delaware
corporation (the "Company"), in connection with the Registration Statement on
Form S-3 (the "Registration Statement") you intend to file with the Securities
and Exchange Commission for the purpose of registering under the Securities Act
of 1933, as amended (the "Securities Act"), up to 3,579,766 shares of common
stock, par value $.001 per share of the Company (the "Common Stock"), including
preferred share purchase rights of the Company, issuable upon conversion of all
of the outstanding 6% Convertible Subordinated Debentures due 2003 (the
"Debentures") or under the standby arrangements described therein, and the
reoffering by Smith Barney Inc. (the "Purchaser") of any Common Stock issued to
Purchaser pursuant to such conversion or otherwise acquired by Purchaser
pursuant to such standby arrangements.
As counsel for the Company, we have examined such corporate records,
documents and such questions of law as we have considered necessary or
appropriate for purposes of this opinion and, upon the basis of such
examination, advise you that in our opinion:
(1) the shares of Common Stock to be issued upon conversion of the
Debentures, as contemplated in the Registration Statement, will be, when so
issued, validly issued, fully paid and non-assessable; and
(2) the shares of Common Stock to be issued by the Company and purchased
by the Purchaser, as contemplated in the Registration Statement, will be,
when and if so issued and sold against payment duly made therefor, validly
issued, fully paid and non-assessable.
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 and elsewhere in the Registration Statement and
prospectus. This consent is not to be construed as an admission that we are a
party whose consent is required to be filed with the Registration Statement
under the provisions of the Securities Act.
Very truly yours,
/s/ Fulbright & Jaworski L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
The Board of Directors
Integrated Health Services, Inc.:
We consent to the use of our report dated March 25, 1998 relating to the
consolidated financial statements of Integrated Health Services, Inc. ("IHS")
and subsidiaries, incorporated herein by reference, to the incorporation herein
by reference of our report dated April 14, 1997 relating to the consolidated
financial statements of Community Care of America, Inc. and subsidiaries, which
report appears in Amendment No. 1 to Form 8-K/A of IHS dated September 25, 1997
and filed on May 29, 1998, to the incorporation herein by reference of our
report dated October 17, 1996 relating to the consolidated financial statements
of First American Health Care of Georgia, Inc. and subsidiaries, which report
appears in Amendment No. 1 to Form 8-K/A of IHS filed on July 11, 1997, and to
the reference to our firm under the heading "Experts" in the registration
statement.
Our report dated March 25, 1998 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 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. 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.
KPMG Peat Marwick LLP
Baltimore, Maryland
May 29, 1998
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference in this Registration Statement
on Form S-3 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 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
May 29, 1998
EXHIBIT 23.3
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
by reference in this registration statement of our report dated March 6, 1998
included in Integrated Health Services, Inc.'s Current Report on Form 8-K dated
December 31, 1997, and to all references to our Firm included in this
registration statement.
Arthur Andersen LLP
Albuquerque, New Mexico
May 27, 1998
EXHIBIT 99.1
IF YOU WISH TO CONVERT YOUR 6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
INTO COMMON STOCK, THEN THIS LETTER OF TRANSMITTAL (OR OTHER IRREVOCABLE
WRITTEN NOTICE OF ELECTION TO CONVERT) AND YOUR DEBENTURE CERTIFICATE(S) MUST
BE RECEIVED BY THE PAYING AND CONVERSION AGENT IDENTIFIED BELOW PRIOR TO 5:00
P.M., NEW YORK CITY TIME, ON JUNE 29, 1998, TIME BEING OF THE ESSENCE. THIS
LETTER OF TRANSMITTAL IS TO BE USED ONLY IF DEBENTURE CERTIFICATES ARE TO BE
FORWARDED HEREWITH. DEBENTURE HOLDERS WHOSE DEBENTURE CERTIFICATES ARE NOT
IMMEDIATELY AVAILABLE OR WHO CANNOT DELIVER THEIR DEBENTURE CERTIFICATES AND
ALL OTHER DOCUMENTS REQUIRED HEREBY TO THE PAYING AND CONVERSION AGENT PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON JUNE 29, 1998 MUST ELECT TO CONVERT THEIR
DEBENTURE(S) ACCORDING TO THE INSTRUCTIONS FOR GUARANTEED DELIVERY DESCRIBED
BELOW.
INTEGRATED HEALTH SERVICES, INC.
LETTER OF TRANSMITTAL
(To accompany the 6% Convertible Subordinated Debentures due 2003, when
surrendered for redemption, or surrendered for conversion
into shares of Common Stock of Integrated Health Services, Inc.)
PLEASE READ CAREFULLY THE ENCLOSED INSTRUCTIONS
ANY DEBENTURES SURRENDERED FOR CONVERSION OR REDEMPTION SHOULD BE DELIVERED AS
FOLLOWS, TOGETHER WITH A COMPLETED AND SIGNED LETTER OF TRANSMITTAL
TO: THE PAYING AND CONVERSION AGENT
THE BANK OF NEW YORK
REDEMPTION ONLY:
----------------
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Fiscal Agencies-7E Fiscal Agencies-7E Church Street Station
Lobby Level New York, NY 10286 New York, NY 10286
New York, NY 10286 Attn: Fiscal Agencies
Dept. 101B-7E
</TABLE>
CONVERSION ONLY:
----------------
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Reorg. Dept.-7E Reorg. Dept.-7E Church Street Station
New York, NY 10286 New York, NY 10286 New York, NY 10286
Attn: Reorg. Dept. 101B-7E
</TABLE>
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY.
<PAGE>
Ladies and Gentlemen:
Reference is made to the Notice of Redemption dated May 29, 1998, receipt
of which is hereby acknowledged, whereby Integrated Health Services, Inc. (the
"Company") has called for redemption on June 29, 1998 (the "Redemption Date")
all of its 6% Convertible Subordinated Debentures due 2003 (the "Debentures")
outstanding on that date at a redemption price of 103.0% of the principal amount
thereof, plus interest accruing from January 1, 1998 to the Redemption Date of
June 29, 1998, for a total redemption price of $1,059.83 per $1,000 principal
amount of Debentures (the "Redemption Price").
ITEMS A, B, E AND F OF THIS LETTER OF TRANSMITTAL
MUST BE COMPLETED IN ALL CASES.
PLEASE CAREFULLY FOLLOW THE INSTRUCTIONS BELOW
ITEM A.
(MUST BE COMPLETED BY ALL HOLDERS OF DEBENTURES)
List below the Debentures to which this Letter relates. If the space
provided below is inadequate, the certificate numbers and principal amount of
Debentures should be listed on a separate signed schedule affixed hereto.
<TABLE>
<CAPTION>
DESCRIPTION OF DEBENTURES PRESENTED
NAME(S) AND ADDRESS(ES) OF REGISTERED HOLDER(S)
(MUST BE EXACTLY AS NAME(S) APPEAR(S) ON PRINCIPAL AMOUNT
DEBENTURES(S). IF THE NAME AND ADDRESS SHOWN OF OF DEBENTURES
RECORD WITH THE PAYING AND CONVERSION AGENT ARE DEBENTURE REPRESENTED BY
NOT CORRECT, PLEASE INDICATE ANY CHANGES NECESSARY.) NUMBER(S) CERTIFICATE(S)
<S> <C> <C>
Total Principal
Amount
</TABLE>
2
<PAGE>
ITEM B.
(MUST BE COMPLETED BY ALL HOLDERS OF DEBENTURES)
THE ABOVE DEBENTURES ARE SURRENDERED FOR THE ACTION INDICATED BELOW.
[ ] CONVERSION into shares of common stock, par value $.001 per share
("Common Stock"), of the Company ("Shares") at the conversion price of
$32.125 per Share (equivalent to 31.13 Shares per $1,000 principal amount
of Debentures), with cash in lieu of fractional Shares. Such payment of
cash will be in the form of a check drawn on an account of the Paying and
Conversion Agent. See Instruction 2. Complete Items C and E below.
Holders of Debentures who convert their Debentures will not be entitled to
any accrued but unpaid interest on the Debentures.
SO LONG AS THE MARKET PRICE OF THE COMMON STOCK IS GREATER THAN $34.05 PER
SHARE AT THE TIME OF CONVERSION, A HOLDER WHO CONVERTS DEBENTURES INTO
COMMON STOCK WILL RECEIVE CONSIDERATION (COMMON STOCK, PLUS CASH IN LIEU OF
ANY FRACTIONAL SHARE) HAVING A MARKET VALUE GREATER THAN THE REDEMPTION
PRICE OF THE DEBENTURES. TAXES, COMMISSIONS AND OTHER COSTS WHICH WOULD
LIKELY BE INCURRED UPON SALE OF COMMON STOCK RECEIVED UPON CONVERSION OF
THE DEBENTURES WOULD REDUCE OR ELIMINATE THE ECONOMIC ADVANTAGE OF
CONVERSION OVER REDEMPTION. MOREOVER, THE MARKET VALUE OF THE COMMON STOCK
RECEIVED IS SUBJECT TO FLUCTUATION. SEE INSTRUCTION 2 BELOW FOR INFORMATION
RELATING TO THE PAYMENT OF CASH IN LIEU OF ANY FRACTIONAL SHARE.
[ ] REDEMPTION at a price of 103.0% of the principal amount thereof, plus
interest accruing from January 1, 1998 to the Redemption Date of June 29,
1998 (the "Redemption Price"). A holder of $1,000 principal amount of
Debentures redeemed at the Redemption Price would receive $1,059.83 in
cash.
See Instruction 3. Complete Items D and E below.
[ ] PARTIAL CONVERSION/PARTIAL REDEMPTION. If this box is checked you must
indicate (1) the principal amount of Debentures you wish to convert into
Shares on Item C and (2) the principal amount of Debentures you wish to
have redeemed on Item D. If this box is checked and no additional
instructions are provided, the delivery of Debentures prior to 5:00 p.m.,
New York City time, on June 29, 1998, will be treated by the Paying and
Conversion Agent as an instruction to convert such Debentures into Shares.
Complete Items C, D and E below.
[ ] CHECK HERE IF DEBENTURES ARE BEING DELIVERED PURSUANT TO A NOTICE OF
GUARANTEED DELIVERY PREVIOUSLY SENT TO THE PAYING AND CONVERSION AGENT.
THE FOREGOING ELECTIONS ARE IRREVOCABLE. IF NO BOX IS CHECKED AND THE ABOVE
DEBENTURES ARE RECEIVED BY THE PAYING AND CONVERSION AGENT PRIOR TO 5:00 P.M.,
NEW YORK CITY TIME, ON JUNE 29, 1998, SUCH DEBENTURES WILL BE DEEMED SURRENDERED
FOR CONVERSION INTO SHARES. IF ANY DEBENTURES ARE RECEIVED AFTER THAT TIME, TIME
BEING OF THE ESSENCE, SUCH DEBENTURES WILL BE REDEEMED REGARDLESS OF WHICH OR
WHETHER ANY CHOICE IS INDICATED.
3
<PAGE>
ITEM C.
CONVERSION
DEBENTURE HOLDERS PLEASE COMPLETE
1. If the stock certificates evidencing Shares of Common Stock and/or check
for payment (if any) are to be issued in the name of a person other than as
indicated in Item A above, fill in this space. See instructions 4 and 5.
ISSUE TO:
Name:
--------------------------------------------------------------------
Address:
-------------------------------------------------------------------
Zip Code:
-------------------------------------------------------------------
Social Security Number or Taxpayer I.D. Number:
---------------------------
2. If stock certificates evidencing Shares of Common Stock and/or check for
payment (if any) are to be mailed to an address other than as indicated in
Item A above, fill in this space. See Instructions 4 and 5.
MAIL TO:
Name:
----------------------------------------------------------------------
Address:
--------------------------------------------------------------------
Zip Code:
-------------------------------------------------------------------
Principal Amount of Debentures Surrendered for Conversion: $
-----------------------
ITEM D.
REDEMPTION
DEBENTURE HOLDERS PLEASE COMPLETE
1. If the check for payment is to be issued to a person other than as
indicated in Item A above, fill in this space. See instructions 4 and 5.
ISSUE TO:
Name:
--------------------------------------------------------------------
Address:
-------------------------------------------------------------------
Zip Code:
-------------------------------------------------------------------
Social Security Number or Taxpayer I.D. Number:
----------------------------
2. If the check for payment is to be mailed to an address other than as
indicated in Item A above, fill in this space. See Instructions 4 and 5.
ISSUE TO:
Name:
--------------------------------------------------------------------
Address:
-------------------------------------------------------------------
Zip Code:
-------------------------------------------------------------------
Principal Amount of Debentures surrendered for Redemption: $
-----------------------
4
<PAGE>
ITEM E.
REQUIRED SIGNATURE
(MUST BE COMPLETED BY ALL HOLDERS OF DEBENTURES)
REQUIRED SIGNATURE
The signatures on this Letter of Transmittal must correspond exactly with the
name(s) of the (1) registered owners of the Debentures surrendered or (2)
persons to whom such Debentures have been properly assigned or transferred, in
which case evidence of transfer must accompany this letter.
See Instructions 1, 4, 5 and 6 below.
Dated:
-----------------------------------------------------------------------
Signature:
-------------------------------------------------------------------
Telephone:
------------------------------------------------------------------
Social Security Number or Taxpayer I.D. Number:
-----------------------------------
SIGNATURE GUARANTEE
(IF APPLICABLE)
If stock certificates are to be issued in a name other than that of the
registered owner of the Debentures surrendered or persons to whom such
Debentures have been properly assigned or transferred, or if a check for
payment is to be made payable to a different name, the signature of the holder
must be guaranteed by an Eligible Institution. See Instructions 4 and 5.
Signature Guarantee:
----------------------------------------------------------
Dated:
---------------------------------------------------------------------
Name of Firm Issuing Guarantee:
------------------------------------------------
Signature of Officer:
-----------------------------------------------------------
Title of Officer Signing This Guarantee:
-------------------------------------------
Address of Guaranteeing Firm:
--------------------------------------------------
-------------------------------------------------------------------------------
5
<PAGE>
ITEM F.
(MUST BE COMPLETED BY ALL HOLDERS OF DEBENTURES)
IMPORTANT TAX INFORMATION
---------------------
COMPLETE AND SIGN SUBSTITUTE FORM W-9 IN ADDITION TO THE
SIGNATURES REQUIRED IN ITEM E.
(SEE INSTRUCTION 13)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
PAYOR: THE BANK OF NEW YORK
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
SUBSTITUTE PART 1 -- PLEASE PROVIDE YOUR TIN IN THE --------------------------
BOX AT RIGHT AND CERTIFY BY SIGNING AND Social Security Number
DATING BELOW.
OR ------------------------
FORM W-9 Employer Identification
PAYOR'S REQUEST Number
FOR TAXPAYER
IDENTIFICATION
("TIN")
--------------------------------------------------------------------------------
PART 2 -- Check the box below. I am (we are) NOT NUMBER
subject to backup withholding under the Internal Revenue
Code because (a) I am (we are) exempt from backup
withholding, or (b) I (we) have not been notified that I
am (we are) subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the
Internal Revenue Service has notified me (us) that I am
(we are) no longer subject to backup withholding.
[ ] Correct [ ]Not Correct
---------------------------------------------------------------------------------
CERTIFICATION -- UNDER PENALTIES OF PERJURY, I CERTIFY THAT PART 3 --
THE INFORMATION PROVIDED ON THIS FORM IS TRUE, CORRECT
AND COMPLETE. [ ] Awaiting TIN
Signature(s): -------------------------
-------------------------
Date: ------------------------- , 1998
</TABLE>
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING
OF 31% OF ANY CASH PAYMENT MADE TO YOU, AND A $50 PENALTY MAY BE IMPOSED BY THE
INTERNAL REVENUE SERVICE. PLEASE REVIEW THE ENCLOSED "GUIDELINES FOR
CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9" FOR
ADDITIONAL DETAILS.
YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF
THE SUBSTITUTE FORM W-9 ABOVE.
CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER
I certify under penalties of perjury that a taxpayer identification number has
not been issued to me and either (a) I have mailed or delivered an application
to receive a taxpayer identification number to the appropriate Internal Revenue
Service Center or Social Security Administration Office, or (b) I intend to
mail or deliver an application in the near future. I understand that,
notwithstanding that I have checked the box in Part 3 (and have completed this
Certificate of Awaiting Taxpayer Identification Number), all reportable
payments made to me prior to the time I provide the Paying and Conversion Agent
with a properly certified taxpayer identification number will be subject to a
31% backup withholding tax.
------------------------------------- ---------------------
Signature Date
6
<PAGE>
INSTRUCTIONS TO LETTER OF TRANSMITTAL
1. GENERAL. Please do not send Debentures to the Company. The Debentures,
together with the signed and completed Letter of Transmittal and any required
supporting documents (see Instruction 2 below), should be mailed, or otherwise
delivered, to The Bank of New York, as Paying and Conversion Agent, at its
appropriate address indicated on the first page of the Letter of Transmittal. If
mail is used, it is recommended that registered mail, with return receipt
requested, properly insured, be used as a precaution against loss. Consideration
should be given to using some form of express delivery service, as the
conversion alternative discussed below expires at 5:00 p.m., New York City time,
on June 29, 1998, time being of the essence. The method of transmitting the
Debentures, however, is at your sole option and risk. If you wish to convert
your Debentures, your Debentures and a properly completed Letter of Transmittal
must be RECEIVED by the Paying and Conversion Agent at one of the addresses
listed on the front page hereof by 5:00 p.m., New York City time, on June 29,
1998.
ALL ELECTIONS TO CONVERT OR REDEEM ARE IRREVOCABLE.
ITEMS A, B, E AND F OF THIS LETTER OF TRANSMITTAL
MUST BE COMPLETED IN ALL CASES.
2. IF YOU WISH TO CONVERT YOUR DEBENTURES. If you wish to convert your
Debentures into Shares of Common Stock, then prior to 5:00 p.m., New York City
time, on June 29, 1998 you must deposit with the Paying and Conversion Agent (a)
the Debentures, (b) a properly completed Letter of Transmittal and (c) any other
documents required by this Letter of Transmittal. If your Debenture Certificates
are not immediately available, please see Instruction 7.
Debentures surrendered for conversion will not be entitled to interest
accrued to the date of conversion. Instead of issuing any fractional Share of
Common Stock which would otherwise be issuable upon conversion of any Debenture
(or specified portions thereof), the Company will pay a cash adjustment in
respect of such fraction in an amount equal to the same fraction of the Closing
Price (as defined below) at the close of business on the day of conversion (or,
if such day is not a Trading Day (as defined below), on the Trading Day
immediately preceding such day). "Closing Price" means the last reported sales
price regular way or, in case no such reported sale takes place on such day, the
average of the reported closing bid and asked prices regular way, in either case
on the New York Stock Exchange ("NYSE"). "Trading Day" means each Monday,
Tuesday, Wednesday, Thursday and Friday, other than any day on which securities
are generally not traded on the NYSE. The Debentures will not be convertible
after 5:00 P.M., New York City time, on the Redemption Date. Such cash in lieu
of any fractional Share will be paid by check drawn on an account of the Paying
and Conversion Agent.
Each holder of Debentures that does not directly hold certificates for its
Debentures, but instead maintains its holdings indirectly in an account with a
broker or other intermediary (each, a "Beneficial Holder") must comply with the
procedures of such intermediary to convert such Beneficial Holder's Debentures.
Such an intermediary may maintain its holdings with The Depository Trust Company
("DTC"). In those instances, the procedures of DTC must also be followed for a
Beneficial Holder to convert its Debentures.
IT IS THE RESPONSIBILITY OF EACH BENEFICIAL HOLDER TO GIVE INSTRUCTIONS TO
ITS INTERMEDIARY IN SUFFICIENT TIME FOR THAT INTERMEDIARY, ANY HIGHER
INTERMEDIARIES AND THE RECORD HOLDER OF SUCH BENEFICIAL HOLDER'S DEBENTURES
(WHICH MAY BE DTC) TO TAKE THE ACTIONS WHICH ARE NECESSARY TO EFFECT CONVERSION
OF SUCH BENEFICIAL HOLDER'S DEBENTURES PRIOR TO 5:00 P.M., NEW YORK CITY TIME,
ON THE REDEMPTION DATE.
AS LONG AS THE MARKET PRICE OF THE COMMON STOCK REMAINS AT OR ABOVE $34.05
PER SHARE, THE HOLDERS OF DEBENTURES WHO ELECT TO CONVERT WILL RECEIVE, UPON
CONVERSION, COMMON STOCK (INCLUDING CASH, IF ANY, RECEIVED IN LIEU OF FRACTIONAL
SHARES) HAVING A GREATER MARKET VALUE THAN THE AMOUNT OF CASH RECEIVABLE UPON
REDEMPTION OF SUCH DEBENTURES (BEFORE DEDUCTING ANY TAXES, COMMISSIONS AND OTHER
COSTS WHICH WOULD LIKELY BE INCURRED ON SALE OF THE COMMON STOCK RECEIVED UPON
CONVERSION OF
7
<PAGE>
THE DEBENTURES). IT SHOULD BE NOTED, HOWEVER, THAT THE PRICE OF THE COMMON STOCK
RECEIVED UPON CONVERSION WILL FLUCTUATE IN THE MARKET. NO ASSURANCE CAN BE GIVEN
AS TO THE PRICE OF THE COMMON STOCK AT ANY FUTURE TIME, AND THE HOLDERS SHOULD
EXPECT TO INCUR VARIOUS EXPENSES OF SALE IF SUCH COMMON STOCK IS SOLD.
If the stock certificates and any cash in lieu of fractional Shares are to
be (i) issued in the same name(s) as that in which the surrendered Debentures
are registered and (ii) mailed to the same address as given in Item A, complete
Items A, B, E and F.
If the stock certificates and any cash in lieu of fractional Shares are to
be issued in the name or names of a different person(s), see Instructions 4, 5
and 6 and complete Items A, B, C, E and F.
If the stock certificates and any cash in lieu of fractional Shares are to
be mailed to an address different from that given in Item A, complete Items A,
B, C, E and F.
If more than one Debenture is surrendered for conversion at any one time
under the same Letter of Transmittal or other notice by the same holder, the
number of Shares issuable upon conversion of such Debentures will be computed
upon the basis of the aggregate principal amount of Debentures so surrendered.
Holders are also entitled to convert fewer than all Debentures they hold,
provided that any conversions are for amounts of Debentures in integral
multiples of $1,000.
A single Common Stock certificate will be issued unless you give written
instructions to the contrary. The Common Stock certificate and cash in lieu of
fractional Shares will be mailed as soon as possible after receipt of your
Debentures.
3. IF YOU WISH TO REDEEM YOUR DEBENTURES. If you wish your Debentures to be
redeemed by the Company, deliver your Debentures and a properly completed Letter
of Transmittal to the Paying and Conversion Agent. A check for $1,059.83 per
$1,000 principal amount of Debentures will be sent to you when the Debentures
have been received by the Paying and Conversion Agent, but in no event earlier
than the Redemption Date, June 29, 1998.
NOTE: THE PRICE RECEIVABLE UPON REDEMPTION OF THE DEBENTURES MAY BE LESS
THAN THE CURRENT MARKET VALUE OF THE COMMON STOCK (INCLUDING CASH, IF ANY,
RECEIVED IN LIEU OF A FRACTIONAL SHARE) RECEIVABLE UPON CONVERSION.
If the check is to be issued in the same name(s) as that in which the
surrendered Debentures are registered and mailed to the same address as given in
Item A, complete Items A, B, E and F.
If the check is to be issued in a different name or names, see Instructions
4 and 5 and complete Items A, B, D, E and F.
If the check is to be mailed to an address different from that given in
Item A, complete Items A, B, D, E and F.
4. CERTIFICATE OR CHECK TO BE ISSUED IN A DIFFERENT NAME. Unless
instructions are given in Item C or D, the Shares and/or check (if any) are to
be issued in the same name as that of the record holder inscribed on the
surrendered Debenture. If the Shares and/or check (if any) are to be issued in a
name other than that of the record holder of the listed Debenture, please be
guided by the following:
(a) Endorsement and Guarantee. The Debentures surrendered must be
properly endorsed (or accompanied by one or more appropriate powers properly
executed by the record holder of such Debentures to the person who is to
receive the Common Stock certificate(s) and/or check). The signature of the
record holder on the endorsement or power must correspond with the name as
written upon the face of the Debentures surrendered in every particular and
must be guaranteed by a commercial bank or trust company having an office or
correspondent in the United States, a member firm of a national securities
exchange or the National Association of Securities Dealers, Inc. or an
"eligible guarantor institution" within the meaning of Rule 17Ad-15
promulgated under the Securities Exchange Act of 1934, as amended (each, an
"Eligible Institution").
8
<PAGE>
(b) Transferee's Signature. The Letter of Transmittal must be signed by
the person to whom transfer or assignment is made, or by his or her agent,
and should not be signed by the person transferring or assigning the
Debentures. The signature of such transferee, assignee or agent must be
guaranteed as provided in Instruction 4(a).
(c) Correction of or Change in Name. For a name correction or for a
change in name that does not involve a change of ownership, proceed as
follows: For a correction in name, the listed Debentures should be endorsed,
for example, "James E. Brown, incorrectly inscribed as J. E. Brown," with
the signature guaranteed as described in Instruction 4(a). For a change in
name by marriage, the surrendered Debentures should be endorsed, for
example, "Mary Doe, now by marriage, Mrs. Mary Jones," with the signature
guaranteed as described in Instruction 4(a).
5. SIGNATURE BY FIDUCIARY OR OTHER THAN REGISTERED HOLDER. If this Letter
of Transmittal is signed by the registered holder(s) of the Debentures
transmitted herewith, the signatures must correspond exactly with the name(s) of
such registered holder(s).
If the Letter of Transmittal is signed in Item E by an executor,
administrator, trustee, guardian, attorney or the like, such person should so
indicate when signing, and the Letter of Transmittal and Debentures must be
accompanied by evidence, satisfactory to the Paying and Conversion Agent and the
Company, of the authority of such person to sign the Letter of Transmittal, and
the signature must be properly guaranteed by an Eligible Institution.
If the Letter of Transmittal is signed in Item E by a person, other than
the registered holder, who is not a person described in the preceding paragraph,
the surrendered Debentures must be properly endorsed or be accompanied by
appropriate powers, properly executed by the registered owner(s), so that such
endorsement or powers are signed exactly as the name(s) of the registered
owner(s) appear(s) on the Debentures and the signature(s) must be properly
guaranteed by an Eligible Institution.
If the Debentures are endorsed by, or accompanied by bond powers signed by,
trustees, executors, administrators, guardians, attorneys-in-fact, officers of
corporations or other persons acting in a fiduciary or representative capacity,
such persons should so indicate when signing, and proper evidence satisfactory
to the Company of their authority so to act must be submitted, and the
signatures must be properly guaranteed by an Eligible Institution.
If you have completed Item C or D regarding special issuance instructions,
the signature on this Letter of Transmittal must be guaranteed, in the space
provided in Item E, by an Eligible Institution.
6. JOINT HOLDERS OR DEBENTURES REGISTERED IN DIFFERENT NAMES. If Debentures
are surrendered by joint holders or owners, all such persons must sign the
Letter of Transmittal in Item E. If Debentures are registered in different names
or forms of ownership, separate Letters of Transmittal must be completed, signed
and returned for each different registration. See Instruction 5 above.
7. NOTICE OF GUARANTEED DELIVERY. Debenture holders wishing to convert
their Debentures whose Debentures are not immediately available or who cannot
deliver their Debentures and all other documents required hereby to the Paying
and Conversion Agent on or prior to 5:00 p.m., New York City time, on June 29,
1998 may elect to convert their Debentures pursuant to the following procedures:
(a) such election to convert must be made by or through an Eligible Institution,
(b) a properly completed and duly executed Notice of Guaranteed Delivery in the
form provided by the Company to all registered holders of Debentures must be
received by the Paying and Conversion Agent on or prior to 5:00 p.m., New York
City time, on June 29, 1998, and (c) the Debentures in proper form for transfer,
together with a properly completed and duly executed Letter of Transmittal and
all other documents required by this Letter of Transmittal, must be received by
the Paying and Conversion Agent within three New York Stock Exchange trading
days after the date such Notice of Guaranteed Delivery is received by the Paying
and Conversion Agent. Notwithstanding the foregoing, Shares will be issued in
respect of Debentures surrendered for conversion only after timely receipt by
the Paying and Conversion Agent of the surrendered Debentures, a properly
completed and duly executed Letter of Transmittal and any other documents
required by the Letter of Transmittal.
9
<PAGE>
8. TRANSFER TAXES. It is not anticipated that any transfer taxes will be
payable in connection with the issuance of certificates evidencing Shares upon
conversion of the Debentures. If, however, it should develop that in certain
circumstances such taxes may be payable, conversion of Debentures will be
effected without charge to the converting holder for any such stock transfer
tax, except in the following cases. If stock certificates issued upon conversion
are to be registered in the name of any person other than the registered owner
of Debentures, the amount of any stock transfer taxes (whether imposed on the
registered owner(s) of the certificate(s) transmitted herewith or such person(s)
payable on account of the transfer to such person(s)) must accompany this Letter
of Transmittal or evidence must be submitted as to the payment of such taxes, or
exemption therefrom. The Company will not be required to issue or deliver stock
certificates in any such case until such person(s) has made payment or submitted
such evidence.
9. LOST OR DESTROYED DEBENTURES. If your Debentures have been either lost
or destroyed, notify The Bank of New York, as Trustee, of this fact immediately
by telephone at (212) 815-3738, or by mail, hand delivery or overnight courier
at the appropriate address set forth on the first page of the Letter of
Transmittal. In order to retain your rights to convert your Debentures which
have been lost or destroyed, the procedures set forth in Item 7(a) and (b) of
these instructions must be followed. You will then be instructed as to the steps
you must take in order to convert or have redeemed the Debentures that you own.
The Letter of Transmittal and related documents cannot be processed until the
missing Debentures have been replaced. You must act promptly if you wish to
safeguard your rights.
10. WAIVER OF CONDITIONS. The Company reserves the absolute right to waive
any of the conditions set forth herein or any defect with respect to the
transmittal of the Debentures.
11. MISCELLANEOUS. Neither the Company nor the Paying and Conversion Agent
is under any duty to give notification of defects in any Letter of Transmittal
or facsimile or in any other required documents, and neither the Company nor the
Paying and Conversion Agent shall incur any liability for failure to give such
notification. Any and all Letters of Transmittal or facsimiles (including any
other required documents) not in proper form are subject to rejection.
12. QUESTIONS ON HOW TO SUBMIT CERTIFICATES AND OBTAIN ADDITIONAL COPIES.
All questions regarding appropriate procedures for completing the Letter of
Transmittal and surrendering Debentures and requests for additional copies of
the Notice of Redemption and Letter of Transmittal should be directed to the
Paying and Conversion Agent at (212) 815-3738.
13. SUBSTITUTE FORM W-9. Each Debenture holder is required to provide the
Paying and Conversion Agent with a correct Taxpayer Identification Number
("TIN") on Substitute Form W-9, which is provided under Item F, and to indicate
whether the Debenture holder is subject to backup withholding by checking the
appropriate box in Part 2 of the form. Each Debenture holder must date and sign
the Substitute Form W-9 in the spaces indicated. Failure to provide the
information on the form may subject the Debenture holder to a $50 penalty
imposed by the Internal Revenue Service and to a 31% United States federal
income tax withholding on any cash payment he or she is otherwise entitled to
receive with respect to Debentures received or amounts paid for fractional
Shares. The box in Part 3 of the form may be checked if the Debenture 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 box in Part 3 is checked, the Paying and
Conversion Agent may still withhold 31% of all payments that the Debenture
holder is otherwise entitled to receive until a TIN is provided to the Paying
and Conversion Agent.
IMPORTANT TAX INFORMATION
Under the United States federal income tax law, the Paying and Conversion
Agent may be required to withhold 31 percent of the amount of any cash payment
to Debenture holders in connection with the redemption or conversion of
Debentures. In order to avoid such "backup withholding," a Debenture holder
whose Debentures are surrendered herewith is required to provide the Paying and
Conversion Agent with such Debenture holder's current Taxpayer Identification
Number ("TIN") on Substitute Form W-9. If such Debenture holder is an
individual, the TIN is his or her social security number. If the Paying and
Conversion Agent is not provided with the correct TIN or an adequate basis for
exemption,
10
<PAGE>
the Debenture holder may be subject to a $50 penalty imposed by the Internal
Revenue Service. In addition, any cash payment made to a Debenture holder with
respect to Debentures surrendered for redemption or conversion may be subject to
backup withholding.
Certain Debenture holders (including, among others, all corporations and
certain foreign individuals) are not subject to these backup withholding and
reporting requirements. In order for a foreign individual to qualify as an
exempt recipient, that Debenture holder must submit a Form W-8, signed under
penalties of perjury, attesting to that individual's exempt status. A Form W-8
can be obtained from the Paying and Conversion Agent.
If backup withholding applies, the Paying and Conversion Agent is required
to withhold 31% of any cash payment made to the Debenture holder with respect to
Debentures surrendered for redemption or conversion. Backup withholding is not
an additional federal income tax. Rather, the tax liability of a person 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.
PURPOSES OF SUBSTITUTE FORM W-9
To prevent backup withholding, the Debenture holder is required to notify
the Paying and Conversion Agent of his or her correct TIN on Substitute Form W-9
and certify that the TIN provided on Substitute Form W-9 is correct (or that
such Debenture holder is awaiting a TIN) and that such Debenture holder is not
otherwise subject to backup withholding. In addition, the Debenture holder must
complete Part 2 of the Substitute W-9, check the appropriate box, and date and
sign the Substitute Form W-9 as indicated.
WHAT NUMBER TO GIVE THE PAYING AND CONVERSION AGENT
The Debenture holder is required to give the Paying and Conversion Agent
the social security number or employer identification number of the record owner
of the Debentures being surrendered for redemption or conversion. If the
Debentures are in more than one name or are not in the name of the actual owner,
consult the enclosed guidelines for Certification of Taxpayer Identification
Number on Substitute Form W-9 for additional guidance on which number to report.
HOLDERS OF DEBENTURES ARE ADVISED TO READ THE PROSPECTUS AND TO CONSULT
THEIR OWN TAX ADVISORS REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX
CONSEQUENCES OF THE CONVERSION OR REDEMPTION OF THE DEBENTURES IN LIGHT OF THEIR
OWN PARTICULAR CIRCUMSTANCES.
11
<PAGE>
INTEGRATED HEALTH SERVICES, INC.
NOTICE OF GUARANTEED DELIVERY
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
This form must be used by a holder of the 6% Convertible Subordinated
Debentures due 2003 (the "Debentures") of Integrated Health Services, Inc. (the
"Company") who wishes to tender such holder's Debentures for conversion to the
Paying and Conversion Agent referred to below pursuant to the guaranteed
delivery procedures described in the accompanying Prospectus of the Company (the
"Prospectus") under the caption "Redemption of Debentures and Alternatives to
Redemption" and in Instruction 7 of the accompanying Letter of Transmittal (the
"Letter of Transmittal"). Any holder who wishes to tender Debentures for
conversion pursuant to such guaranteed delivery procedures must ensure that the
Paying and Conversion Agent receives this Notice of Guaranteed Delivery prior to
5:00 P.M., New York City time, on June 29, 1998. Capitalized terms not defined
herein have the meanings ascribed to them in the Prospectus and the Letter of
Transmittal.
TO: THE BANK OF NEW YORK, AS PAYING AND CONVERSION AGENT
REDEMPTION ONLY:
----------------
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Fiscal Agencies-7E Fiscal Agencies-7E Church Street Station
New York, NY 10286 New York, NY 10286 New York, NY 10286
Attn: Fiscal Agencies
Dept. 101B-7E
</TABLE>
TO CONFIRM BY TELEPHONE CALL:
(800) 438-5473
CONVERSION ONLY:
----------------
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Reorg. Dept.-7E Reorg. Dept.-7E Church Street Station
New York, NY 10286 New York, NY 10286 New York, NY 10286
Attn: Reorg. Dept. 101B-7E
</TABLE>
TO CONFIRM BY TELEPHONE CALL:
(212) 815-3738
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS 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 Debentures 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, receipt of which are hereby
acknowledged, pursuant to the guaranteed delivery procedures set forth in the
Prospectus, as follows:
AGGREGATE PRINCIPAL PRINCIPAL AMOUNT
AMOUNT REPRESENTED TENDERED (MUST BE IN INTEGRAL
CERTIFICATE NOS. BY CERTIFICATE(S) MULTIPLES OF $1,000)
- ---------------------- --------------------- ------------------------------
- ---------------------- --------------------- ------------------------------
- ---------------------- --------------------- ------------------------------
- ---------------------- --------------------- ------------------------------
- ---------------------- --------------------- ------------------------------
This Notice of Guaranteed Delivery must be signed by the Holder(s) exactly
as their name(s) appear on certificates for Debentures or on a security position
listing as the owner of Debentures, or by person(s) authorized to become
holder(s) by endorsements and documents transmitted with this Notice of
Guaranteed Delivery.
--------------------------------------------
Name of Registered Holder
--------------------------------------------
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: -------------- , 1998
<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 Debentures
tendered hereby in proper form for conversion and all other required documents
will be deposited by the undersigned with the Paying and Conversion Agent at
its address set forth above.
The Institution that completes this form must communicate the guarantee to the
Paying and Conversion Agent and must deliver the Letter of Transmittal and
Debentures to the Paying and Conversion 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
--------------------------------- Name ---------------------------
Zip Code Please Type or Print
--------------------------------- Name ----------------------------
Area Code and Tel. No.
Dated ---------------------- , 1998
NOTE: DO NOT SEND CERTIFICATES REPRESENTING DEBENTURES WITH THIS FORM.
CERTIFICATES REPRESENTING DEBENTURES SHOULD BE SENT ONLY WITH
A LETTER OF TRANSMITTAL.
<PAGE>
INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY
1. DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY. A properly completed and
duly executed copy of this Notice of Guaranteed Delivery and any other documents
required by this Notice of Guaranteed Delivery must be received by the Paying
and Conversion Agent at its address set forth herein prior to 5:00 p.m., New
York City time, on June 29, 1998. The method of delivery of this Notice of
Guaranteed Delivery and any other required documents or instruments to the
Paying and Conversion Agent is at the election and risk of the holder, and the
delivery will be deemed made only when actually received by the Paying and
Conversion Agent. If delivery is by mail, registered mail with return receipt
requested, properly insured, is recommended. Instead of delivery by mail, it is
recommended that the holders use an overnight or hand delivery service. In all
cases, sufficient time should be allowed to assure timely delivery. For a
description of the guaranteed delivery procedures, see Instruction 7 of the
Letter of Transmittal.
2. SIGNATURES ON THIS NOTICE OF GUARANTEED DELIVERY. If this Notice of
Guaranteed Delivery is signed by the registered holder(s) of the Debentures
referred to herein, the signature must correspond with the name(s) written on
the face of the Debentures without alteration, enlargement or any change
whatsoever. If this Notice of Guaranteed Delivery is signed by a participant of
DTC whose name appears on a security position listing as the owner of the
Debentures, the signature must correspond with the name shown on the security
position listing as the owner of the Debentures.
If this Notice of Guaranteed Delivery is signed by a person other than the
registered holder(s) of any Debentures listed or a participant of DTC, this
Notice of Guaranteed Delivery must be accompanied by appropriate bond powers,
signed as the name of the registered holder(s) appears on the Debentures or
signed as the name of the participant shown on DTC's security position listing.
If this Notice of Guaranteed Delivery is signed by a trustee, executor,
administrator, guardian, attorney-in-fact, officer of a corporation or other
person acting in a fiduciary or representative capacity, such person should so
indicate when signing, and unless waived by the Company, submit with the Letter
of Transmittal evidence satisfactory to the Company of such person's authority
to so act.
3. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for
assistance and requests for additional copies of the Prospectus may be directed
to The Bank of New York, 101 Barclay Street, New York, New York 10286,
Attention: Carolle Montrevil, Telephone: (212) 815-3738. Holders may also
contact their broker, dealer, commercial bank, trust company or other nominee
for assistance concerning the conversion of Debentures.
EXHIBIT 99.2
NOTICE OF REDEMPTION
TO THE HOLDERS OF
INTEGRATED HEALTH SERVICES, INC.
6% CONVERTIBLE SUBORDINATED DEBENTURES DUE 2003
THE CONVERSION PRIVILEGE DESCRIBED BELOW EXPIRES AT 5:00 P.M., NEW YORK CITY
TIME, ON JUNE 29, 1998, THE REDEMPTION DATE.
NOTICE IS HEREBY GIVEN that in accordance with Article Eleven of the
Indenture, dated as of December 1, 1992 (the "Indenture"), between Integrated
Health Services, Inc. (the "Company") and The Bank of New York (as
successor-in-interest to Signet Trust Company), as Trustee (the "Trustee"), the
Company has elected to redeem all of the Company's 6% Convertible Subordinated
Debentures due 2003 (the "Debentures") on June 29, 1998 (the "Redemption Date").
Capitalized terms used herein and not defined are used as defined in the
Indenture.
The Debentures will be redeemed at a redemption price of 103.0% of the
principal amount thereof, plus interest accruing from January 1, 1998 to the
Redemption Date, for a total price of $1,059.83 for each $1,000 principal amount
of Debentures (the "Redemption Price"). On the Redemption Date, the Redemption
Price will become due and payable upon each Debenture, or portion thereof, to be
redeemed and interest will cease to accrue on and after such date.
Debentures (or any portion thereof which is $1,000 or an integral multiple
thereof) may be converted into the Company's common stock, par value $.001 per
share (the "Common Stock"), at a conversion price of $32.125 principal amount of
Debentures per share of Common Stock (equivalent to 31.13 shares of Common Stock
for each $1,000 principal amount of Debentures). The Company will deliver cash
in lieu of any fractional share of Common Stock. The right to convert the
Debentures will terminate at 5:00 p.m., New York City time, on the Redemption
Date.
Debentures must be surrendered to The Bank of New York, as paying and
conversion agent (the "Paying and Conversion Agent"), to collect the Redemption
Price or to convert the Debentures. A Letter of Transmittal should be used in
connection with the surrender of Debentures for conversion or redemption.
Debentures are to be surrendered for conversion or redemption at the office of
the Paying and Conversion Agent shown below:
REDEMPTION ONLY:
----------------
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Fiscal Agencies-7E Fiscal Agencies-7E Church Street Station
New York, NY 10286 New York, NY 10286 New York, NY 10286
Attn: Fiscal Agencies
Dept. 101B-7E
</TABLE>
CONVERSION ONLY:
----------------
<TABLE>
<CAPTION>
BY HAND: BY OVERNIGHT COURIER: BY MAIL:
(registered or certified mail recommended)
<S> <C> <C>
The Bank of New York The Bank of New York The Bank of New York
101 Barclay Street 101 Barclay Street P.O. Box 11265
Reorg. Dept.-7E Reorg. Dept.-7E Church Street Station
New York, NY 10286 New York, NY 10286 New York, NY 10286
Attn: Reorg. Dept. 101B-7E
</TABLE>
<PAGE>
This Notice of Redemption, a Letter of Transmittal and a prospectus have
been sent to each holder of record of Debentures. Debenture holders should read
the prospectus and instructions to the Letter of Transmittal carefully.
If any holder requires assistance, has questions or would like to obtain
copies of the redemption materials, please contact The Bank of New York, 101
Barclay Street, New York, New York 10286, Attention: Carolle Montrevil,
Telephone: (212) 815-3738.
<PAGE>
ALTERNATIVES AVAILABLE TO HOLDERS OF DEBENTURES
Holders of Debentures have the following alternatives, each of which should
be considered carefully:
1. Conversion into Common Stock. Holders may convert Debentures (or any
portion thereof which is $1,000 or an integral multiple thereof) into Common
Stock of the Company at a conversion price of $32.125 per share of Common Stock
(equivalent to 31.13 shares of Common Stock for each $1,000 principal amount of
Debentures) at any time prior to 5:00 p.m., New York City time, on June 29, 1998
(the "Redemption Date"), time being of the essence. No fractional shares of
Common Stock will be issued upon conversion of Debentures. Instead, the Company
will pay a cash adjustment in respect of such fraction in an amount equal to the
same fraction of the Closing Price (as defined below) at the close of business
on the day of conversion (or, if such day is not a Trading Day (as defined
below), on the Trading Day immediately preceding such day). "Closing Price"
means the last reported sales price regular way or, in case no such reported
sale takes place on such day, the average of the reported closing bid and asked
prices regular way, in either case on the New York Stock Exchange ("NYSE").
"Trading Day" means each Monday, Tuesday, Wednesday, Thursday and Friday, other
than any day on which securities are generally not traded on the NYSE.
On the basis of the $38.1875 closing price of the Common Stock as reported
on the NYSE on May 28, 1998, 31.13 shares had a market value (including cash in
lieu of the fractional share) equivalent to $1,188.78 (without giving effect to
commissions and other costs which would likely be incurred on sale). No payment
or adjustment will be made on conversion for interest accrued on the Debentures
surrendered for conversion. Accordingly, any holder surrendering Debentures for
conversion will not receive any interest with respect to such Debentures from
January 1, 1998.
AS LONG AS THE MARKET PRICE OF THE COMMON STOCK REMAINS AT OR ABOVE $34.05
PER SHARE, THE HOLDERS OF DEBENTURES WHO ELECT TO CONVERT WILL RECEIVE, UPON
CONVERSION, COMMON STOCK (INCLUDING CASH, IF ANY, RECEIVED IN LIEU OF FRACTIONAL
SHARES) HAVING A GREATER MARKET VALUE THAN THE AMOUNT OF CASH RECEIVABLE UPON
REDEMPTION OF SUCH DEBENTURES (BEFORE DEDUCTING ANY TAXES, COMMISSIONS AND OTHER
COSTS WHICH WOULD LIKELY BE INCURRED ON SALE OF THE COMMON STOCK RECEIVED UPON
CONVERSION OF THE DEBENTURES). IT SHOULD BE NOTED, HOWEVER, THAT THE PRICE OF
THE COMMON STOCK RECEIVED UPON CONVERSION WILL FLUCTUATE IN THE MARKET. NO
ASSURANCE CAN BE GIVEN AS TO THE PRICE OF THE COMMON STOCK AT ANY FUTURE TIME,
AND THE HOLDERS SHOULD EXPECT TO INCUR VARIOUS EXPENSES OF SALE IF SUCH COMMON
STOCK IS SOLD.
THE RIGHT TO CONVERT DEBENTURES INTO COMMON STOCK EXPIRES AT 5:00 P.M., NEW
YORK CITY TIME, ON THE REDEMPTION DATE, TIME BEING OF THE ESSENCE. FROM AND
AFTER THAT DATE AND TIME, HOLDERS OF DEBENTURES WILL BE ENTITLED ONLY TO THE
REDEMPTION PRICE, WITHOUT INTEREST FROM THE REDEMPTION DATE.
2. Sale in Open Market. Holders may sell the Debentures in the open market.
Holders of Debentures who wish to sell their Debentures in the open market
should consult with their own advisors regarding if and when they should sell
their Debentures and the tax consequences thereof. Holders may incur various
fees and expenses in connection with any such sale.
3. Redemption. Holders may allow the Debentures to be redeemed on June 29,
1998. Pursuant to the terms of the Indenture between the Company and The Bank of
New York, as Trustee, dated as of December 1, 1992, holders of the Debentures
will be entitled to receive upon redemption 103.0% of the principal amount
thereof, plus interest accruing from January 1, 1998 to the Redemption Date (the
"Redemption Price"). A holder of $1,000 principal amount of Debentures redeemed
at the Redemption Price would receive $1,059.83 in cash. Payment of the
Redemption Price will be made by the Paying and Conversion Agent upon surrender
of Debentures to the Paying and Conversion Agent by holders of Debentures
accompanied by a properly completed Letter of Transmittal. On and after the
Redemption
<PAGE>
Date, interest will cease to accrue and holders of Debentures will not have any
rights as such holders other than the right to receive payment of the Redemption
Price, without interest from the Redemption Date, upon surrender of their
Debentures.
MANNER OF CONVERSION
To convert Debentures into Common Stock, the holder thereof must surrender
such Debentures, duly endorsed, prior to 5:00 p.m., New York City time, on the
Redemption Date to The Bank of New York at the address set forth above,
accompanied by written notice (a form of which is set forth on the reverse of
the Debenture) to the Company that the holder elects to convert such Debentures,
or, if less than the entire principal amount thereof is to be converted, the
portion thereof to be converted. Such notice must also state the name or names
(with address) in which the certificate or certificates for shares of Common
Stock issuable upon conversion are to be issued. Each Debenture surrendered for
conversion must, unless the shares issuable on conversion are to be issued in
the same name as the name in which such Debenture is registered, be duly
endorsed by, or accompanied by instruments of transfer, in form satisfactory to
the Company, duly executed by the holder or his or her duly authorized attorney.
The notice that must be given to the Company may be provided by surrendering
Debentures accompanied by the Letter of Transmittal provided to all record
holders of the Debentures.
As promptly as practicable after the surrender of such Debenture and the
receipt of such notice, as aforesaid, the Company will issue and deliver at the
office of The Bank of New York to such holder, or on such holder's written
order, a certificate or certificates for the number of full shares of Common
Stock issuable upon the conversion of such Debenture and a check for the amount
payable in lieu of any fractional share. Holders are also entitled to convert
fewer than all Debentures they hold provided that any conversions are for
principal amounts of Debentures in integral multiples of $1,000, in accordance
with the terms of the Indenture. No payment or adjustment will be made on
conversion for interest accrued on the Debentures surrendered for conversion.
THE DEBENTURES MAY BE CONVERTED INTO COMMON STOCK ONLY BY DELIVERY OF THE
DEBENTURES, ACCOMPANIED BY THE NOTICE AS DESCRIBED ABOVE, TO THE BANK OF NEW
YORK PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON THE REDEMPTION DATE. SINCE IT IS
THE TIME OF RECEIPT, NOT THE TIME OF MAILING, THAT DETERMINES WHETHER DEBENTURES
HAVE BEEN PROPERLY TENDERED FOR CONVERSION, SUFFICIENT TIME SHOULD BE ALLOWED
FOR DEBENTURES TO BE SENT BY MAIL TO BE RECEIVED BY THE BANK OF NEW YORK PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE REDEMPTION DATE. INSTEAD OF DELIVERY BY
MAIL, IT IS RECOMMENDED THAT HOLDERS USE AN OVERNIGHT OR HAND DELIVERY SERVICE.
ANY DEBENTURES THAT HAVE NOT BEEN PROPERLY PRESENTED FOR CONVERSION PRIOR
TO 5:00 P.M., NEW YORK CITY TIME, ON THE REDEMPTION DATE WILL BE AUTOMATICALLY
REDEEMED AS SET FORTH HEREIN UPON SURRENDER OF THE DEBENTURE.
MANNER OF REDEMPTION
To receive the Redemption Price specified above for any Debentures being
redeemed, the holder thereof must surrender such Debentures to The Bank of New
York at the address set forth above.
<PAGE>
IMPORTANT INFORMATION FOR HOLDERS OF DEBENTURES
MARKET CONSIDERATIONS
On May 28, 1998, the reported last closing price of the Common Stock on the
New York Stock Exchange was $38.1875 per share. During the period from January
1, 1998 through May 28, 1998, the high and low sales prices per share of the
Common Stock as reported on the New York Stock Exchange were $39.9375 and
$28.25, respectively. As long as the market price of the Common Stock (after
giving effect to commissions and any other costs of sale) is equal to or greater
than $34.05 per share, holders who elect to convert their Debentures will
receive shares of Common Stock (including cash paid in lieu of fractional
shares) having a current market value greater than the cash that they would be
entitled to receive upon redemption.
FEDERAL INCOME TAX CONSIDERATIONS
The following is a general summary of certain United States federal income
tax considerations relevant to the conversion, redemption or sale of Debentures
by a beneficial owner of Debentures. This summary is based on the Internal
Revenue Code of 1986, as amended (the "Code"), Treasury Regulations (including
proposed regulations and temporary regulations) promulgated thereunder, Internal
Revenue Service ("IRS") rulings, official pronouncements and judicial decisions,
all as in effect on the date hereof and all of which are subject to change,
possibly with retroactive effect, or different interpretations. This summary is
applicable only to holders who are "United States persons" for federal income
tax purposes and who hold Debentures as capital assets and who will hold any
Common Stock received on conversion of Debentures as capital assets.
Additionally, this summary is not applicable to non-United States persons who
have an indirect interest in Debentures or Common Stock through a United States
partnership, trust or estate, or other flow-through entity.
This summary does not discuss all the tax consequences that may be relevant
to a particular holder in light of the holder's particular circumstances and it
is not intended to be applicable in all respects to all categories of investors,
some of whom -- such as insurance companies, tax-exempt persons, financial
institutions, regulated investment companies, dealers in securities or
currencies, persons that hold the Debentures as a position in a "straddle," as
part of a "synthetic security," "hedge," "conversion transaction" or other
integrated investment, persons that enter into "short sales against the box" or
certain other "constructive sales" involving the Debentures or substantially
identical property, or persons whose functional currency is other than United
States dollars -- may be subject to different rules not discussed below. In
addition, this summary does not address any state, local or foreign tax
considerations that may be relevant to a particular holder.
HOLDERS OF DEBENTURES ARE ADVISED TO CONSULT THEIR OWN TAX ADVISORS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
CONVERSION, SALE OR REDEMPTION OF THE DEBENTURES IN LIGHT OF THEIR OWN
PARTICULAR CIRCUMSTANCES.
CONVERSION OF DEBENTURES
In general, no gain or loss will be recognized on conversion of Debentures
solely into Common Stock. The tax basis for the Common Stock received upon such
conversion will be equal to the tax basis of the Debentures converted (reduced
by the portion of such basis allocable to any fractional share of Common Stock
paid in cash). The holding period for the Common Stock generally will include
the holding period of the Debentures converted. Except as discussed below under
"Market Discount," a holder generally will recognize gain (or loss) upon a
conversion to the extent that any cash paid in lieu of a fractional share of
Common Stock exceeds (or is less than) its tax basis in such fractional share.
SALE OR REDEMPTION OF DEBENTURES
Generally, the sale or redemption of Debentures will result in taxable gain
or loss equal to the difference between (i) the amount realized (except to the
extent such amount is attributable to accrued interest not previously included
in income, which amount generally will be taxable as ordinary income) and
<PAGE>
(ii) the holder's adjusted tax basis in the Debentures. Such gain or loss will
be capital gain or loss. Such gain or loss will be long-term capital gain or
loss if the holding period for the Debentures exceeds one year. In the case of a
non-corporate holder of Debentures, any such capital gain will be subject to tax
at a maximum federal income tax rate of 28% if the holder's holding period in
the Debentures is more than one year but not more than 18 months and at a
maximum federal income tax rate of 20% if the holder's holding period in the
Debentures is more than 18 months.
MARKET DISCOUNT
Special rules will apply to Debentures acquired with market discount. A
market discount note is, generally, a note the principal amount of which exceeds
the holder's basis in the note immediately after acquisition by more than a
specified de minimis amount. Generally, any gain recognized on the sale or
redemption of a market discount note will be treated as ordinary income to the
extent of the accrued market discount on such note not previously included in
income. In general, market discount accrues on a straight line basis or, at the
option of the holder, at a constant yield to maturity basis.
Although the matter is not free from doubt, a holder of a Debenture with
market discount should not have to recognize income on the conversion of the
Debenture, even with respect to market discount that has accrued but has not
been taken into account. Market discount not recognized on conversion will carry
over to the Common Stock acquired upon conversion thereof and will be recognized
as ordinary income to the extent of gain recognized upon the disposition of such
Common Stock, including any deemed disposition of fractional shares of Common
Stock for cash at the time of conversion.
SALE OR DISPOSITION OF COMMON STOCK
Subject to the discussion under "Market Discount" above, a holder will
recognize gain or loss on the sale or exchange of Common Stock received upon
conversion of a Debenture equal to the difference between the amount realized on
such sale or exchange and the holder's adjusted tax basis in the Common Stock
sold or exchanged.
BACKUP WITHHOLDING
A holder of a Debenture or Common Stock issued upon conversion of a
Debenture may be subject to backup withholding at a rate of 31% with respect to
the proceeds of a sale or redemption of such Debenture or Common Stock, as the
case may be, unless (i) such holder is a corporation or comes within certain
other exempt categories and, when required, demonstrates this fact or (ii)
provides a taxpayer identification number, certifies as to no loss of exemption
from backup withholding, and otherwise complies with applicable backup
withholding rules. The amount of backup withholding from a payment to a holder
will be allowed as a credit against the holder's federal income tax liability.
FAILURE TO SURRENDER DEBENTURES OR INDICATE CHOICE
Failure to surrender Debentures at the offices of the Paying and Conversion
Agent for conversion prior to 5:00 p.m., New York City time, on June 29, 1998,
time being of the essence, will automatically result in such Debentures being
redeemed at the Redemption Price of $1,059.83 per $1,000 principal amount of
Debentures. If no choice is indicated in a Letter of Transmittal, the delivery
of Debentures to the Paying and Conversion Agent prior to 5:00 p.m., New York
City time, on June 29, 1998 will be treated by the Paying and Conversion Agent
as an instruction to convert such Debentures into Common Stock.
Integrated Health Services, Inc.
Marc B. Levin
Secretary
May 29, 1998
